Can Birmingham Trust obtain reimbursement from Central Bank under Central’s warranty of prior indorsements? Explain.

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Can Birmingham Trust obtain reimbursement from Central Bank under Central’s warranty of prior indorsements? Explain.

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On July 21, Boehmer, a customer of Birmingham Trust, secured a loan from that bank for the principal sum of $5,500 to purchase a boat allegedly being built for him by A.C. Manufacturing Company, Inc. After Boehmer signed a promissory note, Birmingham Trust issued a cashier’s check to Boehmer and A.C. Manufacturing Company as payees. The check was given to Boehmer, who then forged A.C. Manufacturing Company’s indorsement and deposited the check in his own account at Central Bank. Central Bank credited Boehmer’s account and then placed the legend “P.I.G.,” meaning “Prior Indorsements Guaranteed,” on the check. The check was presented to and paid by Birmingham Trust on July 22. When the loan became delinquent in March of the following year, Birmingham Trust contacted A.C. Manufacturing Company to learn the location of the boat. They were informed that it had never been purchased, and they soon after learned that Boehmer had died on January 24 of that year. Can Birmingham Trust obtain reimbursement from Central Bank under Central’s warranty of prior indorsements? Explain.

Explanation & AnswerSolution by a verified expert

Explanation

PIG provides warranty to the transferor that the check issued by the depositor contains genuine and authorized signatures. In this case, Bank C has provided warranty that the check issued by Customer B contains authorized and genuine signature of the parties by indorsing check under PIG. So, Bank C has become liable for reimbursing Trust B for the loss.
 
If Bank C had not indorsed the check under PIG, the bank would not have been considered liable for payment to Trust B. Bank C is a presenting bank and presenting banks only provide warranty on presentment that the check is authorized for payment, Bank C has no knowledge about signature's authenticity and material alteration.

Verified Answer

In this case, Trust B can succeed in gaining the reimbursement from Bank C since Bank C has issued the check under Prior Indorsement Guarantee (PIG), which means the bank has provided the warranty of the signature being authentic.

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