When Aubrey stopped payment on the check, the bank sustained a $28,193.91 loss because Stephens could not be located. The bank then sued Aubrey for the loss. Explain who should bear the loss.

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When Aubrey stopped payment on the check, the bank sustained a $28,193.91 loss because Stephens could not be located. The bank then sued Aubrey for the loss. Explain who should bear the loss.

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Stephens delivered 184 bushels of corn to Aubrey, for which he was to receive $478.23. Aubrey issued a check with $478.23 typewritten in numbers, and on the line customarily used to express the amount in words appeared “$100,478 and 23 cts” imprinted in red with a check-writing machine. Before Stephens cashed the check, someone crudely typed “100” in front of the typewritten $478.23. When Stephens presented this check to the State Bank of Salem, Anderson, the manager, questioned Stephens. Anderson knew that Stephens had just declared bankruptcy and was not accustomed to making such large deposits. Stephens told Anderson he had bought and sold a large quantity of corn at a great profit. Anderson accepted the explanation and applied the monies to nine promissory notes, an installment payment, and accrued interest owed by Stephens. Stephens also received $2,000 in cash, with the balance deposited in his checking account. Later that day, Anderson reexamined the check and discovered the suspicious appearance of the typewriting. He then contacted Aubrey, who said a check in that amount was suspicious, whereupon Anderson froze the transaction. When Aubrey stopped payment on the check, the bank sustained a $28,193.91 loss because Stephens could not be located. The bank then sued Aubrey for the loss. Explain who should bear the loss.

Explanation & AnswerSolution by a verified expert

Explanation

The banker was presented with a check by Individual S, which was accepted by the banker for value and, at that time, the banker was unaware of the defenses Individual A had against the check. The banker also followed the correct procedures and did nothing out of the normal while accepting the check. The whole case raised a large amount of ambiguity, where the only credible factor was the goodwill of the bank and the banker. As the banker holds the position of a holder in due course, Individual A is liable to the bank to pay the value of the check. The personal defense of Individual A is useless here. If the banker did not hold the position of a holder in due course, the case would have been in favor of Individual A.

Sample Response

Individual A is going to bear the loss since the banker is a holder in due course, who took the instrument for value and was unaware of the defense of Individual A during the time of accepting the check from Individual S. If the banker knew of the defense of Individual A or was able to identify the discrepancy in the check initially, the status of the banker as a holder in due course would not have been maintained.

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