Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 6 - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
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259

Pages:

2
Author:

bratrochanter

Key Points on the Liability of Parties for Negligible and Fraudulent Acts Under Article 3 of the UCC 1. Negligence in Drafting or Signing Instruments: o A party’s negligence in drafting or signing a negotiable instrument may prevent them from using an alteration or unauthorized signature as a defense if the negligence "substantially contributes" to the loss. o If both the maker (e.g., a person writing a check) and the bank fail to exercise ordinary care, the loss can be allocated based on comparative negligence. This rule aims to fairly split liability between parties based on each party's level of fault. 2. Impostor Rule: o The UCC provides that if a person is deceived into issuing a check to an impostor (someone impersonating an intended payee), any endorsement "substantially similar" to the named payee’s name is valid. o The rationale is that the drawer (e.g., the check issuer) is responsible for verifying the payee’s identity. This rule protects subsequent innocent parties who may take the check in good faith. 3. Fictitious Payee Rule: o This rule applies when checks are issued to non-existent payees or to real payees without intention to deliver the check to them. Often involving fraud by an employee, the rule treats any endorsement in the fictitious payee’s name as valid. o Comparative negligence applies, allowing the company to shift some liability to a negligent bank if the bank’s failure to exercise ordinary care contributed to the loss. Comparative Negligence Rule for Impostors and Fictitious Payees:  When an impostor or fictitious payee case arises, and the bank or other party accepting the instrument fails to exercise ordinary care, losses can be shared based on comparative negligence, factoring in each party’s contribution to the loss. Employer Liability for Fraudulent Endorsements by Employees:   The UCC generally holds the employer liable for losses from fraudulent endorsements by employees responsible for handling checks. However, if a bank fails to exercise ordinary care in processing fraudulent transactions, the employer may recover some losses from the bank. Case Study: Victory Clothing Co. v. Wachovia Bank   An employee of Victory forged checks payable to real vendors but deposited them into her account, violating bank policy. Victory sued Wachovia, arguing Wachovia’s negligence in handling the deposits. The court applied comparative negligence, noting that both Victory (for lack of oversight) and Wachovia (for policy violations) contributed to the loss. Thus, liability was allocated based on each party’s degree of fault.

Related Documents

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 6

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 6 - Page 1

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 6 - Page 2

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