Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 14

FACTS The Michigan Basic Property Insurance Association (MBP) issued a check for $69,559.06 from its account with Fifth Third Bank to Joyce Washington, Countrywide Home Loans, and T C Federal Credit Union as co-payees. Washington indorsed the check herself by signing all three payees' names and did not distribute the proceeds to the co-payees.
When the check reached Fifth Third Bank, it notified MBP of the payment through a daily account statement. MBP did not object, so Fifth Third Bank withdrew the funds from MBP's account. Fifth Third Bank also sent information about the check in a monthly account statement, and MBP still failed to object, even though the account agreement required it to provide prompt notice of any forgeries. MBP was forced to issue a second check to Countrywide, so it sued Fifth Third Bank and sought to have its account recredited. The trial court found that Fifth Third Bank was liable to MBP, and another party appealed on Fifth Third Bank's behalf.
ISSUE Was Fifth Third Bank liable to MBP for paying a check with forged indorsements?
DECISION No. The Michigan appellate court reversed the trial court's judgment.
REASON The court noted that, under the Uniform Commercial Code (UCC), the check was not properly payable because it had two forged indorsements. When a bank pays a check bearing a forged indorsement, the UCC ordinarily requires the bank to recredit the customer's account. Nevertheless, the court pointed out that the UCC allows parties to change their duties by contract.
In this case, the account agreement obligated MBP to carefully review its checking account statements and to notify Fifth Third Bank of any problems within thirty days. In the absence of such notice, the contract provided that MBP, not Fifth Third Bank, was liable for any forged indorsements. Because MBP did not provide prompt notice of the forgeries, Fifth Third Bank was not required to recredit MBP's account.
FOR CRITICAL ANALYSIS-Legal Consideration As a practical matter, does it make sense for the customer to bear primary responsibility for discovering instances of fraud? Which party is in a better position to detect any irregularities? Explain.