Stale Checks. On July 15, 1986, IBP, Inc, issued to Meyer Land & Cattle Co a check for $135,234.18 payable to both Meyer and Sylvan State Bank for the purchase of cattle. IBP wrote the check on its account at Mercantile Bank of Topeka. Someone at the

Question

Meyer firm misplaced the check. In the fall of 1995, Meyer's president Tim Meyer found the check behind a desk drawer. Jana Huse, Meyer's office manager, presented the check for deposit at Sylvan, which accepted it. After Mercantile received the instrument and its computers noted the absence of any stop payment order, it paid the check with funds from IBP's checking account. IBP insisted that Mercantile credit IBP's account. Mercantile refused. IBP filed a suit in a federal district court against Mercantile and others, claiming, among other things, that Mercantile had not acted in good faith because it had processed the check by automated means, without examining it manually. Mercantile responded that its check-processing procedures adhered to its own policies, as well as to reasonable commercial standards of fair dealing in the banking industry. Mercantile filed a motion for summary judgment. Should the court grant the motion? Why or why not?

Answer 1

Stale checks
The court granted the motion and issued a judgment in favor of Mercantile. The court ex-plained that a bank's obligations with respect to the payment of stale checks are governed by UCC 4-404, which provides that a bank "may charge its customer's account for a payment made [on a check more than six months after its date] in good faith." Good faith is "honesty in fact and the observance of reasonable commercial standards of fair dealing," under UCC 3-103(a)(4) and UCC 4-104(c). The court pointed out that the UCC "explicitly acknowledge[s] the need for automated check processing . . . to maintain efficiency in the banking industry. . . [T]he [current] system, upon which the entire banking system relies, provides no basis for detecting a check's date." The court added that under the UCC, "[i]n the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage." Here, "Mercantile's policies do not require the bank to examine all checks manually before debiting customer accounts. Nor do such policies contravene accepted banking procedures specifically outlined in the UCC." Finally, "IBP was cognizant of Mercantile's procedures for seeking a stop payment order, yet chose not to secure (or at least update) such an order."