Case Study: The Case of the Dishonored Check
Brogan had an option to purchase a valuable piece of land for $500,000, provided he exercised the option by a certain date by mailing a deposit check for $50,000. He drew a check for that amount on his account at Third American Bank and mailed it to the landowner. At the time he drew the check, he had $60,000 in his account but owed the bank $30,000 for a loan that was overdue. The bank refused to honor the check, Brogan's option became void, and the landowner sold the land to someone else, resulting in a severe loss to Brogan. Brogan sued the bank for damages.
The Trial
At trial, Brogan's attorneys proved the value of the land, Brogan's losses, and the fact that Brogan had always paid the bank on time, except for the most recent payment that was overdue. The bank's attorneys proved that Brogan was over sixty days late on his last loan payment and that it was their practice not to notify customers that there might be insufficient funds in their accounts to cover all checks written, as doing so would place an undue burden on the banking system.
The Arguments at Trial
Brogan's attorneys argued that a hank has no right to dishonor a check except for the normal reasons permitted by law, such as a suspected forgery, an improper endorsement, and so forth. They further argued that the bank, based on its relationship with Brogan, should have contacted him before dishonoring the check so that he could have taken other action to prevent his loss. The bank's attorneys argued that Brogan's being overdue on his last loan payment indicated he was in financial trouble, that they had a right to seize Brogan's account to cover the overdue payment, and that instead they simply refused to honor checks on Brogan's account until the overdue loan was paid. They further argued that based on banking industry customs, it is the responsibility of the customer and not the bank to make sure there are sufficient funds to cover checks written.
Questions to Discuss
1. Who do you feel has the better argument, Brogan or the bank?
2. Whom do you think the judge or jury will favor Brogan or the bank?
3. Do you feel that Brogan should prevail because the bank can afford the loss more than Brogan?
4. Under what circumstances, if any, should a bank be able to offset a loan to a customer against that customer's bank account?