CAUTION -- THIS EXAM WAS DESIGNED TO BE ANALYZED UNDER THE ORIGINAL VERSION OF ARTICLES 3 & 4 OF THE UCC.  THESE ARTICLES WERE AMENDED IN 1989, AFTER THIS EXAM WAS ADMINISTERED.

ESSAY QUESTION 1 -- 110 Points
Limit your answer to 5 pages in a Bluebook

On May 1, 1989 American Business Machines, Inc. (hereinafter ABM) issued three checks, all of which were drawn on Farmers and Merchants Bank (FMB), where ABM had its checking account.

The first check was for $1000 to the order of Lumpy Lawyer in payment for legal services billed to ABM by Lumpy. Lumpy received the check in the mail on May 2 and immediately went to his bank, First Attorney's Trust (herinafter FAT), indorsed the check with his name, and deposited the check into his account at FAT. The next morning, May 2, FAT presented the check to FMB.

In the meantime, late in the day on May 1, after Lumpy's check had been mailed by ABM, ABM discovered that Lumpy had not performed any of the legal services that ABM had paid him for. The head bookkeeper at ABM called FMB and requested FMB to stop payment on the check.

Although the bookkeeper gave FMB's manager ABM's account number, the number of the check, the name of the payee, and the amount of the check, FMB's manager told the bookkeeper that FMB's policy, clearly stated in the account agreement between FMB and ABM, was to refuse to honor oral stop payment orders.

Therefore, the next morning, May 2, ABM's bookkeeper went to FMB and filled out a "stop payment request" form with all of the appropriate information. At about the same time, and before FMB had time to act on this written stop payment order, a clerk at FMB examined the signature on Lumpy's check, examined ABM's account to make sure that there were sufficient funds in its account, charged the check to ABM's account, and stamped the check "PAID". The check was placed in a file to be sent to ABM at the end of the month with ABM's monthly statement.

------

The second check was for $3000 to the order of Howard Earnabuck. This check had been prepared by Dorothy Gale, who was employed by ABM as a clerk in the bookkeeping department. One of Dorothy's responsibilities was to prepare checks to ABM's creditors for signature by Amy Accurate, ABM's full-time accountant. 

The check prepared by Dorothy for Howard was, however, part of Dorothy's scheme to defraud her employer who owed no money to Howard Earnabuck. Howard was really Dorothy's boyfriend and co-conspirator. Amy Accurate nevertheless signed the check after reviewing the bill purportedly from Howard which Dorothy had fraudulently prepared as part of her scheme. After signing the check Amy had her secretary mail it in an envelope addressed to Howard. Upon receipt of the check Howard endorsed it in blank and cashed it at the "Corner Grocery." Corner Grocery deposited it in its account at City Bank & Trust (CBT). CBT forwarded the check to ABM's bank FMB, which paid the check.

The third check was for $1,000 and payable to the order of "Paula Payee" for consulting services rendered to ABM. This check was properly signed by Amy and mailed to Paula. Upon receipt of the check, on May 2, Paula placed it on her dresser, intending to deposit it the next day. In her rush to get ready for work the next morning, May 3, however, Paula forgot to take the check with her. It was stolen later that day by Tilly Thief who burglarized Paula's home.

Tilly carefully forged Paula's signature to the back of the check and wrote "Pay to the order of Tilly Thief" above the forgery of Paula's signature. Later that day Tilly indorsed the check in blank and convinced the bartender at the Bowery Bar & Grill to cash the check for her from the money in the Bowery's cash register at the end of the evening. Bowery deposited the check in its account at First State Bank the next morning, May 4. First State Bank placed Bowery's signature on the check and the next day, May 5, sent the check to Second Bank and Trust which presented it to FMB on May 6.

On May 6, FMB examined the check, examined ABM's account to make sure that there were sufficient funds in its account, charged the check to ABM's account, and stamped the check "PAID". The check was placed in a file to be sent to ABM at the end of the month with ABM's monthly statement.

Paula discovered the theft upon her return home in the early evening on May 3 and informed Amy Accurate of the theft the first thing in the morning May 4. ABM did not inform its bank, FMB, of the theft, until May 8, after it had obtained an "affidavit of forgery" from Paula.

DISCUSS THE RIGHTS AND LIABILITIES OF THE PARTIES!

ESSAY QUESTION 2 -- 40 points
Limit your answer to 2 pages in a Bluebook

On January 15, Dollie Dawson drew a check on Merchant's Bank for $750 payable to the order of Phil Philson, in payment for some gardening work that Phil had done for Dollie. Phil obtained $745 cash for the check at Tom's Tavern after writing "pay to Tom's Tavern, Phil Philson" on the back of the check. Tom's Tavern wrote its name on the check and cashed it at its own bank, Barkeeper's National Bank which gave Tom's $750 in cash for the check. Barkeepers indorsed and on January 19, sent the check to Merchant's Bank. On January 20, a monday, Merchant's Bank returned the check to Barkeeper's National Bank marked "Dishonored - Insufficient Funds." On January 24, Friday, Barkeepers phoned Tom's Tavern and told Tom that the check had returned unpaid. On Monday, January 27, Tom mailed a letter to Phil Philson stating that the check had bounced. Phil received the letter on January 31. Phil made no effort to notify Dollie.

WHAT RIGHTS WILL BARKEEPER'S NATIONAL BANK HAVE AGAINST TOM'S TAVERN, PHIL PHILSON, AND DOLLIE DAWSON?