Heat Oil has a checking account with the Bank of Stern for its payroll expenses. One day Garnett, who has a checking account at Jordan Bank, breaks into Heat Oil's office and steals the company's checkbook. He makes out a check to himself for $200, and indorses the check to Best Buy for the purchase of an iPod. Best Buy deposits the check into its own account with Jordan Bank. The Bank of Stern pays the check. Garnett takes his iPod and boards a flight to Los Angeles.
(1) What party is likely to absorb the loss and why?
Bank of Stern - although they are the bank for Heat Oil, if they do refund the money, which is a relatively low amount to begin with, it won't be until after several months, if at all. The bank may (not definite) have a policy buried somewhere that account holders aren't responsible for thefts against their account. The likelihood of the bank actually refunding the money to the company is slim, even though there is most likely fine print somewhere saying they will refund against theft.
The solution provides a detailed discussion about Garnett, who committed check fraud at Heat Oil and then boarded a flight to Los Angeles. The party most likely to absorb the loss is discussed. This solution is based on law and from my experience as a fraud investigator.