Judge Courtney D (“CD”) Jones’ opinion in Estate of William E. DeMuth, Jr., Deceased, Donald L. DeMuth, Executor, T. C. Memo. 2022-71, filed 7/12/22, brought back to my memory the tragic 1981 murder of Prof. (formerly Dean) Norman S. Penney, who taught me negotiable instruments 57 (count ’em, 57) years ago, on The Hill Far Above. Oh, was I clueless, until I finished typing an outline of my course notes at 2:00 a.m. the morning of the final. I got a “B” in a course I should have failed. Bless his memory.

Judge CD Jones must have gotten at least a “B” at Harvard when she took the course, because she knows the difference between a drawee bank and a depositary bank, and that the final payment rule can only be satisfied by the drawee bank, not the depositary bank.

For the civilians among you, when you write a negotiable instrument, like a check, the “drawee” bank is the bank where your money is. You are drawing on your balance at that bank. If the person you named in the check (the “payee”) deposits the check in their account at the same bank, the depositary bank is also the drawee bank. But if that person deposits your check in another bank, that bank is the depositary bank, so that deposit is not “cleared” (“paid”) until the drawee bank pays the depositary bank the amount of the check. Forget about “available” funds; that’s a fiction. And electronics have different rules.

Judge CD Jones calls out both IRS counsel (for giving away $70K of taxable estate by not knowing the difference and thereby conceding checks deposited by the payees in depositary banks, not the drawee bank, were out of the estate), and the ex’r’s counsel for not knowing the difference either.

Ex’r had POA for his late Dad. As Dad’s life was near its end, ex’r wrote a bunch checks (hi, Judge Holmes) to family members as he had done for some years, as the POA entitled him to do. But only one (count it, one) got paid by the drawee bank before Dad died.

Judge CD Jones checks out the PA UCC (Uniform Commercial Code), an enactment that covers bank stuff in a uniform framework. Ex’r could stop the checks any time before final payment by drawee; the issue is could, not would or did. Section 2033 and Reg. Section 25.2511-(2)(b) include in a decedent’s estate all cash on hand and in bank at death. The cash was there in drawee bank until drawee bank paid it out.

And Judge CD Jones knows that the distinction between a gift inter vivos and a gift causa mortis plays no part here, because until the check is finally paid, there is no completed gift. See T.C. Memo. 2022-71, at p. 8, footnote 10. “…the distinction made by the parties between causa mortis and inter vivos gifts is improper and irrelevant.”

I recommend Judge CD Jones’ opinion to anyone struggling with negotiable instruments law. I’m sure Norm Penney would have given her an “A”.