CH-26-28 Form and Content – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 26 to 28 Chapter 26 FORM AND CONTENT ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. State whether the following provisions impair or preclude negotiability, the instrument in each instance being otherwise in proper form. Answer each statement with either “Negotiable” or “Nonnegotiable” and explain why. a. A note for $2,000 payable in twenty monthly installments of $100 each that provides the following: “In case of death of maker, all payments not due at date of death are canceled.” b. A note stating, “This note is secured by a mortgage on personal property located at 351 Maple Street, Smithton, Illinois.” c. A certificate of deposit reciting, “June 6, 2017, John Jones has deposited in the Citizens Bank of Emanon, Illinois, Two Thousand Dollars, to the credit of himself, payable upon the return of this instrument properly indorsed, with interest at the rate of 6 percent per annum from date of issue upon ninety days’ written notice. (Signed) Jill Crystal, President, Citizens Bank of Emanon.” d. An instrument reciting, “IOU, Mark Noble, $1,000.00.” e. A note stating, “In accordance with our contract of December 13, 2016, I promise to pay to the order of Sam Stone $100 on March 13, 2017.” f. A draft drawn by Brown on the Acme Publishing Company for $500, payable to the order of the Sixth National Bank of Erehwon, directing the bank to “Charge this draft to my royalty account.” g. A note executed by Pierre Janvier, a resident of Chicago, for $2,000, payable in Swiss francs. h. An undated note for $1,000 payable “six months after date.” i. A note for $500 payable to the order of Ray Rodes six months after the death of Albert Olds. j. A note of $500 payable to the assigns of Levi Lee. k. A check made payable “to Ketisha Johnson.” Answer: Form of Commercial Paper. (a) Non-negotiable. Payment is contingent upon the maker continuing to live during the 20 months during which the installments are payable. The contingency is always present during the 20 months that a lesser amount would be payable in the event of the death of the maker. U.C.C., Section 3-104(a). (b) Negotiable. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states that it is secured, whether by mortgage, reservation of title, or otherwise. Such a recitation normally is included only for the purpose of making a record or giving information, and is not intended to condition payment in any way. Section 3-106, Comment i. (c) Non-negotiable. An instrument not payable to order is not made so payable by such words as “payable upon return of this instrument properly indorsed." (d) Non-negotiable. An "I.O.U." is not a promise, but a mere acknowledgment of indebtedness. A promise is not implied from the fact that the existence of the debt is admitted. (e) Negotiable. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states its consideration, whether performed or promised, or the transaction which gave rise to the instrument, or that the promise or order is made or the instrument matures in accordance with or "as per" such transaction. (f) Negotiable. Section 3-106(b)(ii) of the U.C.C. provides: "A promise or order is not made conditional . . . because payment is limited to resort to a particular fund or source." (g) Negotiable. One of the requirements of negotiability is payment of a fixed amount of money. Section 1-201(24) defines "money" in terms of "a medium of exchange authorized or adopted by a domestic or foreign government as part of its currency." The test of "money" is thus one of governmental sanction, whether the government be foreign or domestic. Accordingly, an instrument payable in Swiss francs would be payable in money, even though the instrument were executed in the United States by persons having no connection with Switzerland. (h) Non-negotiable. It is not payable at a definite time since the time of payment cannot be determined from its face. It is, however, by Section 3-115 of the U.C.C., an incomplete instrument. Section 3-115 provides upon completion it may be enforced as a negotiable instrument. (i) Non-negotiable. An instrument which by its terms is otherwise payable only upon an act or event uncertain as to time of occurrence is not payable at a definite time. (j) Non-negotiable. Revised Article 3 does not provide that “assigns” is the equivalent of “order of.” §3-109(b). (k) Negotiable. Despite the fact that the check fails to provide the words of negotiability, it is still a negotiable instrument. Section 3-104(c). 2. State whether the following provisions in a note impair or preclude negotiability, the instrument in each instance being otherwise in proper form. Answer each statement with either “Negotiable” or “Nonnegotiable” and explain why. a. A note signed by Henry Brown in the trade name of the Quality Store. b. A note for $850, payable to the order of TV Products Company, “If, but only if, the television set for which this note is given proves entirely satisfactory to me.” c. A note executed by Adams, Burton, and Cady Company, a partnership, for $1,000, payable to the order of Davis, payable only out of the assets of the partnership. d. A note promising to pay $500 to the order of Leigh and to deliver ten tons of coal to Leigh. e. A note for $10,000 executed by Eaton payable to the order of the First National Bank of Emanon, in which Eaton promises to give additional collateral if the bank deems itself insecure and demands additional security. f. A note reading, “I promise to pay to the order of Richard Roe $2,000 on January 31, 2017, but it is agreed that if the crop of Blackacre falls below ten bushels per acre for the 2016 season, this note shall be extended indefinitely.” g. A note payable to the order of Ray Rogers fifty years from date but providing that payment shall be accelerated by the death of Silas Hughes to a point of time four months after his death. h. A note for $4,000 calling for payments of installments of $250 each and stating, “In the event any installment hereof is not paid when due, this note shall immediately become due at the holder’s option.” i. An instrument dated September 17, 2017, in the handwriting of John Henry Brown, which reads in full: “Sixty days after date, I, John Henry Brown, promise to pay to the order of William Jones $500.” j. A note reciting, “I promise to pay Ray Reed $100 on December 24, 2017.” Answer: Form of Commercial Paper. (a) Negotiable. A negotiable instrument must be signed by the maker or drawer. Section 3-104, U.C.C. Section 3-401 provides: "A signature may be made . . . by use of any name, including a trade or assumed name . . . by a person with present intention to authenticate a writing.” A signature may be made in any name, including any trade or assumed name, however false and fictitious, which is adopted for the purpose. (b) Non-negotiable. The maker of the note has expressly conditioned his promise to pay by the recital; he does not absolutely promise to pay. Section 3-104 of the U.C.C. provides that any writing to be a negotiable instrument within Article 3 must contain an unconditional promise or order to pay a fixed amount of money. (c) Negotiable. Revised Article 3 eliminates the particular fund doctrine. (d) Non-negotiable. Section 3-104 of the U.C.C. provides that any writing to be a negotiable instrument within Article 3 must contain an unconditioned promise or order to pay a fixed amount of money and no other undertaking or instruction . . . to do any act in addition to the payment of money. (e) Negotiable. Section 3-104(a)(3) of the U.C.C. provides that the negotiability of an instrument is not affected by a promise or power to maintain or protect collateral or to give additional collateral. This clause does not render paper non-negotiable under the U.C.C. as it merely aids in the collection of the debt. (f) Non-negotiable. Section 3-108(b) of the U.C.C. dealing with and broadly validating the negotiability of extension clauses provides: An instrument is payable at a definite time if by its terms it is payable at a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or after a specified act or event. Here the extension is for an indefinite period; the promise is illusory and there is not certainty of payment. (g) Negotiable. It is still possible to have a negotiable post-obituary note. An instrument is payable at a definite time if by its terms it is payable at a definite time subject to any acceleration. This is intended to mean that the instrument is not affected by any acceleration clause, whether acceleration be at the option of the maker or the holder, or automatic upon the occurrence of some event, and whether it be conditional or unrestricted. (h) Negotiable. Acceleration does not affect the negotiability of an instrument, so long as the instrument is payable at a fixed time. The acceleration may even be contingent upon some event, such as non payment. (i) Negotiable. There is no requirement in the U.C.C. that a note be signed at the end of the instrument. The signature of the maker may appear in the body of the instrument. (j) Non-negotiable. The words of negotiability are lacking. Section 3-104(a) of the U.C.C. provides that a writing to be a negotiable instrument must be payable to order or to bearer or to their equivalent. 3. On March 10, Tolliver Tolles, also known as Thomas Towle, delivered to Alonzo Craig and Abigail Craig the following instrument, written by him in pencil: For value received, I, Thomas Towle, promise to pay to the order of Alonzo Craig or Abigail Craig One Thousand Seventy-Five ($1,000.75) Dollars six months after my mother, Alma Tolles, dies with interest at the rate of 9 percent from date to maturity and after maturity at the rate of 93/4 percent. I hereby waive the benefit of all laws exempting real or personal property from levy or sale. Is this instrument negotiable? Explain. Answer: Form of Commercial Paper. Non-negotiable. (See f, below). (a) The fact that Tolles also uses an assumed name is immaterial. Section 3-401(b) of the U.C.C. provides: A signature is made by use of any name, including any trade or assumed name. (b) The fact that the note is written in pencil does not destroy negotiability. The U.C.C. prescribes that the instrument must be in writing but it does not state that it must be written with pen and ink. (c) The maker may sign a note at the beginning rather than at the end without impairing negotiability. (d) Words control figures except that if the words are ambiguous, then figures control. Section 3-114, U.C.C. Therefore, the note is for $1,075.00. (e) An increased rate of interest after maturity, in case of default, does not impair negotiability. (f) An undated instrument payable a specific number of days, months or years after the death of an individual is not payable at a definite time, since the time of payment cannot be determined from its face. This provision destroys the otherwise negotiable character of the instrument because the time of payment cannot be determined from the face of the instrument. (g) The fact that the note recites "For value received" is immaterial. (h) The provision waiving the benefit of all laws exempting real or personal property from levy or sale is contrary to public policy and, hence, inoperative. The provision is superfluous and neither adds to nor detracts from negotiability. Section 3-104(a)(3). 4. Henry Hughes, who operates a department store, executed the following instrument: $2,600 Chicago, March 5, 2017 On July 1, 2014, I promise to pay Daniel Dalziel, or order, the sum of Twenty-Six Hundred Dollars for the privilege of one framed advertising sign, size 24  36 inches, at one end of each of two hundred sixty motor coaches of the New Omnibus Company for a term of three months from May 15, 2017. Henry Hughes Is this instrument negotiable? Explain Answer: Unconditional. Negotiable. The mere fact that the consideration for which a promissory note is given is recited in it, although it may appear thereby that it was given for or in consideration of an executory contract, or promise on the part of the payee, will not destroy the negotiability of the note, unless it appears through the recital that it qualifies the promise to pay, and renders it conditional or uncertain, either as to the time of payment or the sum to be paid. A written promise to pay a certain sum of money at a day certain, for consideration thereafter to be rendered, is a valid promissory note. This rule adopts the general commercial understanding that such language is intended as a mere recital of the origin of the instrument and a reference to the transaction for information, but is not meant to condition payment according to the terms of any other agreement. 5. Paul agreed to lend Marsha $500. Thereupon Marsha made and delivered her note for $500 payable to Paul or order “ten days after my marriage.” Shortly thereafter Marsha was married. Is the instrument negotiable? Explain. Answer: Payable at a Definite Time. The note is not negotiable since Marsha’s marriage is not certain to happen. Section 3-108(b). 6. For the balance due on the purchase of a tractor Henry Brown executed and delivered to Jane Jones his promissory note containing the following language: January 1, 2017, I promise to pay to the order of Jane Jones the sum of $7,000 to be paid only out of my checking account at the XYZ National Bank of Pinckard, Illinois, in two installments of $3,500 each, payable on May 1, 2017, and on July 1, 2017, provided that if I fail to pay the first installment on the due date, the entire sum shall become immediately due. (Signed) Henry Brown Is the note negotiable? Explain. Answer: Particular Fund Doctrine. Negotiable. Revised Article 3 eliminates the particular fund doctrine. Two other points should be discussed: (1) The omission of "for value received" does not affect the negotiability of the note. (2) The note is payable at a definite time subject to acceleration and is, therefore, payable at a definite time. 7. Sam Sharpe executed and delivered to Don Dole the following instrument: Knoxville, Tennessee May 29, 2017 Thirty days after date I promise to pay Don Dole or order Five Thousand Dollars. The holder of this instrument shall have the election to require the assignment and delivery to him of my 100 shares of Brookside Iron Works Corporation stock in lieu of the payment of Five Thousand Dollars in money. (Signed) Sam Sharpe Is this instrument negotiable? Explain. Answer: Fixed Amount in Money. The instrument is not negotiable. An option to require something to be done in lieu of payment of money destroys the negotiability of an instrument because it is not desirable in commercial settings. 8. Explain whether the following instrument is negotiable. March 1, 2017 One month from date, I, James Jimson, hereby promise to pay Edmund Edwards: Six Thousand, Seven Hundred Fifty ($6,750.00) Dollars, plus 8 ¾ % interest. Payment for cutting machines to be delivered on March 15, 2017. James Jimson Answer: Fixed Amount in Money. Negotiable. The instrument provides a promise to pay a fixed amount in money. The requirement that payment be of a "fixed amount" only applies to the principal. Moreover, an instrument payable with a stated rate of interest is an obligation for a fixed amount. 9. The following instrument was given to Matthew Andrea: Chapel Hill, N.C. April 15, 2016 Ninety days after date pay to the order of Matthew Andrea, seven hundred and fifty dollars ($750). Value received and charge the trade account of Olympia Sales Corp., N.Y. Explain what type of instrument this is whether it is negotiable. Answer: Requirements of Negotiable Instruments. Negotiable. The instrument provides an order to pay a fixed amount in money, at a particular time, to a stated person. The reference to a particular fund does not destroy negotiability. 10. Broadway Management Corporation obtained a judgment against Briggs. The note on which the judgment was based reads in part: “Ninety Days after date, I, we, or either of us, promise to pay to the order of Three Thousand Four Hundred Ninety Eight and 45/100———Dollars.” (The underlined words and symbols were typed in; the remainder was printed.) There are no blanks on the face of the instrument, any unused space having been filled in with hyphens. The note contains clauses permitting acceleration in the event the holder deems itself insecure and authorizes judgment “if this note is not paid at any stated or accelerated maturity.” Explain whether the note is negotiable order paper. Answer: Payable to Order or to Bearer. Judgment for Briggs—this is not negotiable order paper. Under the U.C.C., an instrument is defined as bearer paper if, by its terms, (1) it is payable to the bearer, or to the order of the bearer, (2) it does not designate a specific payee, or (3) it is payable to “cash,” or to the order of “cash.” (Revised Article 3, Section 3-109 (c) essentially provides the same.) However, a negotiable instrument made payable "to the order of ____________ " is not bearer paper, but an incomplete order instrument, unenforceable until a payee's name is inserted. Here, neither the acceleration clause nor the confession of judgment clause destroys the negotiability of the note. Because the wording of the negotiable instrument implied that the payee's name was to be inserted between the promise and the amount, the note is order paper, not bearer paper. Thus, since the holder could not be determined from the face of the instrument, Broadway could not exercise the right of a holder to invoke the confession of judgment. Broadway Management Corp. v. Briggs, 30 Ill. App. 3d 403, 332 N.E. 2d 131 (1975). 11. Sandra and Thomas McGuire entered into a purchase and sale agreement for “Becca’s Boutique” with Pascal and Rebecca Tursi. The agreement provided that the McGuires would buy the store for $75,000, with a down payment of $10,000 and the balance of $65,000 to be paid at closing on October 5, 2017. The settlement clause stated that the sale was contingent upon the McGuires’ obtaining a Small Business Administration loan of $65,000. On September 4, 2017, Mrs. McGuire signed a promissory note in which the McGuires promised to pay to the order of the Tursis and the Green Mountain Inn the sum of $65,000. The note specified that interest payments of $541.66 would become due and payable on the fifth days of October, November, and December 2017. The entire balance of the note, with interest, would become due and payable at the option of the holder if any installment of interest was not paid according to that schedule. The Tursis had for several months been negotiating with Parker Perry for the purchase of the Green Mountain Inn in Stowe, Vermont. On September 7, 2017, the Tursis delivered to Perry a $65,000 promissory note payable to the order of Green Mountain Inn, Inc. This note was secured by transfer to the Green Mountain Inn of the McGuires’ note to the Tursis. Subsequently, Mrs. McGuire learned that her Small Business Administration loan had been disapproved. On December 5, 2017, the Tursis defaulted on their promissory note to the Green Mountain Inn. On June 11, 2017, PP, Inc., formerly Green Mountain Inn, Inc., brought an action against the McGuires to recover on the note held as security for the Tursis’ promissory note. Discuss whether the instrument is negotiable. Answer: Payable at a Definite Time. This Promissory note is not a negotiable instrument within U.C.C. Article 3. The note is not payable on demand or at a definite time because it does not provide for repayment of principal at a specified time. The acceleration clause provided that the amount was payable upon the maker's default which was also an indefinite time. Despite the fact that this is not a negotiable instrument, Perry still can claim rights as a contract assignee (he will have the same rights as his assignor). PP, Inc. v. McGuire, 509 F.Supp 1079 (D.C. N.J. 1981). 12. On September 2, 2011, Levine executed a mortgage bond under which she promised to pay the Mykoffs a preexisting obligation of $54,000. On October 14, 2017, the Mykoffs transferred the mortgage to Bankers Trust Co., indorsing the instrument with the words “Pay to the Order of Bankers Trust Company Without Recourse.” The Lincoln First Bank, N.A., brought this action asserting that the Mykoffs’ mortgage is a nonnegotiable instrument because it is not payable to order or bearer; thus it is subject to Lincoln’s defense that the mortgage was not supported by consideration because an antecedent debt is not consideration. Is the instrument payable to order or bearer? Discuss. Answer: Payable to Order or Bearer. The instrument is not payable to order or bearer. Antecedent debt is sufficient consideration to support a negotiable instrument, but not a nonnegotiable one. Under the U.C.C., a writing, to be negotiable, must "be payable to order or to bearer." Since the mortgage did not contain such language, it was not a negotiable instrument. The Mykoffs' indorsement could not change the instrument to a negotiable one. Therefore, the mortgage bond is nonnegotiable and unenforceable because it lacks legal consideration. Bankers Trusts' claim is unsecured in that, as assignee, Bankers Trust is subject to the defense of lack of consideration (its position can be no better than that of its assignor, the Mykoffs). In Re Levine, 23 B.R. 410 (N.Y. 1982). 13. Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument was a restriction stating that the note could not be transferred, pledged, or otherwise assigned without Horne’s written consent. As part of the same transaction between Horne and Clark, Horne gave Clark a separate letter authorizing Clark to pledge the note as collateral for a loan of $50,000 that Clark intended to secure from First State Bank. Clark did secure the loan and pledged the note, which was accompanied by Horne’s letter authorizing Clark to use the note as collateral. First State contacted Horne and verified the agreement between Horne and Clark as to using the note as collateral. Clark defaulted on the loan. When First Bank later attempted to collect on the note, Horne refused to pay, arguing that the note was not negotiable as it could not be transferred without obtaining Horne’s written consent. This suit was instituted. Is the instrument negotiable? Explain. Answer: Payable to Order or Bearer. Judgment for First State Bank, even though the note in question is not a negotiable instrument. In order for a note to be classified as a negotiable instrument, one must be able to ascertain from the instrument itself and without reference to other documents that the instrument (1) be in writing; (2) is signed by the maker or drawer; (3) contains a promise or order to pay; (4) be unconditional; (5) be for a sum certain in money [Revised Article 3: fixed amount]; (6) contains no other promise by the maker or drawer except as authorized by law; (7) is payable on demand or at a definite time; and (8) is payable to order or bearer. The note executed by Horne failed to meet the requirements of negotiability because the promise to pay was not payable to order or bearer. Rather, a transfer of the note was conditioned on the holder's obtaining Horne's written consent. This limitation, although it appeared only on the back of the instrument, was part of the instrument and destroyed its negotiability. Furthermore, that flaw could not be overcome by the accompanying letter from Horne to Clark. In order to facilitate the transfer of notes, the party receiving the note must be able to determine its validity and negotiability from the face of the note. Thus, the note was assigned to First State Bank and is governed by the law of assignments. First State Bank at Gallup v. Clark, 570 P.2d 1144 (N.M. 1977). 14. The Society National Bank (Society) agreed in a promissory note to lend U.S.A. Diversified Products, Inc. (USAD) up to $2 million in the form of an operating line of credit upon which USAD could make draws of varying amounts. The outstanding balance was to be paid on April 30 of the following year. USAD defaulted on the line of credit, and Society filed a complaint against USAD. Is the promissory note negotiable? Explain. Answer: Fixed Amount in Money. The line of credit is not a negotiable instrument. This problem is based on the case Yin v. Society National Bank Indiana, Court of Appeals of Indiana, 1996, 665 N.E.2d 58, http://scholar.google.com/scholar_case?case=10434850995862158719&q=665+N.E.2d+58+&hl=en&as_sdt=2,22. The agreement in this case is a line of credit upon which USAD could make draws of varying amounts. Indeed, the face of the note contains a notation regarding “draws.” Although USAD did make various draws upon the line of credit, it was under no obligation to make any draws whatsoever. In fact, if USAD had never drawn upon the line of credit, it would have owed nothing when the agreement matured. The principal would have been zero. This is noteworthy because it illustrates an important feature of the line of credit: to ascertain the principal owed, one must look beyond the agreement itself. Because of the potentially variable principal which results from such an arrangement, the line of credit contains no sum certain or fixed amount. Lacking an unconditional promise to pay a sum certain (fixed amount), the line of credit falls outside the definition of a negotiable instrument. ANSWERS TO “TAKING SIDES” PROBLEMS Holly Hill Acres, Ltd., executed and delivered a promissory note and a purchase money mortgage to Rogers and Blythe. The note provided that it was secured by a mortgage on certain real estate and that the terms of that mortgage “are by this reference made a part hereof.” Rogers and Blythe then assigned the note to Charter Bank, and the bank sought to foreclose on the note and mortgage. Holly Hill Acres refused to pay, claiming that the note was not negotiable and therefore subject to the defense that Holly Hill Acres had been defrauded by Rogers and Blythe. (a) Present the position that the note is a negotiable instrument. (b) What is the position that the note is nonnegotiable? (c) Is the note negotiable or nonnegotiable? Explain Answer: a) Many notes state that they are secured by a mortgage and this is an important part of commercial real estate law. There is nothing in such a provision that destroys the negotiability of a note. (b) The provision that the note is secured by a mortgage does not destroy the negotiability of an instrument. However, the provision that the terms of the mortgage are made part of this note does destroy the negotiability of the note. Such a provision makes one go beyond the four corners of the instrument to determine its terms, and this is not permissible for negotiability. (c) Judgment for Holly Hill. A note that states that it is subject to or governed by any other agreement does not contain an unconditional promise to pay, and therefore, it is not a negotiable instrument. Here, the note executed by Holly Hill Acres provided that it was secured by a mortgage on real estate. This is a common commercial practice, and such a reference does not in itself destroy the negotiability of the note. In addition, however, the note states that the terms of the mortgage are by reference made a part of the note. This condition on the promise to pay renders the note nonnegotiable because it depends on terms not appearing on the face of the instrument. And since the note, therefore, is nonnegotiable, Charter Bank, as the assignee of a mortgage securing a nonnegotiable note, must take subject to all defenses, including that of fraud, available against Rogers and Blythe. Holly Hill Acres, Ltd v. Charter Bank of Gainesville, 314 So.2d 209 (1975) Chapter 27 TRANSFER AND HOLDER IN DUE COURSE ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Roy Rand executed and delivered the following note to Sue Sims: “Chicago, Illinois, June 1, 2017; I promise to pay to Sue Sims or bearer, on or before July 1, 2017, the sum of $7,000. This note is given in consideration of Sims’s transferring to the undersigned title to her 2009 Buick automobile. (signed) Roy Rand.” Rand and Sims agreed that delivery of the car be deferred to July 1, 2017. On June 15, Sims sold and delivered the note, without indorsement, to Karl Kaye for $6,200. What rights, if any, has Kaye acquired? Answer: Transfer and Negotiation. Kaye has become a holder of the note. The note is negotiable in form. The fact that Sims had not indorsed the note does not preclude Kaye's becoming a holder. The note was bearer paper because it was payable to a specified person or bearer. Sect. 3-109. Since it was payable to bearer, transfer by delivery is a negotiation and the transferee becomes a holder. Sect. 3-201. The recital that it is given in consideration of Sims transferring title of his automobile to Rand does not impair negotiability. A promise or order otherwise unconditional is not made conditional by the fact that the instrument states its consideration, whether performed or promised, or the transaction which gave rise to the instrument. 2. Lavinia Lane received a check from Wilmore Enterprises, Inc., drawn on the Citizens Bank of Erehwon, in the sum of $10,000. Mrs. Lane indorsed the check “Mrs. Lavinia Lane for deposit only, Account of Lavinia Lane” and placed it in a “Bank by Mail” envelope addressed to the First National Bank of Emanon, where she maintained a checking account. She then placed the envelope over a tier of mailboxes in her apartment building along with other letters to be picked up by the postal carrier the next day. Flora Fain stole the check, went to the Bank of Omaha, where Mrs. Lane was unknown, represented herself to be Lavinia Lane, and cashed the check. Has Bank of Omaha taken the check by negotiation? Why or why not? Answer: Restrictive Indorsements. No. Lavinia Lane's indorsement is a restrictive indorsement. Section 3-206 permits further negotiation but the transferee must comply with the restriction. Section 3-206 provides: A depository bank must insure that the restrictive indorsement is honored. Here, application of the law to the facts discloses that the Bank of Omaha converted the check in controversy. The check was stolen; it had not become bearer paper; title remained in Lavinia Lane, subject to only that which might legally be done under the indorsement, namely, collection of the proceeds and turning them over to the true owner. The bank cashed the check for an impostor using the name of Lavinia Lane. Thus, the Bank of Omaha did not pay consistently with the restrictive indorsement and therefore did not become a holder. 3. For each of the following indorsements indicate (a) the type of indorsement and whether the indorsement is (b) blank or special, (c) restrictive or nonrestrictive, and (d) qualified or unqualified: (a) “Pay to Monsein without recourse.” (b) “Pay to Allinore for collection.” (c) “I hereby assign all my rights, title, and interest in this note to Fullilove in full.” (d) “Pay to the Southern Trust Company.” (e) “Pay to the order of the Farmers Bank of Nicholasville for deposit only.” Answer: Indorsements. (a) Special, non-restrictive and qualified. The fact that words of negotiability are not used in the indorsement is immaterial. The U.C.C. requires that such words be used in the body of the instrument for it to be negotiable. There is no requirement that a special indorsement state that it is payable to the order of a named indorsee; qualified indorsement indicates that the indorser is not a guarantor of payment in the event the person primarily liable does not pay. (b) Special, restrictive, and unqualified. (c) Special, non-restrictive and unqualified. The indorsement is presumed to be unqualified, unless there are words which express a different intention. The words used indicate a clear expression of assignment and transfer. (d) Special, non-restrictive and unqualified. (e) Special, restrictive and unqualified. 4. Explain whether each of the following transactions results in a valid negotiation: (a) Arnold gives a negotiable check payable to bearer to Betsy without indorsing it. (b) Golden indorses a negotiable, promissory note payable to the order of Golden, “Pay to Chambers and Rambis, (signed) Golden.” (c) Porter lost a negotiable check payable to his order. Kersey found it and indorsed the back of the check as follows: “Pay to Drexler, (signed) Kersey.” (d) Thomas indorsed a negotiable promissory note payable to the order of Thomas, “(signed) Thomas,” and delivered it to Sally. Sally then wrote above Thomas's signature, “Pay to Sally.” (e) Margarita issued to Poncho a negotiable promissory note payable to the order of Poncho. Poncho indorsed the note “Pay to Randy only, (signed) Poncho” and sold it to Randy. Randy then sold the note to Stephanie after indorsing it “Pay to Stephanie, (signed) Randy.” Answer: Transfer and Negotiation. (a) Valid negotiation. An instrument payable to bearer is negotiated by delivery. §3-201(a), 1-201(20), 3-205(5). (b) Valid negotiation. An instrument may be negotiated to more than one transferee as long as all transferees are co-owners of the entire instrument. (c) Not a valid negotiation. The instrument was payable to the order of Porter and may be negotiated by delivery and Porter's indorsement. (d) Valid negotiation. Thomas' indorsement in blank and delivery to Sally was a valid negotiation of an order instrument. U.C.C. Section 3-202(1). Sally, the holder, may convert a blank indorsement into a special indorsement by writing over Thomas' signature any contract consistent with the character of Thomas' indorsement. U.C.C. §3-204. (e) Valid negotiation. Stephanie acquires all the rights of a holder. Poncho' indorsement purported to prohibit further transfer but U.C.C. section 3-206(a) gives such an indorsement the same effect as an unrestricted indorsement. Accordingly, the negotiation to Stephanie is entirely valid and Stephanie becomes a holder. 5. Alpha issues a negotiable check to Beta payable to the order of Beta in payment of an obligation Alpha owed Beta. Beta delivers the check to Gamma without indorsing it in exchange for 100 shares of General Motors stock owned by Gamma. How has Beta transferred the check? What rights, if any, does Gamma have against Beta? Answer: Qualified Indorsements. Beta transferred the instrument by assignment; but Gamma has the specifically enforceable right to have the unqualified indorsement of Beta because the transfer was for value. U.C.C. §3-203(c). 6. Simon Sharpe executed and delivered to Ben Bates a negotiable promissory note payable to the order of Ben Bates for $500. Bates indorsed the note, “Pay to Carl Cady upon his satisfactorily repairing the roof of my house, (signed) Ben Bates,” and delivered it to Cady as a down payment on the contract price of the roofing job. Cady then indorsed the note and sold it to Timothy Tate for $450. What rights, if any, does Tate acquire in the promissory note? Answer: Conditional Indorsements. Tate acquires full rights in the note whether or not Cady satisfactorily repairs Bates' roof. Revised Article 3 makes conditional indorsements ineffective, allowing the indorsee the full right to enforce the instrument. 7. Debbie Dean issued a check to Betty Brown payable to the order of Cathy Cain and Betty Brown. Betty indorsed the check, “Payable to Elizabeth East, (signed) Betty Brown.” What rights, if any, does Elizabeth acquire in the check? Answer: Transfer and Negotiation. None. An instrument payable to two or more persons together must be indorsed by both of them. The purported transfer is ineffective. 8. Marcus issues a negotiable promissory note payable to the order of Parish for the amount of $3,000. Parish raises the amount to $13,000 and negotiates it to Hilda for $12,000. (a) If Hilda is a holder in due course, how much can she recover from Marcus? How much from Parish? If Marcus’s negligence substantially contributed to the making of the alteration, how much can Hilda recover from Marcus and Parish, respectively? (b) If Hilda is not a holder in due course, how much can she recover from Marcus? How much from Parish? If Marcus’s negligence substantially contributed to the making of the alteration, how much can Hilda recover from Marcus and Parish, respectively? Answer: Material Alteration. (a) Since a payee is a holder (Section 1-201(20)) his fraudulent and material alteration discharges any party whose obligation is thereby changed. Section 3-407(b). However, a subsequent holder in due course may enforce the instrument according to its original tenor. Section 3-407(c). Therefore, Hilda can recover $3,000 from Marcus. Parish is liable to Hilda for the full $13,000. Sections 3-416, 3-415. However, if Marcus 's negligence substantially contributed to the alteration, Hilda could recover the full $13,000 from either Marcus or Parish. Section 3-406. (b) If Hilda is not a holder in due course then the material and fraudulent alteration discharges Marcus's liability with respect to Hilda. Section 3-407(b). Therefore, Hilda can recover nothing from Marcus. Hilda can recover the full $13,000 from Parish. Marcus's negligence has no effect upon his discharge with respect to a holder who is not a holder in due course. Sections 3-406, 3-407. Therefore, Hilda would recover nothing from Marcus and $13,000 from Parish. 9. On December 2, 2017, Miles executed and delivered to Proctor a negotiable promissory note for $1,000, payable to Proctor or order due March 2, 2018, with interest at 14 percent from maturity, in partial payment of a printing press. On January 3, 2018, Proctor, in need of ready cash, indorsed and sold the note to Hughes for $800. Hughes paid $600 in cash to Proctor on January 3 and agreed to pay the balance of $200 one week later, namely, on January 10. On January 6, Hughes learned that Miles claimed a breach of warranty by Proctor and, for this reason, intended to refuse to pay the note when it matured. On January 10, Hughes paid Proctor $200, in conformity with their agreement of January 3. Following Miles’s refusal to pay the note on March 2, 2018, Hughes sues Miles for $1,000. Is Hughes a holder in due course? If so, for what amount? Answer: Holder in Due Course: Value. Decision for Hughes. Section 3-303 of the U.C.C. provides: An instrument is issued or transferred for value to the extent that the agreed promise has been performed. Hughes paid $200 of the consideration agreed to be paid after being placed upon notice of a personal defense, namely, breach of contract, available to Miles. Where a person pays any part of the consideration agreed to be paid after notice of infirmity in the instrument or defect in the title of the person negotiating it before he has paid the agreed amount, he is a holder in due course only to the extent of the amount previously paid by him. Six hundred dollars was paid by Hughes before he received notice and he is, accordingly, a holder in due course to the extent of $600 plus his pro rata share of discount (600/800) x200 or $150 for a total of $750. Sections 3-303, 3-302(d). 10. Thornton fraudulently represented to Daye that he would obtain for her a new car to be used in Daye’s business for $17,800 from Pennek Motor Company. Daye thereupon executed her personal check for $17,800 payable to the order of Pennek Motor Company and delivered the check to Thornton, who immediately delivered it to the motor company in payment of his own prior indebtedness. The motor company had no knowledge of the representations made by Thornton to Daye. Pennek Motor Company now brings an action on the check which was not paid against Daye, who defends on the ground of failure of consideration. Is Pennek subject to this defense? Explain. Answer: Payee as Holder in Due Course. Decision for Pennek Motor Company. Section 3-302(comment 4) of the U.C.C. provides that a payee may be a holder in due course. The check was complete when Pennek Motor Company received it from Thornton, and there was nothing in the character of the instrument to charge it with knowledge of any infirmity or put it on inquiry. Pennek Motor Company became the holder of the check in good faith, for value, without notice of any infirmity, and without reason to question its authenticity. The check in its hands was not subject to the defense of failure of consideration (a personal defense) interposed by Daye. It should be noted that the FTC rule limiting holder in due course rights is not applicable to this situation (a) payment by check and not on credit and (b) a business, not consumer, transaction. 11. Adams, who reads with difficulty, arranged to borrow $2,000 from Bell. Bell prepared a note, which Adams read laboriously. As Adams was about to sign it, Bell diverted Adams’s attention and substituted the following paper, which was identical to the note Adams had read except that the amounts were different: On June 1, 2017, I promise to pay Ben Bell or order Twelve Thousand Dollars with interest from date at 16 percent. This note is secured by certificate No. 13 for 100 shares of stock of Brookside Mills, Inc. Adams did not detect the substitution, signed as maker, handed the note and stock certificate to Bell, and received from Bell $2,000. Bell indorsed and sold the paper to Fore, a holder in due course, who paid him $11,000. Fore presented the note at maturity to Adams, who refused to pay. What are Fore’s rights, if any, against Adams? Answer: Fraud in the Execution. Although the note is negotiable (the fact that it appears to be undated does not affect its negotiable character), Fore can only recover from Bell and not from Adams. Fraud in the execution is a real defense. Section 3-305 (a)(1)(iii). Fore, a holder in due course, took subject to the real defense. There are two types of fraud. Fraud in the inducement occurs when the maker, knowing the contents of the paper, is persuaded or induced to sign it by false representations of another. Fraud in the execution occurs where the maker, due to some trick or deception by another, and without negligence on his part, signs a paper, which is a different document from the one that he reasonably believed he was signing. Fraud in the inducement is a personal defense, good only against a holder. The point on which most cases distinguishing the two types of fraud turn is whether the issuer was negligent in not knowing the nature of the paper he signed. This is a question of fact. It is generally held that if the issuer, though literate, is prevented by a trick of the promisee from reading the instrument and learning its nature — always assuming no negligence by the issuer — there is fraud in the execution. In the problem presented, the maker read with difficulty; he read the paper placed before him and ascertained its contents to be what he intended; by trick of the promisee he was thrown off guard and another paper substituted for the one he had just read. Under these circumstances, there was no negligence by the maker and the fraud was fraud in the execution. Accordingly, even though the note is negotiable in form and Fore is a holder in due course, he cannot recover on this note from the maker, Adams. 12. On January 2, 2017, seventeen year-old Martin paid $2,000 for a used motorboat to use in his fishing business, after Dealer’s fraudulent misrepresentation of the condition of the boat. Martin signed an installment contract for $1,500, and gave Dealer the following instrument as down payment: Dated: 2017 I promise to pay to the order of Dealer, six months after date, the sum of $500 without interest. This is given as a down payment on an installment contract for a motorboat. (signed) Martin Dealer, on July 1, sold his business to Henry and included this note in the transaction. Dealer indorsed the note in blank and handed it to Henry, who left the note in his office safe. On July 10, Sharpie, an employee of Henry, without authority, stole the note and sold it to Bert for $300, indorsing the note “Sharpie.” At the time, in Bert’s presence, Sharpie filled in the date on the note as February 2, 2017. Bert demanded payment from Martin, who refused to pay. What are Bert’s rights against Martin? Answer: Notice an Instrument is Overdue. Incomplete Instrument. Ordinarily, the failure to date an instrument does not impair its negotiability except where the due date is made by reference to the date of the instrument, such as "six months after date." Since the time of payment cannot be determined on the face of the instrument, it would not be negotiable unless it was subsequently completed by dating it. Sharpie can complete the blank by filling in the date and thus make it negotiable. An incomplete instrument is not negotiable until completed, but when it is completed in accordance with authority given, it is effective as completed. Section 3-115, U.C.C. In this case, however, while there was authority to complete the instrument on the date it was issued, Sharpie made an unauthorized completion which would amount to an alteration. Section 3-115, U.C.C. Nevertheless, Section 3-407 provides that a subsequent holder in due course may in all cases enforce the instrument as completed. Accordingly, since Bert is a holder in due course, the unauthorized completion by Sharpie could not be a defense so far as Martin is concerned. The fact that Bert purchased from a thief does not affect his rights. Bert has given value and while he observed the completion of the instrument, notice that an incomplete instrument has been completed is not notice of a possible defense. Minority. Section 3-305 provides that a holder in due course does not take the instrument free of the defense of infancy to the extent that it is a defense to a simple contract. Thus, the question would be determined by reference to the particular state law relating to the right of a minor generally to rescind this type of purchase contract. In addition, it must be determined whether the boat was a necessary. Fraud. Martin's defense of fraud in the inducement is not available against a holder in due course. 13. McLaughlin borrowed $10,000 from Adler, who, apprehensive about McLaughlin’s ability to pay, demanded security. McLaughlin indorsed and delivered to Adler a negotiable promissory note executed by Topping for $12,000 payable to McLaughlin’s order in twelve equal monthly installments. The note did not contain an acceleration clause, but it recited that the consideration for the note was McLaughlin’s promise to paint and shingle Topping’s barn. At the time McLaughlin transferred the note to Adler, the first installment was overdue and unpaid. Adler was unaware that the installment had not been paid. Topping did not pay any of the installments on the note. When the last installment became due, Adler presented the note to Topping for payment. Topping refused upon the ground that McLaughlin had not painted or shingled her barn. What are Adler's rights, if any, against Topping on the note? Answer: Holder in Due Course Status. Judgment for Adler against Topping for $10,000. When Adler obtained the negotiable promissory note as security for repayment of his $10,000 loan to McLaughlin, he became a holder in due course of this note. The note is recited to be a negotiable promissory note, and the fact that it made reference to the consideration for the note does not make the promise conditional so as to impair the negotiability of the note. To become a holder in due course of the note, it was necessary that the note be indorsed and delivered to Adler, as it was, and that Adler take it for value, in good faith, without notice that it was overdue or had been dishonored or of any defense against or claim to it on the part of any person and without reason to question its authenticity. Taking the note for security for the antecedent obligation of McLaughlin was "value" and therefore Adler took the note for value. Adler had no knowledge that the note was overdue or dishonored and became a holder in due course of the note. Topping has a good defense to payment of the note insofar as McLaughlin is concerned. McLaughlin had not performed the work required of him, nor furnished the consideration for the note and Topping does not have to pay it to him. However, Topping is responsible to Adler for payment of the note, despite her personal defense against McLaughlin. A holder in due course of a note takes it free from all defenses of any party to the instrument with whom the holder has not dealt, except for real defenses; none of which are applicable here. However, the amount which Adler may recover on the note is not the full amount of the note, but only the amount which McLaughlin owes him and which is secured by the indorsement of the note. If Topping had no defense against McLaughlin on the note, then Adler could collect the entire amount of the note and would be obligated to hold any balance in excess of his claim against McLaughlin for the benefit of McLaughlin. But if the maker of the note has a good defense against the payee, as here, then the holder in due course of the note, as security for an obligation due him, can only recover on the note to the extent of the debt for which it was given as security. Thus, Adler's claim against Topping on the note is limited to the $10,000 owing by McLaughlin to Adler plus interest thereon. 14. Adams, by fraudulent representations, induced Barton to purchase one hundred shares of the capital stock of the Evermore Oil Company. The shares were worthless. Barton executed and delivered to Adams a negotiable promissory note for $5,000, dated May 5, in full payment for the shares, due six months after date. On May 20, Adams indorsed and sold the note to Cooper for $4,800. On October 21, Barton, having learned that Cooper now held the note, notified Cooper of the fraud and stated he would not pay the note. On December 1, Cooper negotiated the note to Davis who, while not a party, had full knowledge of the fraud perpetrated on Barton. Upon refusal of Barton to pay the note, Davis sues Barton for $5,000. Is Davis a holder in due course or, if not, does he have the rights of a holder in due course? Explain. Answer: Shelter Rule. Decision for Davis. Cooper took the note in good faith, without notice, for value and without reason to question its authenticity and hence became a holder in due course. Davis, a transferee from a holder in due course, enjoys the rights of a holder in due course under the shelter theory, U.C.C. Section 3-203 (b), and as such cuts off all personal defenses. Barton's defense of fraud in the inducement is a personal defense and accordingly is ineffective against Davis. 15. Donna gives Peter a check for $3,000 in return for a desktop computer. The check is dated December 2. Peter transfers the check for value to Howard on December 14, and Howard deposits it in his bank on December 20. In the meantime, Donna has discovered that the computer is not what was promised and has stopped payment on the check. If Peter and Howard disappear, may the bank recover from Donna notwithstanding her defense of failure of consideration? What will be the bank’s cause of action? Answer: Holder in Due Course: Value, Lack of Notice. The bank will argue that it is a holder in due course by virtue of having taken the check for value without notice of claims or defenses against it. Donna's claim would appear to be a personal defense (i.e., warranty or merchantability) and the bank would not be subject to it. 16. The drawer, Commercial Credit Corporation (Corporation), issued two checks payable to Rauch Motor Company. Rauch indorsed the checks in blank, deposited them to its account in University National Bank, and received a corresponding amount of money. The Bank stamped “pay any bank” on the checks and initiated collection. However, the checks were dishonored and returned to the Bank with the notation “payment stopped.” Rauch, through subsequent deposits, repaid the bank. Later, to compromise a lawsuit, the Bank executed a special two-page indorsement of the two checks to Lamson. Lamson then sued the Corporation for the face value of the checks, plus interest. The Corporation contends that Lamson was not a holder of the checks because the indorsement was not in conformity with the Uniform Commercial Code in that it was stapled to the checks. Is Lamson a holder? Why? Answer: Indorsements. Yes, Lamson is a holder and would prevail. Because the Bank indorsed the checks to Lamson by name, thus qualifying as a special indorsement, the restrictive indorsement of "Pay any Bank" no longer prevented Lamson from becoming a holder. The problem was whether the special indorsement was correctly and properly affixed to the checks under Section 3-202(2) which provides that "(a)n indorsement must be written...on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof." [Revised 3-204(a) provides: “For determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.”] Since it was physically impossible to place all of the language on the two small checks, the indorsement had to be affixed to the checks in some way. Such a paper is called an allonge. The Court agreed that paper clipping is not sufficient but held that stapling the allonge to the checks was a permanent attachment to the checks so that it becomes "a part thereof." (Under Revised Article 3, it would be adequate.) Section 1-201(20) defines a holder as a person who possesses an instrument indorsed to him. The Bank's special indorsement, stapled to the checks, made Lamson a holder. As a holder, Lamson was entitled to payment unless the Corporation establishes a defense. Lamson v. Commercial Credit Corp., 531 P.2d 966 (Co. 1975). [Note: Decision would change under Revised Article 3, Section 3-204(a).] 17. While assistant treasurer of Travco Corporation, Frank Mitchell caused two checks, each payable to a fictitious company, to be drawn on Travco’s account with Brown City Savings Bank. In each case, Mitchell indorsed the check in his own name and then cashed it at Citizens Federal Savings & Loan Association of Port Huron. Both checks were cleared through normal banking channels and charged against Travco’s account with Brown City. Travco subsequently discovered the embezzlement, and after Citizens denied its demand for reimbursement, Travco brought a suit against Citizens. Is the indorsement effective? Explain. Answer: Fictitious Payee Rule. No, the indorsement is not effective against Travco. An endorsement by any person in the name of a named payee is effective if an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest. Here, however, although Mitchell was an employee of the drawer, Travco, and had supplied the drawer with the names of the fictitious payees, neither check was indorsed in the name of the named payee. Instead, Mitchell indorsed them in his own name, and as a consequence, the indorsements were not effective against Travco, and Citizens is therefore liable. Travco Corporation v. Citizens Federal Savings and Loan Association of Port Huron, 42 Mich. App. 291, 201 N.W. 2d 675 (1972). 18. Eldon’s Super Fresh Stores, Inc., is a corporation engaged in the retail grocery business. William Drexler was the attorney for and the corporate secretary of Eldon’s and was also the personal attorney of Eldon Prinzing, the corporation’s president and sole shareholder. From January 2017 through January 2018, Drexler maintained an active stock trading account in his name with Merrill Lynch. Eldon’s had no such account. On August 12, 2017, Drexler purchased one hundred shares of Clark Oil & Refining Company stock through his Merrill Lynch stockbroker. He paid for the stock with a check drawn by Eldon’s, made payable to Merrill Lynch, and signed by Prinzing. On August 15, 2017, Merrill Lynch accepted the check as payment for Drexler’s stock purchase. There was no communication between Eldon’s and Merrill Lynch until November 2018, fifteen months after the issuance of the check. At that time, Eldon’s asked Merrill Lynch about the whereabouts of the stock certificate and asserted a claim to its ownership. Does Merrill Lynch qualify as a holder in due course? Why? Answer: Holder in Due Course: Notice of Defense. Yes, judgment for Merrill Lynch. A payee may be a holder in due course if it can be shown that it took the instrument for value, in good faith, without reason to question its authenticity and without notice that the instrument was overdue or had been dishonored or of any defense against or claim to it on the part of any person. At issue here is whether Merrill Lynch took the instrument without notice of a defense to it by Eldon's. Merrill Lynch did not have actual knowledge of the claim, nor did it have "inferable knowledge" from the fact that Drexler settled his account with a check drawn by Eldon's. The bank check was delivered to Merrill Lynch by Eldon's agent, Drexler, with the consent and knowledge of Eldon's president; it contained no restrictions or designations as to its use; and Eldon's had no trading account with Merrill Lynch; therefore, Merrill Lynch took the check without notice of Eldon's claims and became a holder in due course of the check free from Eldon's claim of wrongful delivery. Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 296 Minn. 130, 207 N.W.2d 282 (1973). 19. Walter Duester purchased a John Deere combine from St. Paul Equipment. John Deere Co. was the lender and secured party under the agreement. The combine was pledged as collateral. Duester defaulted on his debt, and the manager of St. Paul, Hansen, was instructed to repossess the combine. Hansen went to Duester’s farm to accomplish this. Duester told him that he had received some payments for custom combining and would immediately purchase a cashier’s check to pay the John Deere debt. Hansen followed Duester to the defendant, Boelus State Bank. Hansen remained outside, and Duester returned in a few minutes with a cashier’s check in the amount of the balance of his indebtedness payable to John Deere. The check had been signed by an authorized bank employee. When John Deere, however, presented the check to the bank for payment shortly thereafter, the bank refused to pay, claiming that Duester acquired the cashier’s check by theft. Is John Deere subject to this defense? Why? Answer: Payee as a Holder in Due Course/Personal Defense. No, judgment for John Deere affirmed. Theft of an instrument constitutes a personal defense. The U.C.C. provides that a holder in due course takes an instrument free of the personal defense of theft of the instrument. The court concluded that John Deere was indeed a holder in due course since it had given value in the form of taking an instrument in payment of an antecedent debt and that it had acted in good faith and without notice that was any claim or defense applicable to the instrument. Although the Bank subsequently informed John Deere of the theft, the court stated that subsequent knowledge of a defense or claim does not impair holder in due course status. In addition, the payee of a negotiable instrument may be a holder in due course provided he meets the requirements. In obtaining the check drawn on the defendant bank, John Deere did not deal with the bank, and took the instrument for value, in good faith, and without notice. 20. Stephens delivered 184 bushels of corn to Aubrey, for which he was to receive $478.23. Aubrey issued a check with $478.23 typewritten in numbers, and on the line customarily used to express the amount in words appeared “$100478 and 23 cts” imprinted in red with a check-writing machine. Before Stephens cashed the check, someone crudely typed “100” in front of the typewritten $478.23. When Stephens presented this check to the State Bank of Salem, Anderson, the manager, questioned Stephens. Anderson knew that Stephens had just declared bankruptcy and was not accustomed to making such large deposits. Stephens told Anderson he had bought and sold a large quantity of corn at a great profit. Anderson accepted the explanation and applied the monies to nine promissory notes, an installment payment, and accrued interest owed by Stephens. Stephens also received $2,000 in cash, with the balance deposited in his checking account. Later that day, Anderson reexamined the check and discovered the suspicious appearance of the typewriting. He then contacted Aubrey, who said a check in that amount was suspicious, whereupon Anderson froze the transaction. When Aubrey stopped payment on the check, the bank sustained a $28,193.91 loss because Stephens could not be located. The bank then sued Aubrey for the loss. Explain who should bear the loss. Answer: Holder. Judgment for State Bank of Salem affirmed. Under the U.C.C., value is given for an instrument when the instrument is taken in payment for an antecedent debt. Moreover, when credit is drawn upon, value is given to that extent. Value is also given to the extent that the funds represented by the check are applied to an overdrawn account. Here, the bank's application of funds made available by the Aubrey check to Stephens’ indebtedness and the surrender of the notes constituted taking the instrument for value. Furthermore, the bank took the check without notice of Aubrey's defense. In case of ambiguity, typewritten terms control printed terms and words control figures. The court determined that the impressions made by the check imprinter were not "printed" terms but should be considered "words," since they were on the line typically used for expressing the amount in words, not figures. Moreover, Aubrey did not prove that Anderson violated customary banking standards by not comparing the two amounts. Consequently, Anderson's reliance upon the amount expressed by the check imprinter was reasonable. In addition, the typed figure "100" was not such visible evidence of an alteration of the check as to put the bank on notice of Aubrey's defense. Finally, the circumstances surrounding such a transaction may be so irregular as to put a reasonably prudent banker on notice of a defense or claim. Anderson's knowledge of Stephens’ questionable general financial position, by itself, however, is insufficient to defeat the bank's holder in due course status. Thus, the bank can enforce the check against Aubrey to the extent it gave value for it. St. Paul Fire & Marine Ins. Co. v. State Bank of Salem, 412 N.E.2d 103. 21. L&M Home Health Corporation (L&M) had a checking account with Wells Fargo Bank. L&M engaged Gentner and Company, Inc. (Gentner) to provide consulting services, and paid Gentner for services rendered with a check drawn on its Wells Fargo account in the amount of $60,000, dated September 23, 2016. Eleven days later, on October 4, 2016, L&M orally instructed Wells Fargo to stop payment on the check. Eleven days after that, on October 15, 2016, Gentner presented the L&M check to Wells Fargo for payment. On the same date the teller issued a cashier’s check, payable to Gentner, in the amount of $60,000. On November 5, 2016, Wells Fargo placed a “stop payment order” on the cashier’s check. On January 15, 2017, Gentner deposited the cashier’s check at another bank, but it was not honored and was returned stamped “Payment Stopped.” Gentner sues Wells Fargo for wrongful dishonor of the cashier’s check. Is Gentner a holder in due course of the check? Discuss.. Answer: Holder in Due Course. The trial court ruled in favor of Gentner, finding that Gentner was a holder in due course of the cashier's check. To be a holder in due course, one must take the instrument "for value, in good faith, without notice that the instrument is overdue, has been dishonored, contains an unauthorized signature or has been altered, and without notice of any claim to the instrument” (and now, under the revised article, without reason to question its authenticity.) The reason achieving the status of a holder in due course is important is that the only defenses available against a holder in due course are real defenses that include "infancy" of the obligor, "duress," lack of legal capacity, illegality of the transaction, fraud and discharge of the obligor by bankruptcy. When the instrument is not in the hands of a holder in due course, the obligor can raise many other defenses (personal or contractual defenses). Wells Fargo contends that the holder in due course doctrine does not apply because the cashier's check was purchased by Gentner for payment to itself rather than by another party for payment to Gentner. Logically, one would think that must be so and that Gentner's status as the payee of the cashier's check would preclude it from claiming holder in due course status. However, "[t]he payee of an instrument can be a holder in due course" even though "use of the holder in due course doctrine by the payee of an instrument is not the normal situation," and only "in a small percentage of cases" would it be "appropriate to allow the payee of an instrument to assert rights as a holder in due course." The situation of a bank accepting a customer's check and giving the payee a cashier's check in return appears to fall within that small percentage of cases which presents an opportunity for the payee to establish holder in due course status. Gentner, the payee of the cashier's check, was acting in complete good faith and had no knowledge of any potential defenses held by Wells Fargo as drawer of the instrument. Specifically it did not know, and had no reason to know, that the L & M check which it submitted to Wells Fargo was subject to a stop notice and was, from Wells Fargo's perspective, worthless since the funds could not be recovered from the customer's account. Gentner and Company, Inc. v. Wells Fargo Bank, 90 Cal. Rptr. 2d 904. 22. Stanley A. Erb became a vice president of the Shearson Lehman Brothers, Inc. branch office in Provo, Utah. That year, Erb was contacted by McKay Matthews, the controller for the Orem, Utah–based WordPerfect Corporation and its sister corporation, Utah Softcopy. At Matthews’s request, Erb established and managed three separate investment accounts at Shearson. The accounts were for the benefit of the WordPerfect and Utah Softcopy corporations, and one account was for the WordPerfect principals, Allen Ashton, Bruce Bastian, and Willard Peterson. In March of that year, Erb personally accepted from Matthews a check drawn by Utah Softcopy for $460,150.23 and payable to the order of “ABP Investments.” At that time, there was no ABP investment account at Shearson, although the WordPerfect principals maintained accounts elsewhere in that name. Erb accepted the check, but rather than deposit it in one of the three authorized accounts, Erb opened a new account at Shearson in the name of “ABP Investments,” apparently by forging the signature of Bruce Bastian on the new account documents. Over the next eleven months, Erb induced Shearson to draft thirty-seven checks on the ABP Investment account, payable to ABP Investments, by submitting falsified payment requests to Shearson’s cashier. The checks were mailed to an Orem post office box unknown to WordPerfect and its principals. Erb would obtain the checks and indorse them in the name of ABP Investments. He took the checks to Wasatch Bank for deposit into his personal account. Wasatch accepted the deposits and later allowed Erb to withdraw $504,295.30, the entire amount, from the account. Shearson discovered Erb’s activities after Erb had left Shearson after two years. Shearson brought a suit against Wasatch Bank. Discuss who should prevail. Answer: Indorsements. Judgment for Wasatch. The "fictitious payee" defense as articulated in section 3-405(1)(c) of the Uniform Commercial Code operates under the facts of the present case to shield the collecting bank, Wasatch, from liability resulting from Erb's misconduct while in Shearson's employ. Erb deliberately induced the issuance of checks by Shearson. The payee named on those checks was never intended by Erb to take an interest in the checks. In such circumstances the mandate of the Code is clear–the drawer shall bear the loss resulting from the misdeeds of its employee. Wasatch's conduct in the relevant transactions raises serious questions about whether the bank discharged its duty to act in a commercially reasonable manner. Nevertheless, no fact has been alleged which would support the inference that Wasatch acted in bad faith so as to preclude the operation of the fictitious payee defense. 23. Turman executed a deed of trust note for $107,500 payable to Ward’s Home Improvement, Inc. (Ward’s). The note was in consideration of a contract for Ward’s to build a house on Turman’s property. On the same day, Ward’s executed an assignment of the note to Robert Pomerantz for which Pomerantz paid Ward’s $95,000. Although the document uses the word “assignment,” no notation or indorsement was made on the note itself. Is Pomerantz a holder? Is Pomerantz a holder in due course? Explain. Answer: Holder. Judgment reversed and remanded. Pomerantz is not a holder in due course. “[I]f an instrument is payable to an identified person, negotiation requires its indorsement by the holder.” UCC § 3-201. An assignment is not an indorsement, UCC § 3-204(a), and consequently, the transaction between Ward and Pomerantz was not a negotiation and Pomerantz is not a holder. An assignment vests in the transferee any rights of the transferor to enforce the contract. The rights of the transferee are derivative of the transferor’s. Consequently, the assignee of a negotiable instrument is subject to defenses which the maker could assert against the assignor. One such defense is failure of consideration. If an instrument is issued for a promise, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. Since Pomerantz is not a holder in due course, he is subject to this defense as if it were asserted against Ward. 24. Certain partners of the Finley Kumble law firm signed promissory notes that secured loans made to the law firm by the National Bank of Washington (NBW). When Finley Kumble subsequently declared bankruptcy and defaulted on the loans, NBW filed suit to collect on the notes. Then NBW itself became insolvent, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver for NBW. The FDIC brought suit against the partners who had signed the note. Section 1823(e) of the Federal Deposit Insurance Act places the FDIC in the position of a holder in due course and thus bars all personal defenses against the FDIC claims. Twenty of the Finley partners claimed that they had signed the notes under the threat that their wages and standing in the firm would decrease if they refused to sign. Such a threat constituted economic duress, which, they contended, is not a personal defense but a real defense. Discuss who should prevail. Answer: Duress. Judgment for F.D.I.C. First, s 3-305(2)(b) provides that holders in due course take free of all defenses except for "(b) such other incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity." The words "such" and "as" indicate that the section is not stating that any type of duress renders an obligation to be a nullity. Rather, it suggests that only those types of duress that are so severe as to render it a nullity stand as exceptions to the rule that holders in due course take free of defenses. Of course, the question left open is what type of duress is severe enough to render it a nullity. Neither UCC s 3-305(2)(b) nor the Official Comment attempt to establish a rule governing which types of duress render a transaction void as opposed to merely voidable. Instead, Official Comment 6 declares that "[a]ll such matters are therefore left to the local law." Duress takes two forms. In one, a person physically compels conduct that appears to be a manifestation of assent by a party who has no intention of engaging in that conduct. The result of this type of duress is that the conduct is not effective to create a contract (s 174). In the other, a person makes an improper threat that induces a party who has no reasonable alternative to manifesting his assent. The result of this type of duress is that the contract that is created is voidable by the victim. ANSWERS TO “TAKING SIDES” PROBLEMS Wilson was employed as the office manager of Palmer & Ray Dental Supply of Abilene, Inc. Soon after an auditor discovered a discrepancy in the company’s inventory, Wilson confessed to cashing thirty-five checks that she was supposed to deposit on behalf of the company. Palmer & Ray Dental Supply used a rubber stamp to indorse checks. The stamp listed the company’s name and address but did not read “for deposit only.” The company’s president, James Ray, authorized Wilson to indorse checks with this stamp. Wilson cashed all of the checks at First National Bank. (a) What are the arguments that First National Bank is liable to Palmer & Ray Dental Supply for converting the company’s funds by giving Wilson cash instead of depositing the checks into the company’s bank account? (b) What are the arguments that First National Bank is not liable to Palmer & Ray Dental Supply? (c) Explain who should prevail. Answer: (a) a. Palmer & Ray Dental Supply would argue that the indorsements were unauthorized. (b) First National Bank would argue that the indorsements were authorized. (c) First National Bank should prevail. Palmer & Ray Dental Supply of Abilene, Inc. v. First National Bank, Court of Civil Appeals of Texas (1972), 477 S.W.2d 954. A blank indorsement is one that specifies no particular indorsee and that may consist of a mere signature. A restrictive indorsement, on the other hand, includes one that uses the words “for deposit.” The rubber stamp used by Wilson to indorse the checks on the company’s behalf was a blank indorsement, because it stated only the company’s name and address. Moreover, Wilson indorsed the checks under the actual implied or apparent authority granted by Ray, the company president. Accordingly, when First National Bank delivered cash to Wilson instead of depositing the proceeds from the checks into the company’s account, the bank acted in conformity with the indorsement. Chapter 28 LIABILITY OF PARTIES ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. The undersigned promises to pay to the order of John Doe, Nine Hundred Dollars with interest from date of note. Payment to be made in five monthly installments of One Hundred Eighty Dollars, plus accrued interest beginning on December 1, 2017. In the event of default in the payment of any installment or interest on installment date, the holder of this instrument may declare the entire obligation due and owing and proceed forthwith to collect the balance due on this instrument. (Signed) Acton, agent. On December 18, 2017, no payment having been made on the note, Doe indorsed and delivered the instrument to Todd to secure a preexisting debt in the amount of $800. On January 18, 2018, Todd brought an action against Acton and Phi Corporation, Acton’s principal, to collect the full amount of the instrument with interest. Acton defended on the basis that he signed the instrument in a representative capacity and that Doe had failed to deliver the consideration for which the instrument had been issued. Phi Corporation defended on the basis that it did not sign the instrument and that its name does not appear on the instrument. For what amount, if any, are Acton and Phi Corporation liable? Answer: Signature. Liability of Acton: The instrument is, by its terms, payable to the order of a designated party. Words of negotiability are present. The instrument in question satisfies the requirements of a negotiable instrument. While the amount written in figures and in writing differ, the words control figures except when the words are ambiguous in which case figures control. The instrument in question is clearly for a fixed amount in that the words control the figures, and interest will be at the legal rate from date of the instrument. An instrument is payable at a definite time if by its terms it is payable at a definite time subject to any acceleration. This is an installment note with a specified maturity date for each installment. The fact that the instrument contains an acceleration clause does not affect its negotiability. No person is liable on an instrument unless his signature appears thereon. Section 3-401(a). A signature may be made by an agent or other representative and his authority to make it may be established as in other cases of representation. No particular form of appointment is necessary to establish such authority. However, Section 3-402(b)(2) provides: if (i) the form of the signature does not show unambiguously that the signature is made in a representative capacity or (ii) the represented person is not identified in the instrument, the representative is liable to a holder in due course that took the instrument without notice “of the representative capacity.” With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument.” Todd gave value for the instrument. Section 3-303 states that a holder takes the instrument for value to the extent that he acquires a security interest or lien on the instrument or when he takes the instrument as security for an antecedent claim against any person whether or not the claim is due. Even though Todd has given value to the extent of his lien, he cannot qualify if he is charged with notice that the instrument is overdue in part at the time he purchased the instrument because he knew or should have known of the fact that the first installment was past due. A purchaser has notice that the instrument is overdue if he has reason to know that any part of the principal amount is overdue at the time he acquired the instrument. Todd qualifies as a holder of the instrument but not as a holder in due course. Todd's action on the instrument is subjective to any defense which would be available to the maker of a non-negotiable contract. The defense of failure of consideration is, therefore, available against Todd. Assuming the agent Acton had the authority to sign the instrument, and did sign in a representative capacity, he failed to identify his principal. Therefore, he is personally liable on the instrument unless he can show that Doe did not intend for him to be liable. This is Acton's instrument, but as previously mentioned he has a valid defense. Liability of Phi Corporation. Section 3-401 of the U.C.C. states that no person is liable on an instrument unless his signature appears thereon. An undisclosed principal cannot be held liable on the negotiable instrument even though he may have liability on the underlying debt. The corporation is in no way liable on the instrument whether or not Acton was authorized to act for the corporation. The Phi Corporation cannot be held liable on the instrument because its name nowhere appears on the instrument. 2. While employed as a night watchman at the place of business of A. B. Cate Trucking Company, Fred Fain observed that the office safe had been left unlocked. It contained fifty payroll checks, which were ready for distribution to employees two days later. The checks had all been signed by the sole proprietor, Cate. Fain removed five of these checks and two blank checks that were also in the safe. Fain forged the indorsements of the payees on the five payroll checks and cashed them at local supermarkets. He then filled out one of the blank checks, making himself payee, and forged Cate’s signature as drawer. After cashing that check at a supermarket, Fain departed by airplane to Jamaica. The six checks were promptly presented for payment to the drawee bank, the Bank of Emanon, which paid each one. Shortly thereafter, Cate learned about the missing payroll checks and forgeries and demanded that the Bank of Emanon credit his account with the amount of the six checks. Must the Bank comply with Cate’s demand? What are the Bank’s rights, if any, against the supermarkets? You may assume that the supermarkets cashed all of the checks in good faith. Answer: Warranties on Presentment. The Bank of Emanon must comply with Cate’s demands unless it can prove that Cate was negligent. The office safe being left unlocked may possibly be construed as negligence. The Bank of Emanon is entitled to recover from the supermarkets its loss on the 5 payroll checks with the forged indorsements. Because the payees’ indorsements were forged, the supermarket breached the presenter’s warranty to the bank that it was “entitled to enforce” the checks. Section 3-417(a). The instrument was paid, thus there is no breach of indorser’s liability. The bank may not, however, recover from the supermarket on the check on which Fain forged Cate’s name as drawer. The supermarket will prevail because presenters’ warranties do not cover a guarantee of a forged maker or drawer’s signature. This part of the question involves the principle of Price v. Neale which held that as between a drawee (the bank here) and some party who paid value in good faith for an instrument containing a forged drawer’s signature, the drawee should bear the loss. The principle of this classic case is codified in Section 3-418. 3. A negotiable promissory note executed and delivered by B to C passed in due course to and was indorsed in blank by C, D, E, and F. G, the present holder, strikes out D’s indorsement. What is the liability of D on her indorsement? Answer: Cancellation and Renunciation. G, the holder of the instrument, may discharge the liability of any party on it by canceling it in any manner apparent on the face of the instrument. Section 3-604(a) provides the following example of cancellation: by intentional “cancellation or striking out of the party's signature." Therefore, G has discharged D's liability. 4. On June 15, 2012, Justin, for consideration, executed a negotiable promissory note for $10,000, payable to Reneé on or before June 15, 2017. Justin subsequently suffered financial reverses. In January 2017, Reneé on two occasions told Justin that she knew he was having a difficult time; that she, Reneé, did not need the money; and that the debt should be considered completely canceled with no other act or payment being required. These conversations were witnessed by three persons, including Larry. On March 15, 2017, Reneé changed her mind and indorsed the note for value to Larry. The note was not paid by June 15, 2017, and Larry sued Justin for the amount of the note. Justin defended upon the ground that Reneé had canceled the debt and renounced all rights against Justin and that Larry had notice of this fact. Has the debt been properly canceled? Explain. Answer: Cancellation and Renunciation. Judgment for Larry. Although the law provides that the holder of a note may discharge any party without consideration, this must be done by destruction of the note, some apparent cancellation on the face of the note, by renunciation of rights by a writing signed and delivered, or by surrender of the note to the party to be discharged. None of these requirements were met in this instance. Section 3-604, U.C.C. A discharge or renunciation is not effective against a holder in due course unless he has notice thereof. Section 3-601(b), U.C.C. Robert was not bound by his ineffective renunciation and therefore Larry's knowledge of the oral conversation does not prevent him being a holder in due course as he has no notice of a valid renunciation. 5. Tate and Fitch were longtime friends. Tate was a man of considerable means; Fitch had encountered financial difficulties. To bolster his failing business, Fitch desired to borrow $60,000 from Farmers Bank of Erehwon. To accomplish this, he persuaded Tate to aid him in the making of a promissory note by which it would appear that Tate had the responsibility of maker, but with Fitch’s agreeing to pay the instrument when due. Accordingly, they executed the following instrument: December 1, 2017 Thirty days after date and for value received, I promise to pay to the order of Frank Fitch the sum of $6,600. /s/ Timothy Tate On the back of the note, Fitch indorsed, “Pay to the order of Farmers Bank of Erehwon /s/ Frank Fitch” and delivered it to the bank in exchange for $6,000. (a) When the note was not paid at maturity, may the bank, without first demanding payment by Fitch, recover in an action on the note against Tate? (b) If Tate voluntarily pays the note to the bank, may he then recover on the note against Fitch, who appears as an indorser? Answer: Liability of Accommodation Parties. The Bank may proceed against Tate as the maker of the note because he signed the note as the maker and as such is primarily liable. Section 3-412. Tate cannot defend on the ground that the Bank has not first demanded payment by Fitch. Since the maker’s liability is primary, a note holder may go directly against the maker of a promissory note without demanding payment of intermediate indorsers. Section 3-412. Tate may not defend on the ground that Fitch agreed to be primarily liable. Between Tate and Fitch, Tate was an accommodation party, even though he signed the note as maker. Section 3-419(a). Tate may recover on the note against Fitch after paying the note. Section 3-419(e) provides: “An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party.” 6. Alpha orally appointed Omega as his agent to find and purchase for him a 1930 Dodge automobile in good condition, and Omega located such a car. Its owner, Roe, agreed to sell and deliver the car on January 10, 2017, for $9,000. To evidence the purchase price, Omega mailed to Roe the following instrument: December 1, 2016 $9,000.00 We promise to pay to the order of bearer Nine Thousand Dollars with interest from date of this instrument on or before January 10, 2017. This note is given in consideration of John Roe’s transferring title to and possession of his 1930 Dodge automobile. (Signed) Omega, agent Smith stole the note from Roe’s mailbox, indorsed Roe’s name on the note, and promptly discounted it with Sunset Bank for $8,700. Not having received the note, Roe sold the car to a third party. On January 10, the bank, having discovered all the facts, demanded payment of the note from Alpha and Omega. Both refused payment. a. What are Sunset Bank's rights with regard to Alpha and Omega? b. What are Sunset Bank's rights with regard to Roe and Smith? Answer: Liability Based on Warranty. The instrument is payable in a fixed amount, in money, even though no precise interest rate is specified as the legal rate of interest is implied in cases where the obligation calls for interest and no rate has been specified. More importantly, under Revised Article 3, the fixed amount rule applies only to the principal. The instrument is bearer paper because it so provides and does not name a payee. It is payable on or before January 10, 2014. This satisfies the requirement of Article 3 as to a definite time. Here the instrument was signed by Omega and will be considered and treated as his note. Since there can be no undisclosed principal on a negotiable instrument, this must be the instrument of Omega. The fact that the instrument showed on its face the consideration for which it was executed in no way affects the negotiable character of the instrument. Although Roe's indorsement was forged and is wholly inoperative as Roe's indorsement, it was not necessary for the negotiation of the instrument as a thief may deliver bearer paper and such delivery constitutes a negotiation of the instrument. Section 3-403(a). Bank's rights against Alpha. Section 3-401 of the U.C.C. states that no person is liable on an instrument unless his signature appears thereon. An undisclosed principal cannot be held liable on the negotiable instrument even though he may have liability on the underlying debt. Alpha is in no way liable on the instrument whether or not Omega was authorized to act for Alpha. Bank's rights against Omega. The bank, being a holder in due course of the instrument, even though it took the note at a slight discount, may recover the principal and interest from Omega. Any defense which Omega may assert is only a personal defense and is not available against a holder in due course. Omega's defense would be failure of consideration which is not available for use against a subsequent holder in due course. Since the agent did not disclose the identity of his principal on the instrument, but only his representative capacity, he cannot escape liability or show that another is liable because we are no longer dealing between immediate parties to the transaction. Omega is liable on the instrument. Bank's rights with regard to Roe. The bank has no claim against Roe. A forged signature is totally inoperative as the signature of the person whose name is forged. Section 3-403. Bank's rights against Smith. The bank, being a holder in due course, does have a right to proceed against Smith either for breach of warranty under Section 3-416, U.C.C., or his liability as an endorser, as the unauthorized signature of Smith is treated as his signature for the purpose of fixing liability. Obviously, Smith did not have good title to the instrument as he had stolen it. Therefore he is liable for breach of warranty to his transferee, the bank. 7. In payment of the purchase price of a used motorboat that had been fraudulently misrepresented, Young signed and delivered to Armstrong his negotiable note in the amount of $2,000 due October 1, with Selby as an accommodation comaker. Young intended to use the boat for his fishing business. Armstrong indorsed the note in blank preparatory to discounting it. Tillman stole the note from Armstrong and delivered it to McGowan on July 1 in payment of a past-due debt in the amount of $600 that he owed to McGowan, with McGowan making up the difference by giving Tillman his check for $800 and an oral promise to pay Tillman an additional $600 on October 1. When McGowan demanded payment of the note on December 1, both Young and Selby refused to pay the note because the note had not been presented for payment on its due date and because Armstrong had fraudulently misrepresented the motorboat for which the note had been executed. What are McGowan's rights, if any, against Young, Selby, Tillman, and Armstrong, respectively? Answer: Liability of Accommodation Parties/Liability Based on Warranty. When Armstrong indorsed the note with his blank indorsement he converted what was otherwise order paper into bearer paper. McGowan gave value for the note to the extent ($600) that it canceled an antecedent claim (Section 3-303, U.C.C.), and to the extent of the amount of the negotiable check, that is $800, that he gave Tillman in partial payment of the note. McGowan's oral promise to pay an additional $600, not being negotiable, does not constitute value under Section 3-303. McGowan qualifies as a holder in due course to the extent of $1,400, the amount of the value with which he actually parted, and is a holder to the balance of the instrument. McGowan's rights against Young. Young, the maker of the note, is primarily liable for payment of the note. The maker of the note engages that he will pay the note according to the tenor of the instrument at the time of his engagement. Young, as maker of the note, is a primary party. He has no right to insist, as a condition to liability, that the holder present the note to him for payment on its maturity date. Young's personal defense of fraud in the inducement may not be used against a holder in due course of a negotiable instrument. It may be successfully asserted against one to the extent the party is only a holder of the note. As McGowan is a holder in due course to the amount of $1,400, he may recover this amount from Young. Young's defense of fraud in the inducement may be asserted against McGowan to the extent of $600. McGowan's rights against Selby. Selby is an accommodation maker of the note. When Selby signed the note as a co-maker, he was lending his credit to Young. Section 3-419. An accommodation party is liable in the capacity in which he placed his signature on the instrument, that is as a maker, or as an indorser if he indorsed the instrument. Selby may not successfully defend on the basis that the instrument had not been presented for payment on its maturity date. McGowan is a holder in due course to the extent of $1,400 and only as a holder in the amount of $600. Since the same consideration which supported Young's obligation on the instrument supports Selby's obligation, Selby may use the personal defense of fraud in the inducement or failure of consideration as a defense to the same extent that Young can assert it. McGowan may only recover $1,400 from Selby. McGowan's rights against Tillman. Tillman (the thief) did not indorse the note when he delivered it to McGowan. One who negotiates bearer paper by delivery alone has no secondary liability. Only an indorser adds his credit to the instrument when he negotiates the instrument. Section 3-416 provides that any person who transfers an instrument and receives consideration warrants he is entitled to enforce the instrument and the transfer is otherwise rightful. Tillman did not acquire title to the note by his theft. Therefore he breached the warranty that he is entitled to enforce the instrument when he delivered the instrument to McGowan for value. A warranty is breached as soon as it is made or not at all. Tillman is liable to McGowan on the theory of breach of warranty. McGowan's rights against Armstrong. 1) indorser’s liability—no because there no proper presentment and hence there is a discharge; if there was proper presentment and notice Armstrong would be liable 2) Tranfer Warranty—this warranty was not given because consideration was not given. 8. On July 1, Anderson sold D’Aveni, a jeweler, a necklace containing imitation gems, which Anderson fraudulently represented to be diamonds. In payment for the necklace, D’Aveni executed and delivered to Anderson her promissory note for $25,000 dated July 1 and payable on December 1 to Anderson’s order with interest at 8 percent per annum. The note was thereafter successively indorsed in blank and delivered by Anderson to Bylinski, by Bylinski to Conrad, and by Conrad to Shearson, who became a holder in due course on August 10. On November 1, D’Aveni discovered Anderson’s fraud and immediately notified Anderson, Bylinski, Conrad, and Shearson that she would not pay the note when it became due. Bylinski, a friend of Shearson, requested that Shearson release him from liability on the note, and Shearson, as a favor to Bylinski and for no other consideration, struck out Bylinski’s indorsement. On November 15, Shearson, who was solvent and had no creditors, indorsed the note to the order of Frederick, his father, and delivered it to Frederick as a gift. At the same time, Shearson told Frederick of D’Aveni’s statement that D’Aveni would not pay the note when it became due. Frederick presented the note to D’Aveni for payment on December 1, but D’Aveni refused to pay. Thereafter, Frederick gave due notice of dishonor to Anderson, Bylinski, and Conrad. What are Frederick's rights, if any, against Anderson, Bylinski, Conrad, and D'Aveni on the note? Answer: Liability Based on Warranty. Frederick may recover from D'Aveni, Conrad, or Anderson. As a holder in due course, Shearson could have recovered against Anderson, Bylinski, Conrad, and D'Aveni. Anderson's fraud would not have been a defense to D'Aveni against Shearson. It was fraud in the inducement, a personal defense, rather than fraud in the execution. By striking Bylinski's indorsement, Shearson discharged Bylinski. Consideration was not required. The holder may effect discharge in any manner apparent on the face of the instrument or the endorsement. See Section 3-604. Bylinski's discharge was obvious upon examination of the note. Frederick is bound by Shearson's cancellation. Discharging Bylinski without Conrad's consent under prior Article 3 acted also as a discharge of subsequent indorsers, who relied on Bylinski's signature and whose right of recourse against Bylinski has been destroyed. Section 3-606. Revised Article 3, Section 3-605(b), does not follow this rule and thus Conrad’s liability would not be discharged. As a transferee from Shearson, however, Frederick has rights as a holder in due course. Under the shelter doctrine, a donee acquires a donor's rights unless the transferee was a party to the fraud affecting the note. Section 3-203(b). Frederick may recover on the note from D'Aveni, Anderson, or Conrad. Their liability is not joint, but several. The problem does not seek an answer to whether Frederick could recover from Shearson. Shearson would not be liable to Frederick on a warranty because Shearson did not receive consideration from Frederick. However, Shearson would be liable for payment of the note on his indorsement. Section 3-415. 9. Jack stole a check made out to the order of Bertha. Jack forged Bertha’s name on the back and made the instrument payable to himself. Jack then transferred the check to Sun for cash by signing his name on the back of the check in Sun's presence. Sun was unaware of any of the facts surrounding the theft or forged indorsement and presented the check for payment. Central County Bank, the drawee bank, paid it. Who will bear the loss? Explain. Answer: Forgery. Liability, or loss allocation, under the Uniform Commercial Code ("UCC") for honoring negotiable instruments containing forged or unauthorized signatures is governed by whether the forgery at issue is that of a [drawer's] signature or of the indorsement of a payee or holder. When a drawee bank honors an instrument bearing a forged [drawer's] signature, that payment is final in favor of a holder in due course. But where the only forged signature is an indorsement, the drawee normally may pass liability back through the collection chain to the depositary or collecting bank, or to the forger herself if she is available, by a claim for breach of presentment warranties. So, in this case, Sun would be liable to Central County Bank, but Jack is ultimately liable if he can be found. 10. R & A Concrete Contractors, Inc., executed a promissory note that identifies both R & A Concrete and Grover Roberts as its makers. On the reverse side of the note, the following appears: “X John Ament Sec. & Treas.” National Bank of Georgia, the payee, now sues both R & A Concrete and Ament on the note. What rights does National Bank have against R&A and Ament? Answer: Signature. Judgment for National Bank of Georgia against Ament and R&A. Even though an instrument may name the person represented, the one who signs in a representative capacity may still be personally liable, if, by his manner of signing in a representative capacity, he does not clearly indicate that he is signing in a representative capacity. The complete correct name of the corporate defendant maker was not utilized here. Ament indorsed the note on its reverse side, rather than on the line for the maker on the face, but he or someone else may have considered there to be insufficient space in which to indorse on the face of the note. National Bank of Georgia v. Ament, 27 Ga. App. 838, 195 S.E. 2d 202 (1973). Grover Roberts would also be liable on the instrument as a maker. NOTE—Revised article 3 rules about an agent signing in a representative manner do not apply here because the instrument was not a check. 11. On August 10, 2015, Theta Electronic Laboratories, Inc., executed a promissory note to George and Marguerite Thomson. Three other individuals, Gerald Exten, Emil O’Neil, and James Hane, and their wives also indorsed the note. The note was then transferred to Hane by the Thomsons on November 26, 2016. Although a default occurred at this time, it was not until April 2018, eighteen months later, that Hane gave notice of the dishonor and made a demand for payment on the Extens as indorsers. Are the Extens liable under their indorser’s liability? Answer: Secondary Liability. Judgment for the Extens. Unless an indorsement otherwise specifies (as by words such as "without recourse"), every indorser agrees that upon presentment, dishonor, and any necessary notice of dishonor he will pay the instrument according to its terms at the time of his indorsement to the holder or to any subsequent indorser who pays it. Generally, presentment for payment and notice of any dishonor are necessary to charge any indorser, and unless either is waived or excused, an unreasonable delay will discharge the indorser. Here, Hane waited for an unreasonable period of eighteen months until he gave notice of the dishonor and presented the note to the Extens for payment. This was far beyond the requirement that notice of dishonor be given by persons other than banks before midnight of the third business day after dishonor or receipt of notice of dishonor. Hane v. Exten, 255 Md. 668, 259A.2d 290 (1969). The O’Neils were never given notice of the default and are thus not liable. 12. Attorney Eliot Disner tendered a check for $100,100 to Sidney and Lynne Cohen. In drawing the check, Disner was serving as an intermediary for his clients, Irvin and Dorothea Kipnes, who owed the money to the Cohens as part of a settlement agreement. The Kipneses had given Disner checks totaling $100,100, which he had deposited into his professional corporation’s client trust account. After confirming with the Kipneses’ bank that their account held sufficient funds, Disner wrote and delivered a trust account check for $100,100 to the Cohens’ attorney, with this note: “Please find $100,100 in settlement (partial) of Cohen v. Kipnes, et al[.] Per our agreement, delivery to you constitutes timely delivery to your clients.” Also typed on the check was a notation identifying the underlying lawsuit. Without Disner’s knowledge, the Kipneses stopped payment on their checks, leaving insufficient funds in the trust account to cover the check to the Cohens. The trust account check therefore was not paid due to insufficient funds; the Kipneses declared bankruptcy; and the Cohens served Disner and his professional corporation with demand for payment. The Cohens sought the amount written on the check plus a $500 statutory penalty. Explain who should prevail and why. Answer: Authorized Signatures. Decision for Disner. The trial court entered summary judgment for Disner, reasoning he is not liable on the check because he was a mere conduit or agent for transferring money from the Kipneses to the Cohens. The Cohens appealed from the judgment. California Civil Code § 1719, subdivision (a) provides in part that any person who draws a check that is dishonored due to insufficient funds shall be liable to the payee for the amount owing upon the check and treble damages of at least $100, not to exceed $500.The Cohens do not appeal that Disner was a mere conduit or agent for transferring funds. They contend his representative status and motivations for transferring the funds are irrelevant. According to the Cohens, § 1719 imposes strict liability against the [drawer] of a check drawn on an account lacking sufficient funds. Their contention of strict liability is based on legislative omission. While the UCC permits the drawer of a dishonored check to prove that he signed in a representative capacity and that the holder in due course took the check with notice of the representative’s lack of liability (UCC, § 3–402, subd. (b)(2), sometimes hereinafter referred to as the “representative capacity” defense), § 1719 does not mention this defense. Nothing in § 1719 affirmatively supports the Cohens’ contention that the “representative capacity” and other UCC defenses were written out of § 1719. On the contrary, the express language of subdivision (a) compels us to the opposite conclusion. By acknowledging there must be an enforceable obligation to pay, § 1719 echoes the UCC, which precludes recovery where the payee has no “right to enforce the obligation of a party to pay an instrument.” (UCC, § 3–305, subd. (a).) If the drawer has no enforceable obligation to pay a dishonored check, there is no amount “owing upon that check” under the plain language of § 1719. The court rejected the Cohens’ assertion in their reply brief that the “representative capacity” defense is inapplicable here because the conditions of UCC § 3–402, subdivision (c) have not been met. That subdivision provides: “If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the representative person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.” According to the official code comment on that subdivision: “Subdivision (c) is directed at the check cases. It states that if the check identifies the represented person, the agent who signs on the signature line does not have to indicate agency status. Virtually all checks used today are in personalized form which identify the person on whose account the check is drawn. In this case, nobody is deceived into thinking that the person signing the check is meant to be liable. The Cohens’ assertion is that because UCC § 3–402, subdivision (b)(2)’s “representative capacity” defense is “subject to” subdivision (c), Disner may not be relieved of liability unless he fulfills the requirements of the subdivision (c) defense. sSubdivisions (b)(2) and (c)should not be read in that restrictive manner. Any finding of liability under UCC § 3–402, subdivision (b)(2) is subject to subdivision (c)’s additional exception that the representative is not liable if he signed his name on a personalized check identifying the account of the represented person. Subdivision (c) expands rather than contracts the representative’s defenses. § 1719, by its clear and unambiguous language, permits the drawer of a dishonored check to prove he has no enforceable obligation to pay the check. Cohen v. Disner, California Court of Appeal, 1995, 36 Cal. App.4th 855, 42 Cal.Rptr.2d 782, 27 UCC Rep.Serv.2d 540, http://scholar.google.com/scholar_case?case=11503422137111626726&hl=en&as_sdt=2&as_vis=1&oi=scholarr 13. Vincent Medina signed a check in the amount of $34,348 written on the account of First Delta Financial, a family corporation owned and controlled by Medina. His corporate title did not appear before his signature. He issued the check to James G. Wyche. The check was dishonored for insufficient funds. First Delta Financial is in bankruptcy. Wyche contends that Medina is personally liable because he signed the check without indicating his corporate capacity below his signature. Medina argues that he is not personally liable on account of having signed the check. Explain who should prevail. Answer: Liability of Primary Parties. Medina will prevail. If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person. § 673.4021(3), Fla. Stat. (1997). The official comment makes clear that the revision is intended to address the situation now before us: Subsection [3] is directed at the check cases. It states that if the check identifies the represented person the agent who signs on the signature line does not have to indicate agency status. Virtually all checks used today are in personalized form which identify the person on whose account the check is drawn. In this case, nobody is deceived into thinking that the person signing the check is meant to be liable. ANSWERS TO “TAKING SIDES” PROBLEMS Saul sold goods to Bruce, warranting that the goods were of a specified quality. The goods were not of the quality warranted, however, and Saul knew this at the time of the sale. Bruce drew and delivered a check payable to Saul and drawn on Third National Bank in the amount of the purchase price. Bruce subsequently discovered the goods were faulty and stopped payment on the check. Third National refused to pay Saul on the check a. What are the arguments that Saul can recover (1) from Bruce and (2) from Third National? b. What are the arguments that (1) Bruce should prevail? and (2) Third National should prevail? c. Who should prevail? Why? Answer: (a) A check should be honored and then any defenses from the underlying transaction should be resolved in separate litigation. (b) Bruce received defective goods, and any defense from the underlying transaction should be valid against Saul. As a drawee, Third National has no liability on the instrument until it accepts it. Since Third National did not accept the check, it is not liable to Saul, the payee. (c) Saul cannot recover from Bruce; Saul cannot recover from Third National. Although Bruce as the drawer of an unaccepted draft is obligated to pay the instrument upon its dishonor according to its terms at the time it was issued, Bruce will prevail because Saul committed a fraud in the underlying contract by misrepresenting the quality of the goods. A party to the underlying transaction is subject to defenses arising therefrom. Since the drawee Third National never accepted the check, it is not liable to the payee Saul. Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637