Preview (15 of 52 pages)

This Document Contains Chapters 27 to 28 Chapter 27 TRANSFER AND HOLDER IN DUE COURSE Transfer Negotiation [27-1] Negotiation of Bearer Paper [27-1a] Negotiation of Order Paper [27-1b] The Impostor Rule The Fictitious Payee Rule Negotiations Subject to Rescission [27-1c] Indorsements [27-2] Blank Indorsements [27-2a] Special Indorsements [27-2b] Restrictive Indorsements [27-2c] Indorsements for Deposit or Collection Indorsements in Trust Indorsements with Ineffective Restrictions Qualified and Unqualified Indorsements [27-2d] Formal Requirements of Indorsements [27-2e] Place of Indorsement Incorrect or Misspelled Indorsement Holder in Due Course Requirements of a Holder in Due Course [27-3] Holder [27-3a] Value [27-3b] Executory Promise Security Interest Antecedent Debt Good Faith [27-3c] Lack of Notice [27-3d] Notice an Instrument is Overdue Notice an Instrument Has Been Dishonored Notice of a Claim or Defense Without Reason to Question Authenticity [27-3e] Holder in Due Course Status [27-4] A Payee May Be a Holder in Due Course [27-4a] The Shelter Rule [27-4b] Preferred Position of a Holder in Due Course [27-5] Real Defenses [27-5a] Infancy Void Obligations Fraud in the Execution Discharge in Insolvency Proceedings Discharge of Which Holder has Notice Unauthorized Signature Fraudulent Alteration Personal Defenses [27-5b] Limitations upon Holder in Due Course Rights [27-6] Cases in This Chapter The Hyatt Corporation v. Palm Beach National Bank State of Qatar v. First American Bank of Virginia Georg v. Metro Fixtures Contractors, Inc. Any Kind Checks Cashed, Inc. v. Talcott Triffin v. Cigna Insurance Co. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Distinguish among (1) transfer, (2) negotiation, and (3) assignment. • Identify and explain the requirements for becoming a holder in due course. • Explain the shelter rule and when a payee can have the rights of a holder in due course. • Identify, define, and explain the real defenses. • Define and explain personal defenses. TEACHING NOTES Both negotiable and nonnegotiable instruments can be transferred under the law of assignment, but only negotiable instruments allow a transferee to become a holder; only a holder can be a holder in due course, giving him rights which may be greater than those of the transferor. A holder in due course in a nonconsumer credit transaction takes the instrument free of all claims of other parties and free of all defenses to the instrument, except for a limited number of defenses specifically designated in the Uniform Commercial Code. *** Chapter Outcomes *** Distinguish among (1) transfer, (2) negotiation, and (3) assignment.. Identify and explain the requirements for becoming a holder in due course. TRANSFER 27-1 NEGOTIATION A holder is a person in possession of an instrument drawn, issued, or indorsed to him or his order or to bearer or in blank. Negotiation is the transfer of possession, voluntary or involuntary, by a person other than the issuer of a negotiable instrument in a way that the transferee becomes a holder. By contrast, assignment is the voluntary transfer of rights arising from a contract. 27-1a Negotiation of Bearer Paper A bearer instrument is transferred by mere possession and is therefore comparable to cash. Because bearer paper (an instrument payable to bearer) is payable to whoever is in possession of it, a finder — or for that matter a thief — can be a holder of bearer paper. NOTE: See Figure 27-1: Bearer Paper. 27-1b Negotiation of Order Paper If the instrument is order paper (that is, an instrument payable to order), possession and indorsement (signature) by all necessary parties are both required for the transferee to be a holder. In a transfer for value of an instrument not payable to bearer, the transferee has the right to have the unqualified indorsement of the transferor; otherwise, the transferee has nothing more than the contract rights of an assignee. NOTE: See Figure 27-2: Negotiation of Bearer and Order Paper. CASE 27-1 THE HYATT CORPORATION v. PALM BEACH NATIONAL BANK Court of Appeal of Florida, Third District, 2003 840 So.2d 300, 49 U.C.C. Rep.Serv.2d 1039 http://scholar.google.com/scholar_case?case=6827503413148655725&q=840+So.2d+300&hl=en&as_sdt=2,10 Levy, J. Appellant/defendant the Hyatt Corporation appeals the lower court’s Summary Final Judgment in favor of appellee/ plaintiff Palm Beach National Bank. * * * We affirm. J&D Financial Corporation is a factoring company. Skyscraper Building Maintenance, LLC, had a contract with Hyatt to perform maintenance work for various Hyatt hotels in South Florida. Skyscraper entered into a factoring agreement with J&D. As part of the factoring agreement, J&D requested Hyatt to make checks payable for maintenance services to Skyscraper and J&D. Of the many checks issued by Hyatt to Skyscraper and J&D, two were negotiated by the bank but indorsed only by Skyscraper. They were made payable as follows: 1. Check No. 1-78671 for $22,531 payable to: J&D Financial Corp. Skyscraper Building Maint P.O. Box 610250 North Miami, Florida 33261-0250 2. Check No. 1-75723 for $21,107 payable to: Skyscraper Building Maint J&D Financial Corp. P.O. Box 610250 North Miami, Florida 33261-0250 Only one of the payees, Skyscraper, indorsed these two checks. The bank cashed the checks. According to J&D, it did not receive the benefit of these two payments. J&D filed a complaint against Skyscraper and its principals on the guarantee, Hyatt and the bank. J&D sought damages against Skyscraper under the factoring agreement and separately against Hyatt and the bank for negotiation of the two checks. Hyatt answered and raised the bank’s “fault” as an affirmative defense. * * * The bank, Hyatt and J&D then moved for summary judgment on the issue of whether the bank properly negotiated the checks. It was uncontested that the bank had a duty to negotiate the checks only on proper indorsement, and if it did not, it would be liable. The bank argued that the checks were payable to J&D and Skyscraper alternatively, and thus the bank could properly negotiate the checks based upon the indorsement of either of the two payees. The bank further argued that the checks were drafted ambiguously as to whether they were payable alternatively or jointly, and thus under [UCC] Section [3–110(d)], Florida Statutes, the checks would be construed as a matter of law to be payable alternatively. Hyatt’s position was that the checks were not ambiguous, were payable jointly and not alternatively, and thus under Section [3–110], the checks could only be negotiated by indorsement of both of the payees. J&D similarly argued that the checks were payable jointly. The trial court granted Summary Judgment in favor of the bank, finding that [UCC] Section [3–110(d)] precluded the bank’s liability. Hyatt appealed. J&D filed a cross-appeal. The issue on appeal is whether or not a check payable to J&D Financial Corporation Skyscraper Building Maintenance (stacked payees) is payable jointly to both payees requiring the indorsement of both, or whether it is ambiguous regarding whether the check was drafted payable alternatively, so that the bank could negotiate the check when it was indorsed by only one of the two payees. In 1990, Article 3 of the UCC was revised, and the language of UCC Section 3–116 was added to UCC section 3–110 and became subsection (d). Revised UCC Section 3–110(d), which added language to follow former 3–116(a) and (b), states, “If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.” The net effect of the amendment was to change the presumption. What was unambiguous before is now ambiguous. Turning to our jurisdiction, Florida has adopted the statutory revision to UCC 3–110, * * *. * * * We conclude that based on the 1990 amendment to the Uniform Commercial Code, when a check lists two payees without the use of the word “and” or “or”, the nature of the payee is ambiguous as to whether they are alternative payees or joint payees. Therefore, the UCC amendment prevails and they are to be treated as alternative payees, thus requiring only one of the payees’ signatures. Consequently, the bank could negotiate the check when it was indorsed by only one of the two payees, thereby escaping liability. * * * * * * Thus, we hold that the trial court was correct in granting the Summary Final Judgment. Affirmed. Impostor Rule — Deals with situations where someone impersonates another person, and deceives a third party into delivering a negotiable instrument to the impostor in the name of the other person. The UCC provides that in this situation the indorsement of the impostor in the name of the named payee is effective — blaming the drawer or maker for failing to detect the impersonation. The Fictitious Payee Rule — Applies to a situation similar to the impostor situation, but involves a disloyal agent instead. Under the fictitious payee rule, an indorsement by any person in the name of the named payee is effective, as long as the agent or employee of the maker or drawer has supplied the name of the payee or issued the instrument used for fraudulent purposes. The UCC places the risk of employee fraud on the party employing the agent. 27-1c Negotiations Subject to Rescission If the transfer conforms to the technical requirements, it is an effective negotiation even if the underlying situation involves a void or voidable transaction. 27-2 INDORSEMENTS The revised Article 3 provides a definition of indorsement as: a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. Every indorsement is (1) blank or special, (2) restrictive or nonrestrictive, and (3) qualified or unqualified. Thus, all indorsements disclose three things: • the method to be employed in subsequent negotiations (this depends on whether the indorsement is blank or special), • the kind of interest that is being transferred (this depends on whether the indorsement is restrictive or nonrestrictive), • the liability of the indorser (this depends on whether the indorsement is qualified or unqualified). NOTE: See Figure 27-4: Indorsements 27-2a Blank Indorsements Consists of the indorser's signature alone and transforms order paper into bearer paper. Note that this bearer paper may then be negotiated by mere delivery or the holder may convert it back into order paper. This is done by altering the blank indorsement with words "Pay to ________." A special indorsement is thereby created, and the holder does not have to be as concerned about the theft of the instrument. 27-2b Special Indorsements A special indorsement identifies a certain person as indorsee and thereby renders the instrument as order paper. The indorsee's signature will be required for future negotiation. 27-2c Restrictive Indorsements A restrictive endorsement attempts to restrict the rights of an indorsee. Includes: • indorsements for deposit or collection — in a bank account effectively limit future negotiation to the banking system (EFFECTIVE) • indorsements in trust — the indorsee becomes the trustee while the beneficiary is the individual designated by the indorser to ultimately receive the funds (EFFECTIVE) • indorsements with ineffective restrictions — such as conditional indorsements, require the happening or nonhappening of an event to effect the rights of an indorsee (NOT EFFECTIVE) Indorsements prohibiting further transfer such as a "pay A only;" is treated as an unrestricted indorsement (NOT EFFECTIVE) CASE 27-2 STATE OF QATAR v. FIRST AMERICAN BANK OF VIRGINIA United States District Court, Eastern District of Virginia, 1995 885 F.Supp. 849 http://scholar.google.com/scholar_case?case=1102569369018879687&q=885+F.Supp.+849&hl=en&as_sdt=2,10 Ellis, J. At issue in this sequel to State of Qatar v. First American Bank of Virginia (“Qatar I”) is the meaning and legal significance of the phrase “for deposit only” following an indorsement on the back of a check. More specifically, the question presented is whether a depository bank complies with the restrictive indorsement “for deposit only” when it deposits a check bearing that restriction into any person’s account, or whether that restriction requires a depository bank to deposit the check’s proceeds only into the account of the named payee. For the reasons that follow, the court holds that the unqualified language “for deposit only” following an indorsement on the back of a check requires a depository bank to place the check’s proceeds into the payee’s account, and the bank violates that restrictive indorsement when it credits the check to any other account. I * * * Plaintiffs are the State of Qatar and certain of its agencies (collectively, “Qatar”). From approximately 1986 to 1992, one of Qatar’s employees, Bassam Salous, defrauded his employer by having checks drawn on Qatar’s account in purported payment of false or duplicated invoices that he had created. Although all of the unauthorized checks were made payable to individuals and entities other than Salous, he nonetheless successfully deposited the checks into his own personal accounts with Defendant First American Bank of Virginia (“First American”) and Central Fidelity Banks, Inc.(collectively, “the depository banks”). After Qatar discovered this fraudulent scheme in 1992, it brought suit against the depository banks for conversion. * * * Only one category of checks remains in dispute. These checks all bear the forged indorsement of the payee named on the face of the check, followed by a stamped “for deposit only” restriction. * * * II It is now established that First American may be liable to Qatar for handling a check’s proceeds in violation of a restrictive indorsement. [Citation.] Under §3–205(c) of the pre-1993 Uniform Commercial Code (“UCC” or “Code”) [Virginia adopted Revised Article 3 in 1993] restrictive indorsements are defined to “include the words ‘for collection,’ ‘for deposit,’ ‘pay any bank,’ or like terms signifying a purpose of deposit or collection.” Thus, the UCC makes clear that the phrase “for deposit only” is, in fact, a restrictive indorsement. But the Code does not define “for deposit only” or specify what bank conduct would be inconsistent with that restriction. Nor does Virginia decisional law provide any guidance on this issue. As a result, reference to decisional law from other jurisdictions is appropriate. Not surprisingly, most courts confronted with this issue have held that the restriction “for deposit only,” without additional specification or directive, instructs depository banks to deposit the funds only into the payee’s account. In addition, commentators on commercial law uniformly agree that the function of such a restriction is to ensure that the checks’ proceeds be deposited into the payee’s account. This construction of “for deposit only” is commercially sensible and is adopted here. The clear purpose of the restriction is to avoid the hazards of indorsing a check in blank. Pursuant to former §3–204(2), a check indorsed in blank “becomes payable to bearer.” It is, essentially, cash. Thus, a payee who indorses her check in blank runs the risk of having the check stolen and freely negotiated before the check reaches its intended destination. To protect against this vulnerability, the payee can add the restriction “for deposit only” to the indorsement, and the depository bank is required to handle the check in a manner consistent with that restriction. §3–206(3). And in so adding the restriction, the payee’s intent plainly is to direct that the funds be deposited into her own account, not simply that the funds be deposited into some account. [Citation.] Any other construction of the phrase “for deposit only” is illogical and without commercial justification or utility. Indeed, it is virtually impossible to imagine a scenario in which a payee cared that her check be deposited, but was indifferent with respect to the particular account to which the funds would be credited. * * * Finally, it is worth noting that the new revisions to the negotiable instruments provisions of the UCC, [Revised Article 3], support the result reached here. Although these revisions are inapplicable to this case, the commentary following §3–206 states that the new subdivision dealing with “for deposit only” and like restrictions “continues previous law.” §3–206 comment 3. Shortly thereafter, the commentary provides an example in which a check bears the words “for deposit only” above the indorsement. In those circumstances, the commentary states, the depository bank acts inconsistently with the restrictive indorsement where it deposits the check into an account other than that of the payee. Although the restriction in that example precedes the signature, whereas the restrictions on the checks at issue here follow the signature, this distinction is immaterial. The clear meaning of the restriction in both circumstances is that the funds should be placed into the payee’s account. Therefore, First American violated the restrictive indorsements in depositing into Bassam Salous’ account checks made payable to others and restrictively indorsed “for deposit only.” Pursuant to the holding in Qatar I, then, First American is liable to Qatar for conversion in the amount of the total face values of these checks. 27-2d Qualified and Unqualified Indorsements The "without recourse" indorsement disclaims the indorser's contract liability. Even though payment is not guaranteed by the indorsee a qualified indorsement does not prevent future negotiation of the instrument. Note that the transferor may still be liable under a warranty theory. 27-2e Formal Requirements of Indorsements Place of Indorsement — An indorsement must be written on the instrument or on a separate piece of paper called an allonge that has been affixed to the instrument. An allonge may be used even if there is sufficient space for an indorsement on the document itself. NOTE: See Figure 27-5 for an illustration of Federal Reserve Board guidelines. Incorrect or Misspelled Indorsements — If the name of the payee or indorsee is misspelled or incorrect the indorsee may indorse the instrument in that name or in his correct name or both. HOLDER IN DUE COURSE *** Chapter Outcome *** Identify and explain the requirements for becoming a holder in due course. 27-3 REQUIREMENTS OF A HOLDER IN DUE COURSE A holder in due course must a) be a holder of a negotiable instrument; b) take it for value; c) take it in good faith; d) take it without notice that it is overdue or dishonored, or that the instrument contains an unauthorized signature or an alteration, or that any person has any defense against or claim to it; and e) take it without reason to question its authenticity due to apparent evidence of forgery, alteration, incompleteness or other irregularity. NOTE: See Figure 27-6. 27-3a Holder A holder must have in his possession a negotiable instrument that is payable to bearer or payable to himself by name. The instrument must also have all necessary (valid) indorsements. If order paper, a forged indorsement will preclude someone from becoming a holder. CASE 27-3 GEORG v. METRO FIXTURES CONTRACTORS, INC. Supreme Court of Colorado, En Banc, 2008 178 P.3d 1209, 66 UCC Rep.Serv.2d 477 http://scholar.google.com/scholar_case?case=17407795886687310331&q=GEORG+v.+METRO+FIXTURES+CONTRACTORS,+INC.&hl=en&as_sdt=40000000002&as_vis=1 Hobbs, J. We granted certiorari in this case to address an issue of first impression in Colorado regarding whether under [UCC] § 1-201(b)(20) and [UCC] § 3-302, Colorado’s codification of the Uniform Commercial Code (“UCC”), a person can be a holder of a negotiable instrument entitled to holder in due course status under a theory of constructive possession of a negotiable instrument. The court of appeals partially reversed the trial court’s grant of summary judgment in favor of Freestyle Sports Marketing, Inc. (“Freestyle”), ruling that Freestyle was not a holder in due course because it was not a holder who had actual possession of the negotiable instrument at issue in this action. * * * Freestyle employed Cassandra Demery as a bookkeeper for several years before it discovered that Demery had embezzled over $200,000 for personal use and had failed to pay, on Freestyle’s behalf, approximately $240,000 in state and federal employment taxes. Freestyle terminated Demery’s employment, demanded that she repay Freestyle, and threatened to notify the authorities if she did not. After leaving Freestyle, Demery went to work as a bookkeeper at Metro Fixtures Contractors, Inc. (“Metro”), a company owned by her parents. Demery’s bookkeeping position at Metro included balancing the accounting books, invoicing customers, and paying outstanding bills on behalf of the company. In her position as bookkeeper, Demery wrote a check from Metro’s bank account and made it payable to Freestyle in the amount of $189,000. Demery wrote “for deposit only” on the back of the check as well as Freestyle’s account number, filled out a deposit form, and deposited the check in Freestyle’s bank account. Demery then informed Clinton Georg, Freestyle’s president, by phone, that she had obtained a loan from her family to repay Freestyle and had deposited the funds into Freestyle’s account. After Demery’s phone call, Georg called his bank and confirmed the deposit of the funds into Freestyle’s account. Georg subsequently used the deposited funds for payment of Freestyle’s delinquent employment taxes. After two years, Metro uncovered the transaction instigated by Demery and filed suit against Georg and Freestyle * * *. Metro alleged that it had not given Demery a loan or permission to write and deposit a check in the amount of $189,000 into Freestyle’s bank account. Freestyle moved for summary judgment, contending that it qualified as a holder in due course under [UCC] § 3-302 and [UCC] § 3-306. The trial court agreed that Freestyle was a holder in due course and granted the motion. Metro appealed and the court of appeals partially reversed. The court of appeals held that Freestyle could not have been a holder in due course because it was not a holder with actual possession of the check. Freestyle then appealed to us arguing that it had constructive possession of the instrument when the check was deposited at its bank. We hold, under the facts of this case, that Freestyle had constructive possession of the check and qualified as a holder in due course under [UCC] § 3-302 and [UCC] § 3-306 of Colorado’s UCC. * * * If Freestyle is a holder in due course under [UCC] § 3-306, it takes free of Metro’s claims. [Citations.] * * * Holder in Due Course * * * A check is a negotiable instrument. [UCC] § 3-104. The holder in due course doctrine is designed to encourage the transfer and usage of checks and facilitate the flow of capital. [Citation.] An entity may qualify as a holder in due course even if the instrument at issue may have passed through the hands of a thief. [Citation.] (“The holder in due course is one of the few purchasers in Anglo-Saxon jurisprudence who may derive a good title from a chain of title that includes a thief in its links.”) A holder in due course must meet five conditions: (1) be a holder; (2) of a negotiable instrument who took it; (3) for value; (4) in good faith; (5) without notice of certain problems with the instrument. [Citation.] To be a holder one must meet the two conditions in [UCC] § 1-201(b)(20): (1) he or she must have possession (2) of an instrument drawn, issued, or indorsed to him or her. [Citation.] Possession is an element designed to prevent two or more claimants from qualifying as holders who could take free of the other party’s claim of ownership. [Citation.] With rare exceptions, those claiming to be holders have physical ownership of the instrument in question. [Citation.] An otherwise authorized signature on a negotiable instrument is not converted into an unauthorized forgery when an agent, authorized to sign negotiable instruments in his principal’s name, abuses that authority by negotiating the instrument to a holder in due course for the agent’s own personal benefit. [Citations.] [UCC] § 3-402. Constructive Possession Section 4-201(a), states that a collecting bank “is an agent or sub-agent of the owner of the item.” Further, the statute states, “This provision applies regardless of the form of indorsement or lack of indorsement ….” [Citation.] A check payable to a party and deposited in that party’s account makes the party the “owner” of the check under the UCC. [Citation.] Further, the White & Summers treatise on the UCC speaks to a collecting bank as an agent for the owner’s possession: Sometimes the one claiming to be a holder in due course will not have possession of the instrument at the time of the suit. When a collecting bank holds the check, the solution is simple, for section 4-201 makes that bank the agent of the owner of the check. Under traditional analysis, the agent’s possession would be the owner’s possession and thus the owner would have “possession.” [Citation.] (emphasis added [by the court]). Thus, there are circumstances wherein requiring actual physical possession of the instrument would be problematic and constructive possession applies. [Citation.] Nevertheless, a determination of constructive possession should occur only when delivery is clearly for an identifiable person under circumstances excluding any other party as a holder in due course. [Citation.] Other jurisdictions have recognized constructive possession as qualifying under the UCC for holder in due course purposes. [Citations.] * * * * * * Application to This Case In the case before us, Demery was Metro’s agent, specifically its employee. As a bookkeeper for Metro, Demery’s authority included the power to write checks on Metro’s behalf. Despite the fact that Metro did not specifically authorize Demery to write a check to Freestyle, Metro placed her in a position to do so. Subsequently, Demery informed Freestyle that she had obtained authority from Metro’s owners, her parents, to issue the check and had directly deposited the funds into Freestyle’s account. Freestyle verified with its bank the deposit of these funds into its account and then, relying on the availability of those funds, paid the delinquent taxes to the state and federal authorities. The court of appeals held that Freestyle could not be a holder in due course because it lacked possession of the check. However, this is too narrow a reading of section 3-302, which includes circumstances where the instrument does not bear apparent evidence of forgery and the person to whom the instrument is drawn took the instrument for value, in good faith, and without notice that it contained an unauthorized signature. * * * The trial court found that Freestyle was a holder in due course based on the undisputed facts of this case. Demery delivered the check by depositing it into Freestyle’s bank account. Section 1-201(b)(14) defines delivery with respect to an instrument as a voluntary transfer of possession. Two elements are required for delivery of an instrument: (1) intent of the transferor to transfer possession of an instrument, and (2) the actual transfer of the instrument. [Citation.] However, Metro counters that the bank was not Freestyle’s agent with respect to the collection of a “stolen instrument” because under the UCC, a collecting bank is only the agent for an owner of an instrument and, according to Metro, Freestyle did not own the check. But Metro’s argument is contrary to prior Colorado law defining the term “owner” in relation to negotiable instruments such as checks. An otherwise authorized signature on a negotiable instrument is not converted into an unauthorized forgery when an agent, authorized to sign negotiable instruments in his principal’s name, abuses that authority by negotiating the instrument to a holder in due course for the agent’s own personal benefit. [Citation.] A check payable to a party and deposited in that party’s account makes it the “owner” of the check under the UCC. [Citation.] While Metro claims Freestyle was not a holder, it does not simultaneously argue that it was a competing holder. There is no other possible holder under the facts of this case. *** Freestyle was not only a holder under the facts of this case, it was a holder in due course. * * * Freestyle argues that under section 3-303(a)(3), the instrument was issued as payment for Demery’s outstanding debt to Freestyle. Metro does not contest that Demery embezzled funds from Freestyle and therefore owed Freestyle funds; rather, it asserts that it did not authorize Demery to issue the check. A pre-existing debt is sufficient consideration. [Citation.] Thus, Freestyle took the check for value. Freestyle acted in good faith. Bad faith for the holder in due course standard means guilty knowledge or willful ignorance. [Citation.] Here, Freestyle lacked guilty knowledge or willful ignorance. The record contains no facts asserted by Metro that, if proven, would support a bad faith claim. * * * Finally, Freestyle had no notice that Demery lacked authority to issue the check or that it was forged. The undisputed facts are that Demery was Metro’s bookkeeper and had authority to issue the check. Metro simply insinuates that, because its employee stole from Freestyle, Freestyle should have been on notice that she was also stealing from Metro. However, Metro was in the best position to protect itself against Demery’s action. * * * Application of Colorado’s UCC can result in loss to an innocent party in favor of a holder in due course. [Citation.] However, an important policy objective of the statute is to protect the party least able to protect himself or herself. [Citation.] “[W]here one of two innocent parties must suffer because of the wrongdoing of a third person, the loss must fall on the party who has by his conduct created the circumstances which enabled the third party to perpetuate the wrong.” [Citation.] Reasons to place the risk on the principal of an agent in commercial transactions include: (1) the increased incentive for a principal to exercise care in selecting agents; (2) the fact that the principal is in a better position to supervise the actions of the agent; and (3) the fact that the principal bears the fruit of a principal/agent relationship. [Citation.] Applied to this case, Demery acted as a bookkeeper for Metro for several years. Metro was in the best position to have instituted internal procedures and mechanisms regarding the company’s accounting. Attesting to its lack of internal procedure, Metro did not uncover the embezzlement until two years after Demery deposited the check into Freestyle’s bank account. Freestyle was not in a position, as a third party, to dictate Metro’s internal control procedures to prevent employee theft. * * * Having reviewed the holder in due course elements in light of the undisputed facts of the case, we determine that Freestyle was a holder with constructive possession of a negotiable instrument, which was given for value and taken in good faith without notice of a forgery or an unauthorized signature. Accordingly, we reverse the judgment of the court of appeals and remand with directions that the court of appeals return this case to the district court for entry of judgment in favor of Freestyle. 27-3b Value The law requires that a holder in due course give value for the instrument; it cannot be received as a gift with no exchange of value. Value, for purposes of negotiable instruments, is defined as (1) the actual performing of the agreed promise; (2) the acquiring of a security interest or a lien in the instrument, other than a judicial lien; (3) the taking of the instrument in payment of or as security for an antecedent debt; (4) the giving of a negotiable instrument; or (5) the giving of an irrevocable obligation to a third party. Executory Promise — Because an executory promise has yet to be performed, it cannot confer holder-in-due course status on the person who promises it. The Uniform Commercial Code does provide exceptions to the executory promise rule in two situations: (1) the giving of a negotiable instrument, and (2) the making of an irrevocable obligation to a third party. Security Interest — Where an instrument is given as security for an obligation, the lender is regarded as having given value to the extent of his security interest. Antecedent Debt — Under the UCC a holder does give value when she takes an instrument in payment of or as security for an antecedent debt (that is, a preexisting obligation). 27-3c Good Faith Revised Article 3 defines good faith as "honesty in fact (subjective test) and the observance of reasonable commercial standards of fair dealing" (objective test). CASE 27-4 ANY KIND CHECKS CASHED, INC. v. TALCOTT Court of Appeal of Florida, Fourth District, 2002 830 So.2d 160, 48 U.C.C. Rep.Serv.2d 800, rehearing denied http://scholar.google.com/scholar_case?case=12205265320792531036&q=830+So.2d+160&hl=en&as_sdt=2,10 Gross, J. [In the mid-1990s, D. J. Rivera, a “financial advisor,” sold ninety-three-year-old John G. Talcott, Jr. an investment for “somewhere in the amount of $75,000.” The investment produced no returns. On December 7, 1999, Salvatore Guarino, a cohort of Rivera, established check-cashing privileges at Any Kind Checks Cashed, Inc. That day, he cashed a $450 check without incident. On January 10, 2000, Rivera telephoned Talcott and talked him into sending him a check for $10,000 made out to Guarino, which was to be used for travel expenses to obtain a return on the original $75,000 investment. Rivera received the check on January 11. On that same morning Rivera spoke to Talcott and stated that the $10,000 was more than what was needed for travel. He said that $5,700 would meet the travel costs. Talcott called his bank and stopped payment on the $10,000 check. In spite of what Rivera told Talcott, Guarino appeared at Any Kind’s Stuart, Florida, office on January 11 and presented the $10,000 check to Nancy Michael. She was a supervisor with the company with the authority to approve checks over $2,000. Guarino showed Michael his driver’s license and the Federal Express envelope from Talcott in which he received the check. She asked him the purpose of the check, and he told her that he was a broker and that the maker of the check had sent it as an investment. She was unable to contact Talcott by telephone. Based on her experience, Michael believed the check was good. The Federal Express envelope was “very crucial” to her decision, because it indicated that the maker of the check had sent it to the payee trying to cash the check. After deducting the 5 percent fee, Michael cashed the check and gave Guarino $9,500. On January 15, 2000, Rivera called Talcott and asked about the $5,700, again promising to send him a return on his investment. The same day, Talcott sent a check for $5,700. He assumed that Rivera knew that he had stopped payment on the $10,000 check. On January 17, 2000, Guarino went into the Stuart branch of the Any Kind store and presented the $5,700 check payable to him to the teller, Joanne Kochakian. He showed her the Federal Express envelope in which the check had come. Kochakian noticed that Michael had previously approved the $10,000 check. She called Michael, who was working at another location, and told her about Guarino’s check. Any Kind had no written procedures that a supervisor was required to follow in deciding which checks over $2,000 to cash. Michael instructed the cashier not to cash the check until she contacted Talcott, to obtain approval. On her first attempt, Kochakian received no answer. On the second call, Talcott approved cashing the $5,700 check. There was no discussion of the $10,000 check. Any Kind cashed the second check for Guarino, and deducted a 3 percent fee. On January 19, Rivera called Talcott to warn him that Guarino was a cheat and a thief. Talcott immediately called his bank and stopped payment on the $5,700 check. Talcott’s daughter called Any Kind and told it of the stop payment on the $5,700 check. Any Kind filed a two-count complaint against Guarino and Talcott, claiming that it was a holder in due course. Talcott’s defense was that Any Kind was not a holder in due course and that his obligation on the checks was nullified because of Guarino’s illegal acts. The trial court entered final judgment in favor of Any Kind for only the $5,700 check. On the $10,000 check, the judge found for Talcott. The court held that the check-cashing store was not a holder in due course, because the procedures it followed with the $10,000 check did not comport with reasonable commercial standards of fair dealing. The court found that the circumstances surrounding the cashing of the $10,000 check were sufficient to put Any Kind on notice of potential defenses.] Using the terminology of the Uniform Commercial Code, Talcott was the maker or “drawer” of the check, the person who signed the draft “as a person ordering payment.” [UCC §3-103(3)(a)] By Federal Expressing the check to Guarino, Talcott issued the check to him. See [UCC §3-105(a)] (defining “issue” as “the first delivery of an instrument by the maker or drawer * * * for the purpose of giving rights on the instrument to any person”). Guarino indorsed the check and cashed it with Any Kind. See [UCC §3-204 (a)] (defining “indorsement”). Any Kind immediately made the funds available to Guarino, less its fee. Talcott stopped payment on the check with his bank, so the check was returned to Any Kind. See [UCC §4-403(a)] (regarding a customer’s right to stop payment). When Guarino negotiated the check with Any Kind, it became a holder of the check, making it a “person entitled to enforce” the instrument. See [UCC §§3-201(a), 3-203(b), 3-301(a)]. As the drawer of the check dishonored by his bank, Talcott’s obligation was to pay the draft to a person entitled to enforce the draft “according to its terms at the time it was issued. * * *” [UCC §3-414(a)]. Unless Any Kind is a holder in due course, its right to enforce Talcott’s obligation to pay the draft is subject to (1) all defenses Talcott could raise “if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract,” and (2) a claim of “recoupment” Talcott could raise against Guarino. [UCC §3-305(a) & (b)]. Because Talcott was fraudulently induced to issue the checks, this case turns on Any Kind’s entitlement to holder in due course status. * * * The good faith requirement of the holder in due course doctrine “has been the source of an ancient and continuing dispute.” [Citation]. On the one hand, should the courts apply a so-called objective test, and ask whether a reasonably prudent person, behaving the way the alleged holder in due course behaved, would have been acting in good faith? Or should the courts instead apply a subjective test and examine the person’s actual behavior, however stupid and irrespective of the reaction a reasonably prudent person would have had in the same circumstance? The legal establishment has steered a crooked course through this debate. [Citations.] * * * Application of [old UCC’s] “honesty in fact” standard to Any Kind’s conduct in this case would clothe it with holder in due course status. It is undisputed that Any Kind’s employees were pure of heart, that they acted without knowledge of Guarino’s wrongdoing. However, in 1992, the legislature adopted a new definition of “good faith” that applies to the [UCC §3-302] definition of a holder in due course: “‘good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.” [Citation.] To the old, subjective good faith, “honesty in fact” standard, the legislature added an objective component—the “pure heart of the holder must now be accompanied by reasoning that assures conduct comporting with reasonable commercial standards of fair dealing.” [Citation.] No longer may a holder of an instrument act with “a pure heart and an empty head and still obtain holder in due course status.” [Citation.] Comment 4 to section 3-103, Florida Statutes Annotated, attempts to shed light on how to interpret the new standard: Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. Failure to exercise ordinary care in conducting a transaction is an entirely different concept than failure to deal fairly in conducting the transaction. The Code does not define the term “fair dealing.” * * * Application of holder in due course status is the law’s value judgment that certain holders are worthy of protection from certain types of claims. For example, it has been argued that application of the old subjective standard facilitated the transfer of checks in the stream of commerce; arguably one would be “more willing to accept the checks if * * * she knows * * * she can be a holder in due course of that instrument and take it free of defenses that might have existed between the buyer and the seller in the underlying transaction.” [Citation.] In applying the new standard, “fairness” should be measured by taking a global view of the underlying transaction and all of its participants. A holder “must act in a way that is fair according to commercial standards that are themselves reasonable.” [Citation.] To apply the law requiring “good faith” under section 3-302(a), we adopt the analysis set forth by the Supreme Court of Maine: The fact finder must * * * determine, first, whether the conduct of the holder comported with industry or “commercial” standards applicable to the transaction and, second, whether those standards were reasonable standards intended to result in fair dealing. Each of those determinations must be made in the context of the specific transaction at hand. If the fact finder’s conclusion on each point is “yes,” the holder will be determined to have acted in good faith even if, in the individual transaction at issue, the result appears unreasonable. Thus a holder may be accorded holder in due course status where it acts pursuant to those reasonable commercial standards of fair dealing—even if it is negligent—but may lose that status, even where it complies with commercial standards, if those standards are not reasonably related to achieving fair dealing. [Citation.] * * * Check cashing businesses occupy a special niche in the financial industry. They are part of the “alternative financial services” or “fringe banking” sector, a part of the market that “has become a major source of traditional banking services for low-income and working poor consumers, residents of minority neighborhoods, and people with blemished credit histories.” [Citations.] * * * Against this backdrop, we cannot say that the trial court erred in finding that the $10,000 check was a red flag. The $10,000 personal check was not the typical check cashed at a check cashing outlet. The size of the check, in the context of the check cashing business, was a proper factor to consider under the objective standard of good faith in deciding whether Any Kind was a holder in due course. [Citation.] Guarino was not the typical customer of a check cashing outlet. As the trial judge observed, because of the 5% fee charged, it is unusual for a small businessman such as a broker to conduct business through a check cashing store instead of through a traditional bank. Guarino did not have a history with Any Kind of cashing checks of similar size without incident. The need for speed in a business transaction is usually less acute than for someone cashing a paycheck or welfare check to pay for life’s necessities. The need for speed in cashing a large business check is consistent with a drawer who, for whatever reason, might stop payment. Fair dealing in this case required that the $10,000 check be approached with a degree of caution. * * * To affirm the trial court is not to wreak havoc with the check cashing industry. Verification with the maker of a check will not be necessary to preserve holder in due course status in the vast majority of cases arising from check cashing outlets. This was neither the typical customer, nor the typical transaction of a check cashing outlet. * * * The legislature’s addition of an objective standard of conduct may well have the effect of “slowing the ‘wheels of commerce”’ in some transactions. [Citation.] However, by adopting changes to the “good faith” standard in the holder in due course doctrine, the legislature “necessarily must have concluded that the addition of the objective requirement to the definition of ‘good faith’ serves an important goal. The paramount necessity of unquestioned negotiability has given way, at least in part to the desire for reasonable commercial fairness in negotiable transactions.” [Citation.] In this case, reasonable commercial fairness required Any Kind to approach the $10,000 check with some caution and to verify it with the maker if it wanted to preserve its holder in due course status. AFFIRMED. 27-3d Lack of Notice A holder in due course must take the instrument without notice of dishonorment -- that it is overdue, that it is forged or altered, or that it is subject to any claims or defenses. Visible evidence of a forgery or alteration will make the instrument irregular and will require a transferee to question its authenticity. Under the Code, a person has notice of a fact when “(a) he has actual knowledge of it; or (b) he has received a notice or notification of it; or (c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists.” Notice an Instrument is Overdue — To become a holder in due course, an instrument’s purchaser must take the instrument without notice that it is overdue, which would give a suspicion that something is wrong. • Time paper is due on the stated due date (or the next business day). • Demand paper is due when a demand is made or after it has been outstanding for an unreasonable length of time. Notice an Instrument Has Been Dishonored — Dishonor is the refusal to pay or accept an instrument when it becomes due; notice of a dishonored instrument prohibits the holder from becoming a holder in due course. Notice of a Claim or Defense — A defense protects a person from liability while a claim is an assertion of ownership. 27-3e Without Reason to Question its Authenticity An instrument cannot bear such apparent evidence of forgery or alteration or otherwise be so irregular as to call into question its authenticity. 27-4 HOLDER IN DUE COURSE STATUS 27-4a A Payee May Be a Holder in Due Course A payee may become a holder in due course if she satisfies all of the requirements. *** Chapter Outcome *** Explain the shelter rule and when a payee can have the rights of a holder in due course. 27-4b The Shelter Rule Someone who has not satisfied the holder in due course requirements may assert such rights if the instrument was received from a previous party who did qualify as a holder in due course. An exception to this rule provides that a prior holder who himself has been a party to any illegality may not improve his legal standing by taking the instrument from a holder in due course. CASE 27-5 TRIFFIN v. CIGNA INSURANCE Superior Court of New Jersey, Appellate Division, 1997 297 N. J. Super 199, 687 A.2d 1045, 31 UCC Rep.Serv.2d 1040 http://scholar.google.com/scholar_case?case=11522573068990632822&q=687+A.2d+1045&hl=en&as_sdt=2,10 Dreier, J. Plaintiff, Robert J. Triffin, appeals from a * * * summary judgment dismissing his complaint for payment of a draft of defendant Cigna Insurance Company transferred to plaintiff by a holder in due course after Cigna had stopped payment on the instrument. * * * The defaulting defendant, James Mills, received a draft in the amount of $484.12, dated July 7, 1993 from one of Cigna’s constituent companies, Atlantic Employers Insurance Company. The draft had been issued for workers’ compensation benefits. Mills falsely indicated to the issuer that he had not received the draft due to a change in his address and requested that payment be stopped and a new draft issued by defendant. The insurer complied and stopped payment on the initial draft. Mills nevertheless negotiated the initial draft to plaintiff’s assignor, Sun Corp. t/a Sun’s Market, before the stop payment notation was placed on the draft. All appear to agree that Sun Corp. was a holder in due course. Sun Corp. presented the draft for payment through depositary and collecting banks. The issuer’s bank dishonored the draft in accordance with its customer’s direction, stamped it “Stop Payment,” and returned the draft to Sun Corp. There is no question that had Sun Corp. at that point pressed its claim against the insurer as the issuer of the instrument, Sun Corp. would have been entitled to a judgment because of its status as a holder in due course. Thereafter, plaintiff, who apparently is in the business of purchasing dishonored instruments, obtained an assignment of Sun Corp.’s interests in this instrument and proceeded with this law suit. Plaintiff does not contend that he is a holder in due course of the instrument by virtue of it being negotiated to him for value, in good faith, without notice of dishonor, under the former holder in due course statute, UCC §3-302, nor under the present statute, §3-302a(2). Such negotiation is, of course, only one way for a holder to claim the status of a holder in due course. There exists a second method by which one may become a holder in due course. The shelter provisions of former UCC (§3-201), which was in effect when plaintiff obtained his assignment of this instrument, state clearly that “[t]ransfer of an instrument vests in the transferee such rights as the transferor has therein * * *.” Official Comment 3 to that section sets to rest any question of whether this section applies to the transfer by assignment of the rights of a holder in due course. The Comment reads: “A holder in due course may transfer his rights as such * * *. [The former Negotiable Instruments Law section’s] policy is to assure the holder in due course a free market for the paper, and that policy is continued in this section.” Example (a) following this comment could have been drawn from this case, but is even stronger because it adds an element of fraud and posits a gratuitous transfer rather than a purchase, as in our case: (a) A [Mills] induces M [Cigna] by fraud to make an instrument payable to A. A negotiates it to B [Sun Corp.], who takes as a holder in due course. After the instrument is overdue B gives it to C [plaintiff], who has notice of the fraud. C succeeds to B’s rights as a holder in due course, cutting off the defense. If the 1995 amendments are to be given retroactive effect, the law governing the rights of a transferee who merely has accepted the transfer of the instrument is now found in Revised UCC [§3-203]. It restates the principle of the former Official Comment 3, example (a), as substantive law. * * * The Uniform Commercial Code Comment 2 to this [Revised] section similarly states: Under subsection (b) a holder in due course that transfers an instrument transfers those rights as a holder in due course to the purchaser. The policy is to assure the holder in due course a free market for the instrument. * * * These sections could not be clearer. Plaintiff received by [negotiation] the right of a holder in due course to this instrument, which apparently had been presented and then dishonored because of defendant’s stop payment order. * * * The summary judgment appealed from is reversed, and the matter is remanded with directions to enter judgment in favor of plaintiff, with interest. *** Chapter Outcomes *** Identify, define and explain the real defenses. Define and explain personal defenses. 27-5 THE PREFERRED POSITION OF A HOLDER IN DUE COURSE In a nonconsumer transaction, a holder in due course takes the instrument (1) free from all claims and (2) free from all defenses of any party with whom she has not dealt, except for a few real defenses available against anyone, including a holder in due course. Defenses that may not be asserted against a holder in due course are called personal defenses, or contractual defenses. 27-5a Real Defenses Infancy — State law recognizes a public policy of protecting minors in contractual arrangements. The UCC recognizes this defense against a holder in due course to the extent that it is a defense to a simple contract under state law. Void Obligations — Any incapacity, duress, or illegality are valid defenses against a holder in due course if they are void under state law. Fraud in the Execution — Misrepresentation that induced the person to sign the instrument without knowledge or without reasonable opportunity to obtain knowledge of its character or its essential terms. The defense is not available if the deceived party knew or should have known of the fraud. Discharge in Insolvency Proceedings — A discharge in bankruptcy creates a real defense valid against a holder in due course. Discharge of Which the Holder has Notice — Any other discharge of which the holder has notice when he takes the instrument creates a real defense valid against a holder in due course. Unauthorized Signature — A person will not be held liable on a negotiable instrument where their name has been forged. Exceptions: if he has not reported a known forged signature, that forged signature is assumed to be valid. Also, forged signatures may be considered valid if substantial negligence contributes to their being made (such as an automatic signing device which is not properly safeguarded). An unauthorized signature may be ratified, and therefore validated. Fraudulent Alteration — An alteration is (1) any unauthorized change that modifies the obligation of any party to the instrument, or (2) an unauthorized addition or change to an incomplete instrument concerning the obligation of a party. A fraudulent alteration discharges the affected party, unless negligence in writing the instrument allowed the alteration. . (Under the Code a person taking the instrument for value, in good faith, and without notice of the alteration is accorded the same protection as a holder in due course). NOTE: See Figures 27-7 and 27-8 27-5b Personal Defenses These defenses are not valid against a holder in due course. The most common personal defenses include lack of consideration, breach of contract, fraud in the inducement, economic duress, mistake, undue influence, and misrepresentation. These transactions are typically voidable, as opposed to void, under state law. NOTE: See Figure 27-9 27-6 LIMITATIONS UPON HOLDER IN DUE COURSE RIGHTS The Federal Trade Commission promulgated a rule affecting consumer credit contracts that undercuts much of the protection afforded a holder in due course. In such contracts a provision must be included that warns any holder that she takes the instrument subject to all claims or defenses, whether real or personal, that the consumer could assert against the seller. The rule is intended to prevent consumer purchase transactions from being financed in such a manner that the purchaser is legally obligated to a third party for the full payment price, even though the dealer from whom the purchaser bought the goods committed fraud or the goods sold were defective. Chapter 28 LIABILITY OF PARTIES Contractual Liability Signature [28-1] Authorized Signatures [28-1a] Unauthorized Signatures [28-1b] Ratification of Unauthorized Signature Negligence Contributing to Forged Signature Liability of Primary Parties [28-2] Makers [28-2a] Acceptors [28-2b] Liability of Secondary Parties [28-3] Drawers [28-3a] Indorsers [28-3b] Effect of Acceptance [28-3c] Disclaimer of Liability by Secondary Parties [28-3d] Conditions Precedent to Liability [28-3e] Dishonor Notice of Dishonor Presentment and Notice of Dishonor Excused Liability for Conversion [28-3f] Termination of Liability [28-4] Payment [28-4a] Tender of Payment [28-4b] Cancellation and Renunciation [28-4c] Liability Based on Warranty Warranties on Transfer [28-5] Entitlement to Enforce [28-5a] Authentic and Authorized Signatures [28-5b] No Alteration [28-5c] No Defenses [28-5d] No Knowledge of Insolvency [28-5e] Warranties on Presentment [28-6] Drawees of Unaccepted Drafts [28-6a] Entitled to Enforce No Alteration Genuineness of Drawer's Signature All other Payors [28-6b] Cases in This Chapter Mark Line Industries, Inc. v. Murillo Modular Group, Ltd. Messing v. Bank of America, N.A. Davis v. Watson Brothers Plumbing, Inc. Travelers Indemnity Co. v. Stedman Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain contractual liability, warranty liability, and liability of conversion. • Explain the liability of makers, acceptors, drawers, drawees, indorsers, and accommodation parties. • Identify and discuss the condition precedents to the liability of secondary parties. • Explain the methods by which liability on an instrument may be terminated. • Compare the warranties on transfer with the warranties on presentment. TEACHING NOTES *** Chapter Outcome *** Explain contractual liability, warranty liability, and liability of conversion. CONTRACTUAL LIABILITY Makers of promissory notes and acceptors (drawee on acceptance) of drafts are primarily liable for payment on the instrument; their liability is absolute if they have no valid claim or defense against the holder. Indorsers on any instrument are secondarily liable, i.e., subject to dishonor and notice of dishonor. The liability of drawers of drafts and checks is also conditional because it is generally contingent upon the drawee's dishonor of the instrument. 28-1 SIGNATURE This term is broadly defined to include any name, word, or mark — handwritten, typed, printed, or any other form, intended to authenticate the instrument. 28-1a Authorized Signatures Although agents may sign negotiable instruments on behalf of their principal, they must do so in such a manner that their representative capacity is disclosed and the identity of the principal is given. Otherwise, the agent becomes personally liable on the instrument. The most common incorrect forms of signatures by agents and the liability that results from each are: 1. An agent signs only his own name to an instrument. 2. An authorized agent indicates that he is signing as a representative but does not disclose the name of his principal. 3. An agent signs both his name and his principal’s name but does not indicate that he is an agent, making them appear as co-makers. In all three situations, the agent is liable on the instrument only to a holder in due course without notice that the agent was not intended to be liable. Because the principal’s liability on the instrument is determined by contract and agency law, the principal is liable to all holders. Under Revised Article 3, if an agent signs his name as the drawer of a check without indicating his representative status and the check is payable from an account of the principal who is identified on the check, the agent is not liable on the check if he is an authorized agent. Some courts reached this result under prior Article 3. CASE 28-1 MARK LINE INDUSTRIES, INC. v. MURILLO MODULAR GROUP, LTD. United States District Court, N.D. Indiana, South Bend Division, 2011 ___F.SUPP.3D ____, 74 UCC REP.SERV.2D 253 http://scholar.google.com/scholar_case?q=ucc+3-402%28c%29&hl=en&as_sdt=6,34&as_ylo=2011&case=491499614692884515&scilh=0 Moody, J Plaintiffs Mark Line Industries, Inc., Mark Line Industries, Inc. of Pennsylvania, and Mark Line Industries of North Carolina, LLC (collectively "Mark Line") filed an amended complaint against defendants Murillo Modular Group, Ltd. ("MMG") and Salvador V. Murillo ("Murillo"). The complaint alleges that defendants failed to pay the balances due on two promissory notes that they had given to Mark Line.) * * * The first promissory note, dated September 18, 2009, was for $3,802,532.00. The terms of the note provided that it would mature on the date of whichever was sooner — November 15, 2009, or upon the date(s) when certain conditions were satisfied. Mark Line alleges that defendants did not pay the balance due by November 15, 2009. The second note, also dated September 18, 2009, was for $743,297.50. The terms of this note also provided that it would mature on the date of whichever was sooner—November 15, 2009, or upon the date(s) when certain conditions were satisfied. Mark Line claims that defendants did not pay the balance by November 15, 2009. Line alleges that it received a payment of $79,549.51 on this note on January 10, 2010. Of this payment, $14,175.47 was applied towards accrued interest and the remaining $65,374.04 was applied to reduce the remaining principal balance. Both notes include the following explanation for "Maker/Borrower": Maker/Borrower: Murillo Modular Group Ltd, Salvador Murillo and Nick Mackie, (collectively and severally the "Maker or Makers or Borrower" through Murillo Modular Group, Ltd.). The Makers/Borrowers shall be jointly and severally liable. At the end, both notes state: IN WITNESS WHEREOF, the Maker/Borrower understands that it is liable for all obligations arising under this Note and has caused the same to be signed and delivered as of the date first written above. The form of signature then says "Murillo Modular Group, Ltd, Maker/Borrower." Murillo's signature appears above the signature block, "By: Salvador Murillo, Owner" on the first note and "By: Salvador Murillo, Partner" on the second note. Nick Mackie has also signed the first note as "owner" and the second note as "partner." The notes then say "Accepted: Mark Line" and are signed by "L. Michael Arnold, CEO." * * * [The parties have agreed to dismiss, without prejudice, the claim against Murillo for failure to pay the balance on the second promissory note. The defendants argue that the first promissory note for $3,802,532.00 shows only that Murillo signed the note in his representative capacity for MMG—not that he signed it in his individual capacity. They argue that Murillo is not individually liable because the "form of his signature shows unambiguously" that he signed as a representative of MMG.] Mark Line's pleadings show two different plausible theories for Murillo's individual liability for the note. First, under [UCC 3-402(a)], Murillo may be liable on the promissory note as a matter of contract law. This part of the statute provides: If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract. If the represented person is bound, the signature of the representative is the "authorized signature of the represented person" and the represented person is liable on the instrument, whether or not identified in the instrument. [UCC 3-402(a).] So, for example, if Person A agreed to have Person B act as his representative as a matter of agency law, and Person B signed his own name or Person A's name to an instrument, Person A is bound to the instrument as a matter of contract law. This is because as the authorized representative of Person A, Person B's signature is an authorized signature of Person A. The promissory note at issue states that MMG, Murillo, and Mackie are "collectively and severally the ‘Maker or Makers or Borrower’ through Murillo Modular Group, Ltd.".) The phrase "through Murillo Modular Group, Ltd." could mean that MMG was authorized to act on behalf of Murillo for this note, so that MMG was acting as Murillo's representative on the promissory note and Murillo was the represented person. In this way, Murillo could still be liable on the note even if he only signed in his representative capacity as the owner of MMG. It could be that MMG signed the note, through Murillo in his representative capacity, as Murillo's representative. Thus, the allegations paint a plausible story that MMG acted as the representative of Murillo under agency law, and by signing the note, it bound Murillo "to the same extent [he] would be bound if the signature were on a simple contract." [UCC 3-402(a).] Second, Murillo may be liable on the note under [UCC 3-402(b)]. [UCC 3-401(a)] states that a person is not liable on an instrument unless he has signed the instrument or his agent or representative has signed the instrument. [UCC 3-402(b)(1)] provides that a representative signing his name to an instrument as an authorized signature of a represented person is not liable on an instrument if the "form of the signature shows unambiguously that the signature is made on behalf of the represented person." [UCC 3-402(b)(1).] If the form of signature "does not show unambiguously that the signature is made in a representative capacity," "the representative is liable on the instrument to a holder in due course that took the instrument without notice that the representative was not intended to be liable on the instrument." [UCC 3-402(b)(2).] As 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." [UCC 3-402(b)(2).] In this case the form of signature is ambiguous. * * * The U.C.C. provides three examples of when the form of signature is ambiguous. One example of this is when the agent signs as an agent, but fails to identify the represented person. UCC § 3-402 cmt. 2. That is similar to the situation as alleged here because the form of signature does not clearly identify MMG as the represented party. The note identifies MMG as the "Maker/Borrower" in the form of signature. However, the note defines "Maker/Borrower" as MMG, Murillo, and Mackie "through Murillo Modular Group." It then says that the "Makers/Borrowers shall be jointly and severally liable." It could be argued that if MMG was the only Maker or Borrower, this definition would not make any sense because there would be no one for it to be jointly and severally liable with. Therefore the definition of "Maker/Borrower" in the contract confuses the identity of the represented person and makes the form of signature ambiguous. Further, the form of signature is also ambiguous because both Murillo and Mackie signed for MMG. As described above, the signature line on the promissory note * * * states: "Murillo Modular Group, LTD, Maker/Borrower." Beneath that was "By: Salvador Murillo, Owner" with Murillo's alleged signature and "By: Nick Mackie, Owner" with Mackie's alleged signature. It could be argued that if they were signing only in their representative capacities for MMG, only one of them would have needed to sign the note. So this also causes some ambiguity in the form of signature. In sum, at this point, Mark Line has plead plausible theories for Murillo's individual liability on the note * * *. For the reasons give above, defendants Murillo Modular Group's and Murillo's motion to dismiss is DENIED. *** 28-1b Unauthorized Signatures Includes forgeries and signatures by an agent who lacks the proper authority. Unauthorized signatures will impose liability on the signer regardless of whose name appears on the instrument. Ratification of Unauthorized Signature — Makes the signature valid and relieves the actual signer from liability for the instrument, but not from action by the person whose name was forged. Negligence Contributing to Forged Signature — The person whose name has been forged is not bound unless his negligence contributed to the making of the unauthorized signature. Revised Article 3 adopts a comparative negligence standard in allocating liability. This negligence will preclude the person from employing a lack of authority defense to defeat the claims of a holder in due course. *** Chapter Outcome *** Explain the liability of makers, acceptors, drawees, drawers, indorsers, and accommodation parties. 28-2 LIABILITY OF PRIMARY PARTIES The maker of a note is primarily liable while there is no primary liability on a draft or check unless it is accepted by the drawee. 28-2a Makers Their obligation is to pay the instrument according to its terms at the time of issuance or, if incomplete, according to its terms at completion. 28-2b Acceptors A drawee has no liability until she becomes an acceptor. An acceptance must be written on the instrument — normally vertically across the face of the draft. Accepted checks are said to be certified. Certification is a special type of acceptance where the drawee bank promises to pay the check when presented. However, a bank has no obligation to certify a check. CASE 28-2 MESSING v. BANK OF AMERICA, N.A. Court of Appeals of Maryland, 2003 373 Md. 672, 821 A.2d 22, 50 U.C.C. Rep.Serv.2d 1 http://scholar.google.com/scholar_case?case=15792173749697893031&q=821+A.2d+22&hl=en&as_sdt=2,10 Harrell, J. [Messing had a check in the amount of $976 from Toyson J. Burruss, the drawer. Instead of depositing the check into his bank account, Messing presented the check for payment at Mr. Burruss’ bank, Bank of America, the drawee. The teller, by use of a computer, confirmed the availability of funds on deposit, and placed the check into the computer’s printer slot. The computer stamped certain data on the back of the check, including the time, date, amount of the check, account number, and teller number. The computer also placed a hold on the amount of $976 in the customer’s account. The teller gave the check back to the Messing, who indorsed it. The teller then asked for Messing’s identification. He presented his driver’s license and a major credit card. The teller took the indorsed check from Messing and manually inscribed the driver’s license information and certain credit card information on the back of the check. At some point during the transaction, the teller counted out $976 in cash. She asked whether Messing was a customer of Bank of America. He stated that he was not. The teller returned the check to Messing and requested, consistent with bank policy when cashing checks for noncustomers, that he place his thumbprint on the check. Messing refused and the teller informed him that she would be unable to complete the transaction without his thumb-print. In response, the teller gave Messing back the check, released the hold on the customer’s funds, voided the transaction in the computer, and replaced the cash. Rather than take the check to his own bank and deposit it there, or return it to Burruss, Messing filed an action against Bank of America in the Circuit Court for Baltimore City. Messing claimed that the Bank had violated the Maryland Uniform Commercial Code (UCC) and had violated his personal privacy when the teller asked him to place an “inkless” thumbprint on the face of the check at issue. The Circuit Court entered summary judgment in favor of the bank. The Court of Special Appeals upheld the Circuit Court’s decision in favor of the bank. Messing petitioned this Court for a writ of certiorari, which was granted.] Acceptance under §3–409(a). * * * Under the UCC, a check is simply an order to the drawee bank to pay the sum stated, signed by the makers and payable on demand. Receipt of a check does not, however, give the recipient a right against the bank. The recipient may present the check, but if the drawee bank refuses to honor it, the recipient has no recourse against the drawee. * * * Absent a special relationship, a non-customer has no claim against a bank for refusing to honor a presented check. [Citation.] * * * It is also well settled that a check does not operate as an assignment of funds on deposit, [citation], and the bank only becomes obligated upon acceptance of the instrument. * * * Once a bank accepts a check, under §3–409, it is obliged to pay on the check under §3–413. Thus, the relevant question in terms of any rights Petitioner had against the Bank turns not on the reasonableness of the thumbprint identification, but rather upon whether the Bank accepted the check when presented as defined by §3–409. As will be seen infra, the question of the thumbprint identification is relevant only to the issue of whether the Bank’s refusal to pay the instrument constituted dishonor under §3–502, a determination which has no impact in terms of any duty allegedly owed by the Bank to the Petitioner. Respondent Bank of America argues that the intermediate appellate court correctly found that it did not “accept” the check as that term is defined in §3–409(a). [Citation.] We agree. The mere fact that the teller’s computer printed information on the back of the check does not, as Petitioner contends, amount by itself to an acceptance. * * * * * * “Reasonable Identification” under §3–501(b)(2)(ii) and “Dishonor” under §3–502 We now turn to the issue of whether the Bank’s refusal to accept the check as presented constituted dishonor under §3–501 and §3–502 as Petitioner contends. Petitioner’s argument that Bank of America dishonored the check under §3–502(d) fails because that section applies to dishonor of an accepted draft. We have determined * * * that Bank of America never accepted the draft. Nevertheless, the question remains as to whether Bank of America dishonored the draft under §3–502(b), * * *. The question is whether requiring a thumbprint constitutes a request for “reasonable identification” under §3–501(b)(2)(ii). If it is “reasonable,” then under §3–501(b)(3)(ii) the refusal of the Bank to accept the check from Petitioner did not constitute dishonor. If, however, requiring a thumbprint is not “reasonable” under §3–501(b)(2)(ii), then the refusal to accept the check may constitute dishonor under §3–502(b)(2). The issue of dishonor is arguably relevant because Petitioner has no cause of action against any party, including the drawer, until the check is dishonored. [Citation.] * * * Nowhere does the language of §3–501(b)(2) suggest that “reasonable identification” is limited to information [Respondent] can authenticate at the time presentment is made. Rather, all that is required is that the “person making presentment must * * * give reasonable identification.” §3–501(b)(2). While providing a thumbprint signature does not necessarily confirm identification of the checkholder at presentment—unless of course the drawee bank has a duplicate thumbprint signature on file—it does assist in the identification of the checkholder should the check later prove to be bad. It therefore serves as a powerful deterrent to those who might otherwise attempt to pass a bad check. That one method provides identification at the time of presentment and the other identification after the check may have been honored, does not prevent the latter from being “reasonable identification” for purposes of §3–501(b)(2). * * * In short, when a bank cashes a check over the counter, it assumes the risk that it may suffer losses for counterfeit documents, forged indorsements, or forged or altered checks. Nothing in the Commercial Law Article forces a bank to assume such risks. [Citation]; §3–408. To the extent that banks are willing to cash checks over the counter, with reasonable identification, such willingness expands and facilitates the commercial activities within the State. * * * Because the reduction of risk promotes the expansion of commercial practices, * * * we conclude that a bank’s requirement of a thumbprint placed upon a check presented over the counter by a non-customer is reasonable. [Citations.] As the intermediate appellate court well documented, the Thumb-print Program is part of an industry wide response to the growing threat of check fraud. [Citation.] Prohibiting banks from taking reasonable steps to protect themselves from losses could result in banks refusing to cash checks of non-customers presented over the counter at all, a result which would be counter to the direction of [the UCC]. As a result of this conclusion, Bank of America in the present case did not dishonor the check when it refused to accept it over the counter. * * * * * * Judgment of the Court of Special Appeals affirmed. 28-3 LIABILITY OF SECONDARY PARTIES The liability of indorsers and drawers is triggered by the failure of a person primarily liable on the instrument to pay after dishonor. 28-3a Drawers A drawer orders the drawee to pay and is only liable if the drawee fails to pay an instrument. Under Rev. Article 3, liability is generally contingent upon dishonor and does not require notice of dishonor: • Drawer of an unaccepted draft — obligated to pay upon dishonor, according to its terms at the time it was issued (except with incomplete instruments: see Chapter 28). • Drawer of an unaccepted draft by a nonbank — drawer’s liability is treated as an indorser, which requires dishonor and notice of dishonor. • Drawer of an accepted draft — is discharged from liability. 28-3b Indorsers An indorser promises that upon dishonor and notice that the instrument was dishonored, she will pay it according to its terms at the time of indorsement or the rules for completion of an incomplete instrument. Indorsers are discharged from liability when a draft is accepted by a bank. CASE 28-3 DAVIS v. WATSON BROTHERS PLUMBING, INC. Court of Civil Appeals of Texas, Dallas, 1981 615 S. W.2d 844 http://scholar.google.com/scholar_case?case=16807682647541897506&hl=en&as_sdt=2&as_vis=1&oi=scholarr Akin, J. Defendant was the drawer of a check for $152.38 payable to its employee Arnett Lee. Lee, in turn, endorsed the check over to plaintiff, who operated a liquor store. After Lee endorsed the check to plaintiff and after plaintiff had placed cash on the counter, Lee stated that he wanted to buy a six-pack of beer and a bottle of scotch. When plaintiff turned to obtain the requested merchandise, a thief grabbed approximately $110.00 of the $150.88 ($152.38 less a $1.50 check cashing fee) for which plaintiff cashed the check. Lee took the remainder of the $150.88, approximately $40.88, and notified defendant of the theft. Defendant issued Lee a second check for $152.38 and stopped payment on the first check. Plaintiff sued defendant based on the dishonor of the first check. The county court rendered judgment for plaintiff for the $40.88 that Lee actually received from plaintiff [after the robbery]. Plaintiff, as appellant, asserts that since he proved that he was the holder of the check and since defendant failed to raise any valid defenses, defendant was liable to him for the full face value of the check, $152.38. We agree. “Holder” is defined in Tex. Bus. & Com. Code Ann. [UCC] §1–201(20) as: “[A] person who is in possession of a document of title or an instrument or an investment security drawn, issued or indorsed to him or to his order or to bearer or in blank.” Under the undisputed facts, Lee, the payee endorsed the check in blank to plaintiff, who is now in possession of the check. Thus, as a matter of law, plaintiff is a “holder” under the code [UCC] §3–413(2), [Revised §3–414(b)] which sets forth the rights of a holder, [and] provides, in pertinent part, that: “The drawer engages that upon dishonor of the draft * * * he will pay the amount of the draft to the holder or to any indorser who takes it up.” Thus, the defendant is liable to the holder of the dishonored check unless the defendant has raised a valid defense against the holder. * * * Defendant here asserts that it may raise want or failure of consideration in the transaction between plaintiff and Lee, its payee, as a defense to plaintiff’s enforcement of the instrument against it. We disagree. [UCC] §3–408 [Revised §§3–303(b), 3–305] provides, in pertinent part that: “Want or failure of consideration is a defense against any person not having the rights of a holder in due course * * *.” The comments to §3–408 provide that: “‘Consideration’ refers to what the obligor has received for his obligation, and is important only on the question of whether his obligation can be enforced against him.” Thus, any holder can enforce the obligation of a draft against the drawer regardless of whether the holder gave anything in consideration for the draft to his endorser. The drawer can assert as a defense to enforcement of the draft want or failure of consideration only to the extent such defense lies against the payee of the draft. Thus, the fact that a holder remote to the drawer’s transaction with the payee did not give full consideration for the draft is not a defense available to the drawer. [Citation.] This is true because the drawer’s sole obligation on the check is to pay it according to its tenor. Consequently, the fact that the transfer of the check by the payee to the transferee is without consideration is immaterial to the drawer’s obligation and is not a defense available to the drawer against the holder. A similar conclusion was reached in [citation]. In that case the court held that a defendant maker was not the proper party to raise as a defense that the transfer of the note to the holder was void. Consequently, that court concluded that the maker could not assert the defense that the equitable ownership of the instrument was in someone other than the holder-plaintiff. The rationale of this, and other decisions, reaching the same conclusion, is that the maker or drawer of an instrument admittedly owes the money and he should not be permitted to bring into the controversy equities of parties with which he has no connection. [Citation.] Furthermore, if the drawer or maker is permitted to assert the defense of another party such as the payee, the judgment on that issue would not be binding on the third party claimant who is not a party to the suit. [Citation.] Because defendant here may not assert want or failure of consideration in the transaction between plaintiff and Lee, and because defendant has asserted no other defense against plaintiff, plaintiff is entitled to recover the full face value of the check under §3–413(b) [Revised §3–414] of the Texas Uniform Commercial Code. Accordingly, the judgment of the trial court is reversed and judgment is rendered that plaintiff recover judgment against defendant for $152.38 and all costs. 28-3c Disclaimer of Liability by Secondary Parties Both drawers and indorsers may disclaim their normal secondary liability by drawing or indorsing instruments "without recourse." However, drawers of checks may not disclaim their secondary liability. *** Chapter Outcome *** Identify and discuss the conditions precedent to the liability of secondary parties. 28-3d Conditions Precedent to Liability Defined as an event which must occur before liability arises: for a drawer of an unaccepted draft, it is dishonor; for an indorser or a drawer of an accepted draft, it is dishonor and notice of dishonor. Keep in mind that all indorsers and the drawer are discharged by a subsequent acceptance by a bank. Dishonor — Occurs after a proper presentment and a refusal to pay. Return for lack of a proper indorsement is not dishonor. What constitutes dishonor depends on the type of instrument and whether or not presentment is required. • Notes: demand note is dishonored if not paid on the day of presentment; time notes that require presentment or payable by a bank are dishonored if not paid on its due date or presentment date, whichever is later; all other time notes need not be presented and are dishonored if not paid on their due date • Drafts: an unaccepted draft (except checks) that is payable on demand is dishonored if not paid on the day of presentment; a time draft that is presented for payment is due on the due date or presentation date (whichever is later); a time draft presented for acceptance before its due date is dishonored if not accepted that day; an accepted demand draft is dishonored if the acceptor does not pay it when presented; an accepted time draft is dishonored if not paid on the due date or at presentation (whichever is later) • Checks: Refusal by a drawee bank to pay a check directly upon presentation is dishonor, if not paid that day. A check presented through the normal check collection process generally must respond by midnight of the next business day. (See Chapter 30). Notice of Dishonor — A drawer’s liability is usually not contingent upon receiving notice of dishonor, whereas an indorser’s liability is. Dishonor permits the holder to seek recourse immediately as to drawers and indorsers by giving timely notice of dishonor. Notice is timely if given by a bank by midnight of the next banking day, and as to non-banks, within 30 days following the day on which the person receives notice of dishonor. Presentment and Notice of Dishonor Excused — Presentment is excused by the UCC in several situations, including if the party to present the instrument cannot do so, or if the maker or acceptor will not or cannot pay. Notice of dishonor is excused if the instrument does not require notice to hold the party liable. NOTE: See Figure 28-1: Contractual Liability. 28-3f Liability for Conversion A person who wrongfully takes control over another person's property is liable in tort for conversion. Conversion occurs where an instrument is “taken by transfer, other than negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment ... for a person not entitled to enforce the instrument...” 28-4 TERMINATION OF LIABILITY *** Chapter Outcome *** Explain the methods by which liability on an instrument may be terminated. 28-4a Payment When a party pays the holder, the liability on the instrument is discharged. The person making payment should take the instrument or have it canceled by marking it "paid" or "canceled" so that it cannot be transferred to a subsequent holder in due course. 28-4b Tender of Payment Tender of full payment discharges the party from subsequent liability for interests, costs, and attorney's fees. Refusal of tender does not discharge liability for the face amount and interest accrued at tender, but it does wholly discharge every party who has a right of recourse against the party making tender. 28-4c Cancellation and Renunciation Intentional destruction, mutilation, or the striking of a party's signature by the party with enforcement rights will effect a cancellation even without consideration. Renunciation may also be effected by a signed writing that is delivered, except as against a subsequent holder in due course without knowledge. LIABILITY BASED ON WARRANTY Presentment and transferor warranties are effective even though the prior holder of the instrument fails to sign the instrument or signs without recourse. However, whether subsequent holders have indorsed the instrument will impact on the extent of warranty coverage. These warranties are not disclaimed by a “without recourse” indorsement. NOTE: See Figures 28-2 and 28-3. *** Chapter Outcome *** Compare the warranties on transfer with the warranties on presentment. 28-5 WARRANTIES ON TRANSFER Transferor warranties are operative if consideration is received in return for negotiation or assignment of the instrument. Transfers by delivery alone have warranties for the immediate transferee only; transfers by indorsement carry warranties to any subsequent transferee. 28-5a Entitlement to Enforce A transferor warrants that he is entitled to enforce the instrument. This warranty essentially guarantees that there are no unauthorized or missing indorsements. 28-5b Authentic and Authorized Signatures All signatures are warranted to be authentic and authorized. 28-5c No Alteration This makes the transferor liable to the transferee for the difference between the amount the instrument was originally written for and the forged amount. 28-5d No Defenses A guarantee that the instrument is not subject to a defense or claim in recoupment of any party. 28-5e No Knowledge of Insolvency No knowledge of insolvency proceedings initiated by the maker, acceptor, or drawer of an unaccepted instrument; includes bankruptcy and “any assignment for the benefit of creditors or other proceedings intended to liquidate or rehabilitate the estate of the person involved.” NOTE: See Figure 28-1. 28-6 WARRANTIES ON PRESENTMENT These warranties are made to a drawee bank or maker by any person who obtains payment. 28-6a Drawees of Unaccepted Drafts Includes uncertified checks; receives a presentment warranty from the person obtaining payment or acceptance and from all prior transferors. These parties warrant to the drawee that: they are entitled to enforce the draft, it has not been altered, and they have no knowledge of an unauthorized signature. Entitled to Enforce — Same as transferor warranty except that it also covers the genuineness of the indorsers' signatures (but not that of the drawer or maker). No Alteration — If the presenter’s warranty of no alteration is breached, the drawee can collect the difference from all warrantors, but cannot charge the drawer for more than was authorized. Genuineness of Drawer’s Signature — Warrants that there is no knowledge of unauthorized signatures by the drawer, putting the risk upon the drawee if the signature is indeed unauthorized. NOTE: See Figure 28-2. 28-6b All Other Payors In all instances other than a drawee of an unaccepted draft (including an uncertified check), the only presentment warranty given is that the warrantor is entitled to enforce the instrument or receive payment. CASE 28-4 TRAVELERS INDEMNITY CO. v. STEDMAN United States District Court, Eastern District of Pennsylvania, 1995 895 F.SUPP. 742, 27 UCC REP.SERV.2D 1347 http://scholar.google.com/scholar_case?case=3305267280758542845&q=27+UCC+Rep.+Serv.2d+1347&hl=en&as_sdt=2,34 Reed, J. Currently pending before this court is the motion by defendant Main Line Federal Savings Bank (“Main Line”) for judgment on the pleadings * * * or for partial summary judgment * * * on the crossclaim filed by codefendant Merrill, Lynch, Pierce, Fenner & Smith (“Merrill Lynch”). In dispute is the ultimate liability for pecuniary losses incurred by plaintiff The Travelers Indemnity Company (“Travelers”) when defendants Main Line, as depositary and collecting bank, and Merrill Lynch, as drawee bank, honored seventeen checks unlawfully drawn on the account of the American Lung Association by codefendant Nancy Stedman. * * * In addition, Merrill Lynch advanced a claim for breach of presentment warranties against Main Line pursuant to [UCC] §3–417. The instant motion by Main Line seeks judgment in its favor with regard to twelve of the seventeen checks. Merrill Lynch concedes that Main Line is entitled to judgment on the pleadings with regard to the six checks that were neither deposited nor cashed at Main Line, but Merrill Lynch argues that Main Line is not entitled to judgment on the pleadings with regard to the other six checks at issue. Factual Background and Procedural History In November 1988, plaintiff Travelers issued a comprehensive crime insurance policy to the American Lung Association (the “ALA”), thereby insuring the ALA against financial losses due to employee fraud or dishonesty. Shortly thereafter, in October of 1989, the ALA hired defendant Nancy Stedman as the Director of Bureau Affairs. In her capacity as Director of Bureau Affairs, Stedman possessed the authority to draw checks on a Working Capital Management Account (the “WCMA”), an account established by the ALA with defendant Merrill Lynch for the sole purpose of paying the ALA’s operating expenses. * * * From approximately August 12, 1990 to March 13, 1992, Stedman embarked on a scheme of defalcation, misappropriating $129,624.23 of ALA funds from the WCMA. The ALA finally discovered the scheme in late April, 1992, and subsequently received compensation for its losses under the terms of its insurance policy with Travelers. Asserting its rights as the subrogee of the ALA, Travelers filed this civil action on July 9, 1993 against defendants Nancy Stedman, Merrill Lynch, and Main Line. Merrill Lynch and Main Line agree that the seventeen checks misappropriated by Stedman can be into three groups based on the combination of or unauthorized [drawer] and payee signatures. Group One is comprised of six checks totalling $5,343.00, each bearing a forged cosignatory’s signature, or [co-drawer’s] signature, and forged indorsements. Main Line and Merrill Lynch agree that the Group One checks were neither deposited at nor cashed by defendant Main Line. * * * Group Two is comprised of six checks totalling $85,241.01, each payable to either “American Lung Association” or “American Lung Association/Stedman.” Each Group Two check bore two forged [drawer’s] signatures and at least one forged indorsement. All Group Two checks were accepted for deposit into the personal checking account of Stedman by Main Line, and subsequently presented to and honored by Merrill Lynch. Finally, Group Three is comprised of five checks totalling $39,030.22, each payable to “American Lung Association” and bearing only a forged indorsement. * * * The Group Three checks are not the subject of the instant motion. Discussion * * * Loss Allocation under the Uniform Commercial Code 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. [Citations.] Generally, a drawee bank is strictly liable to its customer, the drawer, for payment over either a forged [drawer’s] signature or a forged indorsement. [Citation.] * * * Moreover, 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 or one who has in good faith changed his position in reliance on the payment. UCC §3–418. As a result, where the only forgery is of the signature of the [drawer] and not of the indorsement, the negligence of a holder in taking the forged instrument will not allow a drawee bank to shift liability to a prior collecting or depositary bank, unless such negligence amounts to a lack of good faith, or unless the payee bank returns the instrument or sends notice of dishonor within the limited time provided by §4–301 of the UCC. [Citation.] 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. [Citation.] Regrettably, the drafters of the UCC failed to address the allocation of liability for honoring instruments containing both a forged [drawer’s] signature and a forged indorsement, so called “double forgeries.” [Citation.] Nor have the state courts of Pennsylvania addressed this issue. Based on a thorough examination of the rationales behind the allocation of liability in “single forgery” cases, however, the Court of Appeals for the Fifth Circuit concluded that double forgeries should be treated as though only containing forged [drawer’s] signatures. [Citations.] * * * Therefore, this court concludes that under Pennsylvania’s adoption of the UCC, checks containing both a forged [drawer’s] signature and a forged indorsement should be treated, for loss allocation purposes, as though bearing only a forged [drawer’s] signature. As a result, the negligence of a holder in taking a double forgery will not allow a drawee bank, such as Merrill Lynch, to shift liability to a prior collecting or depositary bank, such as Main Line, unless such negligence amounts to a lack of good faith, or unless the drawee bank returns the instrument or sends notice of dishonor within the limited time provided by §4–301 of the Pennsylvania adoption of the UCC. [Citation.] * * * Breach of Presentment Warranties The final count of the crossclaim by Merrill Lynch is a claim for an alleged breach of presentment warranties under [UCC] §3–417. As the court illustrated above, the loss allocation rules of the UCC permit a payee bank to shift liability to a depositary bank via a claim for breach of presentment warranties if, and only if, the checks at issue contain only forged indorsements. Should the checks in fact also bear forged [drawer’s] signatures, then a depositary or collecting bank is immunized from liability for having honored such checks unless the depositary or collecting bank failed to meet the requirements of the final payment rule codified in [UCC] §3–418. [Citation.] Moreover, checks bearing dual forgeries are treated as though containing only forged [drawer’s] signatures. Thus, because it is uncontested that all Group Two checks bear forged [drawer’s] signatures, liability for honoring these checks may only be assessed under the loss allocation rules relevant to checks bearing only forged [drawer’s] signatures. See discussion supra part II.B. In other words, Merrill Lynch is precluded by the operation of law from asserting a claim for breach of presentment warranties under the loss allocation scheme of the UCC. As a matter of law, therefore, Merrill Lynch can prove no set of facts in support of this claim that would entitle it to the relief demanded, and this court will accordingly also grant judgment on the pleadings to Main Line on the claim for breach of presentment warranties as it relates to the Group Two checks. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637

Document Details

Related Documents

Close

Send listing report

highlight_off

You already reported this listing

The report is private and won't be shared with the owner

rotate_right
Close
rotate_right
Close

Send Message

image
Close

My favorites

image
Close

Application Form

image
Notifications visibility rotate_right Clear all Close close
image
image
arrow_left
arrow_right