CHAPTER 13
NEGOTIABLE INSTRUMENTS, CREDIT, AND BANKRUPTCY
NEGOTIABLE INSTRUMENTS—Negotiable instruments allow for the creation and transfer
of rights to the payment of money. The Federal Reserve now processes 100 billion checks a year
—an important negotiable instrument. By comparison, in the early 1950s the Federal Reserve
processed just 7 billion checks annually. The law of negotiable instruments originated in
England. 500 years ago, the right to payment was a contract right; it could not be sold to another.
This inhibited trade because of the difficulty it created for those traders who worked on credit. To
alleviate this, laws developed to allow traders to assign promises to pay third parties. In
consideration of the benefits of this, the English and American governments recognized
negotiable instruments during the 18th and 19th centuries. They are now apart of the commercial
law of every state.
The Functions of Negotiable Instruments—Negotiable instruments are a substitute for cash or
a credit device. Negotiable instruments also provide a way credit can be extended to debtors.
The Concept of Negotiability—Negotiable instruments are flexible because they may be
transferred from one party to another. It can be transferred by assignment or by negotiation. If
assigned, the assignee has the same contract rights and responsibilities as the assignor. If it is
transferred by negotiation, the transferee takes the instrument free of any of the transferor’s
contract responsibilities. In this way, the transferee may have better rights than the transferor. A
negotiable instrument may be transferred in two basic ways. If it is made “to the order” of the
payee, the payee must 1) endorse it and 2) deliver it to a third party. Endorsement without
delivery does not bring about a transfer. If the instrument is made “to bearer,” the party in
possession required only to deliver it to transfer it. Bearer instruments can be created in a number
of ways. The maker or the drawer may create a bearer instrument by using the following
language: “to bearer,” “to the order of bearer,” “payable to bearer,” “to cash,” or “pay to the
order of cash.” They are risky since mere delivery creates a negotiation or transfer. 3-202
Requirements for Negotiable Instruments–To be negotiable, a commercial instrument must
meet the requirements of the UCC. Commercial paper may be negotiable or non-negotiable, but
only negotiable instruments fall under the UCC. A dispute could be resolved differently
depending on whether the instrument is negotiable or not. If non-negotiable, the common law of
contracts applies. The assignee is subject to any of the assignor’s contract responsibilities under
the instrument. If negotiable, the UCC govern the resolution of a dispute.
The UCC Requirements—According to the UCC, those negotiable instruments falling within its
scope of coverage must meet the following requirements. It must: 1) be written; 2) be an
unconditional order or promise to pay; 3) be signed by the maker or drawer; 4) be payable on
demand or at a specified time; 5) be made out “to order” or “to bearer;” and, 6) must state a sum
certain of money. 3-104
International Perspectives: Mixing Religion and Finance
The business world requires credit. Historically, Western countries have had usury laws, which
may stem from Christian views about the evils of interest, especially high rates. Islamic countries
have restrictions on interest, but banks are devising loan forms to get around traditional interest
rate agreements. Instead, there are trust account arrangements and leases that are used to create
the same effect, but with a different legal cast.
Requirements for Holders in Due Course—If an instrument is negotiable, it may be traded in the
market without concern for existing contract responsibilities—if the instrument is in the
possession of a holder in due course. The person in possession of a negotiable instrument may be
either a holder in due course or an ordinary holder. The ordinary holder has the same contract
responsibilities as an assignee under a nonnegotiable instrument. To be found a holder in due
course, the transferee must: 1) give value for the negotiable instrument; 2) take the instrument
without knowledge that it is overdue or otherwise defective; and, 3) take the instrument in good
faith. 3-302
Add. Case: Cadle Co. v. Patoine (Sup. Ct., Vt., 2001)—Kimball obtained a $40,000
construction loan from a bank. Patoine cosigned and was liable for payment in case of default.
Kimball died before the note was due and his estate did not have the funds to satisfy it. Five
months after the note was due, the bank granted the estate a six month extension to pay. Patoine
was not involved in that agreement. Later, the bank foreclosed on the real estate that served as
collateral for the loan, leaving a deficiency of $21,000. The bank was taken over by the FDIC,
which sold the note to Cadle, which sued Patione for payment of the debt as cosigner. The court
held Patione liable; she appealed.
Decision: Reversed. The key issue is whether the FDIC was a holder in due course, in which
case Cadle would also be a holder in due course, which would make Patoine liable. Before the
FDIC acquired the bank’s assets, the asset (the note) was extinguished by the bank’s failure to
Add. Case: Amberboy v. Societe de Banque Privee (Sup Ct., Tx., 1992)–The court faced the
question of whether a variable rate note—a promissory note requiring interest to be charged at a
rate that could be determined only by reference to bank’s published prime rate—was a
“negotiable instrument.” There was no precedent on the issue. The 5th Circuit certified a
question to the Texas Supreme Court whether under the UCC a “negotiable instrument” was
involved.
Decision: The S.Ct. replied that a promissory note requiring interest to be charged at a rate that
can be determined only by reference to a bank’s published prime rate is a negotiable instrument
under Texas UCC (§§ 3-104; 3-106). By a “bank’s published prime rate,” it intended its answer
Major Types of Negotiable Instruments—There are four basic negotiable instruments: drafts,
checks, notes and certificates of deposit. They can be separated into two general categories:
promises to pay and orders to pay (which include drafts and checks; they are three-party
instruments used instead of cash and as credit devices). Promises to pay, which include notes and
certificates of deposit, are two-party instruments used as credit devices. 3-104
Orders to Pay: Checks—A check is a “draft drawn on a bank and payable on demand;” the most
common form of a draft. Unlike a draft, which may be payable at a later date and have a bank, an
individual or a corporation as a drawee, a check must be paid on demand and have a bank as its
drawee.
Cashier’s Check: For this negotiable instrument, the bank is drawer and drawee, as the bank has
been paid by the customer prior to issuing the check and designating a payee. Provides high
degree of security for payee.
CASE: Associated Home and RV Sales v. Bank of Belen (Ct. App., NM 2012)—Associated
sold RVs as Enchantment. Ramos worked as a bookkeeper and forged 211 checks in 20 months
and stole $283,000 before managers discovered what she did. The bank refused to cover the
losses as it sent monthly statements and cancelled checks. Enchantment sued; trial court held for
bank; Enchantment appealed.
Decision: Summary judgment reversed. The UCC applies and eliminates common law claims.
Under the UCC, Enchantment would have to show a lack of ordinary care by the bank.
Enchantment contends that the bank should have given monthly statements to the manager rather
Questions: 1. What steps could the bank have taken to reduce the possibility of such a problem?
According to the claims made by Enchanted, the bank let the bookkeeper cash checks without a
company officer present, claimed the signatures on the checks did not look like the ones on the
2. What steps should Enchantment have taken to reduce the possibility of such a problem?
The company was careless not to check the monthly statements; it obviously let the bookkeeper
Add. Case: Lor-Mar/Toto v. Constitution Bank (App. Div., NJ, 2005)—Lor-Mar had a
business checking account. It allowed checks to be honored if they had the signature of Van
Middlesworth or Toto—both stamped signatures. The bank cashed $24,350 in bogus checks. All
info was correct, and the stamped signatures looked good, but the paper stock was not the same.
Lor-Mar sued and won. The bank appealed.
Decision: Affirmed. Under the UCC the checks were not “properly payable.” The endorsement
was forged even though it looked the same. Banks are generally strictly liable in such cases. To
Add. Case: New Wave Technologies v. Legacy Bank (Ct. App., TX 2008)–New Wave sold
computer equipment to Maxim, which sold it to USAA. After delivery of equipment, USAA mailed
checks to Maxim, even though the check was supposed to go to New Wave. The checks were
payable to Maxim/New Wave. The back of the check states “Each Payee Must Endorse Exactly
As Drawn.” Maxim endorsed the checks and deposited them in its account at Legacy Bank. New
Wave did not endorse the checks. Maxim went out of business. New Wave sued Legacy for
conversion for cashing the checks without New Wave endorsement. The trial court held for
Legacy; New Wave appealed.
Decision: Affirmed. The checks, as written, were ambiguous as to whether they were payable to
Maxim and New Wave alternatively or jointly, and, thus, were payable alternatively. Either party
could have deposited the checks. The meaning of the slash mark between names is often
Add. Case: Arkwright Mutual Ins. v. NationsBank (11th Cir., 2000)–Florida Power and Light
(FPL) had 27 forged checks for $4.4 million written against its account at NationsBank.
Arkwright reimbursed FPL for its losses and then sued NationsBank, which could not recover
the funds from the forgers. Arkwright contended that the bank failed to use ordinary care. The
bank contended its contract with FPL shifted the risk of loss by forgery to FPL because FPL
used a facsimile signature machine. The district court agreed and held for the bank. Arkwright
appealed.
Decision: Affirmed in part. “Ordinarily, a drawee bank is absolutely liable to its customer for
payment of a forged check.” However, Florida’s UCC allows a bank to contract around the
default rules of the UCC. A contract that instructs a bank to accept, honor, and pay all checks
Add. Case: Seigel v. Merrill Lynch (Ct. App., D.C., 2000)–Seigel gambled in Atlantic City. He
wrote checks to casinos against his cash management account at Merrill Lynch (ML). When he
returned home after losing a large sum, he told his broker that he did not want the checks paid.
His broker told him to make stop payment orders on the checks and liquidate the account. ML
accidentally paid checks totaling $143,000. Seigel sued ML, demanding a return of $143,000.
The court held for ML, the drawee. Seigel, the drawer, appealed.
Decision: Affirmed. Under the UCC, §§ 4-403 and 4-407, the court assesses whether a drawer
suffered a loss as a result of a drawee’s mistaken payment of checks. The drawee is treated as the
Add. Case: Simmons v. Lennon (Ct. App., Mary., 2001)–For 3 years a secretary and a
bookkeeper conspired to defraud their employer, Simmons, a lawyer, of funds he kept in
accounts. His signature was forged on checks drawn without his knowledge. One check, for
$13,000, was payable to Lennon, who sold a vehicle to the secretary and received the forged
check in payment. The check was cashed more than a year before Simmons discovered the fraud.
He claimed Lennon knew, or should have known, that the check was forged when he accepted it
and sued to recover the $13,000. Lennon had once been romantically involved with the secretary,
who had cheated him out of money, so he had notice of her behavior. The judge granted
judgment for Lennon. Simmons appealed.
Decision: Affirmed. Simmons was not entitled to recover against payee. Under 3-419, the drawer
may not sue the payee for conversion of the check paid on the drawer’s forged signature.
Promises to Pay: Notes—A note is a promise (not an order) by one party (called the maker), to
pay a certain sum of money to another party (called the payee). Usually called promissory notes,
these instruments involve two parties—the maker and the payee—rather than the three parties (a
drawer, a drawee, and a payee) required for a draft or check.
Orders to Pay: Drafts—A draft, or bill of exchange, is an unconditional written order to pay that
involves three parties. It is created by the drawer who orders the drawee to pay a sum of money
to a payee. A draft may be a time draft that calls for payment at a specific time or a sight draft
that is payable upon presentation of goods by the seller to the buyer. The buyer must pay the
amount of the draft before receiving the goods.
Promises to Pay: Certificates of Deposit—A certificate of deposit is an “acknowledgment by a
bank” that it has received money from a customer and it will repay the money received at a date
specified in the instrument or, in some instances, on demand. The bank as maker creates the
certificate and acknowledges receipt of the customer’s money, promising to repay the customer
as payee. Most large CD’s are negotiable which allows them to be sold, used to pay debts, or
used as collateral.
CREDIT—Small businesses are the least likely to recoup losses when a client does not pay or
declares bankruptcy. Financial management involves managing debts owed the organization (as
creditor) and the debts owed to others (as debtor). As a creditor, the business must establish and
monitor its credit extension and debt collection policies. Credit must specify: interest rate,
principal of the debt, and payment dates. This usually involves establishing one set of policies for
consumers (consumer credit policies) and policies for business partners (trade credit policies).
Large corporations may raise funds either through debt or equity financing. Smaller companies
rely much more on debt financing—largely by borrowing money by contract. Short term debt to
obtain inventory is common. A business may need help to obtain credit.
Add. Case: Conklin Farm v. Leibowitz (Sup. Ct., NJ, 1995)–Three investors formed a
partnership and bought land from Conklin for a development. They gave Conklin a $9 million
promissory note, personally guaranteed. Annual interest was 9%; the principal was due in 5
years. Later, one partner assigned his interest to his wife (Leibowitz), who “agreed to be bound
by all of the terms and conditions of the Partnership Agreement.” Later, she assigned the
partnership interest back to her husband. No interest was paid on the note; at the end of the five
years, the partnership failed and Conklin sued the partners for principal plus interest. The
partners all filed for bankruptcy; Conklin sued Leibowitz for payment of 30% of the interest that
accrued during the time she held her husband’s interest. Court held for Leibowitz; appeals court
reversed. Leibowitz appealed.
Decision: Reversed. “The sole issue became whether Leibowitz, an incoming partner, was
personally liable for the interest that had accrued on the preexisting debt while she had been a
partner.” No. “The original partners are personally liable for preexisting debt, the incoming
Credit Policy—Most businesses must use credit sales to help sales. Those credit sales represent
a major investment, so the right credit policy is important. The credit policy sets forth: credit
standards, credit terms, and collection policy. Credit standards are the criteria that determine
which customers will be given credit and how much. Generally, credit standards revolve around
five characteristics of the customer: 1) Character—willingness (or probability) to honor its
promise to pay; 2) Capacity—ability to pay (often judged by past payment records and the
financial manager’s observations of the customer’s operation); 3) Capital—general financial
position; 4) Collateral—the assets that may be pledged to secure credit; and 5) Conditions—
general economic trends. Consumer credit is sensitive to changes in unemployment and income.
Trade credit is more sensitive to changes in interest rates. A creditor may seek financial data on
customers. A seller may buy a credit report about the buyer from a company specializing in
providing such information, such as Dun & Bradstreet (which operates globally), or TRW,
Equifax or TransUnion. Information can also come from banks, financial statements, and trade
associations.
Add. Case: Dun & Bradstreet v. Greenmoss Builders (Sup. Ct., 1985)–D&B sold confidential
reports to business subscribers about the financial status of Greenmoss that stated incorrectly
that Greenmoss filed for bankruptcy. The mistake was in an entry made for D&B by a high
school student. Greenmoss asked for the names of who had the report. While D&B corrected the
report, it would not tell Greenmoss who had received the information. D&B sued for defamation
for damage to its reputation. Jury awarded $50,000 compensatory and $300,000 punitive
damages, which the Vermont supreme court upheld. D&B appealed to U.S. Supreme Court.
Decision: Affirmed. Greenmoss’ credit report is not a public issue; it is strictly a business matter.
Add. Case: Sunward v. D&B (10th Cir., 1987)–Sunward made steel fabricated buildings. After
1975, Sunward would not provide D&B with financial information. By 1979, D&B reports
grossly understated Sunward’s business. It stated it had 3-5 employees with annual sales of
$200,000. The company had hundreds of employees and sales of $29.5 million. From 1979 to
1982, Sunward’s sales fell from $29.5 to $10.1 million. Sunward sued D&B for defamation,
claiming its sales collapse was due to the damage caused by D&B’s false information. D&B
admitted it failed to follow its own procedures requiring checks of public data used in estimating
Sunward’s operations. There was no evidence that companies refused to do business with
Sunward because of the reports, but evidence showed that it was generally known that Sunward
was in financial trouble. The jury found D&B’s reports were defamation and awarded Sunward
$3.85 million in damages. D&B appealed.
Decision. Reversed. Since the reports were not intended to be false, there was no defamation.
That is established by reference—managers in other companies must rely on bad information in
making decisions not to do business with Sunward. Although its competitors had the reports, and
Credit Accounts—The basic credit accounts offered by companies to customers include 1) Open
Account, 2) Installment Account, and 3) Revolving Account. Credit terms are dictated by
competition and industry standards. For business credit under an open account, the terms define
the credit period and note any discount for early payment. A typical term is “net 60 days” from
the date of invoice with a discount of 2 percent if paid within 10 days of invoice. Consumer
credit accounts—installment and revolving accounts—state the interest rate, the timing of
payments, and late charges.
Collections Policy—Most bills are paid on time, but a collection policy is needed for when
debtors fail to pay. This generally begins with a follow up letter to the invoice stating that the
account is past due. This may be followed with a phone call and a second letter. Depending on
the business, a personal visit may be in order. When further action is needed, alternatives depend
upon whether the lender is an unsecured or a secured creditor. In most sales, the sellers are
unsecured (or general) creditors—they hold little more than the customer’s promise to pay.
CREDIT WITH SECURITY—A seller is a secured creditor when it has the ability to take
property from an insolvent customer to satisfy a debt. The law provides two avenues through
which it can obtain a customer’s property (security or collateral); by agreement or by operation of
law (without agreement).
By Agreement—The type of credit agreement depends on whether the customer’s property is
real or personal property. The sale of personal property is governed by the UCC and can take
place with little or no formal documentation. Real property is governed by contract law and
requires documentation; security is provided by a mortgage (covered below).
Suretyship—Small businesses often need a guaranty or surety for debts. A guaranty may be a
pledge of personal assets by the owners or a third-party may provide the guaranty or suretyship
for a fee. A promise is made to pay a particular debt of the business if it does not pay. A
suretyship or guaranty is created and the credit of the party providing it becomes the security for
the debt owed.
Cyberlaw: Innovations in Credit Scoring
FICO is the traditional credit scoring method of 30 to 850 based on consumer reporting agencies
following the Fair Isaac system. Neo Finance and other firms are devising new scoring methods
based on other information such as Linked in that can be used for credit scoring. Promoters claim
the method is accurate and allows better coverage of younger people who have short credit
histories.
Issue Spotter: Helping a Dream?
You and your parents will become sureties or guarantors (in many states there is no difference in
the meaning of those terms). The standard form you sign will make both of you fully liable for
the total line of credit extended (which could include debt she has already accrued, not just the
new credit). Should the store go under, you and your parents will be personally liable for the
principal, interest and, probably, attorney fees, if any. Your sister means well, but if she ends up
in bankruptcy, she cannot repay you. The contract promising to repay is largely worthless. So the
risk is huge. This is the sort of thing that ends up blowing many families apart.
Surety Defined. A suretyship is a promise by a third party (the surety) to be responsible for the
debtor’s payment (or performance) obligations to a creditor. The debtor is the principal. A
suretyship is an express contract between the surety and the creditor and is governed by contract
law. The surety is obligated to pay the creditor until the principal has paid the debt to the creditor.
A common suretyship is co-signature on a bank loan. A guarantor guarantees payment to another
and therefore is the same as a surety. That is, to guarantee is to assume the obligation of a surety.
In several states, a distinction is drawn between a guaranty and a surety to the extent that a surety
is primarily liable for the debt while the guarantor is secondarily liable. Generally, one contract
binds surety and debtor; the creditor is not obligated to exhaust all remedies before demanding
payment by surety. In states drawing a distinction the guarantor is obligated to pay only after the
creditor exhausts legal remedies against the debtor.
Add. Case: Williams v. Sandman (4th Cir., 1999)–Williams, Sandman and Walker were
partners in a business. All signed a letter of credit and security agreement to get a bank loan for
the business. Besides signing guaranty agreements, all pledged their interest in another business
they owned together as collateral. When the new business defaulted on payments, the bank
demanded payment from the partners. Sandman and Walker paid; Williams would not. To cover,
Sandman foreclosed on Williams’ interest in the other business and bought that interest at a
public sale. Williams sued Sandman and Walker for their actions. The court held for defendants;
Williams appealed.
Decision: Affirmed. Williams contends that the only action Sandman and Walker could take is to
sue him for his contribution on the loan to the new business; that they could not foreclose on his
Add. Case: Great American Ins. v. No. Austin Muni. Util. Dist. (S.Ct., Tex., 1995)–GAI
issued payment, performance, and maintenance bonds in favor of North Austin MUD for a
wastewater station. A year after completion, the station fell apart. The contractor refused to
correct the problem, claiming it was the fault of the plans. MUD sent notice of the defect to
surety GAI, stating that since the contractor would not make good, GAI had to pay. GAI also
said the problem was the construction plan, so GAI refused to pay. MUD sued both. The jury
ruled for MUD, finding that GAI had knowingly committed deceptive acts and had breached a
common law duty of good faith and fair dealing. Appeals court affirmed, GAI appealed.
Decision: Reversed in part; affirmed in part. “The contract between MUD and [the contractor]
was an arm’s length transaction, entered into after an open bidding process. No special
relationship between MUD and (the contractor) exists. The derivative nature of a surety’s
liability and its right to rely upon the defenses of its principal compel the conclusion that a
surety, like its principal, should be entitled to test the merits of an obligee’s claim without the
Defenses of Sureties. Since suretyship is a contract, contract defenses available to the principal
are available to the surety; including, among others, impossibility, illegality, duress, and fraud—
but not bankruptcy. More commonly, the surety will raise the defense that it is released when the
creditor releases the debtor without its consent. The surety is released if material changes are
made to the contract between the creditor and the debtor without its consent. When creditors
push on a business for payment, the owner(s) may use personal assets to meet the demands of the
creditors.
CASE: General Electric Business Financial Services v. Silverman (ND, Ill., 2010)—Warren
Park Partners borrowed $34.8 million from GE to buy land in Texas. Silverman and his partners
signed a guaranty and Silverman signed a “Limited Joinder” that guaranteed payment even if
Warren Park went bankrupt—which it did. GE sued for payment from Silverman and partners.
They claimed fraud, extortion, theft and economic duress as affirmative defenses. Hours before
signing the documents, GE modified the loan agreement. Silverman claimed not to have time to
review the modified agreement and was trapped into signing the papers handed him, but was
assured by GE that there were no real changes.
Decision: GE granted summary judgment on claims that a valid contract existed and that
defendants breached the contract. Under Illinois law, it is clear that Silverman et al. are liable on
Questions: 1. Suppose there were multiple witnesses to back up what Silverman said—that a GE
representative told him the new terms of the loan really did not matter. Should that fact not be
taken into consideration?
No. The statute is clear that only the written document matters. Oral statements are not to be
2. Does the Illinois Credit Agreement Act help or harm parties to loans?
One purpose of the statute is to make sure all parties are clear about the law—do not trust oral
Add. Case: Beal Bank v. Biggers (Ct. App., Tex., 2007)—Glenda Biggers was sole shareholder
of Clark Warehouses and Alton Biggers was president. They got a $70,000 SBA loan and signed
as sureties. Later the loan to Clark Warehouses was increased to $130,000 but the Biggers did
not sign as sureties on the $60,000 increase. When Clark Warehouses went bankrupt, Beal Bank
owned the note and moved to enforce it against the Biggers. The court awarded principal and
interest on the original loan, plus attorney fees, but excluded the $60,000. The bank appealed.
Decision: Affirmed. This guaranty is specific; it applied only to the first loan, but not the second,
as that was a separate transaction and there was no surety agreement. There can be a continuing
Add. Case: Hill Roofing v. Lowe’s Home Centers (Ct. App., Ga., 2004)–Hill sold his roofing
company to two of his employees. When he did, he asked Lowe’s to close his company account
that he personally guaranteed. He said that he told a Lowe’s person to close the account, but
Lowe’s had no record of having received written notification, as required by the terms of the
account. The new owners ran up a $9,215 bill on the account and went broke. Lowe’s demanded
Hill make good and the court held for Lowe’s. Hill appealed.
Decision: The guaranty agreement clearly stated that revocation had to be in writing to a certain
Add. Case: Travis Pruitt & Assoc. v. Smith (Ct. App., Ga., 1989)–Pruitt was hired for
engineering work on a subdivision planned by Roswell Co., of which Smith was president. When
Pruitt had done 75% of the work, it billed Roswell but was not paid. Pruitt ceased work. Smith
proposed to Pruitt that he (Smith) execute, personally, a note. Pruitt insisted on a 90-day
unconditional promissory note for the full amount, plus a written agreement governing future
work. The documents were executed by Pruitt and Smith, but 90 days later the promissory note
went into default. Pruitt sued on the note. The court granted Pruitt summary judgment; Smith
appealed.
Decision: Affirmed. The note was a simple promise to pay an existing obligation. Smith has no
defense, since all defenses to the indebtedness were extinguished by the execution of the
Add. Case: Compagnie Financiere de CIC v. Merrill Lynch (2nd Cir., 1999)–Prodipe
borrowed money from CFC to develop a resort in Mexico. Payment was guaranteed by Prodipe’s
major shareholders. The guarantee was governed by NY law and contained a general waiver of
defenses. When Prodipe defaulted and CFC attempted to collect, one shareholder, Weinstock,
directed Merrill Lynch to hold his assets in marketable securities in the name of a company he
owned. When Weinstock would not pay CFC, it sued ML, which claimed Weinstock’s assets could
not be reached. District court held that ML was not affected by the loan agreement. CFC
appealed.
Decision: Reversed. The guarantee agreement waived “all legal or equitable … defenses.” The
Add. Case: Amer. Manufacturing Mutual Ins. v. Tison Hog Market (11th Cir., 1999)–Two
livestock dealers applied to American for it to serve as a surety by issuing bonds for them to
meet the Packers and Stockyard Act requirement that every livestock dealer must maintain a
bond to secure performance of obligations to protect farmers and ranchers in case they sold
their livestock to insolvent or defaulting purchasers. American relied upon the information
provided in the applications and issued the bonds. When the dealers then defaulted in payment
owed to hog sellers, the sellers made claims against the surety bonds for the purchase money
they were due. American discovered that the signatures on the applications were forged and
refused to pay. When the hog sellers sued; the court held for American, concluding that the
bonds were void. Sellers appealed.
Decision: Reversed. Since fraud was committed only by the principals, the livestock dealers,
American is not relieved of liability on the bonds. “It is well established under the common law
Add. Case: Century 21 Products v. Glacier Sales (Sup. Ct., Wash., 1996)–Century buys
potatoes from farmers and sells them to processors. Glacier buys processed potatoes. Glacier
asked Century 21 to sell potatoes to Sun Russett, a potato processor, but Century refused
because it had bad experiences with Sun. Glacier promised to guarantee Century’s sales to Sun.
“This agreement was reached over the telephone, and as is the practice in this industry, never
confirmed in writing.” Sun did not pay Century and filed bankruptcy. Century failed to file a lien
for payment of the potatoes and so got nothing in bankruptcy. Century 21 sued Glacier on the
guaranty. Glacier defended that “its obligations under the guaranty contract should have been
discharged because Century had impaired the collateral by failing to timely file for a
continuation of the … lien.” Court awarded Century $13,210, the amount due. The appeals court
reversed because Century had not filed the lien; if it had, there would have been sufficient funds
from Sun to pay the bill. Century appealed.