15. Donna gives Peter a check for $3,000 in return for a desktop computer. The check is
dated December 2. Peter transfers the check for value to Howard on December 14, and
Howard deposits it in his bank on December 20. In the meantime, Donna has discovered that
the computer is not what was promised and has stopped payment on the check. If Peter and
Howard disappear, may the bank recover from Donna notwithstanding her defense of failure
of consideration? What will be the bank’s cause of action?
16. The drawer, Commercial Credit Corporation (Corporation), issued two checks payable
to Rauch Motor Company. Rauch indorsed the checks in blank, deposited them to its account
in University National Bank, and received a corresponding amount of money. The Bank
stamped “pay any bank” on the checks and initiated collection. However, the checks were
dishonored and returned to the Bank with the notation “payment stopped.” Rauch, through
subsequent deposits, repaid the bank. Later, to compromise a lawsuit, the Bank executed a
special two-page indorsement of the two checks to Lamson. Lamson then sued the
Corporation for the face value of the checks, plus interest. The Corporation contends that
Lamson was not a holder of the checks because the indorsement was not in conformity with
the Uniform Commercial Code in that it was stapled to the checks. Is Lamson a holder? Why?
Answer: Indorsements. Yes, Lamson is a holder and would prevail. Because the Bank indorsed
the checks to Lamson by name, thus qualifying as a special indorsement, the restrictive
indorsement of “Pay any Bank” no longer prevented Lamson from becoming a holder. The
17. While assistant treasurer of Travco Corporation, Frank Mitchell caused two checks, each
payable to a fictitious company, to be drawn on Travco’s account with Brown City Savings
Bank. In each case, Mitchell indorsed the check in his own name and then cashed it at
Citizens Federal Savings & Loan Association of Port Huron. Both checks were cleared
through normal banking channels and charged against Travco’s account with Brown City.
Travco subsequently discovered the embezzlement, and after Citizens denied its demand for
reimbursement, Travco brought a suit against Citizens. Is the indorsement effective? Explain.
Answer: Fictitious Payee Rule. No, the indorsement is not effective against Travco. An
endorsement by any person in the name of a named payee is effective if an agent or employee
18. Eldon’s Super Fresh Stores, Inc., is a corporation engaged in the retail grocery business.
William Drexler was the attorney for and the corporate secretary of Eldon’s and was also the
personal attorney of Eldon Prinzing, the corporation’s president and sole shareholder. From
January 2014through January 2015, Drexler maintained an active stock trading account in
his name with Merrill Lynch. Eldon’s had no such account. On August 12, 2014, Drexler
purchased one hundred shares of Clark Oil & Refining Company stock through his Merrill
Lynch stockbroker. He paid for the stock with a check drawn by Eldon’s, made payable to
Merrill Lynch and signed by Prinzing. On August 15, 2014, Merrill Lynch accepted the check
as payment for Drexler’s stock purchase. There was no communication between Eldon’s and
Merrill Lynch until November 2015, fifteen months after the issuance of the check. At that
time, Eldon’s asked Merrill Lynch about the whereabouts of the stock certificate and asserted
a claim to its ownership. Does Merrill Lynch qualify as a holder in due course? Why?
Answer: Holder in Due Course: Notice of Defense. Yes, judgment for Merrill Lynch. A payee
may be a holder in due course if it can be shown that it took the instrument for value, in good
faith, without reason to question its authenticity and without notice that the instrument was
19. Walter Duester purchased a John Deere combine from St. Paul Equipment. John Deere
Co. was the lender and secured party under the agreement. The combine was pledged as
collateral. Duester defaulted on his debt, and the manager of St. Paul, Hansen, was
instructed to repossess the combine. Hansen went to Duester’s farm to accomplish this.
Duester told him that he had received some payments for custom combining and would
immediately purchase a cashier’s check to pay the John Deere debt. Hansen followed Duester
to the defendant, Boelus State Bank. Hansen remained outside, and Duester returned in a few
minutes with a cashier’s check in the amount of the balance of his indebtedness payable to
John Deere. The check had been signed by an authorized bank employee. When John Deere,
however, presented the check to the bank for payment shortly thereafter, the bank refused to
pay, claiming that Duester acquired the cashier’s check by theft. Is John Deere subject to this
defense? Why?
Answer: Payee as a Holder in Due Course/Personal Defense. No, judgment for John Deere
affirmed. Theft of an instrument constitutes a personal defense. The U.C.C. provides that a
holder in due course takes an instrument free of the personal defense of theft of the
20. Stephens delivered 184 bushels of corn to Aubrey, for which he was to receive $478.23.
Aubrey issued a check with $478.23 typewritten in numbers, and on the line customarily used
to express the amount in words appeared “$100478 and 23 cts” imprinted in red with a
check-writing machine. Before Stephens cashed the check, someone crudely typed “100” in
front of the typewritten $478.23. When Stephens presented this check to the State Bank of
Salem, Anderson, the manager, questioned Stephens. Anderson knew that Stephens had just
declared bankruptcy and was not accustomed to making such large deposits. Stephens told
Anderson he had bought and sold a large quantity of corn at a great profit. Anderson
accepted the explanation and applied the monies to nine promissory notes, an installment
payment, and accrued interest owed by Stephens. Stephens also received $2,000 in cash, with
the balance deposited in his checking account.
Later that day, Anderson reexamined the check and discovered the suspicious appearance of
the typewriting. He then contacted Aubrey, who said a check in that amount was suspicious,
whereupon Anderson froze the transaction. When Aubrey stopped payment on the check, the
bank sustained a $28,193.91 loss because Stephens could not be located. The bank then sued
Aubrey for the loss. Explain who should bear the loss.
Answer: Holder. Judgment for State Bank of Salem affirmed. Under the U.C.C., value is given
for an instrument when the instrument is taken in payment for an antecedent debt. Moreover,
when credit is drawn upon, value is given to that extent. Value is also given to the extent that
21. L&M Home Health Corporation (L&M) had a checking account with Wells Fargo Bank.
L&M engaged Gentner and Company, Inc. (Gentner) to provide consulting services, and paid
Gentner for services rendered with a check drawn on its Wells Fargo account in the amount
of $60,000, dated September 23, 2013. Eleven days later, on October 4, 2013, L&M orally
instructed Wells Fargo to stop payment on the check. Eleven days after that, on October 15,
2013, Gentner presented the L&M check to Wells Fargo for payment. On the same date the
teller issued a cashier’s check, payable to Gentner, in the amount of $60,000. On November 5,
2013, Wells Fargo placed a “stop payment order” on the cashier’s check. On January 15,
2014, Gentner deposited the cashier’s check at another bank, but it was not honored and was
returned stamped “Payment Stopped.” Gentner sues Wells Fargo for wrongful dishonor of
the cashier’s check. Is Gentner a holder in due course of the check? Discuss..
Answer: Holder in Due Course. The trial court ruled in favor of Gentner, finding that Gentner
was a holder in due course of the cashier’s check. To be a holder in due course, one must take
the instrument “for value, in good faith, without notice that the instrument is overdue, has
22. Stanley A. Erb became a vice president of the Shearson Lehman Brothers, Inc. branch
office in Provo, Utah. That year, Erb was contacted by McKay Matthews, the controller for
the Orem, Utah–based WordPerfect Corporation and its sister corporation, Utah Softcopy. At
Matthews’s request, Erb established and managed three separate investment accounts at
Shearson. The accounts were for the benefit of the WordPerfect and Utah Softcopy
corporations, and one account was for the WordPerfect principals, Allen Ashton, Bruce
Bastian, and Willard Peterson. In March of that year, Erb personally accepted from Matthews
a check drawn by Utah Softcopy for $460,150.23 and payable to the order of “ABP
Investments.” At that time, there was no ABP investment account at Shearson, although the
WordPerfect principals maintained accounts elsewhere in that name. Erb accepted the check,
but rather than deposit it in one of the three authorized accounts, Erb opened a new account
at Shearson in the name of “ABP Investments,” apparently by forging the signature of Bruce
Bastian on the new account documents. Over the next eleven months, Erb induced Shearson
to draft thirty-seven checks on the ABP Investment account, payable to ABP Investments, by
submitting falsified payment requests to Shearson’s cashier. The checks were mailed to an
Orem post office box unknown to WordPerfect and its principals. Erb would obtain the checks
and indorse them in the name of ABP Investments. He took the checks to Wasatch Bank for
deposit into his personal account. Wasatch accepted the deposits and later allowed Erb to
withdraw $504,295.30, the entire amount, from the account. Shearson discovered Erb’s
activities after Erb had left Shearson after two years. Shearson brought a suit against
Wasatch Bank. Discuss who should prevail.
Answer: Indorsements. Judgment for Wasatch. The “fictitious payee” defense as articulated in
section 3-405(1)(c) of the Uniform Commercial Code operates under the facts of the present
23. Turman executed a deed of trust note for $107,500 payable to Ward’s Home
Improvement, Inc. (Ward’s). The note was in consideration of a contract for Ward’s to build a
house on Turman’s property. On the same day, Ward’s executed an assignment of the note to
Robert Pomerantz for which Pomerantz paid Ward’s $95,000. Although the document uses the
word “assignment,” no notation or indorsement was made on the note itself. Is Pomerantz a
holder? Is Pomerantz a holder in due course? Explain.
Answer: Holder. Judgment reversed and remanded. Pomerantz is not a holder in due course.
“[I]f an instrument is payable to an identified person, negotiation requires its indorsement by
the holder.” UCC § 3-201. An assignment is not an indorsement, UCC § 3-204(a), and
24. Certain partners of the Finley Kumble law firm signed promissory notes that secured
loans made to the law firm by the National Bank of Washington (NBW). When Finley Kumble
subsequently declared bankruptcy and defaulted on the loans, NBW filed suit to collect on the
notes. Then NBW itself became insolvent, and the Federal Deposit Insurance Corporation
(FDIC) was appointed as receiver for NBW. The FDIC brought suit against the partners who
had signed the note. Section 1823(e) of the Federal Deposit Insurance Act places the FDIC in
the position of a holder in due course and thus bars all personal defenses against the FDIC
claims. Twenty of the Finley partners claimed that they had signed the notes under the threat
that their wages and standing in the firm would decrease if they refused to sign. Such a threat
constituted economic duress, which, they contended, is not a personal defense but a real
defense. Discuss who should prevail.
Answer: Duress. Judgment for F.D.I.C. First, s 3-305(2)(b) provides that holders in due course
take free of all defenses except for “(b) such other incapacity, or duress, or illegality of the
transaction, as renders the obligation of the party a nullity.” The words “such” and “as”
ANSWERS TO “TAKING SIDES” PROBLEMS
Wilson was employed as the oce manager of Palmer & Ray Dental Supply
of Abilene, Inc. Soon after an auditor discovered a discrepancy in the
company’s inventory, Wilson confessed to cashing thirty-$ve checks that she
was supposed to deposit on behalf of the company. Palmer & Ray Dental
Supply used a rubber stamp to indorse checks. The stamp listed the
company’s name and address but did not read “for deposit only.” The
company’s president, James Ray, authorized Wilson to indorse checks with
this stamp. Wilson cashed all of the checks at First National Bank.
(a)What are the arguments that First National Bank is liable to Palmer &
Ray Dental Supply for converting the company’s funds by giving
Wilson cash instead of depositing the checks into the company’s bank
account?
(b)What are the arguments that First National Bank is not liable to Palmer
& Ray Dental Supply?
(c) Explain who should prevail.
ANSWER:
(a)a. Palmer & Ray Dental Supply would argue that the indorsements
were unauthorized.