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.
* * *
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
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.
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
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.
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…”
D. TERMINATION OF LIABILITY
*** Chapter Outcome ***
Explain the methods by which liability on an instrument may be terminated.
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.
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
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.
II. 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.
A. 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.
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.
Authentic and Authorized Signatures
All signatures are warranted to be authentic and authorized.
No Alteration
B. WARRANTIES ON PRESENTMENT
These warranties are made to a drawee bank or maker by any person who
obtains payment.
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.
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
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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. *
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. * * *
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
* * *
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
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
* * *
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