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ANSWERS TO PROBLEMS
1. $900.00 Smalltown, Illinois
November 15, 2014
The undersigned promises to pay to the order of John Doe, Nine Hundred Dollars with
interest from date of note. Payment to be made in five monthly installments of One
Hundred Eighty Dollars, plus accrued interest beginning on December 1, 2014. In the
event of default in the payment of any installment or interest on installment date, the
holder of this instrument may declare the entire obligation due and owing and proceed
forthwith to collect the balance due on this instrument.
(Signed) Acton, agent.
On December 18, 2014, no payment having been made on the note, Doe indorsed and
delivered the instrument to Todd to secure a preexisting debt in the amount of $800.
On January 18, 2015, Todd brought an action against Acton and Phi Corporation, Acton’s
principal, to collect the full amount of the instrument with interest. Acton defended on the
basis that he signed the instrument in a representative capacity and that Doe had failed
to deliver the consideration for which the instrument had been issued. Phi Corporation
defended on the basis that it did not sign the instrument and that its name does not
appear on the instrument.
For what amount, if any, are Acton and Phi Corporation liable?
Answer: Signature. Liability of Acton: The instrument is, by its terms, payable to the
order of a designated party. Words of negotiability are present. The instrument in
No person is liable on an instrument unless his signature appears thereon. Section
3-401(a). A signature may be made by an agent or other representative and his authority
to make it may be established as in other cases of representation. No particular form of
appointment is necessary to establish such authority. However, Section 3-402(b)(2)
provides: if (i) the form of the signature does not show unambiguously that the signature
is made in a representative capacity or (ii) the represented person is not identified in the
known of the fact that the first installment was past due. A purchaser has notice that the
instrument is overdue if he has reason to know that any part of the principal amount is
overdue at the time he acquired the instrument.
Todd qualifies as a holder of the instrument but not as a holder in due course. Todd's
action on the instrument is subjective to any defense which would be available to the
2. While employed as a night watchman at the place of business of A. B. Cate Trucking
Company, Fred Fain observed that the office safe had been left unlocked. It contained
fifty payroll checks, which were ready for distribution to employees two days later. The
checks had all been signed by the sole proprietor, Cate. Fain removed five of these
checks and two blank checks that were also in the safe. Fain forged the indorsements of
the payees on the five payroll checks and cashed them at local supermarkets. He then
filled out one of the blank checks, making himself payee, and forged Cate’s signature as
drawer. After cashing that check at a supermarket, Fain departed by airplane to
Jamaica. The six checks were promptly presented for payment to the drawee bank, the
Bank of Emanon, which paid each one. Shortly thereafter, Cate learned about the
missing payroll checks and forgeries and demanded that the Bank of Emanon credit his
account with the amount of the six checks.
Must the Bank comply with Cate’s demand? What are the Bank’s rights, if any, against the
supermarkets? You may assume that the supermarkets cashed all of the checks in good
faith.
3. A negotiable promissory note executed and delivered by B to C passed in due course to
and was indorsed in blank by C, D, E, and F. G, the present holder, strikes out D’s
indorsement. What is the liability of D on her indorsement?
4. On June 15, 2009, Justin, for consideration, executed a negotiable promissory note for
$10,000, payable to Reneé on or before June 15, 2014. Justin subsequently suffered
financial reverses. In January 2014, Reneé on two occasions told Justin that she knew
he was having a difficult time; that she, Reneé, did not need the money; and that the debt
should be considered completely canceled with no other act or payment being required.
These conversations were witnessed by three persons, including Larry. On March 15,
2014, Reneé changed her mind and indorsed the note for value to Larry. The note was
not paid by June 15, 2014, and Larry sued Justin for the amount of the note. Justin
defended upon the ground that Reneé had canceled the debt and renounced all rights
against Justin and that Larry had notice of this fact. Has the debt been properly
canceled? Explain.
Answer: Cancellation and Renunciation. Judgment for Larry. Although the law provides
that the holder of a note may discharge any party without consideration, this must be
5. Tate and Fitch were longtime friends. Tate was a man of considerable means; Fitch had
encountered financial difficulties. To bolster his failing business, Fitch desired to borrow
$60,000 from Farmers Bank of Erehwon. To accomplish this, he persuaded Tate to aid
him in the making of a promissory note by which it would appear that Tate had the
responsibility of maker, but with Fitch’s agreeing to pay the instrument when due.
Accordingly, they executed the following instrument:
December 1, 2014
Thirty days after date and for value received, I promise to pay to the order of Frank
Fitch the sum of $6,600.
/s/ Timothy Tate
On the back of the note, Fitch indorsed, “Pay to the order of Farmers Bank of Erehwon /s/
Frank Fitch” and delivered it to the bank in exchange for $6,000.
(a) When the note was not paid at maturity, may the bank, without first demanding payment
by Fitch, recover in an action on the note against Tate?
(b) If Tate voluntarily pays the note to the bank, may he then recover on the note against
Fitch, who appears as an indorser?
Answer: Liability of Accommodation Parties.
The Bank may proceed against Tate as the maker of the note because he signed the note
as the maker and as such is primarily liable. Section 3-412.
6. Alpha orally appointed Omega as his agent to find and purchase for him a 1930 Dodge
automobile in good condition, and Omega located such a car. Its owner, Roe, agreed to
sell and deliver the car on January 10, 2014, for $9,000. To evidence the purchase price,
Omega mailed to Roe the following instrument:
December 1, 2013
$9,000.00
We promise to pay to the order of bearer Nine Thousand Dollars with interest from date
of this instrument on or before January 10, 2014. This note is given in consideration of
John Roe’s transferring title to and possession of his 1930 Dodge automobile.
(Signed) Omega, agent
Smith stole the note from Roe’s mailbox, indorsed Roe’s name on the note, and promptly
discounted it with Sunset Bank for $8,700. Not having received the note, Roe sold the car
to a third party. On January 10, the bank, having discovered all the facts, demanded
payment of the note from Alpha and Omega. Both refused payment.
a. What are Sunset Bank's rights with regard to Alpha and Omega?
b. What are Sunset Bank's rights with regard to Roe and Smith?
Answer: Liability Based on Warranty. The instrument is payable in a fixed amount, in
money, even though no precise interest rate is specified as the legal rate of interest is
implied in cases where the obligation calls for interest and no rate has been specified.
7. In payment of the purchase price of a used motorboat that had been fraudulently
misrepresented, Young signed and delivered to Armstrong his negotiable note in the
amount of $2,000 due October 1, with Selby as an accommodation comaker. Young
intended to use the boat for his fishing business. Armstrong indorsed the note in blank
preparatory to discounting it. Tillman stole the note from Armstrong and delivered it to
McGowan on July 1 in payment of a past-due debt in the amount of $600 that he owed to
McGowan, with McGowan making up the difference by giving Tillman his check for
$800 and an oral promise to pay Tillman an additional $600 on October 1.
When McGowan demanded payment of the note on December 1, both Young and Selby
refused to pay the note because the note had not been presented for payment on its due
date and because Armstrong had fraudulently misrepresented the motorboat for which
the note had been executed.
What are McGowan's rights, if any, against Young, Selby, Tillman, and Armstrong,
respectively?
Answer: Liability of Accommodation Parties/Liability Based on Warranty. When
Armstrong indorsed the note with his blank indorsement he converted what was
otherwise order paper into bearer paper. McGowan gave value for the note to the extent
($600) that it canceled an antecedent claim (Section 3-303, U.C.C.), and to the extent of
the amount of the negotiable check, that is $800, that he gave Tillman in partial payment
of the note. McGowan's oral promise to pay an additional $600, not being negotiable,
does not constitute value under Section 3-303.
2) Tranfer Warranty—this warranty was not given because consideration was not given.
8. On July 1, Anderson sold D’Aveni, a jeweler, a necklace containing imitation gems,
which Anderson fraudulently represented to be diamonds. In payment for the necklace,
D’Aveni executed and delivered to Anderson her promissory note for $25,000 dated July
1 and payable on December 1 to Anderson’s order with interest at 8 percent per annum.
The note was thereafter successively indorsed in blank and delivered by Anderson to
Bylinski, by Bylinski to Conrad, and by Conrad to Shearson, who became a holder in due
course on August 10. On November 1, D’Aveni discovered Anderson’s fraud and
immediately notified Anderson, Bylinski, Conrad, and Shearson that she would not pay
the note when it became due. Bylinski, a friend of Shearson, requested that Shearson
release him from liability on the note, and Shearson, as a favor to Bylinski and for no
other consideration, struck out Bylinski’s indorsement.
On November 15, Shearson, who was solvent and had no creditors, indorsed the note to the
order of Frederick, his father, and delivered it to Frederick as a gift. At the same time,
Shearson told Frederick of D’Aveni’s statement that D’Aveni would not pay the note
when it became due. Frederick presented the note to D’Aveni for payment on December
1, but D’Aveni refused to pay. Thereafter, Frederick gave due notice of dishonor to
Anderson, Bylinski, and Conrad.
What are Frederick's rights, if any, against Anderson, Bylinski, Conrad, and D'Aveni on the
note?
Answer: Liability Based on Warranty. Frederick may recover from D'Aveni, Conrad, or
Anderson. As a holder in due course, Shearson could have recovered against Anderson,
9. R & A Concrete Contractors, Inc., executed a promissory note that identifies both R & A
Concrete and Grover Roberts as its makers. On the reverse side of the note, the
following appears: “X John Ament Sec. & Treas.” National Bank of Georgia, the payee,
now sues both R & A Concrete and Ament on the note. What rights does National Bank
have against R&A and Ament?
Answer: Signature. Judgment for National Bank of Georgia against Ament and R&A.
Even though an instrument may name the person represented, the one who signs in a
representative capacity may still be personally liable, if, by his manner of signing in a
10. On August 10, 2012, Theta Electronic Laboratories, Inc., executed a promissory note to
George and Marguerite Thomson. Three other individuals, Gerald Exten, Emil O’Neil,
and James Hane, and their wives also indorsed the note. The note was then transferred
to Hane by the Thomsons on November 26, 2013. Although a default occurred at this
time, it was not until April 2015, eighteen months later, that Hane gave notice of the
dishonor and made a demand for payment on the Extens as indorsers. Are the Extens
liable under their indorser’s liability?
Answer: Secondary Liability. Judgment for the Extens. Unless an indorsement otherwise
specifies (as by words such as "without recourse"), every indorser agrees that upon
presentment, dishonor, and any necessary notice of dishonor he will pay the instrument
11. . Attorney Eliot Disner tendered a check for $100,100 to Sidney and Lynne Cohen. In
drawing the check, Disner was serving as an intermediary for his clients, Irvin and
Dorothea Kipnes, who owed the money to the Cohens as part of a settlement agreement.
The Kipneses had given Disner checks totaling $100,100, which he had deposited into
his professional corporation’s client trust account. After confirming with the Kipneses’
bank that their account held sufficient funds, Disner wrote and delivered a trust account
check for $100,100 to the Cohens’ attorney, with this note: “Please find $100,100 in
settlement (partial) of Cohen v. Kipnes, et al[.] Per our agreement, delivery to you
constitutes timely delivery to your clients.” Also typed on the check was a notation
identifying the underlying lawsuit. Without Disner’s knowledge, the Kipneses stopped
payment on their checks, leaving insufficient funds in the trust account to cover the
check to the Cohens. The trust account check therefore was not paid due to insufficient
funds; the Kipneses declared bankruptcy; and the Cohens served Disner and his
professional corporation with demand for payment. The Cohens sought the amount
written on the check plus a $500 statutory penalty. Explain who should prevail and why.
Answer: Authorized Signatures. Decision for Disner. The trial court entered summary
judgment for Disner, reasoning he is not liable on the check because he was a mere
conduit or agent for transferring money from the Kipneses to the Cohens. The Cohens
appealed from the judgment. California Civil Code § 1719, subdivision (a) provides in
part that any person who draws a check that is dishonored due to insufficient funds shall
be liable to the payee for the amount owing upon the check and treble damages of at least
$100, not to exceed $500.The Cohens do not appeal that Disner was a mere conduit or
ANSWERS TO “TAKING SIDES” PROBLEMS
Saul sold goods to Bruce, warranting that the goods were of a specified quality. The
goods were not of the quality warranted, however, and Saul knew this at the time of the
sale. Bruce drew and delivered a check payable to Saul and drawn on Third National
Bank in the amount of the purchase price. Bruce subsequently discovered the goods were
faulty and stopped payment on the check. Third National refused to pay Saul on the
check
a. What are the arguments that Saul can recover (1) from Bruce and (2) from Third
National?
b. What are the arguments that (1) Bruce should prevail? and (2) Third National should
prevail?
c. Who should prevail? Why?
ANSWER:
(a)A check should be honored and then any defenses from the
underlying transaction should be resolved in separate litigation.
