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1
whole or in part.
Chapter 14
Liability, Defenses, and Discharge
opposed to liability on the underlying contract. This chapter includes a review of some of the defenses that parties
may have against payment on negotiable instruments and some of the ways in which parties can be discharged from
liability.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
2. Timely Presentment
Failure to present on time is the most common reason for the discharge of unqualified indorsers. A
holder of a check must present it for payment or collection within thirty days of its date to hold the
drawer secondarily liable. A holder must present a check within thirty days after its indorsement to
hold the indorser secondarily liable [UCC 3–414(f), 3–415(e)].
Notice, which may be given in any reasonable manner, must be given by a bank before its midnight
deadline and by all others within thirty days [UCC 3–503].
C. ACCOMMODATION PARTIES
the amount from the party that was accommodated.
D. AUTHORIZED AGENTS’ SIGNATURES
1. Liability of the Principal
2. Liability of the Agent
• If an authorized agent signs only his or her own name, and does not name the principal, the
agent is liable to an HDC who has no notice that the agent was not intended to be liable. To
avoid liability to other holders, the agent must show that the original parties did not intend the
CASE SYNOPSIS—
Case 14.1: Jeanmarie v. Peoples
Anthony and Alcibia Jeanmarie sold property in New Orleans to Melanie Murphy. Encore Credit Corp.
loaned $104,000 and $26,000 to Murphy to pay the Jeanmaries with the funds to be deposited in an escrow
account maintained by Pyramid Title, LLC. Mark Peoples, who owned Pyramid, handled the closing and
drew a check on its account payable to the Jeanmaries. When the check was returned for “insufficient
funds,” the Jeanmaries filed a suit in a Louisiana state court to recover the funds from Pyramid and
Peoples. Peoples argued that he had signed the check in his representative capacity and thus should not
be liable. From a judgment in the Jeanmaries’ favor, Peoples appealed.
A state intermediate appellate court vacated the decision and remanded. Under UCC 3–402, if a check
identifies the principal, the agent who signs it does not have to indicate his or her agency status to avoid
liability. In this case, the check clearly identified Pyramid as the principal, and the line on which Peoples
signed was entitled “Authorized Signature.” “It is patent on the face of the check that Mark Peoples signed
as the authorized signatory for Pyramid Title and not in his personal capacity.”
Notes and Questions
What might the parties in this case have done to avoid the situation that instigated this
litigation? Pyramid and Peoples might have more closely monitored its account and kept the others
apprised as to whether the loan checks had been deposited and cleared. The Jeanmaries might have
verified the validity of the check at the time of the closing. Murphy might have contacted Encore for
assurance that the loan had been issued. All of these steps could have been taken before or at the time of
the closing. After the closing, under the facts as stated, the Jeanmaries might have resubmitted the check
after its return. The Jeanmaries might have begun an action to retake possession of the property from
Murphy, who might then have pressured Encore to fully fund her loan or who might have found another
source for the funds.
6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
E. UNAUTHORIZED SIGNATURES
1. The General Rule
A forged or an unauthorized signature does not bind the person whose name is forged.
2. Exceptions to the General Rule
• If the person whose name is signed ratifies the signature, he or she is bound [UCC 3–403(a)].
F. SPECIAL RULES FOR UNAUTHORIZED INDORSEMENTS
When there is a forged or unauthorized indorsement, the burden of loss usually falls on the first party to
take the instrument with the forged indorsement (because a forged indorsement does not transfer title,
and thus, whoever takes on a forged indorsement cannot become a holder.
The imposter’s indorsement will be effective if the maker or drawer believes the imposter to be
the named payee at the time of issue [UCC 3–404(a)].
b. Comparative Negligence
If a bank fails to exercise ordinary care in cashing a check made out to an imposter, the
who has no interest in it [UCC 3–404(b); 3–405].
b. Typical Incidents
A common context for this situation is employment—a dishonest employee deceiving his or
employer.
whole or in part.
whole or in part.
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
2. Do the facts in this case support the court’s conclusion that Mills took Chauvin’s note as an HDC?
Why or why not? In the Mills case, the note at the center of the dispute was drafted by Chauvin (its maker),
signed by him, and transferred to Mills. It included an unconditional promise to a pay a fixed amount of
money. In other words, the note was a negotiable instrument. Mills, the holder, took it as security for
repayment of the money that he had given to Chauvin. The court found Mills to be credible in his claim that
this was how and why he took the note, indicating that he took it in good faith. And he had no reason to
suspect that the instrument might be defective, despite Chauvin’s later claims against payment—that the
money was an investment, not a loan, and that the note was not intended to be a promise of repayment,
which Chauvin asserted lacked consideration in any event. The court concluded that, “Chauvin failed to
establish a bona fide defense” and that “Mills took the note as a holder in due course.”
3. How did Mills’s status as an HDC affect Chauvin’s asserted defense? In the Mills case, the appellate
court concluded that “Mills took the note as a holder in due course.” The court also concluded that the trial
court’s “determination that Chauvin failed to establish a bona fide defense of lack of consideration is
supported by the record.”
If Chauvin had been able to prove a lack of consideration, however, Mills might not have met the
requirements for the status of a holder in due course (HDC). An HDC must take an instrument without notice
that the item is defective. Here Mills would arguably have taken the note with notice of the defense against
payment—if there were no consideration for the note, Mills would likely have known it because he was one of
the principal parties to the exchange of funds that the note represented.
If Mills had acquired the note under other circumstances—for example, if he had not been one of the
parties to the transaction behind it—he might have qualified as an HDC whether or not Chauvin could have
established the defense of lack of consideration. In that situation, Mills’s status would have prevented
Chauvin from asserting the defense of lack of consideration against Mills. Lack of consideration is a personal
defense and cannot be used to avoid payment on a note to an HDC.
4. In whose favor did the court ultimately rule? Why? The trial court in the Mills case ruled that the note
signed by Chauvin and in the possession of Mills “was valid and enforceable and that Mills was entitled to
recover pursuant to its terms.” A state intermediate appellate court affirmed the judgment of the lower court.
Chauvin argued that the note lacked consideration because Mills’s payments represented investments in
the Amelia Village project, not funds to be repaid by Chauvin. In rejecting this claim, the appellate court
stated, “The record amply supports Supreme Court's [trial court’s] finding that the consideration for the
promissory note was the $395,750 that Mills had provided to Chauvin in connection with the Amelia Village
project and that the promissory note represented security for Chauvin's antecedent obligation to repay such
funds. The note itself—which was drafted by Chauvin, signed by him, notarized and transmitted to Mills—
clearly states that it was executed in return for a loan received by Chauvin and contained an unconditional
promise or order to pay a sum certain in money. In addition, Mills took the note as a holder in due course.
Based upon our independent evaluation of the evidence and, giving due deference to the trial court's
credibility determinations concerning witnesses, we conclude that Supreme Court's determination that
Chauvin failed to establish a bona fide defense of lack of consideration is supported by the record.”
3. Fraud in the Inducement (Ordinary Fraud)
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
2. Timely Presentment
Failure to present on time is the most common reason for the discharge of unqualified indorsers. A
holder of a check must present it for payment or collection within thirty days of its date to hold the
drawer secondarily liable. A holder must present a check within thirty days after its indorsement to
hold the indorser secondarily liable [UCC 3–414(f), 3–415(e)].
Notice, which may be given in any reasonable manner, must be given by a bank before its midnight
deadline and by all others within thirty days [UCC 3–503].
C. ACCOMMODATION PARTIES
the amount from the party that was accommodated.
D. AUTHORIZED AGENTS’ SIGNATURES
1. Liability of the Principal
2. Liability of the Agent
• If an authorized agent signs only his or her own name, and does not name the principal, the
agent is liable to an HDC who has no notice that the agent was not intended to be liable. To
avoid liability to other holders, the agent must show that the original parties did not intend the
CASE SYNOPSIS—
Case 14.1: Jeanmarie v. Peoples
Anthony and Alcibia Jeanmarie sold property in New Orleans to Melanie Murphy. Encore Credit Corp.
loaned $104,000 and $26,000 to Murphy to pay the Jeanmaries with the funds to be deposited in an escrow
account maintained by Pyramid Title, LLC. Mark Peoples, who owned Pyramid, handled the closing and
drew a check on its account payable to the Jeanmaries. When the check was returned for “insufficient
funds,” the Jeanmaries filed a suit in a Louisiana state court to recover the funds from Pyramid and
Peoples. Peoples argued that he had signed the check in his representative capacity and thus should not
be liable. From a judgment in the Jeanmaries’ favor, Peoples appealed.
A state intermediate appellate court vacated the decision and remanded. Under UCC 3–402, if a check
identifies the principal, the agent who signs it does not have to indicate his or her agency status to avoid
liability. In this case, the check clearly identified Pyramid as the principal, and the line on which Peoples
signed was entitled “Authorized Signature.” “It is patent on the face of the check that Mark Peoples signed
as the authorized signatory for Pyramid Title and not in his personal capacity.”
Notes and Questions
What might the parties in this case have done to avoid the situation that instigated this
litigation? Pyramid and Peoples might have more closely monitored its account and kept the others
apprised as to whether the loan checks had been deposited and cleared. The Jeanmaries might have
verified the validity of the check at the time of the closing. Murphy might have contacted Encore for
assurance that the loan had been issued. All of these steps could have been taken before or at the time of
the closing. After the closing, under the facts as stated, the Jeanmaries might have resubmitted the check
after its return. The Jeanmaries might have begun an action to retake possession of the property from
Murphy, who might then have pressured Encore to fully fund her loan or who might have found another
source for the funds.
6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
E. UNAUTHORIZED SIGNATURES
1. The General Rule
A forged or an unauthorized signature does not bind the person whose name is forged.
2. Exceptions to the General Rule
• If the person whose name is signed ratifies the signature, he or she is bound [UCC 3–403(a)].
F. SPECIAL RULES FOR UNAUTHORIZED INDORSEMENTS
When there is a forged or unauthorized indorsement, the burden of loss usually falls on the first party to
take the instrument with the forged indorsement (because a forged indorsement does not transfer title,
and thus, whoever takes on a forged indorsement cannot become a holder.
The imposter’s indorsement will be effective if the maker or drawer believes the imposter to be
the named payee at the time of issue [UCC 3–404(a)].
b. Comparative Negligence
If a bank fails to exercise ordinary care in cashing a check made out to an imposter, the
who has no interest in it [UCC 3–404(b); 3–405].
b. Typical Incidents
A common context for this situation is employment—a dishonest employee deceiving his or
employer.
whole or in part.
whole or in part.
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
2. Do the facts in this case support the court’s conclusion that Mills took Chauvin’s note as an HDC?
Why or why not? In the Mills case, the note at the center of the dispute was drafted by Chauvin (its maker),
signed by him, and transferred to Mills. It included an unconditional promise to a pay a fixed amount of
money. In other words, the note was a negotiable instrument. Mills, the holder, took it as security for
repayment of the money that he had given to Chauvin. The court found Mills to be credible in his claim that
this was how and why he took the note, indicating that he took it in good faith. And he had no reason to
suspect that the instrument might be defective, despite Chauvin’s later claims against payment—that the
money was an investment, not a loan, and that the note was not intended to be a promise of repayment,
which Chauvin asserted lacked consideration in any event. The court concluded that, “Chauvin failed to
establish a bona fide defense” and that “Mills took the note as a holder in due course.”
3. How did Mills’s status as an HDC affect Chauvin’s asserted defense? In the Mills case, the appellate
court concluded that “Mills took the note as a holder in due course.” The court also concluded that the trial
court’s “determination that Chauvin failed to establish a bona fide defense of lack of consideration is
supported by the record.”
If Chauvin had been able to prove a lack of consideration, however, Mills might not have met the
requirements for the status of a holder in due course (HDC). An HDC must take an instrument without notice
that the item is defective. Here Mills would arguably have taken the note with notice of the defense against
payment—if there were no consideration for the note, Mills would likely have known it because he was one of
the principal parties to the exchange of funds that the note represented.
If Mills had acquired the note under other circumstances—for example, if he had not been one of the
parties to the transaction behind it—he might have qualified as an HDC whether or not Chauvin could have
established the defense of lack of consideration. In that situation, Mills’s status would have prevented
Chauvin from asserting the defense of lack of consideration against Mills. Lack of consideration is a personal
defense and cannot be used to avoid payment on a note to an HDC.
4. In whose favor did the court ultimately rule? Why? The trial court in the Mills case ruled that the note
signed by Chauvin and in the possession of Mills “was valid and enforceable and that Mills was entitled to
recover pursuant to its terms.” A state intermediate appellate court affirmed the judgment of the lower court.
Chauvin argued that the note lacked consideration because Mills’s payments represented investments in
the Amelia Village project, not funds to be repaid by Chauvin. In rejecting this claim, the appellate court
stated, “The record amply supports Supreme Court's [trial court’s] finding that the consideration for the
promissory note was the $395,750 that Mills had provided to Chauvin in connection with the Amelia Village
project and that the promissory note represented security for Chauvin's antecedent obligation to repay such
funds. The note itself—which was drafted by Chauvin, signed by him, notarized and transmitted to Mills—
clearly states that it was executed in return for a loan received by Chauvin and contained an unconditional
promise or order to pay a sum certain in money. In addition, Mills took the note as a holder in due course.
Based upon our independent evaluation of the evidence and, giving due deference to the trial court's
credibility determinations concerning witnesses, we conclude that Supreme Court's determination that
Chauvin failed to establish a bona fide defense of lack of consideration is supported by the record.”
3. Fraud in the Inducement (Ordinary Fraud)
