978-1285770178 Lecture Note BL ComLaw 1e IM-Ch14 Part 1

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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.

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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.

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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.

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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)