978-1285770178 Solution Manual BL ComLaw 1e SM-Ch13

in whole or in part.

CHAPTER 13

in whole or in part.

CHAPTER 13: TRANSFERABILITY AND HOLDER IN DUE COURSE 3

in whole or in part.

instrument “would greatly impair the negotiability of bills and notes.”

The court reasoned, “If an instrument has a blank indorsement, it is considered ‘payable

to bearer,’ and may be negotiated by transfer of possession alone.” And a note is generally

freely transferable, with the transferee having the right to enforce it. Here, the note had been

indorsed in blank. As the transferee, Deutsche Bank could enforce it.

CASE 13.3—QUESTIONS (PAGE 249)

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that Demery had gone to work for a company with which she had no

relationship and had stolen funds from it to pay Georg. Would Georg then be the more

innocent party? Why or why not? That would make Freestyle’s case quite weak. Georg did

not report the theft to the authorities, so there was no record of what happened. Hence, he did

nothing to give another employer an opportunity to learn of criminal acts. Even putting that

aside, if Demery came up with a check from another company with which she had no personal

relationship that would be very suspicious. In contrast, it is believable that her parents may lend

her fund to help her out. Certainly, though this would not be true with strangers.

THE ETHICAL DIMENSION

Since Georg knew that Demery had previously embezzled funds from Freestyle when she

was an employee, shouldn’t he have been suspicious about the source of the funds that

Demery was using to repay Freestyle? Why did the court conclude that Freestyle acted in

good faith in accepting the check? Discuss. On the question of whether Freestyle took the

check in good faith, so as to qualify as a holder in due course, the court emphasized Demery’s

authority to issue checks for Metro. Georg had no reason to know that Demery did not have the

authority to write this specific check.

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Method of negotiation

An instrument, such as a check, is delivered with necessary indorsements when it is properly

issued payable to the order of the payee and is then indorsed over to the bank for payment.

2A. Payable jointly or in the alternative

Under UCC 3-110, when two names appear on a check, it is presumed to be payable alter–

natively if it is not clear whether it was intended to be joint. If it was joint, then both parties must

indorse for the transfer to be good.

3A. Requirements of an HDC

The payees met the definition of an HDC: value was given, the checks were taken in good faith,

and there never was a reason to suspect a problem.

4 UNIT THREE: NEGOTIABLE INSTRUMENTS

in whole or in part.

4A. Ruling

The checks were properly presented and paid to a holder in due course. Further, the plaintiffs

were negligent for never reviewing their bank statements, which would have revealed that

Bishop was using the money for improper purposes.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

We should eliminate the status of holder in due course for those who possess

negotiable instruments. No one can deny that HDC status allows holders of negotiable

instruments to collect payment even when there has been some underlying misrepresentation or

even fraud. Thus, if holder in due course were eliminated, such misrepresentation or fraud

would no longer be as easily avoided by those who perpetuate it.

If we eliminated the possibility of HDC status for negotiable instruments, we would reduce

severely the amount of negotiable instruments use in commerce. Hence, eliminating HDC

status would cause a reduction in economic activity and therefore cause a reduced rate of

economic growth. On net, we would be worse off.

ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE

AT THE END OF THE CHAPTER

1A. Kurt receives from Nabil a check that is made out “Pay to the order of Kurt.” Kurt

turns it over and writes on the back, “Pay to Adam. [Signed] Kurt.” What type of

indorsement is this? What effect does this indorsement have on whether the check is

considered an order instrument or a bearer instrument? Explain. “Pay to Adam. [Signed]

Kurt” is a special indorsement. This indorsement creates an order instrument. As with any order

instrument, further negotiation requires indorsement and delivery.

2A. Ben contracts with Amy to fix her roof. Amy writes Ben a check, but Ben never

makes the repairs. Carl knows Ben breached the contract, but cashes the check anyway.

Can Carl become an HDC? Why or why not? No, Carl cannot become an HDC. A party who

takes an instrument with knowledge of one defense that the maker or drawer has against

payment on the instrument prevents the party from attaining HDC status as to all defenses. The

party does not satisfy the requirement for HDC status that he or she must take the instrument

without notice.

CHAPTER 13: TRANSFERABILITY AND HOLDER IN DUE COURSE 5

in whole or in part.

ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

13-1A. Indorsements

(Chapter 13—Page 238)

deposit only. [Signed] Better-Garden Nursery” is a restrictive indorsement. It does not prohibit

the further transfer or negotiation of the instrument.

the character of the instrument (order or bearer) at the time of the negotiation. The check

issued to Jordan was order paper. For negotiation, Jordan was required to indorse and deliver

13-2A. Holder in due course

(Chapter 13—Page 246)

evidence she took in bad faith, the only issue is whether she took with notice. UCC 3–302(a)(1)

provides that a purchaser has notice of a claim or defense if “the instrument when issued or

notice. In addition, the alterations from $7 to $70 were cleverly done, and thus we assume there

was “no visible evidence of alteration” that would put Emilio on notice. Thus, Emilio took the

13-3A. Negotiation

(Chapter 13—Page 237–243)

in whole or in part.

8 UNIT THREE: NEGOTIABLE INSTRUMENTS

in whole or in part.

In the actual case on which this problem is based, the court issued a judgment in BAC’s

favor, but on Brock’s appeal, a state intermediate appellate court reversed. On BAC’s appeal,

the Court of Appeals of Maryland reversed the lower court’s decision. “BAC is in possession of

the Note that is indorsed in blank. BAC is therefore the holder of the Note and * * * entitled to

enforce it.”

13-9A. A QUESTION OF ETHICS—Indorsements

(a) The indorsement on Interior’s checks was a restrictive indorsement, which re–

quired the recipient (here, Pan American Bank) to comply with the instructions (here, “Deposit

Only”). Interior asserted UCC 3–206(c), which imposes liability on a bank for failing to honor a

restrictive indorsement. Interior claimed that Pan American was obligated under the

indorsement to deposit the checks into Interior’s account. Pan American’s depositing the funds

in Leparski’s account violated the indorsement, for which Pan American was liable.

The trial court ruled in Interior’s favor, and the state intermediate appellate court affirmed

this ruling. The appellate court explained that under UCC 3–206, a bank that receives checks

with restrictive indorsements is liable “unless the payee . . . receives the amount of the check

or unless the amount of the check is deposited in the endorser’s account. It is undisputed that

neither occurred in the instant matter.”

Pan American argued in part that it was not liable because Leparski, not Interior Designs,

was the actual indorser. The court disagreed. “The [UCC] provides for liability if payment is

made inconsistent with the restrictive endorsement. There is no requirement that the restrictive

endorsement be made only by” the party to whose account the payment is to be credited.

(b) Leparski’s acts were illegal and unethical. Of course, Interior might have thwarted

Leparski under the circumstances of this case by limiting his authority to receive and deposit

Interior’s checks without management’s review. Some unethical conduct is based on a lack of

oversight.

But employees must be trusted to some extent. In those cases, some unethical conduct

is based on a lack of sanctions. To remedy this situation, management can set and apply ethical

standards. By setting realistic goals for employees to follow, periodically reviewing employee

behavior, and not tolerating unethical acts, ethical conduct can be encouraged. Most large

corporations have codes of conduct that indicate the firm’s commitment to compliance with legal

and ethical standards.

13–10A. LEGAL REASONING GROUP ACTIVITY—Holder in due course

(a) The bank does qualify as a holder in due course (HDC) for the amount of $5,000.

To qualify as an HDC, under UCC 3–302, one must take the instrument for value, in good faith,

and without being put on notice that a defense exists against it, that it has been dishonored, or

that it is overdue. In this situation the bank has given full value for the instrument—$4,850

($5,000 – $150 discount). Therefore, the bank is entitled to be an HDC for the face value of the

instrument ($5,000). In addition, the bank took the instrument in good faith and without notice of

the original incompleteness of the instrument (completed when purchased by the bank) or the

lack of authority of Hayden to complete the instrument in an amount over $2,000. The