978-1285770178 Solution Manual BL ComLaw 1e SM-Ch14

in whole or in part.

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 14.1—QUESTIONS (PAGE 261)

WHAT IF THE FACTS WERE DIFFERENT?

agent, but did not give the name of the principal (by signing Mark Peoples, Agent, for example),

he might also be held personally liable on the instrument. Because this signature is ambiguous,

however, parol evidence would be admissible to prove the agency relationship. If he had simply

signed his name, then, according to the provisions of UCC 3–402, he would be liable to a holder

in due course who had no notice of the agency status. He would not be liable to an ordinary

personally liable on the check? Discuss fully. One can certainly sympathize with Peoples,

who had expected to receive the $26,000 from Encore Credit Corporation in time to pay the

Jeanmaries the full amount due to them at the closing. Peoples stated elsewhere in the opinion

that another lender had also failed to fund a loan on time, resulting in an additional shortfall in

Pyramid’s account. Furthermore, residents of New Orleans, including the parties in this case,

in whole or in part.

If Mills had acquired the note under other circumstances—for example, if he had not

4A. 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

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

The applicable provision in this scenario is the fictitious payee rule [UCC 3–404(b) and 3–405].

2A. Rule

In most circumstances, an unauthorized indorsement will not bind the maker or drawer. Under

the UCC provisions known as the fictitious payee rule, however, when a person signs as or on

Under the fictitious payee rule, Golden Years is barred from recovering the amount of the

checks from the bank and thus must bear the loss here. In effect, the fictitious payee rule

4 UNIT THREE: NEGOTIABLE INSTRUMENTS

in whole or in part.

validates a forged payee’s indorsement, and the instrument is payable out of the drawer’s

(employer’s) account. Because the employee was provided with a signature stamp and the

authority to issue certain checks and issued checks in the names of other employees who had

not requested them, for the specific purpose of embezzling money without intending that the

employees have an interest in the checks, Golden Years, the drawer of the checks, cannot

assert the forged indorsements against the bank.

4A. Warranties

Any person who transfers an instrument for consideration warrants in part to all subsequent

violated the warranty that the person obtaining payment or acceptance have no knowledge that

the signature of the drawer of the instrument is unauthorized.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

human resources and thereby increase profits. To be sure, such devices create more oppor–

tunities for embezzlement, but we should look at the net benefits of using devices, which are

clearly positive.

ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE

a drawer’s employee provides the drawer with the name of a fictitious payee (a payee whom the

CHAPTER 14: LIABILITY, DEFENSES, AND DISCHARGE 5

in whole or in part.

drawer does not actually intend to have any interest in an instrument), a forgery of the payee’s

name is effective to pass good title to subsequent transferees.

2A. Skye asks Jim to buy a textbook for her at the campus bookstore. Skye wrote a

check payable to the bookstore and left the amount blank for Jim to fill in the price of the

book. The cost of the book is $100. Jim filled in the check for $200 before he got to the

bookstore. The clerk at the bookstore took the check for $200 and gave Jim the book,

plus $100 cash. Was the bookstore a holder in due course (HDC) of Skye’s check. Yes.

One of the requirements for HDC status is a lack of notice that an instrument is defective. A

party will not attain this status if he or she knows, or has reason to know, that an incomplete

AT THE END OF THE CHAPTER

14-1A. Material alteration

(Chapter 14—Page 267)

No. Material alteration of a negotiable instrument may be a real defense against payment on

that Boz could take the check without notice and become an HDC, then Williams would have a

real defense against paying $10,000. In the latter case, Boz, as an HDC, could collect only

$1,000, the original amount of the check.

14-2A. Signature liability

from payment of the note, Keith cannot hold Waldo liable. Unqualified indorsers are liable on

their signatures, providing the holder has made proper presentment, the instrument has been

dishonored, and proper notice of dishonor has been received [UCC 3–415]. Keith made a

proper presentment (presented the note to Waldo for payment on the due date); the instrument

6 UNIT THREE: NEGOTIABLE INSTRUMENTS

in whole or in part.

was not paid (it was dishonored); and if Keith gives Adam notice of this dishonor within thirty

his unqualified special indorsement [UCC 3–111; 3–414(b), (f); 3–415(a); 3–501(a), (b)(1); 3–

502(a)(1), (2) and (b)–(e); 3–503]. A qualified indorser, “without recourse,” is not liable on his or

her signature [UCC 3–415]. Thus, Grace cannot be held liable on her indorsement. Both

qualified and unqualified indorsers who receive consideration on transfer make certain

warranties to all subsequent holders [UCC 3–416]. Two warranties of interest here are the

at the time of transfer, Grace cannot be held liable on the instrument for breach of warranty (or

on her signature). Since Adam is held liable on his signature, there is no need to prove a

defense was good against Adam at the time of transfer.

14-3A. Defenses

is nothing to indicate that he took the instrument in bad faith. Fourth, he was unaware of Niles’s

fraud (claim or defense), and he took the check before it was overdue (within thirty days of

issue). Thus, Frazier is a holder in due course and can hold Kennedy liable.

14–4A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Defenses

contract, ordinary fraud, and any other defenses that can be asserted to avoid payment on a

contract. Between the maker and the payee, a promissory note is a contract to pay money.

Defenses that may be asserted by the maker against payment on a note include the personal

defenses.

In this problem, Klutz does not qualify as an HDC. Thorbecke signed a note as the maker

in whole or in part.

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

103 A.D.3d 1041, 962 N.Y.S.2d 412.

(a) Issue: What document was at the center of the dispute in this case? The

document at the center of the dispute in this case was a note. Over time, Gregory Mills paid

$395,750 to Robert Chauvin. Chauvin claimed that the funds represented an investment in the

Amelia Village real estate development project. But Mills claimed that the money was a loan.

value given in return for a promise or a performance. For example, cash given in return for a

promise to repay it would be consideration for the promise. Consideration has two elements: (1)

something of legally sufficient value given in exchange for the promise or performance and (2) a

bargained-for exchange.

The requirements for attaining the status of a holder in due course (HDC) are set out in

the process of acquiring the instrument. Finally, a person cannot be an HDC if he or she knows

or has reason to know that the instrument is overdue, has been dishonored, is part of a series in

which at least one instrument has an uncured default, contains an unauthorized signature, has

been altered, is subject to a defense against payment or a claim to it, or is so incomplete or

irregular as to call into question its authenticity.

Chauvin signed the note was something of legally sufficient value given in exchange for

Chauvin’s promise to repay it. The bargained for-exchange included the amount and the terms

for repayment. In the words of the court in the Mills case, “the consideration for the promissory

CHAPTER 14: LIABILITY, DEFENSES, AND DISCHARGE 9

in whole or in part.

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.”

Mills—the party in possession of the note—took it as an HDC. The note was drafted by

Chauvin, 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. In the Mills case,

the court found Mills to be credible in his claim that this was how and why he took the note,

enforceable and that Mills was entitled to recover pursuant to its terms.” Chauvin was liable for

its payment. 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]

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.”

defense against payment. A discharge of liability can occur under UCC 3–605 if a party’s right of

recourse is impaired. A right of recourse is a right to seek reimbursement. An indorser of a note

has a right of recourse against prior indorsers, a maker, and accommodation parties. If a holder

of the note adversely affects the indorser’s right to seek reimbursement from any of these

parties, the indorser is not liable on the note. As noted in the text, this can occur if a holder