Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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
© 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.
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.
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
© 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.
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
in whole or in part.
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
© 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.
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.
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
© 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.
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
in whole or in part.
