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Suggested Additional Assignments
Research: Literary References
Ask students to look at the pictures of the checks on pp. 620 and 622 and answer these questions: Who
are Charles Bingley and Jane Bennet (p. 620) and Frederick Wentworth and Anne Elliot (p. 622)? What is
implausible about these checks? Extra credit to students who can answer these questions without
Googling the names.
Research: Biometric Authentication
Have students research biometric authentication of check-cashing and other financial transactions. What
is biometric authentication? What technologies does it use? How is it being used to authenticate
financial transactions? How much does it cost to implement? What are its advantages? Is anyone critical
of it? Why? Students could present their findings during class.
Field Work: Completing Checks
Ask students to bring in an original or photocopy of a check that they or someone else has filled out. (The
purpose is to determine if there is a standard method for filling out checks.)
Chapter Overview
Chapter Theme
This chapter could also be entitled, “When Bad Things Happen to Good Instruments.” It deals with
liability when a person who ought to be paid on an instrument is not and also when a person who ought
not to be paid is.
Quote of the Day
“The law is not the place for the artist or the poet. The law is the calling of thinkers.” –Oliver Wendell
Holmes, Jr. (1841-1935), Supreme Court justice. (A lot of thinking is required in this chapter!)
Introduction
This chapter focuses on the liability of these extra players: Non-issuers who sign an instrument and
non-holders who receive payment.
The Contract versus the Instrument
Negotiable instruments are issued to fulfill a contract. The instruments create a second contract to pay the
debt created by the first agreement.
The Payment Process
•Presentment. Presentment means that the holder of the instrument demands payment from someone
who is obligated to pay it (such as the maker or drawee). To present, the holder must (1) exhibit the
instrument, (2) show identification, and (3) surrender the instrument (if paid in full) or give a receipt
(if only partially paid).
•Dishonor. The instrument is due, but the maker (of a note) or the drawee (of a draft) refuses to pay.
•Notice of Dishonor. The holder of the instrument notifies those who are secondarily liable that the
instrument has been dishonored. This notice can be given by any reasonable means, including oral,
written, or electronic communication.
Additional Case: You Be The Judge: Messing v. Bank of America1
Facts: Jeff Messing attempted to cash a check for $976 at a Bank of America branch office. The check
was made out to Messing and drawn on the Bank of America. A teller asked Messing to provide
identification. Messing presented his driver’s license and a major credit card but Bank of America policy
required a thumbprint signature from anyone wishing to cash a check who did not have an account at the
bank. When Messing declined, the teller refused to cash the check.
You Be the Judge: Was the bank’s thumbprint policy permissible under the UCC? Had Messing
provided reasonable identification?
Holding: Judgment for Bank of America affirmed. Providing a thumbprint signature may not confirm
identification of the checkholder at presentment, but it does assist in the identification of the checkholder
should the check later prove to be bad. The thumbprint therefore serves as a powerful deterrent to those
who might otherwise attempt to pass a bad check. A reduction of risk facilitates commerce, which is an
important goal of the UCC.
Question: Why didn’t Messing just deposit the check in his own checking account instead of trying
to cash it at a bank where he had no account?
Answer: If Messing deposited the check in his account and it bounced, Messing’s bank would
Question: Is there anything wrong with that?
Question: Why did Messing refuse to provide a thumbprint?
Question: What is the trade-off in this case?
Question: Who should win this case?
Biometric Authentication
Students who have completed the biometric authentication assignment should relate their findings now.
Signature Liability
Liability
Once you sign an instrument, you are potentially liable for paying it. However, liability depends upon the
capacity in which you sign–the liability of an indorser is different from that of a maker, for instance.
Case: Harrington v. MacNab2
Facts: The MacNabs purchased property from Richard Harrington’s client. The MacNabs came to the
closing with an uncertified personal check drawn on their Merrill Lynch cash management account for
$150,128.70. When Harrington called Merrill Lynch, an employee told him that there were sufficient
funds in the MacNabs’ account to cover the check and that she would put a hold on the account in the
amount of the check. She confirmed this promise by fax. Despite this promise, the check bounced.
1 373 Md. 672, 2003 Md. LEXIS 155 Court of Appeals of Maryland, 2003
2 163 F. Supp. 2d 583; 2001 U.S. Dist. LEXIS 15314 United States District Court for the District of
Maryland
Harrington paid his clients the amount owing and then obtained a judgment against the MacNabs. When
they did not pay him, he sued Merrill Lynch.
Issue: Is Merrill Lynch liable to Harrington as the drawee of the check?
Holding: Judgment for Merrill Lynch. Under the UCC, a drawee bank has no liability on a check until it
has accepted the check. A check is not accepted unless the drawee has signed it. In this case, the plaintiff
is asking the court to permit the oral certification of checks, in clear violation of the policies of the
Commercial Code and hundreds of years of commercial law.
Question: Let me get this straight: a Merrill Lynch employee twice told Harrington that the
MacNab’s account contained sufficient funds to cover the check—once orally, once in writing. The
employee promised that she would put a hold on those funds. Harrington relied on her
misrepresentation, yet Merrill Lynch is not liable and Harrington is left holding the bag?
Question: How can that be right?
Question: Why does that matter? Merrill Lynch still made a promise on which Harrington relied.
Answer: If Merrill Lynch is liable in this case, then any drawee would be liable to any payee who
Question: Isn’t it Merrill’s responsibility to train its employees better?
Answer: Clearly it should. But no matter, because under the UCC, a check can only be accepted by
Question: What should Harrington have done differently?
Answer: He should have followed the custom in real estate transactions and insisted the MacNabs
Question: What is the moral of the story?
Indorser’s Liability
An indorser is anyone, other than an issuer or acceptor, who signs an instrument. Indorsers are only
secondarily liable; they must pay if the issuer or drawee does not. But indorsers are only liable to those
who come after them in the chain of ownership. See the diagram on p. 562 of the text.
Question: In this diagram, who is primarily liable on the note?
Question: Who is secondarily liable to Trustie if Shane refuses to pay?
Question: If Hannah pays Trustie, can she demand payment from Christian?
Question: Why isn’t Christian liable to people who came before him?
Answer: Hannah received the check from Shane. If the check is bad, it is more her fault than
Example: Read the back before indorsement
Before indorsing a check, beware of any contracts written on the back. Robert Beken bought a $35
software book from Computer City in San Diego. When he saw the clerk type his name and address into
the computer, he insisted that his name not be added to any mailing lists. The clerk assured him that it
would not. Beken wrote on the back of his check:
Computer City agrees NOT to place Robert Beken on any mailing list or send him any advertisements or
mailings. Computer City agrees that breach of this agreement by Computer City will damage Robert
Beken and that these damages may be pursued in court. Further, that these damages for the first breach
are $1,000. The deposit of this check for payment is agreement with these terms and conditions.
When Beken received junk mail from the store, he sued for breach of contract. The court awarded him
$1,021 (court costs were $21).3
Accommodation Party
An accommodation party is someone—other than an issuer, acceptor, or indorser—who adds her
signature to an instrument for the purpose of being liable on it. An accommodation party has the same
liability to the holder as the person for whom he signed.
Warranty Liability
Basic Rules of Warranty Liability
1. The wrongdoer is always liable.
2. The drawee bank is liable if it pays a check on which the drawer’s name is forged. The bank can
recover from the payee only if the payee had reason to suspect the forgery
3. In any other case of wrongdoing, a person who first acquires an instrument from a wrongdoer is
ultimately liable to anyone else who pays value for it.
The following case nicely illustrates both the liability of indorsers and transfer warranties.
Additional Case: American National Bank v. Augustine 4
Facts: John and Nancy Augustine hired Hanover Homes to build a house. They took out a construction
loan from South Bend Bank. When directed by the Augustines, South Bend would issue a check payable
to John, Nancy, and Hanover; John and Nancy would indorse it and deliver it to Hanover. However, there
was one check that John indorsed and delivered to Hanover without Nancy’s indorsement. Hanover
deposited the check in its account at St. Joseph Valley Bank. Hanover then filed for bankruptcy. South
Bend discovered the missing indorsement and demanded repayment from St. Joseph. Although St. Joseph
could have demanded repayment from Hanover, there was no point since Hanover was bankrupt. So,
instead, St. Joseph demanded repayment from Nancy and John. The lower court held that John was liable
to St. Joseph as an indorser and for violating his transfer warranties. John appealed.
Issue: Is John liable to St. Joseph as an indorser?
Holding: The appeals court held that John was not liable because only a holder has the right to demand
payment on an instrument, and St. Joseph was not a holder because the check had not been properly
indorsed to it (Nancy’s indorsement was missing).
Question: Has John violated his transfer warranty to St. Joseph?
Answer: The court held that John had not violated his transfer warranty. When John transferred the
check, he warranted that:
3 Ross Kerber, “Litigious Crusader Uses Checks To Ensure No Junk Is in the Mail,” Wall Street Journal,
Feb. 2, 1996, p. B1
4 389 N.E.2d 379 Indiana Court of Appeals, 1979
The court observed that an indorser does not warrant against future forgeries or alterations. The wrong in
this case—namely, depositing the check without all necessary indorsements—occurred after John’s
Transfer Warranties
When someone transfers an instrument, she warrants that:
• She is a holder of the instrument – in other words, she is a legitimate owner
• All signatures are authentic and authorized
• The instrument has not been altered
• No defense can be asserted against her, and
• As far as she knows the issuer is solvent.
You be the Judge: Quimby v. Bank of America5
Facts: Steve Szabo, a Venezuelan resident, had a checking account with the Bank of America in Palm
Beach Gardens, Florida. Someone with an internet address in Nigeria hacked into Szabo’s accounts
on-line, called customer service to change the telephone number listed on his account and ordered blank
checks.
Someone then wrote a check on Szabo’s account for $120,000 to pay for an investment in Freddie
Quimby’s gold mine. On February 20, Quimby presented the check for payment at the Bank of America’s
branch in Osburn, Idaho. At Quimby’s request, the branch manager verified through Bank of America’s
records that Szabo’s account had sufficient funds to cover the check. The branch manager also called the
telephone number in Szabo’s account records and spoke to someone claiming to be Szabo who confirmed
that the check was valid.
Quimby endorsed the check to the bank and received in return a cashier’s check for $120,000, which he
deposited to his account at Bank of America in Baker City, Oregon. [You remember that a cashier’s check
is a check drawn on the bank itself.] “Szabo” then contacted Quimby, stating that he had changed his
mind about the gold mine investment and asking Quimby to return the funds. On February 22, Quimby
wired $111,000.00 from his account with Bank of America to an account in Hong Kong. Those funds
disappeared and Bank of America has been unable to reclaim them.
On March 3, the real Szabo reported to the Bank that his signature on the Quimby check was a forgery.
The Bank repaid Szabo and then filed suit against Quimby, seeking repayment on the cashier’s check it
had issued to him, with interest. The Bank argued that Quimby had violated his transfer warranties when
he endorsed the forged check to it.
You Be the Judge: Did Quimby violate his transfer warranties? Is he liable to the Bank of America for
$120,000?
Argument for the Bank: When Quimby endorsed the check to the Bank, he warranted that all signatures
were authentic and authorized. That was not true – the signature was a forgery and the check was invalid.
Moreover, he only waited two days before wiring the funds. If he had waited longer, the fraud might have
been discovered in time.
The Bank had to refund $120,00 to Szabo. Quimby must repay the Bank.
Argument for Quimby: This whole problem is the Bank’s fault. Let us count the ways: the Bank (1)
permitted a thief to hack into Szabo’s account; (2) issued blank checks to the thief; (3) assured Quimby
that there were good funds to pay the check; (4) issued a cashier’s check to Quimby; and(5) wired funds
to Hong Kong that it cannot trace.
5 2009 U.S. Dist. LEXIS 98575 United States District Court For The District Of Oregon, 2009.
In short, the Bank was repeatedly negligent and now it seeks recover from Quimby, who did all he could
to ensure that the check was valid. That is unfair and preposterous.
Holding: Judgment is entered in favor of Bank of America requiring plaintiff to pay the amount of
$117,542.11, together with interest thereon at the legal rate from April 21, 2008
Presentment Warranties
Anyone who presents a check for payment warrants that (1) she is a holder, (2) the check has not been
altered, and (3) she has no reason to believe the drawer’s signature is forged. Anyone who presents a note
for payment warrants only that she is a holder of the instrument.
Additional Case: Wachovia Bank v. Foster Bancshares6
Facts: MediaEdge wrote a check for $133,026 on its account at Wachovia, payable to CMP Media.
Before CMP received the check, someone changed the name of the payee to Sunjin Choi Choi, and
deposited the altered check into Choi’s account at Foster Bancshares. Foster presented the check for
payment to Wachovia; Wachovia paid Foster from MediaEdge’s account. When MediaEdge learned that
CMP never received the check is sued Wachovia for reimbursement. Wachovia then sued Foster.
Issues: Who is liable for paying the stolen check: Wachovia or Foster?
Holding: Foster is liable for paying the stolen check. The check was altered, meaning an unauthorized
change in the check that purports to modify one party’s obligation. The specific warranty made by Foster
when it presented the check to Wachovia for payment was that the check had not been altered. Because
the check had in fact been altered when Foster presented it to Wachovia for payment, Foster breached its
presentment warranty.
General Questions
If students were asked to bring in checks, this would be the appropriate time to look at them. How
much space is usually left on the lines?
Question: Would it be easy or difficult to change the name of the payee on a check? Look
specifically at this case, changing the payee from CMP Media to Sunjin Choi Choi.
Answer: It would probably depend on the name on the line and how much space there was in
Question: If that is the case, why did Foster accept the check?
Question: What have students learned about how to write checks?
Example
Frances-Rose Straith received a promotional check in the mail that looked like one of those from a
sweepstakes company. The check was made out to her from the “Office of the Treasurer” in the amount
of $95,093.35. She promptly deposited it. The check said, “Non-negotiable for cash,” but the young
teller who took the check thought that phrase meant Straith could only deposit the check, not cash it.
Before the bank discovered its error, Straith wrote checks to cover the purchase prices of both a car and a
pickup truck. She claims she had no idea the check she deposited was invalid, that she thought it was
either a tax refund or a payment from her father’s estate. Furthermore, she feels that the bank owes her
the money because it cashed the check. Bank officials, on the other hand, feel she has committed fraud.7
6 2005 U.S. Dist. LEXIS 16356, United States District Court for the Northern District of Illinois, 2005.
7 T. L. Henion, “Fake Check for $95,093 Fools Recipient, Bank,” Omaha World-Herald, June 13, 1995,
p. 1.
Question: Did Straith violate her presentment warranties when she deposited the check for
$95,093.35?
Answer: Anyone who presents a check for payment warrants that she is a holder, the check has not
Question: I s Straith a holder?
Question: Is the check a negotiable instrument?
Answer: To be negotiable, an instrument must (1) be in writing, (2) be signed by the maker or
Question: Was the check validly negotiated?
Question: So—has Straith violated her presentment warranties?
Question: What is the impact of violating her presentment warranties?
Other Liability Rules
Conversion Liability
Conversion means that (1) someone has stolen an instrument or (2) a bank has paid a check that has a
forged indorsement
Impostor Rule
If someone issues an instrument to an impostor, then any indorsement in the name of the payee is valid as
long as the person (a bank, say) who pays the instrument does not know of the fraud.
Example
A stranger knocked on Sam Crisp’s door one day to warn him that his lightning rod needed repair. Crisp,
who was in his late 70s, agreed to $12.50 worth of repairs. Hindered by poor eyesight and arthritis, Crisp
allowed the stranger to fill out a check in that amount. He did note, however, that the payee space was
blank and there was a lot of open space preceding the number $12.50. The stranger promised to fill in the
blanks, which he did, with the number $6212.50. When the stranger presented the check for payment at
Crisp’s bank, he used as an ID a Kentucky driver’s license with a black and white photo and a business
address. Valid licenses have color photos and the driver’s home address. Meanwhile, elderly Mr. Crisp
became suspicious and tried to call the bank, only to discover his phone line had been cut.8
Under the impostor rule, if someone issues an instrument to an impostor, the bank is not liable unless
it knew of the fraud. However, if both the bank and the issuer of the instrument are negligent, they share
the loss according to their negligence.
Question: Who is negligent in this case?
Answer:
The bank: The check showed no sign of having been altered, but the check was large and payable to
8 Sy Ramsey, “The Associated Press File,” Associated Press, Aug. 31, 1979
Question: Who lost?
Fictitious Payee Rule
If someone issues an instrument to a person who does not exist, then any indorsement in the name
of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of
the fraud.
Employee Indorsement Rule: Example
Mary Anne Nichols, a low-level clerk, embezzled almost $500,000 from the Student Services Division of
the University of California at Santa Cruz. She wrote 202 checks to imaginary speakers for conducting
non-existent workshops and then forged indorsements before depositing the checks in her own bank
account. A teller at her bank finally noticed that the clerk had deposited eight university checks in a
10-day period. The Student Services Division had never been audited and had no budget or accounting
oversight.9
Question: The embezzler is a “low-level” clerk. Did she have responsibility for issuing checks?
What difference does it make whether or not she had responsibility?
Question: Did Nichols commit single or double forgeries?
Question: Does it matter if the bank was negligent?
Question: Was the bank negligent?
Question: Was the university negligent?
Answer: Yes. The Student Services Division had no budget or accounting oversight and had never
Question: What could Santa Cruz have done to prevent this large loss?
Answer: It is difficult to prevent an employee from being dishonest, but this scheme went on for a
9 Maria Alicia Gaura, “UC Santa Cruz Embezzler Gets 5 Years; Maximum Sentence Imposed on College
Clerk,” San Francisco Chronicle, March 29, 1994, p. A20
