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Negligence
You Be the Judge: Gulf States Section, PGA, Inc. v. Whitney National
Bank of New Orleans1
Facts: Adrenetti Collins was a secretary who worked in the PGA office. During a four-month period,
she forged 18 PGA checks totaling $22,699.81. To avoid detection, she intercepted two of the bank
statements sent by Whitney National Bank and replaced them with forged statements that left out the
numbers of the checks she had stolen. The usual Whitney statement was printed on vanilla-colored
paper measuring a non-standard 6 ¾ 11 inches. The forged statements were on standard 8½ 11
inch white paper. They were not dated but they did contain the Whitney logo. Collins’s boss, Robert
Brown, received two forged statements and then no statements at all for two months.
Whitney’s policy was to verify signatures on checks equal to or greater than $5,000. One of the
forged checks was in the amount of $5,000, but Whitney did not verify Brown’s signature before
paying it. Brown’s signature was a semi-legible letter or two and a long loop. The forged signature on
the check looked very similar to the real one.
Issue: Is Whitney liable to the PGA for the forged checks it paid?
Holding: Judgment for Whitney. The court held that Brown was negligent and that his negligence
substantially contributed to the forgeries. Furthermore, there was no evidence that Whitney had
violated reasonable commercial standards. Other Louisiana banks, for example, only verify checks for
more than $10,000 or even $20,000. Also, the forged signature was so similar to Brown’s real
signature that, even if it had been verified, the forgery would probably not have been detected.
Question: Aren’t banks liable if they pay forged checks?
Question: Was the PGA negligent in this case?
Answer: The court held that it was. The blank checks should have been locked up and Brown
Question: Wasn’t the bank negligent, too? After all, it violated its own policy by cashing a $5,000
check without verifying the signature.
Answer: There is no rule that banks must verify checks over a certain amount. Indeed, a number
Question: Who would be liable if both the PGA and the bank were negligent?
Crimes
It is beyond the scope of this chapter to catalog all of the crimes that can be committed with negotiable
instruments, but students should be aware of these.
Bouncing a Check
It is illegal to write a check on an account that has insufficient funds. Generally, no serious penalties
are imposed if sufficient funds are immediately deposited.
Check Kiting
Check kiting means moving funds between bank accounts to take advantage of the float. It is possible
because banks start paying interest before deposits clear. But it is illegal.
1 689 So. 2d 638, 1997 La. App. LEXIS 167 Court of Appeal of Louisiana, Fourth Circuit, 1997
Forgery
It is illegal to forge an instrument or to pass on (utter) an instrument that one knows to be forged.
Discharge
Discharge means that liability on an instrument terminates. Article 3 establishes five different ways to
discharge an instrument:
By payment
By agreement
By cancellation
By certification
By alteration
Case: Manley v. Wachovia Small Bus. Capital2
Facts: File this case under:
What parents will do for their children (whether or not they should).
Wachovia Bank loaned Daniel Manley $420,000 and, in return, he gave the bank a promissory note in
that amount. His father, Thomas, guaranteed payment of the note. Seven years later, Daniel stopped
making payments, so Wachovia sent him a default notice. When he did not resume payments, the
bank filed suit to collect the money owed.
At trial, Thomas testified that, shortly after Daniel received his first default notice, he had taken
$375,000 in $100 bills to Wachovia as a payment on the note. Thomas further testified that he had asked
for a receipt from the bank em
ployee to whom he had given the cash but the employee had told him
that a receipt would be mailed to him after the cash was counted. Thomas
never got a receipt but,
three months later, Daniel received the original note in the mail. It was in a Wachovia envelope and had
been stamped “Paid.”
Wachovia employees testified they had no record of a $375,000 cash payment and that the note had
never been paid. Nor could they find the original note. They had no idea who had marked the note paid,
or how Daniel had possession of it.
The jury did not believe Thomas .It found both Daniel and Thomas liable on the note .The father and
son appealed. They argued that, because Wachovia had marked the note “paid,” it had been
discharged and they were no longer liable on it.
Issues: Was the note discharged? Were the Manley men liable on it?
Excerpts from Justice Moseley’s Decision:3
The Manleys rely on [Section 3.604 of the UCC], which provides that the person entitled to enforce the
instrument may discharge the obligation by an intentional voluntary act. The Manleys contend
Wachovia’s acts of stamping the original note “paid and sending it to Daniel were intentional and
voluntary and are conclusive evidence that Wachovia discharged the note. [T]hey assert that only the act
(stamping and returning the note) must be intentional and voluntary, not the result (discharge of the
obligation). We disagree.
Discharge requires the intent to render the instrument ineffective as a legal obligation. This intent
requirement has led courts
to conclude that mistakenly marking a note “paid (or the
equivalent) will
not discharge the debt.
There is evidence that although the note was stamped paid
, it had not, in fact, been paid and amounts
remained due and owing at the time of
trial. There is also evidence Wachovia’s normal procedures
following the payment of a note were not fol
lowed in this case, and [an employee] testified that it was
a mistake for Daniel to receive the note. This, along with other evidence in the record, is some
evidence that the surrender of the note and stamping it paid were the result of a mistake and not
intentional or voluntary.
2 349 S.W.3d 233 Court of Appeals of Texas, 2011
3 For ease of reading the opinion, we have substituted “the Manleys” for “Appellants.”
[W]e conclude the mere fact Daniel received the original
note in a Wachovia envelope with “paid
stamped on it does not conclusively prove that Wachovia, by an intentional voluntary act, discharged
Daniel’s obligation on the note.
Question: What does “discharge” mean?
Question: According to the court, what is the intent requirement of discharge?
Example
Joe and Roberta borrowed money from her father, Howard, and signed two promissory notes. While
Howard was near death in the hospital, his wife Evelyn (who was Roberta’s stepmother) found the
notes. Howard asked Joe to retrieve the notes so that he (Howard) could discharge them. Evelyn
refused to give the notes to Joe and, instead, added her name as a payee. Howard died without
discharging the notes.
Question: Are Joe and Roberta liable to Evelyn on the notes?
Multiple Choice Questions
1. CPA QUESTION A check has the following indorsements on the back:
Paul Frank
without recourse
George Hopkins
payment guaranteed
Ann Quarry
Collection guaranteed
Rachel Ott
Which of the following conditions occurring subsequent to the indorsements would discharge all of
the indorsers?
(a) Lack of notice of dishonor
(b) Late presentment
(c) Insolvency of maker
(d) Certification of check
2. CPA QUESTION Which of the following actions does not discharge a prior party to a
commercial instrument?
(a) Good faith payment or satisfaction of the instrument
(b) Cancellation of that prior party’s indorsement
(c) The holder’s oral renunciation of that prior party’s liability
(d) The holder’s intentional destruction of the instrument
3. What is the difference between a co-maker and an accommodation party?
(a) A co-maker is liable both to the holder and the other co-maker, an accommodation party is
liable only to the holder
(b) A co-maker is liable to subsequent indorsers, an accommodation party is not
(c) A co-maker is liable only to the other co-maker, while the accommodation party is liable to the
holder
(d) A co-maker is not liable once a bank certifies a check, an accommodation party is still liable
even after certification.
4. Karim writes a check to Lew but Karim’s bank accidently refuses to pay the check, despite the fact
that Karim’s account has sufficient funds. As a result, Lew bounces many checks from his own
account and has to pay substantial fees to his bank. Which of the following statements is true?
(a) Lew can recover damages from both Karim and Karim’s bank.
(b) Lew can recover damages only from Karim.
(c) Lew can recover damages only from Karim’s bank.
(d) Lew cannot recover any damages.
5. Nan forges Mina’s name on a check to buy a television set from Costmart. The store deposits that
check into its account at Bank, but Bank does not credit Costmart’s account for the amount of the
check. From whom can Costmart recover?
(a) Nan
(b) Mina
(c) The bank
(d) All of the above
Case Questions
1. One of Doris’s job responsibilities at Winkie, Inc .was preparing company checks for the
president, Willie, to sign. Using Winkie’s check-signing machine, Doris forged $150,000 of checks
on her employer’s account. Willie did not (1) look at the sequence of check numbers, (2) examine
the monthly account statements, or (3) reconcile company records with bank statements. Winkie’s
bank, as a matter of policy, did not check indorsements on checks with a face value of less than
$1,000. By accident, it paid a forged check that had not even been indorsed. Is the bank liable to
Winkie, Inc., for the forged checks?
Answer: The court found for the bank on the grounds that the owner of the company had been
2. Before Parris’s lawsuit against Railroad had settled, he left town and closed out his account with
Bank. Railroad then issued a check to him which somehow came to be in Eddy’s possession. Eddy
indorsed the check “Railroad Eddy” and deposited it in his own account at Bank. Parris sued Bank,
alleging that it was liable to him for having paid the check over an unauthorized indorsement. Is
Bank liable to Parris? On what theory?
Answer: An unauthorized indorsement is the same as a forged indorsement. The court held that
3. You Be the Judge: WRITING PROBLEM Melco, Inc., issued a promissory note
for $12,000, payable to the order of Marjorie. On the back of the note, Charles had signed the
following statement: “For and in consideration of funds advanced herein to Melco, Inc., we
irrevocably guarantee Marjorie against loss by reason of non-payment of this note.” After the
instrument was overdue, Marjorie sued Charles to enforce the note before demanding payment
from the issuer. Is Charles liable on the note before demand is made on the issuer? Argument for
Marjorie: Charles was an accommodation party and, as such, was liable on the instrument even if
no demand had been made on the issuer. Argument for Charles: If the accommodation party
writes, “I guarantee collection,” he is not liable until the issuer fails to pay. In this case, the words
Charles wrote are the equivalent of “I guarantee collection.” Marjorie’s response: To avoid liability
in this case, Charles had to comply with the exact requirements of the statute. How was she to
know that he thought he was writing the equivalent of “I guarantee collection”?
Answer: An accommodation party is liable on an instrument even if the issuer has not defaulted,
4. Arnold and Palmer signed two promissory notes for a total of $25,000 payable to the Banking Co.
The two men argued that they were not liable on the notes because they had signed as agents for
Sunshine Sales. The notes made no reference to Sunshine, but the men alleged that an officer at
Banking had promised to type “Sunshine Sales Corporation” above their signatures on the notes.
Are the men liable on the notes?
Answer: To avoid personal liability, the two men were required to give the name of the principal
5. Merlyn borrowed money from Finance Co. to buy equipment for his farm. He promised Finance
that he would accept payment for his crops only with checks that named him and Finance as
co-payees. This way, Merlyn could not cash the checks without Finance’s indorsement. Merlyn
sold corn to Farmer’s Co-op, which paid by check made out to “Merlyn, Finance Co.” When
Merlyn deposited this check, the comma between Merlyn and Finance appeared as “or.” Only
Merlyn had indorsed the check. When Finance sued Bank for having paid this check, Bank in turn,
filed suit against Merlyn demanding indemnification for Finance’s claims. What claim did Bank
make against Merlyn?
Discussion Questions
1. Recall the Quimby case. This type of fraud is increasingly common. What could Quimby have done
to protect himself?
Answer: When dealing with strangers, only accept cashier’s checks. In this case, Quimby obtained
2. Regions Bank refused to lend money to ZLM, Inc. unless its owner, Stewart, signed the note as an
accommodation party. He did, and, sadly, ZLM did not repay the loan. But because the note was
due on February 16, which that year happened to be Mardi Gras Day (a major festival in
Louisiana), the bank waited until the next day to declare the note in default. Stewart alleged that he
was not liable on the note because the extension had discharged his liability. Do you agree?
3. ETHICS When Steven was killed in an automobile accident, he left his wife, Debra a life
insurance policy for $60,000. She decided to move from Bunkie to Sulphur, Louisiana. Debra
executed a document authorizing her mother-in-law, Helen, to sign checks on Debra’s account at
the bank. Debra also signed several blank checks and gave them to Helen with instructions to use
them to pay off the remaining debt on Debra’s trailer. When Helen received the life insurance
checks, she deposited them in Debra’s account. So far so good. But then she immediately withdrew
$50,000 from the account by using one of the blank checks Debra had left her. She did not use these
funds to pay off the trailer debt. When Debra discovered the theft, she sued the bank for having
paid an unauthorized check. How would you rule in this case? Debra has suffered a grievous loss—
her husband died tragically in an automobile accident. She trusted her mother-in-law and counted
on her help. Should the bank show compassion? If the bank made good on the forged checks, how
great would be the injury to the bank’s shareholders compared with the harm to Debra if she loses
this entire sum?
Answer: The court held that Debra had been negligent in leaving blank checks with her
4. Banks are liable for forged checks except in the case of the three rules (Imposter Rule, Fictitious
Payee Rule, and the Employee Indorsement Rule). Do you think this is the proper allocation of
liability? Why should banks be liable for forged checks, in this era of automated check machines?
Alternatively, could you argue that the three rules provide too much protection to banks?
5. Many accommodation parties and guarantors do not understand their liability when they sign an
instrument. (As the saying goes, “Nothing is more dangerous than a fool with a pen.”) Should the
UCC require that some sort of disclosure be made to an accommodation party or guarantor before
they sign, or that their obligations be clearly spelled out? What language would you require for a
guaranty to be valid?
