Business Law Chapter 25 Homework On the question of whether Freestyle took the check in good faith

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CHAPTER 25

TRANSFERABILITY AND

HOLDER IN DUE COURSE

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 25.1—QUESTIONS (PAGE 482)

1A. How do the requirements for negotiation of an instrument with a blank qualified indorsement

differ from those for negotiation of an instrument with a special qualified indorsement? A blank

qualified indorsement makes the instrument a bearer instrument, and only the delivery of the

instrument is required for negotiation. In contrast, a special qualified indorsement makes the

instrument an order instrument, and indorsement and delivery are required for negotiation.

2A. Suppose that the indorsement at issue in this case had been written on a separate document

that was not firmly affixed to the note. Would this document have constituted an allonge? Would

Deutsche Bank be entitled to enforce the note? Explain. In the law governing negotiable instruments,

CASE 25.2—QUESTIONS (PAGE 489)

WHAT IF THE FACTS WERE DIFFERENT?

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Suppose that Demery had gone to work for a company not owned or managed by a family member 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

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.

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.

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.

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE 217

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.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

25-1A. Indorsements

(Chapter 25—Pages 479–480)

(a) “For rent paid. [Signed] Jordan” is a blank indorsement. The words for rent paid have

nothing to do with the proper means of transfer and negotiation of the instrument. “Pay to Better–

Garden Nursery, without recourse. [Signed] Deborah” is a special qualified indorsement. To properly

negotiate this check, Deborah has to deliver and indorse the instrument. “For deposit only. [Signed]

Better-Garden Nursery” is a restrictive indorsement. It does not prohibit the further transfer or

negotiation of the instrument.

(b) Negotiation is the transfer of an instrument in such form that the transferee becomes a

holder [UCC 3–201(a)]. If the instrument is order paper, the transfer requires an indorsement plus

25-2A. QUESTION WITH SAMPLE ANSWER: 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 instrument was also taken before overdue (before the

maturity date). Thus, First National Bank is an HDC.

holder in due course.

25-3A. Holder in due course

(Chapter 25—Page 492)

To qualify as a holder in due course, Emilio must be a holder [UCC 1–201(20)], take the instrument for

value, take the instrument in good faith, and take the instrument without notice of dishonor, claim,

25-4A. Negotiation

(Chapter 25—Pages 479–480 & 484–485)

(a) On its issue, this check was a bearer instrument. Any instrument that does not designate

a specific payee—such as an instrument “Payable to the order of cash”—is a bearer instrument. Once

25-5A. Alternative or joint payees

(Chapter 25—Pages 485–486)

The court granted a summary judgment in favor of Provident. Pelican appealed to the Maryland Court of

Appeals, the state’s highest court, which affirmed the lower court’s judgment. Pelican asserted that the

25-6A. Holder in due course

(Chapter 25—Pages 490–492)

The court issued a judgment in ADP’s favor and awarded the defendant $5,919.80 in compensatory

damages, representing the private investigator’s fee, and $17,759.40 in punitive damages.

Both parties appealed to a state intermediate appellate court. This court concluded that Triffin

did not qualify as a holder in due course (HDC). He bought the checks, but he was not authorized to scan

the sellers’ signatures into his computer to reproduce them on the assignment forms. There was no

25–7A. CASE PROBLEM WITH SAMPLE ANSWER: Holder in due course

Neither Triffin nor A-1 could claim holder in due course status and therefore had no right to have the

25-8A. Transfer and holder in due course

(Chapter 25—Pages 481–482 & 490–492)

25-9A. A QUESTION OF ETHICS: Indorsements

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

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

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE 221

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

 ANSWER TO VIDEO QUESTION NO. 25–10 

Negotiability & Transferability: Indorsing Checks

(a) According to the instructor in the video, what are the two reasons why banks generally

require a person to indorse a check that is made out to cash (a bearer instrument), even when

the check is signed in the presence of the teller? According to the instructor, banks require you to

to require tellers to inspect every check and determine whether it is an order or a bearer

instrument.

(b) Suppose that your friend makes out a check payable to cash, signs it, and hands it to you.

You take the check to your bank and indorse the check with your name and the words “without

recourse.” What type of indorsement is this? How does this indorsement affect the banks

rights? The words “without recourse” indicate that this is a qualified indorsement. A qualified

signature, no material alteration, and so forth.

for $500. The teller gives you the cash without asking you to indorse the check. After you leave,

the teller slips the check into his pocket. Later, the teller delivers it (without an indorsement) to

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his friend Carol in payment for a gambling debt. Carol takes your check to her bank, indorses it,

and deposits the money. Discuss whether Carol is a holder in due course. To be a holder in due

course, Carol must have taken the instrument (1) for value: (2) in good faith; and (3) without

notice that it is defective. An instrument is defective if it is overdue, dishonored, irregular, or

incomplete; if a defense against it exists; or it contains unauthorized signatures or alterations.

Under UCC 3–303(a), a holder can take an instrument for value in payment of an antecedent

claim. Here, the teller owed money to Carol on a gambling debt, so Carol has antecedent claim

(although it may not have been a legal contract). The circumstances of the transfer would

probably call into question Carol’s good faith, however. Under the UCC, good faith is defined as