Business Law Chapter 26 Homework Article But The Result Would Likely The

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B-110

ALTERNATE CASE PROBLEM ANSWERS

CHAPTER 26

LIABILITY, DEFENSES, AND DISCHARGE

26-1A. Discharge

(Chapter 26—Pages 513–514)

The jury returned a verdict for Mary Ann, and the court issued a judgment that, in part, discharged the

note. The Gardners appealed, arguing that Mary Ann’s finding the note in a file in the basement was not

enough to prove they surrendered the note because Mary Ann did not know how it got there. The

26-2A. Unauthorized indorsements

(Chapter 26—Pages 504–505)

(This case was decided under the unrevised Article 3, but the result would likely by the same under the

revised Article 3.) Ordinarily, First City would be liable to the payor bank (First National) because First

City had accepted the checks in spite of the fact that their indorsements were not genuine or authorized

[UCC 3–404(1) in the unrevised Article 3; UCC 3–403(a) in the revised Article 3]. UCC 3–405(1)(c) in the

unrevised Article 3 [UCC 3–404(b)(2) in the revised Article 3] provides an exception to this general rule,

26-3A. Unauthorized indorsements

(Chapter 26—Pages 504–505)

This case was decided under the unrevised UCC 3–405. Under that section, the law firm had to bear the

loss. The court emphasized that when an indorsement is forged, “generally the bank that first paid on

the check will bear the loss.” But it also pointed out that UCC 3–405(1)(c) provided an exception to this

rule. “This section places the loss on the drawer when an employee supplies him with the name of the

payee intending that the named payee have no interest in the check and an indorsement is forged in the

name of the named payee.” The court held that the forged indorsements in this case fell under this

exception. Mowatt had never intended the payee-partners to have any interest in the checks payable to

them and forged their names when indorsing the checks. The court stated that the reasons for the

fictitious payee rule were “that the employer is normally in a better position to prevent such forgeries by

26-4A. Unauthorized indorsements

(Chapter 26—Page 504)

The court concluded that the imposter rule did not apply. Wanda Snow was not the drawer of the check

but a payee suing the collecting bank for acceptance of the check bearing her forged indorsement. The

court stated that “where the payee of a check is suing a collecting bank, there is no policy reason for

shifting the risk of loss to the payee, since as between [Snow] and Southeast, the bank was in a superior

B-112 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 26

26-5A. Unauthorized indorsements

(Chapter 26—Pages 504–505)

The trial court denied the banks’ motion for summary judgment, and the banks appealed. The appellate

court reversed the lower court’s ruling. Summary judgment for the banks was appropriate because the

unauthorized indorsements fell under the fictitious payee rule of UCC 3–405 and hence the banks were

not liable. The court noted that the principle underlying the fictitious payee rule rests on a fundamental

public policy determination that losses arising from unauthorized checks payable to fictitious payees are

“more business risks than banking risks.” As a general rule, the employer—in this case, the Fund—is in a

26-6A. Defenses

(Chapter 26—Page 509)

In this classic case concerning the defense of fraud in the execution, the Kansas court entertained three

possible views. One was that since Ort never intended to execute a note, he should not be held liable

26-7A. Illegality

(Chapter 26—Page 512)

The trial court held for the plaintiff, and Berenyi appealed. The appellate court affirmed the trial court’s

judgment. In addressing the question of Berenyi’s liability on the note, the court stated that the

APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 26 B-113

“controlling issue presented is whether the defense here asserted is a [‘universal’] defense or a

‘personal’ defense. [Universal] defenses are available against even a holder in due course of a

26-8A. Defenses

(Chapter 26—Page 512)

The court held that nondelivery was a proper defense against Vesely because Vesely was not a holder in

due course. To be a holder in due course the holder must take the instrument without notice of a claim

26-9A. Discharge

(Chapter 26—Pages 513–514)

“Intent” was the principal factor in the eyes of the court. The Supreme Court of Nebraska held that the

unintentional cancellation and surrender of a promissory note through a clerical error does not

26-10A. A QUESTION OF ETHICS

1. In determining whether the bank had been negligent because it had not contacted Parker

before disbursing the loan proceeds to Kirkman, it is important to realize that the note was complete

B-114 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 26

anything wrong with, or unusual about, the note. In view of these circumstances, you could easily con–

2. As mentioned before in this text, an underlying goal of the UCC—and of the law generally—is

to protect innocent parties from harm. Generally, if one of two innocent parties to a transaction must

be forced to bear a loss, the UCC, in the interests of fairness, will hold that the party in the best position

3. If you decided that Parker should be liable for the loss, you could justify your conclusion by

referring to the UCC’s policy discussed above—that the party in the best position to prevent the loss

should bear the loss. Obviously, Parker, by signing an incomplete instrument, opened himself to liability