Business Law Chapter 26 Homework Emilio Notice B Although The Check Was

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CHAPTER 26

TRANSFERABILITY AND HOLDER IN DUE COURSE

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 26.1—CRITICAL THINKING

LEGAL ENVIRONMENT

Even though forged or unauthorized signatures on negotiable instruments are

uncommon, should U.S. Bank have had to prove that the indorsements on this note were

ECONOMIC

How does the presumption that an indorsement is legitimate “without unambiguous

evidence to the contrary” protect the transferability of a negotiable instrument? The

presumption that an indorsement is legitimate “without unambiguous evidence to the contrary”

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CASE 26.2—LEGAL REASONING QUESTIONS

1. What evidence did the plaintiff offer to establish standing to enforce the note?

Explain. At trial, the plaintiff—AS Peleus, LLC—produced the original note, which contained a

2. What might have been the result if the assignments of the note had ended with the

indorsement on the fifth allonge? If the assignments of the note at issue had ended with the

indorsement on the fifth allonge, and no other facts were different, the result would likely have

3. If the series of indorsements on the note had ended with a blank indorsement, would

CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 3

CASE 26.3—CRITICAL THINKING

WHAT IF THE FACTS WERE DIFFERENT?

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

ETHICAL

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 repay Freestyle? Why did the court conclude that Freestyle acted in

good faith in accepting the check? Discuss. On the question of whether Freestyle took the

check in good faith, so as to qualify as a holder in due course, the court emphasized Demery’s

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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

2A. Payable jointly or in the alternative

Under UCC 3-110, when two names appear on a check, it is presumed to be payable alter–

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

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

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Kurt receives from Nabil a check that is made out “Pay to the order of Kurt.” Kurt

turns it over and writes on the back, “Pay to Adam. [Signed] Kurt.” What type of

CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 5

indorsement is this? What effect does this indorsement have on whether the check is

considered an order instrument or a bearer instrument? Explain. “Pay to Adam. [Signed]

2A. Ben contracts with Amy to fix her roof. Amy writes Ben a check, but Ben never

makes the repairs. Carl knows Ben breached the contract, but cashes the check anyway.

ANSWERS TO BUSINESS SCENARIOS

AT THE END OF THE CHAPTER

26-1A. Indorsements

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

(b) Negotiation is the transfer of an instrument in such form that the transferee be-

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

26-2A. Holder in due course

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

strument for value, take the instrument in good faith, and take the instrument without notice of

dishonor, claim, defense, or that it is overdue. Because Emilio has the status of a holder

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negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not

otherwise so irregular or incomplete as to call into question its authenticity.”

(a) The alterations from $9 to $90 were cleverly done, and thus we assume there was

26-3A. Negotiation

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

(b) The finder’s delivery of the check to the creditor was a valid negotiation. All that is

required for the negotiation of a bearer instrument is voluntary delivery.

ANSWERS TO BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

26-4A. Transfer and holder in due course

26–5A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Negotiation

A negotiable instrument can be transferred by assignment or by negotiation. An assignment is a

transfer of rights by contract. A transfer by assignment to an assignee gives the assignee only

those rights that the assignor possessed. Any defenses that can be raised against the assignor

can be raised against the assignee. When an instrument is transferred by negotiation, the

transferee becomes a holder. A holder receives at least the rights of the previous possessor.

CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 7

26–6A. Indorsements

Yes, BAC can enforce the note. Under the UCC, the right to enforce an instrument and the

ownership of the instrument are two different concepts. The holder of a note is entitled to

enforce the instrument even if it is not the owner of the instrument or is in wrongful possession

of it. An instrument indorsed in blank can be transferred by delivery alone.

26–7A. Transfer by negotiation

Fannie Mae’s best response to Duong’s argument is that the indorsement was a blank

indorsement making the note payable to bearer. Thus, by coming into possession of the note,

Fannie Mae became its holder with the ability to enforce it. A bearer instrument is an instrument

that does not designate a specific payee. If an instrument is payable to bearer, it is negotiated

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26–8A. Indorsements

Yes, the evidence offered by Nationstar Mortgage, LCC, established that the allonge was

sufficiently affixed to the note to prove Nationstar’s status as the holder of the note with the right

to enforce it. When an indorsement accompanies the transfer of a negotiable instrument, it is

most often written on the back of the instrument. If there is no room, the indorsement can be

written on a separate piece of paper—an allonge—that is affixed to the instrument and under

the UCC thereby made part of it. A blank indorsement does not specify a particular indorsee and

can consist of a mere signature.

In this problem, the Purificatos signed a note secured by their interest in certain real

property. The note was transferred through several parties to Aurora Loan Services. The

CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 9

26-9A. A QUESTION OF ETHICS—Indorsements

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

quired the recipient (here, Pan American Bank) to comply with the instructions (here, “Deposit

(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

ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS

AT THE END OF THE CHAPTER

26–10A. 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

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(b) The sale to a stranger in a bar for $500 creates an entirely different situation. One

of the requirements for the status of an HDC is that a holder take the instrument in good faith.