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Business Law Chapter 26 Homework Overdue Time Instruments Time Instrument Overdue Taken

Page Count
10 pages
Word Count
7254 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 26
Transferability and Holder in Due Course
INTRODUCTION
This chapter begins with the process of negotiationthat is, the transfer of negotiable instruments from one
person to another. The chapter discusses the types of indorsements that are required whenever certain types of
instruments are being negotiated, and notes some common indorsement problems that may arise during the process
of negotiation, as well as the consequences of various types of indorsements.
A negotiable instrument is not moneybut it is payable in money. Article 3 of the Uniform Commercial Code
(UCC) governs a party’s right to payment of a check, draft, note, or certificate of deposit. Problems arise when a
holder seeking payment of a negotiable instrument learns that a defense to payment exists or that another party has a
prior claim to the instrument. In such situations, it becomes important for the person seeking payment to have the
rights of a holder in due course (HDC). This chapter distinguishes between an ordinary holder and an HDC and
examines the requirements for HDC status.
CHAPTER OUTLINE
I. Negotiation
When a transfer is by negotiation, the transferee can become a holder in due course and acquire greater
rights than the transferor had [UCC 3203(b), 3305].
A. NEGOTIATING ORDER INSTRUMENTS
An order instrument is negotiated by delivery with any necessary indorsements.
B. NEGOTIATING BEARER INSTRUMENTS
II. Indorsements
Generally, by indorsing, an indorser promises to pay the holder or any subsequent indorser the amount of the
instrument if the drawer or maker defaults [UCC 3415(b)]. An instrument is most often indorsed on the back,
but if there is no room, an indorsement can be written on a separate piece of paper (an allonge) “firmly
affixed” to the instrument [UCC 3204(a)].
A. BLANK INDORSEMENTS
A blank indorsement specifies no particular indorsee and can be a mere signature [UCC 3205(b)].
CASE SYNOPSIS
Case 26.1: In re Bass
To buy a house, Tonya Bass signed an adjustable rate note with Mortgage Lenders Network USA, Inc., to
borrow $139,988, repayable with interest in monthly installments of $810.75. The note was transferred by
stamped imprints to Emax Financial Group LLC, Residential Funding Corp., and finally to U.S. Bank N.A.
When Bass stopping paying on the note, U.S. Bank foreclosed. From North Carolina trial and intermediate
appellate decisions in Bass’s favor, based on the lack of a “proper indorsement,” U.S. Bank appealed.
The North Carolina Supreme Court reversed, holding that “with no unambiguous evidence indicating the
signature was made for any other purpose, the stamp was an indorsement that transferred the Note.”
..................................................................................................................................................
Notes and Questions
What sort of signature is required by the UCC to create a negotiable instrument? UCC 1-201(39)
defines the word “signed” as including “any symbol executed or adopted by a party with present intention to
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 3
Why do banks require all checks, including bearer instruments, to be indorsed? Banks impose this
requirement because the indorsement creates indorser liability for the indorsing party. Also, it is more efficient
B. SPECIAL INDORSEMENTS
A special indorsement names the indorsee [UCC 3205(a)]. An instrument indorsed in this way is an
order instrument. A blank indorsement converted to a special indorsement converts a bearer instrument
into an order instrument.
CASE SYNOPSIS
Case 26.2: AS Peleus, LLC v. Success, Inc.
Success, Inc. executed a note for $525,000 payable to Greenpoint Mortgage Funding, Inc. The note was
secured by mortgages on real property in Stratford and Bridgeport, Connecticut. When Success defaulted on
the payments, AS Peleus, LLC filed a suit in a Connecticut state court against Success to foreclose on the
property and recover on the note. The court issued a judgment in the plaintiff’s favor. On appeal, the
defendant claimed that the lower court erred in finding the plaintiff was the owner and holder of the note.
..................................................................................................................................................
Notes and Questions
What is the difference between a blank and a special indorsement? A blank endorsement is a mere
signature by the indorser, whereas a special indorsement names the person (indorsee) to whom the indorser
intends to make the instrument payable. The words “pay to the order of John Doe,” followed by the indorser’s
signature, constitute a special indorsement, whereas the indorser’s signature alone constitutes a blank in-
dorsement.
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.
4 UNIT FIVE: NEGOTIABLE INSTRUMENTS
Indorsing a note “without recourse” does not undercut its negotiability. What effect does this type
of indorsement have? The notation “without recourse” is commonly used to create a qualified indorsement
on an instrument. An indorser who does not wish to be liable on the instrument can use a qualified
indorsement to disclaim liability under UCC 3415(b).
C. QUALIFIED INDORSEMENTS
Most indorsements are unqualified. A qualified indorsement disclaims an indorser’s liability.
1. The Effect of Qualified Indorsements
2. Special v. Blank Qualified Indorsements
A qualified indorsement is accompanied by a special or blank indorsement that determines further
D. RESTRICTIVE INDORSEMENTS
Restrictive indorsements require indorsees to comply with certain instructions.
1. Indorsements to Pay Only a Named Payee
2. Conditional Indorsements
A conditional indorsement conditions payment on the occurrence of a specified event [UCC 3
3. Indorsements for Deposit or Collection
4. Trust (Agency) Indorsements
Indorsements that state they are for the benefit of the indorser or a third person are trust in-
dorsements, and legal title vests in the original indorsee. To the extent that the original indorsee
pays or applies the proceeds consistently with the indorsement, the indorsee is a holder and can
become a holder in due course [UCC 3206(d), (e)].
E. HOW INDORSEMENTS CAN CONVERT ORDER INSTRUMENTS TO BEARER INSTRUMENTS AND VICE VERSA
Before negotiation, an order instrument can be converted to a bearer instrument and vice versa through
III. Miscellaneous Indorsement Problems
A. MISSPELLED NAMES
An indorsement should be identical to the name that appears on the instrument. A payee or indorsee
whose name is misspelled can indorse with the misspelled name, the correct name, or both [UCC 3
204(d)].
B. INSTRUMENTS PAYABLE TO ENTITIES
An instrument payable to two or more persons in the alternative requires the indorsement of only one for
negotiation.
C. ALTERNATIVE OR JOINT PAYEES
If an instrument is payable to two or more persons jointly, then all the payees’ indorsements are
necessary.
1. If the Instrument Is Ambiguous
2. Suspension of the Drawer’s Obligation
Giving one alternative or joint payee a check suspends the drawer’s obligation [UCC 3–310(b)(1)].
The payee holds the check for the benefit of all payees.
IV. Holder in Due Course (HDC)
A. HOLDER V. HOLDER IN DUE COURSE
A holder has the status of an assignee of a contract right. A holder obtains only those rights that the
transferor had in the instrument and is normally subject to the same defenses. An HDC takes an in-
strument free of most defenses against payment on it or claims to it.
B. REQUIREMENTS FOR HDC STATUS
First, the instrument must be negotiable, and whoever seeks HDC status must be a holder. Then, the
following requirements must be met [UCC 3302].
1. Taking for Value
A gift or inheritance does not meet the requirement of value for HDC status, nor does a promise to
give value in the future. A holder takes an instrument for value by
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
Performing the promise for which the instrument was issued or transferred.
Acquiring a security interest or other lien in the instrument, except a lien obtained by a judicial
proceeding.
Taking an instrument in payment of or as security for an antecedent debt.
Giving a negotiable instrument as payment.
Giving an irrevocable commitment as payment [UCC 3303(a)].
a. Value Is Distinguishable from Consideration
A promise to give value in the future may meet the requirement of consideration to form a
contract, but it does not meet the requirement of value for HDC status. Also, a holder takes an
instrument only to the extent that the promise has been performed [UCC 3303(a)(1)].
b. Exceptions
A holder may pay for an instrument but not acquire HDC status by
Purchasing an instrument at a judicial sale such as a bankruptcy or a creditor’s sale
Obtaining an instrument by taking over a trust or estate (as administrator)
Acquiring an instrument as part of a corporate purchase of assets
ADDITIONAL BACKGROUND
Value and Consideration
The Official Comments of the Uniform Commercial Code explain the purposes and the changes in the
prior law that were effected by the UCC. The following is from the text of UCC 3303, Comment 1.
1. . . . The distinction between value and consideration is a fine one. Whether an instrument is taken
for value is relevant to the issue of whether a holder is a holder in due course. If an instrument is not issued
for consideration the issuer has a defense to the obligation to pay the instrument. . . . [O]utside Article 3,
anything that is consideration is also value. A different rule applies in Article 3. Subsection (b) of Section 3
303 states that if an instrument is issued for value it is also issued for consideration.
Case # 1. X owes Y $1,000. The debt is not represented by a note. Later X issues a note to Y for
the debt. Under subsection (a)(3) [an instrument issued as payment or security for an antecedent claim is
issued for value, and thus] X’s note is issued for value. Under subsection (b) [an instrument issued for
value as stated in subsection (a) is also issued for consideration, and thus] the note is also issued for
consideration whether or not, under contract law, Y is deemed to have given consideration for the note.
Case # 2. X issues a check to Y in consideration of Y’s promise to perform services in the future.
Case # 3. X issues a note to Y in consideration of Y’s promise to perform services. If at the due date
of the note Y’s performance is not yet due, Y may enforce the note because it was issued for
2. Taking in Good Faith
The holder must have acted honestly in the process of acquiring the instrument. Good faith is
“honesty in fact and the observance of reasonable commercial standards of fair dealing” [UCC 3
103(a)(4)]. This requirement applies only to the holder.
CASE SYNOPSIS
Case 26.3: Georg v. Metro Fixture Contractors, Inc.
Cassandra Demery worked as a bookkeeper at Clinton Georg’s business Freestyle until he discovered
she had embezzled over $200,000 and failed to pay $240,000 of Freestyle’s taxes. Georg fired Demery and
demanded repayment. Demery went to work for her parents’ firm Metro Fixtures. She wrote a check to
Freestyle for $189,000 on Metro’s account without authorization and deposited it directly into Freestyle’s
account, telling Georg that it was a loan to her from her family. When Metro discovered Demery’s theft, it filed
a suit in a Colorado state court against Georg and Freestyle for conversion. The court issued a summary
judgment in Freestyle’s favor. On Metro’s appeal, a state intermediate appellate court reversed. Georg and
Freestyle appealed.
The Colorado Supreme Court reversed. 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 authority to issue checks for
Metro. Georg had no reason to know that Demery did not have the authority to write this specific check.
Under the UCC, when two innocent parties are victims, the loss falls on the party who created the
circumstances that enabled the wrongdoing. Metro gave Demery authority to write checks, so it bore the loss.
..................................................................................................................................................
Notes and Questions
In an attempt to describe how the standard of “good faith” under Article 3 should be applied, a different
state court articulated the following test in Maine Family Federal Credit Union v. Sun Life Assurance Co. of
Canada, 727 A.2d 335 (Sup. Jud. Ct. 1999).
The factfinder must therefore determine, first, whether the conduct of the holder comported with industry
or “commercial” standards applicable to the transaction and, second, whether those standards were
reasonable standards intended to result in fair dealing. Each of those determinations must be made in
the context of the specific transaction at hand. If the factfinder’s conclusion on each point is “yes,” the
holder will be determined to have acted in good faith even if, in the individual transaction at issue, the
What do your students think about this standard of “good faith”?
Why is good faith required to attain HDC status? To allow otherwise would provide an incentive for
holders to manipulate the rules dishonestly with the knowledge that the enforcement of an instrument could
8 UNIT FIVE: NEGOTIABLE INSTRUMENTS
still be sought in a court.
Was it right for Georg to let the loss fall on Metro, and was it reasonable for him to believe that
Demery’s parents had loaned her the funds? Because there was a family relationship, the claim of a loan
was believable. Demery knew criminal charges could be pressed if she did not repay, so the family might help
her. Given the family relationship, his taking the funds was not unreasonable or indeed unethical.
ADDITIONAL CASES ADDRESSING THIS ISSUE
Taking in Good Faith
Cases in which a party’s good faith to attain HDC status was at issue include the following.
In re AppOnline.com, Inc., __ Bankr. __ (E.D.N.Y. 2002) (the purchaser of mortgage notes from the
original mortgagee for value and in good faith, and without actual knowledge that the checks to closing agent
would be dishonored or of the seller’s claims, qualified as HDCs).
Any Kind Checks Cashed, Inc. v. Talcott, __ So.2d __ (Fla.App. 4.Dist. 2002) (a check cashing store that
released funds represented by a check to the person to whom the check was issued through fraudulent
inducement did not qualify as holder in due course because the store failed to comport with reasonable
commercial standards of fair dealing).
ENHANCING YOUR LECTURE
  GOOD FAITH, INTERNATIONALLY
 
Good faith is an issue not only in domestic transactions involving negotiable instruments but also
internationally. Under the United Nations Convention on International Bills of Exchange and International
Promissory Notes (CIBN), the equivalent of a holder in due course is known as a “protected holder. As
under the UCC, a protected holder is afforded greater protection than an ordinary holder.
Unlike the UCC, however, the CIBN does not provide an objective test by which to measure good faith.
Article 3 of the UCC, as revised in 1990, defines good faith as “honesty in fact and the observance of
reasonable commercial standards of fair dealing.” By including the phrase “the observance of reasonable
commercial standards of fair dealing” in the definition, the UCC gives courts some objective guidelines as to
what constitutes good faith. The CIBN, in contrast, qualifies someone as a protected holder if she or he was
merely “without knowledge” of a fraud or other defense against the instrument. Generally, the CIBN’s test for
protected-holder status is easily passed. In fact, every holder is presumed to be a protected holder unless
there is proof to the contrary.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 9
FOR CRITICAL ANALYSIS
What might be a reason that the CIBN contains only a very broad and subjective definition of good
faith?
3. Taking without Notice
A person will not be afforded HDC protection if he or she knew or should have known at the time
the instrument was acquired that it was defective because
It was overdue.
It had been dishonored.
There was an uncorrected default with respect to another instrument issued as part of the
same series.
The instrument contains an unauthorized signature or has been altered.
There is a defense against it or a claim to it.
The instrument is so irregular as to call into question its authenticity.
a. What Constitutes Notice?
A person has notice of a fact when he or she has
Actual knowledge of the fact.
b. Overdue Demand Instruments
A demand instrument is overdue if it is taken after demand has been made or an unrea-
sonable time after its issue (ninety days in the case of a check) [UCC 3304(a)].
c. Overdue Time Instruments
A time instrument is overdue if it is taken after its expressed due date [UCC 3304(b)]. If, on
an installment note or on a series of notes, the maker has defaulted on an installment or one
of the notes, a buyer cannot take as an HDC [UCC 3304(b)].
d. Dishonored Instruments
A holder has notice if he or she knows an instrument has been dishonored, or knows of facts
that would lead him or her to suspect that an instrument has been dishonored [UCC 3
302(a)(2)].
e. Notice of Claims or Defenses
A holder cannot be an HDC if he or she knows of a claim to the instrument or defense
against it [UCC 3302(a)]. Knowledge can be imputed if a claim or defense is apparent
on the face of the instrument or the buyer otherwise had reason to know from facts
surrounding the transaction.
10 UNIT FIVE: NEGOTIABLE INSTRUMENTS
A holder has notice if he or she knows that a party to an instrument has a defense
entitling the party to avoid the obligation. Knowing of one defense bars HDC status to all
defenses [UCC 3307(b)].
f. Incomplete Instruments
A holder has notice if an instrument is so incomplete that an element of negotiability is lacking.
Accepting an instrument without knowing it was incomplete when issued is not notice.
g. Irregular Instruments
A holder has notice if an irregularity on the face of an instrument calls into question its
ENHANCING YOUR LECTURE
  HOW TO BUY NEGOTIABLE INSTRUMENTS
 
Negotiable instruments are transferred every business day of the year. Most purchasers of negotiable
instruments do not encounter any problems in further negotiating and transferring the instruments or in
collecting payment on them if they are time instruments. Potential problems exist, however, and purchasers
should take precautions against them.
OVERDUE INSTRUMENTS
Suppose that you wish to purchase a demand instrument as a holder in due course (HDC). By definition,
such an instrument has no stated time for payment and therefore may be overduethat is, the payee may
have demanded payment but not received it, or a reasonable amount of time may have passed. (With
checks, a reasonable amount of time is presumed to be ninety days from the date on the check.) If you have
any doubt about whether a demand instrument is overdue, you should investigate.
NOTICE OF DEFECTS
As a prospective holder, you cannot afford to ignore a defect in any negotiable instrument. A four-month-
old date on a check, for example, constitutes notice that the instrument is overdue. Generally, whenever an
instrument has a defect, you will not qualify as an HDC, and you may be unable to obtain payment. In other
words, it is prudent to determine whether the instrument is complete and, in some situations, whether the
transfer will qualify you for HDC status.
CHECKLIST FOR THE PURCHASE OF NEGOTIABLE INSTRUMENTS
1. Make sure that a demand instrument is not overdue before purchasing it.
2. Make sure that the negotiable instrument has no obvious defectslook for indications that the maker or
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 11
drawer of the instrument might have a valid reason for refusing to pay.
V. Holder through an HDC
Anyone who can trace his or her title to a negotiable instrument back to an HDC has the rights of an HDC
[UCC 3203(b)]. This is the shelter principle.
A. THE PURPOSE OF THE SHELTER PRINCIPLE
This principle helps an HCD to readily dispose of a negotiable instrument, promoting its marketability
and transferability.
B. LIMITATIONS ON THE SHELTER PRINCIPLE
If a holder was a party to fraud or some other illegality affecting an instrument, he or she cannot acquire
HDC rights by reacquiring the instrument from an HDC.
ENHANCING YOUR LECTURE
  HOW TO AVOID PITFALLS
WHEN WRITING AND INDORSING CHECKS
 
As a businessperson (or as a consumer), you will certainly be writing and receiving checks. Both activities
can involve pitfalls.
CHECKS DRAWN IN BLANK
The danger in signing a blank check is clear. Anyone can write in an unauthorized amount and cash the
check. Although you may be able to assert lack of authorization against the person who filled in the
unauthorized amount, subsequent holders of the properly indorsed check may be able to enforce the check
as completed. While you are haggling with the person who inserted the unauthorized figure and who may not
be able to repay the amount, you will also have to honor the check for the unauthorized amount to a
subsequent holder in due course.
CHECKS PAYABLE TO “CASH
It is equally dangerous to write out and sign a check payable to “cash” until you are actually at the bank.
Remember that checks payable to “cash” are bearer instruments. This means that if you lose or misplace the
check, anybody who finds it can present it to the bank for payment.
CHECKS INDORSED IN BLANK
Just as a check signed in blank or payable to cash may be dangerous, a negotiable instrument with a
blank indorsement also has dangers; as a bearer instrument, it is as easily transferred as cash. When you
make a bank deposit, therefore, you should sign (indorse) the back of the check in blank only in the presence
12 UNIT FIVE: NEGOTIABLE INSTRUMENTS
of a teller. If you choose to sign it ahead of time, make sure you insert the words “For deposit only” before
you sign your name. As a precaution, you should consider obtaining an indorsement stamp from your bank.
Then, when a check is received payable to your business, you can indorse it immediately. The stamped
indorsement will indicate that the check is for deposit only to your business account specified by the number.
CHECKLIST FOR THE USE OF NEGOTIABLE INSTRUMENTS
1. A good rule of thumb is never to sign a blank check.
3. Be wary of indorsing a check in blank unless a bank teller is simultaneously giving you a receipt for your
deposit.
4. Consider obtaining an indorsement stamp from your bank so that when you receive checks you can
immediately indorse them “For deposit only” to your account.
TEACHING SUGGESTIONS
1. The concept of negotiability is often confusing to students because it refers to the process by which in-
struments are transferred from one party to another. Ask the class to discuss the process by which
negotiable instruments are transferred. Ask students to play the roles of different parties to a transaction and
2. Ask the students to compare the concept of value in commercial law with that of consideration in contract
law. Not all consideration is value. The extraordinary protection conferred on an HDC is given only when an
3. When considering whether a specific party is an HDC, students might find it helpful to divide the question
into two parts: (1) the party must first be a holder, and (2) if the party is a holder, he or she must be in dues
course. To qualify as an HDC, all of the requirements must, of course, be met.
Cyberlaw Link
Is there any part of the HDC concept that would need to be changed to adapt it to an electronic
payment system?
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 13
DISCUSSION QUESTIONS
1. How are instruments negotiated? Negotiation is the transfer of an instrument in such form that the
transferee becomes a holder. If the instrument is an order instrument, it is negotiated by indorsement and delivery. A
bearer instrument, by contrast, is negotiated by delivery alone since the one in possession of it is entitled to payment
2. Why is a transfer by negotiation preferable to a transfer by assignment? In a transfer of an instrument
by negotiation, unlike a transfer by assignment, the transferee (the party to whom the instrument is transferred) not
only receives the rights of the transferor (the party transferring the instrument) but may also receive even more rights
3. What is the difference between qualified and unqualified indorsements? A qualified indorsement is one
which contains words disclaiming the indorser’s contractual liability (but not warranty liability) on the instrument. A
4. What is the difference between a holder and a holder in due course? A holder is a person who pos-
sesses a negotiable instrument drawn, issued or indorsed to him or his order or to bearer or in blank. To be a holder,
5. How can a holder take an instrument for value? Under UCC 3303(a), a holder can take an instrument for
value by (1) performing the promise for which the instrument was issued or transferred, (2) acquiring a security
6. In what situations can a holder take an instrument for value but still not be accorded HDC status? In a
few exceptional circumstances, a holder can take an instrument for value but still not be accorded HDC status. UCC
7. What is good faith? For purposes of revised Article 3, good faith is “honesty in fact and the observance of
8. What kinds of defects in an instrument will prevent a holder knowing about those defects from acquir-
ing HDC status? A person will not be afforded HDC protection if he or she acquires an instrument knowing, or
9. What are some of the circumstances that, as a matter of law, constitute notice of a particular fact in
commercial law? A holder has notice of a defective instrument if he or she has (1) actual knowledge of the defect;
(2) receipt of a notice about a defect; or (3) reason to know that a defect exists, given all the facts and circumstances
10. What sorts of omissions on the face of a financial instrument will prevent a purchaser from becoming
a holder in due course? A purchaser cannot expect to become an HDC of an instrument so incomplete on its face
ACTIVITY AND RESEARCH ASSIGNMENT
Have students research the shelter principle, and find and read cases that involve this rule. What are the
positive and negative features of the shelter principle? Because this principle may permit one who has acted in
bad faith or taken an overdue instrument, for example, to recover as though that person were an HDC, the students
should consider the purposes served by this rule, as well as whether some alternative rule might be more appropriate.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 2: Skyscraper Building Maintenance, LLC, contracted with Hyatt Corp. to perform maintenance
services for some hotels in Florida. Under an agreement with Skyscraper, J & D Financial Corp. asked Hyatt to make
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 15
and others, seeking in part the amount of the two checks, asserting that they were payable jointly. The court issued a
summary judgment in the bank’s favor. J & D and Hyatt appealed. In Hyatt Corp. v. Palm Beach National Bank, a
state intermediate appellate court affirmed. UCC 3–110(d) provides, “If an instrument payable to two or more persons
is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons
alternatively.” Under the previous version of this provision, if an ambiguity existed as to whether multiple payees were
intended as joint or alternative payees, they were deemed joint payees, but an amendment “reverse[d] the prior rule.”
Footnote 3: Vernon and Shirley Graves leased a commercial building in Indiana to John and Tamara
Johnson, who operated Johnson's Towing & Recovery. The Johnsons’ insurer was Westport Insurance Co. A fire
destroyed the building in 2003. Westport hired Claims Management Services, Inc. (CMS), to pay the claim. On CMS’s
behalf, Robert Davis met with Vernon, who was acting as the rebuilding contractor, and agreed that Westport would
pay with three checks “co-payable” to Johnson’s Towing and Vernon. Westport gave two checks to Vernon, who
Would it have made any difference to the outcome of this case if the Graveses had proved that the
Johnsons forged their co-payee’s indorsement? No. A drawer's obligation is discharged as a matter of law when a
check or other draft, properly issued to joint or alternative payees, is delivered, honored and paid, even if one of the
payees forged the other’s endorsement and embezzled the funds. Of course, the unpaid co-payee may have a cause
against the other co-payee, or a bank.
Does a drawer who acts as Westport didconsulting with, and delivering the first two checks to, the
Gravesescreate an ethical obligation with respect to the delivery of the third check? Why or why not? Yes,
because the Graveses depended on Westport, with whom they came to terms about the cost of the reconstruction, to
Is there a method, other than payment, that would have discharged Westport’s obligation as the drawer
of the check? Yes, payment or certification of a check results in discharge of the obligation to the extent of the

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