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CHAPTER 27
LIABILITY, DEFENSES, AND DISCHARGE
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 27.1—LEGAL REASONING QUESTIONS
1. On Evans’s motion for summary judgment, what evidence did the opposing parties
emphasize? Based on this evidence, what did the court conclude? Envision Printing, LLC
held an unpaid note signed by Bernie Evans, chief executive officer of Red Rhino Market Group,
LLC, purportedly on that firm’s behalf. Envision filed a suit in a Georgia state court against
Evans to recover the amount.
Evans filed a motion for summary judgment, asserting that he was not personally liable
2 UNIT FIVE: NEGOTIABLE INSTRUMENTS
2. How did the rules of contract construction apply in this case? According to the state
intermediate appellate court in the Envision case, “the cardinal rule of contract construction is to
ascertain the intention of the parties.” In considering the contract—the note—the court found
“ambiguity as to the capacity in which Evans signed” but resolved that ambiguity by applying this
rule. The court identified three steps to construing a contract. First, as a matter of
3. Suppose that the name Red Rhino Market Group, LLC had not been included on the
note. Would Evans have been personally liable for its payment? Discuss. If “Red Rhino
Market Group, LLC” had not been included on the note, it is not likely that Bernie Evans, Red
Rhino’s chief executive officer and the signatory on the note, would have been personally liable
for its payment.
CHAPTER 27: LIABILITY, DEFENSES, AND DISCHARGE 3
CASE 27.2—LEGAL REASONING QUESTIONS
1A. If the court had accepted Chauvin’s claim that Mills’s funds represented an
investment, would the result in this case have been different? Explain. In this case, it
would have been difficult for the court to conclude that the $395,750 Gregory Mills paid to
2A. Do the facts in this case support the court’s conclusion that Mills took Chauvin’s
note as an HDC? Why or why not? In the Mills case, the note at the center of the dispute was
drafted by Chauvin (its maker), signed by him, and transferred to Mills. It included an
unconditional promise to a pay a fixed amount of money. In other words, the note was a
3A. How did Mills’s status as an HDC affect Chauvin’s asserted defense? In the Mills
case, the appellate court concluded that “Mills took the note as a holder in due course.” The
court also concluded that the trial court’s “determination that Chauvin failed to establish a bona
fide defense of lack of consideration is supported by the record.”
4 UNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Signature liability
The applicable provision in this scenario is the fictitious payee rule [UCC 3–404(b) and 3–405].
2A. Rule
In most circumstances, an unauthorized indorsement will not bind the maker or drawer. Under
the UCC provisions known as the fictitious payee rule, however, when a person signs as or on
3A. Losing party
Under the fictitious payee rule, Golden Years is barred from recovering the amount of the
checks from the bank and thus must bear the loss here. In effect, the fictitious payee rule
validates a forged payee’s indorsement, and the instrument is payable out of the drawer’s
4A. Warranties
Any person who transfers an instrument for consideration warrants in part to all subsequent
transferees and holders who take the instrument in good faith that all signatures are authentic
and authorized and that the instrument is not subject to a defense or claim of any party that can
the signature of the drawer of the instrument is unauthorized.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Because signature stamps create so many opportunities for embezzlement, they
should be banned. It is much harder to engage in embezzlement with checks when some real
CHAPTER 27: LIABILITY, DEFENSES, AND DISCHARGE 5
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Rye signs corporate checks for Suchin Corporation. Rye writes a check payable to
U-All Company, even though Suchin does not owe U-All anything. Rye signs the check,
forges U-All’s indorsement, and cashes the check at Viceroy Bank, the drawee. Does
2A. Skye asks Jim to buy a textbook for her at the County Community College campus
bookstore. Skye writes a check payable to the bookstore and leaves the amount blank for
Jim to fill in the price of the book. The cost of the book is $100. Jim fills in the check for
$200 before he gets to the bookstore. The clerk at the bookstore gives Jim the book and
takes the check for $200. Was the bookstore a holder in due course (HDC) on Skye’s
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
27-1A. Material alteration
No. Material alteration of a negotiable instrument may be a real defense against payment on
the instrument. As against a holder in due course, the raising of the amount (material alteration)
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
27-2A. Signature liability
From all the facts given, Keith qualifies as an HDC. He gave value, took in good faith, and was
without notice of a defense, dishonor of the instrument, or of the instrument being overdue.
Only real defenses claimed by a party are good as against an HDC. One such defense is a
qualified and unqualified indorsers who receive consideration on transfer make certain
warranties to all subsequent holders [UCC 3–416]. Two warranties of interest here are the
following:
(a) The transferor warrants that no defense of any party is good against him or
27-3A. Defenses
Frazier can recover the $1,500 from Kennedy if he is a holder in due course (HDC). He will be
an HDC only if he, as a holder, took the check (a) for value, (b) in good faith, and (c) without
notice that the check was overdue or dishonored or that a claim or defense against it exists. In
CHAPTER 27: LIABILITY, DEFENSES, AND DISCHARGE 7
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
27–4A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Defenses
When an instrument is transferred by negotiation, the transferee becomes a holder. A holder
can become an HDC if the holder takes the instrument for value, in good faith, and without
notice of any defects. An HDC takes an instrument free of most defenses against payment that
could be asserted against the transferor. Defenses against payment fall into two categories.
Universal defenses are good against all holders, including HDCs. Personal defenses are used
to avoid payment to an ordinary holder, but not an HDC. Personal defenses include breach of
contract, ordinary fraud, and any other defenses that can be asserted to avoid payment on a
27–5A . Defenses
Yes, the bank was free of the defense asserted in these facts. A holder in due course (HDC) is a
special-status transferee of a negotiable instrument who, by meeting certain acquisition
requirements, takes the instrument free of most defenses and all claims to it. A holder can
become an HDC if the holder takes the instrument for value, in good faith, and without notice of
8 UNIT FIVE: NEGOTIABLE INSTRUMENTS
In the actual case on which this problem is based, the court issued a ruling in the bank’s
favor.
27–6A. Unauthorized 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.
27–7A. Signature liability
The parties who can be held liable for the loss on the unpaid checks in the Albarran case are R.
Cleaning Impact, Inc. (RCI), and its owners, Guillermo, Guadalupe, Ruben, and Rolando
Albarran.
Generally, when an indorsement is forged or unauthorized, the burden of loss falls on the
first party to take the instrument with the forged or unauthorized indorsement. But this rule has
CHAPTER 27: LIABILITY, DEFENSES, AND DISCHARGE 9
27-8A. SPECIAL CASE ANALYSIS—Defenses
Case No. 27.2
Mills v. Chauvin
Supreme Court of New York, Appellate Division, Third Department, 2013.
103 A.D.3d 1041, 962 N.Y.S.2d 412.
(a) Issue: What document was at the center of the dispute in this case? The
document at the center of the dispute in this case was a note. Over time, Gregory Mills paid
(b) Rule of Law: What are the elements of consideration? And what are the
requirements for attaining the status of a holder in due course (HDC)? Consideration is the
value given in return for a promise or a performance. For example, cash given in return for a
promise to repay it would be consideration for the promise. Consideration has two elements: (1)
something of legally sufficient value given in exchange for the promise or performance and (2) a
bargained-for exchange.
(c) Applying the Rule of Law: Did the document at the center of the dispute in this
case satisfy the elements of consideration? Did the party in possession of the document take it
as an HDC? Explain. The note at the center of the dispute in this case satisfies the elements of
10 UNIT FIVE: NEGOTIABLE INSTRUMENTS
(d) Conclusion: Whom did the court determine was liable? Why? The trial court in
the Mills case ruled that the note signed by Chauvin and in the possession of Mills “was valid
and enforceable and that Mills was entitled to recover pursuant to its terms.” Chauvin was liable
for its payment. A state intermediate appellate court affirmed the judgment of the lower court.
Chauvin argued that the note lacked consideration because Mills’s payments represented
investments in the Amelia Village project, not funds to be repaid by Chauvin. In rejecting this
27-9A. A QUESTION OF ETHICS—Primary and secondary liability
(a) Barnard is liable on the Trustmark notes as their maker. A maker has primary
liability. A primarily liable party is absolutely required to pay an instrument—the liability is not
contingent, and a holder of the note (Trustmark, in this case) does not have to proceed against
any collateral (the trucks) to enforce payment.
CHAPTER 27: LIABILITY, DEFENSES, AND DISCHARGE 11
(b) Ethics focuses on the application of moral principles in everyday life. Business
ethics focuses on the application of these principles in the context of business. An under-
standing of business ethics is important to the long-run viability of a business, the well being of
its owners, operators, officers, directors, and managers, and the welfare of its employees.
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
27–10A. Agents’ signatures
(a) No, an authorized signatory on a corporate account cannot be held personally
liable for corporate checks returned for insufficient funds. Under UCC 3–402(c), “an authorized
(b) The Helmers are not personally liable on Event Marketing’s check. They signed
the check on behalf of the corporation. As noted in the answer to the previous question, under
