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Business law > Chapter 27: Negotiable Instruments > Flashcards

Chapter 27: Negotiable Instruments Flashcards

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1
Q

Commercial paper

A

Written, transferable, signed promise or order to pay specified sum of money; a negotiable instrument

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2
Q

Article 3 of the UCC

A

Defines the types of negotiable instruments and the parties for each

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3
Q

Article 4 of the UCV

A

Covers checks, banking, and electronic funds transfers

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4
Q

Kinds of negotiable instruments

A

1) promises to pay (inc. promissory notes and certificates of deposit)
2) orders to pay (inc. drafts and checks)

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5
Q

Promissory note

A

Unconditional promise in writing made by one person to another, signed by the maker, to pay on demand, or at a definite time, a sum certain in money

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6
Q

Promissory note

A

Unconditional promise in writing made by one person to another, signed by the maker, to pay on demand, or at a definite time, a sum certain in money

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7
Q

Certificate of deposit

A

A promise-to-pay instrument issued by a bank

Acknowledges customers deposit of sum and promises to pay that sum + interest when certificate is surrendered

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8
Q

Draft, or bill of exchange

A

An unconditional order in writing by one person upon another, signed by the person giving it, and ordering the person to whom it is directed to pay upon demand or at a definite time a sum certain in money

Drawee not bound to pay a draft simply because drawer has placed their name on it but may agree to pay draft by accepting it

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9
Q

Drawer

A

Person who writes out and creates a draft or bill of exchange, including a check

Party who gives the order to pay

May also be named as payee

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10
Q

Drawee

A

Part on whom the order is to pay the specified amount/ to whom the draft is addressed (party ordered to pay)

Not bound simply by creation of draft, must accept it. No responsibility until accepted

Usually the buyer in a transaction
Drawee oh a check is the bank

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11
Q

Payee

A

Party of draft to whom payment is made

May be drawer

Usually the seller in a sales transaction

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12
Q

Payee

A

Party of draft to whom payment is made

May be drawer

Usually the seller in a sales transaction

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13
Q

Money order

A

Draft (usually written by a company, banks and non-banks) issued for a fee

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14
Q

Check

A

Order by a depositor on a bank to pay a sum of money to a payee; a bill of exchange drawn on a bank and payable on demand

Draft payable on demand and drawn on a credit union or a bank

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15
Q

Check

A

Order by a depositor on a bank to pay a dum of money to a payee; a bill of exchange drawn on a bank and payable on demand

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16
Q

Maker

A

Party who writes or creates a promisor’s note

Person promising to pay amount specified by the note

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17
Q

Payee

A

Party named in then instrument who is entitled to receive payment

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18
Q

Negotiability

A

Quality of an instrument that affords special rights and standing (protections under article 3 of UCC)

Distinguishes commercial paper and instruments from ordinary contracts and increases the likelihood of payment

Transfer can be made with assurance of payment and no need to investigate the underlying contract

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19
Q

Non-negotiable instrument

A

Contract, note, or draft that does not meet negotiability requirements of article 3

Treated as a contract, governed by contract law

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20
Q

Requirements for negotiability under article 3

A

1- a writing or record
2- signed by the maker or drawer
3- words of negotiability: payable to bearer or order
4- unconditional promise or order to pay
5- sum certain in money
6- payable on demand or at a definite time

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21
Q

Automated clearing house

A

ACH

Electronic check withdrawals authorized by drawers via phone or internet

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22
Q

Requirement: record

A

No particular form is required

Customers of banks may agree to use banks forms as park of their contract with their banks

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23
Q

Requirement: authentication

A

Signatures usually at lower right on the face of instrument but there is no requirement for placement

Authentication may be made by the drawer or the maker or by their agent

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24
Q

Agent signatures

A

Authenticating agent should disclose following on the instrument:

  • the identity of the principal
  • the fact that the authentication was done in a representative capacity

(having this on the face of the instrument avoids liability on the agent’s part)

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25
Q

Representative capacity

A

Action taken by one on behalf of another, as the act of a personal representative on behalf of a decedent’s estate, or as a shareholders bringing a representative action

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26
Q

Agent signatures without representative capacity or identification of lrincipal

A

If instrument fails to show the representative capacity of the person authenticating then the person authenticating may be personally liable for the instrument

Instrument is a final agreement so parole evidence rule applies and cannot introduce external evidence to clarify representative capacity

(Check preprinted with employer’s name is sufficient identification of the principle)

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27
Q

Requirement: words of negotiability

A

Instrument must contain words that permit is transfer

Promissory note: includes promise to pay money (not just acknowledgement of debt)

Certain phrases are required
Pay to the order of x
Pay to x or order
Pay to bearer
Shows no intention of restricting payment to single individual

Checks may be made simply “pay to x” but it is not negotiable on other instruments

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28
Q

Whitaker v. Limeco Corp

A
  • Whitaker and Fletcher loaned Limeco director Kidd $750,000 for the purchase of a hockey team that never happened
  • July 1, 2002 parties entered into “what they referred to as promissory notes” with language stating “on demand, for value received, I promise to pay to R.W. Whitaker… The sum of Three Hundred, Seventy-five Thousand Dollars.”
  • Dec, 11 2003 Whitaker and Fletcher filed suit to recover money
  • trial court dismissed suit for being outside contract’s statute of limitations
  • Whitaker and Fletcher appealed stating notes were negotiable instruments subject to the six year statute of limitations on negotiable instruments
  • court dismissed sui
  • words of negotiability an absolute requirement for a negotiable instruments, without them it is just a contract (suit required to be filed within three years)
  • if document had contained words of negotiability suit could have proceeded
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29
Q

Requirement: unconditional promise or order to pay

A

If duty to pay is dependent upon an event the promise is conditional and the instrument is non-negotiable (enforceable as a contract but not under article 3)

Order for payment from a particular find is negotiable. But the fund must be currently in existence (or the payment is conditional on the creation of the fund)

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30
Q

Reference to collateral in a promissory note

A

Does not affect negotiability

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31
Q

Sum certain

A

Amount due under an instrument that can be computed from its face with only reference to interest rate

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32
Q

Money

A

Any medium of exchange adopted or authorized by the United States, a foreign government, or an intergovernmental organization

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33
Q

Requirement: sum certain in money

A

Negotiable instrument must be for an exact amount of money.

Some exceptions:

  • market rate (non fixed) mortgage
  • note providing for costs and attorney fees in event of litigation

If not payable in money (ex stock or goods) instrument is non-negotiable

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34
Q

Definite time

A

Time if payment computable from the face of the instrument

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35
Q

Requirement: payable on demand or at a definite time

A

Negotiable instruments must be payable on demand or at a definite time

if time is “when convenient” not negotiable. May never be paid. If payment is contingent on an event instrument is not negotiable

Time of payment still considered definite if there are provisions for prepayment/acceleration/extensions

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36
Q

Payable on demand

A

Instrument expressly states it is payable “on demand” at sight, or on presentation

If no date listed then instrument is payable on demand

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37
Q

Smith v. Vaughn

A
  • Vaughn signed document stating that the smiths were lending him $9,900 to be repaid “when you can”
  • 18 months later Smith’s sure for entire amount
  • Vaughn moved for summary judgment saying he did not have to pay if he did not have the ability to do so
  • trial court granted summary judgement. Smiths appealed
  • appeals court: payable “when you can” is not payable on demand and isn’t a negotiable instrument. Parties had an open ended agreement which might form the basis for a contractual obligation
  • potential issue of unjust enrichment and borrower obligation to pay debt
  • case sent back to trial court for resolution of these contract issues
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38
Q

When an instrument contains ambiguous language

A

Rules

  1. Words control figures where conflict exists
  2. Handwriting supercedes conflicting typewritten or printed terms
  3. Typewritten terms supercede preprinted terms
  4. If there is a failure to provide for the payment of interest or if there is a provision for the payment of interest but no rate is mentioned, the judgement rate at the place of payment applies from the date of the instrument
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39
Q

Negotiation

A

The transfer of commercial paper by indorsement and delivery by the person to whom it is then payable in the case of order paper and by physical transfer in the case of bearer paper

The process of transferring a negotiable instrument in a manner that permits.thr transferee to become a holder

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40
Q

Holder

A

Someone in possession of an instrument that runs into that person (is made payable to that person, is indorsed to that person, or is bearer paper)

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41
Q

Order paper

A

Instrument payable to order: payable to the order or any person described in it

Specific words of negotiability determine if order paper or bearer paper

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42
Q

Bearer paper

A

Instrument where no specific person is expressly identified or is only identified by “bearer” (or instruments that include “x person or bearer”

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43
Q

New Mexico v. Herrera

A
  • Herrera found a purse in a dumpster and the purse was returned to the owner.
  • Herrera returned to the dumpster and found more items including a check made out to cash
  • he added “to Joshua Herrera” next to cash on the payee line and indorsed the check (on instruction of the credit union teller)
  • pled guilty to forgery but moved to have indictment dismissed on the grounds that adding his name to a bearer instrument was not forgery
  • court denied motion to dismiss, Herrera appealed
  • court ruled since instrument found was bearer paper adding his name after cash did not change the character of the instrument and since he did not alter the nature of the instrument he could not be charged with forgery
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44
Q

Delivery

A

May be accomplished by constructive or actual transfer of possession of the instrument such that the transferree has exclusive access

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45
Q

Negotiation of bearer instruments

A

Bearer instruments negotiation by delivery (actual or constructive transfer of possession)

Negotiated without regard to whether possession of instrument is lawful. (Some consideration for liability issues)

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46
Q

Negotiation of order instrments

A

Negotiation of order instruments require indorsement and transfer of possession of the paper by the payee or indorsee or their authorized agent

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47
Q

Indorsement

A

Signature of the payee on an instrument

Not necessary that indorsement require words order or bearer to continue to be negotiable as long as words of negotiability are on the front of the instrument. Only need “pay to”

48
Q

Blank indorsement

A

An indorsement that does not name the person to whom the paper, document of title, or investment security is negotiated

Turns an order instrument into a bearer instrument so person who possesses the instrument on which the last indorsement is a blank endorsement is the holder

49
Q

Special indorsement

A

An indorsement that specifies the person to whom the instrument is indorsed (to whom the indorser makes the instrument payable)

Continues the order instrument as an order instrument now negotiable by the indorser

50
Q

Indorsee

A

Party to whom special indorsement is made

51
Q

Town of Freeport v. Ring

A
  • Ring behind on property taxes
  • he received a check made out to him for $11k
  • on the back of the check he wrote “payable to town of Freeport property taxes” and he sent it with a letter to the town offices
  • his property then leined by the tax clerk
  • ring asserted he paid his taxes
  • clerk said not paid as check was not indorsed
  • there was no indorsement as ring had not signed his name, which was required for further negotiation

“Indorsements vary according to the method of signing and the words used along with the signature. The nature of an indorsement also affects the future of the instrument in terms of its requirements for further negotiation.”

52
Q

Qualified indorsement

A

An indorsement that includes words such as “without recourse” that disclaims certain liability of the indorser to a maker or a drawee without affecting the transfer or title or negotiable character of the instrument. Any words that indicate intent to limit liability will work.

(Limits liability to the indorser in the even the maker/drawee does not pay on the instrument)

53
Q

Restrictive indorsement

A

An indorsement that restricts further transfer, such as in trust for or to the use of some other person, is conditional, or for collection or deposit

Ex. “For deposit only”

Specifies the purpose of the instrument or its use but does not prevent transfer or negotiation once the initial restriction is honored

54
Q

Multiple payees and indorsements

A

Possible to name two or more payees on an instrument. Instrument may specify if payable to any one or more or that it is payable to all jointly

If jointly requires indorsement of all payees to negotiate

55
Q

Alternative payees

A

Those persons to whom a negotiable instrument is made payable, any one of whom may indorse and take delivery of it

56
Q

Check city v. L&T enterprises

A
  • L&T issued checks to one of their subcontractors and one of that subcontracts suppliers (presumably payable jointly?)
  • check city cashed the check with only the indorsement or the subcontractor not the supplier
  • it was clear that the check was missing the second required signature
  • check city filed suit against L&T for negligence
  • trial court ruled L&T breached duty by failing to exercise ordinary care and substantially contributing to an alteration of an instrument or forged signature
  • L&T appealed
  • judgment reversed. Check city had failed to obtain necessary signatures for the payees and had liability for the losses as duty to ensure signatures were there and genuine is on the first party to receive the check
57
Q

Holder in due course

A

A holder who has given value, taken in good faith without notice of dishonor, defenses, or that instrument is overdue, and who is afforded special rights and status

Receives the rights of a negotiable instrument without the obligations of the seller who formed the contract (some consumer credit contracts allow for defenses against holders in due course: FTC protections

58
Q

Rights and liabilities of the parties to an instrument

A

Rights of a holder like the rights of a contract assignee - ordinary holder is subject to legitimate defenses against payment

Holders in due course mostly free of contract assignment defenses, unless a consumer credit contract under FTC rule

59
Q

Holder in due course requirements

A

Four requirements for obtaining holder in due course (HDC) status

  • value (consideration in exchange)
  • good faith
  • no knowledge of the instrument’s being overdue or dishonored
  • ignorance of defenses and adverse claims
60
Q

Value

A

Consideration or antecedent debt or security given in exchange for the transfer or a negotiable instrument or creation of a security interest

Not a promise to be performed

Can be value given previously

Courts do not consider if value is sufficient. Just if it has been given

61
Q

Good faith

A

Honest in fact and observance of reasonable commercial standards of fair dealing

Requires a holder of a negotiable instrument act with honest in fact in acquiring the instrument

62
Q

Good faith

A

Honest in fact and observance of reasonable commercial standards of fair dealing

Requires a holder of a negotiable instrument act with honest in fact in acquiring the instrument

63
Q

Close connection doctrine

A

Circumstantial evidence, such as an ongoing or close relationship, that can serve as notice of a problem with an instrument

If a holder has taken so many instruments from its transferor or is so closely connected with transferor that any knowledge the transferor had is deemed transfered to the holder

64
Q

Negotiating when instrument is Dishonored/overdue

A

Still can be negotiated. Transferee is still a holder. But cannot be a holder in due course as the fact that the instrument is circulating overdue/after it has been dishonored is suspicious. There may be adverse claim or defense

Recorded documents do not give notice

Discharge of a party does not prevent the taker from being a holder in due course

65
Q

Defense against payment

A

Prior parties in an instrument may have defenses that entitle them to without payment from the holder (ex:defective merchandise)

If a transferee is aware of any potential defenses they cannot be a holder in due course. Simply a holder

66
Q

In re Trevino

A
  • Trevinos had a mortgage on their home
  • when they went into bankruptcy it was arranged that the trustee would make payments on the mortgage. Plan did not provide for payment of real estate taxes
  • payments of taxes were made both by trustee and mortgage company which resulted in litigation
  • mortgage transfers from HSBC to US bank and trust, who claims they were holders in due course (free and clear of any previous issues and claims)
  • not holders in due course because the note was overdue when transferred and us bank and trust knew that

“A mortgage company or lender that takes over a note following bankruptcy cannot be an HDC.”

67
Q

Negotiable instrument

A

A transferable, written, signed promise or order to pay a specified sum of money

68
Q

Cashier’s check

A

Draft drawn by a bank on itself

69
Q

Teller’s check

A

Draft drawn by a bank on another bank

70
Q

Traveler’s check

A

Check payable on demand provided it is countersigned

71
Q

Acceptor

A

Drawee who has accepted the liability of paying the amount specified in the draft

72
Q

Secondary obligator

A

Aka accommodation party

Person who allows their name to be added to add strength to the collectability of an instrument

73
Q

Who can be a party to a negotiable instrument

A
  • natural person
  • artificial person
  • unincorporated enterprise
74
Q

Statute of limitations on negotiable instruments

A

Generally 3 years

CDs and accepted drafts have a 6 year statute

75
Q

Williams v. Huston plants & garden world

A
  • Green valley growers (owned by Massey) contracted for services and materials from KC Crushed (owned by Smith)
  • GVG took out a loan and paid proceeds to KC Crushed
  • Massey and Smith “executed” (wrote) a promissory note saying that Massey (named) would pay Smith (named) the money with interest
  • GVG went into bankruptcy (trustee Randy Williams)
  • Smith and Massey contend that the note was between the companies KC Crushed and GVG, not themselves as individuals, ergo they are not liable for the debts as individuals
  • Smith claims signed without reading the note believing signing for KC crushed

Holding: Smith and Massey liable. GVG wrote payment checks to Smith, not KC Crushed. + Parties presumed to know contents of documents they signed (subjective beliefs cannot contradict what is written in the contract) and obligations determined Wiley from written agreement p

76
Q

Defenses holder in due course may be subject to

A

“real defenses”

  • infancy
  • duress
  • legal incapacity
  • illegality of the transaction
  • fraud in the factum (inducing the obligor to sign the instrument without knowledge of it’s essential character and terms)
77
Q

Defenses a holder in due course is free of

A

“personal defenses”

Including:

  • fraud in the inducement (obligor could still know content of instrument)
  • misrepresentation
  • lack of consideration
  • undue influence
  • breach of warranty
  • discharge by payment to someone other than the holder of the instrument
  • statutory violations
78
Q

Missing indorsement

A

If parties intend to negotiate an order instrument but fail to indorse, there is no negotiation and the transfer has the effect of a contract assignment

79
Q

Correction of name by indorsement

A

May be used only when the instrument was intended to be payable to the person making the correction

80
Q

Bank indorsement

A

Between banks, any agreed method which identifies the transferor bank is sufficient

81
Q

Agent or officer indorsement

A

An instrument payable to the order of an office holder may be negotiated by the person who holds the office at that time

An instrument payable to a corporation maybe indorsed by any corporate officer

82
Q

Forged and unauthorized indorsements

A

Not a valid indorsement

83
Q

Effect of incapacity or misconduct on negotiation

A

Negotiation is effective even though:

  • made by a minor
  • an act beyond corporate powers
  • obtained by fraud, duress, or mistake
  • a part of an illegal transaction or breach of duty
84
Q

Lost order instruments

A

Finder does not become holder because instrument not indorsed and delivered

85
Q

Lost bearer instruments

A

Finder as possessor is the holder and entitled to enforce payment

86
Q

B.D.G.S inc v. Balio

A

BDGS contracted with Balio to manage a warehouse including collecting and depositing rent

  • discovered that many checks had been made out to slightly wrong name (DBGS) and endorsed over to another company (owned by Balio)
  • brought suit against Balio, the other company and the ban
  • bank determined to be liable
  • it is the bank’s responsibility to verify that the party with the checks is actually the payee and authorized to deposit the checks
87
Q

Imposter Rule

A

Any person may indorse payee’s name. Indorsement is treated as genuine and cannot be attacked.

Doesn’t applies when a valid check to an actual creditor is forged

Negligence of drawee not required

88
Q

Unlimited adjusting group Inc v. Wells Fargo bank

A
  • Won Charlie Yi solicited and was given money by investors under the claim he would invest it in equities
  • he created his own account at wells fargo, deposited the money there, and later absconded with it
  • investors filed against wells fargo to recover losses (claim lack of ordinary care)
  • original and appeal court ruling for Wells Fargo
  • the checks were made out to and deposited by intended payee, even if not always precise. Since investors intended money to go to Charlie’s company bank is not liable for losses simply because the investors later realized he was untrustworthy. Checks were essentially legitimate
89
Q

Reasons for attaining holder in due course status

A

to obtain payment on the negotiable instrument free of any underlying problems between the original parties

90
Q

Limited Defenses

A
  • ordinary contract defenses
  • fraud in the inducement
  • miscellaneous defenses (non-delivery, duress via threat, prior payment or cancellation, breach of warranty, unauthorized completion)

May be called “personal defenses”

not valid against a holder in due course

91
Q

Ordinary contract defenses

A

Defenses that involve breach of contract issues
- lack, failure, or illegality of consideration
- misrepresentation of goods
- failure to perform
defects to underlying transactions

HDC not subject to these defenses with exception for certain consumer contracts

92
Q

Fraud in the inducement

A

Fraud that occurs when a person is persuaded or induced to execute an instrument because of fraudulent statements

cannot be defense against HDC

93
Q

Classifications of defenses and Holders in due course

A

Limited defenses- HDCs are not subject to these defenses

Universal defenses (real defenses)- HDCs are subject to these defenses

Holders subject to all defenses

94
Q

RR Maloan Investments v New HGE Inc

A
  • payee Shelly Mckee got check from HGE for purported rolex (check postdated three days)
  • she indorsed the check and presented it to RR Maloan, which cashed it for her
  • HGE discovered watch was counterfeit and issued stop payment, so their bank refused to honor the check
  • RR Maloan stated they were a holder in due course and sued HGE for payment
  • Since HGE not present on trial date, default judgement to RR Maloan. Maloan appealed
  • Question before the court:
    o do you lose HDC status because it was a post-dated check?
    BUT the bank is not actually required to honor the post-dated date, as long as legit can pay it then
    o Is fraud on the underlying transaction a defense against an HDC
  • RR Maloan found to be holder in due course and fraud by payee is not a defense against an HDCs right to payment
    o Postdating of check does not change HDC status (does not impose duty on RR Maloan to investigate circumstances surrounding check)
95
Q

Universal Defenses

A

Regarded as so basic that the social interest in preserving them outweighs the social interest of giving negotiable instruments the freely transferable quality of money. May be raised against all holders. Includes:

  • fraud in the instrument (in factum)
  • Forgery/ lack of authority
  • Duress depriving control
  • incapacity
  • illegality
  • alteration
96
Q

Fraud in the factum

A

Fraud committed by deceiving the signing party about the nature of the document being signed (false representation)

a universal defense

97
Q

Forgery or lack of authority

A

Defense that a signature was forged or signed without authority

universal defense

that negligence of drawer helped wrongdoer does not prevent drawee from raising defense of forgery

98
Q

Duress depriving control

A

If a negotiable instrument is executed or indorsed in response to a force of such a nature that, under general principles of law, duress makes the transaction void (not just voidable)

Universal defense

Physical duress = universal defense
economic duress = personal/ limited defense

99
Q

Incapacity

A

Incapacity is a universal defense if:

  • raised by a minor
  • if effect of incapacity is to make the instrument void (formal declaration of insanity)
100
Q

illegality

A

Instrument is void by law if illegal

universal defense

101
Q

Alteration

A

The unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument

recovery is still possible under original terms if proof of original terms available

universal defense

102
Q

Effect of alteration on negotiable instrument

A

If alteration is fraudulent then the person whose obligations affect by the alteration is discharged of the liability under the instrument

instrument may still be enforced on original terms by holders in due course who had no notice of the alteration

103
Q

Primary party

A

Party to whom the holder in due course must turn first to obtain payment

For a note or CD: the maker

For a draft: the drawee (it the drawee has accepted the draft. Though the bank is not primarily liable for the instrument in the case of a check they are still the party turned to first)

104
Q

Secondary parties

A

Called secondary obligors under revised article 3, parties to an instrument to whom holders turn when the primary party, for whatever reason, fails to pay the instrument

Notes: indorsers

Checks and drafts: drawers and indorsers

Leaves the secondary party to collect from the primary party

105
Q

Indorser

A

A party who signs and transfers a negotiable instrument; secondary party (or obligor) on a note

106
Q

Steps for enforcing contract liability

A

1) presentment

2) dishonor and notice of dishonor

107
Q

Presentment

A

Formal request for payment on an instrument according to it’s terms

Primary party then required to pay unless there are valid defenses

108
Q

Primary party’s rights on presentment

A

can require presentment be made in a “commercially reasonable manner”

can make specific requirements for receipt of funds (authorization, ID, etc…)

Can require a valid indorsement prior to payment

109
Q

Dishonor

A

Status when the primary party refuses to pay the instrument according to it’s terms

Holder left to turn to secondary parties

110
Q

Notice of dishonor

A

Notice that an instrument has been dishonored required from primary party refusing to pay. Can be oral, written or electronic but subject to time limitations

Non-bank primary parties must give notice of dishonor within 30 days, at which time the holder can turn to secondary parties for payment

111
Q

reason for dishonor

A

A primary party must have a valid reason for refusing to pay or they will be liable for wrongful dishonor

Valid reasons include any valid defenses or failure of the presenting party to provide sufficient identification

112
Q

Warranties

A

Promises that parties to an instrument give to other parties to that instrument that provide assurances of payment and grounds for liability

At both creation and at transfer

113
Q

Warranties of those who present an instrument for payment

A

Warrants that presenter:

  • is authorized to present and enforce the draft
  • that the draft has not been altered
  • that the presenter had no knowledge that the signature of the drawer is forged
114
Q

Presenter

A

Those who present the instrument to the primary party for payment

115
Q

Warranties of transferors

A
  • that they are entitled to enforce the instrument
  • that the signatures are genuine and authorized
  • that there has been no alterations
  • that there are no defenses to an instrument that are good against the transferor (may be disclaimed with a qualified indorsement)
  • that the transferor has no knowledge of any insolvency proceeding

Warranties always return responsibility to the first person who could have prevented the problem

116
Q

Artisan bread senario

A
  • Artisan breads receives promissory note for $2,500 from Diego’s
  • Will (A/R employee) stamps ab endorsement on the back of the note and then fails to put it away correctly and it is lost
  • Diego’s rebilled for same services (told past due).
  • Diego’s manager tells Will that the note had been presented to them by factoring firm Financial Advisors and they had paid it since artisan had endorsed it so they assumed it was a legit firm
  • Financial Advisors said they had received the note in the mail with a preprinted return envelope and had issued payment to that address (not the artisan breads addresss
  • because there was an authorized blank endorsement on the note financial advisors properly presented it for payment. Diego’s may be able to recover from artisan breads /not pay twice as Artisan is reasonable for lax internal controls that allowed theft
  • it there had been no blank indorsement Diego’s would be entitled to demand returned funds from Financial Advisers who would then have to go after forger (FAmay try to use negligence defense against Artisan)

Business law (15 decks)

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