Commercial Paper

Question 1

How should commercial paper essay questions be approached?

Answer 1

1. Note or draft?
2. Identify the parties.
3. Negotiable?
4. Properly negotiated?
5. HDC?
6. What are P’s causes of action?
7. What are D’s defenses?
8. If D is liable, can D pass liability to someone else?

Question 2

What are the types of paper?

Answer 2

1. Note: maker’s promise to pay payee/bearer
   (a) Certificate of deposit: issued by bank and contains (i) acknowledgment of $ received + (ii) promise to repay.
2. Draft: drawer orders drawee (bank) to pay payee
   (a) A check is any draft drawn on a bank and payable on demand. There are 5 types of checks.

Question 3

What are the 5 kinds of checks?

Answer 3

Checks are a draft (order to pay) involving the drawer who orders the drawee (bank) to pay payee.

1. Ordinary check
2. Certified check
   - ordinary check that bank has accepted (agreed to pay)
3. Cashier’s check
   - drawer and drawee are the same bank.
4. Teller’s check
   - check drawn by one bank against another bank
5. Traveler’s check
   - demand instrument requiring countersignature by person who already signed

Question 4

Whether an instrument is negotiable depends on its form. To be negotiable, an instrument must be a written and signed:

Answer 4

(a) unconditional
(b) promise or order to pay

(c) fixed amount of $ that:
(i) is payable to order or bearer when issued or first in possession of a holder;
(ii) is payable on demand or at definite time; and
(iii) states not authorized undertaking or instruction..

Question 5

T/F: Negotiability is determined at time of issuance.

Answer 5

True.

Question 6

If an instrument says it is non-negotiable, is it?

Answer 6

Yes, unless it is a check.

Question 7

Why is negotiability important?

Answer 7

If the paper is negotiable (form) and properly negotiated (transferred), it may reach the hands of a HDC. HDC obtains better rights than the transferor and can get paid from obligor even though the obligor (maker or drawer) has defenses.

If the instrument is not negotiable, it just is a regular contract, meaning that the transferee has no better rights than the transferor.

Question 8

A note says, “I promise to pay to the order of Abe Smith $10,000 if I make the highest score on the next UBE.”

Is this note negotiable?
(hint: meet first element of unconditional)

Answer 8

This is an express conditional promise and it is not negotiable.

Question 9

A note says, “This note is subject to the contract that the parties signed on May 1, 2020.”

Is this note negotiable?
(hint: meet first element of unconditional)

Answer 9

This is a promise or order “subject to” or “governed by” another record. This destroys negotiability because it is conditioned on the controlling contract.

Question 10

A note states, “I promise to pay to the order of Store for $5,000 for a specific item.”

Is this negotiable?
(hint: meet first element of unconditional)

Answer 10

A statement of consideration is still negotiable even though the note states that there is consideration for the monetary payment.

Question 11

A note states, “This note is in accordance with the contract that the parties signed on May 1, 2020.”

Is this note negotiable?
(hint: meet first element of unconditional)

Answer 11

This note is conditional because it references to another record (as per or in accordance). It does not incorporate rights or obligations from another record or make the promise or order subject to another record.

Question 12

What can be incorporated by reference that would not harm negotiability?

Answer 12

1. rights regarding collateral
2. right pre-payment (early payment)
3. acceleration

Question 13

A note states that payment must be from “the proceeds of my Summer 2018 wheat crop.”

Is this note negotiable?
(hint: meet first element of unconditional)

Answer 13

Yes. It is negotiable because a limitation to payment to a particular fund or source does not destroy negotiability.

Question 14

T/F: Consumer protection language in a note or order does not destroy negotiability, but it prevents holder from being HDC.

Answer 14

True.

Question 15

A check provides that it is payable for $550.00 in numerals but “five hundred dollars” in words.

How much is the check payable for?

Answer 15

$500. Words rule.

Question 16

T/F: If the instrument does not state the date it is due, it is a demand instrument.

Answer 16

True, the amount of the note or order is payable on demand.

Question 17

A note is payable on January 1, 2020 but if Uncle Fred dies earlier, the holder may accelerate the note to be payable 30 days after his death.”

Is this payable at a definite time to maintain negotiability?

Answer 17

Yes, it is payable at a definite time. Acceleration of due date clauses are permissible.

Question 18

T/F: A check which the drawer signs but does not fill in the name of a payee is bearer paper.

Answer 18

True, aka didn’t put “payable to _____.” When this happens, the forger can use the bearer paper by indorsing it and cashing in the check.

Question 19

A check is payable to “Good luck on the bar exam.” What type of paper is at issue?

Answer 19

Bearer paper.

Bearer language includes:

• “payable to bearer”
• “payable to the order of bearer”
• indication that possessor entitled to payment
• no payee stated
• “to cash” or “to order of cash”
• not payable to identifiable person

Question 20

A check payable “to the order of Frank Smith” is what type of paper?

Answer 20

This is order paper. It is typically pre-printed on checks.

Question 21

If check has both order and bearer paper, what type of paper is this?

Answer 21

This is bearer paper. It controls over order paper.

Question 22

T/F: A note or non-check draft “payable to H” is not negotiable.

Answer 22

True. It is not negotiable because it lacks bearer language and does not include order language.

Question 23

T/F: A person becomes a holder through a transfer that qualifies as a negotiation.

Answer 23

True.

Question 24

What is the negotiation (transfer) for an instrument that states: “pay to the order of Becky and Cindy”?

Answer 24

This order is payable to Becky and Cindy and each must indorse, which is written on either the instrument or attached to the instrument.

Question 25

Does A have possession of the instrument? If no, what is the result?

Answer 25

A person becomes a holder through a transfer that qualifies as a negotiation. If there has been no transfer aka no possession, then the person is not a holder.

Question 26

If a person has possession of an order instrument, is not the named payee, and all the necessary signatures on the instrument are genuine, what is the result?

Answer 26

The person is a holder and can negotiate the instrument.

Question 27

If a person has possession of an order instrument and is the named payee, what is the result?

Answer 27

The person is a holder and can negotiate the instrument.

Question 28

If a person has possession of a bearer instrument, what is the result?

Answer 28

This person is a holder and can negotiate the instrument. Bearer instruments are negotiated through transfer.

Question 29

What is an indorsement?

Answer 29

An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument.

Question 30

A check is payable “to the order of H.” H signed their name on the back of the check.

Has this order been indorsed (and thus is negotiated/transferred)?

Answer 30

Yes. H has made a blank indorsement and the check is now bearer paper so that anyone in possession of the check has the right to cash it.

Question 31

A check is payable “to the order of H.” H wrote on the back, “Pay to C,” and then signs their name immediately below.

Has this order been indorsed (and thus is negotiated/transferred)?

Answer 31

Yes, H has made a special indorsement and the check is order paper. Further negotiation of the check will need C’s indorsement.

Question 32

A check is payable “to the order of H.” H writes on the back, “For deposit in my Bank account #007 only,” and signs their name immediately below.

Has this order been indorsed (and thus is negotiated/transferred)?

Answer 32

H has made a restrictive indorsement. If the depositary bank does not comply with the indorsement, the depositary bank will be liable to H for conversion.

Question 33

Karla receives a check payable “to the order of Carla.” She may indorse with either her incorrect or correct name.

Answer 33

True. A person giving value for the check may require her to indorse in both names to make the chain of title clear.

Question 34

T/F: Negotiation is ineffective if a payee lacks capacity.

Answer 34

False. Negotiation is effective even if payee lacks capacity (minor, mental illness, etc.)

Question 35

What are the elements of a holder in due course (HDC)?

Answer 35

1. negotiable instrument
2. holder
3. authenticity not apparently questioned
4. paid value for the instrument
5. good faith - honest in fact (subjective) + observance of reasonable commercial standards of fair dealing
6. without notice at time of instrument acquisition

Question 36

Is this a negotiation: “pay half to CK, signed X”?

Answer 36

No. An indorsement that attempts to convey less than the complete amount of the instrument is not a negotiation and the transferee is not the holder.

Question 37

If the holder pays $2,500 of the agreed $5,000 for a $6,000 note, is this holder a holder in due course?

Answer 37

Yes, but only a holder in due course in proportion to the consideration paid - half value or $3,000.

Question 38

If the holder pays $5,000 for a $6,000 note but has paid the full agreed consideration ($5,000), is this holder a holder in due course?

Answer 38

This is known as a discount. The holder is a holder in due course for full value ($6,000).

Question 39

T/F: If the holder does not qualify as a HDC but was a transferee of a HDC, the holder will have the rights of a HDC unless the holder was a party to fraud involving the instrument.

Answer 39

True.

Question 40

T/F: Once you get HDC status, it cannot be taken away.

Answer 40

True.

Question 41

HDCs are protected against what?

Hint : FAIDS

Answer 41

Real defenses, including:

Fraud

Alteration
Adjudication of incompetence

Illegality
Infancy

Discharge (insolvency)
Duress

Statute of limitations (note: 6 yrs; if unaccepted date, 3 years after dishonor otherwise 10)
Suretyship

Question 42

A issues a check for $500 to P who promptly indorses the check in blank and places it in the front seat of his car. The check blows out of the car into the hands of E. E sells the check to H who qualifies as a holder in due course (HDC).

P finds that H has the check and demands that H return it to him. Must H return the check?

Answer 42

No. H may keep the check because she is a HDC. Even a true owner like P cannot recover an instrument from a HDC.

Question 43

An agent escapes personal liability on an instrument if:

Answer 43

1. principal is identified in instrument and

2. signature unambiguously shows it was made on behalf of principal

Question 44

G signs a promissory note “PP, by G.” Is the agent G personally liable for this note?

Answer 44

No. She is not personally liable because the note identifies the principal (PP) and the word “by” unambiguously shows G signed on behalf of PP.

G could have also used “agent for” or “Treasurer.”

Question 45

T/F: Agent is liable to HDC unless agent can prove that holder had notice of the representative nature of agent’s signature.

Answer 45

True. But difficult.

Question 46

T/F: Agent is liable to a non-HDC unless agent can prove that the original parties did not intend the agent to be liable.

Answer 46

True.

Question 47

T/F: Agent for drawer is not personally liable if principal’s name is on check.

Answer 47

True. The agent does not need to indicate agency capacity.

Question 48

H pays phone bill with a check. Before phone company can sue H to collect the check, the company must first present the check to the drawee (Bank).

What happens if the phone company waits 31 days to present?

Answer 48

If the company waited more than 30 days to present, H is still liable unless the drawee (Bank) has become insolvent.

Question 49

What is dishonor?

Answer 49

Dishonor is when the drawee (Bank) refuses to pay the instrument upon proper payment.

(aka when the drawer did not have sufficient funds in drawer’s account to cover the check)

Question 50

The payee of a check, P, indorses the check “without recourse, P.” Is this liability disclaimer allowed?

Answer 50

Yes, this indorsement prevents P from incurring contract liability of an indorses and is effective merely to pass title.

Question 51

What is the order of liability for indorsers?

Answer 51

Indorsers are liable to each other in the order of their signatures. But they are liable only after 3 conditions are satisfied: presentment, dishonor, and notice of dishonor.

Question 52

The payee of a check, PL, indorses the check “pay to JG, PL.” JG waits two months before presenting the check to the drawee Bank for payment. The check bounches.

Can JG collect from PL?

Answer 52

No. JG cannot collect from PL because PL’s liability was discharged after 30 days (and it’s been two months). JG should have presented to the drawee within 30 days to hold PL to her indorser’s contract.

Question 53

D draws a check on Bank for $500 payable to P. P deposits the check into her account at Another Bank. When Another Bank presents the check to Bank, Bank provisionally gives Another Bank the $500.

Bank notices that D’s account only had a balance of $10 but decides to see if D deposits enough money to cover the check. If Bank does not revoke the provisional settlement to Another Bank by midnight of the next banking day, what is the effect?

Answer 53

Final payment occurs and Bank may not recover the money from Another Bank of P. Bank may still pursue its customer D for the money. Bank could also pursue Another Bank if Another Bank breached any of its presentment warranties.

Question 54

T/F: Drawee who pays on forged instrument is liable to the payee in conversion.

Answer 54

True. The person suing for conversion must have received delivery of the instrument. Lost in the mail = sucks but cannot sue for conversion.

Question 55

T/F: Drawee bank may pay checks until it knows that the drawer has died and has a reasonable opportunity to act on that knowledge.

Answer 55

True. Drawee bank may pay for no more than 10 days after drawer’s death if the bank knows of the drawer’s death.

If someone claiming an interest in the account asks that the drawee stop paying the drawer’s checks immediately, the drawee bank must comply.

Question 56

What are accommodation parties?

Answer 56

Accommodation parties are people who sign an instrument to lend his/her credit to another party but who do not receive any direct benefit. aka a co-signer

Question 57

Son wants to buy a car on credit but Dealer is reluctant to Son’s weak credit record. Son convinces Mom to co-sign the note and Dealer sells Son the car. Mom is liable as an accommodation maker. What does this mean?

Answer 57

Dealer may collect the note from Mom and does not need to attempt to collect from Son first.

Question 58

Son wants to buy a car on credit but Dealer is reluctant to Son’s weak credit record. Son convinces Mom to co-sign the note so she co-signs. Immediately before her signature, Mom writes “collection guaranteed only” and Dealer sells Son the car.

What does this mean?

Answer 58

Mom is liable as an accommodation maker. But Dealer cannot collect the note from Mom until Dealer attempts to recover from Son or it is clear that Dealer could not collect from Son.

Question 59

A check is payable to P. The first indorsement on the back of the check is A.

What is the effect of A’s indorsement?

Answer 59

A’s indorsement is odd because it is not in the chain of title. So it can be deduced that A is an accommodation indorsement, which is an indorsement by a person who was not the holder of the instrument (is outside chain of title).

Question 60

Who makes transfer warranties?

Answer 60

The defendant or transferor who receives consideration.

Transfer warranties do not arise in a gift context.

Question 61

Firm pays Clerk with a check of $1000 drawn on Bank. Clerk deposits the check into Clerk’s account at Another Bank. Another Bank presents the check to Bank for payment and Bank pays.

Clerk made what warranties?

Answer 61

Clerk made transfer warranties to Another Bank when Clerk deposited the check.

Question 62

Who are transfer warranties made to?

Answer 62

(a) immediate transferee, and
(b) subsequent transferees if transferor indorsed

This is not made to drawees and makers, who can never sue for breach of transfer warranty because they get instruments presented to them.

Question 63

Who makes presentment warranties?

Answer 63

The defendant (presenter and previous transferors) make presentment warranties that check was properly payable.

Question 64

Firm pays Clerk with a check of $1000 drawn on Bank. Clerk deposits the check into Clerk’s account at Another Bank. Another Bank presents the check to Bank for payment and Bank pays.

What types of warranties do Clerk and Another Bank make?

Answer 64

Clerk and Another Bank (drawee) made presentment warranties to Bank.

Question 65

T/F: If the payor has not paid the instrument (e.g. check bounces), then the holder will sue the indorser on the indorser’s contract.

Answer 65

True.

Question 66

T/F: If the payor has paid and later discovers the payor should not have paid (e.g. the check was forged or note was altered), then the payor will attempt to sue the indorser for breach of warranty.

Answer 66

True.

Question 67

P signs my name on a promissory note. Who is liable on the note?

Answer 67

I am not liable because I did not sign the note, but P is liable because their signature (albeit in letters that spell my name) appears on the note.

Question 68

F steals D’s checkbook and forges D’s signature to a check payable to “Cash” for $400. F cashes the check at Store.

What is the effect?

Answer 68

F’s forgery of D’s name acts as F’s signature and F is liable on the drawer’s contract.

If the drawee bank does not pay the check, it cannot recover from Store because Store did not breach any presentment warranties unless it knew that D’s name was forged.

Question 69

F removed one check from D’s checkbook and forges D’s name as drawer. The drawee bank pays the check and returns it with D’s February statement but D does not check their statement until July.

What is the effect?

Answer 69

Because one year has not elapsed, D may recover the amount of the check from their bank in a not properly payable action unless bank can prove that the 4-month delay somehow prevented the bank from catching and recovering from F.

Question 70

Presentment warranties protect the rights of ____________________​ on unaccepted drafts and ____________________​ of any other instrument or claim.

Answer 70

Presentment warranties protect the rights of drawees and payors. Each of these is a party that ultimately pays on presentment of the instrument.

e.g. bank which pays out the funds on a check is a drawee, and an individual who pays off a promissory note is a payor.

Generally, payment of a negotiable instrument to a holder in due course or one who in good faith changed her position in reliance on the payment is final. But if the party paid breached a presentment warranty, the drawee or payor can recover from him.

On unaccepted drafts, the person obtaining payment and each previous transferor warrants that: she is entitled to enforce the draft or is a representative of someone so entitled; she has no knowledge that the drawer’s signature is unauthorized; the draft is unaltered; and, if the draft is a remotely created item, that its creation in the indicated amount was authorized by the person identified as drawer.

Question 71

Assuming the bank acts in good faith and exercises reasonable care in paying a check, a customer who fails to examine her bank statement:

A - May still assert the defenses of forgery and alteration.

B - May still assert the defense of forgery, but not of alteration.

C - May still assert the defense of alteration, but not of forgery.

D - May not assert the defenses of forgery and alteration.

Answer 71

D.

A customer who fails to examine her bank statement may not assert the defenses of forgery and alteration. Failure to examine bank statements and promptly report a forgery or alteration is a form of negligence, and therefore precludes these defenses.

Question 72

What if a bank did not act in good faith and paid a check. A customer fails to examine her bank account. What is the consequence?

Answer 72

If the bank did not act in good faith in paying the check, the bank bears the entire loss.

Question 73

What if a bank acts in good faith but negligently cashed a check. A customer who fails to examine her bank account. What is the consequence?

Answer 73

If the bank acted in good faith but negligently (e.g., it paid a check that was obviously forged or altered), the loss is allocated between the customer and the bank according to each one’s contribution to the loss.

Question 74

Dan Drawer writes a check to Peter Payee, but gives it to Ian Impostor, who forges Peter’s signature and indorses it to Tina Transferee. Tina Transferee can recover the sum of the check:

Answer 74

from either Imposter Ian or Dan Drawer.

If a drawer gives a check to an impostor, a transferee may recover the sum of a check from either the impostor or the drawer. Generally, an unauthorized signature is wholly ineffective as the signature of the person whose name is signed, but is effective as the signature of the signer. Therefore, the transferee may recover from the impostor, but not from the individual that he impersonated.

Question 75

A stop payment order must describe the item with certainty, be ____________________​, and is effective for ____________________.

Answer 75

written, signed, and dated; for 6 months

Question 76

When processing a check, a bank cannot charge a customer’s account:

A - If the drawer’s signature is forged.

B - If the payee’s signature is forged.

C - For more than the original order when the check has been altered.

D - All of the above.

Answer 76

D. Banks must honor checks as drawn.

They cannot charge a customer’s account if there is no order by the depositor (i.e., when the drawer’s signature is forged), or if they pay the wrong person (i.e., when the payee’s or indorsee’s signature is forged). Similarly, they cannot charge the account for more than the original amount if a check has been altered.

Question 77

T/F: If the maker of an ordinary note does not pay on the date of presentment, the instrument is considered dishonored​ and the indorser may be held liable.

Answer 77

True.

Question 78

One may qualify as a HDC despite having notice that:

A - A maker of a bearer note has defaulted on an installment of its principal.

B - A maker of a bearer note has defaulted on its interest payment.

C - A check is 100 days overdue.

D - An obligor has a defense of duress.

Answer 78

B. Person can qualify as HDC despite having notice that there has been a default in payment of interest.

In the other situations, a person cannot be a HDC.

Question 79

Leah gives Sarah a $1,000 bearer note in exchange for a $500 check made out to cash. Are Sarah and Leah HDC?

Answer 79

Sarah is a HDC for the $1,000 and Leah is a HDC for the $500.

A holder in due course must take the instrument for value. Sarah purchased the bearer note at a discount, but paid the full amount agreed upon. Since she paid full value, she is a holder in due course for the note’s entire amount, i.e., $1,000. Leah also paid the full amount agreed upon when she exchanged her note for the check, so she is also a holder in due course for the check’s entire amount, i.e., $500.

Question 80

T/F: An executory promise, a promise to give value in the future, does not constitute value unless it is an irrevocable obligation to a third party.

Answer 80

True.

e.g. Andrew transfers to Becky a bearer note for $100 due in a month. Becky does NOT become a holder in due course if, in exchange she incurs an irrevocable obligation to paint Andrew’s home. If Becky had incurred an irrevocable obligation to paint Andrew’s sister’s home, Becky would be a HDC.

Question 81

T/F: Person cannot be HDC if they accepted the instrument despite having notice that it is forged or overdue.

Answer 81

True.

Question 82

F carefully removes ten checks from D’s checkbook and forges D’s name as drawer. The drawee bank pays the first three checks and returns them with D’s February statement. The remaining seven checks are included with D’s May statement. D does not inspect either until July.

Can D assert the forgeries of these seven checks?

Answer 82

No. D is precluded from asserting the forgeries of the last seven checks because he did not report the original forgeries within 30 days of when he received his February statement. D can still recover for the original three forgeries because the one-year period has not elapsed unless the drawee bank can prove it suffered a loss because of the delay.

Question 83

T/F: Forged drawer’s signatures must be reported to bank within 1 year regardless of bank’s or customer’s negligence.

Answer 83

True.

Question 84

A pretends to be B. C draws a check payable to B and A forges B’s signature.

Is A’s forgery effective?

Answer 84

A’s forgery is effective and C is precluded from asserting the forgery in a not properly payable action against the drawee. C should have determined the true identity of the payee.

Question 85

A pretends to be an agent of the Business. D draws a check payable to Business. A forges the signature of the Business.

Is A’s forgery effective?

Answer 85

Yes. A’s forgery is effective and D is precluded from asserting the forgery in a not properly payable action against the drawee. D should have determined the true nature of A’s authority.

Question 86

P, the corporate treasurer, writes a check to B not intending B to receive the check, forges B’s name, and cashes the check.

Is P’s forgery effective?

Answer 86

Yes. The forgery is effective and the corporation (the drawer) is precluded from asserting the forgery in a not properly payable action against the drawee. The corporation should have better supervised its employee.

Question 87

P, the secretary of corporate treasurer, writes a check to M and has the corporate treasurer sign the check. P then forges M’s name and cashes the check.

Is P’s forgery effective?

Answer 87

Yes. P’s forgery is effective and the corporation (the drawer) is precluded from asserting the forgery in a not properly payable action against the drawee. The corporation should have better supervised the treasurer’s secretary.

Question 88

What happens when the payee’s name has been forged for order paper?

Answer 88

Forgery breaks the chain of title and the check is not properly payable. The drawer may demand that the drawee bank re-credit the drawer’s account as the check was not properly payable.

Question 89

D hires P as a bookkeeper who is responsible for making D’s deposits. P takes a check payable to D, forges D’s indorsement, and cashes the check.

Is the forged indorsement effective?

Answer 89

Yes, the forged indorsement is effective because D entrusted P with responsibility with respect to the check. D will be precluded from asserting the forgery in attempting to recover from persons other than P.

Question 90

D hires P as a janitor. P breaks into D’s safe and steals a check payable to D, forges D’s indorsement, and cashes the check.

Is the forged check effective?

Answer 90

No. P’s indorsement is ineffective because D did not give P responsibilities with respect to the check. D may assert the forgery in attempting to recover the check.

Question 91

D issues a check payable to P. T steals P’s check, forges P’s name, and deposits the check in T’s account at Another Bank.

Another Bank presents the check to Bank for payment and Bank pays the check. Shortly after, both D and P discover what happened and notify Bank immediately.

What is the consequence for each party?

Answer 91

Bank is liable either (1) to D for cashing a check that was not properly payable or (2) to P for conversion of P’s property.

Then Bank has a claim against Another Bank for breaching the presentment warranty entitled to enforce (Another Bank had no right to enforce the check because the forgery prevented it from being a holder).

Another Bank then can sue T for breaching the transfer warranties of entitled to enforce, all signatures authentic or authorized, and no good defenses.

Question 92

M issues a promissory note payable to E for $100. E alters the note so it reads $1,000 and then sells it to H who qualifies as a HDC.

What can H enforce?

Answer 92

H can enforce the note against M for $100. M has a real defense of alteration for $900, the raised amount.

Question 93

M signs a check but leaves the amount blank and holds it to E. E completes the check for $1,000 and transfers it to a bank which qualifies as a HDC.

How much can the bank enforce the check against M for?

Answer 93

$1,000

Question 94

M signs a promissory note for $100 payable to E. E alters the note so it reads $1000 and then tries to collect that amount from M.

What is the consequence?

Answer 94

M has no liability on the note and is not obligated to pay the original $100. This is a situation when an alteration fraudulently made by the holder means a total discharge for the obligor, M.

Question 95

M signs a promissory note payable for $100 to E. E leaves the note on their desk. Unknown to E, a repairman finds the note, alters it so it reads $1000, and returns the note to the desk.

What is the consequence?

Answer 95

M is still liable for $100, the original terms of the note.

Question 96

D issues a check for $100 to P. P alters the check so it reads $1000 and cashes the check.

What is the consequence?

Answer 96

D may recover against bank because this check was not properly payable.

Question 97

D draws a check for $10 payable to A. The number “10” and the word “ten” are typewritten. A large blank space is left after each number and word. A alters the check in the same font style to add “thousand” after the word “ten” and “,000” after “10.”

If the drawee pays the check, what is the consequence?

Answer 97

D may not be able to recover in a not properly payable action because his negligence in leaving blank spaces contributed to A’s ability to make alterations.

Question 98

T/F: The drawer must report alterations to the drawee within 1 year.

Answer 98

True.

Question 99

D issues a check for $100 to P. P alters the check and cashes it.

D timely reports the alteration after receiving bank statement and the drawee bank re-credits D’s account because this check was not properly payable.

What can D’s bank do?

Answer 99

D’s bank can sue up the chain of banks for breach of presentment warranty of no alteration and the presenting bank can sue up the chain for breach of the transfer warranty of no alteration.