FL Commercial Paper

Question 0

The person who signs or is identified in a note as the person undertaking to pay.

Answer 0

Maker

Question 1

Article 3 of the UCC can be divided into two basic categories:

Answer 1

(1) Notes

(2) Drafts

Question 2

The person to whom the note is payable.

Answer 2

Payee

Question 3

The person who signs or is identified in a draft as the person ordering payment.

Answer 3

Drawer

Question 4

The person ordered in a draft to make payment.

Answer 4

Drawee

Question 5

The person to whom the draft is payable.

Answer 5

Payee

Question 6

When the drawee is a bank, and it is payable on demand, then the draft is a _________.

Answer 6

Check

Question 7

An acknolwedgement by a bank that a sum of money has been received, and a promise by the bank to repay the sum of money.

Answer 7

Certificate of deposit

Question 8

Seller and Buyer sign a contract. Seller delivers goods to Buyer, with Buyer agreeing to pay within 60 ays. Can Seller assign this right to receive payment to X?

Answer 8

Yes

Question 9

Seller and Buyer sign a contract. Seller delivers goods to Buyer, with Buyer agreeing to pay within 60 ays. If Seller assigns to X and the goods turn out to be defective, must Buyer pay X?

Answer 9

No.

Any defense the buyer has against assignor can be raised by assignee.

Question 10

The requirements for a negotiable instrument:

Answer 10

(1) Writing
(2) Signed by Maker (Note) or Drawer (Draft or Check)
(3) Unconditional
(4) Promise to Pay (Note) or Order to Pay (Draft)
(5) Fixed Amount
(6) In Money
(7) No Other Undertaking or Instruction
(8) On Demand or at a Definite Time
(9) To Order or To Bearer

Question 11

Are conditional promises OK?

Answer 11

Yes, under contract law, but they destroy negotiability.

Question 12

Negotiable?

Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series.

Answer 12

Not negotiable.

Question 13

Is negotiability destroyed if the instrument simply refers to another agreement?

Answer 13

No

Question 14

Negotiable?

I promise to pay $100 to the order of Payee “in accordance with” (or “as per”) the contract we signed today.

Answer 14

Yes.
It is okay to mention the underlying contract without destroying negotiability so long as payment of the instrument is not made “subject to” or “conditioned upon” performance of the underlying contract.

Question 15

Article 3 specifically provides that a promise or order will not be deemed conditional because it:

Answer 15

(1) Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration;
(2) Limits payment to a particular source or fund (e.g., “I promise to pay out f the funds received from the sale of my next wheat crop”);
(3) Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (such conditions are common on traveler’s checks).

Question 16

Is an IOU negotiable?

Answer 16

No

Question 17

Is an IOU a promise to pay?

Answer 17

No

Question 18

Is “I wish you would pay” an order to pay?

Answer 18

No

Question 19

Is “I wish you would pay” negotiable?

Answer 19

No

Question 20

Does the requirement for a fixed amount apply to interest?

Answer 20

No. Only to principal.

Question 21

Is a promise to pay 100 bales of cotton a negotiable promise?

Answer 21

No. It is a non-negotiable promise.

Question 22

The UCC does permit a number of extra undertakings or instructions. A promise or order may contain:

Answer 22

(1) An undertaking or power to give, maintain, or protect collateral to secure payment;
(2) An authorization or power to the holder to confess judgment or realize on or dispose of collateral;
(3) A waiver of the benefit of any law intended for the advantage or protection of the obligor (e.g., waiver of a homestead exemption, or trial by jury, or right to notice of dishonor).

Question 23

Is it O.K. to promise to pay costs of collection and attorney’s fees?

Answer 23

Yes.

Question 24

A note is payable on or after a stated time or event certain to happen but uncertain as to time (e.g., “payable on my Uncle Buck’s death”) is it negotiable?

Answer 24

Not negotiable because there is no definite time for payment.

Question 25

A note is payable on July 15, 2020, but provides “if my Uncle Buck dies prior to July 15, 2020, payment is due upon his death.” Is this a negotiable instrument?

Answer 25

Yes. It is accelerated if he dies sooner.

Question 26

Negotiable?

“I promise to pay Paul.”

Answer 26

Not negotiable.

Question 27

Negotiable?

“I promise to pay the order of Paul (or “to Paul or his order”).

Answer 27

Negotiable. Order paper.

Question 28

Negotiable?

“I promise to pay bearer (or “to the order of bearer” or “to Paul or bearer”).

Answer 28

Negotiable. Bearer paper.

Question 29

Negotiable?

“Pay to the order of cash.”

Answer 29

Negotiable. Bearer paper.

Question 30

Negotiable?

“Pay to the order of a bowl of soup (or keg of nails or a Happy Birthday).

Answer 30

Negotiable. Bearer paper where otherwise indicates not payable to an identified person.

Question 31

Specifies the person to whom the instrument is payable.

Answer 31

Special Indorsement.

Question 32

Does not specify the person to whom the instrument is payable; generally consists of a mere signature.

Answer 32

Blank Indorsement.

Question 33

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

What type of indorsement is this?

Answer 33

Special Indorsement

Question 34

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

After this indorsement, is the check order paper or bearer paper?

Answer 34

Order Paper

Question 35

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

If Publix wishes to further negotiate the check to Heinz, what must Publix do?

Answer 35

Transfer possession AFTER indorsing.

Question 36

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

Assumer that Publix simply signs the check “Publix” beneath the previous indorsement.

What type of indorsement is this?

Answer 36

Blank

Question 37

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

Assumer that Publix simply signs the check “Publix” beneath the previous indorsement.

After this indorsement, is the check order paper or bearer paper?

Answer 37

Bearer Paper.

Question 38

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

If Heinz wishes to further negotiate this check to Ken Ketchup, what must Heinz do?

Answer 38

Have Publix sign.

Question 39

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.

Assume that Heinz signs the check “Pay to Ken Ketchup, Heinz” beneath the previous indorsements. After this indorsement is the check order paper or bearer paper?

Answer 39

Special - back to bearer paper

Question 40

Bottom line: Once the parties start indorsing, you need to look at ______________ to determine whether the instrument is order paper or bearer paper.

Answer 40

The last indorsement.

Question 41

Thief steals the paycheck that had been issued to Peter Payee by his employer. Peter had indorsed the check “Peter Payee” before it was stolen.

Was the check order paper or bearer paper when it was stolen?

Answer 41

Order paper

Question 42

Thief steals the paycheck that had been issued to Peter Payee by his employer. Peter had indorsed the check “Peter Payee” before it was stolen.

Is Thief a “holder” of this check?

Answer 42

Yes, but not a holder in due course.

Question 43

Thief steals the paycheck that had been issued to Peter Payee by his employer. Peter had indorsed the check “Peter Payee” before it was stolen.

Can Thief negotiate this check?

Answer 43

Yes. By transfer of possession only AND that person could be a holder in due course.

Question 44

Thief steals a paycheck that had been issued to Paul Payee by his employer. The check had not been indorsed when it was stolen.

Was the check order paper or bearer paper when it was stolen?

Answer 44

Order paper (typically)

Question 45

Thief steals a paycheck that had been issued to Paul Payee by his employer. The check had not been indorsed when it was stolen.

Is Thief a holder of this check?

Answer 45

No because it is not bearer paper (not indorsed).

Question 46

Thief steals a paycheck that had been issued to Paul Payee by his employer. The check had not been indorsed when it was stolen.

Can thief negotiate this check?

Answer 46

No. Because it is order paper and Thief is not a holder.

Question 47

A holder in due course is:

Answer 47

(1) a holder (2) who gives value, (3) in good faith, (4) without notice.

Question 48

A ________ is in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to him.

Answer 48

Holder.

Question 49

Maker issues a $20,000 note to Payee payable in 1 year. Payee doesn’t want to wait for 1 year, and discounts the note to Holder for $18,000. Assuming good faith and no notice, because 100% of the agreed consideration has been performed, Holder is a HDC as to ___________________.

Answer 49

100% of the face amount of the note ($20,000).

Question 50

Maker issues a $20,000 note to Payee payable in 1 year. Payee doesn’t want to wait for 1 year, and discounts the note to Holder for $18,000.

What if Holder pays Payee $9,000 now and promises to pay $9,000 later?

Answer 50

Only 50% of the agreed consideration has been performed. So Holder is a HDC as to 50% of the face amount of the note ($10,000).

Question 51

Maker issues a $20,000 note to Payee payable in 1 year. Payee doesn’t want to wait for 1 year, and discounts the note to Holder for $18,000.

What if Holder pays $9,000 now, learns of a defense, then pays the other $9,000?

Answer 51

Only 50% of the agreed consideration had been performed when Holder learned of the defense. So Holder is a HDC as to 50% of the face amount of the note ($10,000).

Question 52

Maker issues a $20,000 note to Payee payable in 1 year. Payee doesn’t want to wait for 1 year, and discounts the note to Holder for $18,000.

What if Holder pays $9,000 cash, and also gives Payee a note for $9,000?

Answer 52

Giving a negotiable instrument is giving value (the payee might negotiate the note to a HDC). So Holder is a HDC as to the face amount of the note - 20,000 [same as if gave $18,000 cash].

Question 53

On January 1, 2014, Mary borrowed $1,000 from Lois, orally promising to pay the money back from June 1, 2014. On June 1, Mary was unable to pay the $1,000, but negotiated to Lois a note she had received from Charles.

Has Lois given value for the note?

Answer 53

Yes.

Question 54

Payee receives a $1,000 check from Drawer and deposits the check in his checking account with Bank. At the time of the deposit, the account already has $500 in it. The next day, Payee withdraws $500 from the account.

Is the Bank a HDC?

Answer 54

No.

Payee is presumed to have withdrawn her own money (the $500 in the account before the deposit). If Payee had withdrawn $750 instead of $500, then Bank would be a HDC as to $250.

Question 55

The honesty in fact component of good faith is _________.

Answer 55

Subjective (sometimes called the white heart-empty head test)

Question 56

The fair dealing component of good faith is _________.

Answer 56

Objective.

It is concerned with the fairness of conduct (not with the care with which an act is performed).

Question 57

A business person, to be a HDC, must show (in addition to “honesty in fact”) that his actions meet:

Answer 57

The generally accepted standards current in his business, trade, or profession.

Question 58

A HDC must take the instrument without notice (which includes actual knowledge and reason to know) that:

Answer 58

(1) The instrument is so irregular or incomplete as to call into question its authenticity;
(2) The instrument is overdue or has been dishonored;
(3) The instrument contains an unauthorized signature or has been altered;
(4) There is a claim to the instrument;
(5) Any party has a defense or a claim in recoupment (a claim that reduces the amount payable) on the instrument.

Question 59

Shnuck wrote a check on January 2, 2014, but mistakenly wrote down “2013” as the year. He noticed his error, crossed out the “2013” and wrote “2014” above it. Can anyone be a HDC of the check?

Answer 59

Yes. This is a minor change so it is OK (not SO irregular).

Question 60

Maker made a note payable to Payee for $1000. Before the note was delivered, the parties agreed to change tha mount of the note from $1000 to $1500, and crudely accomplished this result by striking over the $1000 and writing $1500 above it. Payee discounted the note at his bank. Subsequently, Maker found that Payee had fraudulently induced him to issue the note by misrepresenting certain facts about the underlying business transaction. Can bank be a holder in due course of this treatment?

Answer 60

No. Claim or defense need not be related to the irregularity.
(Here the defense has no relationship to the irregularity.)

Question 61

Friendly Finance was the payee of a promissory note signed by Mary Maker. The note called for Mary to make 24 monthly interest payments before the note matures. Friendly discounted the note with Big Bank. When it was discounted to Big Bank, the note had written on it in large letters the notation “Missed Paying First Installment.” Is Big Bank a HDC?

Answer 61

Yes, Big Bank may still be a HDC.

Question 62

Donna Drawer wrote a check on January 10 to Peter Painter, a house painter, for $500 for services rendered. Peter indorsed the check over to Herb’s Paint Shop on June 5, and it was dishonored on June 8, when the drawee bank informed Herb that Drawer had stopped payment on the check because she was unhappy with Painter’s work. Is Herb’sPaint shop a HDC?

Answer 62

No.

Taking an old check - check overdue 90 days after date.

Question 63

Able purchased some equipment for his business from Baker Equipment, and executed a note payable to Baker for $3,000. Baker discounted the note to Corleone Finance Company for $100. Is Corleone Finance Company a HDC?

Answer 63

Probably not.

This is a huge discount! Why would someone do this?

Question 64

Able purchased some equipment for his business from Baker Equipment, and executed a note payable to Baker for $3,000. Baker discounted the note to Corleone Finance Company for $2,700. Assume that Corleone Finance Company supplied Baker with all forms, established financing charges, investigated each customer, and reserved the right to reject any note.

Is Corleone Finance Company a HDC?

Answer 64

Not likely.

They were so closely connected, so put on notice.

Question 65

The treasurer of Acme Corporation takes a check that was made payable to Acme Corporation, indorses the check and negotiates the check to her bank in payment of a personal debt that the treasurer owes to her bank. Would the Bank be a HDC?

Answer 65

No, because the bank would have notice of a claim.

Question 66

A holder does NOT become a HDC of an instrument taken by:

Answer 66

(1) legal process or by purchase in an execution, bankruptcy, or creditor’s sale or similar proceeding;
(2) purchase as part of a bulk transaction not in the ordinary course of business of the transferor; or
(3) as the successor in interest to an estate or other organization

Question 67

Maker is fraudulently induced to issue a note to Payee. Payee negotiates the note to Harold, a HDC. Harold then indorses the note and gives it to his son Carl as a graduation present. When Carl demands payment from Maker, Maker raises fraud as a defense.

Is Carl a HDC?

Does Carl take free of the fraud defense?

Answer 67

No, Carl is not a HDC because did not give value.

BUT, Harold was a HDC and Carl took from Harold so takes shelter in Harold’s rights.

Question 68

While a HDC takes free of personal defenses and claims, she takes subject to ________.

Answer 68

“Real defenses”

Question 69

Real defenses:

Answer 69

(1) INFANCY, to the extent that it is a defense to a simple contract;
(2) such other INCAPACITY, or DURESS, or ILLEGALITY of the transaction, AS RENDERS THE OBLIGATION OF THE PARTY A NULLITY;
(3) such MISREPRESENTATION as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms
(4) DISCHARGE in insolvency proceedings (bankruptcy);
(5) Any other discharge of which the holder has notice when he takes the instrument

Question 70

Myrna Minor looked much older than her actual age (15). Minor purchased a motorcycle at City Cycle, and signed a promissory note for $2000 payable to the order of the City Cycle. City Cycle was unaware of Minor’s age. City Cycle then discounted the note with Big Bank for $1800. When the first payment came due, Minor refused to pay, saying that she was disaffirming the contract and wished to return the motorcycle.

Must Minor pay the bank?

Answer 70

No, as long as state law allows this dissaffirmance.

Question 71

When Barry Builder filed for bankruptcy, he listed among his debts a loan he had taken from First Bank which was evidenced by a promissory note that he had signed. As a result of the bankruptcy proceeding, the judge ordered that Builder be discharged from all his scheduled debts. A year later, the note surfaced in the possession of Second Bank, which claimed to be a HDC.

Must Builder pay Second Bank?

Answer 71

No. Discharged by bankruptcy.

Question 72

Bank was unwilling to lend Able money without a co-signor who owned property in the country. Able approached Baker, who Able supervised at work. Baker was “a little slow,” had little education, and virtually no ability to read. Able told Baker that he needed someone to attest to his good character, and displayed a paper which he said contained a statement that he, Able, was of good character and could be depended upon to repay a loan. In fact, this paper was a promissory note. Baker signed the paper without even attempting to read it. IF Baker is sued on the note by a HDC, can Baker raise the defense that he was tricked and did not realize what he was signing?

Fraud in the inducement (a personal defense)?

Answer 72

(Most common)

Can’t be raised - aware of character & essential terms but deceived to sign.

Question 73

Bank was unwilling to lend Able money without a co-signor who owned property in the country. Able approached Baker, who Able supervised at work. Baker was “a little slow,” had little education, and virtually no ability to read. Able told Baker that he needed someone to attest to his good character, and displayed a paper which he said contained a statement that he, Able, was of good character and could be depended upon to repay a loan. In fact, this paper was a promissory note. Baker signed the paper without even attempting to read it. IF Baker is sued on the note by a HDC, can Baker raise the defense that he was tricked and did not realize what he was signing?

Fraud in the factum (fraud in the execution) (a real defense)?

Answer 73

Can be raised - person induced to sign & has no idea what it is & has to show excusable ignorance

Question 74

Mary borrowed some money from her friend, Betty, and issued a promissory note to Betty for $1000. The note was dated July 1, 2013 and was due on January 1, 2014. On December 20, 2013 Mary mailed a check to Betty for the full amount of the loan plus interest. On an enclosed card, Mary asked that the note be returned “whenever Betty could get to it.” Betty spent the proceeds of the check, and on Christmas day, negotiated Mary’s note to Edgar, in payment for obligations owed to him. On January 1, 2014, Edgar demanded payment from Mary. Did Mary’s payment to Betty discharge her on the note, even if Edgar is a HDC?

Answer 74

No. Discharge by payment is a personal defense (can’t be raised against HDC).

Question 75

If Buyer issues an instrument to Seller and Buyer has a defense against the Seller (e.g., breach of warranty), can the defense be asserted?

Answer 75

Yes. Buyer and Seller are the only people involved, so the holder in due course doctrine has no relevance. The doctrine applies only to cases where more than two parties are involved.

Question 76

Buyer pays for goods bought from Seller by giving to Seller a cashier’s check bought from Bank. Does Bank have a defense?

Answer 76

Bank has a defense to its obligation to pay the check because Buyer bought the cashier’s check with a check known to be drawn on an account with insufficient funds to cover the check. If Bank issued the cashier’s check to Seller as payee, Seller may be a holder in due course that takes free of Bank’s defense.

Question 77

Mike is 4 months past due on his rent. Mike gives his landlord a $2000 note to cover this past due rent, the note being payable in 6 months. Landlord agrees to accept the note, and places it in a safe in his home. Landlord then brings suit against Mike for non-payment of rent. When landlord accepted the note as payment, this suspended the landlord’s right to sue on the underlying obligation.

Assume that the note comes due, and Mike makes payment on it. What happens to the underlying obligation?

Answer 77

Instrument is discharged AND so is underlying obligation.

Question 78

Mike is 4 months past due on his rent. Mike gives his landlord a $2000 note to cover this past due rent, the note being payable in 6 months. Landlord agrees to accept the note, and places it in a safe in his home. Landlord then brings suit against Mike for non-payment of rent. When landlord accepted the note as payment, this suspended the landlord’s right to sue on the underlying obligation.

Assume that when the note comes due, Mike fails to make payment. May the landlord now sue on the underlying obligation?

Answer 78

Yes. On the note OR underlying obligation (but 1 recovery)

Question 79

A, B, and C all sign as makers of a $6000 not payable to Bank. When the note matured, Bank sued only A, demanding the entire amount. May A defend on the basis that the Bank should have sued all 3 of them?

Answer 79

No - jointly and severally liable (unless otherwise specified)

Question 80

A, B, and C all sign as makers of a $6000 not payable to Bank. When the note matured, Bank sued only A, demanding the entire amount.
If Bank wins, can A recover from B and/or C? If so, how much from each?

Answer 80

Yes. Can recover based on contribution (1/3 from each)

Question 81

Drawer issued a $900 check to A, who then indorsed it to B, who then indorsed it to C, who then indorsed it to Store Store presented the check to Drawee Bank, which dishonored it. Store gave appropriate notice of dishonor to all parties to the instrument. Store demands payment of the $900 from C alone. C claims that he is liable, at most, for only 1/3 the amount ($900).

Is C correct?

Answer 81

No. Liable for whole amount.

Question 82

Drawer issued a $900 check to A, who then indorsed it to B, who then indorsed it to C, who then indorsed it to Store Store presented the check to Drawee Bank, which dishonored it. Store gave appropriate notice of dishonor to all parties to the instrument. Store demands payment of the $900 from C alone. C claims that he is liable, at most, for only 1/3 the amount ($900).

Could Store “skip over” C and recover the $900 from B? From A?

Answer 82

Yes, could recover from either.

Question 83

Drawer issued a $900 check to A, who then indorsed it to B, who then indorsed it to C, who then indorsed it to Store Store presented the check to Drawee Bank, which dishonored it. Store gave appropriate notice of dishonor to all parties to the instrument. Store demands payment of the $900 from C alone. C claims that he is liable, at most, for only 1/3 the amount ($900).

Assume that Store recovers the $900 from C. May C recover the $900 from B? From A?

Answer 83

Yes, could recover from either because signed before C and signed for the whole amount.

Question 84

Drawer issued a $900 check to A, who then indorsed it to B, who then indorsed it to C, who then indorsed it to Store Store presented the check to Drawee Bank, which dishonored it. Store gave appropriate notice of dishonor to all parties to the instrument. Store demands payment of the $900 from C alone. C claims that he is liable, at most, for only 1/3 the amount ($900).

Assume that Store recovers the $900 from C, and C recovers the $900 from A. Can A recover from B? From Drawer?

Answer 84

Cannot recover from B because signed after, but can recover from Drawer.

Question 85

When parties have made an anomalous indorsement (one made by a non-holder, i.e., surety), the indorsers are _____________ liable.

Answer 85

Jointly & severally

Question 86

Corporation wishes to borrow $20,000 from Bank. Bank says that it will make the loan, but only if Adam, Bob, Carl (3 corporate officers) sign the note along with Corporation. Corporation is the maker of the note, and then Adam, Bob, and Carl (in that order) sign as indorsers. When the note comes due and it is presented to Corporation for payment, Corporation dishonors it. Notice of dishonor is given to each of the indorsers.

Who is liable?

Answer 86

Adam, Bob, and Carl are jointly and severally liable.

Question 87

When an instrument is made payable to joint payees (e.g., H and W) and both payees indorse, they are ___________ liable.

Answer 87

Jointly & severally

Question 88

An indorser is “secondarily” liable. An indorser is liable only after the instrument has been __________ to the maker (if a note) or the drawee (if a check), that party has ____________ the instrument, and a ______________ has been given to the indorser.

Answer 88

Presented; dishonored; notice of dishonor

Question 89

Drawer issues a check to Payee on March 1. On March 3, Payee indorses the check to Holder. Holder presents the check to Drawee Bank for payment on June 25, and the check is dishonored for insufficient funds.

Would Payee be discharged on his indorsement contract?

Answer 89

Yes.

Question 90

Dan Drawer issues a check to the order of Peter Payee, who indorses the check “Peter Payee, without recourse” and negotiates the check to Harry Holder. If the check is dishonored and appropriate notice is given, is Payee liable as an indorser?

Answer 90

No.

Question 91

Drawer issues a check to Payee on March 1. Payee places the check on his desk and forgets about it for several months. On June 1, Payee comes upon the check, and the next day presents it to Drawee Bank. The check is dishonored for insufficient funds.

May Payee successfully sue Drawer on his drawer’s contract?

Answer 91

Yes, unless Drawee bank became insolvent and had no insurance to cover.

Question 92

Is a drawer entitled to notice of dishonor?

Answer 92

Generally, no. A drawer will or should know of the dishonor on her own because of her relationship with the drawee.

Question 93

Drawer issues a check to Payee. When Payee presents the check to Drawee Bank, it is wrongfully dishonored due to a computer foul-up (assume that there was, in fact, enough in the account to cover the check). By the time that Payee can locate Drawer to give notice of dishonor, Drawer has skipped town, having closed his bank account.

Can Payee recover from Drawee Bank?
Would your answer be the same if it had been a certified check?

Answer 93

No. Drawer can sue, but not payee.

No. Payee could sue because drawee would be liable as acceptor.

Question 94

An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it. The accommodation party is liable __________________.

Answer 94

In the capacity in which he signed.

Question 95

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Assume that, after the 15th installment Steve can no longer pay. May Reliable recover from Norman?

Answer 95

Yes, Norman is liable as a maker.

Question 96

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Assume that Steve does not pay (assume he has no defense - he simply doesn’t have the money) and Norman therefore pays. Can Norman recover from Steve? If so, for how much?

Answer 96

Norman can get complete reimbursement from Steve (not simply contribution like an ordinary co-maker).

Question 97

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Suppose that Reliable sues Steve and Steve does not pay the note. May Steve sue Norman?

Answer 97

Steve may NOT sue Norman for contribution. The accommodation party is not liable to the party accommodated.

Question 98

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Assume that Steve is having difficulty making payments to Reliable and is able to persuade Reliable to grant him a 6 month extension. Assume that this is done without the knowledge or consent of Norman. Would this extension discharge Norman?

Answer 98

Yes. This extension without Norman’s consent discharges Norman to the extent that Norman can prove that the extension caused him some loss.

Question 99

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Assume that Reliable gives Steve permission to sell off some of the stock that he had used as collateral. Assume that this is done without the knowledge or consent of Norman. Would this release of the collateral discharge Norman?

Answer 99

Yes. This release of collateral without Norman’s consent discharges Norman to the extent that Norman can prove that the release of collateral caused him some loss.

Question 100

Steve needs some new equipment for his business, but, unfortunately STeve has a rather “spotty” credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich doctor friend Norman, who signs a promissory note “to help Steve out.” Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments. Reliable also requires that Steve put up some stock that he owns as collateral.

Assume that the equipment Steve purchased turns out to be defective, and Steve refuses to make any further payments. If Reliable sues Norman, would Norman have a valid defense?

Answer 100

Yes. Norman may defend on a breach of warranty basis. Norman can raise any defenses that Steve would raise EXCEPT insolvency, infancy, and lack of legal capacity.

Question 101

“Collection guaranteed” or equivalent language means that the signor agrees that she will be liable on the instrument ONLY if:

Answer 101

(1) execution of judgment against the other party has been returned unsatisfied;
(2) the other party is insolvent or in insolvency proceedings;
(3) the other party cannot be served with process; or
(4) it is otherwise apparent that payment cannot be obtained from the other party

Question 102

Jane Doe is the president of Software Corporation. Jane signed a promissory note “Software Corporation.” Assume that Jane had authority (express or implied) to sign the note on behalf of Software Corporation.

Is Software Corporation liable on the instrument?

Answer 102

Yes

Question 103

Jane Doe is the president of Software Corporation. Jane signed a promissory note “Software Corporation.” Assume that Jane had authority (express or implied) to sign the note on behalf of Software Corporation.

Is Jane Doe personally liable?

Answer 103

No, as long as she was authorized to sign on behalf of Corporation.

Question 104

Jane Doe is the president of Software Corporation. Assume that Jane signs the note “Software Corporation, by Jane Doe, President.”

Is Software Corporation liable on the instrument?

Answer 104

Yes

Question 105

Jane Doe is the president of Software Corporation. Assume that Jane signs the note “Software Corporation, by Jane Doe, President.”

Is Jane Doe personally liable?

Answer 105

No, signing as officer.

Question 106

Jane Doe is the president of Software Corporation. Assume that Jane signs the note “Jane Doe, President.”

Is Software Corporation liable on the instrument?

Answer 106

Yes, as long as authorized.

Question 107

Jane Doe is the president of Software Corporation. Assume that Jane signs the note “Jane Doe, President.”

Is Jane Doe personally liable?
Is parol evidence admissible to clear up the liability of Doe?

Answer 107

Yes.

Can bring in parol evidence EXCEPT as against a HDC who took without notice.

Question 108

Jane Doe is the president of Software Corporation. Assume that Jane simply signs the note “Jane Doe.”

Is Software Corporation liable on the instrument?

Answer 108

Yes, if authorized (undisclosed principal).

Question 109

Jane Doe is the president of Software Corporation. Assume that Jane simply signs the note “Jane Doe.”

Is Jane Doe personally liable? Is parol evidence admissible to clear up the liability of Doe?

Answer 109

Yes. Could get to HDC who took without notice and CANNOT bring in parol evidence.

Question 110

Thief steals Sheldon’s checkbook. A month later Sheldon’s bank returned his canceled checks, including one payable to Toys-R-Us for $200, to which Sheldon’s name was forged as drawer. Sheldon promptly notified his bank. Is the check properly payable?

Answer 110

No because the customer never ordered the bank to pay.

Question 111

Harry Homeowner issued a check for $100 to Gary Gardener for some yardwork that Gary had done. Gary’s friend, Tony Thief, stole the check from Gary. Thief then forged Gary’s indorsement on the back of the check and presented the check to Draweee Bank for payment. Drawee Bank paid the check, and Homeowner is demanding that his account be recredited.

Was the check properly payable?

Answer 111

No because of forged indorsement (not a holder).

Question 112

Harry Homeowner issued a check for $100 to Gary Gardener for some yardwork that Gary had done. Gary’s friend, Tony Thief, stole the check from Gary. Gary had indorsed the check in blank. Thief then presented the check to Draweee Bank, which paid it.

Was the check properly payable?

Answer 112

Yes. The blank indorsement made it bearer paper.

Question 113

B issued a check to H and W. H indorsed the check and also forged W’s indorsement. Drawee Bank paid the check and charged B’s account for the amount of the item. W never got a dime of the payment.

Must Drawee Bank recredit B’s account?

Answer 113

Yes.

Question 114

B issued a check to H or W (or H and/or W). H indorsed the check and also forged W’s indorsement. Drawee Bank paid the check and charged B’s account for the amount of the item. W never got a dime of the payment.

Was the check properly payable?

Answer 114

Yes, only need 1 indorsement.

Question 115

B issued a check to H and W. H indorsed the check. Drawee Bank paid the check and charged B’s account for the amount of the item. W never got a dime of the payment.

Was the check properly payable?

Answer 115

No. Need both indorsements.

Question 116

Bob issued a $50 check to Sam, who skillfully raised the amount to $500. Sam presented the check to Drawee Bank, which paid Sam $500. To what extent, if any, can Drawee Bank properly charge Bob’s account?

Answer 116

Only $50.

Question 117

B issued a check to S, leaving the amount blank. S was authorized to complete the check in an amount not to exceed $100. S filled in the amount of $300 and presented the check to Drawee Bank, which paid S $300. To what extent, if any, can Drawee Bank charge B’s account?

Answer 117

$300 because the amount was left blank. Your fault, bank can pay as completed!

Question 118

A check that Sally had written and dated 2 years earlier was presented and paid against her account, creating an overdraft. Sally argues that the check was not properly payable because it was so old, and because it created an overdraft. Is Sally correct?

Answer 118

A check is “stale” after 6 months. The bank is NOT obligated to pay, but it may (so long as payment is made “in good faith”).

The bank is NOT obligated to pay if it creates an overdraft (unless the customer has overdraft protection), but it may pay if it chooses to pay.

Question 119

On May 1, Drawer issued a check to Payee, dating the check May 15 (the check was postdated). Payee presented the check on May 3, and drawee bank paid. Drawer argues that payment could not properly be made from his account until May 15, the date of the check. Is Drawer correct?

Answer 119

Current law is not if customer gives notice to bank of post-dating and describes the check with reasonable certainty.

Question 120

A bank is liable to its customer for damages caused by the wrongful dishonor of an item. What is the bank’s liability in this case?

Answer 120

Liability is limited to actual damages proved and may include damages for arrest or prosecution or other consequential damages.

Question 121

Does death or incompetence of a customer revoke the bank’s authority to pay a check?

Answer 121

Not until the bank knows of the death or adjudication of incompetence and has had a reasonable opportunity to act on it. Even with such knowledge, the bank may for 10 days after the date of death keep paying checks, unless a person claiming an interest in the account orders that payment be stopped.

Question 122

Ned Nudnik was tricked by Sam Slick into buying a $150 freezer for $600. Nudnik paid Sam by check and took the freezer home in his truck. As soon as he arrived home, his neighbor Ward Cleaver, told Nudnik that he had been “ripped off.” Ned immediately called his bank, and told the bank clerk: “This is Ned Nudnik. Do not honor the check that I gave to Sam Slick this morning. He is a crook. He sold me a cheap freezer, and I paid too much.” Nudnik then hung up. The next day Sam presented the check for payment, and the bank paid. Nudnik is now demanding that the bank recredit his account.

Bank argues that the stop payment order did not give enough information to be effective. Is Bank correct?

Answer 122

The stop payment order must describe the item with reasonable certainty; a reasonably prudent banker with that information should be able to find the check (check #, etc.)

The stop payment order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it.

A stop payment order is effective for 6 months but it lapses after 14 calendar days, if the original order was oral and was not confirmed in writing within that period.

The bank may NOT contract out of liability for negligently failing to honor a valid stop payment order.

The burden of establishing the fact and amount of loss resulting from the payment over a valid stop payment order is on the customer.

Question 123

Goniff fraudulently induced Nebbish to issue him a check. Goniff then negotiated the check to Harold, a HDC. Meanwhile, Nebbish gave a valid stop payment order to his bank. When Harold presented the check for payment, Nebbish’s bank mistakenly paid it. Nebbish is demanding that his account be recredited. Must his bank recredit his account?

Answer 123

Bank will say customer wasn’t harmed when paid (to HDC).

Takes free of fraud of inducement defense - so would have to pay Harold anyway b/c HDC

Question 124

Payee received his weekly paycheck of $200 from Drawer. Shortly thereafter, Thief broke into Payee’s home and stole the check. Thief forged Payee’s indorsement and cashed the check at Brown’s, a local liquor store. Brown’s indorsed the check and deposited it in its account at Depositary Bank, which then indorsed the check and presented it to Drawee Bank which made payment.

What are Payee’s options?

Answer 124

Payee may recover the $200 from Drawer. Drawer will then demand that Drawee Bank recredit its account because the check was not properly payable (because of the forged indorsement).

The payee can sue Drawee Bank, or anyone taking the check after the forgery (Thief, Brown’s, Depositary Bank), in conversion.

NOTE: The payee would have no conversion action if the check had been stolen from the mail before it had bene received by Payee.

Question 125

Transfer Warranties: Each party that transfers an instrument and receives consideration warrants that:

Answer 125

(1) they are entitled to enforce the instrument (in essence, a warranty of good title); and
(2) that all signatures on the instrument are authentic and authorized; and
(3) the instrument has not been altered; and
(4) that no defense or claim of any party is good against the warrantor; and
(5) that the warrantor has no knowledge of any insolvency proceeding that has been instituted against the maker, acceptor, or, in the case of an unaccepted draft, the drawer.

Question 126

Payee received his weekly paycheck of $200 from Drawer, and immediately made the following indorsement:
For deposit only
/s/ Peter Payee
Shortly thereafter, Thief broke into Payee’s home and stole the check. Thief wrote her own name below that of Payee and cashed the check at Brown’s, a local liquor store. Brown’s indorsed the check and deposited it in its own account at Depositary Bank, which then indorsed the check and presented it to Drawee Bank which made payment.

Was the check converted by Drawee Bank (Payee Bank)?

Answer 126

No. Can disregard along with any intermediary bank.

Question 127

Payee received his weekly paycheck of $200 from Drawer, and immediately made the following indorsement:
For deposit only
/s/ Peter Payee
Shortly thereafter, Thief broke into Payee’s home and stole the check. Thief wrote her own name below that of Payee and cashed the check at Brown’s, a local liquor store. Brown’s indorsed the check and deposited it in its own account at Depositary Bank, which then indorsed the check and presented it to Drawee Bank which made payment.

Can Payee sue anyone for conversion of the check?

Answer 127

Yes. Thief, liquor store & depository bank (because acted inconsistently).

Question 128

Joe Crooks steals one of Daisy Drawer’s blank checks and fills it in, making it payable to the order of “Joe Crooks” for $500, and forges Daisy’s name on the drawer’s line. Joe writes his own name on the back of the check and takes it to his own bank, Depositary Bank, asking it to cash the check for him. Depositary Bank pays Joe $500 and, after stamping its own indorsement under Joe’s, presents the check to Drawee Bank. Drawee Bank pays the check.

Daisy demands that Drawee Bank recredit her account. Must Drawee Bank do so?

Answer 128

Yes because the check was not properly payable.

Question 129

Joe Crooks steals one of Daisy Drawer’s blank checks and fills it in, making it payable to the order of “Joe Crooks” for $500, and forges Daisy’s name on the drawer’s line. Joe writes his own name on the back of the check and takes it to his own bank, Depositary Bank, asking it to cash the check for him. Depositary Bank pays Joe $500 and, after stamping its own indorsement under Joe’s, presents the check to Drawee Bank. Drawee Bank pays the check.

If Daisy recovers from Drawee Bank, may Drawee Bank recover the $500 recredited?

Answer 129

Drawee Bank probably cannot recover the $500 from anyone. Unlike the situation involving a forged indorsement, Depositary Bank here does have good title (though it is good title to a check with Joe Crooks as drawer). Drawee Bank takes the risk that the drawer’s signature is unauthorized unless a prior party in the chain of collection had knowledge that the drawer’s signature was unauthorized (the presentment warranty does include a warranty that the party has no knowledge that the signature of the drawer is unauthorized). It is likely that forger would be the only one with this knowledge (and the forger probably is insolvent or unavailable). This generally leaves the loss on the Drawee Bank.

Question 130

Joe Crooks steals one of Daisy Drawer’s blank checks and fills it in, making it payable to the order of “Joe Crooks” for $500, and forges Daisy’s name on the drawer’s line. Joe writes his own name on the back of the check and takes it to his own bank, Depositary Bank, asking it to cash the check for him. Depositary Bank pays Joe $500 and, after stamping its own indorsement under Joe’s, presents the check to Drawee Bank. Drawee Bank pays the check.

Assume that Drawer discovered the theft in time to stop payment on the check before it was paid by Drawee Bank and that Depositary Bank now holds the dishonored check. Could Depositary Bank recover?

Answer 130

As a holder of a check (with Crooks as drawer), Depositary Bank could recover from Crooks as an indorser or drawer, and/or for breach of transfer warranty (all signatures not genuine). Depositary Bank could not recover from Drawer, as she never signed or transferred the check.

Question 131

____________ occurs when a party, with full knowledge of the forgery (or alteration) accepts the benefits thereof or actively assents to the wrongful activity.

Answer 131

Ratification

Question 132

This rule validates the forged indorsement of the payee’s name where the maker or drawer has been duped by an imposter to issue the instrument.

Answer 132

The Imposter Rule

Question 133

Upon answering the door, Amy, an animal lover, found a man at her door who said he was Wally Woodall, and that he was seeking contributions so that he could save the endangered species, the snipe (which he claimed was endangered because of all the snipe hunts conducted at summer camps around the country). Amy gave the man a check for $100 payable to the order of Wally Woodall. In fact, the man’s name was Sam Slick, a con artist. Sam took the check, indorsed it “Wally Woodall,” then signed his own name underneath the forged signature. Sam then presented the check to Drawee Bank, which paid it. Upon discovering that she had been swindled, Amy demanded that her bank recredit her account. Amy argues that the check was not properly payable because of the forged indorsement.

Is Amy correct?

Answer 133

Generally correct - but because of the Imposter Rule it is payable.

Question 134

If the drawer, maker, or other person whose intent determines to whom an instrument is payable does not intend (at the time that the instrument was issued) for the person identified to have any interest in the instrument, or if the person identified in the instrument as the payee is fictitious, then an indorsement in the name of the payee is effective.

NOTE: If the signature of the issuer of an instrument is made by automated means, such as a check-writing machine, the relevant intent is that of the person who supplied the name of the payee.)

Answer 134

Fictitious Payee Rule

Question 135

The treasurer of D Corporation, who is authorized to write checks on the company’s account, embezzles funds by drawing two checks totaling $50,000. One check is drawn payable to X Corporation, a company with which D Corporation often does business. The other check is drawn payable to Y Corporation, a fictitious company. When these checks are issued, the treasurer does not intend for either of the payees to have any interest in these checks. The treasurer indorses both checks so that it appears that officers of the payee companies signed them. He then cashes the checks and disappears with the proceeds. The checks are paid and charged to the account of D Corporation. D corporation argues that the checks were paid over forged indorsements, and so were not properly payable. It demands that the drawee bank recredit its account. Must drawee bank recredit the account?

Answer 135

Ordinarily, check to X needs X’s indorsement, BUT never intended them to get money, so properly payable in this case.

Question 136

If an employer entrusts an employee (including an independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, the indorsement is _____________.

Answer 136

Effective

Question 137

“Responsibility with respect to an instrument” (Fraudulent Indorsements by Employees) includes authority:

Answer 137

(1) to sign or indorse instruments on behalf of the employer;
(2) to process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition;
(3) to prepare or process instruments for issue in the name of the employer;
(4) to supply information determining the names or addresses of payees of instruments to be issued by the employer; and
(5) to control the disposition of instruments issued in the name of the employer

Question 138

Bob works in the billing department of a law firm, and his duties include receiving checks and posting them to the firm’s account. Bob steals a check made out to the firm, forges the indorsement of the firm, and transfers the check to X. Is the indorsement effective?

Answer 138

Yes, had authority.

Question 139

Bob works in the billing department of a law firm, and his duties include receiving checks and posting them to the firm’s account. A janitor steals a check and forged the name of the firm. Is the indorsement effective?

Answer 139

No because janitor has no authority.

Question 140

Company gives E, an employee, responsibility for verifying, electronically recording, and mailing checks that company draws to pay accounts owed to other people. One day, E stole several checks and forged the payee’s indorsements. Are these indorsements effective?

Answer 140

Yes because E had responsibility.

Question 141

Carl Contractor was sitting in his office when his secretary brought him his checkbook. The secretary informed him that he owed $2000 to Rex Roofer for some work that he had done for Contractor. Contractor wrote out a check for that amount to Roofer, and the secretary forged Roofer’s name to the check and pocketed the proceeds. Is the check properly payable from Contractor’s account?

Answer 141

Yes.

Question 142

If a person, by his negligence, ________________ to a material alteration or to the making of an unauthorized signature, he is precluded from asserting the alteration or lack of authority against a HDC or the drawee or other payor who pays in good faith an din accordance with the reasonable commercial standards of the drawee’s or payor’s business.

Answer 142

Substantially contributes

Question 143

If the drawee bank or other person paying the instrument or taking it for value or for collection fails to exercise ordinary care, the person bearing the loss (under The Imposter Rule, The Fictitious Payee Rule, The Fraudulent Indorsement by Employee Rule, or The Negligence Rule) may recover from the drawee bank or other person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

Answer 143

Comparative Negligence

Question 144

Maker borrows money from Corleone Loan Company, and signs a $2000 note payable in 6 months. After Maker leaves the office ,Corleone skillfully altered the amount of the ntoe to read $20,000. When the note came due, Corleone demanded the $20,000 from Maker. What amount, if any, must Maker pay Corleone?

Answer 144

Nothing

Question 145

Maker borrows money from Corleone Loan Company, and signs a $2000 note payable in 6 months. After Maker leaves the office ,Corleone skillfully altered the amount of the ntoe to read $20,000. After altering the note, Corleone had negotiated the note to Finance Company, a HDC. When the note comes due, Finance Company presents the note to Maker for payment.

What amount, if any, must Maker pay Finance Company?
If Finance Company cannot recover the full $20,000 from Maker, can Finance Company recover anything from Corleone?

Answer 145

$2,000 (original amount).

Yes, the other $18,000. (Transfer warranty)

Question 146

S takes a personal check from B for $100 in payment for the price of goods sold by S to B. S alters the instrument to read $1000 and cashes the check at his own bank, Local Bank. Local Bank then presented it to Drawee Bank, which paid the $1000. When B received his bank statement, he immediately complained to Drawee Bank, demanding that his account be recredited.

Must Drawee Bank recredit B’s account? If so, how much?
If B’s bank must recredit B’s account, could it recover anything from Local Bank (the bank presenting the check)?

Answer 146

Can only pay $100, so recredit $900.

Yes, must recredit account because of presentment warranty.

Question 147

Statute of Limitations

Answer 147

5 years