Business Law Study Set 13

Business

Quiz 29 :

Transfers of Negotiable Instruments and Warranties of Parties

Quiz 29 :

Transfers of Negotiable Instruments and Warranties of Parties

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insurer issued a settlement check on a claim brought by an injured minor that was payable to "Trudy Avants attorney for minor child Joseph Walton, mother Dolores Carpenter 11762 S. Harrells Ferry Road #E Baton Rouge LA 70816." The lawyer indorsed the check. Two unknown individuals forged indorsements for the other two names and obtained payment of the check. The insurer sued the payor bank claiming the instruments were not properly payable because of the forged indorsements. The court is unclear whether the indorsement required is one for an either/or payee or joint payee. What advice can you offer the court as it faces this issue? [Coregis Insurance Co. v Fleet National Bank, 793 A2d 254 (Conn App)]
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Answer:

Refer to the case Coregis Insurance Co. v Fleet National Bank
Case Issue:
The issue is whether the bank is liable for cashing a check which includes an endorsement from one of the actual payees and two forged endorsement by unknown people and whether the check is a joint payee check or alternative payee check.
Trial court held for the plaintiff the bank is liable, citing that the check is joint payee check and needs proper (non-forged) endorsements from all named payee. Bank appealed the decision.
Relevant Terms, Laws, and Cases:
Joint Payee - can only be negotiated when all payees listed are present e.g. a check that list payable to the order of "X Y", both X Y must be present.
Alternative payee - can only be negotiated when either payees listed are present e.g. a check that list payable to the order of "X or Y", either X or Y may be present.
UCC 3-205(d) - states that an anomalous endorsement (endorsement made by a non-holder of the instrument, e.g. random person on the street who picks up a check not payable to him) does not affect the negotiation of the check.
UCC 3-110(d) - states that if an instrument is ambiguous regarding joint or alternative payee then it is payable to alternative payee.
Opinion
Higher court reversed the decision.
The court cited section UCC 3-110(d) the instrument is an alternative payee instrument there is one valid endorser hence it can be negotiated. Furthermore, under UCC 3-205 the anomalous endorsement (forgeries by unknown) did not make the check non-payable. Hence, bank is not liable for paying a properly endorsed check.

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(Abbott Development Company) made a note payable to Western State Bank of Midland. The FDIC took over Western State's operations after it failed. ABCO had defaulted on the note, after which the FDIC permitted ABCO Homes to refinance the note, making its refinancing note payable to the FDIC. The FDIC indorsed its note to SMS Financial and inadvertently sent it to SMS as part of a large batch of documents. When litigation resulted on the note, SMS claimed it was the holder. Others challenged its status, saying that SMS never had the instrument delivered to it. The lower court held SMS was not a holder and SMS appealed. Is SMS a holder? Why or why not? [SMS Financial, L.L.C. v ABCO Homes, Inc., 167 F3d 235 (5th Cir)]
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Answer:

Refer to the case SMS Financial LLC v ABCO Homes
Case Issue:
The issue is whether the plaintiff is a valid holder of a note that was accidentally sent to them. The note was endorsed by the previous holder.
Trial court granted summary judgment in favor of defendant, plaintiff appealed the decision.
Relevant Terms, Laws, and Cases:
Holder - a holder of a negotiable instrument can claim payment on it. For example, A made a check payable to B and is in possession by B ; B is the holder and may claim payment from A.
Negotiation - transfer of a negotiable instrument. Instruments with a specified payee must be endorsed, signed by payee, prior to negotiation. E.g. B endorses the check and gives it to C ; C is the new holder and may claim payment from A.
Opinion:
Higher court reversed, holding that plaintiff is holder of the note.
There was a proper negotiation of the note. The court argued, since the note was endorsed by the previous holder, the government agency, and sent to the plaintiff, the plaintiffs then become the new holder of the note. It did not matter that the note was sent to plaintiffs by accident.

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Harbor Realty Co. had a checking account in First National Bank. When construction work was obtained by Snug Harbor, its superintendent, Magee, would examine the bills submitted for labor and materials. He would instruct the bookkeeper which bills were approved, and the bookkeeper then prepared the checks in accordance with his instructions. After the checks were signed by the proper official of Snug Harbor, Magee picked them up for delivery. Instead of delivering certain checks, he forged the signatures of the respective payees as indorsers and cashed the checks. The drawee bank then debited the Snug Harbor account with the amount of the checks. Snug Harbor claimed this was improper and sued the bank for the amount of the checks. The bank claimed it was protected by the impostor rule. Will the bank be successful? Explain. [Snug Harbor Realty Co. v First National Bank, 253 A2d 581 (NJ Super)]
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Answer:

Refer to the case Snug Harbor Realty v First National Bank
Case Issue:
The issue is whether a company (plaintiff) can recover from embezzlement of one of their employees from the bank (defendant) which processed the embezzled checks.
Trial court held for the defendant, plaintiff appealed.
Relevant Terms, Laws, and Cases:
UCC 3-405 - waives a depositor's liability for cashing a forged check, when it was an employee of the maker forged a check under a payee's name with payee having no benefit in the transaction, and if the employee supplied the names of the payee. In this case, the employee forged payees name to embezzle the money.
Opinion:
Higher court reversed the decision and remand for a new trial.
The higher court argued that the trial court erred in judgment for not considering the fact that these checks were for actual payees of the plaintiff and not names supplied by the employee. For example , if the employee forged made up a payee of a company check and forged the endorsement and embezzled that check, then the bank would be protected under UCC 3-405. But this was not the case as the checks were meant for actual payees of the company.

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Corey Brandon Bumgarner, who was separated from his wife, Crystal, had an accident caused by Donald Wood that resulted in $2,164.46 in damages to Corey's vehicle. Wood's insurance carrier mailed a draft in the amount of $2,164.46 drawn on Fleet Bank of Hartford, Connecticut, payable to Corey, to his box at P.O. Box 153, Hillsboro, North Carolina. The draft was negotiated at Community Bank and Trust, and the name, "Crystal Bumgarner," was handwritten on the back of the draft. Corey's name was written below Crystal Bumgarner's name. Crystal Bumgarner's driver's license number was handwritten on the front of the draft. Corey Bumgarner filed suit to have the insurer pay him the $2,164.46. The insurer indicated that it had sent order paper, that it had been delivered, and that there was, therefore, no claim against it or Wood. The trial court found that there had been no delivery and that Bumgarner was entitled to another check. Wood and his insurer appealed. Who is correct about delivery and why? [ Bumgarner v. Wood , 563 S.E.2d 309, 47 UCC Rep. Serv. 2d 1099 (N.C. App.)]
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claims filed with an insurance company were approved for payment, they were given to the claims clerk, who would prepare checks to pay those claims and then give the checks to the treasurer to sign. The claims clerk of the insurance company made a number of checks payable to persons who did not have any claims and gave them to the treasurer with the checks for valid claims, and the treasurer signed all of the checks. The claims clerk then removed the false checks, indorsed them with the names of their respective payees, and cashed them at the bank where the insurance company had its account. The bank debited the account of the insurance company with the amount of these checks. The insurance company claimed that the bank could not do this because the indorsements on the checks were forgeries. Was the insurance company correct? [General Accident Fire Life Assur. Corp. v Citizens Fidelity Bank Trust Co., 519 SW2d 817 (Ky)]
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Michael Sykes, the president of Sykes Corp., hired Richard Amelung to handle the company's bookkeeping and deal with all of its vendors. Amelung entered into an agreement with Eastern Metal Supply to help reduce Sykes's debt to Eastern. Whenever Sykes received a check, Amelung would sign it over to Eastern and allow it to keep 30 percent of the check amount. On 28 checks that totaled $200,000, Amelung indorsed the back as follows: "Sykes Associates or Sykes Corporation, Richard Amelung." Amelung then turned the checks over to Eastern, and Eastern deposited them into its account at Barnett Bank. Eastern would then write one of its checks to Sykes Corp. for the 70 percent remaining from the checks. When Michael Sykes learned of the arrangement, he demanded the return of the 30 percent from Barnett Bank, claiming that it had paid over an unauthorized signature and that the indorsement was restricted and had been violated by the deposit into Eastern's account. What type of indorsement did Amelung make? Did he have the authority to do so? Should Sykes be reimbursed by Barnett? [Sykes Corp. v Eastern Metal Supply, Inc., 659 So2d 475 (Fla App)]
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Jerry O. Peavy, Jr., who did not have a bank account of his own, received a draft from CNL Insurance America in the amount of $5,323.60. The draft was drawn on CNL's account at Bank South, N.A., and was "payable to the order of Jerry Peavy and Trust Company Bank." Jerry O. Peavy, Sr., allowed his son Peavy, Jr., to deposit the draft in his account at Bank South, N.A. Bank South accepted the draft and deposited it on December 29, 1992, with only the signature of Jerry Peavy, Jr. Both Mr. and Mrs. Peavy, Sr., then wrote checks on the amount of the draft using the full amount to benefit their son. On March 30, 1993, Bank South realized that it had improperly deposited the draft because it was lacking an indorsement from Trust Company Bank and reversed the transaction by debiting Mr. and Mrs. Peavy's account for the full amount of the draft. A bank officer then called Mr. and Mrs. Peavy, told them what had happened with the draft, and "threatened to send them to jail if they did not immediately deposit the sum of $5,323.60." The Peavys deposited that amount from the sale of some stock they owned and then filed suit against Bank South for its conversion of their son's draft and funds. Do the Peavys have a case? [Peavy v Bank South, 474 SE2d 690 (Ga App)]
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employees of the state of New Mexico fraudulently procured and indorsed a warrant (a draft drawn against funds of the state) made out to the Greater Mesilla Valley Sanitation District. There was no such sanitation district. The employees obtained payment from Citizens Bank. Western Casualty, the state's insurer, reimbursed the state for its loss and then brought suit against the bank for negligently paying the warrant. Is the bank liable for its payment? Discuss your answer. [Western Casualty Surety Co. v Citizens Bank of Las Cruces, 676 F2d 1344 (10th Cir)]
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Would a bank be liable to a customer who indorsed a check "For deposit only into account #071698570" if that check were deposited into the wrong account? What if the customer's indorsement was "For deposit only"? Would any account qualify? Would any bank qualify? [Qatar v First American Bank of Virginia, 885 F Supp 849 (ED Va)]
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Allstate Insurance Company issued a check payable to "Chuk N. Tang Rosa C. Tang HWJT" with "Bank of America" on the second line and the following explanation on the front of the check: "Settlement of our rental dwelling loss caused by fire on 11/21/93." The Tangs indorsed the check and forged the indorsement of Bank of America. When Bank of America objected, the Tangs claimed that only they needed to sign the instrument for further negotiations. The check was intended as a joint payment for Bank of America as the mortgagee on the Tangs' rental property because the insurance policy required that the mortgagee be paid first before any proceeds went to the property owners. Bank of America sued Allstate. Is Bank of America entitled to recover for the lack of its indorsement? Was its indorsement necessary for further negotiation? [Bank of America Nat'l Trust Savings Ass'n v Allstate Insurance Co., 29 F Supp 2d 1129 (CD Cal)]
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Eutsler forged his brother Richard's indorsement on certified checks and cashed them at First National Bank. When Richard sought to recover the funds from the bank, the bank stated that it would press criminal charges against Eutsler. Richard asked the bank to delay prosecution to give him time to collect directly from his brother. His brother promised to repay him the money but vanished some six months later without having paid any money. Richard sued the bank. What result? [Eutsler v First Nat'l Bank, Pawhuska, 639 P2d 1245 (Okla)]
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could a check made out to "Joseph Klimas and his Attorney Fritzshall Gleason Blue Cross Blue Shield Company and Carpenters Welfare Fund" be negotiated further? What would be required? [Chicago District Council of Carpenters Welfare Fund v Gleason's Fritzshall, 693 NE2d 412 (Ill App)]
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Getty Petroleum distributes gasoline through dealer-owned stations. Customers who buy gas at a Getty station can pay by cash or credit card. When a customer uses a credit card, Getty processes the transactions, receives payment from the credit card company, and then issues computer- generated checks payable to dealers to reimburse them for their credit card sales. Many checks, however, are not intended for negotiation and are never delivered to the payees. Instead, Getty uses these checks for bookkeeping purposes, voiding them and then crediting the check amount toward the dealer's future purchases of gasoline from Getty. Lorna Lewis, a supervisor in Getty's credit processing department, stole over 130 checks, forged the indorsements of the payees by hand or rubber stamp, and then submitted the checks to American Express and other credit card companies to pay her own debts. The credit card companies then forwarded the checks through ordinary banking channels to Chemical Bank, where Getty had its checking account. Chemical Bank honored the checks Lewis had forged. Getty, on discovering the larceny of Lewis, sought recovery of the amounts from the credit card companies. Getty sought payment on 31 of the checks from American Express (which had been paid by Chemical Bank). At trial, a judge held American Express liable to Getty for $58,841.60. The appeals court found that American Express was grossly negligent in taking and cashing the checks and also held it liable. American Express appealed. Who wins and why? [Getty Petroleum Corp. v American Exp. Travel Related Services Co., Inc., 683 NE 2d 311, 660 NYS 2d 689, 32 UCC Rep Serv 2d 1031]
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January 1998, Allied Capital Partners, L.P. and American Factors Corporation were in the business of factoring accounts receivable for third-party clients. Allied assigned its factoring contract with Complete Design, Inc. to American but retained an interest in the factoring of Complete Design's invoices. On January 25, 1998, in payment of invoices issued by Complete Design, Clark Wilson Homes, Inc., issued a check for $6,823.15. The check was payable to: Complete Design Allied Capital Partners, L.P. 2340 E. Trinity Mills Ste. 300 Carrollton, Texas 75006 On February 10, 1998, Clark Wilson issued another check for $26,329.32 made payable to: Complete Design Allied Capital Partners, L.P. 2340 E. Trinity Mills Ste. 300 Carrollton, Texas 75006 Complete Design deposited both checks in its account at Bank One. However, Allied and American received none of the proceeds of the checks. Complete Design subsequently declared bankruptcy, and Allied and American made demand on Bank One for damages resulting from Bank One's conversion of the two checks. Bank One denied all liability for conversion of the checks. Allied and American subsequently sued Bank One, asserting conversion. Bank One filed a motion for summary judgment asserting that, because it was ambiguous to whom the checks at issue were payable, they were payable upon a single indorsement. The trial court granted Bank One's motion. Allied and American appealed. Who is correct here? Were both signatures necessary for a proper indorsement, or will one do? [Allied Capital Partners, L.P. v Bank One, Texas, N.A., 68 SW3d 51 (Tex App)]
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Benton, as agent for Savidge, received an insurance settlement check from Metropolitan Life Insurance Co. He indorsed it "For deposit" and deposited it in Bryn Mawr Trust Co. in Savidge's account. What were the nature and effect of this indorsement? [Savidge v Metropolitan Life Ins. Co., 110 A2d 730 (Pa)]
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