Quiz 30: Liability of the Parties Under Negotiable Instruments

Business

Randy Bocian had a bank account with First of America-Bank (FAB). On October 8, Bocian received a check for $28,800 from Eric Christenson as payment for constructing a pole barn on Christenson's property. Bocian deposited the check at FAB on October 9 and was permitted to draw on the funds through October 12. Bocian wrote checks totaling $12,334.21, which FAB cleared. On October 12, Christenson stopped payment on the check as the result of a contract dispute over the pole barn. Bocian's account was then overdrawn once the check was denied clearance by Christenson's bank. FAB brought suit against both Bocian and Christenson to collect its loss. Christenson counterclaimed against Bocian for his contract breach claims on the pole barn construction. FAB maintained that it had given value and was a holder in due course and that, as such, it was not required to be subject to the pole barn issues or the stop payment order. Is FAB right? [First of America-Bank Northeast Illinois v Bocian, 614 NE2d 890 (Ill App)]

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Refer to the case First of America Bank Northeast Illinois v Bocian Case Issue The issue is whether the bank (plaintiff) that deposited a check paid by defendant is a holder in due course of the check. Trial court granted summary judgment in favor of the bank, defendant appealed. Relevant Terms, Laws, and Cases Holder in due course - a holder in due course is a holder that has more legal protections for claiming a payment on an instrument. The holder in due course that is received a check, such as a bank, can claim on payment for the check even if the initial payee and payer are in conflict. UCC 3-302 - defines the provision to be a holder in due course including, taking an instrument by a) giving value, b) good faith, c) no knowledge of that the instrument is overdue, dishonored, or other claims on the check. Opinion The higher court affirmed the decision. The bank is a holder in due course. The court argued that the bank was a holder in due course because it given value, by allowing the payee to draw money from the deposit, there was no dispute of that the bank didn't take the check in good faith, and the bank did not have knowledge of the disputes when they took the check. Hence, the bank met the provisions for holder in due course and may state claim on the check free from defendant's contract claims.

Q 2

Cronin, an employee of Epicycle, cashed his final paycheck at Money Mart Check Cashing Center. Epicycle had issued a stop payment order on the check. Money Mart deposited the check through normal banking channels. The check was returned to Money Mart marked "Payment Stopped." Money Mart brought an action against Epicycle, claiming that, as a holder in due course, it was entitled to recover against Epicycle. Epicycle argued that Money Mart could not be a holder in due course because it failed to verify the check as good prior to cashing it. Is Money Mart a holder in due course? [Money Mart Check Cashing Center, Inc. v Epicycle Corp., 667 P2d 1372 (Colo)]

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Refer to the case Money Mart Check Cashing Center, Inc v Epicycle Corp Case Issue The issue is whether the check cashing company (plaintiff) that cashed a check paid from defendant is a holder in due course of the check. Trial court granted summary judgment in favor of the company, defendant appealed. State Superior court reversed the decision, arguing that the company did not verify the validity of the check (the check was issued a stop payment); the company appealed. Relevant Terms, Laws, and Cases Holder in due course - a holder in due course is a holder that has more legal protections for claiming a payment on an instrument. The holder in due course that is received a check, such as a bank, can claim on payment for the check even if the initial payee and payer are in conflict. UCC 3-302 - defines the provision to be a holder in due course including, taking an instrument by a) giving value, b) good faith, c) no notice of that the instrument is overdue, dishonored, or other claims on the check. Opinion The State Supreme Court reversed the decision. The company is a holder in due course. The company gave value for the check by giving cash for it; the first condition for holder in due course is met. Hence, the court looked at whether the company took the check in good faith and without knowledge of disputes on the check. The State Supreme court argued that failure to investigate the nature of a check doesn't mean a lack of good faith in taking it. Furthermore, the court believed the company had no notice of the disputes on the check because there was nothing suspicious about it, and the company did not have a duty to verify. Hence, the judgment is granted to the company.

Q 3

Halleck executed a promissory note payable to the order of Leopold. Halleck did not pay the note when due, and Leopold brought suit on the note, producing it in court. Halleck admitted that he had signed the note but claimed plaintiff Leopold was required to prove that the note had been issued for consideration and that the plaintiff was in fact the holder. Are these elements of proof required as part of the case? [Leopold v Halleck, 436 NE2d 29 (Ill App)]

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Refer to the case Leopold v Halleck Case Issue The issue is whether plaintiff (creditor) has to prove that he is a holder and had taken a promissory note for consideration from defendant (debt). Trial court held for defendant, plaintiff appealed. Relevant Terms, Laws, and Cases Holder - is a person or business that has an instrument and may state claim on the amount due on it. Opinion Higher court reversed the decision. The plaintiff did not have to prove he was the holder and that the note was taken as consideration. The court argued that it was clear plaintiff was holder since the amount was to be paid to him and he was in possession of the note. Instead, they argued that it was only necessary to prove holder status if there are actual evidence contending it.

Q 4

Calhoun/Johnson Company d/b/a Williams Lumber Company (Williams) sold building materials to Donald Miller d/b/a Millercraft Construction Company (Millercraft) on credit. Miller had signed a personal guaranty for the materials. Miller requested lien waivers from Williams for four of his projects and asked for them from Fabian Boudreau, Williams's credit manager. Fabian refused to grant the waivers because Miller was $28,000 delinquent on his account. Miller agreed to bring his account current with the exception of $11,000 for which he signed a no-interest promissory note. Miller obtained the lien waivers and then defaulted on the note. Williams brought suit for payment, and Williams said there was lack of consideration and that the note was not valid. He said he must give value to be able to recover on the note. Was he correct? [Miller v Calhoun/Johnson Co., 497 SE2d 397 (Ga App)]

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Q 5

Statham drew a check. The payee indorsed it to Kemp Motor Sales. Statham then stopped payment on the check on the grounds that there was a failure of consideration for the check. Kemp sued Statham on the check. When Statham raised the defense of failure of consideration, Kemp replied that he was a holder in due course. Statham claimed that Kemp could not recover because Statham learned of his defense before Kemp deposited the check in its bank account. Discuss the parties' arguments and rights in this situation. [Kemp Motor Sales v Statham, 171 SE2d 389 (Ga App)]

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Q 6

check cashing companies be holders in due course? What arguments can you make for and against their holder-in-due-course status? [Dal-Tile Corp. v Cash N' Go, 487 SE2d 529 (Ga App)]

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Q 7

Jones, wishing to retire from a business enterprise that he had been conducting for a number of years, sold all of the assets of the business to Jackson Corp. Included in the assets were a number of promissory notes payable to the order of Jones that he had taken from his customers. Upon the maturity of one of the notes, the maker refused to pay because there was a failure of consideration. Jackson Corp. sued the maker of the note. Who should succeed? Explain.

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Q 8

Elliot, an officer of Impact Marketing, drew six postdated checks on Impact's account. The checks were payable to Bell for legal services to be subsequently performed for Impact. Financial Associates purchased them from Bell and collected on four of the checks. Payment was stopped on the last two when Bell's services were terminated. Financial argued that it was a holder in due course and had the right to collect on the checks. Impact claimed that because the checks were postdated and issued for an executory promise, Financial could not be a holder in due course. Who was correct? Why? [Financial Associates v Impact Marketing, 394 NYS2d 814 (Misc)]

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Q 9

drew a check to the order of P. P took the check postdated. P knew that D was having financial difficulties and that the particular checking account on which this check was drawn had been frequently overdrawn. Do these circumstances prevent P from being a holder in due course? [Citizens Bank, Booneville v National Bank of Commerce, 334 F2d 257 (10th Cir); Franklin National Bank v Sidney Gotowner, 4 UCC Rep Serv 953 (NY Supp)]

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Q 10

Daniel, Joel, and Claire Guerrette are the adult children of Elden Guerrette, who died on September 24, 1995. Before his death, Elden purchased a life insurance policy from Sun Life Assurance Company of Canada through a Sun Life agent, Steven Hall, and named his children as his beneficiaries. Upon his death, Sun Life issued three checks, each in the amount of $40,759.35, to each of Elden's children. The checks were drawn on Sun Life's account at Chase Manhattan Bank in Syracuse, New York. The checks were given to Hall for delivery to the Guerrettes. Hall and an associate, Paul Richard, then fraudulently induced the Guerrettes to indorse the checks in blank and to transfer them to Hall and Richard, purportedly to be invested in HER, Inc., a corporation formed by Hall and Richard. Hall took the checks from the Guerrettes and turned them over to Richard, who deposited them in his account at the Credit Union on October 26, 1995. The Credit Union immediately made the funds available to Richard. The Guerrettes quickly regretted having negotiated their checks to Hall and Richard, and they contacted Sun Life the next day to request that Sun Life stop payment on the checks. Sun Life immediately ordered Chase Manhattan to stop payment on the checks. When the checks were ultimately presented to Chase Manhattan for payment, Chase refused to pay the checks, and they were returned to the Credit Union. The Credit Union received notice that the checks had been dishonored on November 3, 1995, the sixth business day following their deposit. By the time the Credit Union received notice, however, Richard had withdrawn from his account all of the funds represented by the three checks. The Credit Union was able to recover almost $80,000 from Richard, but there remained an unpaid balance of $42,366.56. The Credit Union filed suit against Sun Life, and all of the parties became engulfed in litigation. The Credit Union indicated it was a holder in due course and was entitled to payment on the instrument. Sun Life alleged fraud. Is the Credit Union a holder in due course? Can the parties allege the fraud defense against it? [Maine Family Federal Credit Union v Sun Life Assur. Co. of Canada, 727 A2d 335 (Me)]

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Q 11

C. Vincent was an employee of Porter County Development Corporation (PCDC). Vincent had three personal credit cards through Citibank. Vincent diverted checks to the PCDC, deposited them into his personal checking account, and issued checks drawn upon that personal account to pay part of the outstanding balance of his three Citibank-held credit card accounts. Citibank was unaware that Vincent used misappropriated funds to pay his credit card balance. PCDC filed suit to have Citibank return the embezzled funds. Citibank moved for summary judgment on the grounds that it was an HDC. The trial court granted summary judgment and PCDC appealed. Who should prevail on appeal and why? [ Porter County Development Corp. v. Citibank (South Dakota) , N.A., 855 N.E. 2d 306 (Ind. App.)]

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Q 12

Sanders gave Clary a check but left the amount incomplete. The check was given as advance payment on the purchase of 100 LT speakers. The amount was left blank because Clary had the right to substitute other LT speakers if they became available and the substitution would change the price. It was agreed that in no event would the purchase price exceed $5,000. Desperate for cash, Clary wrongfully substituted much more expensive LT speakers, thereby increasing the price to $5,700. Clary then negotiated the check to Lawrence, one of his suppliers. Clary filled in the $5,700 in Lawrence's presence, showing him the shipping order and the invoice applicable to the sale to Sanders. Lawrence accepted the check in payment of $5,000 worth of overdue debts and $700 in cash. Can Lawrence recover the full amount? Why or why not?

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Q 13

is a Michigan corporation engaged in the business of buying and selling cars. Between 1997 and 2000, Katrina Stewart was employed as a manager by GRAS. During that period, Stewart wrote checks, without authority, on GRAS's corporate account payable to MBNA and sent them to MBNA for payment of her husband's MBNA credit card account. MBNA accepted the checks and credited the proceeds to Stewart's husband's credit card debt. MBNA accepted and processed the GRAS checks in its normal manner through electronic processing. When MBNA receives a check for a credit card payment, the envelope containing the check and the payment slip is opened by machine and the check and the payment slip are electronically processed and credited to the cardholder's account balance. MBNA does not normally review checks for credit card payments. After crediting a payment check to the cardholder's account, MBNA transfers it to the bank on which it is written for collection. Pursuant to its standard practice, MBNA did not review the checks it received from Stewart. GRAS did not have a customer relationship with MBNA during the relevant time period. GRAS sought a refund of the amounts Stewart embezzled via the MBNA application of the checks to Stewart's husband's credit card account. MBNA said it was a holder in due course. Was MBNA a holder in due course? Was MBNA subject to GRAS's defense of unauthorized instruments? [Grand Rapids Auto Sales, Inc. v MBNA America Bank, 227 F Supp 2d 721 (WD Mich)]

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Q 14

William Potts was employed by Jemoli Holdings, Inc., to liquidate assets of defunct companies. Potts had the authority to sign checks for Jemoli. Potts had a personal investment account with Raymond James Financial Services. When the stock market had its 2000 crash due to the dot-com bubble, Potts had difficulty meeting his margin calls. He began giving checks from Jemoli to Raymond James to cover the margin calls. When a representative questioned Mr. Potts about the Jemoli checks, he assured the representative that Jemoli was him, and that it was his firm. Over four months, Potts wrote checks totaling $1.5 million to Raymond James to cover loans and tomake more investments. When Jemoli's principals discovered the embezzlement they brought suit to recover the funds from Raymond James. Raymond James says it was an HDC of the checks and not subject to Jemoli's claims for breach of fiduciary duty by its agent, Potts. Who is correct about the HDC status of Raymond James and why? [ Jemoli Holding, Inc. v. Raymond James Financial, Inc. , 470 F.3d 14 (1st Cir.)]

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Q 15

Trading issued two checks totaling $75,000 to Country Grain Elevators for grain it had purchased. Country Grain indorsed the checks over to the law firm of Carter Grimsley as a retainer. Country Grain then collapsed as a business, and Omni stopped payment on the checks because all of its grain had not been delivered. Carter Grimsley claimed it was a holder in due course and entitled to payment. However, the Department of Agriculture claimed its interest in the checks for liens and maintained that Carter Grimsley was not a holder in due course because it had not given value. The trial court granted summary judgment for the Department of Agriculture because the checks were indorsed as a retainer for future legal work and Carter Grimsley had not given value. Is Carter Grimsley a holder in due course? [Carter Grimsley v Omni Trading, Inc., 716 NE2d 320 (Ill App)]

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Quiz 30: Liability of the Parties Under Negotiable Instruments

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