Business Law Study Set 14

Business

Quiz 25 :

Transferability and Holder in Due Course

Quiz 25 :

Transferability and Holder in Due Course

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A QUESTION OF ETHICS: Indorsements. As an assistant comptroller for Interior Crafts, Inc., in Chicago, Illinois, Todd Leparski was authorized to receive checks from Interior's customers and deposit the checks into Interior's account. Between October 2000 and February 2001, Leparski stole more than $500,000 from Interior by indorsing the checks "Interior Crafts - For Deposit Only" but depositing some of them into his own account at Marquette Bank through an automated teller machine owned by Pan American Bank. Marquette alerted Interior, which was able to recover about $250000 from Leparski. Interior also recovered $250,000 under its policy with American Insurance Co. To collect the rest of the missing funds, Interior filed a suit in an Illinois state court against Leparski and the banks. The court ruled in favor of Interior, and Pan American appealed to a state intermediate appellate court. [ Interior Crafts, Inc. v. Leparski, 366 Ill.App.3d 1148, 853 N.E.2d 1244, 304 Ill.Dec. 878 (3 Dist. 2006)] (a) What type of indorsement is "Interior Crafts-For Deposit Only" What is the obligation of a party that receives a check with this indorsement Does the fact that Interior authorized Leparski to indorse its checks but not to deposit those checks into his own account absolve Pan American of liability Explain. (b) From an ethical perspective, how might a business firm such as Interior discourage an employee's thievery such as Leparski's acts in this case Discuss.
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a). Indorsements:
In the case of Interior Crafts, Inc. v. Leparski, 366 Ill.App.3d 1148, 853 N.E.2d 1244, 304 Ill.Dec. 878 (3 Dist.2006), the trial court granted summary judgment in favor of Interior on the basis of conversion. The Appellate Court affirmed.
The indorsement is a restrictive indorsement under UCC 2-206(c)(2), which imposes conversion liability on a depository bank for failure to honor a restrictive endorsement. The first party to receive this indorsement is a depository bank strictly liable to the payee of the checks.
The Court stated that the code provides for liability if payment is made inconsistent with the restrictive endorsement. There is no requirement that the restrictive endorsement be made only by an authorized agent. 
Therefore, regardless of Leparski's authority to indorse checks, he was not authorized to deposit them into his personal account.
b). Employee Thievery:
In order to discourage employee thievery the duties of receipt and deposit of funds should be delegated to different employees who both have the duty to submit recording of the receipts and deposits to a controlling authority. The separation and oversight provides multiple preventions to employee thievery.

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Transfer and Holder in Due Course Germanie Fequiere executed and delivered a promissory note in the principal amount of $240,000 to BNC Mortgage. As security for the note, Fequiere executed and delivered a mortgage on real property. BNC indorsed the promissory note in blank. Several years later, when Fequiere failed to make payments on the note, Chase Home Finance, LLC-the holder in due course of the note and holder of the mortgage-moved to foreclose on the property. In defense, Fequiere asserted that Chase could not foreclose on the property because the mortgage on the property had not been properly transferred from BNC to Chase. Assuming that is true, does it mean that Chase, as holder of the negotiable note, cannot foreclose on the collateral (the property secured by the mortgage) Explain your answer. [ Chase Home Finance, LLC v. Fequiere, 119 Conn.App. 570, 989 A.2d 606 (2010)]
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Transfer and Holder in Due Course:
In the case of Chase Home Finance, LLC. v. Fequire, 119 Conn.App. 570, 989 A.2d 606 (2010), the trial court supported a judgment of strict foreclosure. The Appellate Court affirmed.
The Court stated that Chase was a holder of the negotiable note in due course because General Statutes § 49-17 permits the holder of a negotiable instrument that is secured by a mortgage to foreclose on the mortgage even when the mortgage has not yet been assigned to him.
Under this law the mortgage followed the note and as a holder of the note, it had common law rights to foreclose on the property when the mortgage was not yet assigned to them. Additionally, standing to enforce the promissory note is set forth by the provisions of the Uniform Commercial Code as adopted in General Statutes § 42a-1-101 et seq.

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CASE PROBLEM WITH SAMPLE ANSWER: Holder in Due Course American International Group, Inc. (AIG), an insurance company, issued a check to Jermielem Meniwether in connection with a personal-injury matter. Merriwether presented the check to A-1 Check Cashing Emporium for payment. A-1's clerk forgot to have Meniwether sign the check. When he could not reach Meniwether and ask him to come back to A-1 to sign the check, the clerk printed Merriwether's name on the back mi deposited the check for collection. When the check was not paid, A-1 sold it to Robert Triffin, who is in the business of buying dishonored checks. When Triffin could not get the check honored, he sued AIG, contending that he, through A-1, had the right to collect on the check as a holder in due course (HDC). The trial court rejected that claim. Triffin appealed. On what basis could he claim HDC status [ Triffin v. American International Group, Inc., __ A.2d __ (N.J.Super. 2008)]
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Holder in Due Course:
In the case of Triffin v. American International Group, Inc., ___ A.2d ___ (N.J.Super. 2008), the trial judge dismissed the complaint. The Court of Appeals affirmed.
The Court stated that Triffin was not a holder in due course because A-1 was not a holder in due course. A-1 tried to cash the check that was unsigned when it was presented for payment.
UCC 3-320 states that an unauthorized signature does not create a holder in due course. Merriwether was the only person authorized to sign the check and he did not.

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VIDEO QUESTION: Indorsements. Go to this text's Web site at www.cengage.com/blaw/darkson and select "Chapter 25." Click on "Video Questions" and view the video titled Negotiability Transferability: Indorsing Checks. Then answer the following questions. (a) According to the instructor in the video, what are the two reasons why banks generally require a person to indorse a check that is made out to cash (a bearer instrument), even when the check is signed in the presence of the teller (b) Suppose that your friend makes out a check payable to cash, signs it, and hands it to you. You take the check to your bank and indorse the check with your name and the words "without recourse." What type of indorsement is this How does this indorsement affect the bank's rights (c) Now suppose that you go to your bank and write a check on your account payable to cash for $500. The teller gives you the cash without asking you to indorse the check. After you leave, the teller slips the check into his pocket. Later, the teller delivers it (without an indorsement) to his friend Carol in payment for a gambling debt. Carol takes your check to her bank, indorses it, and deposits the money. Discuss whether Carol is a holder in due course.
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Alternative or Joint Payees Hartford Mutual Insurance Co. issued a check for $60,150 payable to "Andrew Michael Bogdan, Jr., Crystal Bogdan, Oceanmark Bank FSB, Goodman-Gable-Gould Company." The check was to pay a claim related to the Bogdans' commercial property. Besides the Bogdans, the payees were the mortgage holder (Oceanmark) and the insurance agent who adjusted the claim. The Bogdans and the agent indorsed the check and cashed it at Provident Bank of Maryland. Meanwhile, Oceanmark sold the mortgage to Pelican National Bank, which asked Provident to pay it the amount of the check. Provident refused. Pelican filed a suit in a Maryland state court against Provident, arguing that the check had been improperly negotiated. Was this check payable jointly or in the alternative Whose indorsements were required to cash it In whose favor should the court rule Explain. [ Pelican National Bank v. Provident Bank of Maryland, 381 Md. 327, 849 A.2d 475 (2004)]
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Indorsements A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: "For rent paid, [signed] Jordan." Jordan's landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm frees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: "Pay to Better-Garden Nursery, without recourse, [signed] Deborah." Better-Garden Nursery sends the check to its bank indorsed "For deposit only, [signed] Better-Garden Nursery." (a) Classify each of these indorsements. (b) Was the transfer from Jordan's landlord to Deborah, without indorsement, an assignment or a negotiation Explain.
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Holder in Due Course Through negotiation, Emilio has received from dishonest payees two checks with the following histories: (a) The drawer issued a check to the payee for $9. The payee cleverly altered the numeral amount on the check from $9 to $90 and the written word from "nine" to "ninety." (b) The drawer issued a check to the payee without filling in the amount. The drawer authorized the payee to fill in the amount for no more than $90. The payee filled in the amount of $900. Discuss whether Emilio, by giving value to the payees, can qualify as a holder in due course of these checks.
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Negotiation Bertram writes a check for $200 payable to "cash." He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank's parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check "For deposit only, [signed] Amber Dowel" and deposits it into her checking account. In light of these circumstances, answer the following questions: (a) Is the check a bearer instrument or an order instrument (b) Did Jerrod's delivery of the check to Amber constitute a valid negotiation Why or why not (c) What type of indorsement did Amber make (d) Does Bertram have a right to recover the $200 from Amber Explain.
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How do the requirements for negotiation of an instrument with a blank qualified indorsement, as was used in this case, differ from those for negotiation of an instrument with a special qualified indorsement
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Holder in Due Course Robert Triffin bought a number of dishonored checks from McCall's Liquor Corp., Community Check Cashing II, LLC (CCC), and other licensed check-cashing businesses in New Jersey. Seventeen of the checks had been dishonored as counterfeit. In an attempt to recover on the items, Triffin met with the drawer, Automatic Data Processing, Inc. (ADP). At the meeting, Triffin said that he knew the checks were counterfeit. When ADP refused to pay, Triffin filed suits in New Jersey state courts to collect, asserting claims totaling $11,021.33. With each complaint were copies of assignment agreements corresponding to each check. Each agreement stated, among other things, that the seller was a holder in due course (HDC) and had assigned its rights in the check to Triffin. ADP had not previously seen these agreements. A private investigator determined that the forms attached to the McCall's and CCC checks had not been signed by their sellers but that Triffin had scanned the signatures into his computer and pasted them onto the agreement ADP claimed fraud. Does Triffin qualify as an HDC If not, did he acquire the rights of an HDC under the shelter principle As for the fraud claim, which element of fraud would ADP be least likely to prove [ Triffin v. Automatic Data Processing, Inc., 394 N.J.Super. 237, 926A.2d 362 (App.Div. 2007)]
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QUESTION WITH SAMPLE ANSWER: Holder in Due Course. Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000. (a) Does the bank qualify as a holder in due course If so, for what amount Explain. (b) If Hayden had sold the note to a stranger in a bar for $500, would the stranger qualify as a holder in due course Explain.
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Suppose that the indorsement at issue in this case had been written on a separate document that was not firmly affixed to the note. Would this document have constituted an allonge Would Deutsche Bank be entitled to enforce the note Explain.
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