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Quiz 26 :

Transferability and Holder in Due Course

Quiz 26 :

Transferability and Holder in Due Course

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Accommodation Parties Donald Goosic, a building contractor in Nebraska, did business as "Homestead" builders. To construct a house "on spec" (without a preconstruction buyer), Donald obtained materials from Sack Lumber Co. on an open account. When Donald "got behind in his payments," his wife, Frances, cosigned a note payable to Sack for $43,000, the outstanding balance on the account. Donald made payments on the note until he obtained a discharge of his debts in a bankruptcy proceeding to which Frances was not a party. Less than a year later, Sack filed a suit in a Nebraska state court against Frances to collect on the note. She contended that she was an accommodation party, not a maker, and thus was not liable because the applicable statute of limitations had run. She testified that Donald "made more debt than … money" and that she was "paying the bills out of [her] income." The Goosics' most recent tax returns showed only losses relating to Homestead. Under the Uniform Commercial Code, a person receiving only an indirect benefit from a transaction can qualify as an accommodation party. How would you rule on this question of fact? Why? [ Sack Lumber Co. v. Goosic, 15 Neb.App. 529, 732 N.W.2d 690 (2007)]
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Accommodation Parties:
In the case of Sack Lumber Co. v. Goosic, 15 Neb.App. 529, 732 N.W.2d 690 (2007), the trial court found in favor of Goosic. The Appellate court affirmed.
The Court determined that under UCC 3-419 , a person receiving only an indirect benefit from a transaction can qualify as an accommodation party.
Goosic was not a direct beneficiary of the value given by Sack Lumber for the instrument, the court's determination that Goosic was an accommodation party was correct.

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Signature Liability Gil makes out a $900 negotiable promissory note payable to Ben. By special indorsement, Ben transfers the note for value to Jess. By blank indorsement, Jess transfers the note for value to Pam. By special indorsement, Pam transfers the note for value to Adrien. In need of cash, Adrien transfers the instrument for value by blank indorsement back to Jess. When told that Ben has left the country, Jess strikes out Ben's indorsement. Later she learns that Ben is a wealthy restaurant owner in Baltimore and that Gil is financially unable to pay the note. Jess contends that, as a holder in due course, she can hold Ben, Pam, or Adrien liable on the note. Discuss fully Jess's contentions.
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Signature Liability:
Jess intentionally cancelled Ben's signature, thus didscharging Ben's liability without consideration under UCC 3-604(a)(i). When Jess crossed out Ben's indorsement she also removed the liability of subsequent indorsers under UCC 3-604(a)(i).
When Jess reacquired the note previously held by her, all intervening parties were discharged under UCC 3-207.
Hence Jess cannot hold any of the previous indorsers liable on the note.

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CASE PROBLEM WITH SAMPLE ANSWER: Agents' Signatures. Ameripay, LLC, is a payroll services company that, among other things, issues payroll checks to the employees of its clients. In July 2002, Nu Tribe Radio Networks, Inc. (NTRN), based in New York City, hired Ameripay. Under their agreement, Ameripay set up an account on NTRN's behalf at Commerce Bank. NTRN agreed to deposit funds in the account to cover its payroll obligations. Arthur Piacentini, an owner of Ameripay, was an authorized signatory on the account. On the checks, NTRN was the only identified company, and Piacentini's signature appeared without indicating his status. At the end of the month, four NTRN employees cashed their payroll checks, which Piacentini had signed, at A-1 Check Cashing Emporium, Inc. The checks were returned dishonored Ameripay had stopped their payment because it had not received the funds from NTRN. A-1 assigned its interest in the checks to Robert Triffin, who filed a suit in a New Jersey state court against Ameripay. Between a principal and an agent, what principles determine which party is liable for the amount of an unpaid instrument? How do those principles apply in this case? Is Ameripay liable? Why or why not? [ Triffin v. Ameripay, LLC, 368 N.J.Super. 587, 847 A.2d 628 (App. Div. 2004)]
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Agents' Signatures:
In the case of Triffin v. Ameripay, LLC., 368 N.J.Super. 587, 847 A.2d 628 (App.Div. 2004), the trial court found in favor of Triffin. The Appellate court reversed.
The Court determined that under UCC 3-402(c), liability for the dishonored checks rests on the disclosed principal, not the agent. Therefore, a company's check binds only the company and not the agent.
Hence, Ameripay as an agent was not liable to Triffin for the funds that their customer, NRTN did not deposit to cover the checks.

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Nancy Mahar was the office manager at Golden Years Nursing Home, Inc. She was given a signature stamp to issue checks to the nursing home's employees for up to $100 as advances on their pay. The checks were drawn on Golden Years' account at First National Bank. Over a seven-year period, Mahar wrote a number of checks to employees exclusively for the purpose of embezzling funds for herself. She forged the employees' indorsements on the checks, signed her name as a second indorser, and deposited the checks in her personal account at Star Bank. The employees whose names were on the checks never actually requested them. When the scheme was uncovered, Golden Years fi led a suit against Mahar, Star Bank, and others to recover the funds. Using the information presented in the chapter, answer the following questions. What is the rule set forth by that provision? DEBATE THIS: Because signature stamps create so many opportunities for embezzlement, they should be banned.
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A QUESTION OF ETHICS: Primary and Secondary Liability. Clarence Morgan, Jr., owned Easy Way Automotive, a car dealership in D'Lo, Mississippi. Easy Way sold a truck to Loyd Barnard, who signed a note for the amount of the price payable to Trustmark National Rank in six months. Before the note came due, Barnard returned the truck to Easy Way, which sold it to another buyer. Using some of the proceeds from the second sale, Easy Way sent a check to Trustmark to pay Barnard's note. Meanwhile, Barnard obtained another truck from Easy Way, financed through another six-month note payable to Trustmark. After eight of these deals, some of which involved more than one truck, an Easy Way check to Trustmark was dishonored. In a suit in a Mississippi state court, Trustmark sought to recover the amounts of two of the notes from Barnard. Trustmark had not secured titles to two of the trucks covered by the notes, however, and this complicated Barnard's efforts to reclaim the vehicles from the later buyers. [ Trustmark National Bank v. Barnard, 930 So.2d 1281 (Miss.App. 2006)] (a) On what basis might Barnard be liable on the Trustmark notes? Would he be primarily or secondarily liable? Could this liability be discharged on the theory that Barnard's right of recourse had been impaired when Trustmark did not secure titles to the trucks covered by the notes? Explain. (b) Easy Way's account had been subject to other recent overdrafts, and a week after the check to Trustmark was returned for insufficient funds, Morgan committed suicide. At the same time, Barnard was unable to obtain a mortgage because the unpaid notes affected his credit rating. How do the circumstances of this case underscore the importance of practicing business ethics?
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Unauthorized Indorsements Stephen Schor, an accountant in New York City, advised his client, Andre Romanelli, Inc., to open an account at J. P. Morgan Chase Bank, N.A., to obtain a favorable interest rate on a line of credit. Romanelli's representative signed a signature card, which he gave to Schor. When the accountant later told Romanelli that the rate was not favorable, the firm told him not to open the account. Schor signed a blank line on the signature card, changed the mailing address to his office, and opened the account in Romanelli's name. In a purported attempt to obtain credit for the firm elsewhere, Schor had its principals write checks payable to themselves for more than $4.5 million, ostensibly to pay taxes. He indorsed and deposited the checks in the Chase account and eventually withdrew and spent the funds. Romanelli filed a suit in a New York state court against Chase and other banks, alleging that a drawer is not liable on an unauthorized indorsement. Is this the rule? What are its exceptions? Which principle applies to these facts, and why? [ Andre Romanelli, Inc. v. Citibank, N.A., 60 A.D.3d 428, 875 N.Y.S.2d 14 (1 Dept. 2009)]
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Nancy Mahar was the office manager at Golden Years Nursing Home, Inc. She was given a signature stamp to issue checks to the nursing home's employees for up to $100 as advances on their pay. The checks were drawn on Golden Years' account at First National Bank. Over a seven-year period, Mahar wrote a number of checks to employees exclusively for the purpose of embezzling funds for herself. She forged the employees' indorsements on the checks, signed her name as a second indorser, and deposited the checks in her personal account at Star Bank. The employees whose names were on the checks never actually requested them. When the scheme was uncovered, Golden Years fi led a suit against Mahar, Star Bank, and others to recover the funds. Using the information presented in the chapter, answer the following questions. Under the UCC, which party, Golden Years or Star Bank, must bear the loss in this situation? Why? DEBATE THIS: Because signature stamps create so many opportunities for embezzlement, they should be banned.
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Defenses Thomas and Heidi Klutz, who did business as Hit Enterprises, LLC, obtained a franchise from Kahala Franchise Corp. to operate a Samurai Sam's Teriyaki Grill restaurant in Vancouver, Washington. Their agreement allowed them to transfer the franchise only on Kahala's approval. Six years later, the Klutzes sold the restaurant to William Thorbecke and Regina Norby-Thorbecke for $170,000. The Thorbeckes signed a promissory note to the Klutzes for $110,000 of the price. At the time, the Klutzes claimed that they also had the right to sell the franchise to the Thorbeckes. They advised the Thorbeckes, however, to operate the restaurant under the Klutzes' franchise agreement to avoid paying a $5,000 transfer fee to Kahala. When Kahala learned of the deal, the franchisor told the Thorbeckes to stop using the Samurai Sam's name and fi led a suit in a Washington state court against the Klutzes. The Thorbeckes stopped paying on the note, and the Klutzes fi led a claim against them for the unpaid amount. In defense, the Thorbeckes asserted breach of contract and fraud. Are the Thorbeckes' defenses effective against the Klutzes? Explain. [Kahala Franchise Corp. v. Hit Enterprises, LLC, 159 Wash.App. 1013 (2011)]
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Material Alteration Williams purchased a used car from Stein for $1,000. Williams paid for the car with a check (written in pencil) payable to Stein for $1,000. Stein, through careful erasures and alterations, changed the amount on the check to read $10,000 and negotiated the check to Boz. Boz took the check for value, in good faith, and without notice of the alteration and thus met the Uniform Commercial Code's requirements for the status of a holder in due course. Can Williams successfully raise the universal (real) defense of material alteration to avoid Payment on the check? Explain.
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Signature Liability Waldo makes out a negotiable promissory note payable to the order of Grace. Grace indorses the note by writing on it "Without recourse, Grace" and transfers the note for value to Adam. Adam, in need of cash, negotiates the note to Keith by indorsing it with the words "Pay to Keith, Adam." On the due date, Keith presents the note to Waldo for payment, only to learn that Waldo has filed for bankruptcy and will have all debts (including the note) discharged. Discuss fully whether Keith can hold Waldo, Grace, or Adam liable on the note.
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Defenses On September 13, 1979, Barbara Shearer and Barbara Couvion signed a note for $22,500, with interest at 11 percent, payable in monthly installments of $232.25 to Edgar House and Paul Cook. House and Cook assigned the note to Southside Bank in Kansas City, Missouri. In 1997, the note was assigned to Midstates Resources Corp., which assigned the note to the Cadle Co. in 2000. According to the payment history that Midstates gave to Cadle, the interest rate on the note was 12 percent. A Cadle employee noticed the discrepancy and recalculated the payments at 11 percent. When Shearer and Couvion refused to make further payments on the note, Cadle filed a suit in a Missouri state court against them to collect. Couvion and Shearer responded that they had made timely payments on the note, that Cadle and the previous holders had failed to accurately apply the payments to the reduction of principal and interest, and that the note "is either paid in full and satisfied or very close to being paid in full and satisfied." Is the makers' answer sufficient to support a verdict in their favor? If so, on what ground? If not, why not? [ The Cadle Co. v. Shearer, 69 S.W.3d 122 (Mo.App.W.D. 2002)]
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QUESTION WITH SAMPLE ANSWER: Defenses. Niles sold Kennedy a small motorboat for $3,500, maintaining to Kennedy that the boat was in excellent condition. Kennedy gave Niles a check for $1,500, which Niles indorsed and gave to Frazier for value. When Kennedy took the boat for a trial run, she discovered that the boat leaked, needed to be painted, and required a new motor. Kennedy stopped payment on her check, which had not yet been cashed. Niles has disappeared. Can Frazier recover from Kennedy as a holder in due course? Discuss.
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Nancy Mahar was the office manager at Golden Years Nursing Home, Inc. She was given a signature stamp to issue checks to the nursing home's employees for up to $100 as advances on their pay. The checks were drawn on Golden Years' account at First National Bank. Over a seven-year period, Mahar wrote a number of checks to employees exclusively for the purpose of embezzling funds for herself. She forged the employees' indorsements on the checks, signed her name as a second indorser, and deposited the checks in her personal account at Star Bank. The employees whose names were on the checks never actually requested them. When the scheme was uncovered, Golden Years fi led a suit against Mahar, Star Bank, and others to recover the funds. Using the information presented in the chapter, answer the following questions. Based on these facts, describe any transfer or presentment warranties that Mahar may have violated. DEBATE THIS: Because signature stamps create so many opportunities for embezzlement, they should be banned.
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Nancy Mahar was the office manager at Golden Years Nursing Home, Inc. She was given a signature stamp to issue checks to the nursing home's employees for up to $100 as advances on their pay. The checks were drawn on Golden Years' account at First National Bank. Over a seven-year period, Mahar wrote a number of checks to employees exclusively for the purpose of embezzling funds for herself. She forged the employees' indorsements on the checks, signed her name as a second indorser, and deposited the checks in her personal account at Star Bank. The employees whose names were on the checks never actually requested them. When the scheme was uncovered, Golden Years fi led a suit against Mahar, Star Bank, and others to recover the funds. Using the information presented in the chapter, answer the following questions. With regard to signature liability, which provision of the Uniform Commercial Code (UCC) discussed in this chapter applies to this scenario? DEBATE THIS: Because signature stamps create so many opportunities for embezzlement, they should be banned.
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