Chapter 17
Chapter 17 Case Hypothetical Timothy Jones drafts a check in the amount of $12,000 in full and final payment for a car that Andre Hastings is scheduled to deliver to him the following Friday. Andre immediately completes a special endorsement to Clint Patterson on the back of the check (“Pay to Clint Patterson, Signed, Andre Hastings”), and transfers the check to Clint in return for a lot of land Clint deeds to him. Andre fails to deliver ownership and possession of the car to Timothy the following Friday. One week later, Clint approaches Timothy, and requests payment of the $12,000. Clint shows Timothy Andre’s special endorsement to him on the back of the check. Timothy states “I don’t owe you anything. Andre never delivered the car I was supposed to get for that $12,000. If you have problems with what I’ve just said, go talk to Andre.” Is Clint Patterson entitled to the $12,000 from Timothy Jones? If so, does Timothy have any legal recourse against Andre Hastings?
Chapter 17 Case Hypothetical Nora Abbey, eighteen years old, is overjoyed to have received her first paycheck from her first employer, Nightingale Fashions, Inc. The check is in the amount of $542.00, and is drawn on the Bank of the Homeland. Eager to document here entitlement to the paycheck, Abbey turns the check over, and signs her name in the “endorsement” section. She gets into her car, and heads to the Bank of the Homeland, where she has a checking account, to make a deposit. Unbeknownst to Nora, the check has slipped out of her pocketbook, and onto Main Street. A cross-wind blows the check onto a street corner. An unidentified woman picks up the check, and later that day, at another Bank of the Homeland branch, she cashes the check. Four weeks later, Nora notices that the check has been processed, and she immediately calls the vice-president of the Bank of the Homeland branch she frequents, requesting that the $542 be credited to her account. The bank vice-president assures Nora that she will “look into it,” but offers no assurances. Must the bank credit Nora’s account?
Chapter 17 Ethical Dilemma According to UCC 3-416(a), “a person who transfers an instrument for consideration warrants to the transferee, and, if the transfer is by indorsement, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the instrument; (2) all signatures on the instrument are authentic and authorized; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; and (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer.” The above-referenced implied promises are commonly referred to in the legal profession as “transfer warranties.” They are implied by law, meaning that the transferor of commercial paper need not expressly make these warranties; instead, they are recognized automatically by operation of law. Most laypersons are not familiar with these warranties (that is, until a complainant seeks to hold the transferor liable for breach of one or more of them!) From an ethical standpoint, is it fair to hold transferors of commercial paper responsible for transfer warranties, even though the transferor does not expressly make them?
Chapter 17 Case Hypothetical Ira Ofseyer is an eighteen-year-old freshman at Golden State University. He arrives on campus several days before classes begin, and learns of a party scheduled at Tau Phi Gamma Fraternity on Friday evening. Ofseyer arrives at the party, confident that a thorough university education means more much more than mere academics. Beer is served at the party, and that night, Ira consumes the first alcohol of his young life. In the haze of the alcohol, and caught up in socializing with the Tau Phi fraternity brothers (who are trying to convince him of the merits of fraternity membership,) Ofseyer inadvertently leaves his checkbook on the dining room table. Three days later, Ira realizes he is missing his checkbook. He returns to the fraternity to find his checkbook, but to no avail. He hurries to his bank’s university branch on University Avenue, and learns that one check has been written on his account in the last three days, for $3,500 at University Stereo Shack. Ofseyer’s remaining checking account balance is $5.83. His parents will not be happy. Is Ofseyer’s bank legally obligated to re-credit his account in the amount of $3,500?
Holder in Due Course Doctrine
Requirements for “Holder In Due Course” Status
Holder Takes Instrument “For Value” If Holder:
Advantage of Holder In Due Course Status
Holder In Due Course Is Subject to Following “Real” Defenses:
“Shelter” Principle:
Federal Trade Commission Rule: Negotiation of consumer notes may not be subject to holder in due course status, if consumer credit contract or purchase money loan contains following statement:
Signature Liability
Parties Signing Negotiable Instrument
Parties Signing Negotiable Instrument (Continued)
“Primary” Liability Versus “Secondary” Liability
Proper Presentment of Negotiable Instrument
Accommodation Party
Unauthorized Signature
Negotiable Instrument Warranty Liability
Transfer Warranties
Presentment Warranties
Avoiding Liability for Negotiable Instruments
“Real Defenses” (Applicable to All Parties):
Common Law Personal Defenses (Applicable to Holders, But Not Holders In Due Course):
Personal Defenses (Applicable to Holders, But Not Holders In Due Course):
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