Review Question 3: Official Comment 3, Case #7 to 3-405 is directly on point! It places the loss on the employer, Big C, thus Dependable Bank should prevail. See Problems 193 and 194 of the text. Analysis:

Big C gave Carol "responsibility" as defined in 3-405(a)(3) because she had the authority to prepare checks for Tom’s signature. 3-404(b)(I) does not apply because Tom’s intent controls, and he does intend Shirt World (SW) to be the payee.

SW does not have an action in conversion against anyone because SW never got delivery of the check – 3-420. There is no forged drawer’s signature.

There is no forged indorsement per se, but under the Official Comment to 3-405, the depositing into a SW account is treated as an effective indorsement. See also 3-405©(ii).

The only possible counterargument here is that DB was negligent in allowing Carol to open up this account without proof of authority, deposit a check to it without an indorsement, and receive and withdraw credit for that deposit. Thus, under 3-406, perhaps DB should be apportioned part of the loss, depending on its level of contributory negligence – see Official Comment #4 to 3-405.

Review Question 9: 1. No. SB should not be liable to Larry for its dishonor of the $1,000 check to FSC. The check was dated 7/2 and was presented for payment at 9 am on 7/3, at which precise time there were insufficient funds in the account. Even though Larry made a deposit to the account at 10 am on 7/3, the bank is not required to make those funds available until the next business day following the banking day of deposit - EFAA’s Reg CC §229.19©(1) .Therefore, at no time on July 3^rd were there enough funds in the account to cover the check. The bank is allowed to pay a check that would create an overdraft but is not required to. Bank is allowed to dishonor a check when the account is NSF – 4-402(a) and Official Comment #4 to 4-402. Bank did not become accountable for the item because it dishonored it before its midnight deadline passed under 4-301&302. Although Larry could recover actual damages resulting from the dishonor and consequential damages as well if there was a wrongful dishonor – 4-402(b), here there is no wrongful dishonor so this is n/a. Note also 4-402(c) which allows the bank to make more than one determination whether or not there are funds in the account to cover the check at any time before it gives notice of return or returns the check.

2. Yes. A drawer can postdate a check as long as the drawer gives the bank timely notice of the postdating – 4-401 Official Comment #3. Here there was notice given of the postdating, so the check is no longer properly payable under 4-401© and under this Official Comment, the bank can be liable for damages for the resulting loss which can include damages for dishonor of subsequent items. An open issue here might be whether Lori’s phone call to her "friend" at the Bank is adequate notice to the Bank (oral notice may be permissible; query whether the friend was the type of employee with authority to receive such notices). Bank is going to argue that the notice was not given in the time and manner necessary to allow the bank to act on it, thus it is not liable for paying the postdated check. However, none of this is dispositive, because an overriding issue is that Larry issued a valid oral stop payment order (assuming he correctly identified the check, usually by check number) on the check (see 4-403) and the Bank paid the item over his stop payment order, subjecting it to liability under 4-403© which includes damages for dishonor of subsequent items. The Bank may try to use 3-418(a) restitution against the payee to recover the amount of the check from the payee, even if it was negligent in mistakenly paying, see Official Comment 1 to 3-418, unless the payee is a person who took in good faith and for value.

Bank is entitled to pay Lori’s check after death for up to 10 days even after notice of death, unless Larry is a person who claims an interest in the account. Since he probably is, then his instruction to Bank not to pay her check after her death is valid under 4-405 and Bank acted wrongly in paying it. Finally, if the Bank wrongfully paid the check, it is still subrogated to the payee’s rights against Larry/the lawn co., so if the debt is really owed, there may be no recovery from the Bank by Larry – see 4-407.

Review Question 17A: HV should not recover from SSB for Ron’s checks but should for Rhonda’s checks; for hers, SSB should bear the loss. Ron’s checks: Once Ron indorses them in blank on the back, they become bearer paper and then Sally becomes a holder and a person entitled to enforce them, even if she is wrongfully possessing the checks – 3-301. If Sally is a PETE then there is no conversion action by the person who actually owns the right to the funds (HV, through the assignment of pension benefits to HV by residents) against the Bank, SSB – see 3-420(a) and 3-301 last sentence. Thus, HV would bear the loss on these checks. From a policy perspective, maybe it should, for failing to adequately supervise its employee, Sally – 3-406? The only argument here against the bank is that maybe it should have been on notice of something unusual when Sally deposited so many pension checks into her personal account, thus perhaps this is some sort of contributory negligence subjecting it to partial liability. Or, this fact destroys the bank’s ability to be a holder in due course, since it has "notice" of a problem re: the checks. However, it need not be a HIDC in order to be a PETE, see 3-301.

Rhonda’s checks: These are payable to X and Y, thus an indorsement by one of the two payees is not valid under Official Comment 1 to 3-420, and therefore no one can become a person entitled to enforce the check thereafter, thus the Bank has actually converted the funds. Here, the person who owns the funds, HV, should be able to bring a conversion action against SSB under 3-420. This also makes sense, policy-wise, since the Bank had a perfect opportunity to discover the defect in the indorsement, when it accepted it for deposit, thus since it was in a position to protect everyone against the loss and discover the wrongdoing, it should bear the loss. It’s also the first person in the chain of title to deal with the wrongdoer, who is long gone – consistent with policy we discussed on wrongdoing generally. Note that a conversion action would also lie against Sally, but she is long gone.

Note: 3-405 does not apply here because the checks were not indorsed by Sally nor were they deposited into an account bearing the name of the payee; they were deposited into her personal account. See 3-405©(ii). Also, one check was altered under 3-407(a) because it was otherwise stale (more than 6 months old – 4-404) and the bank wouldn’t have had to honor it. It is enforceable according to its original terms, which means the bank can elect to pay it but is not required to. If paid in good faith, then can charge drawer’s account for the item.

Review Question 7: I. Kim is not liable on the check but Kim’s mother is. This is because Kim signed the check in a representative capacity (e.g., as her mother’s agent). Note that the account is in her mother’s name, not in a business or trade name. Kim had actual authority to sign her mom’s checks, so her signature therefore binds her mother – 3-402 (a). Kim is not herself liable on the check because, although she did not disclose her agent status, she signed preprinted checks on which her mother was shown as the drawer, so this lets Kim off the hook under 3-402 (c). Mom has 3-414(b) drawer’s liability.

1. Kim can sue both OB and NB in conversion under 3-420. OB, if it ends up bearing the loss by paying Kim, can then sue back up the chain to NB under a breach of presentment warranty cause of action under 4-208(1), thus the loss ultimately falls on the first person in the chain of title to deal with the thief, which is consistent with the policy on liability for forged indorsements. Analysis: Kim is the payee of a cashier’s check. OB is drawer and drawee of the check. She receives delivery of the check, thus entitling her to sue in conversion if it is converted, under 3-420(a). The Thief makes a forged indorsement of the payee’s signature, thus no one possessing the check thereafter can be a holder, including NB. The general rule is that the Thief is liable in conversion to the actual owner of the funds, which is here the payee, or Kim. However, the Thief is likely unfindable, so the loss should rest on NB, who was in the best position to discover the forged indorsement by making inquiry of Thief about the indorsement and his or her identity. As the drawer and drawee of the cashier’s check, note that OB is liable on this check under 3-412, as long as NB is a PETE or indorser who paid it, except that here NB can’t be a PETE if it isn’t a holder.

Another issue here is that OB received notice from Kim that the cashier’s check was stolen; however, there is no right to stop payment on a cashier’s check (would make them unreliable commercially and there is a policy to make these as fungible and reliable as possible) – Official Comment 4 to 4-403. Perhaps OB was negligent in paying it? 3-406? So it should bear some of the risk of loss as between OB and NB??

Review Question 14: Erma is an employee of RRR. She is responsible for paying bills by signing the owner’s name to checks drawn on RRR’s bank account at Local Savings Bank, reconciling bank statements, and is essentially unsupervised. The employer’s accounting firm did an annual review but did not review individual checks. RRR is the drawer/employer, Erma is the employee, Local Savings Bank is the drawee bank, and Penny Savings Bank is the depositary bank and the payee.

Erma has been authorized by RRR to write checks, apparently by signing the owner’s name to the checks. Even if this isn't a forged signature of the owner, under 1-201(43) this would be an "unauthorized signature" of the drawer which includes a forgery and a signature made by one exceeding apparent or actual authority, Ofc. Comt 1 to 3-403. The general rule would be that Erma's signature would bind Erma but not RRR on the checks (unless RRR is precluded from asserting the unauthorized signature by 4-406). The Price v. Neal doctrine would put the loss on the drawee bank, Local. The checks would not be "properly payable" under 4-401 (customer did not authorize the payment, see Ofc Comt 1) and RRR could sue Local Savings Bank to recredit its account. However, Local can defend against the Price v. Neal doctrine and the not-properly-payable suit and place the loss on RRR loss under 4-406 or 3-406. One could try to place the loss on RRR via ratification under 3-403 or 3-405, as discussed below, but I think both would fail. Penny may also have been negligent, as discussed below, but it may not operate to end up placing any loss on Penny. RRR and Local should share this loss, as explained below.

Assuming that this is an unauthorized signature:

One question is whether RRR is responsible for reviewing its bank statements under 4-406(f) and thereby is estopped from asserting an unauthorized signature on unreviewed checks over one year old (complete statute of limitations for checks over one year old) (also cuts off Local’s suit on breach of warranty). One could argue that RRR failed its duty to review bank statements under 4-406(c), or alternatively you could argue that RRR delegated this duty to Erma who was the wrongdoer so RRR had no opportunity to discover the unauthorized signature in this way -- See Ofc Comt 1. If you thought RRR breached its 4-406(c) duty, you could go on to discuss the effects of 4-406(d)(1) and (2). 4-406(d)(2) would result in Local bearing the loss for the checks included in the first statement sent to RRR for which RRR did not complain within the 30-day time period; but RRR should bear the loss for any checks paid thereafter. Comparative negligence between Local and RRR also applies under 4-406(e).

Second, discuss whether 3-406 on negligence applies to apportion fault between the banks and the employer. Analogize to Case #1 in Ofc Comt 3 to 3-406 and argue that RRR was negligent in not supervising Erma more closely and instructing her to forge the owner's signature such that she had the opportunity to make these checks. If RRR was negligent, it will be precluded from asserting that the checks were not properly payable as against Local as drawee.

3-405:

Another issue is whether 3-405 applies to place the loss on the employer. Here there is no forged indorsement of RRR's name as payee or of a payee of an instrument issued by RRR. It would seem that 3-405 would not apply.

Ratification:

Alternatively, you could argue that the signature was authorized by RRR's ratification of this procedure, and therefore the signature is not a forgery and that the forgery rules would not apply. Because Erma regularly forged the owner's signature and RRR had ratified this conduct under 3-403(a) last sentence, it is now estopped from asserting the forged owner's signature. Then, RRR would bear the loss unless it could argue that Penny was negligent in depositing the checks to Erma's personal account, see PROBLEMS 199 & 200. However, this is not the kind of case involving ratification because RRR did not know about AND benefit from Erma’s forgeries. No benefit.

Possible Liability of Penny?

Erma wrote 100 checks payable to Penny Savings Bank and deposited into her personal account at Penny Savings Bank. Another issue is therefore whether Penny is liable for negligence in allowing Erma to deposit company checks into her personal account. Cases have held that a bank in this situation is negligent, see PROBLEM 199 and 200, but the comparative negligence rule of 3-406 does not appear to apply, since its negligence did not contribute to the making of the forged signature. However, its negligence does contribute to the loss, so you could argue for the applicability of comparative negligence. Alternatively, you could argue that Penny had notice of Erma's breach of fiduciary duty under 3-307(b)(4), but the counterargument here is that Penny had no reason to know that Erma was acting in her capacity as a fiduciary and thus 3-307(b)(4) does not apply. The applicability of 3-307(b)(4) is arguable. If you decide that it applies, then Penny is on notice of a claim and cannot then be a HIDC, and RRR will then assert that it had a claim to the proceeds of the check.

So, Local would bear the loss under Price v. Neal and 4-401, except that RRR would bear its part of the loss caused by its negligent supervision of Erma and by its failure to examine its bank statements. You might argue that Penny should be liable in part to RRR for its part of the loss caused by its own (arguable) negligence in depositing the checks to Erma's personal account.

Question 6: Is this note a negotiable instrument? "I promise to pay the sum of $10,000 without interest to Bo on May 1, 1994. /s/ Al."

Is this a "negotiable instrument ("NI")?" Instrument = note or draft. Note = written promise of maker to pay money to payee; this appears to be a note, so it is an instrument.

Go thru the seven elements of negotiability:

writing 3-103(a)(6) & (9): this is in writing.

signed 3-103 (a)(6) & (9): yes, it is signed by Al.

unconditional promise or order 3-104(a); defined in 3-106; no conditions appear to exist on the promise to pay.

fixed amount of money: yes, $10,000 without interest.

courier without luggage 3-104(a)(3); no additional provisions are present so this appears to be satisfied.

payable on demand or at a definite time 3-104(a)(2); yes, May 1, 1994.

payable to bearer or order 3-104(a)(1); defined in 3-109: Because this is payable to an identified person, Bo, it must be either payable "to the order of Bo" or to "Bo or order," and this is only payable "to Bo," so it fails the 7th element of negotiability and therefore is not a negotiable instrument.

Question 12: Assuming this note is a negotiable instrument, Article 3 applies. You could briefly go thru the 7 elements and conclude that this is negotiable, once you make a couple of assumptions about the wording of the note. Richard is the maker; CC is the payee. Harry Holder may or may not be a holder; CC, Landlord, and Friend are all indorsers (possibly with indorser's liability) under 3-204(a) and (b).

Is Harry a holder? A holder of order paper is the identified person who is also in possession of the negotiable instrument, 1-201(20). To be a holder, there must have been a valid negotiation of the NI into Harry's hands; negotiation occurs thru indorsement.

It is unclear from the question if the indorsements are made in blank or are special indorsements; if you decide they are all special indorsements (e.g., pay to the order of), then the note remains order paper; if you decide that CC's is a blank indorsement, then the note is bearer paper and Landlord's out of order indorsement does not have any effect, Landlord is a holder of bearer paper by virtue of possession, and Friend is also, and then if Friend's indorsement is a blank indorsement, Harry is a holder of bearer paper. If you decide they are all special indorsements, then Harry is a holder of order paper, and the only issue is whether Landlord's out of order indorsement has any effect. Parol evidence would be admissible to show the actual order of indorsement (Lawrence p. 132). Or, Landlord's indorsement might be an anomalous indorsement under 3-205(d) which still makes Landlord liable as an indorser on the note.

Is Harry a HIDC? He is a holder (see above). He takes in good faith (defined in 3-103(a)(4) subjectively and objectively) and w/o notice of problems (notice defined in 1-201(25)), but he does not take for value, 3-303 (e.g., not a gift; but not same as consideration). He pays no consideration for this note. Both Landlord and Friend took for value (delinquent rent and reduced amount, respectively), so they can both be HIDCs. Although Harry is not a HIDC, he could have HIDC rights under the 3-203(b) "shelter rule" as a transferee of a HIDC. In this case,

his right are derivative of his predecessor and he takes subject to all defenses good vs. Friend. There is no evidence of any real or personal defenses to payment that Richard might have, however. Staleness of the note might be raised as an argument estopping Harry from recovering on this note (however, note that the 4-404 rule about checks more than 6 months old does not apply to a note, ditto re: 3-415(e) discharge rule re: indorsers (also n/a)). Because Harry is a holder, he is a person entitled to enforce, see 3-301(i).

Richard is liable to Harry as a maker, 3-412. This is primary liability.

CC, Landlord, and Friend are all liable to Harry as indorsers since they all indorsed the note, 3-415, but this is secondary liability (only liable once Richard refuses to pay). Indorser's liability exists once the conditions precedent are met: presentment to maker, dishonor, notice of dishonor under 3-503 or excuse thereof under 3-504(b). Each of CC, Landlord, and Friend is liable downstream only to a subsequent indorser who pays the NI under 3-415: Thus, CC is liable to Landlord and Friend and Harry but not Richard; Landlord is liable to Friend and Harry but not Richard or CC; Friend is liable only to Harry.

Question 21A: 1. Ann is the maker, Brian is either a surety or a co-maker, and Carla is clearly only a surety and is a guarantor of payment in absence of language making her a guarantor of collection only. As a payment guarantor, there is no need for the holder to sue the maker first and receive an unsatisfied judgment against the maker before suing Carla; Carla can be sued first. Carla can then sue Ann as the maker, for maker's liability under 3-412. Bounty and Advance are both holders of the note. Under 3-302(b), because they both had notice of the collateral release and time extension which are good defenses of Brian to liability, Brian’s discharge is effective as against them, even though they remain HIDCs under 3-302(b) and Ofc Comt 2. Bounty has no liability as an indorser since it made a qualified indorsement of the note to Advance "without recourse." 3-415(b).

Brian makes an anomalous indorsement (b/c he is not a holder), 3-205(d), and is therefore presumed to be an accommodation party, 3-419(c). Brian and Carla are both sureties under the common law of suretyship and are both accommodation parties under 3-419(a) because they sign the note itself and because (I assume) they did not get any benefit from the value given for the instrument but are signing for the purpose of incurring liability on the note. Brian could be an accommodation maker which makes him liable as a maker under 3-412 or an accommodation indorser which makes him liable as an indorser under 3-415. Because of the place in which he signed, there is a presumption that he is signing as a maker, so he could be an accommodation maker (no benefit) or a co-maker w/ maker’s liability under 3-412 (benefits), depending on whether he receives benefit, see above. See Ofc Comt 3 to 3-419. Carla is clearly only an accommodation indorser (not a maker) because of the guarantor language. Id. If Brian is a comaker, he is jointly and severally liable with Ann (see PROBLEMS 129 & 130) and has a right of contribution 3-116(a) and (b); if Brian is an accommodation maker, he can sue Ann to recover the full amount from her if he pays the full amount.

Release of collateral for the note and extension of time for payment of note would both usually discharge any accommodation parties on the note from liability. Brian is discharged from liability on the note under 3-605(c) (time extension; if extension causes loss to Brian), (e) & (f) & (g) (impairment of collateral; discharges Brian; Brian has burden to prove impairment; impairment includes release under (g); Bank as person entitled to enforce has notice of accommodation status of Brian under 3-419(c)). Discharge is a personal defense and as such, is not good against a HIDC unless the HIDC has notice of or knowledge of the discharge; here, clearly both Bounty and Advance have notice of Brian's discharge. See also 3-302(b). Brian would be discharged as explained above. Advance's knowledge of these two things at the time it bought the note makes it have "notice" of the discharge of Brian. Note that 3-605 would not apply to discharge Brian from liability on the note if he is a "co-maker" and not an accommodation maker.

However, Carla expressly consented to these two things, so she remains liable on the note (as a payment guarantor) under 3-605(i);

2. Draft is payable to Ted and Leslie jointly. Thus, the law of negotiable instruments applies (see Hutzler v. Hertz Corp. case). Ted forges Leslie's indorsement as payee and absconds with the proceeds. Ted and Leslie were joint payees; Perpetual is the drawer; Advance Bank is the drawee; Dover Bank is the depositary bank. Note this is a draft and not a check. Leslie as payee sued Ted, Dover, Advance, and Perpetual for conversion (see 3-420(a)); however, payees usually only have conversion actions against the drawee and the depositary bank, not against the drawer.

Because of the forged indorsement of Leslie's name, no subsequent transferee can be a holder and there can be no subsequent valid negotiation of the draft.

Leslie is not liable to any party; her forged indorsement does not operate as her signature but rather as the forger's signature under 3-403(a). Thus she has no indorser's liability under 3-415.

Under the Hutzler v. Hertz case, the loss would fall on Leslie as the "creditor" of Perpetual. See the court's holding on p. 553 that a person whose name is forged on an instrument by her agent is by her unwise selection of that agent estopped or precluded from denying the unauthorized signature and cannot recover from the drawee, Perpetual. Perpetual has been discharged once the draft was paid. However, other cases do disagree with this holding. Further, some commentators believe that Leslie can then sue Advance Bank for conversion under 3-420(a) because it paid over a forged indorsement; and that she can sue Dover Bank for conversion under 3-420(a) as well. If she recovers against Advance, Advance Bank would then be able to sue "up the chain" on a breach of presentment warranty action under 3-417(a)(1) (Dover was not a person entitled to enforce because it is not a holder due to the forged indorsement) against Dover; Dover would then end up with the loss as the first solvent (find-able) party in the chain after the wrongdoer, Ted. If Ted is able to be located, Dover could of course sue Ted on a breach of transfer warranty action under 3-416(a)(1) and (2), and the loss would come to rest with Ted.

Question 17: There are three checks in question: (1) to Cline for $400, which the teller refused to cash because Adams had NSF funds in his account with Columbus Bank; (2) to Dawson for $400, which the teller cashed; and (3) to Edwards for $25 but this check is over a year old, which the teller cashed. All checks were presented on the same day to Columbus Bank. On that day, Adams had a balance of $100 but had also deposited a check from Baker for $1,000, so one issue is funds availability on the check from Baker. Did the bank do anything wrong?

Stale check: The bank was not obligated to honor any check which is over 6 months old under 4-404, so it was within its rights to dishonor or refuse to pay check (3). The only exception in 4-404 is for certified checks which this is not. The bank can honor this check, however, and may charge Adams' account for paying the check if it is acting in good faith, 4-404.

Stop payment: Adams' stop payment order on check (3) had expired; his order was oral only (via telephone) and there are no facts to indicate that he followed up the oral order with a written stop payment order. An oral stop payment order is only valid for 14 calendar days under 4-403(b) unless it is confirmed in writing within that period; a written stop payment order is only effective for 6 months, 4-403(b). Stop payment orders can be renewed for additional 6-month periods but this must be in writing, according to 4-403(b). Therefore, Adams' stop payment order on check (3) was of no effect; the bank was entitled to pay it.

Funds availability: Adams' deposit of the Baker check was most likely a local check because it is likely that Columbus Bank and Cleveland Bank are banks located in the same Federal Reserve check-processing region (see text page 521). Thus, only the first $100 of it is required to be available at the start of the next business day after the deposit under §229.10(c)(1)(vii). Thus, Adams would not have any ability to write checks on Baker's check or withdraw funds from his account on Baker's check on the same day as the deposit, under the expedited funds availability rules. Therefore, the bank was entitled to take the position that he had insufficient funds to cover checks (1) and (2). (If you decided it was a nonlocal check because you assumed Columbus and Cleveland are not in the same Federal Reserve check-processing region, then the same result: only the first $100 of it is required to be available at the start of the first business day after the deposit under §229.10(c)(iv) (see pages 522-23 of text)).

Under 4-402(a), Columbus Bank is entitled to dishonor a check that would create an overdraft (e.g., checks (1) and (2)) unless it has agreed to pay the overdraft. See also 4-402(c) (the bank can determine Adams' balance at any time between receipt of the item by the bank and the time that it returns the item). The midnight deadline rules of 3-502(b)(1) which refers to 4-301 and 4-302 do not apply; where a an over-the-counter presentment is made (as here), 3-502(b)(2) requires the bank to pay or return the check by the close of business on that same day.

Further, Columbus Bank is entitled to pay a check that would create an overdraft and then can charge that amount against the account of the customer, Adams, under 4-401(a), as long as the check is properly payable, which checks (1) and (2) appear to be.

Thus, the bank did not act legally wrong in any of these transactions.

Question 21: The underlying transaction is between Bob's and Anton for a used car; the car is stolen so Anton has a good, albeit personal defense against payment for the car against Bob's. Both the note and the check given by Anton to Bob's appear to be negotiable instruments. (You could reiterate the requirements of NI's if you have time.) Bob's is the payee of both; Anton is the drawer of the check and the maker of the note; Gloria and Frank's may be holders of their respective instruments; Evan, Bob's, and Gloria are all indorsers of the check; Bob's and Donald are both indorsers of the note. See PROBLEM 93.

Gloria: Evan cannot be a HIDC because he is aware of Anton's insolvency so he has notice that Anton may have a real defense good against even a HIDC (e.g., discharge in insolvency under 3-305(a)(1)(iv) and (b)). Gloria cannot be a HIDC because she receives the check as a gift, therefore she does not take the check "for value." Gloria can only be a holder as a person to whom the check was properly negotiated by Evan's indorsement (you have to assume that he specially indorsed it to her). She may take under the shelter rule, but her rights would then be derivative of Evan's, who is not a HIDC, and she would be deemed to take with notice of Anton's insolvency proceedings. Neither Evan nor Gloria is a HIDC. Thus, Gloria would take the check subject to Anton's defense of insolvency (a real defense) and also subject to his personal defense to payment based on the fact that the car was stolen. Gloria will not be able to sue Anton on the check successfully on his liability as a drawer under 3-414. Drawer's liability is only secondary, and only arises after the check has been presented to the drawee and been dishonored, as it has here, see 3-414(b). (The drawee bank has no liability on the check unless it has been accepted under 3-409; here the check was affirmatively dishonored, so no drawee's liability under 3-413, see 3-408.)

Even if you decide that the check was indorsed in blank by Bob's, so that it becomes bearer paper, Gloria is still only a mere holder of bearer paper, and therefore is subject to both of Anton's defenses of insolvency and stolen car.

Frank's: Donald is not a HIDC because he had notice that the car was stolen. Assuming Bob's indorsed the note specially to Donald and Donald indorsed it specially to Frank's, Frank's would be a HIDC of order paper. If you assumed that the indorsements were made in blank, then Frank's would be a HIDC of bearer paper. You may go thru the HIDC analysis, here. Frank's is a holder, who took for value 3-303 (e.g., not a gift; but not same as consideration) of $3,000, in good faith (defined in 3-103(a)(4) subjectively and objectively), w/o notice of problems (notice defined in 1-201(25)). The only argument here that Frank's is not a HIDC would be based on the size of the discount of the note from face value ($3,000 vs. face value of $5,000). You could argue that this "deep discount" should put Frank's on notice of some irregularity in the underlying transaction. If so, then Frank's would be a mere holder and not a HIDC and would take the note subject to Anton's personal defense based on the fact that the car was stolen. If Frank's is a HIDC, however, then Frank can recover from Anton on the note (Anton has maker's liability under 3-412 which is primary) unless Anton has been discharged in insolvency proceedings, see 3-305(a)(1)(iv), which is a real defense good against a HIDC, see 3-305(b).

In other words, Anton has maker's liability under 3-412, which runs to a person entitled to enforce the note or check, defined in 3-301(i) as a holder (Frank's) or in (ii) as a nonholder in possession with the rights of a holder (Gloria could be this if there is no indorsement by Evan to her and it is order paper). Anton has good defenses, though, against a HIDC (discharge in insolvency) and against a nonHIDC (car was stolen), and will not have to pay Frank's or Gloria.

Question 8: Adams is the drawer of a check, Baker is the payee, Baker's bookkeeper indorses the check which is outside the scope of his or her authority as Baker's agent by applying a rubber stamp to which Baker apparently allowed him or her access, to the back of the check. However, the bookkeeper's motives were good (not intending to steal check). Assuming for a moment that the indorsement by the bookkeeper is valid or would be deemed valid, the bookkeeper now loses the check, which at this point is bearer paper since it has been indorsed in blank. Thus, Carr is a holder of bearer paper by virtue of his possession. Carr converts the bearer paper to order paper by writing "Pay to Dandy" above the indorsement (see PROBLEMS 93 and 98, 3-205(c)). The discrepancy between "Dandy" and "Denby" does not affect the validity of the indorsement or her negotiation and indorsement (see Lawrence p. 63-64 and 3-110(a) and Ofc Comt 1). She is a holder, and she transfers it back into bearer paper by writing "Pay to cash" and signing her name below that. Elton steals the check at gunpoint, but at this point it is bearer paper, so even a thief can be a holder of bearer paper. Elton's forgery of Denby's signature and purported special indorsement to himself are of no effect since it is bearer paper and he is the valid holder -- see PROBLEM 96; forged signatures on bearer paper are irrelevant and disregarded. If Floyd then took the check from Elton, Floyd became a holder via possession of bearer paper. Floyd could then cash the check at Gamay's (no facts to indicate if Floyd was required to indorse it or not; Gamay would likely have asked him to indorse it in order to make him liable as an indorser, see PROBLEM 96). Gamay would then have been a holder. Gamay might be a HIDC since it took the check for value, in good faith, and without notice of any valid defenses. Assuming Gamay is a HIDC, the only defenses available to preclude liability of any party to Gamay would be real defenses. Further, Gamay as a HIDC would take the check free of claims to the instrument under 3-306, last sentence, so that no one could recover the check from Gamay.

Indorsement by Bookkeeper:

The indorsement by Bookkeeper exceeds the scope of his actual authority as a bookkeeper, and thus could arguably be an "unauthorized signature" under 1-201(43) and Ofc Comt 1 to 3-403. Then, Adams would try to assert the forgery did not bind Adams and thereby escape liability on the check. However, Baker’s negligence in not supervising the Bookkeeper and allowing the Bookkeeper access to this stamp caused the situation to occur, therefore 3-406(a) should estop Baker from asserting that the indorsement is unauthorized (see first clause of 3-403(a) "Unless otherwise provided in this Article or Article 4..."), as against Gamay (again assuming that Gamay is a person who in good faith paid the instrument or took it for value or for collection). Under 3-406(b), if Gamay is also negligent in taking the check, then Gamay and Baker would share the loss. The application of 3-405 to this situation, assuming that you characterize Bookkeeper’s indorsement as a "fraudulent indorsement" under 3-405(a)(2), would place the loss on Baker as well.

Question 22: Ann purchased a money order from LSBank; payee was Bob. Underlying transaction is the purchase of a painting. Bob indorsed the money order on the bank in blank, thus converting order paper into bearer paper. When his girlfriend, Cindy, stole it, she was a holder of bearer paper and as such is a person entitled to enforce the instrument. She bought a car with it and gave it to Homer, who had seen Cindy and Bob together on several prior occasions to test drive cars (use this fact to argue that Homer is a HIDC because he should not have suspected that the money order was stolen; he had the right to believe Bob gave it to Cindy). Cindy converts the paper back into order paper by indorsing it to Bob and signing her name, but she also thereby incurs indorser's liability herself. Homer cashes the money order at LSBank (drawee; note this is not a check so Article 4 does not apply). Cindy has absconded. Bob sues Homer. You represent Homer.

Argue that Homer is a HIDC and takes free of Bob's personal defense that Cindy stole the money order. It is a personal defense because it is not one of the few real defenses. Thus, Bob will not win as against Homer. So here, you need to go through an analysis showing that the money order is a NI, and then showing that Homer is a HIDC.

Question 23: Again, this is a situation where an employee is authorized to draw checks of the employer, but decides to simply write some checks for his own benefit. He is authorized to apply his signature and the signature stamp to the Law Firm’s checks, but when he does so for his own benefit, he is making an unauthorized drawer’s signature since it exceeds his actual authority. Same analysis as in previous two problems. Because unauthorized, checks are not properly payable under 4-401 and the payor bank would bear the loss unless one of the exceptions to liability applies (e.g., 3-404, 3-405, 3-406, 4-406, etc.) to place loss on Law Firm. Also note that Price v. Neal would put the loss for this "forged drawer’s signature" on payor bank, also absent one of these exceptions. [Alternatively, however, you could argue that the signature was authorized; it depends on agency law, see Ofc Comt 1 to 3-402 and 3-402(a). Then, Law Firm would be bound on the checks. You could and should probably discuss both arguments. (This is a difficult question with many issues and arguments.)]

Check No. 1: 10/1/93 (let’s assume ‘98 so the new Code applies) wrote check to buy watch for girlfriend. No forged indorsement or fictitious payee. Used proceeds for personal use. 3-405 does not apply. Analyze why. See Case #2 to Ofc Comt 3 to 3-405. 3-406 also does not apply, because there is no forged signature or alteration. However, 3-307 does apply if you can argue that the recipient of the check should have realized that Office Manager was a fiduciary of Law Firm, should have questioned why it was receiving a company check from him for a personal transaction (watch), and therefore is not a HIDC. See 3-307(b)(4)(ii). If the Rolex vendor is not a HIDC, then it is subject to all the defenses including a claim in recoupment of the obligor on the check (and failure of consideration of the underlying transaction). 3-305, Ofc Comt 2. Law Firm would have a claim in recoupment of the check, see Lawrence p. 111-112, as against Vendor.

Check No. 2: 7/17/93 check to fictitious payee and forged indorsement by Office Manager of fictitious payee’s name. Cashed check and used proceeds for personal use. 3-404 applies to place the loss on the Law Firm. Explain why 3-404 applies. Query if bank that cashed the check should have questioned the odd name "Calypso Kat?" such that the bank was partially negligent? And then would bear part of the loss under 3-406?

Check No. 3: 11/2/92 check to buy photograph for girlfriend, proceeds used for personal use, no fictitious payee or forged indorsement. Checks discovered 2/18/94: Means that Check No. 3 is more than one year old, failure to examine bank statements for one year under 4-406 cuts off Law Firm’s ability to complain about Check No. 3. Might argue that Law Firm had no opportunity to examine statements, since Office Manager had that job, and try to avoid 4-406; counterargument is Law Firm hired him so his failure to discover the loss is imputed to Law Firm and 4-406 applies.

Thus, Law Firm might be able to avoid liability on Check No. 1 but not on Checks 2 or 3, under these various theories.

Question 22: Maker is the maker of a note, Seller is the payee, Seller indorses it to Banker at a discount and negotiates it via a valid special indorsement. Maker pays off note early with Banker's (now the holder's and should also be a HIDC) agreement. Banker specially indorses note to Maker. At this point, the note should be merged, since it has been paid. This payment should discharge Seller and Banker from liability as indorsers. You should argue that the payment also discharges Maker’s obligation on the original note.

When Maker then indorses the note to Bob, however, it springs back into existence, but it's like a new note at this point. Bob specially indorses the note to Credit Union, who becomes the note's holder and should be a HIDC (unless you argue notice of some irregularity by the fact that Maker is in the chain). Maker defaults, Credit Union sues Maker, and Maker tries to assert a defense based on a problem with the goods purchased from Bob. If Credit Union is a HIDC, then Maker has to pay Credit Union and Maker's defense is only a personal defense which is not good against a HIDC. However, if Credit Union is a HIDC, then you had to decide that it had no notice of any irregularities by reason of Maker being in the chain of indorsements, and that might lead you to decide then that Seller and Banker have indorsers’ liability, as a result.

If instead you argue (as I would urge you to) that Credit Union is not a HIDC because it has notice of a potential claim by Banker and Seller that they were discharged when the note was reacquired by Maker, then Maker's personal defense based on defective goods might be good against Credit Union. Then, Credit Union would bear the loss and would sue Bob.

Bob is liable to Credit Union as an indorser; Bob would then have to sue Maker on his or her maker's liability and as between Bob and Maker, Maker's defense based on the failure of the underlying goods would be good. Bob is not a HIDC w/o notice of Maker’s defense of defective goods; Bob knows or is deemed to know of this defense. Bob would end up bearing the loss if Credit Union sued Bob.

Question 8: Bob is a HIDC of the notes from Busted Bank. Assume proper special indorsement to Bob. Bob properly indorsed the notes over to Joe, who is also a HIDC. Explain why Joe is a HIDC. Joe wants to now enforce the notes against their respective makers. Maker No. 1 will prevail over Joe since discharge in bankruptcy is a real defense good even against a HIDC; Maker No. 2 will not prevail and will have to pay Joe since his or her only defense is a personal defense based on a problem with the goods purchased with the note. Bob has no claim against Joe. Joe can then sue Bob on his indorser's liability on Note No. 1 once conditions precedent have been met, which they have, since Joe has demanded payment from the maker and been refused (go thru conditions to indorser's liability).

1. In a rare moment of generosity, Carol lent her brother Bob her credit card and her ATM debit card on the day after his house burned to the ground (along with all his possessions). She told him her PIN number (to be used with the debit card). Bob agreed to return the cards to her in three days, when his replacement credit cards and debit card were supposed to arrive. He also agreed not to charge more than $1,000 on the credit card and not to use the debit card to make more than $500 in purchases, to get through the next three days. However, the next day, being so distraught from the loss of his home, Bob freaked out and disappeared. He left no forwarding address and was nowhere to be found. A month has elapsed and Carol has just discovered that he is in California and has run up $5,000 on her credit card and withdrawn $2,000 from her checking account using her debit card. She did not expect him to violate their agreement; in fact his behavior is completely uncharacteristic of him. Is she liable for Bob's purchases and charges?

2. One of the credit card charges was for the purchase of a very expensive item that Bob cannot use; it is obvious to Carol that the vendor took advantage of Bob in his weakened state after his fire and convinced him to purchase this item that he does not need and cannot use. It is a health club membership for $500, purchased in California where Bob has been hanging out for a month; Bob has a medical condition that does not allow him to exercise or exert himself physically. Can Carol dispute the charge based on the invalidity of the underlying transaction between Bob and the vendor and, if she wants to do this, what should you advise her to do?

3. While in California, Bob strikes up a friendship with Joe who manages a kitchen cabinet installing business in California. Bob has been a kitchen cabinet installer in Ohio for 25 years and because of his fire, wants to "start over." Joe is interested in getting out of California. Bob agrees to sell Joe his kitchen cabinet installing business in Ohio for $30,000 and Joe agrees to wire $30,000 in cash to Bob's business account numbered 1146734 with Columbus Bank in Columbus, Ohio by May 29, 1998. (Assume that Bob and Carol have by now worked out their problems with Bob's overzealous use of her cards.) On May 28, 1998, Joe instructs his bank, the Los Angeles State Bank, to wire $30,000 from his account with LASB to Bob, Commercial Account #1146734, at Columbus Bank in Columbus, Ohio, with a payment date of the next day. Joe and Bob plan to close on the sale of the business in the early morning of May 29. LASB executes this payment order by issuing an identical payment order to the Federal Reserve Bank in California, who issues an identical payment order to the Federal Reserve Bank in Cleveland, who issues an identical payment order to Columbus Bank (e.g., pay $30,000 to Bob, Account #1146734, with a payment date of the next day). All of this occurs on May 28. At 1:00 p.m. PST on May 28, 1998, Bob comes out of his fog, realizes that he has almost sold his pride and joy (his lifelong business), is suddenly homesick for Ohio, and no longer wants to sell his business. Bob calls his bank and tells it not to accept Joe's wire transfer. Can the bank do this? What should it do and about how quickly (generally, not specifically)? What happens if the bank fails to do what you suggest?

1. Credit Card: The limitation of liability in Regulation Z, §226.12(b)(1) (lesser of $50 or the charges made before notification to the card issuer) does not apply because the original use is authorized. The question is whether Bob has "apparent authority" to charge on the card, even after Carol might have notified the card issuer that Bob had no authority to keep on charging. Courts have split on the issue of apparent authority. Carol could be liable for all of Bob’s charges on her credit card, even if she notifies the card issuer that Bob is no longer authorized to use her charge card. See p. 579 of text.

Debit Card: The limitation of liability of Regulation E §205.6 (see text p. 584-85) and the EFTA (lesser of $50 or the amount of unauthorized EFTs that occur before Carol gives notice to the bank of the unauthorized use), would not apply because here the EFT is not "unauthorized" as defined in §903(11) of the EFTA. This limitation only applies to "unauthorized EFTs" which is defined in §903(11) of the EFTA. It is not unauthorized because the card, code, and all means of access to Carol’s account was furnished to Bob by Carol and Bob is making the debits. If Carol notifies the bank, she can make further EFTs by Bob "unauthorized" and then get the benefit of the loss limitation in §205.6(b). She therefore should promptly notify the bank that his EFTs are no longer unauthorized. You could go on to discuss the difference in loss limitation if Carol notified within 2 days of discovering the loss vs. later, see §205.6(b)(1) and (2) and PROBLEM 218. Note that her liability for unauthorized EFTs is unlimited for EFTs occurring more than 60 days after her bank statement. (You could also strenuously argue that she gave him the PIN for a limited use and his use in excess of that limitation is unauthorized, but the language of §903(11) of the EFTA seems to preclude this argument.)

2. Carol could try to use the rule on disputed transactions paid for by credit card in Regulation Z, §226.12(c) (see p. 580 of text and PROBLEM 213), but it does not appear to apply. The rule is found in §226.12(c)(1) of Reg. Z which says she can assert against the card issuer all claims and defenses arising out of the underlying transaction, does not have to pay the bill, and can't have an adverse credit report filed against her as a result, IF she has made a good faith attempt to resolve the dispute with the merchant and the amount exceeds $50 and the disputed transaction occurred in her home state (Ohio) or within 100 miles of the cardholder’s address. Because the transaction occurs in California, it would appear that this benefit generally given to credit card holders would not apply in this case. See p. 580-81 of text.

3. Columbus Bank can reject the payment order it receives from the Federal Reserve Bank in Cleveland if it affirmatively rejects it before "acceptance" occurs under 4A-209(b). A bank is always free to reject a payment order (as long as there is no separate agreement otherwise) before acceptance. See 4A-210(d). However, CB needs to act immediately in order to avoid acceptance by default under 4A-209(b)(3). It needs to reject the order by sending notice of rejection to the sender orally, electronically, or in writing. 4A-210(a). If the bank fails to reject the payment order within the time limits of 4A-209(b)(3), it will have "accepted" the payment order. Once it accepts the payment order, there is no right of chargeback, and Bob will have a right to the funds. The bank cannot thereafter reject the payment order, 4A-210(d). However, acceptance by CB means that CB is liable to Bob for the $30,000; it does not create any obligation of CB to the sender of the order (either Fed Reserve Bank Cleveland or Joe), see Ofc Comt 4 to 4A-209. Thus the legal effect of acceptance should not pose a risk for CB, since Bob wants to cancel the wire transfer. This is not the typical situation where the beneficiary seeks to keep the wire transferred funds and the beneficiary's bank seeks to undo its acceptance of the transfer, see Impulse Trading, Inc. v. Norwest and Bank of America v. Sanati, for example.