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Determine whose name was forged (maker, drawer, or indorser).
Different rules apply to each situation.
2. Drawer not inspect bank statement.
Duty to inspect statement and checks in a timely manner and report forgeries to bank.
2. Drawer not inspect bank statement.
If not report within one year, bank does not have to recredit account even if bank negligent.
2. Drawer not inspect bank statement.
“Repeat offender rule” – If the same person is forging a series of checks, the drawer must report the forgeries within 30 days.
If drawer does not report, bank does not have to recredit for subsequent forgeries by the same person.
2. Determine if any presentment warranties breached.
Normally, none will be breached.
Note that the presenting party had the right to enforce the forger’s obligation and thus was a holder.
1. Bearer Paper
Forgery on bearer paper is irrelevant because indorsement is not needed to negotiate.
2. Impostor Rule
Issuer (maker or drawer) is estopped to deny validity of a forged indorsement if the issuer acted carelessly:▪ Not check ID of payee.▪ Not supervise employees (agents) who
sign for the issuer.
3. Fraudulent Indorsement by Employee Entrusted with Check
Payee cannot assert a forgery made by a payee’s employee entrusted with the check.
Conversion liability to the payee,
or
Not properly payable liability to the drawer
[see next slide for diagram]
Bank will sue presenter and prior transferors for breach of presentment warranty of entitled to enforce (presenters and prior transferors were not holders of the check).
[see diagram on next slide]
Presenting bank will sue transferors for breach of transfer warranties:
1. Entitled to enforce (holder status) 2. All signatures authentic or
authorized 3. No good defenses
[see diagram on next slide]
Obligor (maker or drawer) does not want to pay because the instrument shows a different obligation than to which the obligor originally agreed.
2. Unauthorized completion
Amount of check is left blank. Drawer tells payee, “fill in $50.00.” Payee says “OK.” Payee later fills in for $700.00.
1. Change in obligation = HDC can enforce for original amount.
Maker wrote promissory note for $100.
Evil payee changed to $1,000. Evil payee transfers note to HDC. HDC can enforce for $100; Maker
has defense for $900
2. Unauthorized completion – HDC can enforce as completed Drawer signs check and says to Friend,
“You can buy yourself a present with the check but no more than $100.”
Friend buys present from Payee (e.g., a store) costing $500 and writes check for $500.
Payee transfers check to HDC (Payee’s bank).
HDC can enforce for $500.
1. Fraudulently made by holder = Total discharge of obligor Maker signs promissory note
payable for $100 to Payee. Payee changes amount to $1,000. Payee (not a HDC) presents to
Maker. Maker is discharged (does not even
owe the original $100).
2. Not fraudulently made by holder = no effect on obligation On January 2, 2011, Drawer signs
check for $100 payable to Payee and writes the date as “January 2, 2010.”
Payee changes the date to “January 1, 2011.”
Payee may still enforce for $100.
If bank pays an altered check from your account, bank must return the money to your account as the check was not properly payable ----
Unless bank has a defense.
2. Drawer waited more than 1 year to report the alteration (drawer has duty to inspect bank statement)
1. Drawee bank sues presenter (or prior transferors) for breach of presentment warranty of no alteration.
2. Presenter sues prior transferors for breach of transfer warranty of no alteration.
Instrument discharges underlying obligation if it is:
1. Certified check 2. Cashier’s check 3. Teller’s check
Instrument suspends underlying obligation if it is:
1. Promissory note 2. Normal (uncertified) check
Instrument suspends underlying obligation if it is:
1. Promissory note 2. Normal (uncertified) check
If note or check dishonored, holder may sue on either instrument or underlying obligation.
A person who wants payment may not have possession:
Lost the original. Original destroyed. Original stolen.
To enforce the instrument, this person must prove:
1. Was holder when loss occurred. 2. Did not voluntary transfer the
instrument.
To enforce the instrument, this person must prove:
1. Was holder when loss occurred. 2. Did not voluntary transfer the
instrument. 3. Instrument not lawful seized.
To enforce the instrument, this person must prove:
1. Was holder when loss occurred. 2. Did not voluntary transfer the
instrument. 3. Instrument not lawful seized. 4. Why unable to produce the
original.
To enforce the instrument, this person must prove: 1. Was holder when loss occurred. 2. Did not voluntary transfer the
instrument. 3. Instrument not lawful seized. 4. Why unable to produce the
original. 5. Posted a security or bond to
protect payor from double payment.
1. Bank may dishonor (bounce) the check.
2. Bank may pay the check and seek recovery of the money from the drawer.
Bank may pay early unless ---
The customer (drawer) gives bank a notice of the postdating which describes the check with reasonable certainty.
Requirements of a stop payment order:
1. In writing , but can be oral in many states but only for 14 days.
Requirements of a stop payment order: 1. In writing , but can be oral in
many states but only for 14 days. 2. Describe the check with
reasonable certainty:▪ Account number▪ Check number▪ Amount
Requirements of a stop payment order:
1. In writing , but can be oral in many states but only for 14 days.
2. Describe the check with reasonable certainty.
3. Valid for 6 months unless renewed.
Bank’s defense for paying check even if valid stop payment order = no loss because drawer would have to pay HDC anyway.
Bank liable to customer for damages if dishonors a properly payable check unless check is more than 6 months old (a “stale” check).
Bank not liable to payee for damages if dishonors a properly payable check as bank did not sign the check.
Check which states that it is in full payment of an obligation that is:
1. Subject to a bona fide dispute, or
2. Unliquidated (exact amount owed not yet determined).
If payee cashes the check, the check operates as an “accord and satisfaction” of the debt unless:
1. Payee returns the money within 90 days, or
If payee cashes the check, the check operates as an “accord and satisfaction” of the debt unless:
1. Payee returns the money within 90 days, or
2. Payee is an organization and notified drawer of a particular person or address where payment in full checks are to be sent.
All questions are essay.
There are 7 questions.
Total of 200 points: 100 Secured Transactions 100 Commercial Paper
Answers should include citation to the correct section of the U.C.C. that supports your answer.
You can get partial credit if you cite the correct section even if your answer is incorrect.
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