Commercial Paper Ch. 3 & 4

Stephen Maturin bought a sailboat from Jack Aubrey, paying $500 down and signing a $1,000 promissory note for the balance due. Maturin loved everything about the boat except its color, and he promptly repainted it his favorite color, black. Prior to the sale Aubrey had told Maturin that the boat was construct so that I wouldn't sink even in the roughest weather. This proved to be untrue and when the sailboat went down in the first storm that came along, and it cost Maturin $300 to have it dredged from the bottom and restored. In the meantime, Aubrey had given the promissory note to his father as a birthday gift, and the father presented it to Maturin for payment at maturity. May Maturin assert his damages against the father's demand for payment?

(Class) The rights of HDC can be transferred to a person who does not qualify as HDC if only the element of value is missing. All other requirements of HDC must be met. If so then HDC rights under Shelter Rule can be transferred. Yes. Here, the father is not a HDC in his own right because he didn't give value for the instrument. So the question becomes can he be protected under the shelter rule. Ordinarily he could come under the shelter rule protection because value is missing however, the status of the transferor is what is transferred so the transferor must also be HDC. Here, the Jack was not in good faith b/c he gave Maturin a warranty so he should have known that the boat was going to sink. The buyer is going to assert the defense of redhibition against Jack. Buyer's defense will defeat Jack because Jack is not HDC. As such, Jack's father doesn't qualify for shelter rule protection because Jack (transferor) wasn't HDC in that he had notice of defect and was not in good faith.

(b) If ONB recovers its money from Portia at maturity, can Portia sue her mother, whose maker's obligation, §3-412, does run to indorsers such as Portia?

(General Rule) §3-412: The obligation to pay is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument. However, under §3-419(f) (exception) An accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, and accommodation party. Yes under the general rule, but not under the exception. Generally makers become liable to indorsers. In this case, even though Portia is an indorsers and her mom is the maker, Portia is an accommodated party and her mom is an accommodation party. As such Portia has no right of recourse against her mother and thus is not entitled to contribution from her mother the accommodation party. (The other exception is when the indorser give the instrument as a gift and no value)

(d) Is there a simple way that the bank could have avoided all these issues ab initio?

Although not required, the bank could have given notice to Shadbolt to minimize the risk of loss. The bank also could have gotten Shadbolts concent to the higher rate of interes.

Frank Family wanted to move out of his apartment and into his dream house. He hired Quickie Contractor to build the house on land Family had purchased, requiring Quickie to get a performance and payment bond guaranteeing that Quickie would to the work and pay its laborers and suppliers. Quickie got Big Bank to issue the bond guaranteeing these matters. Quickie went bankrupt halfway through the job, and Family called on Big Bank to finish the work. Which of these parties is the surety? Which the principal? Which the creditor? Identify the three contracts.

Big bank is the surety; Quickie Contractor is the principal; and Frank Family is the creditor. The first contract is the underlying obligation between Quickie and Frank. The second contract is the promise of Big Bank to back up the underlying obligation to build the house and see that Frank loses nothing as a result of accepting Quickie's promise to do so. The third contract is the promise of Quickie to reimburse Big Bank if Big Bank is forced to pay off Big Bank's promise to Frankie.

(b) What should the church's lawyer advise it to do now?

Cash the checks

If she does and prevails, Alfred will reacquire the instrument. Does the shelter rule give him Portia's holder in due course rights?

In this case the shelter does not apply. Because Alfred was always a HDC in his own right he doesn't need the shelter rule.

(2) "Money Corporation, John Smith."

Maybe; Here we have an undisclosed principal and must consider whether or not John was required to disclose the principal. Assuming that John was required to disclosed the principal, then as agent John would be liable if he doesn't disclosed the principal and if the principal doesn't' come forth.

If Martha had not filed for bankruptcy, but the vineyard was still lost when the state seized it because she hadn't paid her taxes, is she discharge by the bank's failure to perfect its interest in the vineyard?

No. The fact that the bank failed to perfect interest doesn't relieve her of her personal obligation to the bank. It is irrelevant as to whether or not she filed her taxes.

(3) "Money Corporation, John Smith, President."

No; he is not personally liable because he is signing in his representative capacity.

Happy Jack, the used car salesman, sold Manny a lemon car, taking in payment a promissory note for $2,000 made payable to the order of Happy Jack. Jack discounted the note with Alfred, a local licensed money broker, who paid him $1,700 and took the note without knowledge of the underlying transaction. Alfred's daughter Jessica had a birthday shortly thereafter, so Alfred indorsed the note in blank and gave it to her as a present. When the note matured, Manny refused to pay it to Jessica—the care had fallen apart and he felt that he shouldn't have to pay for a pile of junk. Is Jessica a holder in due course?

SHELTER RULE §3-203(b): Transfer of an instrument, whether or not the transfer is a negotiation, vest in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of HDC by a transfer, directly or indirectly, from a HDC if the transferee engaged in fraud or illegality affecting the instrument. (Class) The rights of HDC can be transferred to a person who does not qualify as HDC if only the element of value is missing. All other requirements of HDC must be met. If so then HDC rights under Shelter Rule can be transferred. No. Here, the car that was purchase was given as a gift to Jessica. B/c it was a gift, no value was given in exchange for the car. Therefore Jessica in her own right does not qualify as HDC because value was lacking, but she has HDC rights under the shelter rule.

Same result if the boat never sank, but Aubrey's dog bit Maturin on the leg one week after the delivery of the sailboat, and Maturin incurred $100 in medical bills as a consequence?

The dog bit is a counterclaim. You must challenge the status. So if a requirement for HDC status is lacking you must still challenge this status or he will become HDC by default. Here there is a defense of a counterclaim that has nothing to do with the transaction. If you don't challenge the transaction then he becomes HDC and is entitled to enforce the instrument. The dog bit may be an offset to damages.

Zach Taylor bought a car for his business from Fillmore Motors, signing a promissory note for $23,000 payable to Fillmore. Fillmore sold the note to the Pierce Finance Company for $22,800, a $200 discount. The car fell apart, and Zach refused to pay. Is the finance company (assuming good faith and lack of notice) a HDC for $23,000 or $22,800? If Millard Fillmore, the owner of Fillmore Motors, owed his mother $21,000 and gave her the note with the understanding that the extra $2,000 was a Mother's Day gift, would the mother be a holder in due course for the full amount?

The finance co is HDC for the full amount because they gave value. The code doesn't specify how much value has to be given. Unless value is so small that you can say that it was a gift. §3-303(a)(1): An instrument is issued or transferred for value if the instrument is issued or transferred for payment of, or as security for, an antecedent claim against any person, whether or not the claim is due. Here, the mother is HDC only to the extent that value was given (21,000). Mother has an antecedent claim to the extent of 21,000 the remaining was intended as a gift.

Would you answer change depending on whether or not Point ever had the money to pay the note at any relevant period?

Yes my answer would change because then Shadbolt would not be able to prove that the extension caused him a lost.

After Lorenzo (from the last Problem) acquired the note, he sold it for $1,800 to Portia, a local attorney. She had no notice of problems with the instrument. When she presented it to Manny for payment, her refused to pay and instead filed for bankruptcy. May she recover from Alfred?

Yes. Here Portia is a HDC because she met all the requirements thereof. B/c Manny is insolvent the assertion of this defense will be effective against Portia. On the other hand, Alfred does not have a real defense that can be asserted against Portia therefore, she can recover from Alfred. The issue of no damages and no injury is lacking because she gave value.

If in the above Problem Jessica had thereafter made a gift of the note to her husband, Lorenzo, would Lorenzo have holder in due course rights?

Yes. Lorenzo also gets the shelter rule b/c its not just limited to the 1st transferee. All Lorenzo have to do is come under the shelter.

Does Alfred reacquire his original holder in due course status when he gets the instrument back?

Yes. Since Alfred used to be a HDC on reacquiring the instrument he would get the status back as regards to all prior parties.

Craig Covey was the maker of the following promissory note, which he signed: I, Craig Covey, promise to pay to bearer the sum of $5,000 on demand. I also promise to buy bearer lunch on the date of presentment. He signed an order to buy a computer. The note was given to his uncle, who had loaned him the money for the computer. The uncle sold the note to the Stonewall Finance Company in return for a check for $4,500. Stonewall Finance Company's check bounced, and the uncle was very angry. He went down to the finance company's office and found that there was a sign on the door saying "GONE OUT OF BUSINESS." The next day the note was stolen from the office of the Stonewall Finance Company and later surfaced in the hands of Jane Eleanor, an innocent purchaser for value, who presented it to Craig for payment. In the meantime both his uncle and the Stonewall Finance Company had contacted Craig and asked him to refrain form paying the instrument, the uncle pointing to the bounced check and Stonewall to the fact that the note had been stolen from it. Is Jane a holder in due course?

Yes. The instrument is bearer paper which means that anyone in possession can enforce it. Jane would be HDC provided that all of the other requirements are met.

Does it matter if Lorenzo, prior to the gift, knows of Manny's problems with the car?

Yes. The shelter rule only comes in when the element of value is missing. Here, Lorenzo didn't give value but if he knows of the problems he would have notice of a claim or defense. With these two elements missing, Lorenzo would not be able to take advantage of the shelter.

Could Shadbolt, had he known of the extension agreement, have ignored it, paid the note, and then sued Point for reimbursement?

Yes; He can always ignored the agreement and then seek reimbursement if the note is due.

The president of Money Corporation was John Smith. He signed three corporate promissory notes as follows: In each case is he personally liable to a holder in due course of the instrument? (1) "John Smith." Money Corporation was not mentioned in the note

Yes; John is liable because he did not clearly show that he was signing only in his representative capacity nor did he identify the principal on the note.

To Wickets National Bank?

Yes; unless Finch can prove that he and Biggley did not intent for Finch to be liable. In this case Finch would argue that although his signature appears on the signature line, his name is not contained in the body of the note and thus he was not intended to be liable.

In each case is he personally liable to a holder in due course of the instrument?

Yes; unless he can show the HDC took the instrument with notice that he was not intended to be liable as an agent.

In the last Problem would Finch himself be liable to a holder in due course?

Yes; unless he can show the HDC took the instrument with notice that he was not intended to be liable as an agent.

Does Malvolio have remedies outside the Code?

sue

Marian Melody, a professional pianist, bought a piano from the Ivory Keys Music Company, signing a promissory note payable to the company for $3000. The day after the piano was delivered, the music company discounted the note to the Friendly Loan Company for $2,700, indorsing it on the back, "Pay to the Friendly Loan Company, Ivory Keys Music Company (Without Recourse)." The piano fell apart, and Melody refused to pay the note when it came due. Friendly Finance sued both Melody and the Ivory Keys Music Company. What is its cause of action against each? What defenses can each defendant raise?

§ 3-415(b): if an indorsement states that it is made "w/o recourse" or otherwise disclaims liability of the indorser, the indorser is not liable to pay the instrument. Here, Ivory Keys Music signed its name with the statement "no recourse" and was thereby a qualified indorser which relieved them of any contractual liability on the instrument. However, Friendly Loan Company is HDC b/c they were a holder; in good faith; gave value; etc...Friendly can sue Marian Melody on maker's liability. Marian will raise the defense of redhibition in that the piano was defective but it's a personal defense and will not be able to defeat Friendly's HDC status. Marian Melody can sue Keys Music Company under a contractual obligation but it would not be effective against Friendly.

When Ellen Brown found out the computer she had purchased didn't work, she was furious and decided not to pay the promissory not she had signed. The note stated that it was "payable at Busy State Bank" (which in this case means that the bank would pay the note when presented and then expect reimbursement from the maker; cf. §4-106(b)). Harold Slow, the head cashier at the bank, took Ellen's phone call and promised not to pay the note when it was presented. Four months went by, and, on one hectic afternoon, the bank paid the note by accident. Slow said he had forgotten the request not to pay. The bank now demands payment, claiming to be a holder in due course. Is it?

§1-202(a)(2): A person has notice of a fact if the person has actual knowledge of it. § 3-302(a)(2)(vi): a holder in due course means the holder of an instrument if the holder took the instrument without notice that any party has a defense or claim in recoupment. No. Here, Ellen would argue that there is a defense of redhidbition. As such, she informed the bank not to pay the instrument when it was presented so the bank was put on notice that they shouldn't pay the note. The bank has actual notice and therefore can't simply say they forgot and claim HDC status because they took the instrument with notice of a claim or defense.

(d) If Charlie Brown comes back into the chips, can she sue him? On what theory?

§3-103(a)(11): "Principal obligor" means the accommodated party or any other party to the instrument against whom a secondary obligor has recourse. §3-103(a)(17): "Secondary obligor" means an indorsers or accommodation party; that has recourse against another party to the instrument. §3-419(f): An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party. Yes; on the maker's liability. As an anomalous indorser, Peppermint Patty was an accommodation party in that she signed the note for the benefit of CB the accommodated party. As such, if she pays as she can then sue him for the full amount because he is the principal obligor.

When Barbara Shipek was off to Las Vegas for a fun weekend, she bought a traveler's check for $3,000 from Octopus National Bank. The payee line on the traveler's check was blank, but the bank had her sign a line on the check indicating the name of the remitter (§3-103(a)(11)). The check contained another blank for a countersignature, under which was printed a statement that the bank would pay the traveler's check only if the remitter resigned the check on this blank at the time of negotiation to the payee. On Ms. Shipek's first night in Las Vegas a thief stole her purse, getting the traveler's check as part of the booty. The thief apparently forged Ms. Shipek's name on the countersignature line and negotiated the check to Vegas Check-Cashing City, an entity listed as payee when the check was presented by Vegas to ONB for payment, by which time Ms. Shipek had phoned the bank and told them what had happened. You are the attorney for the bank. Should it pay the traveler's check to Vegas?

§3-104(i): a traveler's check is an instrument that requires as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument. §3-106(c): This condition does not make the promise or order conditional. If the person whose specimen signature appears on an instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument. No. The bank shouldn't pay because the countersignature requirement was not met. The bank will argue that Vegas had knowledge of forgery in that the person forging's Barbara's name was a man and not a female. Here the bank will argue that the forge signature is a defense of their obligation to pay Vegas. However, if Vegas would have passed it on to another who became a HDC, then the bank's defense of forgery can not be asserted against a HDC because it is not a real defense. Forgery is a factual question so if the forgery is bad, there may be notice but if the forgery is good there may not be notice. Furthermore, if the bank does not pay Vegas (holder) he will not be able to recover from Barbara b/c her obligation was extinguished when she purchased the traveler's check.

(b) If she pays $10,000, can she sue Pig Pen for the entire amount or only part?

§3-116 (a) two or more persons who have the same liability on an instrument as indorsers who indorse as anomalous indorsers are jointly and severally liable in the capacity in which they sign. (b) a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution. Yes; but for only part. Both Peppermint Patty and Pig Pen indorsed the instrument but were not holders of the instrument so their indorsement is anomalous. They both have the same liability on this instrument as anomalous indorsers. As such they are jointly and severally liable and must share the liability among themselves proportionately. Therefore she can only sue him for ¼ of his virile share.

Winkin, Blinkin, and Nod signed the following promissory note: Oct. 1, 2010 $3000 On or after six months from date, we promise to pay to the order of Grimms National Bank, the sum of three thousand dollars ($3000). We, along with all sureties and subsequent indorsers, waive all rights to presentment, notice of dishonor, and protest, and all parties hereto agree to any extension of time granted by the holder to the makers. Wilber Winkin Barney Blinkin Harry Nod Grimms National Bank indorsed the note in blank and discounted it to Andersen Finance Co. When the note matured, Andersen sued only Winkin, demanding the entire amount. May he defend on the basis that Andersen should have sued all three of them, since the note contains the words "we promise to pay?" If Andersen wins, can Winkin sue Blinkin for $2000? $1000?

§3-116(a): two or more person who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payee, or anomalous indorsers are jointly and severally liable in the capacity in which they sign. (b): a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution. Yes. Because they signed the instrument together as makers, they are all joint and severally liable on the instrument. So if Andersen sues Winkin and if Winkin pays, he can sue Blinkin for his virile share of $1,000.

(c) If she is sued, can she bring the other indorsers into the lawsuit

§3-119 In an action for breach of an obligation for which a 3rd person is answerable over, the defendant may give a 3rd person notice of the litigation in a record, and the person notified may then give similar notice to any other person who is answerable over. If the notice states that the person notified may come in and defend and that failure to do so will bind the person notified in a later action, the person notified is so bound unless they come in and defend. Yes. She must give notice of the litigation (SOP) to the indorsers; that notice must state that they can come in and defend and that they are bound in a later action if they fail to do so.

Giant Earthmovers brought some machinery from Tractors, Inc., and in payment executed a promissory note payable to the order of Tractors for $2,000. Tractors sold the note without indorsement to the Friendly Finance Company for $1,500. The maker of the note refused to pay the note when it matured, stating that the machinery did not operate properly. Friendly decided to sue Giant Earthmovers, and the day before the lawsuit was filed, Friendly's lawyer noticed that the note had never been indorsed by Tractor's Inc. He had Tractor's president specially indorse the note over to Friendly right away, and then the suit was filed. Is Friendly a holder in due course?

§3-203(c): if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until the indorsement is made. No. Friendly Finance (purchaser) received possession of the note but Tractor (payee) neglected to indorse it. Friendly Finance became the person entitled to enforce the instrument but did not become HDC because of the missing indorsement. Friendly received notice of the defense by Giant Earthmovers that machinery did not work before he obtained Tractor's indorsement. Friendly can specifically demand indorsement however, Friendly cannot become a HDC because at the time notice of the defense was received the note had not been negotiated to Friendly. Friendly learned of the defense when the suit was filed and they got an answer, so they were put on notice of the defense before the instrument was negotiated to them. Therefore Friendly took the note with notice of a claim or defense to instrument and thus is not a HDC.

(3) If the bank does recover from Snow, will he have to pay the whole amount or do the indorsers divide up the indorsement liability and share it proportionately?

§3-205(d): an anomalous indorsement means an indorsement made by a person who is not the holder of the instrument. §3-116(a): two or more persons who have the same liability on an instrument as anomalous indorsers are jointly and severally liable in the capacity in which they sign. Whole amount. Here for the indorsers Snow and the drugstore to be joint and severally liable they must be joint payees or indorse it together. There has to be some legal or contractual responsibility in order for Snow to go against the previous indorser drugstore or maker to recover the money. The drugstore and Snow did not indorse the instrument together nor are they joint payees therefore they are not joint and severally liable. As such Snow will have to pay the entire amount.

Could he sue Jessica or Lorenzo?

§3-207: Reacquisition of an instrument occurs if it is transferred to a former holder, by negotiation or otherwise. A former holder who reacquires the instrument may cancel indorsements made after the reacquirer first became a holder of the instrument. If the cancellation causes the instrument to be payable to the reacquirer or to bearer, the reacquirer may negotiate the instrument. An indorser whose indorsement is canceled is discharged, and the discharge is effective against any subsequent holder. No. Alfred may not sue Jessica or Lorenzo because they gave no value for the instrument. Alfred can only sue the Finance company and subsequent indorsers after Alfred can go against Alfred. (Typically you can always go up to the parties who indorsed before you. You can't go to people who sign subsequently to you but there are exceptions accomodation parties)

Fred wrote a check on January 5, 2008, but mistakenly put down "2007" as the year. He saw his error, crossed out the last digit, and wrote "8" above it. Can anyone become a holder in due course of this instrument?

§3-302(a)(1): HDC means holder of an instrument if the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into the question its authenticity. Yes. This is an authorized alteration. A scratch out and subsequent signature is not an apparent alteration such that it would call into questions its authenticity. Therefore anyone can become HDC.

Childe Harold, also age 17, received a check for $1,000 from his employer and decided to use it to buy a car from Byron Auto Sales, a used car dealership. He picked out the car he wanted, indorsed the check in blank, and handed it over to the salesman. Byron Auto Sales indorsed the check on the back and cashed it at its own bank, the Crusaders National Bank. Before this bank could present the check to the drawee bank, Childe Harold decided to buy a horse instead of an automobile, so he returned the car to the dealer and asked for the check back. Informed that the bank had it, Childe Harold called up the bank and informed it of his rescission of the contract. When the bank refused to return the check to Childe Harold, he filed suit, asking the court to restrain the bank from presenting the check to the drawee and to order replevin of the check. How should the court rule?

§3-302(a)(i): negotiation is effective even if obtained from an infant. Negotiation may be rescinded but not against a HDC in good faith and w/o knowledge of facts that are a basis for rescission. Here, the minor in question is the payee on the instrument. The bank is a HDC as such if the bank doesn't have knowledge of his infancy; his action to rescind his indorsement is of no good against a HDC. The real defense of infancy is applicable to him only as maker or drawer of the check. Because minor is the payee he is not liable as maker or drawer. The minor can rescind his indorsement if he proves that the bank learned of his infancy before they received the instrument or before his action of rescission. If he can't prove knowledge, then its not a real defense that is asserted and Bank will not be defeated.

Dan Drawer wrote a check dated April 30 to Dr. Paine, his dentist, for $80, in payment for services rendered. Dr. Paine was not aware that the check fell to the floor behind his desk, where it lay until the end of August, when the janitor found it. Dr. Paine then indorsed the check to the local grocery store on August 31, and it bounce on September 3, when the drawee bank informed the manager of the grocery store that Dan had stopped payment because the dental work had been done badly. Is the grocery store a holder in due course?

§3-304(a)(2): An instrument payable on demand becomes overdue if the instrument is a check, 90 days after its date. §3-302(2): "holder in due course" means the holder of an instrument if the holder took the instrument without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series. No. The grocery store is not a HDC because they took an instrument that was overdue in that 90 days from the date of issuance would have been around the end of July. The requirement is that the instrument must not be overdue, it doesn't matter whether or not the grocery store knew that it was overdue.

Ace Finance Company was the payee on a promissory note signed by John Maker. On its face the note calls for John to make 12 monthly interest payments before the note matures. Ace sold the note at a discount to Big Town Bank (BTB). If the note has written on it, in big letters, a penciled notation, "Missed Paying First Installment," can BTB ever qualify as a holder in due course?

§3-304(c): Unless the due date of principal has been accelerated, an instrument does not become over due if there is default in payment of interest but no default in payment of principal. Yes, because the instrument is not overdue on the principal only the interest. There is a default of interest and not on the principal.

When Ronald Rube, newly rich, moved to New York City, he was impressed by the Brooklyn Bridge when first he saw it. Simon Mustache, a con man, told Rube that he was the owner of the bridge (a lie, of course), and offered to sell it to Rube for $2,000,000 (described as "a bargain"). Rube paid $20,000 cash as a down-payment and signed a promissory note, payable to Mustache, for the rest. Mustache negotiated the note to a finance company, which claimed to be a holder in due course. When Rube discovered that Mustache lacked title to the bridge, he refused to pay the note. Does he have a real defense of fraud here?

§3-305(a)(1)(iii): the right to enforce the obligation of a party to pay an instrument is subject to the defense of the obligor based on fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms. No. The real defense of fraud deals with a maker who is tricked into signing a note under the belief that it something else. Here, Rube knew that he was signing a promissory not but the question is whether or not he believed title rest with Mustache. Rube may try to void the contract but the problem is that it was passed to the finance company (3rd party) and assuming this 3rd party qualifies as a HDC, Rube has no real defense against them. Rube has thus incurred liability so the finance company would take the instrument free of the claim to the instrument.

When she heard her creditors fighting over priorities on her doorstep, Elsie Maynard knew that she had no choice but bankruptcy. Among the debts that she reported to the bankruptcy court was the loan she had taken from Point National Bank, which was evidenced by a promissory note she had signed. In due course the bankruptcy proceeding culminated in the judge's ordering that Elsie be discharged from all her scheduled debts. Two years later, the promissory note surfaced in the possession of Shadbolt State Bank, which claimed quite convincingly to be a holder in due course. Must Elsie pay?

§3-305(a)(1)(iv): the right to enforce the obligation of a party to pay an instrument is subject to a defense of the obligor based on discharge of the obligor in insolvency proceedings. No. Here, Elsie is insolvent and therefore a Real defense of insolvency trumps a holder in due course.

A child prodigy, Thomas Minor, had been playing the piano since he was three and making professional tours of the world since he was twelve. He looked much older than his seventeen years. He signed a promissory note for $800 payable to the order of Merry Music Company as payment for a piano, planning to tour with it. The company was unaware of Minor's age. The payee indorsed the note over to Big National Bank for $725. When the first payment came due, Minor refused to pay. He told the bank to come pick up the piano—he was disaffirming the sale. Who wins?

§3-305(a)(i): the right to enforce the obligation of a party to pay an instrument is subject to a defense of the obligor based on infancy. Minor. Here the Bank would qualify as HDC because they met all the requirement needed. Even though the Bank is a HDC it matters not because the maker is an infant so the maker can defeat the bank under the defense of infancy. Minor can disaffirm the sale and is not liable on the instrument. The defense of infancy applies only when the minor is a maker or drawer.

If not, can Craig raise the suggested jus tertii against her? If Craig wants to pay Jane, can his uncle stop him?

§3-305(c): in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, or claim to the instrument of another person, unless they are joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a HDC and the obligor proves that the instrument is a lost or stolen instrument. No; If Jane meets the requirement of a HDC, Craig can not raise jus tertii against her because it's not a real defense. Jus tertii is allowed when the other person is joined in the action and they personally assert the claim. Yes, provided that all of the requirements are met.

Joe Lunchpail arrived home one day to find a note from his wife stating that she was divorcing him and that he should get a lawyer. Since he had just been paid that day, he took his paycheck down to the law office of Nathan Novice and endorsed it over to Nathan in return for the latter's promise to represent Joe in his divorce. Later that evening, Joe's wife sent the sheriff to seize his paycheck. Joe laughingly referred the sheriff to his attorney. Can the sheriff succeed in wresting the check from Nathan's hands?

§3-306: a person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument. §3-303(a)(1): An instrument is issued or transferred for value if the instrument is issued or transferred for a promise of performance, to the extent the promise has been performed. Here, the wife has a right to file a claim of property or possessory right in the instrument if she wants to recover it from Nathan. However, when Joe indorsed the check over to Nathan, Nathan became a holder of the instrument. Nathan will probably claim HDC status in order to take free of the wife's claim to the instrument. Nathan will have to establish that he took the check for value. The consideration for the check was Nathan's promise of representation in the pending divorce case. Since the check was transferred in exchange for a promise of performance this will be considered as value. Therefore, Nathan has given value for the instrument; he took it in good faith and was unaware of the wife's claim to the instrument. Nathan will more than likely qualify as HDC but only to the extent that he has performed services. As such he will take the instrument free of the wife's claim.

The corporate treasurer of the Business Corporation was having major troubles paying his personal bills, so finally he decided to embark on a life of crime. He used a corporate check to pay his American Express bill, making the check out to "Amerex Corp., 770 Broadway, NY, NY 10003" (the actual address of American Express). On the corporate check requisition form he wrote a phony explanation that this check represented shipping expenses. This caused no suspicions at Business Corporation and, thus encouraged, he did it every month for 2 years. When Business Corporation finally figured out what had happened, it sued American Express in quasi-contract for all the money it had received in this fashion. American Express replied that it was a holder in due course of these checks and, as such, was not amenable to this suit. Business Corporation pointed to the suspicious circumstances and to UCC §3-302(a) and 3-307 (arguing that the corporate treasurer was a fiduciary). How should this be resolved?

§3-307(a)(1): Fiduciary means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument. (b)(2)(ii): In the case of an instrument payable to the represented person or the fiduciary as such, the taker has notice of the breach of fiduciary duty if the instrument is taken in a transaction known by the taker to be for the personal benefit of the fiduciary. Here the corporate treasurer had a fiduciary duty to Business Corporation in the capacity as treasurer. This duty was breached when the treasurer used the corporate checks to pay his personal obligations to Amex. In order to beat Amex, Business Corporation has to show that Amex knew that the checks were being credited to the treasurer's personal debt and not the corporate debt. In addition if the corporation would have indicated to Amex that the treasurer breached his fiduciary duty, then this would serve as notice. Amex will probably argue good faith however; they will not prevail because they should have known that the checks were for personal debts and as not for shipping expenses when they credited his personal account using a corporate check.

Suppose in the last Problem Aunt Fran had paid her rent by giving a cashier's check to Simon. The check was drawn by Octopus National Bank on itself (the very definition of a cashier's check - see §3-104(g)). Simon took the check down to ONB and was dismayed to discover that the bank had failed and was now closed. He returned to Aunt Fran and demanded the rent money. What should she tell him?

§3-310(a): If a certified check, cashier's check or teller's check is taken for an obligation, the obligation is d/c to the same extent d/c would result if an amount of money equal to the amount of the instrument were taken in payment of the obligation. D/C of the obligation does not affect any liability that the obligor may have as an indorser of the instrument. She should tell him that when she tendered the cashier's check her obligation was d/c as if she had given money. Because the bank is both the drawer and drawee the bank has liability on the instrument. The landlord can go after the bank but not after Aunt Fran.

(b) If Lear does not pay the second note when it matures, can Kent sue on the first note, or has it been paid and discharged by the second note?

§3-310(b)(2): If a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be d/c if an amount of money equal to the amount of the instrument were taken. In case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in d/c of the obligation to the extent of the payment. Yes; Kent can sue on the first note because there has been a dishonor of the 2nd note which suspended the obligation of the 1st note. The 1st note would be d/c by the 2nd note only if there has been payment of the 2nd note. Kent can now enforce one or the other of the instrument, in that there can be no double recovery in this case.

Aunt Fran was unable to pay the annual rent on her hat shop, so she asked the landlord, Simon Mustache, to accept instead a promissory note from her to him for the amount of the rent, the note to be due three months in the future. Simon tool the note and immediately discounted it with a local bank, a week later (and before the note matured), Simon brought suit against Aunt Fran for non-payment of the rent (the underlying obligation being the lease agreement). Can she defend by saying that the note somehow suspended his right to sue on the underlying obligation?

§3-310(b)(2): If a note or uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken. In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in discharge of the obligation to the extent of the payment. §3-310(b)(3): If the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person obligated to enforce the instrument, the oblige may enforce either the instrument or the obligation. Yes. When Mustache took the note for payment on Fran's rent, her obligation was suspended until the note is dishonored. He can not take the note and then request payment of the rent. He must wait until her note is dishonored first before going after her for the rent. If the note is dishonored then he can go after her for either the rent or the note.

In 2009 Rex Lear borrowed $5,000 from the Kent Lending Corporation and gave them his promissory note due June 8, 2012. Rex had his daughter Cordelia sign as accommodation maker. Early in 2012 Rex defaulted on the installment payments and in return for mercy by the lending company, he signed a new promissory note date January 11, 2012, payable to the company September 25, 2012, for the same amount but with additional collateral. The Kent Lending Corporation kept the first note a security for the payment of the second. Cordelia never signed the second note. Answer these questions: (a) Can the payee sue on the first note prior to September 25, 2012?

§3-310(b)(2):If a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be d/c if an amount of money equal to the amount of the instrument were taken. In case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in d/c of the obligation to the extent of the payment. No; Here the payee took the 2nd note as a substitute for the 1st note. This creates a new obligation and the 1st note is not one that can be sued on until the 2nd note is dishonored. So the payee can not sue on the first note prior to Sept 25 because the 2nd note is not due until then. Once the 2nd note becomes due and there has been a dishonor, then the payee would be able to sue on the 1st note.

Jimmy Slick, an expert con man, went into John's Jewelers and told John, the owner, that he was Milton Money, the richest man in town. John was too awed to ask for identification. Slick then picked out several very expensive pieces of jewelry and signed Money's name to a promissory note to pay for them. Slick skipped town with the jewelry. When the note matured, the Tenth National Bank (a holder in due course to whom John has negotiated the paper) presented it to Milton Money for payment. May Money refuse to pay to holder in due course?

§3-401(1)(a): a person is not liable on an instrument unless (i) the person signed the instrument. §3-403(a): an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who is in good faith pays the instrument or takes it for value. Comments 2: the generally accepted rule that the unauthorized signature, while wholly inoperative as that of the person whose name is signed, is effective to impose liability upon the signer or to transfer any rights that the signer may have in the instrument. The signer's liability is full liability on the instrument in the capacity in which the signer signed. It is; however, limited to parties who take or pay the instrument in good faith; and one who knows that the signature is unauthorized cannot recover from the signer on the instrument. Yes. Here, the signature of Money is unauthorized therefore the instrument is not negotiated so the person to whom it has passed to can not be a holder. Slick was not a holder and can't transfer holder status to Jewelers. Slick however is the only person whom the instrument can be enforced against. Slick has full liability on the instrument and unless it can be shown that Jewelers knew that the signature was unauthorized Slick is obligated to pay and not Money.

If Manny won't pay, is Alfred liable to Lorenzo?

§3-401(a): a person is not liable on an instrument unless the person signed the instrument. §3-415(a): if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument according its terms. No. Ordinarily as an indorser, Alfred has indorser's liability but Lorenzo suffered no injury and no damages because he gave no value for the instrument as it was a gift.

When Tycoon J.B. Biggley wanted to borrow money for a business venture, he had his agent, J. Pierpont Finch, negotiate the loan from Wickets National Bank. When Finch signed the promissory note payable to the bank, he simply wrote his name as "J. Pierpont Finch, Agent," and failed to mention the name of his principal, J.B. Biggley. Is Biggley bound on this note?

§3-402(b): If a representative is authorized to sign on behalf of a representative to an instrument and (i) if the form of the signature does not show unambiguously that the signature is made in a representative capacity or (ii) the represented person is not identified in the instrument, the representative is liable on the instrument to a HDC that took the instrument w/o notice that the representative was not intended to be liable on the instrument. W/respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument. No; Biggley not is liable on the instrument because although Finch was authorized to sign on behalf of Biggley, Finch did not clearly state that he was the agent of Biggley nor did he identify Biggley in the instrument. Therefore Biggley is not liable but the agent is liable.

Kit Fielding was the corporate president of Francis Racing Stables. The corporate checks had the words "Francis Racing Stables" printed prominently in the upper left-hand corner of the checks, but when Fielding went to sign the checks on the drawer's line, he simply signed his name and did not sign the name of the company or in any way indicate that he was signing as an agent. If the check is negotiated to a holder in due course and then dishonored by the drawee bank, may the holder in due course successfully impose personal liability on Fielding?

§3-402(c): if a representative signs the name of the representative as drawer of a check w/o indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person. Comment 3: if the check identifies the represented person the agent who signs does not have to indicate agency status. In this case no one is deceived into thinking that the person signing the check is mean to be liable. No; because the check itself identifies the principal Francis Racing Stables and Fielding signed his name as drawer of the check. A HDC could not successfully argue that Fielding meant to liable.

George Generous gave a check for $5,000 to the Grapes of Wrath Church as part of the church's drive to get money for a planned new building. The church did not want to cash any checks it received until it had at least $20,000 worth of pledges. On the other hand, the church didn't want contributors to be able to back out and stop payment either, so the church's lawyer advised the church directors to have all large checks certified. This, the lawyer knew, would have the effect of making the certifying bank primarily liable on the check (§3-413(a)). The church treasurer took George's check down to the drawee bank and asked to have it certified, a presentment for acceptance. The drawee bank refused, saying that its practice was never to certify gift checks. (a) Is that a dishonor so that the church should give George notice of dishonor?

§3-409(d)(last sentence): The drawee of a check has no obligation to certify the check and refusal to certify is not a dishonor of the check. No; the drawee bank is not obligated to certify the gift check.

(c) If the bank had certified the check but later refused to pay it, could the church sue George on his drawer's obligation? Same result if George had donated a certified check that the bank later dishonored?

§3-414(c): If a draft is accepted by a bank, the drawer is d/c, regardless of when or by whom acceptance was obtained. No; George's obligation was d/c when the bank certified the check. George will never be obliged on a ceritified check because the bank is both the drawer and drawee.

When Grosvenor gave Bunthorne a check to pay off an old debt, Bunthorne negligently lost it behind the sofa and didn't find it for eight months. The bank it was drawn on refused to pay it because it was suspiciously old (§4-404). Is Grosvenor still liable on this check?

§3-414(f):if a check is not presented for payment or given to a depositary bank for collection w/ 30days after its date, the drawee suspends payment after expiration of 30-days w/o paying the check and b/c the suspension of payments, the drawer is deprived of funds maintained with the drawee to cover the payment of the check, the drawer to the extent of the funds being deprived may d/c the obligation to pay the check by assigning to the person entitled to enforce the check the rights of the drawer against the drawee. No; Here the check has been presented for payment more that the 30 days. As such the bank has suspended payment and Grosvenor is now deprived of his funds. Bunthorned may go to Grosvenor and ask Grosvenor to cash it or re-issue the check. On the other hand, Grosvenor may d/c the obligation to the extent that his funds were deprived.

Charlie Brown wanted to borrow $10,000 from the Peanuts National Bank, but the bank told him that it would not loan him the money unless his note was indorsed by four responsible people. Charlie explained his problem to his friend Lucy, and she signed her name to the back of the instrument. Charlie then took the note to another friend, Schroeder, who not only signed, but also persuaded his friend Pig Pen to add his name below Schroeder's. Finally, Charlie Brown had Peppermint Patty sign her name, at which point he took the note back to the bank, and it loaned him the money. When the note came due, the bank made a presentment of it to Charlie Brown and demanded payment. He had used the money in a business venture that, predictably enough, was a moral but not a financial success, and so he was unable to pay the note (a dishonor). The Peanuts National Bank gave notice of dishonor to all four indorsers, but demanded payment of Peppermint Patty alone. She resisted, claiming she was liable at most for only one-fourth of the amount ($2,500). (a) Is she right?

§3-415(a) if an instrument is dishonored; an indorser is obliged to pay the amount due on the instrument according to the terms of the instrument at the time it was indorsed. §3-205 (d) Anomalous indorsers mean an indorsement made by a person who is not the holder of the instrument. §3-116(a): Two or more persons who have the same liability on an instrument as indorsers who indorse as anomalous indorsers are jointly and severally liable in the capacity in which they sign. No. Here, PNB can sue on indorser's liability in that the instrument was dishonored when CB couldn't pay and a notice of dishonor was given to all 4 indorsers. As such Peppermint Patty became liable on the instrument as an anomalous indorser in that she signed the note and is not the holder of the instrument. She is therefore obligated to the pay the full amount due.

Billy Bigelow wrote out a check payable to the order of Enoch Snow to pay for some carnival equipment. Snow cashed the check at Bascombe Drug Store, indorsing his name on the back. Bascombe Drug Store then indorsed the check and deposited it in its account a Jordan State Bank. This bank also indorsed the check and then presented it to the drawee bank, Rodgers National Bank, which dishonored it because Bigelow had no money in his account, marking it "NSF." The check was returned to Jordan State Bank. You are the bank's attorney, and it calls you with three questions: (1) Bascombe Drug Store has suddenly gone out of business and there is no money in its account. Can Jordan State Bank sue Enoch Snow and, if so, on what theory?

§3-415(a): if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument according to its terms. Yes. (Indorser's liability). Enoch is the payee as well as an indorser. Therefore the bank can go against any of the indorsers on the instrument to get paid. Remember you can't be liable on an instrument unless you sign it. You can always go up the instrument through the chain of indorser and sue.

(c) Instead of the above, assume that on the maturity date Orrin Cather went to Goodwin and offered to pay the debt, to which Goodwin made the same reply. A month later Saul went bankrupt, and Orrin Cather filed for Bankruptcy at the same time. Is Stout, the payee-indorser, liable to Goodwin?

§3-415(a): if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument finish according to the terms. Yes. Goodwin is a HDC. Because Saul (maker) and Cather (accommodation party) is insolvent they can raise the real defense of insolvency. Therefore Goodwin can recover from Stout on indorser's liability. (The inability to pay is of no fault of the lender Goodwin.)

(2) If Jordan State Bank sues Snow, may he raise his defenses (say, that the drugstore had failed to pay him any money when he indorsed it over to them), or is the indorser liability found in §3-415 b,c,d,e strict liability.

§3-415(b)(c)(d)(e): If an instrument states that it is made w/o recourse or other disclaimer; if notice of dishonor is not given to indorser; if draft is accepted by bank after indorsement; or if check is not presented for payment or given to depository bank for collection w/i 30 days after indorsement was made, then the liability of the indorsers is d/c. No. (Indorser's liability not strictly liable). Here, if the Jordan Bank has given value to the extent it has a security interest in an item, then it is a HDC provided that the other requirements for HDC are meet. In this case, the bank on behalf of the drugstore should have either allowed the drugstore to withdraw cash or allow the checks that the drugstore written to be cleared or paid against that check that they deposited in Jordan State Bank. The mere fact that JSB has deposited the check doesn't mean that JSB has given value, therefore; the bank is not a HDC. Snow is still liable on the instrument in that there is no situation present that would d/c his liability. Because JSB hasn't given value they are a holder and not a HDC and therefore Snow may raise his personal defense against JSB.

Frank Fortune was walking along the street, his pockets stuffed with money and checks he had won with a dazzling display of his prowess in the game of stud poker, when he was stopped by a creditor, one Mr. Holdit. Holdit demanded payment of a long-due $50 obligation, and Fortune was glad to indorse over to him a check for that amount that Fortune had won from Dan Deuces; Fortune was named as payee on the check. After giving the check to Holdit, Fortune thought better of the whole transaction so he contacted Dan Deuces, the drawer, the next day and persuaded him to stop payment on the check. Holdit held onto the check for six weeks and then took it to his bank, the Creditors National, and cashed it. Creditors National presented the check to the drawee bank, which dishonored it, whereupon Creditors National reclaimed the money from Mr. Holdit. Holdit, now very mad, sued Fortune on his indorser's obligation. Was Frank Fortune discharged by the delay in presentment?

§3-415(e): If an indorser of a check is liable on indorser's obligation, and the check is not presented for payment, or given to a depositary bank for collection, w/i 30 days after the day the indorsement was made, the liability of the indorser is d/c. Yes; Holdit held on to the instrument for 6 weeks which is more than 30 days before his presented it for payment; therefore, Frank was d/c.

Would he be if the drawee bank had folded five months after the check was written but before it was presented? Yes If Bunthorne had indorsed the check the day after it was issued to him and then cashed it at the corner drugstore and the drugstore mislaid it for five months before the drawee bank dishonored it, is Bunthorne still liable to the drugstore?

§3-415(e): If an indorser of a check is liable under indorser's liability and the check is not presented for payment, or given to a depositary bank for collection, w/I 30 days after the day the indorsement was made, the liability of the indorser is d/c. No; Bunthorne's is no longer liable on the instrument because the drugstore failed to present the instrument for payment w/i the 30-day time period. Therefore, Bunthorne's liability is d/c.

When Portia Moot graduated from law school, she moved to a new city and needed to borrow money but discovered that her credit rating was so bad not one would lend her the money. She appealed to her mother, Margaret Moot, a successful doctor, and Margaret agreed to help her out. Margaret borrowed $5,000 from Octopus National Bank, signing a promissory note as maker with the bank as payee. Margaret had Portia indorse the note on the back before it was handed over to ONB in return for the money. (a) If Margaret Moot is forced to pay this note when it matures, can she sue Portia, the indorser?

§3-419(a): If an instrument is issued for value given for the benefit of a party to the instrument (accommodated party) and another party to the instrument (accommodation party) signs the instrument for the purpose of incurring liability on the instrument w/o being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party "for accommodation". §3-419(f): an accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party. Yes. Portia's mom got the loan for the direct benefit of Portia and signed the instrument as accommodation party. Portia's mom as an accommodation maker signed on behalf of Portia the accommodated party and thus can sue Portia for reimbursement if she is forced to pay.

(c) Is George an accommodation maker or an accommodation indorser?

§3-419(b): An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser and is obliged to pay the instrument in the capacity in which the accommodation party signs. Here George is an accommodation maker because he signed on the front of the instrument for the benefit of Mary.

(b) May George defend on the basis that he received no consideration for his undertaking?

§3-419(b): The obligation of an accommodation party may be enforced not withstanding any statute of frauds and whether or not the accommodation party receives consideration for accommodation. No; not necessary Here, George's defense of lack of consideration is irrelevant in that his obligation as an accommodation party may be enforced whether not he received consideration for accommodation.

Consider the following promissory note: FRONT: December 23, 2010 I, Mary Maker, promise to pay $4000 to the order of Paul Payee oon December 25, 2012, with interest at 8 percent per annum from date. /s/ George Generous /s/ Mary Maker BACK: Pay to Ace Finance /s/ Paul Payee Ace Finance comes to you early in 2013 and tells you that the note is in default, but that it failed to give notice of dishonor—a right that indorsers have but makers do no—to George Generous. (a) May George Generous establish his status as surety against a holder in due course? Can he raise it as a defense?

§3-419(c): A person signing an instrument is presumed to be an accommodation party. No. He doesn't have to establish his statutes as surety but he can't raise it as a defense against a HDC because "status as an accommodation party is not a real defense.

Suppose in the prior Problem George Generous had written the word Guarantor after his name. Would Ace Finance have had to sue Mary Maker first or not?

§3-419(d):If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if (i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or (iv) it is otherwise apparent that payment cannot be obtained from the other party. Yes; Here Ace Finance must exhaust 1-4 before he would be entitled to enforce the instrument against George. This would include suing Mary Maker first. George should have written unambiguously "Guarantee for collection or guarantor" in order to receive this protection. Because George didn't put this after his name, Ace Finance can come after George first instead.

Does the accord and satisfaction agreement between the bank and Point also bind Shadbolt, or may the latter still seek complete reimbursement from Point?

§3-419(f): An accommodation party who pays the instrument is entitled to reimbursement from the accommodation party and is entitled to enforce the instrument against the accommodated party and is entitled to enforce the instrument from the accommodated party. §3-605(g): in order to determine whether the terms of a release or extension preserve the secondary obligors' recourse two things must happen (1) terms of the release or extension must provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor and (2) the terms of the release or extension must provide that the recourse against the principal continues as if the release or extension had not been granted. Ordinarily as an accommodation party, Shadbolt would be entitled to reimbursement if he paid the instrument. However in terms of the release, if bank retain their right to enforce the instrument against Shadbolt and if the terms provides that Shadbolts recourse continues as though the bank had not granted the release, then Shadbolt would be entitled to reimbursement of the amount he paid.

Archibald Grosvenor finally paid off an old debt to Reginald Bunthorne by giving him a check drawn on the Patience National Bank. Bunthorne took the check to the bank and demanded payment. The bank asked him to sign his name on the back, but Bunthorne refused, saying, "I will never put my name on any check Grosvenor has touched." If the bank declines to pay the check, has a technical dishonor occurred? This may be important because Grosvenor's §3-414 obligation is conditioned on a dishonor, and he can no longer be sued on the underlying obligation that is suspended until dishonor by §3-310.

§3-501(b)(3)(i): w/o dishonoring the instrument, the party to whom presentment is made may return the instrument for a lack of a necessary indorsement. §3-414(b): If an unaccepted draft is dishonored, the drawer is obliged to pay the draft. No; Bunthorne upon making a demand for payment refused to indorse the check and therefore the bank can return the check without having dishonored the check for lack of indorsement. This is important b/c Grosvenor's liability doesn't kick in until his bank dishonors the note.

Was the presentment delay excused within the meaning of §3-504(a)(iv)?

§3-504(a)(iv): if the drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to require that the instrument be paid or accepted then presentment for payment or acceptance of an instrument is excused. Yes; Here, presentment was excused in that although Frank did not expressly waive presentment, he has no reason to expect that the check is going to be paid in that he called Dan to stop payment on the check

A promissory note contains a clause stating, "All parties to this note hereby waive all rights to presentment, notice of dishonor, and protest...." Is a clause like this buried in the fine print on the front side of a note sufficient to deprive indorsers of their right to notice of dishonor?

§3-504(a)(iv): presentment for payment or acceptance of an instrument is excused if the drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to require that the instrument be paid or accepted. (b)(ii): notice of dishonor is excused if the party whose obligation is being enforced waived notice of dishonor. A waiver of presentment also constitute a waiver of dishonor. Maybe; the person having a right to enforce the instrument may argue that this clause is sufficient to give indorsers notice. However, one could argue that despite the presence of this clause, this was not sufficient because the print was too small such that indorsers wouldn't be aware that they are giving up their right to notice of dishonor.

Sam Selachii was the surety on a promissory note that Marty Make had given to the Dogfish Loan Company along with a pledge of 100 shares of Titanic Telephone stock to secure the loan for $800. Shortly after receiving the loan, Marty asked for the stock back, saying he wanted to sell it and buy other stock and he would repledge as collateral. Dogfish gave him back the stock, which Marty sold. He used the proceeds to finance a bad day at the races. A week later Dogfish transferred the note for value to the Hammerhead Loan Company, a bona fide purchaser. Assume that Sam had been discharged under §3-605(d) (impairment of the collateral). Is he still liable to Hammerhead?

§3-601(b): d/c of an obligation of a party is not effective against a person acquiring rights of a HDC w/o notice of the d/c. Comments: d/c is effective against a HDC only if the holder had notice of the d/c when the HDC status was acquired. (Ex: if an instrument bearing a cancelled indorsement is taken by a holder, the holder has notice that the indorser has been d/c and thus the d/c is effective against the holder even if the holder is a HDC.) Yes; assuming that Hammerhead obtains HDC status, Sam's d/c would not be effective against Hammerhead unless Hammerhead had notice of Sam's d/c when HDC status was acquired.

Malvolio, a traveling salesman, bought a new car from Valentine Auto Sales, signing a note for $18,000. The payee discounted the note for $16,800 to the Orsino Finance Company, which notified Malvolio that he should make all future payments to them. Malvolio immediately sent them a check for the outstanding balance (he had come into some money when his aunt died). He asked for the note back, but Orsino was evasive. A week later Malvolio received a note from the Olivia Finance Company saying that his note had been assigned to them and that he should direct his payment to their office. When Malvolio protested, they made holder in due course noises and became quite nasty. Malvolio, worried, comes to you for advice. What should he do?

§3-601(b): discharge of the obligation of a party is not effective against a person acquiring rights of a HDC of the instrument w/o notice of the d/c. He should file suit against Orisno for their failure to give notice of the discharge to Olivia. When Malovio paid the outstanding balance, his obligation to Orsino was d/c. Presuming that Olivia is a HDC, this d/c will not be effective against them because it is not a real defense. On the other hand if Malvolio can show that Olivia had notice of the d/c then Olivia can not claim HDC status and thus Malvolio will be able to raise the personal defense of payment against them as holder.

(b) On the due date Saul went to Goodwin and offered to pay, but Goodwin said, "Look, I know you need the money for you other bills—pay me next month." A month later Saul went bankrupt. Can Goodwin now recover from Cather? From Stout, the payee/indorser?

§3-603(b): If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument and the tender is refused, there is d/c of the obligation of an indorser or accommodation party having a right of recourse, to the extent of the amount of the tender, with respect to the obligation to which the tender relates. to the extent of the amount of the tender. No; he can't recover from Cather nor Stout. Here the Saul (maker) is offering to pay the instrument to Goodwin the person entitled to enforce the instrument. One can argue that when Saul offered to pay Goodwin that a tender of payment was made, in that he was willing, able and ready to pay. Goodwin refused and as such there is a d/c of Cather's obligation as the accommodation party and Stout the indorser. (Goodwin can't by his own fault of refusing to accept payment from Saul go after Cather or Stout for payment now).

When Saul Panzer needed to borrow money, his friend Rex Stout agreed to loan him $10,000 if Saul could get a co-signer. Saul talked Orrin Cather into signing Saul's promissory note as co-maker. The note was payable to the order of Rex Stout, who loaned Saul the $10,000 and took the note in return for the money. Stout indorsed the note and sold it at a discount to Archie Goodwin. (a) On the date the note matured, knowing that Saul Panzer, the maker, was in financial trouble and wanting to stop the running of interest, Orrin Cather, the co-signer, went to Archie Goodwin, the current holder, and offered to pay the note, planning to seek reimbursement from Saul. Goodwin replied, "Let's give poor Saul a chance to pay it off himself." A month later Saul went bankrupt, and Goodwin demanded the Cather pay the initial amount due plus interest for the extra month. Cather refused, and Goodwin sued, adding a claim for attorney's fees. To what is he entitled, if anything?

§3-603(c): If tender of payment of an amount due on an instrument is made to a person entitled to enforce to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is d/c. (regardless of whether or not there was a refusal) Tender of paymentif presentment is required with respect to an instrument and the obligor is able and ready to pay on the due date at every place of payment stated in the instrument, the obligor is deemed to have made tender of payment on the due date to the person entitled to enforce the instrument. The initial amount only. Here when Cather learned of Saul's inability to pay he went to the lender and offered to pay the note. One can argue that Cather manifest that he was willing, able and ready to pay the note and therefore there was tender of payment. Once tender of payment was made, Cather's obligation to pay any interest after the due date was d/c. Therefore Goodwin will only be entitled to the amount due on the date the note matured. (Regardless of whether or not they can't pay, you don't have to pay interest.) Orrin will argue that Goodwin should not be entitled to anything in that his obligation as surety arises as a result of the principal obligor being unable to pay and that when Saul initially went to pay Goodwin should not have refused.

When Aunt Fran (from problem 42) told Simon that she was not liable for the rent as long as the note was outstanding, he got it back from the bank and tore it up. May he now sue her for the rent even though the note has not yet matured?

§3-604(a)(i): A person entitled to enforce an instrument, with or w/o consideration, may d/c the obligation of a party to pay the instrument by intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation or cancellation of the instrument, cancellation or striking out of the party's signature, or the addition of words to the instrument indicating d/c. No. Because he intentionally destroys the note, the note is unenforceable. He can't collect on the note b/c he has d/c her obligation on the note.

When Jack Point borrowed $75,000 from Yeomen National Bank to start up his carnival business, the bank made him sign a promissory not in its favor and get a surety. Point talked his good friend Wilfred Shadbolt into signing as an accommodation maker. Is Shadbolt discharged by any of the following agreements between Yeoman National and Point? (a) When the note matured, Point told Yeomen National that his business had gone bust and that he was thinking of filing a bankruptcy petition. Worried that it would get nothing in the bankruptcy distribution, Yeomen National persuaded him to pay all he could, a mere $5,000, and then signed an agreement with Point excusing him from having to pay the rest of the debt. The bank then demanded that Shadbolt pay the amount still due. Does Shadbolt owe it?

§3-605(a)(2): If a person entitled to enforce an instrument releases the obligation of a principal obligor in whole or in part, and another party to the instrument is a secondary obligor, the secondary obligor is d/c to the same extent as the principal obligor from any unperformed portion of its obligation on the instrument unless the terms of the release provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor. No: Unless YNB retained their right to enforce the instrument against Shadbolt as a part of their release, Shadbolt is released of the remaining part of the debt as is Point. However, if this right was retained then Shadbolt would owe the bank for the amount due.

(b) Assume instead that when the note matured Point went to the bank and asked for more time in which to pay. The bank did this, giving Point an extra six months. No one notified Shadbolt of this extension. At that end of the six-month period, Point filed for bankruptcy instead of paying the note. Was Shadbolt discharged by the bank's actions?

§3-605(b)(2): If a person entitled to enforce an instrument grants a principal obligor an extension of the time at which one or more payments are due on the instrument and another party to the instrument is a secondary obligor, the secondary obligor is d/c to the extent that the extension would cause him a loss. Comments: Thus if the extension is for a longer period, the secondary obligor might be able to prove that during the extension period the principal became insolvent thereby reducing the value of his right of recourse. In this case he is d/c to the extent of that harm. The payee is not required to notify the secondary obligor of the extension, but the payee can minimize the risk of loss by the secondary obligor by giving him prompt notice of the extension. Yes, if Shadbolt can prove that the extension caused him a loss. In this case the bank is not required to notify Shadbolt of the extension but could minimize the loss by giving him notice.

(c) Assume the Cordelia can prove that the failure of the lender to enforce its rights on the first note caused her major damages in that Lear's financial situation deteriorated drastically between January 11 and September 25, 2012, and the collateral became worthless during the same period. Is Cordelia still liable on the first note?

§3-605(c)(2): If a person entitled to enforce an instrument agrees, with or w/o consideration, to a modification of the obligation of a principal obligor other than a complete or partial release or an extension of the due date and another party the instrument is a secondary obligor, the secondary obligor is d/c to the extent that the modification would cause the secondary obligor a loss. Yes; unless she can prove that the modification caused her a loss then she will be d/c. Here the bank took additional collateral with the perfection of the 2nd note. As such the failure of Lear to pay on the note would result in the Banking taking the collateral in recovery. Cordelia may have difficulties showing that she suffered a loss in that if she has to pay the bank, she has the right to subrogate to the Bank's interest in the collateral to recover her loss.

When Butch Byrd borrowed $10,000 from Octopus National Bank, the bank not only made him get a surety, but also demanded that the inventory of Butch's feed store stand collateral. Butch talked his brother Arnold into signing the promissory note as a guarantor and signed the necessary papers for the bank to get an Article 9 security interest in the inventory. Unfortunately, the bank failed to file the Article 9 financing statement in the correct place, so when Butch had financial difficulties, other creditors prevailed over the bank's attempt to claim the inventory. The inventory was worth $6,000. What is the effect of the bank's Article 9 difficulties on Arnold's liability?

§3-605(d): if the obligation of a principal obligor is secured by an interest in collateral, another party to the instrument is a secondary obligor with respect to that obligation, and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of the secondary obligor is d/c to the extent of the impairment. Impairment of collateral may include the failure to perform a duty to preserve the value of collateral owed under Art. 9. Comments: The secondary obligor is d/c to the extent that the secondary obligor proves that the impairment was caused by a person entitled to enforce the instrument. If the value of the collateral impaired is as much or more than the amount of the note and if there will be no recovery on the note as an unsecured claim, there is complete d/c. Here the bank impaired the value of the collateral when they failed to file the Art. 9 papers. As such it would be unfair to allow the Bank to go after the Arnold (surety). Arnold would be able to prove that the Bank caused the impairment and would thereby be d/c of his obligation to the extent of the value of the collateral. On the other hand, assuming the Bank somehow obtain payment from Arnold then the normal course of events would have resulted in Arnold being able to step into the shoes of the bank (subrogate) and get the collateral to recover some or all of the losses he suffered in paying the note. Unfortunately, because the bank failed to file the Art. 9 papers there's nothing for Arnold to recover and thus will have to bear his losses.

(c) Assume instead that when the note was signed the bank also made Point put up 100 shares of stock as collateral for the debt. Before the note matured Point went to the bank and asked to have the stock back, saying he needed to take advantage of a stock split the issuing corporation was offering. The bank returned the stock to him, but made him agree to pay a higher rate of interest. The original note contained a clause by which the surety automatically agreed in advance to any impairment of the collateral. Has Shadbolt nonetheless been discharged?

§3-605(d): if the obligation of a principal obligor is secured by an interest in collateral, another party to the instrument is a secondary obligor, and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of the secondary obligor is d/c to the extent of the impairment. Yes; He is d/c to the extent of the higher rate of interest. Shadbolt agreed only to the impairment of the collateral but he did not agree to the higher rate of interest thus he is d/c.

George and Martha Washington borrowed $10,000 from the Mt. Vernon Finance Company, both signing a promissory note for the amount borrowed. To secure the note, the bank took a mortgage on Martha's vineyard, but failed to file its mortgage in the proper place. Before the note matured, Martha filed for bankruptcy, and the bankruptcy creditors were able to get the vineyard free and clear of the bank's mortgage. Is George discharged in whole or in part by §3-605(e)? By §3-605(f)?

§3-605(e): (Special Rule for a surety against HDC) secondary obligor is not d/c unless the person entitled to enforce the instrument knows that the person is a secondary obligor or has notice that the instrument was signed for accommodation; (f) that the secondary obligor consents; or waives d/c. Not d/c at all: Unless he can show that his signature was an anomalous signature and that it wasn't necessary and therefore the bank was put on notice that he was signing as surety, then the d/c as to her might affect him. (Must show that the note saids; I, Mary Martha)

Who has the burden of proof here?

§3-605(h): A secondary obligor asserting the d/c has the burden of proof. Shadbolt has the burden of proof.

Who has the burden of proof on the issues?

§3-605(h): A secondary obligor asserting the d/c has the burden of proof. Shadbolt has to prove the occurrence of the acts that he is alleging harmed him and he also has to prove the loss or prejudice caused by those acts.

Same situation as Problem 22 except that when Tom deposits the $1,000 check in his account, the account contains $500. Later on that afternoon, he withdraws $500. Is the bank a holder in due course for any amount? What result if he withdraws $750?

§4-210(b): If credit given for several items received at one time or pursuant to a single agreement is withdrawn or applied in part, the security interest remains upon all the items, any accompanying documents or the proceeds of either. Credits first given are first withdrawn. No, because no value has been given by the bank at this point, he merely withdrew the funds that he had already before deposit. The Bank suffered no lost. Yes, the bank has given value so is therefore HDC, but only for $250 taken from the $1,000 that was deposited.

Tom Winker tricked old Mrs. Nodding into writing a check payable to Tom (she thought he was the agent for a local charity). The check for $1,000 was drawn on her bank, the First County Bank. Tom took the check to his bank, the Last National Bank, and after indorsing it, put it in his checking account. Last National Bank sent the check to the First County Bank for payment, but by the time it got there Mrs. Nodding had stopped payment so that the check was dishonored and returned to Last National. Is Last National Bank a holder in due course? This question will be important if Tom has skipped town and Last National decides to sue Mrs. Nodding.

§4-211: In determining its status as a HDC, a bank has given value to the extent it has a security interest in an item, if the bank otherwise meet other HDC requirements. Here the bank would have given value if Tom would have w/d the $1,000 from the bank; or if the funds were credited to some outside obligation (i.e. Tom wrote a check) or if the bank used the funds to pay for an obligation that Tom owed the bank. LNB is a holder in due course when they allowed the funds to be withdrawn to the extent of the amount withdraw against the deposit.

After he bought a successful Truth in Lending action against Octopus National Bank, attorney Sam Ambulance made the mistake of continuing to bank at ONB. At a time when his bank balance greatly exceed that amount, Sam wrote an alimony check for $3,000 and gave it to his ex-wife, Sue. Because similar checks had bounced in the past, Sue hurriedly walked the check directly into the bank and presented it across the counter. The teller who took the check alerted the bank's manager, who laughed evilly as he threw it back across the counter at Sue, informing her that Sam's business was no longer welcome at ONB and that it refused to pay any more of his checks, even though there was money in the account sufficient to meet the check. You are the attorney who handled Sue's divorce, so she calls you and asks what should she do?

§4-402(a): a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft. . §4-402(b): A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. §3-414(b): If an unaccepted draft is dishonored, the drawer is obliged to pay the draft. Because the unaccepted check was dishonored, Sue may recover the amount of the check from Sam. As such Sam has statutory cause of action against the bank for wrongful dishonor in that he had the money in this account to cover the check. The bank is thus liable to Sam for all of his damages resulting from the wrongful dishonor.

If the cancellation had been a clerical error, what result?

§604 requires that the intent to cancel the obligation so it would still be valid. If there is a clerical error it doesn't qualify as d/c if it is not by intentional act.