BUSINESS LAW
I (continued)
Precursor to XXI. Commercial paper
1. When a negotiable instrument
2. is negotiated
3. to a holder in due course (HDC),
4. the HDC takes free of personal defenses. The HDC is subject only to real defenses.
2-party note: The signer, the maker, who takes on the obligation, is the payee, the mortgage holder is the payer.
3-party check or draft: The drawer is the employer, the payee is the employee, the drawee is the bank.
XXI. Commercial Paper - Form and Content
A. Formal requirements
1. Writing
2. Signed by maker or drawer
3. must contain an unconditional promise or
order to pay money. We must look at the "four corners" of the
instrument. If it is subject to another document, then it is conditional. If it
is conditional, it cannot be a negotiable instrument. "Subject to" is
a conditional phrase. ie. 1. This note is
"subject to" a mortgage executed on "even date" (this note
is conditional, therefore, non-negotiable). "Even date" means the
same date. ie. 2. This note [is] executed on even date with a mortgage to Bank One
(this is a mere reference; it is unconditional; it is negotiable).
4. Specify a sum certain money.
a. Money is the medium of exchange authorized by a government as its currency.
b. Sum certain is necessary to determine the minimum payment.
5. No other promise or order. [Money only, cannot include boot property]
6. Payable on demand or at a definite time. This promotes certainty in ascertaining the present value of the instrument.
a. Demand paper. This is sufficiently certain as to the time for payment: The holder makes demand and sets the time for payment. Time paper is payable other than on demand. A mortgage note is time paper.
b. "On or before" clauses. These clauses are payable at a definite time.
c. "At a fixed period after a stated date" This is payable at a definite time, but the instrument must be dated.
d." At a fixed period after sight" This is used at trade acceptances. A trade acceptance is a draft drawn by the seller of goods and accepted by the purchaser. A bill of lading is given in exchange for the draft.
e. "At a definite time subject to acceleration by the payee" is payable at a definite time.
f. “At a definite time subject to the extension by payee” is payable at a definite time. Extension can be unlimited if at the discretion of the payee. However, extension by the maker must be for a set time, such as 6 months.
g. An instrument payable only upon an act or event, uncertain as to the time of occurrence, is not payable at a definite time, if that wording is on the face of the instrument. ie. a post-obit
7. The instrument must be payable to order or bearer, these are the magic words of negotiability.
a. Payable to order. Pay to the order of Jane Jones. Pay to Jane Jones or her order. Pay to Jane Jones or her assigns.
b. Payable to bearer. Pay to bearer. Pay to cash or to the order of cash. Pay to cash.
XXII. Transfer and negotiation. Only negotiable instruments are transferable by negotiation. The transferee of a negotiable instrument is a holder.
A. Transfer
1. If a transfer is by assignment or by negotiation, then the transferee has the same right that the transferor had.
2. A transfer for value of an instrument not payable to bearer (order paper) gives the transferee the right to the unqualified endorsement of the transferor. The presumption is that if value was given, then negotiation was intended. (See D.4 below) “Without recourse” is a qualified endorsement.
B. Negotiation
1. The negotiation is the transfer of a negotiable instrument in such a manner that the transferee becomes a holder of it.
2. Bearer paper is negotiated by delivery alone (just like cash).
3. Order paper is negotiated by endorsement plus delivery.
4. Anyone in possession of bearer paper is a holder.
C. Endorsements
1. It is the signature of the payee, or the drawee, or an accommodation endorser, or a holder. It must be on the instrument or on an allonge, a piece of paper permanently affixed to the paper.
2. Liability is in the order in which the endorsements appear. (See XVIII and XXIX below)
3. A forged endorsement breaks the chain of title. (See XVIII and XXIX below)
4. Endorsement which convey less than the entire instrument operate as a partial assignment.
D. Types of endorsements.
1. Blank endorsement. It consists only of a signature and does not designate an endorsee. It converts order paper to bearer paper.
2. Special endorsement. It designates the person to whose order the instrument is to be payable. Words of negotiability are not necessary in an endorsement. ie. “Pay A”, [signed payee]; it does not have to say “Pay to the order of”.
3. Restrictive endorsement.
a. Conditional. The endorser makes the rights of the endorsee subject to the happening or the non-happening of an event. ie. Pay Isabel if she delivers 500 tons of flour before July 28 [signed payee].
b. Deposit or collection. “For deposit only” [signed payee].
c. In trust. The first endorsee pays the funds consistent with the endorsement. ie. “Pay Teresa, parent and next of friend, and guardian of Monica, a minor, and Helen M. Roe, her attorney $1 million” [signed payee]. Teresa and Helen must endorse the one check written.
4. Qualified endorsement. It transfers legal title but does not guarantee payment. ie. [signed payee] “without recourse” (blank and qualified endorsement)
1. Must be a holder (UCC 1-201 (20)). A person who is in possession of an instrument drawn or issued to his order or his bearer, or endorsed to him, or endorsed in blank, is a holder
2. The holder must give value.
a. A purchaser of a note who has not given value, may rescind if a defense becomes known to him.
b. A holder takes the instrument for value only to the extent that the agreed consideration has been given. This is UCC 3-303 (a).
c. A holder gives value when he takes an instrument in payment of, or as security, for an antecedent debt (UCC 3-303 (b)).
3. Good faith.
a. This means honesty-in-fact in the conduct in the transaction involved (UCC 1-201 (19)).
b. If a purchaser was actually innocent, he is held to have bought the paper in good faith, even though a prudent man, under the circumstances, would have known something was wrong with it.
4. Without notice. A holder in due course must take without notice that an instrument is subject to any claim or defense, or is overdue or is dishonored. Notice must be received at such time and in such a manner as to give a reasonable opportunity to act on it.
a. Notice of a claim or defense:
1. An instrument is so incomplete, bears visible evidence of forgery or alteration, or is otherwise so irregular as to call attention to its validity.
2. A purchaser has notice
that any obligation of any party is voidable or that all of the parties have
been discharged. ie. All of the endorsements have
been crossed out.
3. The following are not a notice of a claim or defense:
a. The instrument is antedated or postdated
b. The instrument was given for an executory promise
c. A party signs as an accommodation maker
d. An incomplete instrument is completed unless the purchaser has notice that the completion was improper.
b. Notice that an instrument is overdue. ie. If an instrument is payable on June 1, a purchaser cannot be a holder in due course by buying the note on June 2.
1. If an installment note or several notes are issued as part of the same transaction, a purchaser has notice if he has reason to know that part of the principal is overdue or there is an uncured default in the same series. ie. If X receives checks from several parties and one of those checks is overdue, X cannot be a holder in due course.
2. Demand paper: A purchaser has notice if he knows he is taking after demand has been made or the instrument is outstanding and unreasonable length of time. Checks are unreasonable after 90 days. Demand notes are unreasonable after 60 days.
c. Notice that an instrument has been dishonored.
A. A payee may be a holder in due course. (UCC 3-302 (2))
B. The shelter rule (UCC
3-201 (1)). If a holder does not comply with all of the requirements for
being a holder in due course, he acquires the rights of a holder in due course
if the previous holder has been a holder in due course. However, a transferee
who has been a party to any fraud or illegality affecting the instrument or as
a prior holder had notice of a claim, that transferee cannot reacquire the
paper. ie. P induces M in fraud to make a note
payable to P’s order and then P negotiates it to A, a holder in due course. A
gives the note to B, his mother-in-law and tells her to take a cruise. B is not
a holder in due course since she did not pay value (the note was a gift from
A). However, B acquires the rights of a holder in due course because A was a
holder in due course. B gets paid.
C. A holder in due course status is denied under UCC 3-302(2) in the case of a judicial case a bulk transaction and an estate sale.
XXV. Personal defenses are not valid against a holder in due course. This means that the maker or the drawee must pay the holder in due course.
A. Lack of consideration
B. Failure of consideration.
C. Breach of contract
D. Fraud in the inducement [but not in fraud in the execution, which is a real defense]
E. Illegality, such as a misdemeanor, which does not render the transaction void.
F. Duress, undue influence, mistake, misrepresentation, or incapacity which does not render the transaction void.
G. Set off or counterclaim. If the original maker of the note is owed by the holder in due course the same amount of money, the maker still must pay the holder in due course.
H. Discharge of which the holder in due course does not have notice
I. Non-delivery of an instrument whether complete or incomplete
J. Unauthorized completion of an incomplete instrument.
K. Payment without surrendering the instrument
L Theft of a bearer instrument or a properly endorsed order instrument.
M. Lack of authority of a corporate officer or an agent or partner as to the particular instrument where such agent or partner had general authority to issue negotiable paper for his principal or firm.
XXVI. Real defenses are valid against a holder in due course. This means that the maker or the drawee does not pay the holder in due course.
A. Minority UCC 3-305(2). This is available as a defense against a holder in due course to the extent that it is a defense under state law.
B. Void obligations. This is available against a holder in due course where the instrument is void from the beginning. ie. The adjudication of an individual who is mentally disabled or a wager. The execution of an instrument by one who has been adjudicated mentally disabled is void. This is a real defense against a holder in due course; therefore, the holder in due course does not get paid.
C. Fraud in the execution. A party has signed the instrument with neither the knowledge nor the reasonable opportunity to obtain knowledge of the character or essential terms of the instrument. ie. A person signs a promissory note thinking it was a receipt.
D. Discharge in insolvency proceedings (Assume that the holder in due course has notice of the bankruptcy). Discharge in insolvency proceedings is a real defense which is good against a holder in due course. This means that the holder in due course does not get paid.
E. Discharge of which the holder has notice when he took the instrument. UCC 3-304(1)(b). Remember if all the parties have been discharged, then the holder cannot be a holder in due course.
F. Forgery of signature (See XXIX below). It is an unauthorized signature. It may be made without actual, implied, or apparent authority. The maker or drawer cannot be liable, in the absence of estoppel or ratification. However, one can be held liable for an unauthorized signature stamp.
G. Material alteration.
1. Material alteration changes the contract of a party: The number or relation of the parties, the unauthorized completion of an incomplete instrument, adding or removing a writing.
2. As against any person other than a holder in due course, alteration by a holder, which is both fraudulent and material, discharges any party whose contract is thereby changed. A subsequent holder in due course, however, may enforce the instrument according to its original tenor (amount). If the alteration is not material or fraudulent, there is no discharge and the instrument may be enforced according to its original tenor. ie. M executes and delivers a note to P for $200 which P subsequently endorses and transfers to A for $200. A intentionally and skillfully raises the note to $2000, and then negotiates it to B who takes it in good faith and without notice of any wrongdoing for $2000. B is a holder in due course, and therefore, can collect the original amount of the note ($200) from M or P and the full amount of $2000 from A, less any amount paid by the other parties.
5 Nov. 2001
A. Liability on the instrument.
1. It is a [contract] based on signature.
2. An unauthorized signature operates as the signature of the unauthorized signer in favor of one who takes instrument in good faith and for value. ie. A forgery or the signature of an agent beyond his actual authority.
B. Liability of primary parties.
1. The maker of the note and the drawer of the draft, upon acceptance, are primary parties and are unconditionally liable.
2. Drawer, payee and other endorsers are secondarily liable. If [the] maker cannot pay the holder in due course, the payee has to pay. Primary is liable on a note. Secondary is liable on a note. Drawer is liable on a check.
Primary - maker
Secondary - payee, drawer, endorsers
3. The maker pays according to his original tenor; a drawer is liable on the terms of his acceptance.
4. Certification at the request of the drawer does not relieve him of secondary liability. ie. A person (drawer) buys a $20K certified check; the drawee is Bank One. If Bank One does not pay, the drawer is still liable to pay.
C. Liability of the secondary parties
1. Endorsers, drawers, and payees are secondary parties. They are liable if primary parties do not pay. The conditions precedent to their being liable are presentment, dishonor, and prompt notice of dishonor and protest. These are done by the holder on the maker or on the drawee. If these are satisfied, then the secondary parties (except a qualified endorser) are liable according to their tenor at the time of their endorsements or engagements.
2. Conditions precedent to liability.
a) Presentment (definition).
1) This [is the] demand for payment on the maker or for acceptance on the drawee. If payment is to be made on a specified maturity date, then the instrument is due on that date. Otherwise, the instrument is due at a reasonable time: Drawer - 30 days after issue; endorser - 7 days after endorsement.
2) Delay in presentment discharges endorser, but drawer is discharged only to the extent to any loss suffered by the delay.
3) Presentment is necessary to charge any endorsers.
b) Dishonor. An instrument is dishonored when presentment is [solely] made and acceptance payment is refused or cannot be obtained [without] a reasonable time. The holder then has the immediate right of recourse against the drawers, endorsers, and payees by giving them notice of presentment and notice of dishonor.
c) Notice of dishonor. Notice must be given by the bank before midnight on the next banking day following the banking day of dishonor. All others have until midnight of the 3rd business day following the business day of dishonor. All others have until midnight of the business day following the business day of dishonor.
d) Protest. This is a certificate of dishonor for a draft drawn or payable outside of the U.S.
e) Excuse of presentment, dishonor, notice of dishonor, and protest. This is allowed where the holder doesn’t have notice that the instrument is due or there are circumstances beyond his control. ie. blizzard
f) Waiver of presentment, dishonor, notice of dishonor, and protest. This is often in a note, such as a mortgage note.
20 Nov. 2001
D. Special Situations of liability
1. Impostor rule. Endorsement of an impostor in the name of a named employee or other person is effective if the impostor has induced the maker or drawer to issue the instrument to him using the name of the payee. The drawers account can be charged. ie. The payee is in the best position to determine the true identity of the impostor; the bank doesn’t.
2. Fictitious payee rule., The endorsement of any person in the name of a named payee is effective if the agent of the maker or drawer has supplied the maker or drawer with the name of the payee, intending the payee to have no such interest (the drawer’s account can be charged).
A. Warranties on transfer. These run to the immediate transferee of the transfer is by delivery alone (bearer paper). However, if the transfer is by endorsement, then the transfer warranties run to all holders who take the instrument in good faith. The transfer must be for consideration.
1. Good title – means no forged endorsements. See XXII. C.3.
2. All the signatures are genuine and authorized.
3. No material alteration
4. No personal or real defenses against the transferor (if the transferor has endorsed with a qualified endorsement of without recourse, then he warns that he has no knowledge of a defense).
5. No knowledge of insolvency
B. Warranties on presentment.
1. Good title – no forged endorsements.
2. No knowledge of the signature of the maker of the drawer is forged or unauthorized.
3. No material alteration
XXIX. Unauthorized signatures. An unauthorized signature is ineffective as the signature of the person whose name is signed. ie. If the forger signs a maker’s signature as maker, then the maker has no liability. If the forger signs the drawer’s signature as drawer, then the drawer has no liability. The forger is liable because the unauthorized signature of the maker or the drawer is effective as the signature to one who takes in good faith and pays value.
A. Forged drawer and maker’s signature.
1. A valid negotiable instrument is created when there is a forged drawer’s or a forged maker’s signature. The forged signature operates as the signature of the maker or the drawer. Therefore, payees and holders may be holders in due course.
2. *Under the rule of Price v. Neal, the drawee bank is bound by the forged drawer’s signature and cannot recover back payment from the drawer.
3. The forged signature
of a drawer gets passed to a third party. The fourth party is involved and it
is a bank. The drawer bank. Debbie drawer is a CPA out of town on a business
trip. Her cleaning lady comes to clean the apartment. She takes one of Debbie’s
personal checks, makes it payable to herself in the amount of $10K. Mary cashes
it at the Jewel. Jewel negotiates it at Bank One. Bank One negotiates it to the
drawee bank. Debbie returns from the business trip and discovers the $10K debit
to her account and the cancelled check contained the forged drawer’s signature.
Drawee bank refuses to credit Debbie’s account for $10K. Debbie sues; Debbie
wins. Under the rule of Price v. Neal, the drawee bank is bound by the forged
drawer’s signature and cannot recover back payment from the drawer. This the
drawee bank cannot recover back payment from Debbie. Rational, the drawee
bank should’ve checked the signature of Debbie Drawer.
B. Forged endorsement.
1. A forged endorsement is ineffective to negotiate the instrument. There can be no holders or holders in due course after the forged endorsement (this is unlike a forged drawer or a forged maker’s signature where the payees and holders can be holders in due course. Therefore it cannot be negotiated.)
2. A drawee bank paying out on a forged endorsement may not charge the drawer’s account but may recover from prior transferors on breach on the presentment warranty of good title. ie. If a payee’s signature is forged. Pamela is a CPA out of town . Sue steals Pamela’s paycheck and forges the endorsement of Pamela at the Jewel. Jewel negotiates the check at Bank One. Bank One negotiates the check at the drawee’s bank. IBM sues drawee bank to credit its account. IBM’s bank is on the right. Jewel was in the best position to determine the identity of Pamela payee.
XXX. Termination of liability. Striking out the signature of a prior endorser discharges subsequent endorsers who have a right of recourse against the endorser discharged.
XXXI. Relationship of Principal and Agent. Agency is a relationship between two persons whereby the agent is authorized to act for and on behalf of the principal.
A. Creation of agency and scope of purpose
1. Whatever business activity a person may accomplish personally, he may do through an agent. ie. power of attorney. A principal may not appoint an agent to perform acts which are so personal, that their performance may not be delegated to another. ie. contracts for personal services
2. An agency is a consensual relationship that may arise by contract between the principal and agent. ie. estoppel or ratification
3. Whether the principal has the capacity to act through an agent depends on the capacity of the principal to do the act himself. The incapacity of the agent to bind himself through a contract does not disqualify him from making a binding contract on the principal. ie. newspaper boy, girl scout cookies
B. Classification of agencies
1. Disclosed. Third person has notice that the agent is acting for the principal and knows the principal’s identity.
2. Partially disclosed. Third person has notice that the agent acts or may act for another but does not know the principal’s identity. Land trust - the people don’t know who the property owner is.
3. Undisclosed. Third person has no notice that the agent is acting for principal. ie. Walt Disney World
C. Types of authority.
1. General. The agent can transact all business of the principal or all business of a particular kind at a particular place.
2. Special. The agent acts only in a particular transaction. ie. real estate broker
3. Subagent. The subagent is employed by an agent with the knowledge and the consent of the principal.
D. Other legal relations
1. Master-Servant. Work is of a ministerial nature and the servant has little authority. ie. maid, cook
2. Independent contractor. Hirer has no control. ie. UL
E. Duties of an agent to a principal
1. Obedience
2. Diligence
3. Inform
4. Account. See F.1.c. Document and account for expenses.
5. Fiduciary. This arises out of a relationship of trust and confidence.
a. The agent cannot represent the principal in a transaction in which the agent has a personal interest.
b. The agent owes full disclosure.
c. The agent cannot use for his own benefit information obtained in the course of his agency.
d. The agent cannot make a secret profit.
F. Duties of a principal to an agent.
1. Contractual duties
a. By contracting to employ an agent, the principal does not promise the agent an opportunity to work. ie. sales rep
b. The principal has a duty to render the agent a true account of money. ie. commissions
c. The principal is under a duty to indemnify and reimburse the agent for authorized payments made by an agent on behalf of the principal. ie. travel expenses, contracts: put travel and other potential expenses in engagement letter
d. If no specific rate of compensation is set, then the principal must pay a reasonable rate of compensation. Put compensation in the contract.
2. Tort duties
a. Principal must provide reasonably safe conditions of employment. Common law duties are maintenance, inspection, and repair of premises.
b. Workers compensation. This is allowed when an employee is injured and the injury arises out of his employment. This is sole compensation from the employer.
G. Termination of agency
1. Acts of the parties
a. Mutual agreement
b. Fulfillment of the purpose. ie. real estate closing
c. Revocation of authority [principal fires agent]
d. Renunciation of authority [agent fires principal]
2. Operation of law
a. Bankruptcy of principal or agent
b. Death of principal or agent
c. Incapacity of principal or agent
d. Loss or destruction of the subject matter
e. Loss of qualification of principal or agent
f. Disloyalty of agent
g. Change of law
h. Outbreak of war
3. Irrevocable agencies. These occur when the agency is coupled with an interest. ie. A factor advances funds on behalf of the principal in the garment industry.
A. Relation between the principal and the third party
1. Contract liability of the principal. The principal is liable for the authorized acts of the agent. The principal is not liable for the unauthorized acts of the agent unless he ratifies them.
2. Types of authority
a. Actual authority. It depends on the consent manifested from the principal to the agent whether express or implied.
1) Express authority is actual authority embodied in language instructing the agent. This is oral or written. ie. Board of directors resolution to an officer on signing authority. Power of attorney
2) Implied authority is inferred from the words or conduct from the principal to the agent. ie. Business trip includes expenses for travel.
b. Apparent authority. This arises out of words or conduct of a disclosed principal manifested to a third person where the third person is reasonably induced to believe that actual authority exists.
c. Upon termination of agency, actual authority ceases but apparent authority may continue to third persons until the third person receives actual or constructive notice of termination. Actual notice must be given by the principal to third persons that the agency has been terminated. Constructive notice is made through an advertisement.
B. Tort liability of the principal
1. The principal is liable for authorized acts of the agent to commit tortious acts with respect to the third person or property of another. ie. “Trespass to the person” is battery. If a person hires a hit man, the person (the principal) and the hit man (agent), both, will be liable civilly and criminally. The contract will be unenforceable. “Trespass to the property” works the same way.
2. The principal is liable for the unauthorized acts of the agent committed within the scope of the agent’s employment. [Doctrine of respondeat superior] ie. The authorized route is the scope of employment. If an employee does an unauthorized act, but it is within his scope of his employment, the principal is liable. If the employee is on a “detour”, the principal is still liable, but if the employee is on “a frolic of his own”, not within the scope of his employment, the principal is not liable.
Case 1. On 1 April 2001, Melvin, a farmer bought a tractor for
$50,000 from Paris Farm Equipment. The salesman assured him that it was brand
new. Melvin executed a negotiable promissory note for $50,000 for the purchase
price. The promissory note was properly negotiated by Paris to Henry, a holder
in due course. On 1 September 2001, the tractor broke down. Tom, a local
mechanic, told Melvin that the tractor was not new, but was rebuilt and
repainted. When the note became due on 31 March 2002, Melvin refused to pay
Henry.
Case 2. Mary brought her diamond engagement ring to Paul
Jewelers to be cleaned. She thought she signed a receipt from Paul but he
tricked her and she actually signed a negotiable promissory note for $5,000.
Paul negotiated the note to Harry, a holder in due course. When Harry presented
the note to Mary, she refused to pay.
Case 3. David, an avid golfer, left his sports bag in his locker at Playmore Golf Club. Paul, a caddie at the club, broke into David’s locker and stole one of David’s checks from his checkbook. Paul made a check out to himself in the amount of $20,000, forged David’s signature, and cashed the check at Jewel. Jewel properly deposited the check at First Bank. First Bank negotiated the check to Bank One, the drawee bank for David’s checking account. When David discovered the cancelled check and the $20,000 charge on his bank statement, Bank One refused to withdraw the charge. Who is liable on the check?
Case 4. Paula hosted a fund raiser in her home. Anna saw
Paula’s paycheck from Downs Company in the amount of $10,000, drawn on Davis
Bank sitting on Paula’s desk. Anna stole the check, forged Paula’s signature
and cashed it at Jewel. Jewel deposited the check at First Bank. First Bank
negotiated the check to Davis Bank. Paula did not notice that the check was
missing because she went on an emergency business trip to Japan the next week.
When she returned home, she noticed the check was missing and called her
employer, Downs Company. Downs said the check had been cashed. Davis Bank refused
to not charge the account of Downs Company. Who is liable on the check?
Rule of Law: When a negotiable
instrument is negotiated to a holder in due course, the holder takes free of
personal defenses, subject only to real defenses. Fraud in the inducement
is a personal defense, not valid against a holder in due course. The maker of
the note must pay the holder in due course.
Analysis: The facts state that
the note was negotiable and that it was negotiated to a holder in due course.
The lie of Paris, the payee, to Melvin, the maker, that the equipment was new constituted
fraud in the inducement, a personal defense. Decision for Henry
Rule of Law: A valid negotiable
instrument is negotiated to a holder in due course, the holder takes free of
personal defenses, subject only to real defenses. This means the maker does not
pay the holder in due course.
Analysis: The facts state that
the note was negotiable and that it was negotiated to a holder in due course.
The trick by Paul, the payee, on Mary, the maker, constituted fraud in the
execution: She signed without the reasonable opportunity to obtain
knowledge about the instrument. This is a real defense, which is valid against
Harry, the holder in due course. Decision for Mary
Rule of Law: A valid negotiable
instrument is created when there is a forged drawer’s or a forged maker’s
signature. The forged signature operates as the signature of the maker or the
drawer. Therefore, payees and holders may be holders in due course. Under the
rule of Price v. Neal, the drawee bank is bound by the forged drawer’s
signature and cannot recover back payment from the drawer.
Analysis: When Paul forged David’s signature, a valid negotiable instrument was created and Jewel, First Bank and Bank One became holders in due course. However, Bank One, the drawee bank, is bound by the forged drawer’s signature by Paul and cannot recover back from David. Therefore, Bank One suffers the loss of $20,000. Decision for David
Rule of Law: A forged
endorsement is ineffective to negotiate the instrument. There can be no holders
or holders in due course after the forged endorsement. Therefore, it cannot be
negotiated. A drawee bank paying out on a forged endorsement may not charge the
drawer’s account but may recover from prior transferors on breach of the
presentment warranty of good title.
Analysis: Anna’s forged
endorsement cannot negotiate the check. Therefore, Jewel, First Bank and Davis
Bank cannot be holders in due course. Davis Bank can recover from First Bank,
and then First Bank can recover from Jewel on breach of the presentment
warranty of good title. Therefore, Jewel suffers the loss of $10,000. Decision
for Paula, Jewel is liable on the check.