Exam 18: Holder in Due Course, Liability, and Defenses

Zachary,who has been authorized to write a check from a company account to pay employees,draws bonus checks from the company account for five imaginary employees; he then endorses the checks in their names and deposits the checks into his own bank account.Which of the following is true regarding whether the company will be required to take the loss on the checks?

Angry employee.Martin is in charge of payroll and other expenses for ABC,Inc.He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy.Martin decided to quit but not before he got some extra money from ABC,Inc.Martin wrote five checks from the account of ABC,Inc.to pay off the five credit card companies that Martin owed money.The credit card companies took the checks without reason to be suspicious as to the source of payment.The checks to the credit card companies in total amounted to $30,000,and each check was in an amount under $10,000.Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist.Each of these checks was in the amount of $5,000.Martin took the checks,endorsed and cashed the checks in the names of the various fake employees,and kept the cash.Finally,Martin discovers through office gossip that Adam has been looking for another job with XYZ,Inc.located in a neighboring state and that Adam is supposed to go there for an in-person interview in a few weeks.Martin sets up an interview with XYZ,Inc.pretends to be Adam,and induces XYZ,Inc.to give him,posing as Adam,a check for $5,000 as a signing bonus.Martin immediately endorses the check pretending to be Adam and pockets the cash.Finally,Martin leaves town heading for the Caribbean.Is ABC,Inc.entitled to a refund from its bank for the five checks used to pay Martin's credit card companies?

Even if a holder is aware that an instrument he or she is taking has been dishonored,the holder can still become a holder in due course by paying value for the instrument.

According to the Uniform Commercial Code,when does a person have notice of a fact?

After initially receiving notice of dishonor,when must parties other than a collection bank give notice of dishonor to a secondarily liable party?

Angry employee.Martin is in charge of payroll and other expenses for ABC,Inc.He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy.Martin decided to quit but not before he got some extra money from ABC,Inc.Martin wrote five checks from the account of ABC,Inc.to pay off the five credit card companies that Martin owed money.The credit card companies took the checks without reason to be suspicious as to the source of payment.The checks to the credit card companies in total amounted to $30,000,and each check was in an amount under $10,000.Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist.Each of these checks was in the amount of $5,000.Martin took the checks,endorsed and cashed the checks in the names of the various fake employees,and kept the cash.Finally,Martin discovers through office gossip that Adam has been looking for another job with XYZ,Inc.located in a neighboring state and that Adam is supposed to go there for an in-person interview in a few weeks.Martin sets up an interview with XYZ,Inc.pretends to be Adam,and induces XYZ,Inc.to give him,posing as Adam,a check for $5,000 as a signing bonus.Martin immediately endorses the check pretending to be Adam and pockets the cash.Finally,Martin leaves town heading for the Caribbean.Is ABC,Inc.entitled to a refund from its bank for the checks the bank paid written to fake employees?

If Adam Brewer possesses a check that states "Payable to Adam Brewer," Adam is a(n)________.

Check Cashing Business.Susan owns and operates a check cashing business.A customer,Bob,claiming to be Sam,came in and cashed a $2,000 check issued by ABC Trucking to Sam.The day after Susan cashed the check,she received a notice from ABC Trucking that some checks had been stolen.It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking.At the time she took the ABC Trucking check,Susan was very busy with several customers in line.She simply glanced at the check and cashed it.A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000.Susan decided that she needed to hire some people to help her because she also had a problem with another check.On the same day that she took the ABC Trucking check,she took a check from another customer,Maurice.It was later discovered that the check from Maurice,which was four months old,was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work.The issuer claimed that the work was improperly done.Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks.Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks.What is the effect of the alteration of the check on Susan's status as a holder in due course?

A holder in due course must take the negotiable instrument in good faith.

The "for-value" requirement for becoming a holder in due course is more stringent that the ________ requirement of ordinary contract law.

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is true regarding when,or if,the note was dishonored?

The Uniform Commercial Code's definition of good faith is strictly a subjective standard.

A payee can be considered a holder in due course.

When a holder presents an instrument in a timely and proper manner but acceptance or payment is refused,the instrument has been ________.

A party who is conditionally liable on an instrument must pay the stated amount when it is presented for payment and make the payment without resorting to any other party.

Which of the following is true regarding negotiable instruments in England?

A holder in due course is free from the following personal defenses:

A holder can take an instrument for value if the holder acquires a security interest or some other lien in the instrument.

A time instrument becomes overdue ninety days after it is executed.

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is true regarding Henry's entitlement to payment from Millie?