20 QUESTIONS: - Sandra and Thomas McGuire entered into a purchase and sale agreement for “Becca’s Boutique” with Pascal and Rebecca Tursi. The agreement provided that the McGuires would buy the store for $75,000, with a down payment of $10,000 and the balance of $65,000 to be paid at closing on October 5, 2017. The settlement clause stated that the sale was contingent upon the McGuires’ obtaining a Small Business Administration loan of $65,000. On September 4, 2017, Mrs. McGuire signed a promissory note in which the McGuires promised to pay to the order of the Tursis and the Green Mountain Inn the sum of $65,000. The note specified that interest payments of $541.66 would become due and payable on the fifth days of October, November, and December 2017. The entire balance of the note, with interest, would become due and payable at the option of the holder if any installment of interest was not paid according to that schedule.
The Tursis had for several months been negotiating with Parker Perry for the purchase of the Green Mountain Inn in Stowe, Vermont. On September 7, 2017, the Tursis delivered to Perry a $65,000 promissory note payable to the order of Green Mountain Inn, Inc. This note was secured by transfer to the Green Mountain Inn of the McGuires’ note to the Tursis. Subsequently, Mrs. McGuire learned that her Small Business Administration loan had been disapproved. On December 5, 2017, the Tursis defaulted on their promissory note to the Green Mountain Inn. On June 11, 2017, PP, Inc., formerly Green Mountain Inn, Inc., brought an action against the McGuires to recover on the note held as security for the Tursis’ promissory note.
Is this instrument negotiable? Please explain.
- Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument was a restriction stating that the note could not be transferred, pledged, or otherwise assigned without Horne’s written consent. As part of the same transaction between Horne and Clark, Horne gave Clark a separate letter authorizing Clark to pledge the note as collateral for a loan of $50,000 that Clark intended to secure from First State Bank. Clark did secure the loan and pledged the note, which was accompanied by Horne’s letter authorizing Clark to use the note as collateral. First State contacted Horne and verified the agreement between Horne and Clark as to using the note as collateral. Clark defaulted on the loan. When First Bank later attempted to collect on the note, Horne refused to pay, arguing that the note was not negotiable as it could not be transferred without obtaining Horne’s written consent. This suit was instituted. Is the instrument negotiable? Please explain.
- The Society National Bank (Society) agreed in a promissory note to lend U.S.A. Diversified Products, Inc. (USAD) up to $2 million in the form of an operating line of credit upon which USAD could make draws of varying amounts. The outstanding balance was to be paid on April 30 of the following year. USAD defaulted on the line of credit, and Society filed a complaint against USAD. Is the promissory note negotiable? Please explain.
- A drawer, Commercial Credit Corporation (Corporation), issued two checks payable to Rauch Motor Company. Rauch indorsed the checks in blank, deposited them to its account in University National Bank, and received a corresponding amount of money. The Bank stamped “pay any bank” on the checks and initiated collection. However, the checks were dishonored and returned to the Bank with the notation “payment stopped.” Rauch, through subsequent deposits, repaid the bank. Later, to compromise a lawsuit, the Bank executed a special two-page indorsement of the two checks to Lamson. Lamson then sued the Corporation for the face value of the checks, plus interest. The Corporation contends that Lamson was not a holder of the checks because the indorsement was not in conformity with the Uniform Commercial Code in that it was stapled to the checks. Is Lamson a holder? Please explain.
- Certain partners of the Finley Kumble law firm signed promissory notes that secured loans made to the law firm by the National Bank of Washington (NBW). When Finley Kumble subsequently declared bankruptcy and defaulted on the loans, NBW filed suit to collect on the notes. Then NBW itself became insolvent, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver for NBW. The FDIC brought suit against the partners who had signed the note. Section 1823(e) of the Federal Deposit Insurance Act places the FDIC in the position of a holder in due course and thus bars all personal defenses against the FDIC claims. Twenty of the Finley partners claimed that they had signed the notes under the threat that their wages and standing in the firm would decrease if they refused to sign. Such a threat constituted economic duress, which, they contended, is not a personal defense but a real defense. Please explain who should win the lawsuit.
- L&M Home Health Corporation (L&M) had a checking account with Wells Fargo Bank. L&M engaged Gentner and Company, Inc. (Gentner) to provide consulting services, and paid Gentner for services rendered with a check drawn on its Wells Fargo account in the amount of $60,000, dated September 23, 2016. Eleven days later, on October 4, 2016, L&M orally instructed Wells Fargo to stop payment on the check. Eleven days after that, on October 15, 2016, Gentner presented the L&M check to Wells Fargo for payment. On the same date the teller issued a cashier’s check, payable to Gentner, in the amount of $60,000. On November 5, 2016, Wells Fargo placed a “stop payment order” on the cashier’s check. On January 15, 2017, Gentner deposited the cashier’s check at another bank, but it was not honored and was returned stamped “Payment Stopped.” Gentner sues Wells Fargo for wrongful dishonor of the cashier’s check. Is Gentner a holder in due course of the check? Please explain.
- While assistant treasurer of Travco Corporation, Frank Mitchell caused two checks, each payable to a fictitious company, to be drawn on Travco’s account with Brown City Savings Bank. In each case, Mitchell indorsed the check in his own name and then cashed it at Citizens Federal Savings & Loan Association of Port Huron. Both checks were cleared through normal banking channels and charged against Travco’s account with Brown City. Travco subsequently discovered the embezzlement, and after Citizens denied its demand for reimbursement, Travco brought a suit against Citizens. Is the indorsement effective? Please explain.
- On July 1, Anderson sold D’Aveni, a jeweler, a necklace containing imitation gems, which Anderson fraudulently represented to be diamonds. In payment for the necklace, D’Aveni executed and delivered to Anderson her promissory note for $25,000 dated July 1 and payable on December 1 to Anderson’s order with interest at 8 percent per annum.
The note was thereafter successively indorsed in blank and delivered by Anderson to Bylinski, by Bylinski to Conrad, and by Conrad to Shearson, who became a holder in due course on August 10. On November 1, D’Aveni discovered Anderson’s fraud and immediately notified Anderson, Bylinski, Conrad, and Shearson that she would not pay the note when it became due. Bylinski, a friend of Shearson, requested that Shearson release him from liability on the note, and Shearson, as a favor to Bylinski and for no other consideration, struck out Bylinski’s indorsement.
On November 15, Shearson, who was solvent and had no creditors, indorsed the note to the order of Frederick, his father, and delivered it to Frederick as a gift. At the same time, Shearson told Frederick of D’Aveni’s statement that D’Aveni would not pay the note when it became due. Frederick presented the note to D’Aveni for payment on December 1, but D’Aveni refused to pay. Thereafter, Frederick gave due notice of dishonor to Anderson, Bylinski, and Conrad.
What are Frederick's rights, if any, against Anderson, Bylinski, Conrad, and D'Aveni on the note? Please explain.
- On August 10, 2015, Theta Electronic Laboratories, Inc., executed a promissory note to George and Marguerite Thomson. Three other individuals, Gerald Exten, Emil O’Neil, and James Hane, and their wives also indorsed the note. The note was then transferred to Hane by the Thomsons on November 26, 2016. Although a default occurred at this time, it was not until April 2018, eighteen months later, that Hane gave notice of the dishonor and made a demand for payment on the Extens as indorsers. Are the Extens liable? Please explain.
- Attorney Eliot Disner tendered a check for $100,100 to Sidney and Lynne Cohen. In drawing the check, Disner was serving as an intermediary for his clients, Irvin and Dorothea Kipnes, who owed the money to the Cohens as part of a settlement agreement. The Kipneses had given Disner checks totaling $100,100, which he had deposited into his professional corporation’s client trust account. After confirming with the Kipneses’ bank that their account held sufficient funds, Disner wrote and delivered a trust account check for $100,100 to the Cohens’ attorney, with this note: “Please find $100,100 in settlement (partial) of Cohen v. Kipnes, et al[.] Per our agreement, delivery to you constitutes timely delivery to your clients.” Also typed on the check was a notation identifying the underlying lawsuit. Without Disner’s knowledge, the Kipneses stopped payment on their checks, leaving insufficient funds in the trust account to cover the check to the Cohens. The trust account check therefore was not paid due to insufficient funds; the Kipneses declared bankruptcy; and the Cohens served Disner and his professional corporation with demand for payment. The Cohens sought the amount written on the check plus a $500 statutory penalty. Please explain who should win and why.
- Vincent Medina signed a check in the amount of $34,348 written on the account of First Delta Financial, a family corporation owned and controlled by Medina. His corporate title did not appear before his signature. He issued the check to James G. Wyche. The check was dishonored for insufficient funds. First Delta Financial is in bankruptcy. Wyche contends that Medina is personally liable because he signed the check without indicating his corporate capacity below his signature. Medina argues that he is not personally liable on account of having signed the check. Explain who should win.
- On September 2, 2011, Levine executed a mortgage bond under which she promised to pay the Mykoffs a preexisting obligation of $54,000. On October 14, 2017, the Mykoffs transferred the mortgage to Bankers Trust Co., indorsing the instrument with the words “Pay to the Order of Bankers Trust Company Without Recourse.” The Lincoln First Bank, N.A., brought this action asserting that the Mykoffs’ mortgage is a nonnegotiable instrument because it is not payable to order or bearer; thus it is subject to Lincoln’s defense that the mortgage was not supported by consideration because an antecedent debt is not consideration. Is the instrument payable to order or bearer? Please explain.
- On July 21, Boehmer, a customer of Birmingham Trust, secured a loan from that bank for the principal sum of $5,500 in order to purchase a boat allegedly being built for him by A. C. Manufacturing Company, Inc. After Boehmer signed a promissory note, Birmingham Trust issued a cashier’s check to Boehmer and A. C. Manufacturing Company as payees. The check was given to Boehmer, who then forged A. C. Manufacturing Company’s indorsement and deposited the check in his own account at Central Bank. Central Bank credited Boehmer’s account and then placed the legend “P.I.G.,” meaning “Prior Indorsements Guaranteed,” on the check. The check was presented to and paid by Birmingham Trust on July 22. When the loan became delinquent in March of the following year, Birmingham Trust contacted A. C. Manufacturing Company to learn the location of the boat. They were informed that it had never been purchased, and they soon after learned that Boehmer had died on January 24 of that year. Can Birmingham Trust obtain reimbursement from Central Bank under Central’s warranty of prior indorsements? Please explain.
- Laboratory Management deposited into its account at Pulaski Bank a check issued by Fairway Farms in the amount of $150,000. The date of deposit was February 5. Pulaski, the depositary bank, initiated the collection process immediately by forwarding the check to Worthen Bank on the sixth. Worthen sent the check on for collection to M Bank Dallas, and M Bank Dallas, still on February 6, delivered the check to M Bank Fort Worth. That same day, M Bank Fort Worth delivered the check to the Fort Worth Clearinghouse. Because TAB/West Side, the drawee/payor bank, was not a clearinghouse member, it had to rely on TAB/Fort Worth for further transmittal of the check. TASI, a processing center used by both TAB/Fort Worth and TAB/West Side, received the check on the sixth and processed it as a reject item because of insufficient funds. On the seventh, TAB/West Side determined to return the check unpaid. TASI gave M Bank Dallas telephone notice of the return on February 7, but physically misrouted the check. Because of this, M Bank Dallas did not physically receive the check until February 19. However, M Bank notified Worthen by telephone on the fifteenth of the dishonor and return of the check. Worthen received the check on the twenty-first and notified Pulaski by telephone on the twenty-second. Pulaski actually received the check from Worthen on the twenty-third. On February 22 and 23, Laboratory Management’s checking account with Pulaski was $46,000. Pulaski did not freeze the account because it considered the return to be too late. The Laboratory Management account was finally frozen on April 30, when it had a balance of $1,400. Pulaski brings this suit against TAB/Fort Worth, Tab/Dallas, and TASI, alleging their notice of dishonor was not timely relayed to Pulaski. Please explain which party is correct in its assertion.
- Tally held a savings account with American Security Bank. On seven occasions, Tally’s personal secretary, who received his bank statements and had custody of his passbook, forged Tally’s name on withdrawal slips that she then presented to the bank. The secretary obtained $52,825 in this manner. Three years after the secretary’s last fraudulent withdrawal she confessed to Tally who promptly notified the bank of the issue. Can Tally recover the funds from American Security Bank? Please explain.
- During a period of sixteen months, Great Lakes Higher Education Corp. (Great Lakes), a not-for-profit student loan servicer, issued 224 student loan checks totaling $273,152.88. The checks were drawn against Great Lakes’s account at First Wisconsin National Bank of Milwaukee (First Wisconsin). Each of the 224 checks was presented to Austin Bank of Chicago (Austin) without indorsement of the named payee. Austin Bank accepted each check for purposes of collection and without delay forwarded each check to First Wisconsin for that purpose. First Wisconsin paid Austin Bank the face amount of each check even though the indorsement signature of the payee was not on any of the checks. Has Austin Bank breached its warranty to First Wisconsin and Great Lakes due to the absence of proper indorsements? Please explain.
- Jones bought a used car from the A–Herts Car Rental System, which regularly sold its used equipment at the end of its fiscal year. First National Bank of Roxboro had previously obtained a perfected security interest in the car based upon its financing of A–Herts’s automobiles. Upon A–Herts’s failure to pay, First National is seeking to repossess the car from Jones. Does First National have an enforceable security interest in the car against Jones? Please explain.
- On June 1, Smith contracted with Martin d/b/a Martin Publishing Company to distribute Martin’s newspapers and to account for the proceeds. As part of the contract, Smith agreed to furnish Martin a bond in the amount of $10,000 guaranteeing the payment of the proceeds. At the time the contract was executed and the credit extended, the bond was not furnished, and no mention was made as to the prospective sureties. On July 1, Smith signed the bond with Black and Blue signing as sureties. The bond recited the awarding of the contract for distribution of the newspapers as consideration for the bond.
On December 1, payment was due from Smith to Martin for the sum of $3,600 under the distributor’s contract. Demand for payment was made, but Smith failed to make payment. As a result, Martin brought an appropriate action against Black and Blue to recover the $3,600. What would be the result? Please explain.
- Anita bought a television set from Bertrum for her personal use. Bertrum, who was out of security agreement forms, showed Anita a form he had executed with Nathan, another consumer. Anita and Bertrum orally agreed to the terms of the form. Anita subsequently defaulted on payment, and Bertrum sought to repossess the television.
(a) Please explain who would win.
(b) Please explain whether the result would differ if Bertrum had filed a financing statement.
(c) Please explain whether the result would differ if Anita had subsequently sent Bertrum an e-mail that met all the requirements of an effective security agreement?
- National Acceptance Company loaned Ultra Precision Industries $692,000, and to secure repayment of the loan, Ultra executed a chattel mortgage security agreement on National’s behalf on March 7, 2011. National perfected the security interest by timely filing a financing statement. Although the security interest covered specifically described equipment of Ultra, both the security agreement and the financing statement contained an after-acquired property clause that did not refer to any specific equipment.
Later in 2011 and in 2012, Ultra placed three separate orders for machines from Wolf Machinery Company. In each case it was agreed that after the machines had been shipped to Ultra and installed, Ultra would be given an opportunity to test them in operation for a reasonable period. If the machines passed inspection, Wolf would then provide financing that was satisfactory to Ultra. In all three cases, financing was arranged with Community Bank (Bank) and accepted, and a security interest was given in the machines. Furthermore, in each case a security agreement was entered into, and the secured parties then filed a financing statement within ten days. Ultra became bankrupt on October 7, 2014. National claimed that its security interest in the after-acquired machines should take priority over those of Wolf and Bank because their interests were not perfected by timely filed financing statements. Please explain who has priority in the disputed collateral.
