LAW BUSINESS. for. 17e

Transcription

1 LAW BUSINESS for 17e John D. Ashcroft, J.D. Distinguished Professor of Law and Government Regent University Member of the Missouri and District of Columbia Bar Janet E. Ashcroft, J.D. Member of the Missouri and District of Columbia Bar

2 Law for Business, Seventeenth Edition John D. Ashcroft and Janet E. Ashcroft Vice President of Editorial, Business: Jack W. Calhoun Publisher: Rob Dewey Acquisitions Editor: Vicky True Developmental Editor: Daniel Noguera Marketing Manager: Jenny Garamy Marketing Coordinator: Heather McAuliffe Content Project Manager: Darrell E. Frye Media Editor: Kristin Meere Frontlist Buyer, Manufacturing: Kevin Kluck Production Service: Integra Sr. Art Director: Michelle Kunkler Cover and Internal Designer: Beckmeyer Design Cover Image: Todd Davidson/Stock Illustration Source/Getty Images, Inc. 2011, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, For permission to use material from this text or product, submit all requests online at Further permissions questions can be ed to ExamView is a registered trademark of einstruction Corp. Windows is a registered trademark of the Microsoft Corporation used herein under license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license Cengage Learning. All Rights Reserved. Library of Congress Control Number: ISBN-13: ISBN-10: South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit Purchase any of our products at your local college store or at our preferred online store Printed in the United States of America

3 CHAPTER 23 Negotiation and Discharge LEARNING OBJECTIVES 1 Discuss how to negotiate by indorsement, and identify the different types of indorsements. 2 Describe the liabilities of an indorser. 3 Explain how negotiable instruments may be discharged. PREVIEW CASE Checks were made payable to San Francisco Plumbing, Inc./Danco, Inc. San Francisco presented the checks to Commerce Bank and received payment after indorsing them and forging Danco s signature. Danco sued the bank for paying the instruments with a forged Danco indorsement. When there are multiple payees, who must indorse an instrument? What does the virgule (/) mean? N egotiation involves the transfer of a negotiable instrument in such a way that the transferee becomes the holder of the instrument. Bearer instru- ments may be negotiated by delivery. Delivery effectively vests owner- ship in the transferee. Thus, the transferee becomes the holder. An instrument payable to order can be negotiated only by authorized indorsement and delivery. An indorsement is a signature on the back of an instrument (usually the holder s) along with any directions or limitations regarding use of or liability for the instrument. Indorsing or transferring a negotiable instrument creates certain liabilities, depending on the nature of the indorsement or transfer. Although an indorsement is not required for negotiation of bearer paper, a transferee may require it because this adds the liability of the new indorser to the paper and thus makes it a better credit risk. It also preserves a written chronological record of all negotiations. LO 1 Indorsements Indorsement Signature of holder on back of instrument with any directions or limitations Chapter 23 Negotiation and Discharge 265

4 266 Part 5 Negotiable Instruments Trailing Edge Left side of front of check Allonge Paper so firmly attached to instrument as to be part of it Place of Indorsement Banks require that an indorsement on a check be on the back and within 1½ inches of the trailing edge. The trailing edge is the left side of a check when looking at it from the front (see Illustration 23 1). If the indorser s signature appears elsewhere and it cannot be determined in what capacity the signature was made, it will be considered an indorsement. In any event, an indorsement must be on the actual instrument to be indorsed or on a paper firmly attached to the instrument. An allonge is a paper securely attached to an instrument. For example, a paper stapled to an instrument is securely affixed. The Uniform Commercial Code (UCC) states that such a paper is part of the instrument. If a party wants to transfer an instrument but does not wish to be liable as an indorser, the instrument can be assigned by a written assignment on a separate piece of paper. ILLUSTRATION 23 1 Indorsed Check Folded to Show the Position of the Indorsement COURT CASE Facts: BNC Mortgage, Inc., loaned Anthony Marcino $75,200, and he signed a note to BNC. He and his wife, Melissa Marcino, granted a mortgage on real estate to BNC. After the Marcinos defaulted on the note, U.S. Bank National Association sued them. Attached to the note was a separate document, titled Allonge to Note, which read in its entirety, PAY TO THE ORDER OF: WITHOUT RECOURSE BNC MORTGAGE, INC. The allonge was signed on behalf of BNC by Dolores Martinez, Asst. Vice President. The Marcinos claimed U.S. Bank was not the holder of the note since they had executed the note in favor of BNC. Outcome: The court said that the allonge, indorsed in blank, converted the note to bearer paper. U.S. Bank s possession of the original note was sufficient to establish that it was the real party in interest. U.S. Bank Nat l Assn. v. Marcino, 2009 WL (Ohio App.)

5 Chapter 23 Negotiation and Discharge 267 Occasionally, the name of the payee or indorsee of an instrument is misspelled. If a paycheck intended for, and delivered to, Janice F. Smith is made out to Janice K. Smith through clerical error, Janice F. Smith may ask her employer for a new check properly made out to her or she may keep the check and indorse in any of the following ways: 1. Janice K. Smith 2. Janice F. Smith 3. Janice K. Smith, Janice F. Smith (If she intends to receive value for the check, the person to whom it is negotiated may require her to sign both names) However, if Janice F. Smith obtains a check made payable to, and intended for, Janice K. Smith, it would be illegal for Janice F. to indorse it and receive payment for it. Only when the check is actually intended for Janice F. Smith may she make a corrective indorsement. It is not always necessary to correct an irregularity in the name of a party to an instrument. An irregularity does not necessarily destroy negotiability. Only if it is shown that different people were actually identified by the different names is the irregularity significant. If the different names stand for the same person, the irregularity need not be considered. It has been held that a note was correctly negotiated when indorsed Greenlaw & Sons by George M. Greenlaw, although it was payable to & Sons Roofing & Siding Co. Nothing indicates that the two enterprises were not the same firm. Multiple Payees Frequently, negotiable instruments are made payable to more than one person. Whether the instrument must be indorsed by more than one of them depends on the exact language used in naming them on the instrument. If the parties are named using the word and between their names, then it is payable jointly and all of them must indorse the instrument in order to negotiate it. For example, if the instrument reads, Pay to the order of Mary and John Doe, then both Mary and John must indorse the instrument. Neither can negotiate the instrument alone. If the word or is used between the names of the parties, then the instrument is payable in the alternative and only one needs to indorse the instrument in order PREVIEW CASE REVISITED Facts: Checks were made payable to San Francisco Plumbing, Inc./Danco, Inc. San Francisco presented the checks to Commerce Bank and received payment after indorsing them and forging Danco s signature. Danco sued the bank for paying the instruments with a forged Danco indorsement. Outcome: The court held that the virgule (/) meant or. Because the checks only needed the indorsement of either San Francisco or Danco and they contained the valid indorsement of San Francisco, the payment was proper. Danco, Inc. v. Commerce Bank/Shore, 675 A.2d 663 (N.J. Super. A.D.)

6 268 Part 5 Negotiable Instruments to negotiate it. When an instrument reads, Pay to the order of Hank or Nancy Florio, either Hank or Nancy can indorse and negotiate the instrument. Normally, if the instrument is not clear as to whether it is payable jointly or alternatively, it will be construed to be payable in the alternative. Kinds of Indorsements Four types of indorsements include: 1. Blank indorsements 2. Special indorsements 3. Qualified indorsements 4. Restrictive indorsements Blank Indorsement Indorsement consisting of signature of indorser Special Indorsement Indorsement that designates particular person to whom payment is to be made Blank Indorsements As the name indicates, a blank indorsement is one having no words other than the name of the indorser (see Illustration 23 2). If the instrument is bearer paper, it remains bearer paper when a blank indorsement is made. Thus, the new holder may pass good title to another holder without indorsing the instrument. The one primarily liable on the instrument is bound to pay the person who presents it for payment on the date due, even if the person is a thief or other unauthorized party. If the instrument is order paper, a blank indorsement converts it to bearer paper; if thereafter indorsed to someone s order, it becomes order paper again. Converting the instruments to order paper can minimize risks involved in handling instruments originally payable to bearer or indorsed in blank. Special Indorsements A special indorsement designates the particular person to whom payment should be made (see Illustration 23 2). After making such an indorsement, the paper is order paper, whether or not it was originally so payable or was originally payable to bearer. The holder must indorse it before it can be further negotiated. Of course, the holder may indorse the instrument in blank, which makes it bearer paper. Each holder has the power to decide to make either a blank or a special indorsement. An indorsee by a blank indorsement may convert it to a special indorsement by writing the words pay to the order of [indorsee] above the indorser s signature. ILLUSTRATION 23 2 Blank Indorsement and Special Indorsement ENDORSE HERE Anne Compton ENDORSE HERE Pay James W. Baker or order Karen Mazzaro

7 Chapter 23 Negotiation and Discharge 269 Such an instrument cannot now be negotiated except by indorsement and delivery. This in no way alters the contract between the indorser and the indorsee. Qualified Indorsements A qualified indorsement has the effect of qualifying, thus limiting, the liability of the indorser. This type of indorsement is usually used when the payee of an instrument is merely collecting the funds for another. For example, if an agent receives checks in payment of the principal s claims but the checks are made payable to the agent personally, the agent can and should elect to use a qualified indorsement to protect from liability. There is no reason for the agent to risk personal liability when the checks are the principal s. The agent does this merely by adding to either a blank or special type of indorsement the words without recourse immediately before the signature (see Illustration 23 3). This releases the agent from liability for payment if the instrument remains unpaid because of insolvency or mere refusal to pay. A qualified indorser still warrants that the signatures on the instrument are genuine, that the indorser has good title to the instrument, that the instrument has not been altered, that no defenses are good against the indorser, and that the indorser has no knowledge of insolvency proceedings with respect to the maker, acceptor, or drawer (as was mentioned in Chapter 22). An indorser may avoid these warranties as well by indorsing the instrument without recourse or warranties. Qualified Indorsement Indorsement that limits liability of indorser Restrictive Indorsements A restrictive indorsement is an indorsement that attempts to prevent the use of the instrument for anything except the stated use (see Illustration 23 3). The indorsement may state that the indorsee holds the paper for a special purpose or as an agent or trustee for another or it may impose a condition that must occur before payment. Such an indorsement does not prohibit further negotiation of the instrument. Restrictive indorsements are ineffective with respect to anyone other than the indorser and indorsee. As against a holder in due course, it is immaterial whether the indorsee has in fact recognized the restrictions. A bank receiving a check for deposit is called a depository bank. A depository bank receiving a check with a restrictive indorsement, such as for deposit or for collection, must honor the restriction. Restrictive Indorsement Indorsement that restricts use of instrument Depository Bank Bank receiving check for deposit ILLUSTRATION 23 3 Qualified Indorsement and Restrictive Indorsement ENDORSE HERE Pay to Max Ransom without recourse Thomas Temkotte ENDORSE HERE For deposit only Carol Starzenberger

8 270 Part 5 Negotiable Instruments COURT CASE Facts: The assistant comptroller of Interior Crafts, Inc., Todd Leparski, took customers checks payable to Interior and indorsed them Interior Crafts for deposit only. He deposited the checks in Pan American Bank s ATM with instructions to deposit them in his account at Marquette Bank. Pan American did not have any idea who owned the Marquette account. In four months, he stole more than $500,000, until Marquette notified Interior that Leparski was depositing checks in his account payable to Interior. Interior sued, and Pan American alleged it was not a depository bank, so it did not have to honor the restrictive indorsement. Outcome: The court stated that Pan American was the first bank to take the checks, so it was a depository bank. As a depository bank, it was required to apply the funds consistently with the restrictive indorsement. Interior Crafts, Inc. v. Leparski, 853 N.E.2d 1244 (Ill. App.) LO 2 Indorser liabilities Liability of Indorser By indorsing a negotiable instrument, a person can become secondarily liable for payment of the face amount and responsible for certain warranties. Liabilities for Payment of Instrument By making an indorsement, an indorser, with the exception of a qualified indorser, agrees to pay any subsequent holder the face amount of the instrument if the holder presents the instrument to the primary party when due and the primary party refuses to pay. The holder must then give the indorser in question notice of such default. This notice may be given orally or it may be given by any other means, but it must be given before midnight of the third full business day after the day on which the default occurs. Warranties of the Indorser Chapter 24 lists the warranties of all transferors. They differ from liability for the face of the paper in that they are not subject to the requirements of presentment and notice. The distinction is also important for purposes of limiting liability; an indorsement without recourse destroys only the liability of the indorser for the face of the instrument. It does not affect warranties. Thus, the warranty liability of a qualified indorser is the same as that of an unqualified indorser. An indorsement without warranties or a combined without recourse or warranties is required to exclude warranty liability. Obligation of Negotiator of Bearer Paper Bearer paper need not be indorsed when negotiated. Mere delivery passes title. One who negotiates a bearer instrument by delivery alone does not guarantee payment, but is liable to the immediate transferee as a warrantor of the genuineness of the instrument, of title to it, of the capacity of prior parties, and of its validity. These warranties are the same as those made by an unqualified indorser, except that the warranties of the unqualified indorser extend to all subsequent

9 holders, not just to the immediate purchaser. But because negotiable instruments are not legal tender, no one is under any obligation to accept bearer paper without an indorsement. By requiring an indorsement even though it is not necessary to pass title, the holder is gaining protection by requiring the one who wishes to negotiate it to assume all the obligations of an indorser. Chapter 23 Negotiation and Discharge 271 Discharge of the Obligation Negotiable instruments may be discharged by payment, by cancellation, or by renunciation. Payment at or after the date of the maturity of the instrument by the party primarily liable constitutes proper payment. Cancellation consists of any act that indicates the intention to destroy the validity of the instrument. A cancellation made unintentionally, without authorization, or by mistake is not effective. A holder of several negotiable instruments might intend to cancel one on its payment and inadvertently cancel an unpaid one. This does not discharge the unpaid instrument. Renunciation is a unilateral act of a holder of an instrument, usually without consideration, whereby the holder gives up rights on the instrument or against one or more parties to the instrument. The obligations of the parties may be discharged in other ways, just as in the case of a simple contract. For example, parties will no longer be held liable on instruments if their debts have been discharged in bankruptcy or if there has been the necessary lapse of time provided by a statute of limitations. A negotiable instrument may be lost or accidentally destroyed. This does not discharge the obligation. A party obligated to pay an instrument has a right to demand its return if possible. If this cannot be done, then the payor has a right to demand security from the holder adequate to protect the payor from having to pay the instrument a second time. The holder usually posts an indemnity bond. This is an agreement by a bonding company to assume the risk of the payor s having to pay a second time. LO 3 Discharge of negotiable instruments Cancellation Act that indicates intention to destroy validity of an instrument Renunciation Unilateral act of holder giving up rights in the instrument or against a party to it QUESTIONS 1. How are bearer instruments negotiated, and how are order instruments negotiated? 2. What is an indorsement? 3. Where do banks require the indorsement on a check to be? 4. What can a party who wants to transfer an instrument but does not want to be liable as an indorser do? 5. When may a person make an indorsement correcting the name of the payee on a check? 6. When there are multiple payees on an instrument, how can one know whether all must indorse or only one need indorse the instrument to negotiate it? 7. Name four kinds of indorsements, and give an example of the proper use of each one. 8. What do all indorsers except qualified indorsers agree to by making an indorsement? 9. How may a negotiable instrument be discharged? 10. How does the warranty liability of a qualified indorser differ from that of an unqualified indorser?

10 272 Part 5 Negotiable Instruments CASE PROBLEMS LO 3 LO 1 LO 3 LO 1 LO 2 LO 1 1. Chester Crow signed a note for a loan from First National Bank (FNB). The note was due in ninety days, but Crow could not pay the full amount when due. Several years later, Premier Bank, the successor to FNB, returned three payments to Crow with a cover letter that called the payments overpayments. It then issued an IRS Form 1099-C (Cancellation of Debt) to Crow, with these notations: date canceled:... ; Amount of debt canceled: $7, The 1099-C resulted in a negative tax impact for Crow. At the same time, Premier sold the note and three dozen others having a total face value of $600,000 and indorsed: without recourse, representation or warranty of any kind to Credit Recoveries, Inc. (CRI) for $1,500. Four months later, CRI demanded Crow pay his note. Crow wrote CRI that Premier had returned a refund check for the last payment. Four years later, after no contact, CRI again demanded Crow pay the note. Crow replied that Premier had issued the 1099-C. CRI sued Crow. Had Premier cancelled the debt? 2. Patricia Woodberry executed a promissory note to SouthStar Funding, LLC secured by a mortgage on her home. Two years later, she filed for bankruptcy and listed Structured Asset Investment Loan Trust, (ASC) as a creditor. In the bankruptcy proceedings, the court had to decide whether ASC was actually a party with an interest in the bankruptcy case. It was, if it was the holder of the note. ASC had possession of the note and there was an attachment to the original note entitled Allonge to Note, containing the statement: pay to the order of without recourse. Woodberry argued that ASC did not have an interest in the case. Was ASC the holder of the note? 3. James and Wylene Neely borrowed $28,500 from North Carolina Federal Savings & Loan Association and executed a promissory note for that amount. GE Capital Mortgage Services became the holder of the note. When the Neelys owed almost $25,000, GE erroneously credited $24,000 to their account and sent them a letter saying only $980 would pay off their debt. They immediately sent the required amount although they knew they owed much more. GE marked the note Paid and Satisfied and sent it to the Neelys. When GE realized its error, it insisted the Neelys continue making payments. They refused, saying the note was void as a result of the mistaken cancellation. Can GE recover against them? 4. On a check payable to Rick Knight-Simplot Soil Builders, Knight indorsed his name and forged Simplot s. He deposited the check in his account at Yakima Federal Savings & Loan. Simplot sued Yakima for improperly paying the check on a forged indorsement. Had Yakima improperly paid the check on a forged indorsement? 5. When Bottom Line Productions, Inc., borrowed $725,000 from Consumers United Insurance Co., Andre Bustamante, the vice president of Bottom Line, signed the back of the note without reference to his corporate position. Above his signature was language stating that, The undersigned... waive [notice provisions] without prejudice to their liability as endorsers of this note. Bottom Line defaulted on the note and Consumers sued Bustamante as an indorser. Should he be held to indorser liability? 6. First Texas Realty Corp. executed a promissory note to Canyon Lake Bank. The note was on an 8½ 14-inch piece of paper printed on both sides except an area of 2 4 inches on the back. After transfers, an indorsement filled the entire 2 4-inch area. Subsequent indorsements were written on an 8½ 11-inch piece of paper stapled to the note. Southwestern Resolution Corp., the final purchaser,

11 sued First Texas on the note. When Southwestern produced the note and allonge at the trial, they were taped together and both had several staple holes in them. The note and allonge had been separated several times for photocopying. Southwestern could recover if it was the holder of the note, and it was a holder if all the indorsements were written on the note or on a paper affixed to it. Should the court rule that Southwestern can recover? Chapter 23 Negotiation and Discharge 273