July 14, 2010

1. July 14, 2010

2. Forgery • Determine whose name was forged (maker, drawer, or indorser). • Different rules apply to each situation.

3. Forged Maker’s Signature • Alleged maker not liable. • Forger is liable.

4. Forged Drawer’s Signature

5. Forged Drawer’s Signature – Bank’s defenses to recrediting • 1. Drawer was negligent.

6. Forged Drawer’s Signature – Bank’s defenses to recrediting • 2. Drawer not inspect bank statement.

7. Forged Drawer’s Signature – Bank’s defenses to recrediting • 2. Drawer not inspect bank statement. • Duty to inspect statement and checks in a timely manner and report forgeries to bank.

8. Forged Drawer’s Signature – Bank’s defenses to recrediting • 2. Drawer not inspect bank statement. • If not report within one year, bank does not have to recredit account even if bank negligent.

9. Forged Drawer’s Signature – Liability of Drawee if no defenses • 2. Drawer not inspect bank statement. • “Repeat offender rule” – If the same person is forging a series of checks, the drawer must report the forgeries within 30 days. • If drawer does not report, bank does not have to recredit for subsequent forgeries by the same person.

10. Forged Drawer’s Signature – Bank’s liability if no defenses • 1. Recredit drawer’s account as check was not properly payable.

11. Forged Drawer’s Signature – Bank’s liability if no defenses • 2. Determine if any presentment warranties breached. • Normally, none will be breached. • Note that the presenting party had the right to enforce the forger’s obligation and thus was a holder.

12. Forged Indorsement

13. Forged Indorsement – Bank’s defenses • 1. Bearer Paper • Forgery on bearer paper is irrelevant because indorsement is not needed to negotiate.

14. Forged Indorsement – Bank’s defenses • 2. Impostor Rule • Issuer (maker or drawer) is estopped to deny validity of a forged indorsement if the issuer acted carelessly: • Not check ID of payee. • Not supervise employees (agents) who sign for the issuer.

15. Forged Indorsement – Bank’s defenses • 3. Fraudulent Indorsement by Employee Entrusted with Check • Payee cannot assert a forgery made by a payee’s employee entrusted with the check.

16. Forged Indorsement – Bank’s defenses • 4. Failure to sue within three years

17. Forged Indorsement – Liability of Bank (drawee) if no defenses • Conversion liability to the payee, or • Not properly payable liability to the drawer [see next slide for diagram]

18. Forged Indorsement

19. Forged Indorsement – Drawee Bank’s Cause of Action • Bank will sue presenter and prior transferors for breach of presentment warranty of entitled to enforce (presenters and prior transferors were not holders of the check). [see diagram on next slide]

20. Forged Indorsement

21. Forged Indorsement – Presenting Bank’s Cause of Action • Presenting bank will sue transferors for breach of transfer warranties: • 1. Entitled to enforce (holder status) • 2. All signatures authentic or authorized • 3. No good defenses [see diagram on next slide]

22. Forged Indorsement

23. Alteration • Obligor (maker or drawer) does not want to pay because the instrument shows a different obligation than to which the obligor originally agreed.

24. Alteration -- Types • 1. Change in obligation • Amount changed – for example, $10.00 to $10,000

25. Alteration -- Types • 1. Change in obligation • Date due changed – for example, August 1, 2011 to August 1, 2010.

26. Alteration -- Types • 1. Change in obligation • Name of payee changed – for example, “I.N.G.” to “I.N. Garrison.”

27. Alteration -- Types • 1. Change in obligation • Interest rate changed – for example, 5% to 15%.

28. Alteration -- Types • 2. Unauthorized completion • Amount of check is left blank. • Drawer tells payee, “fill in $50.00.” • Payee says “OK.” • Payee later fills in for $700.00.

29. Alteration and Holders in Due Course • 1. Change in obligation = HDC can enforce for original amount.

30. Alteration and Holders in Due Course • 1. Change in obligation = HDC can enforce for original amount. • Maker wrote promissory note for $100. • Evil payee changed to $1,000. • Evil payee transfers note to HDC. • HDC can enforce for $100; Maker has defense for $900

31. Alteration and Holders in Due Course • 2. Unauthorized completion – HDC can enforce as completed

32. Alteration and Holders in Due Course • 2. Unauthorized completion – HDC can enforce as completed • Drawer signs check and says to Friend, “You can buy yourself a present with the check but no more than $100.” • Friend buys present from Payee (e.g., a store) costing $500 and writes check for $500. • Payee transfers check to HDC (Payee’s bank). • HDC can enforce for $500.

33. Alteration and Non- Holders in Due Course • 1. Fraudulently made by holder = Total discharge of obligor

34. Alteration and Non- Holders in Due Course • 1. Fraudulently made by holder = Total discharge of obligor • Maker signs promissory note payable for $100 to Payee. • Payee changes amount to $1,000. • Payee (not a HDC) presents to Maker. • Maker is discharged (does not even owe the original $100).

35. Alteration and Non- Holders in Due Course • 2. Not fraudulently made by holder = no effect on obligation • On January 2, 2011, Drawer signs check for $100 payable to Payee and writes the date as “January 2, 2010.” • Payee changes the date to “January 1, 2011.” • Payee may still enforce for $100.

36. Altered checks are not properly payable • If bank pays an altered check from your account, bank must return the money to your account as the check was not properly payable ---- • Unless bank has a defense.

37. Bank’s defenses to recrediting account for paying an altered check • 1. Drawer was negligent. • Wrote in pencil. • Left blank spaces.

38. Bank’s defenses to recrediting account for paying an altered check • 2. Drawer waited more than 1 year to report the alteration (drawer has duty to inspect bank statement)

39. If bank recredits account --- • 1. Drawee bank sues presenter (or prior transferors) for breach of presentment warranty of no alteration. • 2. Presenter sues prior transferors for breach of transfer warranty of no alteration.

40. Checks and MICR Routing number Account number Check number Amount

41. Discharge by Holder • Holder may discharge the obligation Destroy Cancel Return to Maker or Drawer

42. Effect of Instrument on Underlying Obligation • Instrument discharges underlying obligation if it is: • 1. Certified check • 2. Cashier’s check • 3. Teller’s check

43. Effect of Instrument on Underlying Obligation • Instrument suspends underlying obligation if it is: • 1. Promissory note • 2. Normal (uncertified) check

44. Effect of Instrument on Underlying Obligation • Instrument suspends underlying obligation if it is: • 1. Promissory note • 2. Normal (uncertified) check • If note or check dishonored, holder may sue on either instrument or underlying obligation.

45. “Holder” who lacks possession • A person who wants payment may not have possession: • Lost the original. • Original destroyed. • Original stolen.

46. “Holder” who lacks possession • To enforce the instrument, this person must prove: • 1. Was holder when loss occurred.

47. “Holder” who lacks possession • To enforce the instrument, this person must prove: • 1. Was holder when loss occurred. • 2. Did not voluntary transfer the instrument.

48. “Holder” who lacks possession • To enforce the instrument, this person must prove: • 1. Was holder when loss occurred. • 2. Did not voluntary transfer the instrument. • 3. Instrument not lawful seized.

49. “Holder” who lacks possession • To enforce the instrument, this person must prove: • 1. Was holder when loss occurred. • 2. Did not voluntary transfer the instrument. • 3. Instrument not lawful seized. • 4. Why unable to produce the original.

50. “Holder” who lacks possession • To enforce the instrument, this person must prove: • 1. Was holder when loss occurred. • 2. Did not voluntary transfer the instrument. • 3. Instrument not lawful seized. • 4. Why unable to produce the original. • 5. Posted a security or bond to protect payor from double payment.