Payment Systems (L6386)
Columbia Law School
Prof. Avery Katz

Sample questions
First midterm quiz

 

Instructions:  Here is a set of sample questions that illustrate the format and coverage of our first midterm quiz. In the actual quiz, there will be 36 questions based on five separate fact patterns. You will have one hour to complete the quiz and return it to the proctor. 

For each statement below, indicate whether it is true or false. If either "true" or "false" seems plausible, or if neither answer seems exactly right, choose the answer  that appears best on balance. There is no penalty for guessing. 

Questions 1-9 are based on the following facts.

Parsons, a ninety-three-year-old retiree, invested $75,000 with Haney, a self-styled financial advisor and con artist. This investment produced no returns. Subsequently, Haney talked Parsons into sending him a check for $10,000 made out to Guano, who was known to Parsons as Haney’s partner. This check was purportedly to be used for travel expenses to obtain a return on the original $75,000 investment.

Guano had previously established check cashing privileges at AllChecks, Inc. by filling out a customer card that included his social security number and identification by driver's license. After receiving Parsons’ check, Guano presented it at AllChecks’ office. The office manager, Michaels, asked Guano the purpose of the check; Guano replied that he was Parsons’ broker and presented a Federal Express envelope sent by Parsons as evidence of his authority. After unsuccessfully attempting to contact Parsons’ by phone and obtaining Guano’s indorsement, Michaels cashed the check, deducted a 5% fee, and handed over $9500 to Guano. Shortly thereafter, Parsons discovered the fraud and stopped the check before AllChecks could obtain payment.

  1. AllChecks gave value when it cashed the check for Guano.

  2. Guano was holder of the check at the time he presented it to AllChecks.

  3. Guano was a holder in due course at the time he presented the check to AllChecks.

  4. If most check cashing outlets would not cash a check of this size without contacting the drawer, and if the standard check cashing fee for checks of this size is 2% rather than 5%, then AllChecks is not a holder in due course.

  5. AllChecks was on notice that Guano breached a fiduciary duty to Parsons.

  6. If AllChecks qualifies as a holder in due course, it can enforce the check against Parsons notwithstanding fraud on the part of Haney or Guano.

  7. If AllChecks qualifies as a holder in due course, it can enforce the check against Parsons even if he is shown not to have been of sound mind when he sent the check to Guano.

  8. Even if AllChecks is not a holder in due course, it qualifies as a person entitled to enforce the check under 3-301.

  9. Guano is liable to AllChecks on the check.

Reveal answers

    1. AllChecks gave value when it cashed the check for Guano.

      T — $9500 counts as value.

    2. Guano was holder of the check at the time he presented it to AllChecks.

      T — it was order paper made out to him.

    3. Guano was a holder in due course at the time he presented the check to AllChecks.

      F — he had notice of a defense.

    4. If most check cashing outlets would not cash a check of this size without contacting the drawer, and if the standard check cashing fee for checks of this size is 2% rather than 5%, then AllChecks is not a holder in due course.

      T — these facts would indicate that AllChecks was not operating in accordance with reasonable commercial standards of fair dealing, and hence lacks good faith.

    5. AllChecks was on notice that Guano breached a fiduciary duty to Parsons.

      F — The case falls under 3-307(b)(3), which requires actual knowledge on the part of the taker of the check.

    6. If AllChecks qualifies as a holder in due course, it can enforce the check against Parsons notwithstanding fraud on the part of Haney or Guano.

      T — this would be fraud in the inducement, which is not a real defense under 3-305.

    7. If AllChecks qualifies as a holder in due course, it can enforce the check against Parsons even if he is shown not to have been of sound mind when he sent the check to Guano.

      F — lack of capacity would be a real defense under 3-305(a).
    8. Even if AllChecks is not a holder in due course, it qualifies as a person entitled to enforce the check under 3-301.

      T — It is still a holder, though its right to enforce is subject to defenses under 3-305.

    9. Guano is liable to AllChecks on the check.

      T — he is liable as indorser under 3-415, and furthermore has breached his transferor’s warranty under 3-416

(Hide answers)