A. Holder-in-Due-Course Status

1. The Requirements for Holder-in-Due-Course Status
2. Rights of Holders in Due Course

State St. Bank & Trust co. v. Strawser

3. Payment and Discharge
4. Transferees Without Holder-in-Due-Course Status

B. The Fading Role of Negotiability

1. Declining Use of Negotiable Instruments
2. The Decreasing Relevance of Negotiability to Negotiable Instruments

Problem Set 27

Problem Set 27

27.1. When you come into the office Monday morning, you find a telephone message from Stacy Vye (from Wessex Bank, a client of yours since Problem Set 22) asking you to call her about a package of promissory notes that she wants to acquire. None of the notes mature during the next five years, but in each of them, the borrower has missed one or more of the recent scheduled monthly payments. The seller of the notes has not yet accelerated the date of maturity of the notes or otherwise responded to the default. Wessex Bank plans to acquire a package of those notes at a deeply discounted purchase price, reflecting the fact that the notes currently are in default. Stacy says that she does not need you to examine the notes to determine whether they are negotiable in form. Instead, assuming that they are negotiable in form, that the seller of the notes is the current holder of the notes, and that Stacy obtains proper indorsements in connection with the purchase, she wants you to tell her whether her knowledge that the borrowers have missed payments would prevent her from becoming a holder in due course of the notes.

She tells you that the notes have two different types of payment schedules. Some call for a series of amortizing monthly payments (part interest and part principal), while others call for monthly payments of interest only, with the entire principal due in a single “balloon” payment on the date of maturity. What do you tell her? UCC §§3-302(a)(2)(iii), 3-304, 3-304 comment 2.

27.2. You have lunch today with Bill Robertson, a grocery-store operator whom you have represented on a variety of matters. He tells you that he has gotten into a dispute with Bulstrode Bank over a $2,000,000 promissory note that Bill issued to Texas American Bank (TAB) in connection with a mortgage of his recent project “Shops at Four Corners.” Bill tells you that he paid off the TAB note last month with a lump-sum payment of $2,000,000, made by a wire transfer directly to TAB. Accordingly, Bill was surprised yesterday to receive a telephone call from Bulstrode Bank informing Bill of the address to which Bill should send this month’s payment. When Bill told the officer from Bulstrode (Nicholas Bulstrode) that Bill already had paid off the TAB note last month, Bulstrode laughed and said that wasn’t his problem, because Bulstrode purchased the TAB note from TAB six weeks ago (two weeks before Bill made the $2,000,000 payment). Bill can’t believe that he might be liable to Bulstrode for a note that Bill already has paid. What do you tell him? UCC §§ 3-302(b), 3-601(b), 3-602(a).

27.3. Following up on your successful work in Problem Set 26, you take an afternoon field trip to visit your client Tom Mae at his pool-hall check-cashing service. While there, he asks you about a traveler’s check that he recently cashed for a customer. The check was issued by Hunt Bank and payable to “bearer,” but required a countersignature from Jane Kingsley as a condition to payment. It turns out that the customer for whom he cashed the check had stolen the check from Kingsley. The customer forged the Jane Kingsley countersignature. Because Kingsley had notified Hunt Bank of the theft before the check was processed, Hunt Bank refused to honor the check. Accordingly, Tom is stuck with the check. Not surprisingly, Tom cannot locate the customer for whom his employee cashed the check. Tom points out to you that he did not really do anything wrong. Because the forgery was quite good, he could not plausibly have known that there was a problem. Why can’t he rely on holder-in-due-course status to enforce the check against Hunt Bank? UCC §§ 1-202, 3-104(a), 3-106(c), 3-106 comment 2, 3-305(a)(2).

27.4. Jodi Kay (from CountryBank) calls with a problem about a cashier's check that her bank has issued. It appears that one of her customers (Fluffy Feed Corporation) issued a check for $10,000 payable to Flatiron Linen. Because Fluffy Feed's account did not have $10,000 on the day that the check was presented for payment, Jodi's bank dishonored the Fluffy Feed check. A few days later Fluffy Feed sent Jodi a stop-payment order covering the check. Three months later the president of Flatiron walked into a branch of CountryBank and asked the teller if the teller would exchange the Fluffy Feed check for a cashier's check payable to Flatiron. Because Fluffy Feed's account at that time had a balance of far more than $10,000, the teller happily complied.
Minutes later the teller's supervisor noticed that payment had been stopped for the check the teller had taken in exchange for the cashier's check. The supervisor immediately called Flatiron and told the president that CountryBank would dishonor the check. Flatiron insists that the bank must honor its cashier's check. The matter is now on Jodi's desk and seems headed for litigation. What do you tell her? UCC§§3-302, 3-303, 3-305, 3-412 & comment 2. 3-418 & comment 2.

27.5. Your friends at the World Wilderness Fund (WWF) call you for some advice about a gift that they recently received. They explain that the problem arises out of a transaction between Diggory Venn and Clym Yeobright. Venn operates a dyeing business, under which he dyes clothes a bright red that (he claims) is permanent and impervious to extremes of heat and cold. Clym Yeobright asked Venn to dye for him a set of 20 uniforms that Yeobright planned to sell to the local fire department. Yeobright agreed to pay for the work with a negotiable promissory note in the amount of $3,000, payable to the order of Venn in equal monthly installments over two years. When Venn finished the uniforms, Yeobright delivered the note. Venn promptly took the note to Stacy Vye at Wessex Bank. She agreed to purchase the note from Venn for $2,800. Venn added a special indorsement, as follows:

Pay to Wessex Bank
/s/ Diggory Venn

Venn then gave the note to Stacy. A few weeks later, Stacy called your friends at WWF and told them that Wessex wanted to donate the note to WWF. She delivered the note to them, with a special qualified indorsement, as follows:

Pay to WWF, Without Recourse
Wessex Bank,
by /s/ Eustacia Vye
Vice President

It turns out that Venn did a poor job of the dyeing. The dye washed out of the uniforms the first time that they got wet. Accordingly, Yeobright refuses to pay the note. WWF got a letter today from Yeobright’s lawyer asserting that WWF could not force Yeobright to pay because WWF is not a holder in due course. WWF wants to know your opinion. What do you say? UCC §§ 3-203(b), 3-204, 3-205, 3-302(a)(2), 3-303(a), 3-305(a)(3), 3-305(b), 3-412.

27.6. Consider again the facts of Problem 1.3, in which Bud Lassen wrote Carol Long a $1,500 check for some kitchen equipment that was too large for his kitchen and then stopped payment on the check in an effort to avoid payment. Suppose that instead of cashing the check at the First State Bank of Matacora (as Carol did in Problem 1.3), Carol properly indorsed the check and deposited it into an account at her own bank (the Nazareth National Bank). Now suppose that the Matacora bank (on which the check was drawn) dishonored the check the next day based on the stop-payment request and returned it to the Nazareth bank before the funds were available to Carol under the Nazareth bank’s customary funds availability policies. What can the Nazareth bank do to recover the funds that it has credited to Carol’s account? UCC §§ 1-201(20), 3-302, 3-303(a)(2), 3-305(b), 4-105(5), 4-210, 4-211, 4-214.

Assignment Update

No update is needed at this time.