ESSAY - Commercial Paper

Rule: Under Article 3 of the UCC, unless a person or their agent signs an instrument, they are not liable on it UNLESS their negligence substantially contributes to the instrument being forged. If they are negligent in allowing the instrument to be forged, then they cannot assert the forgery defense to escape liability. 

• (Facts: Here, payee did not sign. Theif is not her agent and therefore his signature is ineffective as hers. Furthermore, she was not negligent and therefore the exception does not apply.) 
• (Conclusion: Therefore, seller cannot recover from payee b/c she is not liable on the instrument.)

 

• Rule: When an instrument has been dishonored, one entitled to enforce it may bring an action against the drawer to do so.
• To be eligible to enforce an instrument, one must be a holder.
• A holder is one who has possession of the instrument with the power to enforce it.
• One has the power to enforce bearer paper merely by possessing it.
• One has the power to enforce order paper by possessing it and indorsing it. 

• (Facts: Seller does not have a legal right to enforce the instrument. The check is order paper payable to Payee who was the only person who could be the holder until she indorsed it. She did not indorse it before it was stolen and therefore Thief could not have been a holder. Furthermore, it also was not properly negotiated to Thief b/c Payee did not deliver it to him; he obtained possession wrongfully. Because of that, Thief did not acquire Payee's rights in the instrument. Since Thief had no rights in the instrument, he had no rights to convey to Seller, so Seller also did not become a holder and therefore lacks ability to enforce it. 
• Therefore, Seller does not have a claim against Drawer b/c Seller is not a holder and not entitled to enforce the check.

 

Rule: Drawee banks are liable for wrongfully dishonoring checks.

Rule 2: A bank is not liable on an unaccepted check. 

Banks are under no obgliation to a holder to pay a check that has not been accepted.  

(Facts: Seller was not a holder and not entitled to enforce the check so there was no wrongful dishonor). 

Rule: In transferring an instrument for consideration, a person warrants that they are entitled to enforce the instrument, it is not forged, the signatures are authentic and authorized, there are no claims or defenses against the instrument and there are no insolvency problems regarding it.  

(FP: Thief is not entitled to enforce the check. Additionally, Payees signature was forged (not authorized). Therefore, Thief breached transfer warranties. Seller took in good faith, for value, and without notice to any claims or defenses against the check, so Seller is entitled to enforce the check against Thief for the full amount of the check.