Deck 21: Holder in Due Course and Liability of Parties

Question 1

Transfer Warranty David M. Fox was a distributor of tools manufactured and sold by Matco Tools Corporation (Matco). Cox purchased tools from Matco, using a credit line that he repaid as the tools were sold. The credit line was secured by Cox's Matco tool inventory. In order to expedite payment on Cox's line of credit, Matco decided to authorize Cox to deposit any customer checks that were made pay­able to "Matco Tools" or "Matco" into Cox's own account. Matco's controller sent Cox's bank, Pontiac State Bank (Pontiac), a letter stating that Cox was authorized to make such deposits. Several years later, some Matco tools were sto­len from Cox's inventory. The Travelers Indemnity Company (Travelers), which insured Cox against such a loss, sent Cox a settlement check in the amount of $24,960. The check was made payable to "David M. Cox and Matco Tool Co." Cox indorsed the check and deposited it in his account at Pontiac. Pontiac forwarded the check through the banking system for payment by the drawee bank. Cox never paid Matco for the destroyed tools. Matco sued Pontiac for accepting the check without the proper indorsements. Is Pontiac liable? Matco Tools Corporation v. Pontiac State Bank. 614 F.Supp. 1059, Web 1985 U.S. Dist. Lexis 17234 (United States District Court for the Eastern District of Michigan)

Answer 1

Transfer of warranty:
Transfer of warranty refers to passing the duties and responsibilities connected with the issue of making payments and receipts of a negotiable instrument. In this regard the person who passes on the liability is referred to as the transferor and the person who accepts the responsibility is termed as transferee.
The transferor will be acquiring liability in the form of signatures on the cheques and for breaching the implied warranty.
Facts:
Person DC is an authorized distributor of M Company. DC used a make purchase credit line which was repaid when the tools were sold. M authorized DC to deposit the check which was payable in M to his account. In this regard M's controller had issued a letter to M's bank stating that DC is authorized to make deposits.
After a few years, When M's products were stolen from DF's inventory, the insurance company paid a check payable to M and DF. DF indorsed the check and deposited it into his account. M sued Bank P for not checking the proper indorsements.
Outcome:
In this case, P bank cannot be held liable for making the payment to DF without checking for proper indorsements. This is because Company M transferred the responsibility of collecting the payments to DF.
Company M also notified the bank about the transfer of responsibility to DF wherein he was allowed to deposit checks payable to M in his account. Thus M Company cannot blame P bank or not checking for proper indorsements.
Thus, it can be concluded that Bank P is not liable for making the payments.

Question 2

Presentment Warranty John Waddell Construction Company (Waddell) maintained a checking account at the Longview Bank Trust Company (Longview Bank). Waddell drafted a check from this account made payable to two payees, Engineered Metal Works (Metal Works) and E. G. Smith Construction (Smith Construction). The check was sent to Metal Works, which promptly indorsed the check and presented it to the First National Bank of Azle (Bank of Azle) for payment. The Bank of Azle ac­cepted the check with only Metal Works's indorsement and credited Metal Works's account. The Bank of Azle subse­quently presented the check to Longview Bank through the Federal Reserve System. Longview Bank accepted and paid the check. When Waddell received the check along with its monthly checking statements from Longview Bank, a com­pany employee noticed the missing indorsement and notified Longview Bank. Longview Bank returned the check to the Bank of Azle, and the Bank of Azle's account was debited the amount of the check at the Federal Reserve. Has the Bank of Azle breached its warranty of good title? Longview Bank Trust Company v. First National Bank of Azle , 750 S.W.2d 297, Web 1988 Tex. App. Lexis 1377 (Court of Appeals of Texas)

Answer 2

Yes, bank A breached its warranty of good title.
The check was payable to two payees. The company, however, accepted the check with only one of the payee's endorsement and credited the same to payee's account. Therefore, it breached a presentment warranty of good title as it negotiated the improperly indorsed check.
A warranty of good title implies an assurance that nobody but only the warrantor has better title to a check. It means that the check presented contains all required genuine endorsements.
When a check is made payable to more than one payee jointly, it can only be negotiated, or enforced by all of the joint payees. Thus, the payment of the check did not discharge the defendant's liability because it was a depository bank, and it paid the check with the terms that were not consistent with the restricted endorsement. The absence of indorsement by the joint payee indicates the defendant's dominion and control over the check inconsistent with the rights of the non-signing payee's.

Question 3

Ethics Case The Grand Island Production Credit Association (Grand Island) is a federally chartered credit union. Carl M. and Beulah C. Humphrey, husband and wife, entered into a loan arrangement with Grand Island for a $50,000 line of credit. Mr. and Mrs. Humphrey signed a line of credit promissory note that provided, in part, "As long as the Borrower is not in default, the Association will lend to the Borrower, and the Borrower may borrow and repay and rebor­row at any time from date of said 'Line of Credit' Promissory Note in accordance with the terms thereof and prior to matu­rity thereof, up to an aggregate maximum amount of principal at any one time outstanding of $50,000."
Mr. Humphrey borrowed money against the line of credit to purchase cattle. Two months later, Mrs. Humphrey went to Grand Island's office and told the loan officer that she had left Mr. Humphrey and filed for divorce. She told the loan officer not to advance any more money to Mr. Humphrey for cattle purchases. When the Humphreys failed to pay the outstanding balance on the line of credit, Grand Island sued Mr. and Mrs. Humphrey to recover the unpaid balance of $13,936.71. Is Mrs. Humphrey a co-maker of the line of credit promissory note and, therefore, primarily liable for the outstanding principal balance of the note, plus interest? Is it ethical for Mrs. Humphrey to deny liability on the promissory note in this case? Grand Island Production Credit Association v. Humphrey , 388 N.W.2d 807, Web 1986 Neb. Lexis 1185 (Supreme Court of Nebraska)

Answer 3

Liability of a Co-Maker:
A Co-maker is the person who signs a promissory note or signs a security agreement along with another party. The co-maker can be held principally liable for non-payment of the loan. The co-maker is also termed as the co-guarantor.
Facts:
A Credit Company G offered a line of credit to Mrs. and Mr. H to buy products. The line of credit offered them a loan up to $ 50, 000.
In order to utilize the line of credit the H's signed an agreement together. The agreement stated specifically that the line of credit can be used till it reached the limit of $ 50,000 and then they have to clear the loan to utilize the credit.
Mr. H took the loan and after few months Mrs. H notified G that they are divorced and she will not be responsible for the loan taken by her husband. When H failed to clear the loan, G sued both of them.
Outcome:
As stated above a co-maker is principally liable for the non-payment of debt. In this case, Mrs. H is the co maker of the agreement and she signed the security agreement as a co-Guarantor and thus she is responsible for making the payment to G. Thus, she has to pay the principal amount along with the interest also.
Mrs. H failed to act ethically by denying responsibility for the loan because she signed the surety agreement as a co-maker. Thus, she did not act ethically in the case.

Question 4

Did Bryant act ethically? Did Berwick act ethically in trying to place his loss on the Sands?