Cengage Advantage Books: Business Law 9th Edition by Arnold Goldman ,William Sigismond

Exercise 16

Salamone, a financial adviser, sold 93-year-old John Redbank an investment for $50,000, indicating that it would produce "excellent" returns. The investment, however, was producing no returns. Montgomery, a cohort of Salamone and also a financial adviser, learned of Redbank's initial no-return investment and established check-cashing privileges at All Checks Cashed, Inc., a checkcashing outlet. He then telephoned Redbank and talked him into sending him a check for $10,000 made out to him (Montgomery). The money was to be used to bolster his current $50,000 investment. Redbank did send a check as requested without checking with Salamone as to the peculiar nature of Montgomery's request. When Salamone learned about Montgomery's call to Redbank, he contacted Redbank stating that Montgomery was a cheat and a thief. Redbank then called his bank and stopped payment on the $10,000. Although Montgomery knew what Salamone had told Redbank, he nevertheless presented Redbank's check to All Checks Cashed, Inc. for payment. When questioned about the purpose of the check, Montgomery told the approving check supervisor that he was a broker and that a gentleman by the name of John Redbank had sent it to him as an investment. When asked for more proof, Montgomery produced a Federal Express envelope used by Redbank to forward the check to him. The supervisor cashed the check for Montgomery based only on her experience that the check was good. She actually had no idea who Montgomery was, whether he was telling the truth, or that a stop payment order had been placed on the check by Redbank. (Typically, a check-cashing outlet would not cash a check of this size or of this nature.) As a result of the stop order, the $10,000 check was returned to All Checks Cashed, Inc. All Checks Cashed, Inc. was unable to recover from Montgomery, so it brought a lawsuit against him claiming that it was a holder in due course and should be reimbursed for cashing the $10,000 regardless of the stop order.
Questions
1. What is a holder in due course and for what reason would All Checks Cashed, Inc. claim to have the right to collect the $10,000, regardless of the circumstances that lead to accepting the check?
2. The Uniform Commercial Code demands that a person who acts unethically (not in good faith) cannot become a holder in due course. Do you think that All Checks Cashed, Inc. violated the UCC rule regarding holders in due course and acted unethically?