Case 1: Check with Slash Mark between Payees Names Payable to Either Payee Description

Appeals court held that a bank did not convert the funds from checks when it allowed one payee on checks made out to two payees, with names separated by a slash mark, to cash the checks. The meaning of the slash was unclear, but is usually interpreted to mean or.

Topic
Negotiable Instruments/Commercial Paper

Key Words
Checks; Endorsement; Payment; Conversion

CASE SUMMARY
Facts
New Wave sold computer equipment to Maxim, which sold it to USAA. After delivery of some equipment, USAA mailed checks to Maxim, even though on those sales the check was supposed to go directly to New Wave. The checks were payable to Maxim/New Wave. The back of the check states Each Payee Must Endorse Exactly As Drawn. Maxim endorsed the checks and deposited them in its account at Legacy Bank. New Wave did not endorse the checks. Maxim went out of business. New Wave sued Legacy for conversion for cashing the checks without New Wave endorsement. The trial court held for Legacy; New Wave appealed.

Decision
Affirmed. The checks, as written, were ambiguous as to whether they were payable to Maxim and New Wave alternatively or jointly, and, thus, were payable alternatively. Either party could have deposited the checks. The meaning of the slash mark (a virgule) between the names is often interpreted to mean or which would mean either party could deposit the checks. Legacy did not convert the checks despite the statement on the back of the check. Since the meaning of the slash was ambiguous, Legacy could rely on the endorsement of either of the parties when it deposited the checks.

Citation
New Wave Technologies, Inc. v. Legacy Bank of Texas, ---S.W.3d--- (2008 WL 2553519, Ct. App., Texas, 2008)

Case 2: Good Faith Buyer of Vehicle Obtained by Swindle Gets Good Title Description
Colorado high court held that when a seller accepts a bad check for a vehicle, which is then sold to an innocent buyer, the innocent buyer can keep the vehicle. One of the two injured parties must suffer a loss. It falls on the one best able to prevent the loss.

Topic
Negotiable Instruments/Commercial Paper

Key Words
Bad Check; Good Faith Purchaser; Stolen Property; Recovery
CASE SUMMARY

Facts
SW Legal turned his car over to a buyer who presented what appeared to be a valid cashier's check but, ten days later, turned out to be counterfeit. The police could not locate the car, but SW Legal located it two years later. The car had been resold to Roberts by the passer of the bad check. SW Legal sued Roberts to recover the car under UCC 4-405. The trial court held that 4-405 does not apply to situations like this. Instead the court applied UCC 2-403. Roberts, as a good faith purchaser for value, could retain ownership of the car. SW Legal appealed.

Decision
Affirmed. Roberts, as a good faith purchaser for value, obtained good title to the car under 2403. A good faith purchase from a dishonest non-merchant seller can occur. SW Legal voluntarily parted with the car as a result of a criminal act. But Roberts was a bona fide purchaser who obtained good title. One of two innocent parties must suffer because of the wrongdoing of a third person. The loss must fall on the party who by his conduct created the circumstances which enabled the third party to perpetuate the wrong. SW Legal failed to confirm the validity of the check before releasing the car and title to the fraudulent buyer.

Citation
SW Legal v. Roberts, 143 P.3d 1037 (Sup. Ct., Colo., 2006)

Case 3: Bank May Be Liable for Conversion for Cashing Check without Endorsement Description
Wisconsin high court held that a financial advisor who cashed a clients check exceeded his limited powers of attorney, and so was liable for conversion. The bank that processed the check without endorsement by the payee may be liable for conversion for failure to follow reasonable banking procedures.

Topic
Negotiable Instruments and Credit

Key Words
Check; Endorsement; Conversion; Power of Attorney
CASE SUMMARY

Facts
Putnam Mutual Funds had limited powers of attorney, executed by client Schmitz, in favor of his financial advisor with respect to certain investments. Schmitzs financial advisor at Putnam deposited two checks made out to Schmitz into the account of Georgetown Financial without Schmitzs knowledge. Firstar Bank cashed the checks without Schmitzs signature, but with Putnams stamp on the back. Schmitz sued Putnam and Firstar for conversion. The district court held for defendants. Schmitz appealed.

Decision
Reversed. The limited powers of attorney gave Putnam no authority to endorse and deposit checks from Schmitzs accounts that were not listed on the forms he signed. Powers of attorney are strictly construed and interpreted to grant only those powers that are clearly specified. So Putnam converted Schmitzs funds. Liability on the part of the bank will have to be determined at trial. Whether the bank acted in good faith or in accordance with reasonable commercial standards under 403 of the UCC has yet to be tried. In general, accepting a check with the payees endorsement missing is not in accordance with reasonable commercial standards of banking.

Citation
Schmitz v. Firstar Bank Milwaukee, 658 N.W.2d 442 (Sup. Ct., Wisc., 2003)

Case 4: Injunction Allowed to Block Payment by Letter of Credit When Good Legal Remedy Not Available Description
Ohio high court held that a court may enjoin payment by letter of credit when there is evidence of fraud in a transaction and the issue of the letter would not be likely to receive adequate compensation via litigation later. Since multiple parties in several nations were involved, and fraud was shown to be likely, an injunction against payment was reasonable.

Topic
Negotiable Instruments and Credit

Key Words
Letter of Credit; Presentation; Fraud
CASE SUMMARY

Facts
Mid-America, a tire wholesaler issued a letter of credit (LC) for over $500,000 via First National Bank of Chicago for PTZ Trading, a European exporter selling tires and beneficiary of the LC. PTZ offered to obtain surplus winter Michelin tires in France to ship to MidAmerica. The deal fell apart when Mid-America became concerned that the tires were nonconforming with the agreement. Mid-America sued to enjoin payment under the LC. The trial court agreed. The seller appealed and the appeals court reversed. The buyer appealed.

Decision
Reversed. The injunction is reinstated. If there is an adequate remedy at law, an injunction will not be issued. The UCC permits injunctive relief against honoring a letter of credit if all conditions under state law have been met, including inadequacy of remedy at law, which includes full indemnity via practical litigation. Here, where buyer has shown that there may be fraud involved, an action to recover damages would not be an adequate legal remedy because it would not be as prompt, efficient, and practical as an injunction. Rather, it would involve multiple suits against different defendants in several jurisdictions.

Citation
Mid-America Tire, Inc. v. PTZ Trading Co., 768 N.E.2d 619 (Sup. Ct., Ohio, 2002)

Case 5: Payee Owed No Special Duty to Drawer of Forged Check Description

Topic
Negotiable Instruments/Commercial Paper

Key Words
Forgery; Conversion; Negligence
CASE SUMMARY

Facts
For three years a secretary and a bookkeeper conspired to defraud their employer, Simmons, a lawyer, of funds he kept in various account. His signature was forged on numerous checks drawn without his knowledge. One check, for $13,000, was payable to Lennon, who sold a vehicle to the secretary and received the forged check in payment for the vehicle. This check was written and cashed more than a year before Simmons discovered the fraud. According to Simmons, Lennon knew, or should have known that the check was forged when he accepted it and sued to recover the $13,000. Lennon had once been romantically involved with the secretary, who had cheated him out of money, so he should have been on notice of her behavior and suspected the fraud. The trial judge granted summary judgment in favor of payee Lennon. Simmons appealed.

Decision
Affirmed. The drawer, Simmons, was not entitled to recover against the payee. Under UCC 3-419 the drawer may not sue the payee for conversion of the check paid on the drawer's forged signature. Similarly, under common law, the drawer could not successfully sue the payee for conversion of the check. The payee owed no duty to warn the drawer of his employee's history of forgery; there was no contractual privity between the parties. Lennon accepted the check in good faith and properly endorsed it to cash it. The UCC was redrafted after this incident occurred and 3-420 was added concerning conversion, but it would not change the outcome of the case.

Citation
Simmons v. Lennon, - A.2d - (2001 WL 611445, Ct. App., Mary., 2001)

Case 6: Bank Not Liable for Paying Checks on Which Stop Payment Orders Had Been Placed Description
Appeals court held that under the UCC a drawee was not liable to a drawer for accidentally paying checks on which stop payment orders had been placed since the drawer was liable to the payee of the checks anyway.

Topic
Negotiable Instruments and Credit

Key Words
Checks; Stop Payment
CASE SUMMARY

Facts
Seigel, a Maryland resident, gambled in Atlantic City, New Jersey at various casinos. He wrote checks to the casinos to get gambling chips. The checks were written against his cash management account at Merrill Lynch. When he returned home, after losing a substantial sum, he told his broker that he did not want the checks to be paid. On advice of his broker, he placed stop payment orders on the checks and liquidated the account. While Merrill Lynch did not pay many of the checks, it accidentally paid checks totaling $143,000. Seigel sued Merrill Lynch for breach of contract, negligence, and breach of trust, demanding a return of $143,000. The trial court held for Merrill Lynch, the drawee, and Seigel, the drawer, appealed.

Decision
Affirmed. Under the UCC, 4-403 and 4-407, the drawer did not suffer an actual loss from the drawee's mistakenly paying checks upon which stop payment orders were placed. In assessing whether a drawer suffered a loss as a result of a drawee's mistaken payment of checks, upon which stop payment orders were placed, and which were issued to casinos to pay drawer's gambling debts, the drawee had to be treated as the subrogee of any rights of the casino payees against the drawer. Since the debts were valid and owed to the casinos, there was no actual loss for which the drawee, Merrill Lynch, could be held liable.

Citation
Seiger v. Merrill Lynch, Pierce, Fenner & Smith, 745 A.2d 301 (Ct. App., D.C., 2000)

Case 7: Waiver of Defenses Eliminates Defenses Against Discharge of Debt Description

Topic
Negotiable Instruments/Commercial Paper

Key Words
Guarantee Agreement; Waiver of Defenses
CASE SUMMARY

Facts
Prodipe borrowed money from CFC to develop a resort in Mexico. Payment was guaranteed by Prodipe's major shareholders. The guarantee agreement was governed by New York law and contained a general waiver of defenses. When Prodipe defaulted and CFC attempted to collect, one shareholder, Weinstock, directed Merrill Lynch to hold his assets in marketable securities in the name of a company he owned. When Weinstock would not pay CFC, it sued Merrill Lynch, which claimed Weinstock's assets could not be reached. District court ruled against CFC, holding that Merrill Lynch was not affected by the loan agreement. CFC appealed.

Decision
Reversed. The guarantee agreement waived "all legal or equitable ... defense[s]." Hence, the waiver of defenses reached all transactions related to the obligations that existed under the loan. The fact that CFC took over Prodipe's operations did not affect the debt obligations.

Citation
Compagnie Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, - F.3d - (1999 WL 594901, 2nd Cir.)

Case 8: Business Partners Must Make Good as Guarantors of Business Debt Description
Partners co-signed a business loan and guaranty agreement. Appeals court affirmed verdict in favor of partners whom, when their business defaulted on loan, covered on behalf of partner who failed to contribute. The paying partners had the right, on the guaranty, to foreclose against other property of the non-paying partner.

Topic
Negotiable Instruments/Commercial Paper

Key Words
Guaranty; Partners
CASE SUMMARY

Facts
Williams, Sandman and Walker were partners in a business called Pavilion. All three signed a letter of credit and a security agreement to obtain a bank loan for Pavilion. Beside each of them signing guaranty agreements, they all pledged their interest in another business they owned together as collateral. When Pavilion defaulted on payment to the bank, the bank demanded payment from the three partners. Sandman and Walker paid; Williams would not. To cover Williams' share, Sandman foreclosed on Williams' interest in the other business and bought Williams' interest at a public sale. Williams sued Sandman and Walker for their actions. The trial court held for defendants; Williams appealed.

Decision
Affirmed. Williams contends that the only action Sandman and Walker could take is to sue him for his contribution on the loan to Pavilion; that they could not foreclose on his other partnership interest. That is incorrect. Williams signed a guaranty. A guaranty of payment is an obligation separate and distinct from the original letter of credit. Under state law, Sandman and Walker could thereby foreclose on the collateral promised in the guaranty.

Citation
Williams v. Sandman, - F.3d - (1999 WL 598213, 4th Cir.)

LIC OF INDIA VS. ABHISHEK GHOSH DASTIDAR Wrong account no mentioned on premium cheque-dishonoured paid up value paid-insurer kept mum for 1 year-held insurer liable for deficiency in service as no notice of dishonour served on insured: The brief facts giving rise to the case are that the insured was covered under a short term policy of 5 years with the above insurer. The four yearly premiums were duly paid by the insured but the last one was paid by the mother of the insured as his guardian. In this last cheque the account number was by mistake wrongly mentioned and it was returned unpaid. The insurer paid the paid up value to the insured. The insured was at the time of maturity informed of this fact of dishonour of the cheque but he claimed the sum assured along with the interest be paid to him which was declined. The insured filed a complaint with the district forum which held the insurer liable for deficiency in service as the fact of dishonour of the cheque was not intimated to the insured and awarded interest on the amount of premium paid along with the interest. In appeal by the insurer the appellate court observed that it was clear that the insured had tried to pay the premium by cheque. However unfortunately the cheque was dishonoured due to the reason mentioned above and premium remained uncollected. But the fact to be noted was that the cheque was dishonoured before the date of payment of last premium i.e. 15-11-99 yet the insurer did not care to inform/intimate the insured about this fact and kept silent for a period of one year till maturity of policy and till the insured laid claims for the maturity amount with the insurer. Had the insurer intimated the fact of dishonour of cheque to the insured there was all the possibility that the insured would have issued a fresh cheque or taken efforts to correct the account number of the cheque in question already issued. Thus though the insured inadvertently committed a mistake in issuing the cheque bearing wrong account number, yet the fault on the part of the insurer was much graver and it has to bear the blame of its omission of not intimating the insured about the same. As regards the amount of compensation it was clear that the insured would get nothing more than what he would have got had the last premium amount was collected. The court allowed compensation of Rs.11000/- and cost Rs.1000/- to the insured besides the paid up value of Rs.40000/- already received. Held: The insurer liable for deficiency of service and to pay paid up value along with compensation and costs and interest @12% p.a. in case of default in paying the same.