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Sales OUTLINE
Overview of the UCC:
Article 1: Definitions
Article 2: Sale of Goods (Focus for the first 7 weeks)
Article 3: Negotiable Instruments (checks that are just as good as money) (4-5 weeks of focus on this)
Article 4: Banking, Commercial Papers (the last topic)
• Article 2 Review:
• §1-201: definitions
• §2-201: article 2 applies to goods not services
• §2-104: defines a merchant
• §2-106: a sale under the UCC
• §2-204: how to create a k under the UCC
o Hybrid transaction: 2 tests: If the goods predominant transaction, the UCC applies (if services
do, it doesn’t apply) AND Gravaman Test
• §2-201: statute of frauds, what has to be in the writing (signed by the party to be bound, over 500
dollars, goods) and exceptions
• §2-202: Parole Evidence rule (as it relates to goods), has to be a writing, final expression of the parties
• §2-205: Merchant with assurances, can’t be revoked for three month’s
• §2-207**Exam**: handout; Battle of the Forms
o §2-308, 309, 310, 314: time, place, payment terms, merchantability warranty
• Warranties: two kinds (check tape)
• §2-314, §2-315: goods are fit for their ordinary use
• §2-719: can limit the warranty to repair or replacement, so long as the remedy doesn’t fail its essential
purpose
• §2-607: Seller’s notice defense to liability*
• §2-305-§2-311: Gaps fillers
• §2-601: Perfect Tender Rule: have to be delivered exactly as the contract says or can accept all, reject all
or accept one commercial unit.
• §2-508: Right to Cure under the PT rule; surprise exception
• §2-612: Installment contracts, PT rule doesn’t apply
• §2-606: Possession doesn’t mean acceptance; have to have reasonable time to accept after inspection
• §2-608: revoking after acceptance; substantial impairment to you to revoke
• §2-602: rejecting before acceptance
• Risk of Loss always the seller, can shift the buyer
• §2-509: risk of loss with no breach; has the duty to tender them the carrier if shipment K; destination K,
the risk is transferred at the tendering at the destination location. (FOB, C&S, etc)
• §2-510: risk of loss with breach
• Buyer and Seller’s Remedies
o Seller’s Liberal: §2-705: Acceptance; §2-706, 708: Non-acceptance
o Buyer: §2-714: acceptance; §2-712: non-acceptance
• §2-610: Anticipatory Repudiation
• §2-611: Retraction of Anticipatory Repudiation
• §2-725: Statute of Limitations of Sales Contracts

• Intro, Scope of Article 2 and 2A, Contract Formation


• Where CL is in conflict with the UCC, the UCC controls always

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• UCC: a statute that every state can opt into(all have, except LA, that has taken only parts)
o Article 2: the sale of goods
o Article 3: negotiable instruments (a piece of paper that is just as good as money)
o Article 4: commercial papers (banking)
• § 1-102: act should be liberally construed to promote purposes and policies
• § 2-102: The UCC applies to the sale of goods
• § 2-106: Sale: buying and passing of title from the seller to the buyer for a price.
• §2-105: Goods: all things that are movable at the time of the identification at the time of sale
o Problem 1: Does article 2 apply? (Sale of Goods)
 Sale of insurance policy: NO
 Sale of real property: NO (not movable)
 Sale of house apart from real property: NO, not technically movable at the time of sale
 Sale of building material as part of construction project: NO, hybrid service and sale, and
more service (see tests to come)
 Sale of standing timber: YES
 Defective spinal plate given to a patient in a hospital operating room? NO, sale- service
hybrid
 Sale of membership of a spa: NO, not movable.
 Sale of entire assets of clothing store: YES
 Sale of electricity: § 6-103: YES, according to most courts (unless they don’t want the
UCC to apply)

• Hybrid Transactions:
• Milau Assoc v. North Avenue Development Corp
• Severe water damage from a burst pipe in commercial building; determined that sprinkler
system burst because of a defect in installation by the subcontractor (general approved it),
sued the subcontractor and the general contractor that built the warehouse.
• Implied warranty and negligence?  fit for the purpose to which is was bought for
• Hybrid hereService Predominates Analysis: have to look to whether the product is
mostly service or sale of goods (sale= UCC protection)
o Service here (more of a contract for installation of the piping, not the piping
themselves.
• The predominate reason for entering into the contract= whether it is sale of goods or
services

• Internet Software Application:


• Article 2B: totally anti-consumer; article 2 doesn’t apply to software, MD and VA have
adopted only.

• Analysts Intern Corp v. Recycled Paper Products


• Software system was developed by D for P to organize electronically all orders
• Parties dispute the entire contract; does the UCC apply?
o Ct: “except for the provision of a good- the computerized reordering system- the
agreement would have no purpose.”
• Predominant Purpose Test: whether the “Essence or dominant factor” in the formation of the K
was the provision of goods.

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o Factors:
o Terms of the contract,
o Objective of the parties when they entered the contract,
o What part was the most expensive part of the contract, the service or the good?
o The type of businesses of the parties of the contract.
 Anthony Pools v. Sheehan
 P was injured when he fell off a diving board and was injured; no skid resistant on the
edges.
 P purchased a pool that was in ground, in addition to other items, such as the board.
 D argues that the pool and board are one, that the installation of the pool was a service
 Hybrid…?
 Predominant Purpose Test: UCC will apply if the a good doesn’t apply here
 CT: the pool installation was a service, but the board was sold separately as a good.
 §2-316: implied warranties ok, except that you absolutely cannot disclaim consumer
goods.
• 2nd Hybrid Test: Gravaman Test: doesn’t matter whether the dominant purpose was for goods or
services; where a part of a commercial transaction in which consumer goods are sold after
completion of a performance promised to the consumer, and where monetary loss or personal
injury is claimed to have resulted.
o The UCC will apply if the essence of the suit relates to consumer goods, the goods retain
their character as goods after the sale and loss or injury resulted from a defect.
• § 2-104: Merchant def: a person who deals in goods of the kind or otherwise by his occupation
holds himself out as having knowledge or skill peculiar to the practices or goods involved in the
transaction or to whom such knowledge or skill ay be obtained from his employment status
• UCC applies to everyone, but certain provisions require that both parties be merchants.
o §2-201(2), 2-205, 2-207, 2-314 and 2-209 only apply to merchant transactions
• Problem: 2-102 applies because it is a sale of a good (car) but not §2-314, because she is not in the
business of selling cars.

• Siemen v. Alden
• Rip saw injury purchased from D, who had used it for 6 years and instructed the P on use.
• Breach of warranty, negligence, implied warranty is argued by P
• Merchant? In order to have an implied warranty of merchantability, he has to be a “merchant”
• § 2-104: isolated sale, no implied warranty of merc.
• §2-314: a warranty that the goods shall be merchantable is implied in the contract for their sale if
the seller is a merchant with respect to the goods of that kind.
• § 2-315: back door: the seller must know of the particular purpose for which the goods are
required AND that the buyer rely on the seller’s skill or judgment in selecting the particular
product.
• Neither apply; not a merchant and the P did not rely on the seller’s skill in the selection, only his son’s
• Problem 3: Are the following person’s merchants?
o Quit her teaching job on Fri. and opened a hat store on Mon YES, the court will consider that
she just started, but the UCC makes no distinction
o Selling your produce to a wholesaler? YES, if not a casual seller
• Article 2A: not on exam, mostly mirrors Article 2 used for leasing of goods. (p. 38)

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• Contract Formation/ SOF
• Oral contracts are as goods as written, except when Statute of Frauds is implicated
o SOF here: performance can’t be performed within one year.
o §2-201: requirements:
 Sale of goods over 500,
 Written; has to have quantity
 And signed by the party to be charged.
• a contract can be enforced even if the main term is omitted or misstated, the only
necessary term for a sufficient memo is quantity
o Exceptions: §2-201(2) and §2-201 (3): excepts for merchants that don’t need to meet the SOF
 Between merchants an oral agreement, with a follow up memo, buyer- merchant has
ten days to contest, doesn’t need to be signed by the merchant that it will be enforced
against them.
• Doesn’t mean that the buyer can’t sue, only that he can’t use SOF as a defense.
 Specially manufactured goods not suitable in the ordinary course of business/ can’t be
resold
 Part performance or part payment, but only for that part.
 Admissions: if you admit that there was a contract, even in discovery, it can be used
against you in CT.
• Problem 6: §2-201 (1): signed, in writing with quantity
o If quantity is not listed, presumed to be one

• St Ansgar Mills v. Streit


• Grain seller, previous dealings, no confirmation received by the buyer because buyer didn’t happen to
come by the farm like he had in the past.
• DC found that the written confirmation was not received in a reasonable time; reversed here.
• SOF requires that the confirmation be received in a reasonable amount of time by the buyer from the
seller and the buyer only has ten days to contest the contract.
• §2-201 at issue “reasonable time”

Week 2
• Problem 7: 2-201: writing, quantity, signed check; “Tank” in the memo line, quantity? Could be seen as
an inference of one tank, as people don’t buy large quantities, and SoF would be fulfilled.
• Problem 8: 2-201: quantity always required in the k? not always, a contract is enforceable beyond the
quantity stage, not just because you want to cancel can you say it’s void for no quantity.

• Parol Evidence Rule


• HANDOUT
• Williston v. Corbin’s Views:
o Williston: presumed to be the final integrated expression (merger clause); final if it would be
natural to include; partial, not natural term, look to intentions(no merger clause) {majority}
o Corbin: look to the true intention of the parties and allow the judge to look at all the relevant
extrinsic evidence (current trend)
• Problem 9: Under the Code, when dealing with the PER, you first have to determine if:
o 1) the writing is the final expression of their agreement and
o 2) is it the total/complete expression of their agreement?

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• Extrinsic evidence would come in if is not a natural term in the contract and it doesn’t contradict any
other term in the existing k.
o Columbia Nitrogen v. Royster
o Set price for fertilizer, price has dropped, D ordered less than the contract required; P wants to
introduce evidence on the course of dealing and trade usage.
o Test of admissibility: whether the proffered evidence of course of dealing and trade usage
reasonably can be construed as consistent with the express terms of the agreement.
o Rule: Usage of Trade and Course of dealings are allowed to circumvent the PER and be
entered to supplement the K.

• Offer and Acceptance


• Mirror Image rule: general rule: offeree puts forth the deal, the offeror accepts the offorer’s terms any
change would be a counteroffer to the offeree.
• §2-204 and §2-206 are important to the general rule
• §2-204: Contract Formation: a contract can be formed in any manner sufficient to show an
agreement between the parties, which includes their conduct.
o If a term is left open, the contract will not fail for indefiniteness:
 If the parties intended to have a contract AND
 There is a reasonably certain basis for giving an appropriate remedy.
• Problem 10: a) Shipment would not be agreement, because it was reply by mail (old idea); when was
contract? When they shipped the goods.
 §2-204: a contact can be made in any matter sufficient to show an agreement
o B) Non-conformity because they ordered good fuses and you sent bad fuses? D can’t breach the
agreement because they sent the wrong item code treats it as an acceptance and a breach at the
same time.
o C) §2-206 (1) (b): a non-conforming good can be offered as an accommodation to the asked for
goods; a counteroffer of the original offer. (No liability if you don’t want the goods, you can
send them back.
• §2-205: Firm Offers: Firm offers are irrevocable, even without consideration if:
o The firm offer relates to a contract to sell goods,
o It is made BY a merchant AND
o The offer is in a signed writing which states that it will be held open.
 It is irrevocable: for the period of time specified in the offer OR for a reasonable time no
longer than 3 months.
• Problem 11: §2-205: firm offer: an offer by a merchant to buy or sell goods in a signed writing with
assurance that it will be held open is not revocable, for lack of consideration, for the duration of the
stated time, or if no time is stated, for a reasonable time not exceeding 3 mos. (purchasing an option)
o No cause of action here, no signed writing= back to CL, no firm offer.
o Offeror can revoke at any time during the time before acceptance without a writing
o No money/consideration needed for a firm offer, just the writing.
• §2-206: Acceptance: Acceptance can be by any reasonable manner unless the offer unambiguously
states otherwise.
o With Performance: starting performance constitutes acceptance if:
 The offeree/acceptor notifies the offeror within a reasonable time.
o With Shipment: an offer that states for immediate shipment is accepted either by a promise to
ship OR by actually shipping.
 If non-conforming goods are shipped, it is either an acceptance or a counteroffer:

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• Shipment of non-conforming goods the shipment is both an acceptance and a
breach of the contract.
• Shipment with notice that the seller is not accepting the offer, but only sending
the substituted goods as an accommodation the seller has made a counteroffer
that the buyer can accept or reject; With acceptance by the buyer, the contract is
formed.
• §2-202: Parol Evidence Rule: when inconsistent terms are not allowed:
o Do you have a writing?
o Is it integrated? Presumption that the contract is partially integrated.
 Consistent additional terms: always allowed unless the court finds that the parties
intended the writing to be the complete and exclusive statement of the contract terms
(merger clause)
• Test: whether the evidence can be reasonably construed as consistent with the
express terms of the agreement.
 Course of dealing and usage of trade: unless carefully negated, they are always
admissible to supplement the terms of any writing.

• Battle of the Forms §2-207


• §2-207 (1): an acceptance adding new terms creates a contract based on the original offer, unless the
acceptance is expressly made conditional on assent to the additional terms.
• §2-207 (2): (agreement at the paper stage) the additional terms are construed as proposals for addition to
the K; they become part of the K between merchants unless: they expressly limit the acceptance to the
terms of the offer, they materially alter or notification of objection is given within a reasonable time of
notice.
• §2-207 (3): conduct of both parties which recognizes an existence of a K is sufficient to establish a
contract even though the writings of the parties don’t establish a k; the k is where the writings agree and
where they can be brought in under other parts of this act.
• Generally speaking, the buyer is the offeror in the agreement, seller is the offeree.
• Lost shot doctrine: the person who sends the last writing is not to get an advantage over the over
merchant, so the UCC controls conflicting/additional terms.
o Problem 13: Parties aren’t in agreement; the date change materially alters the contract, so there
really isn’t one.

• Diamond Fruit v. Krack


• Cool uniting sold to third party; initial agreement between merchants had a disclaimer on
the return form.
• Agreement at paper stage? NO, but their conduct leans towards assent to an agreement.
• §2-207 (3) controls; the disclaim of warranty drops out of the agreement
• Problem 14: YES, arbitration is a materially alteration of a contract

• Bayway Refining v. Oxygenated Marketing


• IRS taxes Petro sold to unregistered buyers; 430K tax paid by the seller, buyer refuses to
pay tax, even though it was conditioned on the sale (on a separate form, custom in the industry)
• Agreement at the paper stage? NO, §2-207 (2) controls
• §2-207 (2) 3 exceptions:
 1) Material alterations: an alteration that would “result in surprise or hardship if
incorporated without express awareness by the other party”

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o 2) “Surprise”: a party must establish that under the circumstances it cannot
be presumed that a reasonable merchant would have consented to the additional
term.
o 3) “Hardship”: can’t be because of market prices, profit margins or losses
that weren’t foreseen; need more.
• Clause comes in unless exception applies; here material alteration is not found (the D
controlled the registration and it is expected in the business)

• Problem 15: §2-207 (2): different terms are litigated highly, treated like additional terms
in most juris
• Problem 16: no agreement because there is proviso language (could have walked away at
this point) (proviso language: “there is not an acceptance unless”), section 3 kicks in, because
there was a shipment; gap fillers used.

• Leonard Pevar v. Evans Products


• Plywood sale, ORAL; sent acknowledgement of the agreement in a written confirmation.
• SoF Exception: Oral agreements are valid if written confirmation is sent to the receiving
party and the receiving party does not object to the confirmation within ten days.
• Proviso language in the confirmation if they don’t materially alter the agreement, then
2-207 controls and they are in!
• Proviso: on EXAM: must say: “expressly conditional on assent to” to qualify for proviso= every
state treats this as proviso, some allow a little bit of a difference.

Week 3
• Warranties:
• §2-312: warranty of title: the seller is warranting that they have good title to sell to buyer (not on
exam)
o When goods are sold, one of the parties is in a better position than the other; we want the person
in the better position to have the risk= seller… seller almost always tries to transfer the risk to the
buyer
 The question is whether that transfer (disclaimer) is effective
• And Warranty of Quality (most often, focus here)
o When you buy goods, they should be fit for their purpose
o 2 types: Express and Implied
• §2-313: Express: the seller must do something to create it (affirmative) before the sale/formation
of the contract; They are created by the seller if:
o A) There is an affirmation of fact or promise requires: 1) they must “relate to the goods”
and must be the basis of the bargain.
 Basis of the bargain: a statement that was part of the deal and has the natural tendency to
induce the buyer to purchase, even if it was not the only reason.
• It must form some belief by the buyer that the particular good will be up to the
standard described by the seller.
o B) Describes how the product should work as part of the bargain, written or oral, OR
o C) A sample or model of the goods made part of the bargain
 Puffing is not a warranty if they don’t say it won’t do something, just talking, not
warranty.

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o Problem 21: a) both are more than puffing, express warranty
o B) expectation created, no disclaimer, express warranty
o C) No expectation, mere puffing
o D) First part was express; second, no reliance or basis of the bargain, no express warranty.
• Problem 22:
• a) Which of the salesman representation’s amount to express warranties?
o 1) finest: puffing
o 2) goes up easily: warranty
o 3) dries immediately: warranty
o 4) would look wonderful: puffing
o 5) was used by famous woman: warranty
o 6) can be put on with any paste: warranty
• B) Any others? Sample was given
• Problem 23: Ad discovered after purchase of the wig, warranty? Probably not, because he
didn’t know about it when we bought the product.

• Implied Warranties: are automatically part of the contract of sale, unless the seller affirmatively
disclaims them or circumstances show otherwise.
• 2 kinds: §2-314: Implied Warranty of Merchantability and §2-315: Fit for their purpose
• §2-314: Seller must be a merchant of goods of that kind, must be fit for the ordinary purposes for
which such goods are used.
o When you buy something, it should work are it is supposed to
• §2-315: fitness for a particular purpose: it is used for a purpose other than its ordinary use
o The buyer must rely on the seller’s skill or judgment in selecting the product,
o And the seller must have reason to know the particular purpose for which the goods are
required, when completing the sale/ contract.
o You need not be a merchant seller, applies to any transaction for the sale of goods.

• Shaffer v. Victoria Station


• P had wine glass break in their hand, suing for breach of implied warranty of
merchantability.
• Restaurant: they weren’t a merchant because they didn’t sell the glass, only the
wine.
• Ct: wine glass is necessary for purpose
• Food and beverage must be adequately packaged for sale, held responsible for the
injury.

• *Problem 24*:
• A) Cigs: there is an assumption of risk in the sale taken by the buyer (obviousness
defense)

• Daniell v. Ford
• Woman was locked in her car trunk for nine days trying to commit suicide
• Argues that the car should have had a mechanism inside the trunk to allow escape
from inside.
• Also argues: express, and both implied types

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• Ct: Ford never said that you could get out of the trunk (express no)
• The trunk was fit for it’s ordinary use (merchantability meet)
• She never thought about using the car as a suicide place at buy/sell, car dealer
could not warranted it

• Problem 26:
• Merchantability suit? No, fit for its ordinary purpose
• Fitness suit? Yes, the friend helped build the room, helped pick out the heater, and
then it didn’t work; not an exact fit, but knows purpose and quality of product, implied
warranty of fitness.

• Problem 28:
• Natural ingredients, reasonable expectation of the buyer is the main issue see
Webster v. Blue Ship Tea

• Webster v. Blue Ship Tea


• Native New Englander, fish chowder ordered, fish bone got stuck in her throat,
had numerous surgeries to correct.
• Sues under breach of implied warranty of merchantability
• Reasonable expectation of the biter test: when you are eating and there are
natural hazards, is it reasonable that the person would not expect them to be there?
• Test here: history of chowder has the bones, she reasonably should have
known the risk.

• Problem 29:
• Probably wouldn’t win, it is fit for it’s ordinary use as to the seller’s knowledge
(notice now, not before)

• Disclaimers of Warranties:
• Risk of loss always begins at the seller, 99% of the time, they disclaim
• §2-316 (1): applies to express, once a seller creates a warranty, they can disclaim, as long as they
can co-exist and it is reasonable (very hard to get around, they will stay in place if they are
inconsistent)
• §2-316 (2): implied (created my operation of law), to disclaim:
o By specific language:
 Disclaiming the warranty of “merchantability”:
• Must say or write “merchantability, AND
• It must be conspicuous (a reasonable person would have noticed it)
 Disclaiming the warranty of fitness:
• It must be in writing stating that you are disclaiming, but the word fitness
doesn’t need to be mentioned AND
• It must be conspicuous.
• §2-316 (3): Notwithstanding section (2):
o a) all implied warranties excluded by “as is”, with all faults” or any other language like
that, you don’t have to state the warranty you are disclaiming;
o b) when the buyer has examined the goods, the defects should be obvious or had the
opportunity to examine and refused;

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o c) Course of dealings or course of performance shows that the warranty is disclaimed.
• Bell Sports v. Yarusso
• Dirt bike accident left rider quadriplegic; suing says that the helmet doesn’t not
work the way the warranty states it should, the disclaimer is not effective.
• Ct: the D didn’t disclaim liability; experts have testified that the helmet didn’t
work in the manner it was supposed to
• §2-316(1) express warranty here created by the expectation; the warranty is
inconsistent with the disclaimer, therefore Ct must protect the buyer.
• Claiming expectation on one sentence and then trying to take away in the next
sentence.

• Problem 30:
• Car, much lower gas mileage than stated by the dealer rep
• A)
• B) No, there is no disclaimer of merchantability because that word is not used
• C) Maybe, some Ct’s say it is misleading, need to bring it to the attention of the
buyer in the K to be ok.

• Cate v. Dover
• Bought car lifts that didn’t function properly
• Were the implied warranties properly disclaimed? Conspicuous?
• Conspicuous: when it is so written that a reasonable person should have noticed it
in the k; bigger words, capitals, bolder than the rest of the writings.
• Test: objective standard, whether attention can reasonably be expected to be
called to the disclaimer
• Ct: buyer may have had knowledge of the disclaimer
• Burden on the seller to prove that the buyer had knowledge

• Problem 31:
• A) No, they can’t disclaim this way, you have to make sure that it is conspicuous
• B) Yes, for implied warranty; No, for express disclaimer
• C) No, responsibility of the dealer to demand in examining before sale to have a
disclaimer of the implied warranty (comment 8, §2-316)
• D) No, don’t expect anything from those types of sales (on the side of the road, in
the train station)

• Problem 32:
• Post sale disclaimers, see Bowdoin v. Showell Growers

• Bowdoin v. Showell Growers


• If you sell a good, then later you find that there is a contract with a disclaimer,
you can’t disclaim, not part of the basis of the bargain.
• There can be no reliance on the disclaimer and not conspicuous because you don’t
have it in front of you
• Both disclaimers were ineffective

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• Rinaldi v. Iomega Corp
• Computer disks were eating the data, disclaimer on the inside of the package
• Conspicuous?
• Ct looks to the purpose: to protect the buyer from unexpected and unbargained for
language of the disclaimer
• The customer had the choice to use the product right after reading the disclaimer,
conspicuous and therefore an effective disclaimer

• Limitations on the Warranty


• What if you don’t want to disclaim, but you just want to limit the recovery of the buyer to repair or
replacement?
• §2-719: Limitations of Remedies:
• You can disclaim and limit or just limit
o 1) a) An agreement may provide for the remedies of repair and replacement of the product
AND
o b) Remedy is optional unless expressly agreed to
o 2) Seller can limit recovery, but you have to make good on the limitation otherwise
defaults to the act
 §2-719 (2): any remedy can be recovered (under the code) if the warranty fails its
essential purpose, but under §2-719 (3), consequential damages are limited to
unconscionable warranties (exclusions/limitations)/ actions.
 Bad faith = unconscionable
o 3) Consequential damages may be limited or excluded, unless you can show that it would
be unconscionable;
 Consumer goods, prima facie unconscionable if: consumer goods and injury to a person.
 Commercial goods, burden on P to show unconscionable.

• Wilson Trading v David Ferguson


• Yarn sale, discoloration of sweater’s after the first washing
• Limitation of remedy allowed 10 days to return the product
• Ct: the limitation basically left the buyer with no remedy
• Failed it’s essential purpose

• Who should bear the risk of loss seller, always


• But they usually disclaim it to the buyer

• Problem 33: §2-719 (3) personal injuries with a limited warranty are prima
facie unconscionable.

 Pierce v. Catalina Yachts


 Limited warranty stated that the seller would repair or pay damages to the buyer if the
clear coat blistered; didn’t correct and said that they wouldn’t.
 Ct: seller acted in bad faith when it breached the warranty and the company cannot
conscionably enforce the warranty provision barring consequential damages.
 Issue: did the warranty fail its essential purpose?

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 Unconscionable liking to be found when: consumer is involved, disparity in bargaining
power, when there is a consequential damages clause on a pre-printed form, bad faith;
unlikely to find unconscionable when the limitation is freely negotiated btw sophisticated
parties, most likely in a commercial setting.
• Defense in Warranty Actions: §2-607: Notice Provisions: where tender is accepted
o 3a: within a reasonable time the buyer must notify (written or oral) the seller of any breach
after he discovers or should have discovered the breach or he is barred from remedy.
 Problem 34: §2-313: Did the buyer give notice to the seller of the breach within a
reasonable time? §2-607 must be seasonable/ reasonable notice Buyer knew of the
breach and held it for 60 days until the bill arrived; not reasonable, express warranty was
breached by the seller, but buyer didn’t notify.
 Problem 35: Even if the breach is obvious, you still have to give notice; filing suit is not
notice, you must give them time to cure first.

Week 4
• Defenses in Warranty: Privity
• There must be a legal connection btw the parties
• Vertical (manufacturer, distributor, consumer) v. horizontal (not the immediate buyer)
o Vertical: how far back up the chain can the buyer go?
o Horizontal: to whom is the retail seller liable other than the immediate purchaser?
o Who can sue?

• §2-318: Third Party Beneficiaries of Express/ Implied Warranties


• Three alternatives: each state has adopted ONE
o Alternative A: most restricted; extends to a natural person of the household or guest, if
reasonable to expect that someone will use/consume the good or be affected by the goods and
who is injured in person by the breach of warranty.
o Alternative B: extends to a natural person who may be reasonably be expected to use, consume
or be affected by the goods (doesn’t have to be a family member)
o Alternative C: extends to any person who may be reasonably expected to use, consume, or be
affected by the goods and is injured by the breach (allows property damages)
• Reed v. City of Chicago
• Jail death of son, mother is suing from his estate saying the city, officers and
manufacturers of the gown that he used to hang himself were negligent
• Ct: §2-318 does not differentiate btw vertical and horizontal privity
• Every warranty needs to have a basic adequate remedy mother can sue on his
behalf (otherwise, there would be no one to sue)

• East River Steamship v. Transamerica Delaval


• Issue: Torts or contracts to be applied?
• Turbine issue to a fleet of ships, no personal injuries at all, only property damage
• If it’s entirely economic loss then warranty actions are more appropriate than tort
actions (for negligence)
• Ct: this types of loses can be insured against, warranty only
• Problem 38: Motorcycle defect caused death to bystander= what cause of action
and against whom? Warranty offers no punitive (attorney fees); bystander’s estate should
sue in negligence; rider can sue under warranty for damages to bike/defect in warranty.

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• Terms of the Contract:


• Gap Fillers:
• §2-305: Open Price Term: reasonable price, if price is not stated, they fail to agree, was to be set price,
but not set according to open market.
• §2-306: Output, Requirements and Exclusive Dealings: a term which measures the quantity by the
output of the seller or the requirements of the buyer means that the actual output or requirements must
occur in good faith and no quantity unreasonably disproportionate to any stated estimate or requirements
may be tendered or demanded.
• §2-307: Delivery in a single lot: unless otherwise agreed all goods called for by the contract for sale
must be tendered in a single delivery and payment is only due on such tender, unless circumstances give
either party the right to make or demand delivery in apportioned lots.
• §2-308: Absence of Specified Place for delivery: unless otherwise agreed: the place for delivery of the
goods is the seller’s place of business or his residence if no business, unless in the contract for the sale
of identified goods which to the knowledge of the parties at the time of contracting are in some other
place, that place is the place for their delivery.
• §2-309: Time: delivery and termination: reasonable time for delivery or shipment, and reasonable
notification of termination of the K, invalid it unconscionable.
• §2-310: Reasonable Time to pay: payment is due at the time and place at which the buyer is to receive
the goods even though the place of shipment is the place of delivery AND if the seller is authorized to
send the goods he may ship them under reservation and may tender the documents of title, but the buyer
can inspect the goods after their arrival before payment is due unless this is inconsistent with the terms
of the contract.
• §2-311: Past Dealings and what to do when the parties leave things open
 Problem 43: §2-305: if parties haven’t agreed to a price, the contract doesn’t fail, we have
a reasonable price also look to past dealings (§1-205, §2-311: if the parties have left a
term open, has to be in good faith and commercially reasonable to complete the k)
• Reasonable expectation
• April fools joke: §1-609: anticipatory pediation: reasonable goods to be insecure,
have to send 609 letter, 30 days to respond, breach of that and can walk away.
 Landrum v. Devenport
 Car purchase, negotiated for NASCAR limited edition car, selling price left blank, but
sticker price was 14 to 18k; wanted 22k, bought for price after objection and sued.
 §1-207: purchase under protest; you buy, but you are reserving your rights for remedy
later.
 §2-311: if evidence if there was intent for a k and a reasonably certain basis for giving an
appropriate remedy, then there is a k with the price to be filled in as reasonable.

• Performance of the Contract


• §2-301: the seller’s basic obligation is “to transfer and deliver” and the buyer’s is “to pay in
accordance with the contract”
• §2-507 (1): the seller’s rights are conditional on the buyer’s failure/ their performance and vice
versa.
• §2-511 (1)
o UCC requires tender; the party that wants to sue has to at least tender before they can sue
on the k.
• Handout:

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• Perfect Tender Rule: Single Delivery Contract: §2-601: when goods are delivered, they have to
perfect per the k, exactly what the party contracted for under the contract; subject to installment
k’s and as otherwise agreed under contractual limitations.
o if the goods or tender fail in any respect to conform to the k, the buyer may:
o a) Reject the whole OR
o b) Accept the whole OR
o c) Accept any commercial unit or units and reject the rest.
 §2-105(6): a commercial unit: it may be a single article or set of articles or an assortment
of quantities or any other unit treated in use or in the relevant market as a single whole.
• §2-601 is subject to Installment contracts:
• §2-612: Substantial Performance: you have to show that there was substantial impairment to the value
of the installment to you from the shipment to get out of that individual shipment and can not be cured
or substantially impairs the whole k.
o The buyer may reject an installment that is non-conforming only if the non-conformity
substantially impairs the value of that installment to him and cannot be cured.
 Exception: if the non-conformity does not substantial impair the value of the WHOLE
contract, and the seller gives adequate assurance of its cure, the buyer must accept the
installment.
• If the non-conformity of the installment impairs the value of the WHOLE
contract, there is a breach of the whole and the party can stop performance
after requesting an adequate assurance under §2-609.
o Exception: the aggrieved party reinstates the contract if he accepts a non-
conforming installment without seasonable notifying the seller of
cancellation, or demand performance as to future installments, or he brings
action with respect to past installments.
• §2-508: Seller’s Right to Cure: the seller has the right to cure any rejected tender if within the
time of performance, must seasonally notify of intent to cure; where the buyer rejects tender
which the seller reasonably believed was reasonable and conforming, more reasonable time is
allowed to cure than time of performance if the seller notifies the buyer of his intent seasonably.
o A seller has an automatic right to cure if:
o The seller has acted in good faith,
o The delivery was rejected because it was non-conforming,
o The time for performance has not yet expired,
o The seller notifies the buyer of his right to cure AND
o Within the time of the contract for performance the seller makes delivery at their expense.
 Merchant Surprise Exception:
 Even if time of performance has expired, the seller can get additional reasonable time to
cure if he is surprised that the buyer didn’t accept the goods:
• Seller reasonably expected the buyer to accept the non-conforming goods
• Reliance where the buyer has accepted other non-conforming goods and never
rejected or
• Trade usage or custom (seller sends a better product and the buyer rejects)
• Acceptance: §2-606: Acceptance of Goods:
o have to have a reasonable opportunity to inspect the goods and signify to the seller that the
goods are conforming; OR
o fail to adequately make an effective rejection after inspection; OR

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o does any act inconsistent with the seller’s ownership (don’t use it, otherwise you are saying
it’s ok for it’s value)
 §2-513: the buyer is entitled to a reasonable trial period to inspect the goods
 §2-601: prior to acceptance, the seller must prove that a perfect tender was made,
but upon acceptance, the burden shifts to the buyer under §2-607 (4).

• Rejection: §2-602; then right to cure §2-508 (unless shaken faith, then no right)
• §2-602: Rightful Rejection of Goods: a buyer may reject goods if they or the tender of delivery
fails in any respect to conform to the contract, subject to seller’s right to cure
o Must reject within a reasonable amount of time,
o With seasonable notice to the seller; AND
o If the buyer has possession of the goods, he must hold the goods with reasonable care until
seller removes them.
 Subject to: not exercising ownership over the goods and under a duty of care for a
reasonable time to permit seller to remove them.
• NOTICE is important
• Problem 53: substantial impairs the value of the last shipment, but not the whole k

• Cherwell- Ralli v. Rytman Grain


• Cornmeal delivery, buyer has not paid on time repeatedly, seller wants payment,
buyer sends check, stops payment because the truck driver that the seller was going under
and would not be performing the k.
• Ct: didn’t seasonably notify of cancellation, buyer is in breach, not the seller.
• If you are the breacher, you can’t use §2-609 (ask for assurance)

• Problem 54: Right to cure? Yes; ability cure new car defects when they are
minor? Some say if new, means new, no defects, other are against total replacement.

• §2-508: Curing defective performance: Problem 55: Do they have to accept a new
motor or give them a new car by the delivery date Shaken faith doctrine= you can’t
cure because the defect was so significant, that their faith is shaken before the deal is
complete (need a life or death type circumstance)

• Wilson v. Scampoli
• TV sale, red color on the screen, tech can out to house to check it out, refused to
let in store repair, just wanted new TV.
• Ct: P didn’t give the opportunity to cure the defect, no liability because they were
denied access to cure.
• All that is required to sue for performance is tender by the party wishing to sue.
o §2-601: Perfect Tender Rule
• Ramirez v. Autosport
• Camper van purchased, never left the lot for minor defect repairs; seller says not ready,
never delivered, transferred title, held for over a year, wanted money back
• Ct: the P accepted, but the seller didn’t cure the defect within a reasonable time
• Rules: (Handout too)
• Before acceptance: the buyer may reject goods for any non-conformity; within the time
set for performance, the seller’s right to cure is unconditional

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• After acceptance: the buyer may revoke acceptance only if the non-conformity
substantially impairs the value of the goods to him.

• Problem 57:
• Acceptance; rejection can be had with notice and right to cure
• Can sue for breach of warranty, because there was an express warranty by the seller; if he
notifies and asks for a cure, then he is not barred from suit should have rejected the whole.

• Plateq of North Haven v. Machlett


• Steel tank sale, special purpose of radiation research; P was behind schedule, but D said
they would take it the next day, then cancelled the whole order the day of scheduled pick up
without any reasons.
• Ct: you accept when you fail to reject properly; acceptance when they said they would
take them

Revocation of Acceptance
• Rester v. Morrow
• Used car purchase, minor defects, gas smell, AC broke, oil indicator light broke, hazard
lights; repaired, more problems, same issues; tried to return right after, had for 22 days,
returned it and demand refund.
• Rule: a buyer may revoke acceptance if there is substantial impairment of the value of the
car to him
• “Our law does not allow a seller to postpone revocation in perpetuity by fixing everything
that goes wrong with the car; there comes a point where enough is enough.”
• 2 part Test: (subjective) substantial impairment is determined by reference to the
particular needs of the buyer, even though the seller may have no advance knowledge of
those needs AND (objective) would it substantially impair the value of a reasonable person in
the same circumstances.
• Problem 58:
• Fender comes off after acceptance: notify and right to cure
• Problem 59:
• If it failed it’s essential purpose, it’s ok to revoke
• Problem 60:
• Probably not, he can’t revoke because it causes substantial impairment to him, the
buyer, but not a reasonable person
Week 5
• Risk of Loss: No breach
• §2-509(3), General Rule: where the seller is a merchant, the risk of loss passes to the buyer on the
buyer’s actual receipt of the goods; where the seller is not a merchant, risk of loss passes to the
buyer when the seller tenders delivery.
o Always begins at the seller (they have control of the goods, insurance)
• §2-510: Risk of Loss: Breach: the risk of loss will always remain with the seller if he delivers non-
conforming goods until he cures or the buyer accepts them, regardless of the degree of non-
conformity.
• Exception: installment contracts (substantial compliance is ok, needs to substantially impair)

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o §2-510: Whoever has possession, their insurance will cover to the extent that insurance
covers, any excess amount must be paid by the breacher.
 Jakowski v. Carole Chevy
 Chevy camaro returned to get repairs after purchase; stolen over night at the dealer
 Rule: D has to cure and P must accept the goods in order for the risk to pass
 Seller was in breach; no evidence that they cured.

• How do you determine who bares the risk?  Shipment Contract v. Destination Contract
• §2-509 (a): Shipment contract: risk of loss transfer to the buyer when the seller has duly tendered
the goods to the carrier (risk is on buyer during shipping)
• §2-509 (b): Destination Contract: risk of loss transfers to the buyer when the seller has duly
tendered the goods from the carrier (risk is on seller during shipping)
• Problem 46: Seller has the risk because the buyer never picked up the car
• Problem 47: risk of loss passed to the buyer because the non-merchant seller
tendered the piano at sale
• §2-319: F.O.B: Free on Board can indicate either a shipment or destination contract; always
contains a named place and the risk of loss passes at the named place.
• §2-319 (2): F.A.S.: Free Alongside: the seller is only responsible up to the point of the dock; the
buyer is responsible for the risk and costs after the goods are at the dock.
• §2-321: C.I.F/C. & F.: ALWAYS shipment terms: C.I.F: the goods, cost of freight, and cost of
insurance is included on the package and paid by the buyer C& F: the seller is required on
behalf of the buyer to purchase insurance, cost of freight, but risk is still on the buyer.
• §2-322: Delivery Ex-Ship: the seller is responsible for the risk until the goods are of the ship and
on the dock of the destination.
• Presumption of a Shipment contract if not stated.
 Problem 48/Problem 49/Problem 50: in book; the buyer has to be able to identify what
goods are his in order to insurance them; seller has the risk until that point after the
diversion the railroad track.
 Cook v. Schrlock
 Hydraulic press brake lost in transit; F.O.B. MSI warehouse (the seller)
 Ct: risk was on the buyer, once the goods left the warehouse of the seller.

Week 6
• Generally, sellers can’t be bailees under §2-509 (2)
• §2-504: where the seller is req’d or authorized to send the goods to the buyer and the contract
does not require him to deliver them to a particular location, then unless otherwise agreed, he
must: promptly notify the buyer of shipment.
 Rheinberg-Kellerei v. Vineyard Wine
 Wine shipment lost at sea; info from shipping never got to buyer, only to the seller’s
agent.
 Told shipping info after the ship was lost; shipment contract
 Buyer wins, seller failed to notify

• Impossibility of Performance
• §2-613: Casualty to Identified Goods: if the contract identifies specific goods, and these goods
suffer casualty without fault of either party and before the risk of loss passes to the buyer:
o If the loss is total, the contract is avoided/terminated.

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o If the loss is partial or the goods have deteriorated,
 The buyer may demand inspection AND
 As his option, he can either treat the contract as avoided/terminated OR
 Accept the goods with due allowance from the contract price, but without further
rights against the seller.
• If part performance is possible, then the contract is not avoided, unless the goods
are specifically identified in the contract.
• Seller must notify the buyer of the delay, non-delivery, or if there was part
performance
• §2-614: Substituted Performance: 1) where without fault of either party, the agreed loading or
unloading facilities fail or the agreed type of carrier becomes unavailable or commercially
impracticable, but a commercially reasonable substitute is available, such substitute performance
must be tendered and accepted. 2) If the agreed means or manner of payment fails because of
domestic or foreign government regulation, the seller may hold or stop delivery unless the buyer
provides means or manner which is commercially substantially equivalent.
• §2-615: Excuse by Failure of Presupposed Conditions:
o A seller is entitled to claim excuse by failure of presupposed conditions when a contingency
has occurred,
o The non-occurrence of which was a basic assumption of the contract OR
o When a government regulation is implemented after the making of the contract and the
seller is unable to provide a reasonable substitute.
 The frustrating event must be severe and not reasonably foreseeable.
• Comment 1: increased cost alone does not excuse performance unless the rise in
cost is due to an unforeseen contingency; a rise or collapse of the market is not a
justification either.
• §2-616: Buyer’s Alternatives: Upon receiving notice, the buyer may:
o Terminate the contract as to any delivery or as to the entire contract
 However, if the buyer fails to respond within a reasonable time, 30 days or less, the
contract automatically lapses.
 Problem 65: §2-613: goods need to be identified; 615 relevant here;
 Problem 66: total loss of identified goods; so the K can be avoided.
• Arabian v. Lasma Arabian
• Horse purchase; died before promotion period over
• Commercial Frustration: circumstances beyond the control of the parties which
render performance of the contract impossible and exonerate the party failing perform;
requires that the supervening event be reasonably unforeseeable.
• Can still promote dead horse; not avoidable as impossible.
• Problem 67: Rising prices is not a way to avoid; unless there is an embargo, gov’t
action that makes it impracticable. Seller must do everything they can to make sure that
the source of the goods doesn’t fail.

o Problem 68: Buyer’s Restitution:


 Add up total cost of performance
 Calculate 20 percent of the total cost of performance or 500, whichever is less
 Add up the amount actually paid on the K
 Deduct from the amount actually paid 20 percent of the total cost of performance, or 500,
which ever is less

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 =Amount recoverable

• Seller’s Remedies
• Start with §1-106 (1): the remedies provided by this Act shall be liberally administered to the end
that the aggrieved party may be put in as good a position as if the other party had fully performed
but neither consequential or special nor penal damages may be had except as specifically provided
in this Act or by other rule of law.

• Unaccepted Goods:
• §2-706: chief remedy, buyer not accepted, repudiates before delivery or rejects:
o The seller may resell the goods concerned or the undelivered balance;
o If made in good faith and is commercially reasonable, the seller can get the difference btw
the resell price and the contract price.
 §2-706: the seller has the ability to resell to someone else and get damages of the
difference and incidental damages (but no consequential damages)
• Why? Incidental: damages trying to prevent the breach;
• Consequential: all general damages that are not incidental.
o Seller is in the business of selling and should have someone else to sell to.
o But buyer can recover incidental and consequential
• §2-703: Seller’s damages under breach of K
• §2-708: if the seller doesn’t resell the goods:
o The seller can sue for the difference btw the contract price and the market price;
o The lost volume seller (profit) who has an unlimited source of inventory, he can sue for the
lost profits from the contract.
 Seller chooses btw 706 and 708
• (§2-706 &) §2-708: seller is trying to sell, buyer won’t accept; if you don’t try
to resell, then you can get damages for incidental to the breach
• §2-708: “reasonable overhead” Ct’s not clear on what is reasonable,
relates to inventory of seller.

• Buyer Accepted the Goods:


• §2-709: Seller’s Remedies:
• If the buyer has made a technical acceptance of the goods or if the goods are destroyed within a
commercially reasonable time after the risk of loss shifts to the buyer, the seller can sue.
o If the seller still has possession of the goods (or the risk of loss at the time of their destruction),
damages are measured by other sections.
o Appropriate for seller to sue for the full purchase price of the contract when:
 Technical acceptance by the buyer;
 Risk of loss has passed to buyer and goods are destroyed/damaged within a
commercially reasonable time after the risk of loss passed;
 Buyer will not pay for the goods and there is no market for the goods. (§2-704:
specially manufactured goods)
• Problem 69: Seller can go for the contract price; buyer had accepted under 2-709,
had the risk of loss on receipt of the goods; buyer had a reasonable duty to take care
of the goods.
• Teradyne v. Teledyne

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• D cancelled test system order, refused to accept another from the P; resold for the
same price, plus reassembling costs.
• Wages should have been deducted; all other calculations of damages correct
• Questions, 317: “Proceeds of resale” 2-708: drafting error, courts don’t subtract
the proceeds of the resale.

Week 7:
• Buyer’s Remedies
• §2-711: general rule of buyer’s remedies
• Buyer must give reasonable notice
o Can cover; recover damages for non-delivery; specific performance

• Accepted Goods:
• §2-714: Where buyer has accepted goods under §2-606 and given notice, may recover damages for
any non-conformity of the tender;
o Measure of damages is the difference at the time and place of the acceptance btw the value
should have been, unless special circumstances can be shown.
 Under §2-607 (3) (a), the buyer may still sue for a breach of warranty if notice of the
defect has been given to the seller within a reasonable time after the defect should have
been discovered.
• §2-715: Incidental and Consequential Damages:
o Incidental: reasonably incurred expenses of inspection, receipt, transportation and care
and custody of the goods
o Consequential damages as a result of seller’s breach: any loss resulting from general or
particular requirements which the seller at the time of contracting had reason to know and
which could not be reasonably prevented by cover.
 Includes injury to person or property proximately caused from the breach of
warranty.
 Burden is on the buyer
 Recovery is denied unless the buyer first attempts to minimize the damages in good
faith
• Problem 74:
• A) Warranty? Yes, implied warranty of merchantability (is the piano fit for its
ordinary purpose)
• B) Only the piano cost can be recovered under 2-714
• C) Consequential: reason to know of his unique situation is different than the
forseeability standard of Hadley
• Problem 75: Yes, she can refuse to pay the bill, but she must give notice
• Problem 76: Consequential damages can be disclaimed, but the damages are
incidental here (storage costs)
• §2-717: The buyer can also deduct all or any part of the damages resulting from any breach of the
contract from any part of the price still due under the contract, if the seller has notice.

• Unaccepted Goods: Buyer’s remedy is to go out and cover under §2-712


• §2-712: after breach the buyer may cover by making in good faith and without unreasonable delay
any reasonable purchase of or contract to go purchase goods in substitution

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o The buyer can recover from the seller in damages the difference btw the cost of cover and
the contract price with any other incidental or consequential damages
o Failure to cover doesn’t bar another remedy (not mandatory),
o Comment: if you don’t cover, you can’t receive consequential damages
• Problem 77: Damages of 2.5k; cover within a reasonable amount of time? Yes,
damages ok.
• Hughes Communications v. US
• NASA and satellites contract; Pres says not no private satellites are to launched
by NASA, private company had to find replacement to launch of 3 of 5 satellites of
the contract; sued for cover.
• Two ways to measure the damages analyzed by the Ct
• Ct: reasonable cover
• Problem 78: a) 2-712 damages= cost of cover- k price, which is 750- 750, so no
damages to recover.
• 2-713: if could not cover, 900 minus contract price
• Tongish v. Thomas
• Sunflower seed sale; Middle man is suing for damages on the breach of k by the
seller to the buyer.

• Other Remedies:
• Anticipatory Repudiation
• Contract is cancelled before performance is due, but you can sue NOW for breach and not wait
until performance was due and passed.
o Has to be a definitive statement of cancellation
• A/R: excuses the condition of being ready, willing and able to perform and may sue right away, BUT if
PIP, then you must wait until the time of performance (wishy washy about cancellation)
o §2-609: right to adequate assurance of performance when there is a reasonable basis for
assurance.
• §2-610: Anticipatory Repudiation: The aggrieved party has the right to: wait for performance for
a commercially reasonable time; resort to any remedy for breach, even though he has notified the
repudiating party that he will await performance and has urged retraction; AND in either case,
suspend his own performance or proceed on the seller’s right to identify goods to the K
notwithstanding breach or salvage unfinished goods.
• §2-611: until the repudiatory parties’ next performance is due, repudiation can be retracted unless
the aggrieved party has since cancelled or materially changed his position or otherwise indicates
that the repudiation is final.
 Problem 80: Most courts hold that you should measure damages at the end of a
commercially reasonable time for covering; Here, sloppy drafting because the
language “learned of breach” in §2-713 was meant only to apply when the buyer
first discovered a breach.

• Statute of Limitations: four years from the date that the goods are dully tendered; can be reduced
to one year by parties, but no more than 4years.
• §2-725: SOL in Contracts for Sale
• 1) Clock starts ticking when breach occurs, regardless of the aggrieved parties’ knowledge of the
breach;

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• 2) Breach of warranty occurs when tender of delivery is made except where the warranty
explicitly extends to future performance of the goods and discovery of the breach must await the
time of such performance the cause of action accrues when the breach is or should have been
discovered.
 Poli v. Chrysler
 Timing belt problems, extended warranty of 7 years; 5 years after purchase, sued
 Issue: Accrued at tender of car or continues because of the future performance of the
repairs?
 Ct: General rule of tender of delivery is starting point doesn’t apply; the exception does,
because the “promise” of warranty extends to future performance on the warranty of 7
years.
• Can’t be breached until the car needs to be repaired

• Article 3: Negotiable Instructions: CHECKS


• HIDC: Super Plaintiff: The only defenses you can use is the there is something wrong with the check

Week 8
ARTICLE 3 & 4
Article 3: drawee bank
Article 4: checks: drawee bank becomes the payee’s bank

• Article 3 is more general; negotiable instruments, CHECKS


1. Paper that can be substituted for cash money
2. Bank becomes your contractual creditor
• HIDC: Super Plaintiff: The only defenses you can use is the there is something wrong with the
check

• Article 4 is more specific


1. Banking
2. Relationship b/w bank and customer

• Who should bear the risk of loss for this money substitute?
• If conflict, the more specific law takes priority UNLESS the legislative intent says otherwise

N+N=H+G
V
NN = HDC

Negotiable Instrument Analysis


1. Negotiability (Right form) + Negotiation (transferred correctly  Order or Bearer Paper) =
Holder
2. Holder + Good Faith + Value + No Notice = Holder in Due Course Super Plaintiff

• Order  Made out to a certain person and only to that person


• Bearer  Paper is exactly like money, only needs physical possession for control
• Holder  Person has the right to possess that piece of paper

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For HIDC (immune to almost all affirmative defenses), must show:
1. Gives value;
2. Received paper in good faith;
AND
3. No notice that there was anything wrong w/ paper.

Vocabulary
1. Promissory Notes – 2 parties, a written promise by a maker to pay money to a payee.
a. Maker: person who issues it and promises to pay
b. Payee: person to whom the note is made payable
2. Drafts (Checks) – 3 parties, an instrument that the drawer orders a designated drawee to pay
money to a third person payee.
a. Drawer: creates the draft and orders the drawee to pay
b. Drawee: person to whom the drawer addresses the order of payment (usually the bank)
c. Payee: person entitled to payment

• Problem 83
• Portia is a Remitter – 3-103(a)(11)
• The Bank is the Drawer and takes the liability upon negotiation

1. Holder in Due course: holder gives to person for value, the third person is immune from all defenses and the
drawee must pay.

NEGOTIABILITY
A Paper must have the following characteristics to qualify to have Negotiability, otherwise, if the paper is
non-negotiable, the paper’s transfer is only an assignment of contract rights and later holders of the contract
take subject to all defenses arising from the underlying transaction:
1. Writing (but doesn’t have to be on paper);
a. §3-104(a): must be in writing, but doesn’t need to be on paper.
2. Signed
a. §1-201 (39) and (27): anywhere on the document, with the present intent by the party
executing to accept the writing.
i. A symbol printed, stamped or written
ii. Initials
iii. Thumbprint
1. Signature by an agent, or with assumed or trade name: will bind the maker or
drawer
2. Unauthorized or forged signatures will not bind the maker, absent ratification or
estoppel, but will bind the actual signer.
3. Unconditional Promise/Order - §3-106
a. No other “hoops” to jump through in order to receive money
b. NOT unconditional if:
i. Express condition to payment, (implied are permissible);
ii. Promise/order subject to another writing thru incorporation (reference to
another writing does not destroy negotiability though); OR
iii. Rights/Obligations w/ respect to promise as stated in another writing
c. Allowed to limit payment from a certain account
d. If statutory notice is placed on instrument, holder cannot become a HDC b/c cannot jump
the “Notice” hurdle.

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i. Is still a holder, but all defenses can be raised against them
e. Conditions must be expressly stated!
4. Fixed Amount of Money
a. Need to know the exact amount of money due, at the least through a mathematical
calculation §3-112b
b. Must be an authorized currency §3-107
5. “Courier w/o Luggage” Requirement § 3-104a
a. Cannot be burdened w/ anything other than unconditional promise/order
6. Payable on Demand or at a Definite Time - §3-108
a. “Payable on Demand” – (i) explicitly stated payable on demand/at sight or indicates
payable at will of holder or (ii) does not state time of payment
b. “At a definite time” –
c. If both – payable on demand before fixed date, and after fixed date, on that date
d. §3-113  Date stated determines time of payment if payable on fixed period.
i. If undated – date is date of issue or date of first possession of holder
7. Payable to Bearer or to Order - §§ 3-104(a)(1), 3-109
a. You need to place the “to Order” language in for it to be considered Order paper
i. Possession and a signature; the instrument is payable to a specific person and until
that person indorses it, it cannot be validly transferred.
b. Bearer paper, with possession, is payable to the holder of the paper and not a specific
person.
• Problem 84
• Yes, the “X” is a signature b/c there was a present intent to authenticate

• Problem 85
• Yes, a signature can use any name including a trade name if there is present intent
- §3-401(b)

• Triffin
• Did the money orders qualify as negotiable instruments?
• AmEx argued that legend qualified as a express condition that makes the MOs
non-negotiable
• Court  Legend was simply a warning and an implied condition, thus they were
negotiable instruments
• Dissent  use of the word “if” makes the condition express and the majority’s
use of Napoleonic code was moot since decision was based upon UCC

• Problem 86
• No, payment is subject to an express condition of the independent signing of a K -
§3-106(a)
• Yes, statement only refers to another writing §3-106(a)
• Yes under §3-106(b)(i)

• Problem 87
• Non-negotiable since payment is conditioned upon deposit w/in the stated time-
frame

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• Problem 88
• No, the instrument is still negotiable, under §3-106(b) it can reference to another
writing for rights to collateral…

• Problem 89
• Negotiability is not destroyed b/c reference to writing outside the instrument to
determine interest

• Problem 90
• Yes, it makes the payee promise more than paying
• No, 3-14(a)(3)(i) – protects collateral
• (3)(iii) – confess judgment
• No – A&S
• No (3)(i) – power to give collateral

• Woodworth
• Did the forfeiture clause destroy negotiability?
• Yes, since the clause was to be exercised by the partnership and not the holder,
and clause can be enacted before default could occur.
• Such a provision must stay w/ the holder

• Problem 91
• No - §3-108(b)
• Yes – no specific date/time stated
• No - §3-108(b)(ii)
• Yes – need a date
• No - §3-108(b)(iv)
• Yes – it’s maker’s option NOT holder
• Yes – we don’t know Al’s lifeline
• No - §3-108(b)(ii)
• If know date  Yes, if not  No

How do you negotiate the Paper?


1. Order Paper
a. Indorsed by the proper person (Indorser), AND
b. Delivery of instrument to the transferee (Holder)
NOTE: An INDORSEMENT is a signature placed on an instrument by the payee or any
later transferees.
c. Indorsement should be on the back
i. If multiple payees:
1. “and” all payees must indorse
2. “or”/ “and/or” can be indorsed by any of the payees for valid negotiation.
2. Bearer Paper §3-201
a. Needs no indorsement
b. Delivery of the instrument to the transferee (Holder)

Problem 92

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1. It’s Order paper – it need to specifically state “Pay to the Order of…”
2. Yes, it’s bearer paper (a)(1), comment 2
3. Yes, it’s bearer paper (a)(1)
4. Yes, it’s bearer paper (a)(3)
5. Yes, it’s bearer paper (a)(3) – not an identifiable person
Problem 93
1. It’s incomplete, but qualifies as bearer paper under 3-109(a)(2)Technically
it’s Bearer, but Banks consider it Order paper  identified John Doe’s estate
2. Order paper – it’s the office that’s significant
3. Check is still negotiable - §3-104(c);
It must conspicuously stated that instrument is NOT NEGOTIABLE;

Transfer and Negotiation


1. Issuance §3-105: delivery of an instrument by the maker or drawer to a holder.
2. Transfer(s) §3-203
a. Every legally significant movement of the paper b/w issuance and presentment
b. Physical transfer of the instrument vests in the transferee whatever rights the transferor
had in the instrument
c. If the physical transfer is done in a way to make the transferee a HOLDER, then the
transfer is called a NEGOTIATION.
3. Presentment §3-501: person must:
a. Present the instrument
b. Present a reasonable ID
c. Sign a receipt on any payment made or surrender the instrument for full payment.

Order Paper
1. When a payee wants to transfer it to another person, the drawee bank will require the payee’s
indorsement. §3-501(b)(2)(iii)
a. Blank Indorsement – when the payee simply signs the back of the instrument.
Legal effect? It converts the paper into bearer paper
b. Special Indorsement – to preserve the “order” character, the original payee must specify a
new payee by writing “Pay (name).”
c. The new payee becomes a holder as soon as the instrument is delivered. (Do not need “pay
to order of” here)
d. Forgery of the special indorsee signature= no holder following the forgery.
• Qualified Indorsement: “without recourse” limits the liability of the indorser
• Restrictive indorsement: “deposit only” restricted to that action
• *Negotiability is not affected by the language written on the instrument during the
course of negotiation
Problem 94
1. Hansen – drawer
2. MNB – Drawee
3. Egger – Payee
4. ONB – deposit bank
5. Everyone qualifies as a holder except for Hansen
6. Yes - §4-205, depository bank becomes a holder and can negotiate your
check whether or not it’s indorsed
7. Language made it a special indorsement paper and made it Order paper
8. Egger, Cornucopia, and ONB are indorsers

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Problem 95
1. If made to both persons, both must indorse - §3-110
2. If made to either, only one must indorse
3. If ambiguous, either may indorse

Problem 96
Bank should have Portia sign under both names

Problem 97
Signatures must by physically attached to qualify as “affixed” – stapled, glued, etc.

**As long as proper form and transferred in the proper way = HOLDER. If you meet property
requirements = HOLDER IN DUE COURSE…
EXCEPT FOR
Forgery of Payee’s Name
1. If an instrument is payable to the ORDER of a named payee, only that payee can
become a HOLDER
2. That person does not become a holder until PAYEE gets possession of the
instrument.
3. W/O the payee’s indorsement, no later transferees will have taken by a valid
NEGOTIATION.
4. An unauthorized signature (forgery or signature by non-agent) is NOT effective to
negotiate the instrument.
5. Following a forgery of the payee’s name, no later transferee (no matter how
innocent) can qualify as a holder.

Week 9
• Negotiability + negotiate = Holder + value (good faith, no notice)= Holder in due course
• Negotiability: (7 elements for a check to be negotiable)
o Unconditional promise or order
o Fixed amount of money
o Courier without luggage
o Payable on demand or at definite time
o Payable to bearer (all you need is possession) or order
o Signed
o Writing

• Forgery of the Payee’s Name


• If an instrument is payable to the order of a named payee, only that payee can become a
holder.
• That person does not become a holder until the Payee gets possession of the instrument.
• Thereafter, no one can qualify as a Holder until the payee indorses the instrument.
• Without the payee’s valid indorsement, no later transferees will have taken by a valid
negotiation of the instrument, which remains the payee’s property.
• An unauthorized signature (i.e., a forgery or signature by a non-agent) is not effective to
negotiate the instrument.

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• Following a forgery of the payee’s name, no later transferee (no matter how innocent, no
matter how good the forgery, no matter how far down the line the taker is, etc.) can qualify
as a holder.
 Who ever comes into possession of forged paper can never be a HIDC.
 Problem 98:
 When Laura Lawyer’s briefcase was stolen, it contained her monthly
paycheck from the law firm for which she worked, made payable to her order.
She has not indorsed it. The thief who stole the briefcase forged her name to
the back of the check and transferred it to an innocent party, Grocery. When
the latter tried to cash the check at the drawee bank, the bank alerted Laura,
and she arrived at the bank immediately. Can she retrieve the check from the
Grocery? See §3-306.
o Yes, forgery is not effective to negotiate the instrument. (3-306).
Cornocopia is not a holder.
o Can’t be a holder in due course because of the forgery

 Problem 99:
 Assume that on receiving her paycheck, Laura had signed her name to the
back of the instrument, which was then blown out a window and landed at the
feet of a criminal, Harry. Harry took the check to the Grocery and told the
manager that he was Lance lawyer, Laura’s father, and asked the manager to
cash it for him. The manager made Harry indorse the instrument (reason: to
make Harry contractually liable thereon (§3-415(a)), so Harry wrote “Lance
Lawyer” under Laura’s name. Is the Grocery a holder?
o No

 Problem 100:
 Assume that Laura wanted to indorse the instrument over to her mother, so
on the back she wrote “Pay to Lilly Lawyer” and then signed her own name.
Thus indorsed, the instrument was blown out the window, and Harry found it.
He indorsed “Lilly Lawyer” under Laura’s name and transferred the check to
Grocery. Is the Grocery a holder? See §3-205(a).
o No, forgery is not effective to negotiate, so Cornocopia is not a
holder. Lilly had to endorse first.
o Special indorsement (to her mother) makes it order paper
 Rule: The rule here is that ay unauthorized indorsement of the payee’s name or any
special indorsee’s name is not a valid negotiation and gives subsequent transferees
no legal rights in the instrument no matter how innocent they are or how far
removed from the forgery. The same rule applies to missing indorsements of the
payee of special indorsee; later possessors of the instrument do not qualify as
holders. BUT once an instrument becomes bearer paper, subsequent unauthorized
signatures have no effect on the holder status of later takers, since valid indorsements are
not required to negotiate bearer paper (§3-201(b)).
o Problem 101:
o Laura never had a course in commercial paper, so when she received her
paycheck, she simply wrote her name on the back and mailed the check to
her mother. Her mother needed some reason to hold onto the check for a
week before cashing it, so she wrote “Pay to Lilly lawyer” above Laura’s

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indorsement. Has the check now become order paper requiring the
mother’s indorsement for further negotiation? See §3-205(c)?
 Yes, under 3-205(c), holder can make bearer paper into order
paper.

 Acquiring Holder in Due Course Status


 §3-301: Person entitled to enforce instrument
 §3-302: Holder in Due Course
 Section 1: when you’re not a HIDC if: the instrument when issued or negotiated if apparently
forged or altered or irregular or incomplete as to call into question its authenticity
 Section 2: when you’re a HIDC if: took for value, good faith, without notice that something may
be wrong with the instrument (no notice of alteration, unauthorized signature, recoupment)
o HIDC Requirements:
 1) Holder: possession of the instrument through valid negotiation, with no forgeries
of the payees name
• Note: Drawee bank (who pays the instrument) can never be a holder because
it is presented to them for payment and not negotiated.
• Note 2: Payees can be HIDC under §3-302 exceptions, but are normally not.
• Comment 4: Theoretically, a payee can be a HIDC, but they are usually to
close to the circumstance, they can’t get around the notice/good faith
requirement.
 2) For value §3-303: a lien, a performed promise, an irrevocable obligation, a
negotiable instrument.
• A future promise is not enough; lien must be by agreement
• The “value” of the instrument can be to secure a debt.
 How do you give “Value”: it has no value until its promise is performed
§3-303: Value and Consideration:
(a) An instrument is issued or transferred for value if:
(1) the instrument is issued or transferred for a promise of performance, to the
extent the promise has been performed;
(2) the transferee acquires a security interest or other lien in the instrument
other than a lien obtained by judicial proceeding;
(3) the instrument is issued or transferred as payment of, or as security for, an
antecedent claim against any person, whether or not the claim is due;
(4) the instrument is issued or transferred in exchange for a negotiable
instrument; or
(5) the instrument is issued of transferred in exchange for the incurring of an
irrevocable third party by the person taking the instrument.
(b) “Consideration” means any consideration sufficient to support a simple K. The
drawer or maker of an instrument has a defense if the instrument is issued
without consideration.
 3) In Good Faith: fairness in the transaction according to reasonable commercial
standards (objective) and honesty in fact in the transaction (subjective)
 4) No Notice of any defects, measured at the time the person gave value and becomes
a holder.
o “Good Faith” and “Notice”

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o To become a HDC, the owner of the instrument must basically be a bona
fide purchase – that is, the owner must have given value for the instrument
in good faith (defined in §1-201(19) as “honesty in fact in the conduct or
transaction concerned,” but redefined in §3-103(a)(4) to include not only
“honesty in fact” but also “the observance of reasonable commercial
standards of fair dealing”), thus making the test one that is both subjective
and objective. Comment 4 of §3-103(a)(4) says that ordinary care means
observance of reasonable commercial standards of the relevant businesses
prevailing in the area in which the person is located. The holder must also
be without notice that there are problems with the instrument. If, at the
time value is given for the instrument, a person has notice of a defense the
maker of a note has against the payee, the holder cannot be said to take the
note with the good faith expectation that it should be paid in spite of the
defense.
o If you have notice, you didn’t act in good faith under the UCC

• Comment 1: The distinction between value and consideration in Article 3 is a fine one. Whether an
instrument is taken for value if relevant to the issue whether a holder is a HDC. If an instrument is not
issued for consideration the issuer has a defense to the obligation to pay the instrument. Outside Article
3, anything that is consideration is also value, but a different rule applies in Article 3.
Example #1:
X owes Y $1000. The debt isn’t represented by a note Later X issues a note to Y for the debt.
Under subsection (a)(3) X’s note is issued for value. Under subsection (b) the note is also issued
for consideration whether or not, under K law, Y is deemed to have given consideration for the
note.
Example #2:
X issues a check to Y in consideration of Y’s promise to perform services in the future. Although
the executory promise is consideration for issuance of the check it is value only to the extent the
promise is performed. Subsection (a)(1).
Example #3:
X issues a note to Y in consideration of Y’s promise to perform services. If at the due date of the
note Y’s performance isn’t yet due, Y may enforce the note because it was issues for
consideration. But if at the due date of the note, Y’s performance is due and hasn’t been
performed, X has a defense. Subsection (b).

• Problem 102: No, partial performance by the lawyer, so lawyer can keep the
check according to the contract.
• Problem 103: Zach bought a car for his business from Fillmore, signing a
promissory note for $23,000 payable to Fillmore. Fillmore sold the note to the Pierce
Financing Company for $22,800, a $200 discount. The car fell apart, and Zach refused to
pay. Is the finance company (assuming good faith and lack of notice) a HDC for the
$23,000 or $22,800? If Millard Fillmore, the owner of Fillmore, owed his mother
$21,000 and gave her the note with the understanding that the extra $2000 was a
Mother’s Day gift, would the mother be a HDC for the full amount?
o The Finance company is a HDC for the $23,000.
o Millard would be a HDC for only the $21,000 because she gave no value
for the other $2000 because it was a gift.

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• Problem 104: Tom tricked old Mrs. Nodding into writing a check payable to Tom
(she thought he was the agent for a local charity). The check for $1000 was drawn on her
bank, First County Bank. Tom took the check to his bank, Last National Bank, and after
indorsing it, put it in his checking account. Last National Bank sent the check to First
County Bank for payment, but by the time it got there Mrs. Nodding had stopped
payment so that the check was dishonored and returned to Last National. Is Last National
Bank a HDC? This question will be important if Tom has skipped town and Last National
decides to sue Mrs. Nodding under §3-414.
o It depends on whether they have had to give money out of their own
pocket. If the bank permitted Tom to get the money before the check was cleared
through the drawee bank, and there is not $1000 in Tom’s account, the Last
National Bank would be a HDC because they would have to pay out of their
pocket.
o HDC depends on whether it was given value (whether they are giving up
their money (HDC) or your money (no HDC because no value))

• Falls Church Bank v. Wesley Heights Realty, Inc.


• Customer deposited a check for $1400 in his bank account and withdrew $140.
Later the check was dishonored because a stop payment was placed on it. Customer had
skipped town in the interim. So his bank was out $140 of its own money. The bank sued
Wesley as a HDC.
• The depository bank did acquire a security interest in the deposited check because
they allowed Wesley to withdraw cash off a deposited check. A bank acquires a
security interest in items deposited with it to the extent that the provisional credit
given the customer on the item is withdrawn. §4-208.
• §3-303(a)(2) says that a security interest proves that value has been given.
• The depository bank gave “value” to the extent that it acquired a security interest
in the check. For purposes of achieving the status of HDC, the depository bank gives
value to the extent that it acquires a security interest in the item in question. §4-209.
• A bank may be a holder in due course while acting as a collecting agent for its
customer.
• The bank is a HDC as to $140, because that is what they have paid out of their
own pocket.

 Problem 105:
 Same situation as Problem 104 except that when Tom deposits the $1000 check in his
account, the account contains $500. Later that afternoon he withdraws $500. Is the bank a
HDC for any amount? See §4-210(b) (the FIFO rule: First in, First out.) What result if
he withdraws $750?
• The bank is not a HDC because they have failed to give value themselves; they
aren’t out of pocket anything.
• However, if he withdrew $750, the bank would be a HDC for the $250.

• General Investment Corp. v. Angelini


• Angelini hired Lustro to do repair work on their home. Their work contract said
that no payment was due until work was completed. Angelini signed a note payable
to Lustro that had a blank space as to when payment was due, this was blank when
Angelini signed it, but later a date was filled in by Lustro.

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• General Investment, a finance company, purchased the note from Angelini. Is
General Investment a HDC?
• General Investment Corp. required Lustro to deliver the home improvement
contract between Angelini and Lustro with the note knew payment wasn’t due until
completion of work.
• Rule: Ordinarily where the note appears to be negotiable in form and regular on
its face, the holder is under no duty to inquire as to possible defenses, such as failure
of consideration, unless the circumstances of which he has knowledge rise to the level
that the failure to inquire reveals a deliberate desire on this part to evade knowledge
because of a belief or fear that investigation would disclose a defense arising from the
transaction.
• No duty to inquirer, but burden to prove they didn’t have notice; but if there are
circumstances that are suspicious, you must inquirer to be without notice.
• By failing to get the actual required information, General Investment acted in bad
faith, so that they cannot obtain HDC status.

• Problem 106:
• The corporate treasurer of the Business Corporation was having major troubles
paying his personal bills, so finally he decided to embark on a life of crime. He used a
corporate check to pay his American Express bill, making the check out to “Amerex
Corp., 770 Broadway, NY, NY 10003” (the actual address of American Express). On
the corporate check requisition form he wrote a phony explanation that this check
represented shipping expenses. This caused no suspicions at Business Corporation
and, thus encouraged, he did it every month for two years. When Business
Corporation finally figured out what had happened, it sued American Express in
quasi-contract for all the money it had received in this fashion. American Express
replied that it was a HDC of these checks and, as such, was not amenable to this suit.
Business Corporation pointed to the suspicion circumstances and to UCC §3-302(a)
and 3-307 (arguing that the corporate treasurer was a fiduciary). How should this be
resolved?
o American Express is a HDC because they have given value up front,
expecting to get a payment back in return.
o No notice for AmEx; no defense for Business Corp.

• Anykind Case v. Talcott


• 93 year old man defrauded of 75k, 10k check is paid, 5.7k cashed; 10k should
have been cancelled; investment partners screwed him over.
• Ct: the manager should have gotten in touch with the person who wrote the
check before cashing it; it was suspicious.
• Check cashing place was not a HDC because the procedures they followed
was not commercially reasonable.
• Subjective standard: “honesty in fact” (puree heart, no knowledge)
standard; and objective standard: would someone in your industry have acted
the same way.
o As long as you honesty believe that you are acting fairly AND it is
commercially reasonable, you will be ok.

• Winter & Hirsch, Inc. v. Passarelli

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• D applied for $10,000 from the mortgage company, Equitable. They agreed to
pay back $16,000. Passarelli signed it. Equitable sold it to Winter and Hirsch.
• Passarelli’s defaulted, and Winter and Hirsch claimed that it was a HDC so that
they would get their money.
• It is significant that Plaintiff was a co-originator of the note because they were to
pay Winter and Hirsch directly instead of Equitable, and Winter and Hirsch’s name
was on the loan application.
• As a co-originator, they can’t claim that they are innocent as to the usury note,
they had knowledge all along.
• A reasonably prudent businessperson should have raised the question here;
they should have noticed that something was wrong.
• A person has notice of a claim or defense if the instrument is so incomplete, ears
such visible evidence of forgery or alteration, or is otherwise as irregular as to call
into question its validity, terms or ownership or to create an ambiguity as to the party
to pay. A person also has notice of a fact when from all the facts and circumstances
known to him at the time in question he has reason to know that it exists. They were
on notice here, so they do not achieve HDC status.

• Problem 107:
• Fred wrote a check on Jan 5, 2008, but mistakenly put down 2007 as the year. He
saw his error, crossed out the last digit, and wrote 8 above it. Can anyone become a
HDC of this instrument?
o Something is only an alteration if it is an unauthorized change. Here
he authorized the change, he did it himself, so this is not considered an
alteration and someone can become a HDC.

§3-304: Overdue Instrument:


(a) An instrument payable on demand becomes overdue at the earliest of the following times:
(1) On the day after the day demand for payment is duly made;
(2) If the instrument is a check, 90 days after its date; or
(3) If the instrument isn’t a check, when the instrument has been outstanding for a period of
time after its date which is unreasonably long under the circumstances of the particular
case in light of the nature of the instrument and usage of the trade.
(b) With respect to an instrument payable at a definite time the following rules apply:
(1) If the principal is payable in installments and a due date hadn’t been accelerated, the
instrument becomes overdue upon default under the instrument for nonpayment of an
installment, and the instrument remains overdue until the default is cured.
(2) If the principal is not payable in installments and the due date hasn’t been accelerated, the
instrument becomes overdue on the day after the due date.
(3) If a due date with respect to principal has been accelerated, the instrument becomes
overdue on the day after the accelerated due date.
(c) Unless the due date of principal has been accelerated, an instrument doesn’t become overdue if
there is default in payment of interest but no default in payment of principal.

• Problem 108:
• Ace Finance Company was the payee on a promissory note signed by John
Maker. On its face the note calls for John to make 12 monthly interest payments
before the note matures. Ace sold the note at a discount to Big Town Bank. If the

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note has written on it, in big letters, a penciled notation, “Missed Paying First
Installment,” can Big Town Bank ever qualify as a HDC?
o Yes. Under §3-304(c), a missed interest payment is not the same as
a missed principal payment. Under §3-304(b), only when principal
payments are missed and the holder is put on notice can they lose HDC
status.

o Problem 109:
o Dan Drawer wrote a check dated April 30 to Dr. Paine, his dentist, for
$80, in payment for services rendered. Dr. Paine was not aware that the check fell
to the floor behind his desk, where it lay until the end of August, when the janitor
found it. Dr. Paine then indorsed the check over to his local grocery store on
August 31, and it bounced on Sept 3, when the drawee bank informed the
manager of the grocery store that Dan had stopped payment because the dental
work had been done badly. Is the grocery store a HDC?
• §3-304 (a) (2): No, the date was on the check, so the grocery store was
clearly on notice that the check was overdue because more than 90 days had
passed since it was issued.

o Problem 110:
o When Ellen found out that the computer she had purchased didn’t work,
she was furious and decided not to pay the promissory note she was furious and
decided not to pay the promissory note she had signed. The note stated that it was
“payable at Busy State Bank” (which in this case means that the bank would pay
the note when presented and then expect reimbursement from the maker.) Harold,
the head cashier at the bank, took Ellen’s phone call and promised not to pay the
note when it was presented. Four months went by, and, on one hectic afternoon,
the bank paid the note by accident. Harold said he had forgotten the request not to
pay. The bank now demands payment, claiming to be a HDC. Is it?
o No. Problem 108 involves the “forgotten notice doctrine,” which
permitted a holder to forget notice and thus become a HDC if sufficient
time passed between the notice and the acquisition of the instrument. The
UCC does seem to retain the “forgotten notice doctrine” under §1-
201(25), but the courts don’t like this doctrine at all.

o §3-203: Transfer of Instrument; Rights Acquired by Transfer:


• (c) Unless otherwise agreed, if an instrument if transferred for value and the transferee doesn’t
become a holder because of lack of indorsement by the transferor, the transferee has a specifically
enforceable right to the unqualified indorsement of the transferor, but negotiation of the
instrument doesn’t occur until the indorsement is made.
 Comment 3: Subsection (c) provides that there is no negotiation of the instrument
until the indorsement by the transferor is made. Until that time the transferee
doesn’t become a holder, and if earlier notice of a defense or claim is received, the
transferee doesn’t qualify as a HDC under §3-302.

o Problem 111:
o Giant bought some machinery from Tractors, and in payment executed a
promissory note payable to the order of Tractors for $2000. Tractors sold the note

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without indorsement to the Friendly Finance Company for $1500. The maker of the note
refused to pay the note when it matured, stating that the machinery didn’t operate
properly. Friendly decided to sue Giant, and the day before the lawsuit was filed,
Friendly’s lawyer noticed that the note had never been indorsed by Tractors. He had
Tractors’ president specially indorse the note over to Friendly right away, and then the
suit was filed. Is Friendly a HDC?
o Friendly had notice before the indorsement so they are not a HDC.

• Jones v. Approved Bancredit Corp.


• Jones wanted to purchase a home. She was presented with several things to sign,
including an affidavit (sworn statement) that said the work was finished, but it hadn’t
actually started. She asked to have an attorney present, but they refused to start until
she signed and kept pressuring her to sign, so she finally signed it upon their
coercion. She signs a mortgage, a note, and the affidavit. The note was sold to
Bancredit and they gave value for the note. The home was destroyed during
construction. The construction company went out of business. Jones didn’t pay for
the unfinished home and Bancredit sued Jones for the value of the note, claiming to
be a HDC.
• The rule of balance involves balancing the needs of the installment-buying
community and the commercial community.
• The finance company is better able to bear the risk of the contracting party’s
insolvency.
• This court adopts the rule of balance. It should operate in favor of the installment
buyer for the reason that, in their opinion, Bancredit was so involved in the
transaction that it may not be treated as a subsequent purchaser for value.

• Sullivan v. United Dealers Corp.


• The Sullivan’s pleaded that the finance company wasn’t a HDC of the note and
that the contractor had constructed the house in an un-workmanlike manner by reason
of which they had been damaged (this is a personal defense); they sought to assert
their claim against the contractor as a defense against the finance company.
• The Sullivan’s argued that the finance company was not a HDC because they
were put on notice that there might be a defense on the note because of the faulty
construction of the dwelling house.
• “Notice” means notice at the time of the taking or at the time the instrument
is negotiated, and not notice arising subsequently. The time when value is given
for the instrument is decisive. The moment value is given without notice the
status as a HDC generally is definitely and irrevocably fixed.
• The Commercial Code provides that to be effective, notice to a purchaser must be
received at such time and in such manner as to give a reasonable opportunity to act on
it.
• The evidence failed to demonstrate any bad faith on the part of the finance
company at the time of the negotiation and transfer of the note to it. All of the
evidence demonstrated a complete lack of notice to the finance company that would
justify a finding that it failed to acquire the status of a HDC.

The Shelter Rule:

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• It has always been a basic rule of the CL that the unqualified transfer of a chose in action places the
transferee in the transferor’s shoes and gives the transferee all the rights of the transferor. This rule is
codified in §3-203(b), where it is made clear that even HDC rights can pass to a person not
otherwise entitled to them. Because the transferee of a HDC takes shelter in the status of the
transferor, §3-203(b) is called the shelter rule.

• §3-203(b): The Shelter Rule:


• Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any
right of the transferor to enforce the instrument, including any right as a HDC, but the transferee
cannot acquire rights of a HDC by a transfer, directly or indirectly, from a HDC if the transferee
engaged in fraud or illegality affecting the instrument.
• Triffin v. Somerset Valley Bank
• Hauser issued their payroll checks through ADP. Someone got hold of these ADP
checks and began passing them fraudulently. The fraudulent checks were written to
Triffin. Triffin demands payment from Hauser as HDC. The checks cleared through
Somerset Bank, which is why they are a party.
• The checks were negotiable instruments because they were signed and
everything appeared to be valid.
• §3-203(b): shelter rule:
o Comment 2 states that Ҥ3-203(b) states that transfer vests in
the transferee any right of the transferor to enforce the instrument
“including any right as a HDC.”
• If the transferee is not a HDC because the transferor didn’t indorse, the
transferee is nevertheless a person entitled to enforce the instrument under §3-301
if the transferor was a holder at the time of transfer. Although the transferee is not
a holder, under subsection (b) the transferee obtained the rights of the transferor
as holder. Because the transferee’s rights are derivative of the transferor’s rights,
those rights must be proved . . . .”
• §3-308(a) shifts the burden of establishing the validity of the signature
to the plaintiff, but only if the defendant specifically denies the signature’s
validity in the pleadings.
o Comment 1 provides that a specific denial is required to give
the plaintiff notice of the defendant’s claim of forgery or lack of
authority as to the particular signature, and to afford the plaintiff an
opportunity to investigate and obtain evidence . . . In the absence of
such specific denial the signature stands admitted, and is not in issue..
Nothing in this section is intended to prevent amendment of the
pleading in a proper case.
• The reason for the shelter rule: It may seem unfair to give HDC status to
non-purchasers and those who take with notice of defense, but on reflection the
unfairness disappears. If the rule were otherwise, the current holder would simply
pass the instrument back up the chain until it reached a former holder in due
course, who would then reacquire that status, sue the instrument’s creator, and
prevail. The shelter rule accomplishes the same result without all these maneuvers
and has the further benefit of promoting commercial confidence in the soundness
of the instrument once it has floated through the hands of multiple purchasers.

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o Comment 4: The operation of §3-203 is illustrated by the following example. Payee, by fraud,
induced Maker to issue a note to Payee. The fraud is a defense to the obligation of Maker to pay
the note under §3-305(a)(2).
o Example #1:
o Payee negotiated the note to X who took as a HDC. After the instrument became overdue X
negotiated the note to Y who had notice of the fraud. Y succeeds to X’s rights as a HDC and
takes free of Maker’s defense of fraud.
o Example #2:
o Payee negotiated the note to X who took as a HDC. Payee then repurchased the note from X.
Payee doesn’t succeed to X’s rights as a HDC and is subject to Maker’s defense of fraud.
o Example #3:
o Payee negotiated the note to X who took as a HDC. X sold the note to Purchaser who received
possession. The note however, was indorsed to X and X failed to indorse it. Purchaser is a person
entitled to enforce the instrument under §3-301 and succeeds to the rights of X as HDC.
Purchaser is not a holder, however under §3-308 Purchaser will have to prove the transaction
with X under which the rights of X as HDC were acquired.
o Example #4:
o Payee sold the note to Purchaser who took for value, in good faith and without notice of the
defense of Maker. Purchaser received possession of the note but Payee neglected to indorse it.
Purchaser became a person entitled to enforce the instrument but didn’t become the holder
because of the missing indorsement. If Purchaser received notice of the defense of Maker before
obtaining the indorsement of Payee, Purchaser cannot become a HDC because at the time notice
was received the note hadn’t been negotiated to Purchaser. If indorsement by Payee was made
after Purchaser received notice, Purchaser had notice of the defense when it became the holder.

• Problem 112:
• Happy, the used car salesman, sold Manny a lemon car, taking in payment a
promissory note for $2000 made payable to the order of Happy. Happy discounted the
note with Alfred, a local licensed money broker, who paid him $1700 and took the
note without knowledge of the underlying transaction. Alfred’s daughter Jessica had a
birthday shortly thereafter, so Alfred indorsed the note in blank and gave it to her as a
present. When the note matured, Manny refused to pay it to Jessica, the car had fallen
apart and he felt that he shouldn’t have to pay for a pile of junk. Is Jessica a HDC?
o She is not an actual HDC (because a gift, no value given), but she
has the rights of a HDC because Alfred was a HDC and she is taking it
under the shelter of a HDC.

• Problem 113:
• If in the above Problem Jessica had thereafter made a gift of the note to her
husband, Lorenzo, would Lorenzo have HDC rights? Does it matter if Lorenzo, prior
to the gift, knows of Manny’s problems with the car? If Manny won’t pay, is Alfred
liable to Lorenzo? See §3-305(a)(2) and 3-303.
o Lorenzo would also have rights of a HDC under the shelter rule.
Mere knowledge of the problems wouldn’t strip him of his HDC rights.
Alfred was a HDC and Lorenzo has rights of a HDC, the actual HDC will
win out.

• Problem 114:

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• After Lorenzo (from the last Problem) acquired the note, he sold it for $1800 to
Portia, a local attorney. She had no notice of problems with the instrument. When she
presented it to Manny for payment, he refused to pay and instead filed for bankruptcy.
May she recover from Alfred? See §3-305(b). If she does and prevails Alfred will
reacquire the instrument. Does the shelter rule give him Portia’s HDC rights? Does
Alfred reacquire his original HDC status when he gets the instrument back? Could he
sue Jessica or Lorenzo?
o She is an actual HDC, so yes. No, he gets his own rights back, not
hers.

Week 10
Reacquisition of an instrument:
• On reacquisition a holder is remitted to his former rights as regards all prior parties. Although the UCC
doesn’t expressly state this rule, the idea is implicit throughout the Code, and it is therefore still the law.
• §3-207: Reacquisition:
• Reacquisition of an instrument occurs if it is transferred to a former holder, by negotiation or
otherwise.
o A former holder who reacquires the instrument may cancel indorsements made after the
re-acquirer first became a holder of the instrument.
o If the cancellation causes the instrument to be payable to the re-acquirer or to bearer, the
re-acquirer may negotiate the instrument.
o An indorser whose indorsement is canceled is discharged, and the discharge is effective
against any subsequent holder.
 When a previous holder reacquires the instrument, he or she has the power to strike
the intervening indorsements.

Real and Personal Defenses/Claims


• Defenses Against a Holder in Due Course:
• Real Defenses §3-305:
o Infancy
o Mental Incapacity (adjudicated): contract must be void
o Duress
o Illegality: contract must be void
o Forgery
 An important issue is whether forgery is a real defense under the Code, so that it can be
raised against a HDC, or a personal defense, so that it cannot.
 The answer to this question lies in §3-401(a): “A person isn’t liable on an instrument
unless (i) the person signed the instrument . . .” and §3-403(a): “Unless otherwise
provided in this Article or Article 4, an unauthorized signature is ineffective except as the
signature of the unauthorized signer in favor of a person who in good faith pays the
instrument or takes it for value . . . .
o Insolvency
o Fraud in the Factum: fraud that induced the obligor to sign the instrument with no
knowledge or reasonable opportunity to discover the essential terms or nature of the
instrument= “excusable ignorance”
 A claim of recoupment is not valid against a HIDC
o §3-302b: Discharge in bankruptcy; assertable if HIDC has notice

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o Co-signor: If HIDC had notice of so-signor/suretyship, the HIDC takes subject to their
defenses.
o Alteration: change in the terms of the instrument may be a real defense
• Personal Defenses: cannot be asserted against a HIDC
o All other defenses
o Includes: fraud in the inducement, failure of consideration, estoppel
• Note: HIDC commonly doesn’t apply to consumer transactions under §3-305 e.

§3-305: Defense in Claims in Recoupment:


(a) Except as stated in subsection (b), the right to enforce the obligation of a party to pay an instrument is
subject to the following:
(1) REAL DEFENSES: a defense of the obligor based on (i) infancy of the obligor to the extent it is a
defense to a simple K; (ii) duress, lack of legal capacity, or illegality of the transaction which,
under other law, nullifies the obligation of the obligor; (iii) fraud that induced the obligor to sign
the instrument with neither knowledge nor reasonable opportunity to learn of its character or its
essential terms; or (iv) discharge of the obligor in insolvency proceedings; (real defenses that will
be upheld against a holder in due course)
(2) PERSONAL DEFENSES: a defense of the obligor stated in another section of this Article or a
defense of the obligor that would be available if the person entitled to enforce the instrument were
enforcing a right to payment under a simple contract.
(3) a claim in recoupment of the obligor against the original payee of the instrument if the claim arose
from the transaction that gave rise to the instrument; but the claim of the obligor may e asserted
against a transferee of the instrument only to reduce the amount owing on the instrument at the
time the action is brought.
(b) The right of a HDC to enforce the obligation of a party to pay the instrument is subject to defenses of
the obligor stated in subsection (a)(1), but isn’t subject to defenses of the obligor stated in subsection (a)
(2) or claims in recoupment stated in subsection (a)(3) against a person other than the holder.
 Comment 3: addresses this idea about claims and recoupment (if the buyer has a
warranty claim…) If the HDC is the actual seller of the goods, the seller can’t hide
behind the HDC status to get away with selling bad goods. So, claim in recoupment
is valid against a HDC, even if the seller is a HDC. But if talking about any other
HDC then it is ok (that is going to be a defense) that is not valid against any other
HDC. (last three sentences are important
• The obligor mentioned throughout §3-305 is the party to the instrument who is
being sued by the holder of the instrument. Thus, the obligor could be the drawer
of the draft, the maker of the note, or someone who indorsed the instrument. A
“defense,” of course, is the legal excuse the obligor may have to avoid paying the
obligation.
• Subsection (b) tells us that a HDC takes subject to the defenses listed in
subsection (a)(1), meaning that these defenses, if true, defeat the right of the HDC
to enforce the instrument. Subsection (b) tells us that a HDC is not subject to the
defenses raised in subsection (a)(2).
• Subsection (b) also states that a HDC holds free of “claims in recoupment” per
§3-305(a)(3), but what does that mean? Recoupment is the legal ability to subtract
from any payment due the amount the person is trying to collect the debt (or that
person’s predecessor) happens to own the debtor. For example, if I owe you $500
pursuant to our contract, and, as a result of your breach of that same contract, you

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have caused me $200 worth of damages, my claim in recoupment permits me to
subtract those damages and only pay you $300.

• Problem 115:
• Stephen bought a sailboat from Jack, paying $500 down and signing a $1000
promissory note for the balance due. Stephen loved everything about the boat except
the color, and he promptly repainted it his favorite color black. Prior to the sale Jack
had told Stephen that the boat was constructed so that it wouldn’t sink even in the
roughest weather. This proved to be untrue when the sailboat went down in the first
storm that came along, and it cost Stephen $300 to have it dredged from the bottom
and restored. In the meantime, Jack had given the promissory note to his father as a
birthday gift, and his father presented it to Stephen for payment at maturity. May
Stephen assert his damages against the father’s demand for payment? Same result if
the boat never sank, but Jack’s dog bit Stephen on the leg one week after the delivery
of the sailboat, and Stephen incurred $100 in medical bills as a consequence?
• Yes, even though he has no value (and is not a HDC) the father has an argument
to enforce it under the shelter rule… He would take shelter under Jack as a HDC.
Reason why father cannot lock this defense in recoupment is b/c the seller who is
HDC cannot shield himself from a claim in recoupment. (2nd part)… this is setoff
and Stephen cannot use setoff here. This is not a valid claim to reduce the amount
owed on the note. (no recoupment, thus no set off)

• Federal Deposit Insurance Corp. v. Culver


• Farmer gets into financial arrangement with Culver.
• What kind of fraud is a “real” defense Fraud in the factum. 3-305(a)(1)(iii).
• To the extent that a holder is a HDC he takes the instrument free from (2) all
defenses of any party to the instrument with whom the holder has not dealt except…
(c) such misrepresentation as has induced the party to sign the instrument with neither
knowledge nor reasonable opportunity to obtain knowledge of its character or its
essential terms.
• Comment 7 to §3-305:
o The test of the defense here stated is that of excusable ignorance of the
contents of the writing signed. The party must not only have been in
ignorance, but must also have had no reasonable opportunity to obtain
knowledge.

• Problem 116:
• When Ronald, newly rich, moved to NYC, he was impressed by the Brooklyn
Bridge when he first saw it. Simon, a con man, told Ronald that he was the owner of
the bridge (a lie, of course), and offered to sell it to him for $2,000,000 (described as
a bargain). Ronald paid $20,000 cash as a down payment and signed a promissory
note, payable to Simon, for the rest. Simon negotiated the note to a finance company,
which claimed to be a HDC. When Ronald discovered that Simon lacked title to the
bridge, he refused to pay the note. Does he have a real defense of fraud here?
• This is fraud but just not essential fraud, which is required to be good against a
HDC. This is personal defense, and this is not good against a HDC. (Fraud in the
inducement here (you knew what you were signing, but it turns out differently), not in
factum (you didn’t know what you were signing)

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• Problem 117:
• A child prodigy, Thomas, had been playing the piano since he was 3 and making
professional tours of the world since he was 12. He looked much older than he 17
years. He signed a promissory note for $800 payable to the order of Mercy Music
Company as payment for a piano, planning a tour with it. The company was unaware
of Thomas’ age. The payee endorsed the note over to Big National Bank for $725.
When the fist payment came due, Thomas refused to pay. He told the bank to come
pick up the piano – he was disaffirming the sale. Who wins?
• The kid wins b/c he is an infant and under 3-305(a) this is a real defense which is
valid against a HDC.

• Problem 118:
• Childe, 17, received a check for $1000 from his employer and decided to use it to
buy a car from Byron Auto, a used car dealership. He picked out the car he wanted,
indorsed the check in blank, and handed it over to the salesman. Byron Auto indorsed
the check on the back and cashed it at its own bank the Crusaders National Bank.
Before this bank could present the check to the drawee bank, Childe decided to buy a
horse instead of a car, so he returned the car to the dealer and asked for the check
back. Informed that the bank had it, Childe called up the bank and informed it of his
rescission of the K. When the bank refused to return the check to Childe, he filed suit,
asking the court to restrain the bank from presenting the check to the drawee and to
order replevin of the check. How should the court rule? It is clear that a HDC takes
subject to the defense of infancy, but does it take subject to a claim to the instrument
based on infancy? See §3-202, §3-305(a) and (b), and §3-306.
• Under 3-306, if the bank is HDC, they take free of the claim to the instrument and
the child won’t get the check back. But if the bank isn’t a HDC the bank doesn’t take
free of the claim to the instrument and the childe can get the check back.

• Sea Air Support, Inc. v. Herrmann


• What did the Nevada Statute hold regarding notes drawn for the purpose of
gaming?
o The statute provides that all notes drawn for purpose of reimbursing or
repaying any money knowingly lent or advanced for gaming are “utterly void,
frustrate, and none effect.”
• Was Sea Air an HDC? Why or why not?
o Sea Air had at least constructive notice of a defense against collection b/c
the check was payable to a casino, and Sea Air knew the check had been
dishonored. Consequently, Sea Air is not a HDC.
• If Sea Air had been an HDC, would it have been able to enforce the check then?
Now?
o This would have been a real defense b/c these types of promises are illegal
and illegality that makes something void that makes something a real defense
which is valid against a HDC.

• Kedzie & 103rd Currency Exchange, Inc. v. Hodge


• What is the distinction between void and voidable, and why does it matter under
article 3?

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o Voidable means you can proceed if you want to, but if a transaction is
utterly null and void then you could not precede.
o Utterly void is a real defense and something that is voidable is a personal
defense.
o If the particular illegality is voidable, then it can’t be raised as illegality
under 3-305
o If the particular illegality is void, then it is an illegality under 3-305.
• What is the difference between illegality of the transaction and illegality of the
instrument? Why does it matter?
o Illegality of the transaction is… and illegality of the instrument is
• Why did the dissent disagree with the majority?
o The dissent said that something was missing from section 3-305. 3-305
doesn’t make a distinction b/w the instrument being void and the transaction
being void which the majority used.

• Problem 119:
• When she heard her creditors fighting over priorities on her doorstep, Elsie knew
that she had no choice but bankruptcy. Among the debts that she reported to the
bankruptcy court was the loan she had taken from Point National Bank, which was
evidenced by a promissory note she had signed. In due course the bankruptcy
proceeding culminated in the judge’s ordering that Elsie be discharged from all her
scheduled debts. Two years later, the promissory note surfaced in the possession of
Shadbolt State Bank, which claimed quite convincingly to be a HDC. Must Elsie pay?
See §3-305(a)(1) and (b).
• No, under 3-305(a)(1)(4) which says discharge of the obligor in insolvency
proceedings, is a real defense that would be good against a HDC. Discharging
bankruptcy is always a real defense.
• Problem 120:
• Malvolio, a traveling salesman, bought a new car from Valentine Auto, signing a
note for $18,000. The payee discounted the note for $16,000 to the Orsino
Finance Company, which notified Malvolio that he should make all future
payments to them. Malvolio immediately sent them a check for the outstanding
balance (he had come into some money when his aunt died). He asked for the note
back, but Orsino was evasive. A week later Malvolio received a note from the
Olivia Finance Company saying that his note had been assigned to them and that
he should direct his payments to their office. When Malvolio protested, they made
HDC noises and became quite nasty. Malvolio, worried, comes to you for advice.
What should he do? See §3-501(b)(2); read §3-601 and 3-602. Does Malvolio
have remedies outside the Code? Think back to Contracts.
• Personal defense her (discharge by payment). Should have gotten the actual note
back b/c if it gets in the hands of a HDC then the fact that you already paid it is
not a real defense against a HDC and you may have to pay on it again.
• Problem 121:
• Slick, an expert con man, went into John’s and told John, the owner, that he was
Money, the richest man in town. John was too awed to ask for identification. Slick
then picked out several very expensive pieces of jewelry and signed Money’s name to
a promissory note to pay for them. Slick skipped town with the jewelry. When the

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note matured, the Tenth National Bank (a HDC to whom John has negotiated the
paper) presented it to Money for payment. May Money refuse to pay a HDC?
• Yes. This is not an effective authorized signature under 3-403. Under 3-305(a) there
is no party to pay the instrument b/c this was an unauthorized signature. He never
signed the document himself. So this is an effective defense b/c the party never
signed the document.

Defenses Against a Non-Holder in Due Course:


o All claims and both real and personal defenses may be asserted against anyone who doesn’t qualify as a
HDC.
o The only claim a non-HDC takes free of is a perfected security interest in non-negotiable instruments,
and then only if they are purchased for value in the ordinary course of business without notice of the
security interest.
o The most common of personal defenses are want of consideration (no consideration) and failure of
consideration (breach of contract, called a claim in recoupment in the Revision).

Liability of the Parties


Once a negotiable instrument is created and enters commerce, the parties thereto are automatically locked into
relationships that may lead to legal liability. When a problem arises in connection with one of these instruments,
the knowledgeable attorney (and the wise student) asks four preliminary questions:
(1) What negotiable instrument labels (drawer, payee, drawee, maker, indorser, guarantor,
accommodation party, acceptor, etc.) do the parties bear?
(2) What causes of action (contractual obligation: 3-412, 3-415, 4-101; Property (warranty) 3-416. 3-
417, 4-207, 4-208; Tort actions (conversion) 3-420; suits “off the instrument”) are available to each
party?
(3) What defenses are possible?
(4) Can liability be passed to someone else?
• If your signature is on the check, you are liable in some way.

o The Underlying Obligation


• The most common lawsuit connected with negotiable instruments, but not created by Articles 3 and
4, is a suit on the underlying obligation that generated the instrument.
o §3-310b: The Merger Rule: If someone owes you a debt, and you accept a check as
payment, the underlying obligation is merged into the instrument and is not available as a cause of
action. ( you can not sue on the debt)
o Suspension of the underlying obligation:
 Once the instrument is presented and dishonored, §3-310 b3 separates the underlying
obligation from the contract and separate causes of action exist for both.
 The holder may sue on the instrument or the underlying obligation, not both.
 If the liability of the instrument is discharged in any way, the obligation is also
discharged because of the merger.

o Liability on the Instrument


o §3-401: you are not liable on a negotiable instrument unless you sign it
o The basic rule found in §3-401(a) states “[a] person isn’t liable on an instrument unless (i) the person signed
the instrument . . . .” This means that no contractual liability arises on a negotiable instrument until and
unless a signature is placed thereon.

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o As soon as someone places a signature on a negotiable instrument, an implied contractual
obligation is automatically made promising to pay the instrument when it matures (unless in the
meantime a defense, real or personal, develops).
o Putting one’s signature on a negotiable instrument in anything other than an innocuous capacity
(“witness” for example) leads to a promise implied in law (actual intent being irrelevant) to pay the
instrument under certain circumstances.
o This obligation is sometimes described as liability on the instrument – that is, as a result of signing
the instrument, and the person who could enforce that liability was the current holder of the
instrument.

o The Maker’s Liability:


o §3-412: the maker promises to pay the promissory note according to its terms at the time of the
signature and is absolutely and primarily liable on the note.
o §3-116: If there is more than one maker, those who sign are presumed to be jointly and severally
liable to the rest of the world (meaning that they can be sued individually or as a group), but they
have a right to contribution from their co-makers if they are forced to pay more than their share.
o §3-116: joint and several liability, with right to contribution.
 Problem 127:
 Grimms National Bank indorsed the note in blank and discounted it to Anderson
Finance Co. When the note matured, Anderson sued only Winkin, demanding the
entire amount. May he defend on the basis that Anderson should have sued all three
of them, since the note contains the words “we promise to pay”? If Anderson wins,
can Winkin sue Blinkin for $2000? $1000? See §3-116.
No, it is perfectly ok to sue one of the three makers. They are jointly and
severally liable. Anderson can sue (according to the agreement that they were equally
liable) Winkin for$ 1000. If one is insolvent and you paid the entire $3000 then you
can go after the other one (split amongst 2) for $1500.

The Indorser’s obligation: the right to sue back up the chain of the previous indorser’s
• §3-415: an indorser becomes surety for all prior parties and promises to pay any later holders.
o This promise is conditioned on the indorser first being accorded the procedural rights of
present, dishonor and notice of dishonor.
• Anyone who signs an instrument is conclusively presumed to assume liability thru §3-204 (a)
• Three rights: presentment, dishonor and notice of dishonor. (page 489)
• §3-415: 30 days to be put on notice to be discharged as indorser.
• §3-504: (a4): no notice is needed if the indorser has done something to waive presentment or
otherwise has no reason to expect or right to require that the instrument be paid or accepted.
• When you sign a check over to someone else, you have indorser’s liability unless you write “no
recourse” under your signature.
o Exceptions:
 Indorsement “without recourse”
 No notice of dishonor under §3-305
 Draft is accepted by a bank after an indorsement is made or
 If the check is not presented for payment within 30 days from the day the
indorsement is made.
• Once the payee signs the back of the instrument, the payee automatically incurs the obligation the law
imposes on an indorser.

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• In fact, per §3-204(a), anyone who signs an instrument in an ambiguous capacity is conclusively
presumed to assume this liability.
• Note that unlike the obligation of a maker, the indorser’s obligation is secondary in that there are certain
technical conditions that must be met before the indorser can be sued on the §3-415 obligation: the
instrument must have first been presented to the maker (if it is a note) or to the drawee (if it is a draft),
there must have been a dishonor (by the maker or drawee), and in certain circumstances §3-503 requires
that the indorser be given notice of dishonor.
• Problem 128:
• Billy wrote out a check payable to the order of Snow to pay for some carnival
equipment. Snow cashed the check at Drug Store, indorsing his name on the back.
Drug Store then indorsed the check and deposited it in its account at Jordan State
Bank. This bank also indorsed the check and then presented it to the drawee bank,
Rodgers National Bank, which dishonored it because Billy had no money in his
account, marking it NSF. The check was returned to Jordan State Bank. You are the
bank’s attorney, and it calls you with three questions:
• Drug Store has suddenly gone out of business and there is no money in its
account. Can Jordan State Bank sue Snow and, if so, on what theory? Read §3-415(a).
• Yes, under the indorser obligation.
• If Jordan State Bank sues Snow, may he raise his defenses (say, that the Drug
Store had failed to pay him any money when he indorsed it over to them), or is the
indorser liability found in §3-415 strict liability?
• Not Strict Liability, he may raise such a defense, however, it is a personal
defense, so if it is against a HDC will not be effective.
• If the bank does recover from Snow, will he have to pay the whole amount or do
the indorsers divide up the indorsement liability and share it proportionately? See §3-
116, 3-205(d).
• Will be entitled to the full amount from him. 3-116 allows for Joint and several
liability which allows for contribution but only where indorser signs the agreement
with the other indorsers. He may or may not get contribution depending on how he
signed the agreement.

• Problem 129:
• Charlie Brown wanted to borrow $10,000 from the Peanuts National Bank, but
the bank told him that it wouldn’t loan him the money unless his note was indorsed
by four responsible people. Charlie explained his problem to his friend Lucy, and she
signed her name to the back of the instrument. Charlie then took the note to another
friend, Schroeder, who not only signed, but also persuaded his friend Pig Pen to add
his name below Schroeder’s. Finally, Charlie had Peppermint Patty sign her name, at
which point he took the note back to the bank, and it loaned him the money. When
the note came due, the bank made a presentment of it to Charlie and demanded
payment. He had used the money in a business venture that, predictably enough, was
a moral but not a financial success, and so he was unable to pay the note (a dishonor).
The Peanuts National Bank gave notice of dishonor to all four indorsers, but
demanded payment of Peppermint Patty alone. She resisted, claiming she was liable
at most for only ¼ of the amount ($2,500). See §3-415.
o Is she right?
o §3-415 tells us that she is not right b/c she is contracted to pay that full amount.
As an indorser she made her self liable to the full amount.

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o If she pays $10,000, can she sue Pig Pen for the entire amount or only for part?
See §3-116, 3-205(d).
o §3-116 tells us that she is only able to sue for the proportionate amount. This will
be governed by the way in which they signed the agreement.
o If she is sued, can she bring the other indorsers into the lawsuit? See §3-119
(explaining the so called “vouching in” notice.)
o §3-119 tells us yes, she can bring the others into the lawsuit.
o If Charlie Brown comes back into the chips, can she sue him? On what theory?
o Yes, she can sue under the issuer’s liability which is part of the maker’s liability
under §3-412 and an accommodation party under §3-419(e).
 Makel Textiles v. Dolly
 Issue: Goldberg’s liability= did he personally indorse the note?
 P is arguing that he was indorser, no 30 days notice, so he’s not liable.
 Ct: 3-504: notice of dishonor if you signed off in the indorser’s capacity, but
presentment and notice is excused if you already know (that the company has no
money to pay the note)

The Drawer’s Obligation:


• §3-414: the drawer has secondary liability that is similar to that of an indorser (presentment,
dishonor and notice of dishonor.
• The drawer can eliminate his liability with “with recourse” to his signature
o §3-501(b)(2): Presentment: a demand for payment or acceptance made by the holder of the
instrument to the maker or drawee.
 When presentment is made, failure to comply with the following allows the
maker/drawee to refuse payment WITHOUT dishonor.
 They may demand:
o Presenting the instrument
o ID
o Evidence of the presenter’s authority
o Reasonable time and place
o A receipt AND
o Surrender of the instrument
o §3-502: Dishonor: this occurs when a maker or drawee returns an instrument WITHOUT
paying or accepting within the allowed time.
 A checked presented across the counter must be paid or returned that day
 A check presented through bank collection channels allows the drawee bank until
12:00 am of the banking day following the banking day of receipt to dishonor.
o §3-414: Notice of dishonor: defined by §3-503: may be given to anyone liable on the
instrument, and operates for the benefit of all parties with rights on the instrument against
the notified party.
 It may be oral and given in any reasonable manner
 Note: the drawer is not entitled to notice of dishonor, although if presentment
occurs more than 30 days after the date of the check, and the drawee becomes
insolvent during the delay, the drawer has no liability upon assignment of rights
against the drawee to the holder (as long as he acted in good faith and didn’t cause
the delay)

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o Stale checks presented more than 6 months after its date of sale are subject
to a good faith limitation.
 Non-bank parties have 30 days to give notice of dishonor, while banks have a
midnight deadline on the day of dishonor to notify.
o Exceptions: §3-504: the above may be unnecessary if:
o Delay in compliance is excused (the delay is caused by circumstances
beyond the party’s control and reasonable diligence is used to comply
after the problems.
o Compliance excused completely if:
 Waiver (written or implied)
 Unavailability of the primary party
 Impossibility
 Futility (thru anticipatory repudiation, prior dishonor, revoked
payment)
o It is sometimes said that the drawer’s liability is secondary because the draft must first be
presented to the drawee for payment and dishonored by the drawee before the drawer has a legal
obligation to pay the instrument (unlike the liability of a maker of a note, which is primary since
it is not subject to these conditions precedent).
o Why should the drawer’s liability be different from that of a maker? The answer is that, with a
draft, it is the understanding of all the parties that the payee will first attempt to secure payment
from the drawee (a presentment) and only look to the drawer if the drawee refuses to pay
(makes a dishonor). Consider, for example, that if I owe you money and give you a check for
the amount due, common sense tells you that you must first try to collect the check from my
bank. Only if my bank refuses to pay the check can you expect me to make the check good.
Similarly, with a sales draft drawn by the seller on the buyer, the seller is not liable until the draft
is dishonored by the buyer/drawee.

o Presentment is the demand for payment made to the maker of the note or, for drafts, to the
drawee. The Code is more flexible – exhibition is required only if the presentee demands it. §3-
501(b)(2), sets out other rights of the presentee. Dishonor is the refusal of the presentee to pay.
Problem 141:
Grosvenor finally paid off an old debt to Bunthorne by giving him a check drawn on the
Patience National Bank. Bunthorne took the check to the bank and demanded payment.
The bank asked him to sign his name on the back, but Bunthorne refused, saying “I will
never put my name on any check Grosvenor has touched.” If the bank declines to pay the
check, has a technical dishonor occurred? See §3-501(b)(3)(i), 3-501(b)(2)(iii). This may
be important because Grosvenor’s §3-414 obligation is conditional on a dishonor, and he
can no longer be sued on the underlying obligation that is suspended until dishonor by
§3-310.
o A bank declining a draft b/c not presented correctly – NOT a
dishonor, thus drawer not liable

o Messing v. Bank of America


o §3-501(b)(2) – Upon presentment, the person must … (ii) give reasonable presentment…
o §3-501(b)(3) – If presentment is not proper, payment/acceptance may be refused and
refusal does not constitute a dishonor

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Problem 142:
When Grosvenor gave Bunthorne a check to pay off an old debt, Bunthorne
negligently lost it behind the sofa and didn’t find it for 8 months. The bank it was
drawn on refused to pay it because it was suspiciously old (§4-404). Is Grosvenor
still liable on this check? See §3-414(f). Would he be if the drawee bank had
folded 5 months after the check was written but before it was presented? If
Bunthorne had indorsed the check the day after it was issued to him and then
cashed it at the corner drugstore and the drugstore mislaid it for 5 months before
the drawee bank dishonored it, is Bunthorne still liable to the drugstore? See §3-
415(e).
Probably yes, but loophole if the drawee bank causes the problem itself.
(e) says you are entitled to 2 things as the drawee before you have to pay:
presentment and dishonor.

Problem 143:
A promissory note contains a clause stating, “All parties to this note hereby waive
all rights to presentment, notice of dishonor, and protest . . . .” Is a clause like this
buried in the fine print on the front side of a note sufficient to deprive indorsers of
their right to notice of dishonor? See §3-504(a)(iv) and (b)(ii).
Yes, that is effective. §3-504 doesn’t say anything about where the waiver
must be located. The waiver would be effective, but negotiability is not
destroyed.

Problem 144:
Fortune was walking along the street, his pockets stuffed with money and checks
he had won with a dazzling display of his prowess in the game of stud poker,
when he was stopped by a creditor, one Mr. Holdit. Holdit demanded payment of
a long-due $50 obligation, and Fortune was glad to indorse over to him a check
for that amount that Fortune had won from Deuces; Fortune was named as payee
on the check. After giving the check to Holdit, Fortune thought better of the
whole transaction so he contacted Deuces, the drawer, the next day and persuaded
him to stop payment on the check. Holdit held onto the check for 6 weeks and
then took it to his bank, the Creditors National, and cashed it. Creditors National
presented the check to the drawee bank, which dishonored it whereupon Creditors
National reclaimed its money from Mr. Holdit. Holdit, now very mad, sued
Fortune on his indorser’s obligation. Was Fortune discharged by the delay in
presentment? See §3-415(e). Was the presentment delay excused within the
meaning of §3-504(a)(iv)?
• Normally answer if yes, but under these facts the answer is no b/c
of his urging to stop payment he doesn’t have a right to expect that the
instrument would be paid in the first place, so this would be considered a
waiver. §3-504(a)(iv). This is an example of excuse.
• Fortune waived because he asked to stop payment he doesn’t
expect to get paid, therefore he waived right of notice= excused.
o

Week 11:
Indorsers are Sureties: (Very important note)

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Whether the indorser intends it or not, the imposition of a §3-415 obligation makes the indorser an unintentional
surety for the parties who have signed the instrument prior to the indorser, and the Code generally gives
indorsers all the rights it gives to voluntary sureties, whom it calls accommodation parties.

The Surety’s Obligation: §3-419: strictly construed in favor of the surety


o In a negotiable instruments setting, suretyship problems come up whenever the maker must get others to
“lend their names” to the maker’s basic obligation. Suretyship matters can arise even in connection with
checks.
o In any surety setting, there are three basic contracts involved.
o (1) The underlying obligation between the principal and the creditor.
o (2) The promise of the surety to back up the underlying obligation and see that the creditor loses
nothing as a result of accepting the principal’s promise on the first contract.
o (3) The promise of the principal to reimburse the surety if the surety is forced to pay off on the
surety’s promise to the creditor.
Surety’s Obligation
o Financier’s careful to loan money to people due to their credit rating
o Usually requires a Surety (Co-signer) to sign the note as well
o Relationship:
o K1: Principal (debtor) / “Accommodated Party” and Creditor (holder) / “Person
entitled to enforce the instrument”
o K2: Creditor and Surety / “Accommodation Party”
o K3 (presumed): Surety / “Accommodation Party” and Principal / “Accommodated
Party”

o CL rights Given to Sureties/Co-signors:


o Reimbursement
o Exoneration: This is an equitable right by which the surety, at maturity, can compel the principal to
perform instead of the surety.
o Subrogation: If the surety is forced to pay off the creditor, the surety is subrogated to whatever
rights the creditor had.
 Put another way, the surety steps into the shoes of the creditor and is said to take an
“equitable assignment” of the creditor’s rights.
 In effect, by paying off on the second contract, the surety’s right of subrogation permits the
surety to become a party to the first contract and enforce it as if the surety were the
creditor.
o Contribution: This is the right of partial reimbursement that co-sureties have against each other for
proportionate shares of the debt.
 If the creditor releases the principal debtor from liability on the first contract or gives the
debtor a binding extension of time in which to pay, the surety is discharged unless (1) the
surety consents, or (2) the creditor informs the principal of the preservation of the surety’s
rights against the principal.

o UCC Surety Rights:


o §3-419: a party who signs the instrument for the purpose of incurring liability on it,
without being its direct beneficiary, may sign in any capacity (maker, drawer, indorser), but is
obligated to pay the instrument in the capacity for which he signs.

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o Section 3-419 applies to an accommodation party, defined in subsection (a) as a party
who “signs the instrument for the purpose of incurring liability on the instrument without being a
direct beneficiary of the value given for the instrument.
o Subsection (b) informs us that the accommodation party may sign in any capacity (as
maker, drawer, acceptor, or indorser), but is “obligated to pay the instrument in the capacity in
which the accommodation party signs.”
 This means that the surety (accommodation party) has the same liability as a
maker if the surety signs as a maker, but the surety signing as an indorser is liable only in
that capacity (and has the rights of an indorser: presentment, notice of dishonor, etc.); in
addition, of course, the surety gets both statutory and common law suretyship rights.
o §3-419(d): A guarantor is a surety who adds words of guaranty to his signature. (“I
hereby guarantee this instrument,” for example), but words of guaranty add nothing to the
suretyship obligation unless the surety has specifically guaranteed collection only, in which case
guarantor is given the extra protections described in §3-419(d).
o If write on there that “I hereby guarantee this instrument for collection only” then you
will have the protection of §3-419(d).
• Problem 133:
• Suppose in the prior problem George Generous has written the word
Guarantor after his name. Would Ace Finance have had to sue Mary Maker first
or not? §3-419(d).
• No, when he signs as accommodation maker they can go after him without
ever having to go after her.
o §3-603 Tender of Payment Rule: if the surety or indorser tenders payment at maturity that is
refused, the surety is still liable for the full amount, unless the surety can show harm, but is not
liable for any subsequent amounts (interest, etc.)
 If the principal tenders payment, the surety or the indorser is completely discharged
under §3-605
o §3-606: Impairment on collateral:
 On paying off the creditor and thereby acquiring the negotiable instrument, the surety
is also entitled to collateral
 If the holder impairs the collateral for an instrument by failing to take reasonable case,
non-consenting sureties are discharged up to the amount of the impairment.
o §3-605: Agreements between creditor and principal
 If the holder fails to collect payment at maturity, the surety is not discharged
 Holder and principal agree to extend or suspend the time of payment; Non-consenting
surety is discharged to the extent of harm caused by the extension, as long as no waiver
was given.
• Exceptions:
o A holder’s agreement not to sue the principal does not discharge non-
consenting sureties.
o If the surety consents to an extension, the surety is not discharged.
 Consent may either be express or implied, and may be given in
advance or afterwards.
§3-605 – Discharge of Indorsers and Accommodation Parties
o Indorser includes a drawer having an obligation
o Discharge of obligation of party to pay does NOT discharge indorser’s obligation
having a right to recourse

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o If Enforcer agrees to extension of due date, extension discharges indorser to extent
indorser proves the it causes loss
o If Enforcer agrees to material modification of obligation, indorser discharged to the
extent the modification causes loss proven by indorser
o If obligation is secured by the collateral and Enforcer impairs the value of the
collateral, indorser’s obligation is discharged to the extent of the impairment.
o Impairment is (i) the value reduced to an amt less than the indorser’s right of
recourse, or (ii) the reduction in value causes the right to recourse to increase beyond
the value of the interest
o §3-310 (b) (2): Creditor and debtor exchange a new note for the old one
 Once the new note is accepted, the obligation on the old note is suspended until the second
note is dishonored; Once the second note is dishonored, a suit would be on the first note.
§3-310(b)(2):
(b) Unless otherwise agreed and except as provided in subsection (a), if a note or an
uncertified check is taken for an obligation, the obligation is suspended to the same
extent the obligation would be discharged if an amount of money equal to the amount of
the instrument were taken, and the following rules apply:
(2) In the case of a note, suspension of the obligation continues until dishonor of the
note or until it is paid. Payment of the note results in discharge of the obligation to the
extent of the payment.
• Problem 132
o Yes, he can
o consideration is a non-issue
o Where he signed indicates he’s a maker

• Problem 133
• §3-419(d) – Signing “Guarantor” presumes you are a PAYMENT guarantor,
you must unambiguously state you are a COLLECTION guarantor.

• Floor v. Melvin
• Court stretched to find terms to make the guarantor a collection guarantor

• Problem 134
• Margaret cannot sue Portia b/c Marg is a maker
• Portia can sue Marg if ONB collects

• Chemical Bank
• Does signing as a guarantor make one guarantee against tortuous and/or criminal
behavior?
• Majority: Signing as a payment guarantor, one waives their right against tortuous
or criminal behavior
• Dissent: If payment guarantor, you are NOT waiving your right to everything,
especially criminal and tortuous behavior. (Majority of courts would agree with
dissent)

• London Leasing

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• Rule: Surety’s consent can be expressly given OR implied from the
surrounding facts or conduct
Problem 135:
When Saul Panzer needed to borrow money, his friend Rex Stout agreed to loan him
$10,000 if Saul could get a co-signor. Saul talked Orrin Cather into signing Saul’s
promissory note as co-maker. The note was payable to the order of Rex Stout, who
loaned Saul the $10K and took the note in return for the money. Rex indorsed the note
and sold it as a discount to Archie Goodwin.
(a) On the date the note matured, knowing that Saul Panzer, the maker, was in
financial trouble and wanting to stop the running of interest, Orrin Cather, the co-
signor, went to Archie Goodwin, the current holder, and offered to pay the note,
planning to seek reimbursement from Saul. Goodwin replied, “Let’s give poor
Saul a chance to pay it off himself.” A month later Saul went bankrupt, and
Goodwin demanded that Cather pay the initial amount due plus interest for the
extra month. Cather refused, and Goodwin sued, adding a claim for attorney’s
fees. To what is he entitled, if anything? See §3-603(c)’s first sentence.
§3-603(c) tells us that he is still going to be liable for the initial amount
due, but he will not be liable for any additional interest since he tendered
payment and was refused.
(b) On the due date Saul went to Goodwin and offered to pay, but Goodwin
said, “Look, I know you need money for your other bill—pay me next month.” A
month later Saul went bankrupt. Can Goodwin now recover from Cather? From
Stout, the payee/indorser? See §3-603(b).
§3-603(b) tells us no, he tried to pay, they wouldn’t take his money and
both parties would be discharged b/c they wouldn’t take his tender.
(c) Instead of the above, assume that on the maturity date Orrin Cather went
to Goodwin and offered to pay the debt, to which Goodwin made the same reply.
A month later Saul went bankrupt, and Orrin Cather filed for bankruptcy at the
same time. Is Stout, the payee/indorser, liable to Goodwin?
No, the refusal of Cathers tender discharged Stout’s obligation to pay.
 Problem 135
 Because of extension of the due date, Cather is only liable for the original amt. The
tender and refusal caused her a loss of interest and attorney’s fees dealing with the suit.
 Goodwin cannot go after the surety because the amount was discharged
 No, he was discharged to the amt tendered

Problem 136:
When Butch Byrd borrowed $10K from ONB, the bank not only made him get a surety,
but also demanded that the inventory of Butch’s feed store stand as collateral. Butch
talked his brother Arnold into signing the promissory note as a guarantor and signed the
necessary papers for the bank to get an Article 9 security interest in the inventory.
Unfortunately, the bank failed to file the Article 9 financing statement in the correct
place, so when Butch had financial difficulties, other creditors prevailed over the bank’s
attempt to claim the inventory. The inventory was worth $6K. What is the effect of the
bank’s Article 9 difficulties on Arnold’s liabilities? §3-605(e) and (g).
The effect was that Arnold is discharged of his liability up to the value of the
collateral that is lost.
• Problem 136

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• Arnold is discharged up to the value of the collateral - $6K

Problem 137:
George and Martha Washington borrowed 10K from the Mt. Vernon Finance Co, both
signing a promissory note for the amount borrowed. To secure the note, the bank took a
mortgage on Martha’s Vineyard, but failed to file its mortgage in the proper place.
Before the note matured, Martha filed for bankruptcy, and the bankruptcy creditors were
able to get the vineyard free and clear of the bank’s mortgage. Is George discharged in
whole or in part by §3-605(e)? By §3-605(f)? If Martha had not filed for bankruptcy, but
the vineyard was still lost when the state seized it b/c she hadn’t paid her taxes, is she
discharged by the bank’s failure to perfect its interest in the vineyard? As to all this, see
OC 7 to §3-605.
§3-605(e) doesn’t apply to George, it only applies to an indorser or an
accommodation party, he is a maker. Under §3-605(f) George is discharged in to
his extent of his contribution that is prejudiced by his impairment of that
particular collateral. Martha is not discharged b/c she has not suffered any harm.
 Problem 137
 George is a co-maker b/c of signing
 Under 3-605(e) – George
 Under 3-605(f) – George is
Problem 138:
When Jack Point borrowed 75K from Yeomen National Bank to start up his carnival
business, the bank made him sign a promissory note in its favor and get a surety. Point
talked his good friend Wilfred Shadbolt into signing as an accommodation maker. Is
Shadbolt discharged by any of the following agreements between Yeomen National and
Point?
(a) When the note matured, Point told Yeomen that his business had gone
bust and that he was thinking about filing a bankruptcy petition. Worried that it
would get nothing in the bankruptcy distribution, Yeomen persuaded him to pay
all he could, a mere 5K, and then signed an agreement with Point excusing him
from having to pay the rest of the debt. The bank them demanded that Shadbolt
pay the amount still due. Does Shadbolt owe it? §3-605(b). Does the accord and
satisfaction agreement b/w the bank and Point also bind Shadbolt, or may the
latter still seek complete reimbursement from Point? §3-419(e) and OC 3 to §3-
605.
Yes, this is different from the common law. He would be liable for the
entire 70K remaining. Yes, he can still seek reimbursement from Point
(but this is tough b/c Point is about to file bankruptcy.
(b) Assume instead that when the note matured Point went to the bank and
asked for more time in which to pay. The bank did this, giving Point an extra 6
months. No one notified Shadbolt of this extension. At the end of the 6 month
period, Point filed for bankruptcy instead of paying the note. Was Shadbolt
discharged by the bank’s actions? Would your answer change depending on
whether or not Point ever had the money to pay the note at any relevant period?
§3-605(c) and its OC 4. Who has the burden of proof on the issues? Could
Shadbolt, has he known of the extension agreement, have ignored it, paid the
note, and then sued Point for reimbursement?
Shadbolt would be discharged if he could show some harm by extending
that particular time. The burden would be on him. Yes, it will depend on

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whether he had the money to pay the note. If they will allow that, he
could sue Point for reimbursement..
(c) Assume instead that when the note was signed the bank also made Point
put up 100 shares of stock as collateral for the debt. Before the note matured
Point went to the Bank and asked to have the stock back, saying he needed to take
advantage of a stock split the issuing corporation was offering. The bank returned
the stocks to him, but made him agree to pay a higher rate of interest. The
original not contained a clause by which the surety automatically agreed in
advance to any impairment of the collateral. Has Shadbolt nonetheless been
discharged? Who has the burden of proof here? §3-605(d) and OF 5.
2 issues here: impairment of the collateral and the higher interest rate. The
Burden of proof has shifted, it is on the bank to show that it doesn’t cause
him harm otherwise the higher interest rate will discharge him.
 Problem 138
 Shadbolt still on the hook for the $70K, b/c he’s better off for the debtor paying the $5K
 Yes, to the extent of loss;
Yes, if debtor had the ability to pay, that’s a loss on the surety;
Surety has the burden of proof;
Yes, Surety could have paid the note in full then sued the Debtor for reimbursement
 Automatic waiver of discharge on the original note is a valid waiver of discharge of
rights of the surety. There was no discharge

Problem 139:
In 2009 Rex Lear borrowed 5K from the Kent Lending Corp. and gave them his
promissory note due June 8, 2012. Rex had his daughter Cordelia sign as
accommodation maker. Early in 2012 Rex defaulted on the installment payments
and in return for mercy by the lending company, he signed a new promissory note
dated January 11, 2012, payable to the company September 25, 2012 for the same
amount but with additional collateral. The Kent Corp. kept the first note as
security for the payment of the second. Cordelia never signed the second note.
(a) Can the payee sue on the first note prior to September 25, 2012?
Under §3-310(b)(2), No that first note is suspended during that particular
time.
(b) If Lear does not pay the 2nd note when it matures, can Kent sue on the first
note, or has it been paid and discharged by the second note?
If note 2 is dishonored, then Kent can sue on note 1.
(c) Assume that Cordelia can prove that the failure of the lender to enforce its
rights on the 1st note caused her major damages in that Lear’s financial situation
deteriorated drastically b/w January 11 and September 25, 2012, and the collateral
became worthless during the same period. Is Cordelia still liable on the first note?
§3-605(c) tells us that she will be discharged b/c taking that second note
worked to an extension of time b/c she it caused her severe damages.
 Problem 139
 §3-310 – If surety has signed on an older note, then the original parties enter into a new
note, the surety’s obligation is suspended until payment or dishonor of the new note.

Problem 140:

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Sam was the surety on a promissory note that Marty Make had given to the
Dogfish Loan Company along with a pledge of 100 shares of Titanic Telephone
stock to secure the loan for $800. Shortly after receiving the loan, Marty asked for
the stock back, saying that he wanted to sell it and buy other stock that he would
repledge as collateral. Dogfish gave him back the stock, which Marty sold. He
used the proceeds to finance a bad day at the races. A week later Dogfish
transferred the note for value to the Hammerhead Loan Company, a bona fide
purchaser. Assume that Sam has been discharged under §3-605(e), (impairment
of the collateral). Is he still liable to Hammerhead?
This is a personal defense, so if Hammerhead is a HDC then Sam is still
liable to Hammerhead unless he had notice of the impairment of the
collateral , which we don’t know here.

The Drawee’s Obligation: BANK OF ISSUER:


o §3-408: a drawee has no contractual liability merely by being named as such by a drawer
o General Rule: the bank has no liability to the payee until it accepts the check, its liability is
to its customer
o §3-408: (DRAWEE NOT LIABLE ON UNACCEPTED DRAFT)
o A check or other draft does not of itself operate as an assignment of funds in the hands of
the drawee available for its payment, and the drawee is not liable on the instrument until
the drawee accepts it.
 If the drawee does not sign the draft as required under §3-401 a, it is not liable on it.
 The drawer’s writing of the check does not, absent unusual circumstances, create any
immediate rights in the checking account funds, and the drawee bank has no liability to
the holder of the check until it accepts it. Of course, the drawee bank is bound by the
terms of its checking account agreement with its customer, the drawer.
o Signature Rule: no person is liable on an instrument unless his signature appears on it; a
drawer’s name on an instrument is not a signature.
o §3-413a: Obligation of Acceptance: the drawee who places a signature on the draft is said
to have accepted it, and he incurs the obligation as acceptor.
 The acceptor has the same liability as the maker, primary; he promise to pay the
instrument according to its terms at the time of acceptance.
o §3-409d, §3-413 b: Check Certification: if a bank certifies a check, it’s primarily liable as
an acceptor and the drawer may not stop payment.
 Certification discharges the drawer and indorsers, no matter who procures the
certification.
o §3-402 a: Liability of an agent: a negotiable instrument may be signed by an agent on
behalf of a principal
 §3-402(a) generally defers to the common law governing an agent’s signing of a K
on behalf of the principal. Thus, the agent’s authority to sign the principal’s name
may be real (express or implied) or even apparent.
 §3-402 (b): how to avoid liability of the agent: 1) sign in the representative capacity
and 2) name the principal for whom you are signing for; must be unambiguously
signed on behalf of the principal or the agent is liable on the instrument as a holder
in due course.
 §3-402 (b2): burden on the agent to show that the signature meets the req’ments
 §3-402 (c): exception: on company checks, agency almost assumed.

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 Unauthorized signatures do not bind the person who’s name was signed, only the
person who signed it
 To escape liability against a HIDC: §3-402 (b) (1):
• (1) name the principal and
• (2) unambiguously indicate that the agent is signing only in a representative
capacity.
o Exception: §3-401 (c)(1): if the check identifies the represented person
the agent who signs does not have to indicate agency status.
o If the agent does one of these 2 things but not the other, the agent is liable
to a holder in due course taking the instrument without notice that the
agent was not intended to be liable, but otherwise the agent may prove that
the original parties did not intend for the agent to incur liability. .
 To escape liability against all others: the agent may prove that the original parties
did not intend for him to incur liability.
• Galyen Petro v. Hixson
• P got three checks from D; D also owed 7k to his bank. All three checks were
dishonored and returned twice, then setoff a debt that the customer owes the bank.
• A check draft does not of itself operate as an assignment of any funds in the
hands of the drawee available for its payment, and the drawee is not liable on the
instrument until he accepts it.
• Bank says that the payee P has not standing, but the customer does
• Ct: Payee has no standing to sue the bank, only the customer drawer can sue.

Problem 143:
After he brought a successful Truth in Lending action against ONB, attorney Sam
Ambulance made the mistake of continuing to bank at ONB. At a time when his bank
balance greatly exceeded that amount, Sam wrote an alimony check for 3K and gave it to
his ex-wife, Sue. B/c similar checks had bounced in the past, Sue hurriedly walked the
check directly into the bank and presented it across the counter. The teller who took the
check alerted the bank’s manager who laughed evilly as he threw it back across the
counter at Sue, informing her that Sam’s business was no longer welcome at ONB and
that it refused to pay any more of his checks, even thought there was money in the
account sufficient to meet the check. You are the attorney who handled Sue’s divorce, so
she calls you and asks what she should do. §3-408, 3-401(a), 3-414, 4-402.
The drawee, not having signed the draft, is not liable on it. The drawee, having
signed nothing, incurs no contractual obligation (though it may still be liable to
the drawer under §4-402.

Problem 145:
After he brought a successful Truth in Lending action against ONB, attorney Sam
Ambulance made the mistake of continuing to bank at ONB. At a time when his bank
balance greatly exceeded that amount, Sam wrote an alimony check for 3K and gave it to
his ex-wife, Sue. B/c similar checks had bounced in the past, Sue hurriedly walked the
check directly into the bank and presented it across the counter. The teller who took the
check alerted the bank’s manager who laughed evilly as he threw it back across the
counter at Sue, informing her that Sam’s business was no longer welcome at ONB and
that it refused to pay any more of his checks, even thought there was money in the

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account sufficient to meet the check. You are the attorney who handled Sue’s divorce, so
she calls you and asks what she should do. §3-408, 3-401(a), 3-414, 4-402.
The drawee (bank), not having signed the draft, is not liable on it. The drawee,
having signed nothing, incurs no contractual obligation (though it may still be liable
to the drawer under §4-402)
3-401: the bank didn’t sign the check; therefore they aren’t liable for not cashing the
check
4-402: bank has liability to Sam (Proper Payable Rule)
• Norton v Knapp
• Flaxseed cleaner sold to Knapp, check promised to be paid, wrote kiss my
foot on the back
• Ct: kiss my foot is not acceptance by the drawee.
Problem 146:
George Generous gave a check for 5K to the Grapes of Wrath Church as part of the
church’s drive to get money for a planned new building. The church did not want to cash
any checks it received until it had at least 20K worth of pledges. On the other hand, the
church didn’t want contributors to be able to back out and stop payment either, so the
church’s lawyer advised the church directors to have all large checks certified. This, the
lawyer knew, would have the effect of making the certifying bank primarily liable on the
check (§3-413(a)). The church treasurer took George’s check down to the drawee bank
and asked to have it certified, a presentment for acceptance. The drawee bank refused,
saying that its practice was never to certify gift checks.
(a) Is that a dishonor so that the church should give George notice of
dishonor? See §3-409(d) and OC 4.
No, that is not a dishonor, so no need to give notice of a dishonor.
(b) What should the church’s lawyer advise it to do now?
Cash a gift check immediately.
(c) If the bank had certified the check but later refused to pay it, could the
church sue George on his drawer’s obligation? See §3-414(c). Same result is
George had donated a certified check that the bank later dishonored? See OC 3 to
§3-414.
3-414(c) tells us that they could not sue him on the drawer’s obligation if
they accepted it. They certified it when the accepted it.
Problem 147:
When tycoon J.B. Biggley wanted to borrow money for a business venture, he had his
agent, J. Pierpont Finch, negotiate the loan from Wicket’s National Bank. When Finch
signed the promissory note payable to the bank, he simply wrote his name as “J. Pierpont
Finch, Agent,” and failed to mention the name of his principal Biggley. Is Biggley bound
to this note? See §3-402 and OC 1.
Yes. It doesn’t matter whether he has been identified on the instrument.
Undisclosed principals are bound by the agent’s signature whether clearly
identified or not.
Failed to name the principal; liable as a holder in due course to the bank.

Problem 148:
In the last problem would Finch himself be liable to a HDC? To Wickets National Bank?
Yes, the agent was probably not enough to unambiguously show that he was
signing for someone else. If Wickens wasn’t a HDC, he can defend by arguing
that he was not expected or intended to be liable for this.

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 Mundaca Investment v. Febba


 Mortgage and note by trust; mortgage was ambiguously the trust, but the note was
signed by the P and then put ‘trustee’ next to their names.
 §3-402: principal NOT unambiguously identifiedagent’s are liable on the note.
 Mortgage and note together are not enough; has to be on the note’s face.

Problem 149:
The president of Money Corporation was John Smith. He signed three corporate
promissory notes as follows:
(1) “John Smith.” Money Corporation was not mentioned in the note.
(2) “Money Corporation, John Smith.”
(3) “Money Corporation, John Smith, President.”
In each case is he personally liable to a HDC of the instrument?
(1) He is personally liable because principal is not named (2) Principal named,
but not shown to be representative capacity. (3) This is clear that he is an agent of
Money, so he is not personally liable.
Problem 150:
Kit Fielding was the corporate president of Francis Racing Stables. The corporate checks
had the words “Francis Racing Stables” printed prominently in the upper left-hand corner
of the checks, but when Fielding went to sign the checks on the drawer’s line, he simply
signed his name and did not sign the name of the company or in any way indicate that he
was signing as an agent.

If the check is negotiated to a HDC and then dishonored by the drawee bank, may the
HDC successfully impose personal liability on Fielding? See §3-402(c) and OC 3.
No, so long as the check has the name of the corporation at the top of it, then and
only then the signature on the drawer line (assuming it’s authorized) wouldn’t
impose personal liability.

 Nichols v. Seale
 Signed note Fashion Salon, Carl Nichols
 Enough? Yes, he’s not liable under 3-402 (representative and principal named)
Article 4
• 4-401: Proper payable rule: DRAWEE BANK IS NOW THE PAYOR BANK: lays the foundation
for a checking account.
o Depository Bank: the first bank to which an item is transferred for collection; it could also
be the payor bank in situations where the drawer and the holder do their banking at the
same institution.
o Collecting Bank: any bank in the collection process, except the payor bank (this includes
the depository bank)
• 4-401: Proper payable rule: a contract between the drawee and drawer exists that the bank may
pay out the customer’s money only if it follows her orders exactly.
o If an item is not properly payable, the bank must recredit the customer’s account in a
timely manner.
• §4-401(a) When bank may charge a customer’s account: can pay from account, even if it
overdrafts;
o The bank has the option to pay or not to pay.

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o It is properly payable when the customer has authorized it and in accordance with any
agreement btw the customer and the bank.
• §4-401 (b) a customer is not liable for the amount of overdraft if the customer neither signed the
item nor benefited from the proceeds of the item.
• §4-401 (c) & (c) (3): Post-dated checks: may be paid at anytime, unless the customer gives the
bank notice of the postdating.
• §4-404: Stale Checks: the bank does NOT have to honor it but they can.
o There is no liability if the bank pays out a check that is older than 6 mos, as long as it ws
paid in good faith.
• The longer is it past 6 mos, the less likely it will be found to be in good faith.
• §4-403: Stop payment orders:
o Customer gives oral or written notice:
• Oral= valid for 14 days
• Written= valid for 6 months
o Reasonable description
o In time to allow a bank a reasonable opportunity to act with the technology that is
available AND
o The amount of loss that occurred.
• The bank must have a reasonable opportunity to act in order to stop a check and the bank
not be liable for false payment.
• GR: the bank is to pay only per the customer’s request.
• Customer’s Right to Stop payment: §4-403: if you write the check, you have the
right to stop payment on the check
• §4-403: the item must be described with reasonable certainty; can be oral (only
stopped for 14 days) or written (stopped for 6 mos)
• Parr v. Security National Bank
• Check described was off by 50 cents, banks system didn’t recognize the check as
the stopped one because the amount was wrong.
• Ct: the bank had notice and P had everything else correct as far as date, check
number.
• Rule: doesn’t have to be absolute certainty, it was to be reasonably certain to
identify the check.
• Problem 159: a) reasonable certain to be the check? Bank has date, name, and
refrigerator check. But no account number, check number.
• B) §4-103: Bank can’t waive good faith, but can waive the oral stop payment
• C) §4-403 comment 7
• D) §4-403 comment 1

• §4-405: Death or Incompetence of the Customer: death or incompetence does not revoke the
authority of the bank until they know and they have a reasonable opportunity to act.
o Bank may for 10 days after death pay from the account unless someone who claims an
interest stops payment on a check
• Right to Setoff: a bank can setoff a customer’s debts to the bank against a general checking or
saving account, without notice
o Exceptions: No setoff is permitted after final payment has been made
o The bank does not have the priority of right in equity where the bank seeks to set off an
unmatured debt that is not presently due.

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• Bank’s right of Setoff:
• Walter v. National City Bank
• Garnishment order from court, bank decides that it will set off previous debt for
their benefit.
• Ct: bank knew that customer was insolvent at the time of the note, garnishment
order came first, they must pay first and the note wasn’t due yet.
• Proper Presenter: a bank may charge its customer’s account only if it pays a person entitled to
enforce the instrument (a holder)
• §4-402: Wrongful Dishonor: a bank is NOT liable in conversion because the money is on loan to
the bank, the customer must sue claiming it wasn’t properly payable.
o Mental suffering may be recovered, along with other damages, as long as they can be
measured with reasonable certainty.
• Twin City Bank v. Isaacs
• P reported check book missing, forged checks cashed, account frozen for 4 years,
even though someone was arrested and charged with the theft (Bank believed that
the P was involved in the forgery)
• Damages awarded to the P for damage to credit, re-po of two cars.
• §4-402: damages for wrongful dishonor: any wrongful dishonor, unless it
would create an overdraft and no agreement to pay the fee.
• Liable for damages proximately caused by the dishonor
• Rare, but blatant disregard of the law here.
• Problem 157: Won’t cash check unless you are a customer; YES, if there is a
clause in the K with the customer, the bank can dishonor the check.
• Problem 158: §4-405: the neighbor claimed an interest and they should stop,
because they would be liable if they don’t and the interest is real; it’s not a
wrongful dishonor in this case, because they have to stop cashing against the
account under 4-405.
• Problem 151: 4-401 c: even post-dated checks will be cashed, unless the customer
gives them notice to stop payment (the system’s don’t read the date)
• Problem 152: check is not authorized (forged) and therefore not properly payable,
so there is no liability to the customer (he doesn’t have to pay if they cash it, they
owe him)
• Problem 153: forged check
• Problem 154: Yes, the payor bank is wrong by honoring the pre-authorized
checks; it HAS to have your signature on the check, this one didn’t. (violates the
proper payable rule)
• Problem 155: §4-404: stale checks; the bank would have to argue that they made
the payment in good faith because the customer wanted it paid (8 years here, very
hard to make); 4-402: bank doesn’t have to pay overdrafts, they can cash it.
• §4-407: Payor’s Banks right to subrogation on improper payment: Bank can step into the shoes of
the holder in due course to sue.
o If a bank pays an item not properly payable, the bank is subrogated to any person
connected with the item (usually its customer or HIDC) to the extent necessary to prevent
unjust enrichment
• The bank need not credit the customer’s account first
• Problem 160: Because he would have a legitimate obligation to the dealer, the bank can
then step into the shoes of the dealer; the bank doesn’t have to recredit the account.

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• Canty v. Vermont
• IRS redeposited cancelled checks and the bank paid them for the second time.
• The law allows a bank to refuse to recredit its customer’s account after wrongful payment
of an item by subrogating itself to the rights of the presenter of the improperly paid
instrument.
• The bank steps into the shoes of the IRS, so there is no responsibility of the Bank to put
the money back in the acct because they will have to pay them again anyways (what?, ct
is dumb)
• SOL: three years from the action accruing for negotiable instruments (six years for some under A3)

• Cashiers, tellers and certified checks:


• All are just like money and can’t be dishonored without liability.
• Problem 163: If a bank fails to make payment on a cashier’s check, they are liable.
• §3-411 and §3-305; See case below
• Patriot Bank v. Federal Credit Union
• 7k cashier’s check, bank returned check because the indorsement was wrong; second
check written, paid out on in twice then because of dishonorment by bank.
• UCC signature rule: ok if “there is a present intent to authenticate”
• Can you stop payment on cashier’s check? NO, it’s like money, should have been
processed and the bank is liable.

• Wrongdoing and Error: Warranty Suits off the Contract: warranty suits involving negotiable
instruments are based on property rights; intentions of the parties is not relevant and the Plaintiff
neither has to be a holder nor have possession of the instrument in order to bring a suit.
o General Rule: the UCC puts the risk of loss if there is an alteration or forgery on the party
who had the opportunity to work with the wrongdoer.
o If the forgery is of:
• Payee/Indorser’s Name: no valid negotiation takes place and no one taking the
instrument thereafter qualifies as a holder.
• The risk of loss is on the party who interacted with the payee (depository
bank)
o They must check ID or else it will be liable.
• Exception: if the check was made out to bearer or if the payee has indorsed it
in the black before the check was stolen.
o In these cases, anyone in possession would be a holder and possibly a
HIDC.
• §4-302: Drawer’s (Customer’s) Name: the drawee/payor bank is then the drawee’s
bank is almost always liable for the loss.
• Because its their customer and they should know their customer’s signature.
o Problem 183: §3-414, §3-201
o Problem 184: Helen a holder? NO, she has no indorsement on the check
and it therefore not negotiatible; but she can force her to enforce it under
the shelter rule (§3-203).
o §4-205: Bank can be a holder of your unsigned check because they step
into your shoes to cash it.

Week 13

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Warranties:
• Presentment warranty only applies to a drawee bank (they are the only ones who can sue)
• Transfer warranty can be used by anyone in the line of transfer.
• Conversion: property interest-like;

• Warrant Liability
o Article 4: this check is moving, who’s liable at any one point.
o Two Types of Warranties:
 Presentment: §3-417 and §4-208: can only be used by the drawee bank;
 If you write a check, it goes to payee, depository bank, then to your bank
everyone that has touched that check has made a promise to the drawee bank that:
• A) Warrants:
o a person entitled to enforce the draft,
o draft has not been altered, AND
o the warrantor has no knowledge that the signature is unauthorized.
• B) Damages, notice and what happens when it is dishonored.
o Notice of breach of warranty must be given to the warrantor within 30
days after the claimant has reason to know of the breach.
 Transfer Warranties: §3-416 and §4-207: any movement of an instrument other
than an issuance or presentment is a transfer, and can be used by any party during
negotiation process.
• Warrants:
o Person entitled to enforce the instrument (the transferor has taken
pursuant to valid negotiation )
o Valid Signatures (even if bearer paper)
o No alterations
o No knowledge of insolvency proceedings
 (a) (3): Later transferees can sue for breach, if the transferor
indorses the instrument
 (a) (4): protects all collecting banks, regardless of indorsement.
 §4-207 d: Bank has 30 days from the day they have reason to know of the breach to
notify the transferor of breach of the warranty (of transfer or presentment);
discharged if the notice is not given within 30 days
• Problem 185:
• §4-401: Portia can make Octopus National Bank credit her account
because 1) under 4-401 Octopus did not pay a person entitled to enforce the
instrument (no holder), not properly payable; and 2) comment 4 refers us to 3-
407, which allows a payor bank or drawee (Octopus) paying a fraudulently
altered instrument in GF without notice of the alteration to enforce rights with
respect to the instrument according to its original terms (Octopus can go
after the drugstore (and Merchant bank) for payment, because the risk of loss
is placed on the party who had the opportunity to work with the wrongdoer.)
• §4-302 (b), §4-208; 1) which warranty was breached? Transfer and
Presentment warranty, 2) who breached it? Both drugstore and Merchant, but
drugstore is ultimately liable because they worked with the wrongdoer.
• Drawee bank can argue transfer and presentment, but usually go for
presentment.

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• Problem 186:
• Can Merchant sue the drugstore with §4-208 (a)? NO, under §4-208a, only
the drawee bank, Octopus, has rights against the Drugstore.
• How does Merchant get legal relief? §4-207a: Transfer warranties: Under
4-207a, the drugstore warranted to Merchant Bank that all the signatures on
the draft were authentic.
• The warranties of transfer (Drugstore to Merchant and Octopus) and
presentment (Drugstore to drawee Octopus bank) were breached in this
scenario.
• §4-207 d: Merchant has 30 days from the day they have reason to know of
the breach to notify the Drugstore of breach of the warranty (of transfer.);
discharged if the notice is not given within 30 days.
• If the drugstore refuses to pay, under §4-111, Merchant has 3 years after
the action accrues to commence a suit against the Drugstore, and under 3-118,
an action for breach of warranty must be commenced within 3 years after the
action accrues.

• Problem 187: Drugstore’s relief from Thief: they can sue under §4-207a
under the theory that the Thief breached the transfer warranty, because he was
not entitled to enforce the draft and the signature was not authentic.
• Damages from Thief: §3-416: typically won’t get attorney’s fees

• Conversion Liability: misappropriation of another’s property


• Problem 188:
• §3-420a: An instrument is converted if it is taken by transfer, other than negotiation, from a
person to entitled to enforce the instrument.
o Either the payee (original holder) or the person to whom the instrument who negotiated to
can bring suit.
o Any action can’t be brought by:
 the issuer or acceptor of the instrument or
 a payee or indorsee who did not receive delivery of the instrument directly or thru an
agent.
o Forged or missing indorsements constitute a conversion whenever there is a forgery of a
necessary indorsement or a necessary indorsement is missing.
o Good faith is no defense.
• §3-420c: a representative other than a depository bank who in GD dealt with an instrument or its
proceeds on behalf of one who was not entitled to enforce the instrument is not liable in conversion
beyond the amount of any that have not been paid out.
o §3-420: No, the check is your property and they would be converting to their property
without proper payment if they didn’t pay you.
• Problem 189: Under §3-420a, Dodger is guilty of conversion because he took by transfer
other than negotiation; he misappropriated Wellborn’s check by taking his wallet; Wellborn
has an action for conversion as the payee.
• Problem 190: Is Portia the proper P? NO, Portia is the issuer and only the payee has a
sufficient property interest as holder to sue under conversion, so 1) Landlord John Clark
would be the only one who could sue under conversion as payee.

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• 2) What relief does she have? No relief under §3-420, because she is the issuer of the
converted instrument, but under§4-401a, she can argue that is not properly payable.
• 3) If the landlord brings a 3-420 conversion action, it would be against Octopus Bank for
making payment with respect to the instrument for a person not entitled to enforce the
instrument or receive payment.

• Problem 191: No, under §3-420a, (ii), Octopus would not have an action for conversion,
because as they did not receive delivery of the instrument. The Bank however has recourse to
sue on the underlying obligation under §3-310 (b) 4, which would allow them the ability to
go after Sleepy Hollow because it was stolen and therefore they are under no obligation to
enforce the check.

 Leeds v. Chase Manhattan Bank:


 Facts: Plaintiff, Mother and Son Leeds hired an attorney to represent them in a mortgage
foreclosure action and the purchase and resale of a property in East Orange, NJ, on which
they held a mortgage and had purchased at a foreclosure dale. Their Attorney, Egnasko,
accepted a settlement check on their behalf for 87,293 and change. Their attorney altered
the check to read: Egnasko, Attorney’s for the Leeds and the Bank and signed and
deposited the check into his attorney trust account at Chemical Bank. Chemical
Bank/Chase, as successor in interest to Chemical, stamped the check “endorsement
guaranteed” and presented it to Summit, which honored it’s own teller’s check. He then
made a check to the Leeds for 92k and they were paid from an attorney trust account at
the Trust Company of NJ. The problem is that Egnasko improperly used funds from the
Trust Company account and money that belonged to Shrewsbury State Bank (that was to
be used to pay off a mortgage for an unrelated real estate transaction) was used to pay the
Leeds.
 Pro: Shrewsbury sued the attorney and the Leeds seeking repayment of the funds
traceable to the attorney’s fraud. The Leeds cross claimed that they didn’t owe the
converted monies, because Chase (the depository bank) and Summit, the
drawer/drawee/payor bank were strictly liable for the conversion due to payment on the
altered settlement check. Chase and Summit were granted summary, P Leeds appeals.
o CT: A depository bank is strictly liable for conversion on a forged indorsement check if it
makes payment with respect to an instrument for a person not entitled to enforce the
instrument or receive payment.
• Chase: The Attorney accepted the check as an agent for the Leeds and as such
they are proper P’s for conversion as Chase paid someone not entitled to be paid, the
Attorney.
• Summit: Not liable under 3-420 because they acted in GF; under state law,
damages are limited against everyone except a depository bank when they acted in GF
with the instrument, to the amount of any proceeds that it has not paid out fully paid,
so therefore they are not liable.

• Problem 192: §3-110D and 3-420A: Is a missing signature treated the same as a
forged one? No. Has the presenting bank breached the warranty that it is a person entitled
to enforce the check? Yes, under §3-110 d, when the instrument is payable to two or
more persons not alternatively (Joe and Mary), then it may only be enforced by all of
them. Could Mary sue the banks in conversion? Yes, under §3-420, the bank made

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payment for someone not entitled to payment, because Joe and Mary BOTH had to
indorse the check for proper payment.
o Or: either can sign
o And: both must sign, like a restrictive indorsement.

• Forgery of the Drawer’s Name: basic rule: of Price v. Neal: the drawee (person ordered to make
payment of the draft) who pays or accepts a draft takes the risk of a forged drawer’s signature.
Later cases established that the drawee does not take the risk of a forged indorser’s (person who
endorsed the draft) signature.
 Price v. Neal
 Price agreed to pay any bills of exchange that Sutton drew on Price. Lee forged Sutton’s
name on two of the bills made payable to Ruding. After several people endorsed the bills,
Neal received them. Endorsed them, guaranteed “Accepted, John Price” on one. Price
learned that Lee had forged Sutton’s signature. Price sued Neal for return of the money.
Price said Neal had to return the money because he had paid by mistake and Neal argued
that he should keep the money because Price was negligent in failing to check whether
Sutton signed the bills.
 Neal wins; “ends the transaction”
o Rule: if the drawee pays or accepts the draft, it cannot pass the risk of the drawer’s
signature being forged off onto a prior good faith party.
 The rule has been expanded by judicial application to place on the drawee the risk of any
mistaken payment not covered by the presentment warranty.

• Forgery of a drawer’s name= the drawee’s is always liable (they are in the best position to know
their own customers signature)

• Decibel Credit Union v. Pueblo Bank and Trust


• A thief stole checks that were Decibel’s (drawee) customer’s checks; the thief forged 14
checks over 40 days to the tune of 2,350 and each were cashed at Pueblo Bank, which is where
the thief had an account, but no money. Decibel requested the money be returned to their
customer, Pueblo declined. Suit follows; judgment for Decibel at TC. Reversed for Pueblo at
Appeals.
• Rule: the presenting bank (Pueblo) does not extend a presentment warranty
(warrants all signatures to be genuine) to a drawee bank (Decibel) for amounts paid by
drawee bank on forged checks.
• Same rule as Price ,just 2000 case 

• Problem 193: Who can you sue and under what theory? Only the forger; the bank is the
drawee bank so they are stuck with the loss otherwise Price v. Neal rule.
• Problem 194: No, making a mistake on the signature cannot pass the loss back to the
innocent parties.

• Alteration: §3-407: a fraudulent alteration discharges a party whose obligation is affected by the
alteration unless they have assented to the change.
• §3-406a: Effect of Negligence: DEFENSE only: a person whose failure to exercise ordinary case
substantially contributes to the alteration is not discharged and is liable on the instrument as
altered.

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o Burden: of proving failure on the person asserting the preclusion
o Substantial Contribution Test: does the conduct of the alleging party substantially
contribute to the forgery or alteration?
 Examples:
 Writing a check in pencil
 Losing a check and failing to do anything about it
 Writing the wrong address
 Failure to draw a line after the number
 Corporation allowing the same person to draw checks and deposit money
 Corporation allowing the person who received the invoices to write checks
 Corporation’s failure to recognize a forged signature
 Blank spaces on the check
• §4-409 d: Incomplete Instruments: a HIDC and a drawee/payor bank may enforce the item as
completed, even though the bank knows the item has been completed, unless it knows the
completions was improper.
 Problem 216: What legal defenses does Innocent have? §3-407: Under §3-407 b, a
fraudulent alteration completely discharges a non-negligent person whose negotiable
instruments contracts is changed by alteration.
 Problem 217: The bank should argue that Johnson was negligent (the check was bearer
paper because it was blank) and they should try to recover under 3-407c, as the payor
bank who paid a fraudulently altered instrument “enforcing its rights according to the
terms that they were completed.”
 Problem 218: 1) NO, the Nephew’s obligation is not discharged under 3-407 because it
was altered by a third party with NO INTENT TO DEFRAUD, and the Nephew would
still owe the 1,000 for the care. 2) If Molly had eaten the note instead, under 3-309a, he
would still be responsible for the money and they could recover under this section
because they meet all three of the criteria in A, when the note is gone.
 Problem 219: Smith can ask the bank to recredit the unauthorized amount, $495, under
§3-407 (b) because he is discharged as the fraudulent alteration, but he authorized 5.00 to
be paid under the proper payable rule 2) what remedy for the bank? Under 4-208a, when
the friend presented the check to be cashed, he warranted that the draft was not altered.
 If you write a check, you have to do everything you can so that the check looks like it has
been altered if it has otherwise, if you can’t tell it’s altered, the transfer creates a
HIDC.
• §3-403a: In forgery, the forger “signs” his own name by the forgery, so they are liable, but no one
else is liable because the drawer’s signature was forged. (to reduce harshness of Price)
o Problem 195: a forgery of the drawer’s name, the drawee is liable.
• §3-404: Imposter Rule: if you have someone who is impersonating someone and someone writes a
check to them, it qualifies as that imposter’s signature and it verifies that it’s properly payable.

Review of Article 2

UCC only applies to transactions in GOODS.

***Must cite the code sections on exam when discussing the material. A big part of grade.

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Be responsible for all code sections in syllabus: Article 2 code sections to know as listed on syllabus: 2-102, 2-
105, 2-104, 1-203, 2-201, 2-202, 2-204, 2-205, 2-206(Scope, Merchants, S/F, PER), 2-207, 2-403, 2-312, 2-313,
2-314, 2-315(Contract Formation, Battle of the Forms, Warranty of Quality, Title), 2-316, 2-719, 2-607, 2-515,
2-508, 2-318(Disclaimer and Limitations Notice, Privity), 2-305, 2-311, 2-601, 2-508, 2-612, 2-602, 2-601, 2-
607(Terms of the K, Gap Filling, Perfect Tender, Installment Sales, Cure, Rejection, Acceptance, Revocation),
2-509, 2-319, 2-326, 2-510, 2-503, 2-504, 2-610, 2-616(Risk of Loss: Breach, No Breach, Impossibility of
Performance), 2-711, 2-714, 2-715, 2-717, 2-712, 2-713, 2-610, 2-611, 2-612(Seller’s remedies and Buyer’s
remedies), 2-502, 2-507, 2-403, 2-718, 2-725(Anticipatory Repudiation, Goods Oriented Remedies, LDC,
Restitution, S/L-this section also includes Sections 2-711, 2-714, 2-715, 2-717 from previous lesson) - - - 50
code sections to be responsible for on Article 2

Also know any code sections mentioned in cases/problems.

Not responsible for Leases 2A, Magnuson Act.

Be comfortable w/ 1-201, 2-201, 2-105, 2-104, 2-106, 2-101, 2-103, 2-204.

2 tests used to determine if UCC applies to hybrid situations:


1. Predominant Purpose Test- When you look at the goods and service, which component predominates? If
service predominates, then the UCC will not apply. If goods predominate, UCC will apply.
2. Gravaman Test- Looks at the complaint the lawyer has filed. It asks whether the essence of the lawsuit
relates to a good or service. Atty. has a great deal to do with this determination.
--Talk about both if says it is a hybrid unless she says it is a jurisdiction that accepts one of them.

How do you create a K? Offer, acceptance, consideration. We began our class with discussion of Statute of
Frauds under 2-201. Has to be a writing, goods costing more than 500 dollars, has to be signed by the parties,
and must state a quantity. Be comfortable with this provision. Be comfortable with paragraph 2 of this
provision: special merchant confirmation section(?). Be familiar with paragraph 3 which talks about
exceptions.

2-202 Parol Evidence Rule: Only looking at it as it as it relates to goods. It must be (1) writing, (2) intended to
be the final written expression of the parties, and (3) can’t be contradicted by anything, but it may be
supplemented by course of dealing, course of performance, and Usage of trade. Consistent additional terms
would not come in unless you can show that they certainly would have been included in the contract.

2-205 Firm Merchant Offer- says you have merchant, sale of goods, signed writing which makes assurances
can’t be revoked for a period of up to 3 months (rvw).

***2-207 Battle of the Forms- Be very comfortable with this. It is definitely on the test. Refer to handout.
Doesn’t matter if it’s additional term or different term, you ask: does it come in? Does the term change a
dickered term? (Price, Quantity) If it changes one of these, that means the party does not want the K as it is and
so it is a counteroffer. Go to 2-207(3): if there are no dealings between the parties, the other party can walk
away (rvw). Now you have a K by conduct. Ask yourself: What are the terms of the K. Terms of the K are
those that are agreed upon by the parties as well as any gap fillers (rvw handout for gap fillers)---2-308 (place,
time, payment, implied warranty of merchantability and implied warranty for a particular purpose (meaning
that, if the parties have introduced different terms, and one of those terms is one of these gap fillers, you throw
the parties’ terms out and replace them with the gap fillers.) If there is no change in a dickered term, you now
ask if there is Proviso language. What is proviso language? It has to be EXACTLY the language she has given
us: “Our acceptance is expressly conditional on your assent to our terms.” Only this language triggers Proviso

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language. “Our acceptance is SUBJECT TO…” does not constitute proviso language. She wants the exact
wording mentioned above!!! If it has this language, then it is a counteroffer by definition, so you go over to 2-
207(3) and you look at the conduct of the parties. If they haven’t done business in the past, the party can walk
away from the counteroffer. BUT, if they have done business you have a K based on the conduct. What are the
terms of the K? The terms that agreed upon as well as the UCC gap fillers. If it doesn’t change a dickered
term, and it doesn’t trigger proviso language, then you have an acceptance. So in this scenario, go to the left
side of the handout. 2-207(2) says we have acceptance and the first thing you do is decide whether it was
between merchants. If it is NOT between merchants, the changes do not come in unless the offeror explicitly
agrees. If it is beteen merchants, it automatically comes in(this is very rare because you can usually argue that
one of the 3 exceptions applies). Where the offeror says he doesn’t want the other terms it does not come in.
Also, where, within a reasonable time, the offeror objects to it, it does not come in. Another situation is
where(the most common scenario) the changed term is not material. In this case, the terms can be changed and
they will come into the K. Now, in order to get out of the K, you must argue that it materially alters the K.
How do you show this? Discuss issues of Surprise, Hardship. There are subjective and objective tests for
showing this.

Warranty- Risk allocation devices. Who is in the best position to insure against loss? The seller is always in
the best position(start here in analysis), BUT you must ask if the seller has shifted the burden to the buyer.
Look to see if the seller did anything to shift the risk of loss to the buyer. If he has not taken a step to shift the
burden, the burden is on the seller. With warranties, we are looking at what the seller is saying or doing that
explains what the product will do. There are two types of warranties: (1) Warranties of title(not tested), (2)
Quality Warranties (we deal with these). Quality warranties are of two types: (1) Express warranties, and (2)
implied warranties. Implied warranties are of two types as well: (1) implied warranty of Merchantability
(under 2-314) and (2) Implied warranty of fitness for a particular purpose (under 2-315). With express
warranties, we look at whether the seller has said something, given you a picture, model, or sample. Once they
have done this, the law says they have done something which has created the basis of the bargain. Basis of the
Bargain- there is now an expectation from the buyer that there is something else included in the deal. There is a
presumption that the buyer might have relied on this information(very low burden to meet.) When an express
warranty has passed, the seller is pretty much stuck with it. With implied warranties, unlike express warranties,
they attach by operation of law. They are automatically there. Implied warranty of merchantability simply
requires that goods are fit for their ordinary use. There are a number of requirements for this implied warranty,
but the only one we must zero in on is: That goods are fit for their ordinary use. There has to be a merchant
with regard to the goods that are to be sold (with the Implied Warranty of Merch.) AND, you have to show
that the goods are fit for their ordinary use. You don’t have to show reliance by the buyer in order for the
warranty to kick in. Under 2-315 – Implied warranty of fitness for a particular purpose, the seller doesn’t have
to be a merchant. You must prove, however, that the seller had reason to know how the buyer intended to use
the goods. Must show Actual Reliance (with regard to whom? Rvw).

Be comfortable with the Foods problems in terms of pits in olives, bones in fish, shells, in soup, etc. What
happens when you are eating foods that may have inherently dangerous items in them? Was it within the
REASONABLE EXPECTATION OF THE BUYER that these particular things would have been removed from
the goods? Can the seller disclaim warranties? Yes. 99% of the time he probably will. UCC says that the
seller cannot disclaim express warranties. Once the seller has created express warranties, they are almost
impossible to get away from. BUT, sellers can disclaim the implied warranties. Under 2-316 seller can
disclaim implied warranties by using “as is” language or, if there is a requirement by the seller to inspect the
goods, and the buyer refuses to do so, the implied warranties with regard to the good are thereby disclaimed.
Under 2-316, in order to disclaim the implied warranty of merchantability, the disclaimer does not have to be
written, but if it is written, it must be conspicuous(rvw). Seller can disclaim the implied warranty of fitness for
a particular purpose by (rvw). Under 2-719, this warranty can be limited by limiting it to repair or replacement

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(no money back) so long as the K does not fail of its essential purpose. If it fails of the essential purpose, the
buyer can then sue based on an expectation of reliance. If there is personal injury, this is prima facie evidence
and there is a presumption that it would be unconscionable to make the buyer bear the risk of loss. In other
scenarios, you must show that it would be unconscionable for buyer to bear the risk of loss.

Defenses that a seller has in Warranty actions: Notice, Privity(she is not testing us at all on Privity 2-318).
With Notice (2-607), the seller has to give the buyer notice. If he doesn’t, and there are defects, the buyer is not
liable.

Terms of the K – Remember the gap fillers (2-305 to 2-311).

Performance under the K- - be comfortable with TENDER. Goods do not have to be delivered. The buyer duty
to pay is conditional on the seller’s tender of the goods. Look at 2-507 and 2-511 which say that you can’t sue
unless one of the parties does not perform under the K. Look at PERFECT TENDER RULE(2-601) with regard
to Performance (handout). Goods have to be delivered perfect as to the K. This doesn’t mean “perfect goods”
but means that delivery must take place exactly as set out in the K. If delivery is not as set out in the K, the
buyer has several options: (1) can reject it all, (2) accept it all, or (3) accept a commercial unit (rejecting the
rest). The perfect tender rule is very harsh and so it is cushioned by the right to cure under 2-508, which says
that you have an automatic right to cure by the time set forth in the K. You have additional, reasonable amount
of time to cure under 2-508 if you have a SELLER SURPRISE EXCEPTION. The other cushion with regard to
the PTR is 2-612 (Installment K’s) where PTR does not apply. If it is a one-shot deal the PTR applies(2-601).
If it is installment K, the PTR does not apply and 2-612 applies. This section makes it more difficult to get out
of the contract because it has provisions saying that the installment has to impair the value of the entire K. With
Perfect tender and installment, the seller can either accept or reject. With acceptance under 2-606(?), remember
possession does not mean acceptance. The buyer must have a reasonable opportunity to INSPECT, before he
can be said to have accepted the goods. Once there is acceptance, the only way for the buyer to get out of the K
is by REVOCATION. This is the hardest standard to meet. Under 2-608, with revocation, the buyer must show
SUBSTANTIAL IMPAIRMENT to the value of the K. If buyer rejects (under 2-602), SEASONABLE
NOTICE (as well as reasonable notice) to the seller is required. Remember, there can be acceptance of goods
if they are not rejected in the proper way. Be familiar with all these provisions as well as the seller’s RIGHT
TO CURE.

Remember with Risk of Loss – it is a risk allocation device which is used to determine who is in a better
position to deal with loss on the K. Always start with the seller and then determine if it has been shifted to the
buyer. 2-509—we deal with risk of loss when there has been no breach by either party. 2-510- deals with who
should bear the risk of loss if there is a breach. With NO BREACH (2-509), we must determine what kind of K
it is, either SHIPMENT K or DESTINATION K. Seller, with shipment K, only has a duty to tender the goods
to the carrier, and if loss occurs while in transit, the buyer bears the risk of loss. With a destination K, the risk
of loss has not shifted to the buyer until the goods have been delivered and duly tendered to the buyer at that
particular location. (This is very important and will be on test.) Shipment terms to know: FOB(free on board),
CIF, CNF. FOB can be either shipment or destination K. It just depends on where the goods are being sent to.
CIF and CNF are ALWAYS SHIPMENT K’s, meaning that the seller has gotten insurance and has covered the
cost of this insurance in the freight costs. With these latter terms, the insurance is probably blanket insurance.
EX SHIP basically means that goods have to be duly delivered and they have to be put in a place alongside the
ship. If the K is neither a shipment nor destination K, it can be a bailment, which means that the buyer has now
gotten possession of the goods but may not have title. If the K does not fall into one of these categories, there is
a catch-all: if the seller is a merchant, the risk of loss shifts upon receipt; if a non-merchant, the risk of loss
shifts upon payment for the goods. With risk of loss where there HAS been a BREACH, look at 2-510.
(CAUTION: be sure whether there is a breach or not). This provision says that if the buyer is in breach, and

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the seller still has physical possession of the goods, the seller’s insurance must take care of the loss, and, to the
extent that it doesn’t, the buyer’s insurance must pick up the remaining loss. 2-510 simply tries to put the risk
of loss on the party who is in the best position to deal with it. Usually in this situation, the non breaching party
has physical possession of the goods.

REMEDIES: broken up into seller’s remedies and buyer’s remedies under the UCC. Seller’s remedies have to
be applied liberally. We break up seller’s remedies by asking whether the goods have been accepted or rejected
by the buyer. If there is ACCEPTANCE BY THE BUYER: the seller under 2-709 is entitled to payment for
the goods that were delivered. If NO ACCEPTANCE BY THE BUYER: seller has the right to resell the goods
under 2-706(?). Seller can get the difference between the K price and the resell price WITH any
INCIDENTAL damages (No Consequential). OR the lost volume seller has the right to, (in 2-708(sub 2?), pick
up the difference between what was actually sold and what the entire unit would have sold for (RVW-not very
clear on this)- - including reasonable profit and overhead costs. DO NOT worry about calculating damages, but
you must understand the analysis that goes into this. BUYER’S REMEDIES: they almost mirror the seller’s
remedies. If the goods have been accepted and there is something wrong with them, the buyer gets to sue for
the difference between the goods as delivered and what he contracted for, and he gets to recover
CONSEQUENTIAL AND INCIDENTAL damages(2-714 and 2-715). If the buyer has not accepted the goods,
2-712 allows the buyer to COVER and recover the difference between the K price and the resell price along
with any consequential and incidental damages. What if the buyer does not want to cover? The law does not
require him to cover, and the damages are the difference between the K price and the Market price.

Anticipatory Repudiation: be comfortable with this! It happens in the case where either party comes forth and
says “I will not perform.” This will be treated as a breach under 2-610. 2-609 also applies. Anticipatory
repudiation can happen in the case where one of the parties is simply not sure the other party will perform(?
Rvw). In this case Adequate assurances can be demanded. The other party can retract the anticipatory
repudiation under 2-611.

Statute of Limitations (Rvw-what section applies?): 4 years unless the seller does something and extends the
time for performance. Statute of Limitations (under subsect. 2) does not begin until you know or should have
known of the breach.

---End of RVW of ARTICLE 2---


Article 3 and 4 Code sections covered: 3-104, 3-100’s, 3-103, 3-205, 3-302, 3-305 (Negotiability, HDC), 3-
305, 3-601, 3-401, 3-308, 3-602, 3-310, 3-309, 3-401, 1-201(39), 3-412, 3-414, 3-503, 3-501, 3-409 (HDC-
defenses, Claims, Contract Liability, Underlying Maker, Drawer), 3-415, 3-419, 3-603, 3-310, 3-605, 3-305, 3-
408, 3-402 (The nature of Liability, Indorser, Liability, Suretyship, Drawee, Agent), 3-401, 3-403, 4-402, 4-
405, 4-403, 4-407 (Banks and their Customers, Checking Accts., Stop Orders, Bank Statements), 4-215, 3-418,
3-416, 3-417, 3-407, 3-406 (Wrongdoing and Error, Forgery and Alteration)---34 specific sections to be
responsible for in addition to 3-100’s

IN DUE COURSE(HDC) who then becomes what is known as a SUPER-PLAINTIFF. This person has no
NOTICE of any problems with the instrument. Being an HDC means you will get paid just as if someone gave
you cold, hard cash.

How do we create this magic paper (the negotiable instrument)? First, start with the concept of negotiability.
With negotiability, the paper has to look a certain way. The things we need to consider are the following 7
requirements: 1. There has to be a writing, 2. It must be signed (signature is defined under 1-201(rvw) 3. There
must be a present intent to authenticate (almost anything will qualify as long as this is met) 4. There must be an
unconditional promise or order (can’t put a lot of baggage and conditions on it)—(BUT, there are certain things

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you can put on the instrument. You can add things that are related to it or you can accelerate it without
destroying negotiability (rvw). 5. It must be for a SUM CERTAIN in money or somebody’s currency (official
government currency)—(But, we can also allow for interest in terms of things like variable interest rates). 6.
There can’t be any other promise, order, obligation, or power (meaning you can’t add excess baggage. You
should be able to look at it and see that, on its face, there are no restrictions. In other words, you should know
by looking at it that you will get paid. 7. It must be payable on demand and at a definite time (you should
know when you are going to get paid. Also it must be either BEARER or ORDER paper.)—rvw these
requirements from book. If it is missing one of these, it fails for negotiability. If there is a negotiability or
HDC issue on the exam, analyze these requirements to see if they are met.

How do you TRANSFER? It can be done in one of 2 ways. You can transfer with order paper or bearer paper.
With transfer we look at the 3 stages a check goes through: 1. ISSUANCE, 2. TRANSFER, 3.
PRESENTMENT. With the negotiation, we are looking at the transfer stage (the significant movement of this
instrument from one party to the next). With the transfer, we look at Order Paper. With Order Paper, in order
to transfer, you must have the proper indorsement (made out to the right person) AND the other person has to
have physical possession of it. With Bearer Paper, it doesn’t have to be indorsed, meaning that you’ve paid off
on it, and anyone having physical possession can get paid on it. We focus on the civil liability of who is liable
on a check. The person with physical possession of the instrument is a HOLDER, and we want to see if that
person is an HDC.

The issue of HDC: Look at 3-302(rvw.) The HDC is a super-plaintiff and will get paid unless the instrument
violates something very significant. Most of the issues that could otherwise be raised (as in breach of K) cannot
be raised against the HDC. When there are cases such as: you weren’t paid, there was fraud (can be in the
inducement), and many other scenarios CANNOT be raised against the HDC. To become HDC, you must first
of all be a HOLDER- 1-201(?), meaning one who has possession of the instrument in its proper form, it has
been negotiated, and it must have been given in GOOD FAITH, a principle that runs throughout the UCC.
GOOD FAITH, in terms of HDC, is not just honesty in fact, but the observance of reasonable commercial
standards (a current requirement). Once you take in good faith, you get VALUE. What does this mean? The
cases talk about value as opposed to consideration, and with VALUE it is a little more restrictive than
consideration. For instance, with consideration, you give a promise to do something. With value, on the other
hand, you must have PERFORMANCE. You want to make sure that the person has given up something (such
as a benefit). 3-302 covers the concept of VALUE. It says that a promise does not constitute value. Also, in
order to be an HDC, that person must not have had notice that there are any problems with the instrument.
Bottom line: you need 3 things to become an HDC: 1. must give VALUE, 2. Must accept in GOOD FAITH,
and 3. You cannot have notice that there is anything wrong with the instrument. The cases discuss situations
where a person is too close to particular circumstances to have given in good faith. The only thing that stops a
person from getting paid are the REAL DEFENSES: 1. infancy (a K with a minor, in most jurisdictions 18 and
under)—makes the K void, 2. Duress, 3. Illegality, 4. Fraud in Factum (this is not fraud in the inducement.
Here we are saying that the person signed , didn’t have knowledge of the circumstances, AND didn’t have a
reasonable opportunity to find out), 5. Incapacity (Mental - adjudicated incapacity), 6. Discharge of Insolvency
(rvw?) 7. Forgery. Everything else outside of these 7 Real defenses falls under the category of PERSONAL
DEFENSES, which CANNOT be used against a Holder In Due Course.

“Taking Under the Shelter of an HDC”—an HDC can transfer his rights over to someone else, who, under this
rule, is not an HDC, but has the rights of the HDC. (REMEMBER: for purposes of the exam, this person is not
an HDC, but has the rights of the HDC.) This person cannot sue the HDC because they have given no value.

LIABILITY: Will be determined by the capacity in which different actors have signed the instrument. If your
signature is not on the check, you have no liability on the check. BUT, your liability will kick in based upon

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HOW you signed the check. Here you must identify the actors: DRAWER, PAYEE, DRAWEE, INDORSER,
ACCOMODATION PARTY. When we look at this area, remember there are 5 things to look at: Who are the
parties, Proper payable rule (4-401?), warranties involved (transfer warranty, presentment warranty), conversion
(forgery—can we shift the liability to someone else? Look up code section). You don’t have to take checks as
payment of a debt, but, when you do, you run into the MERGER DOCTRINE which says that when you take a
check, that check and the obligation merge together, AND it suspends your ability to sue on the check until the
check has been dishonored.

When we look at the PARTIES, we look at the MAKER’S OBLIGATION. The Maker is primarily liable in
terms of the instrument. The DRAWER’s obligation is secondary in terms of liability. (RVW this. Aren’t the
drawer and the maker the same?) There must be PRESENTMENT, there must be a DISHONOR, and there
must be a NOTICE OF DISHONOR before one can become liable on a check. What happens is that, once you
write a check, your obligation is suspended and so you can’t get sued until the above 3 things take place.

DRAWEE’S OBLIGATION: Remember that this is in terms of the BANK. Their obligation is to their
customer (the DRAWER). Look at 4-401 which provides, insofar as the PROPER PAYABLE RULE, the
DRAWEE has to pay out on the check exactly as the customer requested or they are liable. There is no
obligation to anyone else for the DRAWEE, until they have actually accepted a particular check.

Also, focus on the INDORSER’S OBLIGATION: It is similar to the Drawer’s obligation in that the 3 things
(presentment, dishonor, and notice of dishonor) must take place before they are liable. With INDORSERS, the
liability goes UPSTREAM. The last indorser can sue the one who indorsed before them and so on and so forth.

SURETY OBLIGATION: a major area of litigation, the surety is like a COSIGNER. Also called:
ACCOMODATION PARTY, GUARANTOR, and INDORSER (unless suggested otherwise). The general rule
(3-419) talks about how you sign off as a Guarantor. You can sign off as a Guarantor for payment, or as a
Guarantor for collection. In looking at a guarantor for payment, this means that someone can go after you first
(as the guarantor) without having first to try to get the money from the debtor. With a Guarantor for Collection,
the person seeking to collect must go after the debtor for payment as well. The courts interpret this area
liberally.

What are your rights as a SURETY? If you are a surety, you have several rights: 1. the right to exoneration, 2.
the right to subrogation, 3. contribution, and 4. indemnification. With subrogation the surety can step into the
shoes of anyone who has a legitimate interest, claim or right against someone else. Banks use
SUBROGATION a lot as a way to defend themselves. SURETY LIABILITY with regard to being
DISCHARGED: When you are a surety and the debtor ATTEMPTS TO PAY, or the debtor and the creditor
EXTENDS THE TIME TO PAY ON THE DEBT. How does this affect the SURETY’s LIABILITY? (look up
the code section for this!) The gist of this is, if you are a surety, you are discharged to the degree that it can be
shown that the debtor attempted to pay (don’t spend a lot of time on this. It is not a major part of the test.). The
relevant section is 3-605. First of all, who is trying to pay the debt? If you have a circumstance where the
DEBTOR TRIES TO PAY THE DEBT to the creditor, and the creditor says no (in essence, that they will give
the debtor more time to pay), and the DEBTOR CANNOT PAY AT A LATER DATE, the SURETY, to the
degree that it can show that there was an offer, IS DISCHARGED FROM THE OBLIGATION TO PAY.
EXAMPLE: if the debtor offers to pay ½ the debt, and the surety can show this, the surety is only discharged as
to that ½ of the total debt. What happens when the SURETY COMES FORWARD AND TRIES TO PAY
THE DEBT (because the debtor can’t pay at that time)? The surety is not discharged. The right the surety has
is that it won’t have to pay the interest that accrues in the time it takes the debtor to pay. In addition to interest,
the surety does not have to pay any atty. fees, or anything more than what he would have had to pay had the
debt been paid off in time.

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WARRANTY: TRANSFER WARRANTY and PRESENTMENT WARRANTY. Presentment Warranty can


only be used by the drawee bank. When a check is presented to the drawee bank, then everyone who was
significantly involved in the check’s transfer has warranted that the party that presented the check was solvent,
that the check has not been materially altered, that they are a holder. This means that, once the check goes to the
DRAWEE BANK, they are transferring it back and trying to put the risk of loss on the party who has made the
presentment warranty to them that the check is good in all the above-listed ways and was not a forgery. The
Drawee Bank can use the Presentment Warranty to shift liability, and it also may use the Transfer Warranty
(which can be used by anyone)(rvw.)

FORGERY—2 rules (it is a non-issue with an HDC): Liability depends on whose name was forged. 1. If there
is a forgery of the payee name (versus a forgery of the drawer’s name), then the rule says that you go back to
the person who most closely dealt with the forger and put the risk of loss on them. 2. If there is a forgery of the
Drawer’s name, Price v. Neal (rvw.) says liability rests with the Drawee Bank. The Drawee bank cannot go
back and use the Presentment Warranty to shift the risk of loss away from itself. What is the liability of an
agent who signs off on the check (under 3-402)? There are only 2 things the agent is required to do to avoid
liability on a check: 1. must identify the principal when they sign, and 2. they must say that they are acting in
an agency capacity. If they fail to do one of these things, they will be liable and will have no way to get around
an HDC. They will have liability to a non-HDC unless they can show that it was not the intent of the particular
agent of the party they contracted with to not be liable on the K (rvw.) However, if you have a corporate check
that identifies the principal, then the agent does not have to identify the principal. It is clear who the principal is
on the face of the check.

When looking at BANKS, focus on the PROPER PAYABLE RULE (4-401). When you open a checking
account with a bank, you are the creditor, the bank is the debtor. The bank has to perform according to your
wishes.

STOP-PAYMENT(4-403)—be comfortable with this. ORAL STOP-PAYMENT IS GOOD FOR 14 days. A


Written stop-payment is good for 6 months. The BURDEN is on the customer to show that they have incurred
some loss. When looking at stop-payments, even if the bank paid and there was a stop-payment order,
subrogation can apply (under 4-407) and the bank can step into the shoes of anyone who has a legitimate
defense against the creditor. The bank, to the extent subrogation is applicable, does not have to recredit the
customer’s account.

Rules from the cases:

Week 1: Scope, Merchants, S/F, Parol Evidence Rule

1. Milau Assoc., Inc. V. North Avenue Development Corp.

Rule: When service predominates, and the transfer of personal property is an incidental feature of the
transaction, the implied warranty standards of the UCC will not apply.

Code sections involved: 2-315

2. Analysts Intern. Corp. v. Recycled Paper Products, Inc.

Rule: Under Illinois law, standard software is regulated as a “good,” but custom software may be either “good”
or service,” depending on the contract’s “dominate purpose.”

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Tests Involved: 1. Dominant purpose test: the court must inquire whether the “essence or dominant factor in
forming the contract was providing goods. (minority view)
But, some courts use the 2. “Gravaman Test”- tends to extend the UCC’s greater implied protections to
consumer items, even if a large part of the contract was their installation rather than manufacture.

Vocabulary:
1. FITNESS FOR A PARTICULAR PURPOSE: Warranty implied by the UCC in special circumstances.
Basically when the buyer of goods (i) knows nothing about the good’s quality, (ii) explains to the seller
that he needs the good for a specified purpose, and (iii) relies reasonably on the seller’s assurance that
the product is fit for that purpose, then the product must actually be usable for that purpose, or the seller
is liable. Thus, it protects buyers who rely on the seller’s recommendation.

2. MERCHANTABILITY: warranty implied by the UCC requiring that a product sold be salable as “a
product of that kind,” meaning it must fulfill the ordinary functions generally expected of products of
that kind. E.g., a product sold as a “chair” must be capable of doing the basic tasks people would expect
of a chair. Basically, this means that the item must not be defective, and cannot be marketed as
something tjhat it is not.

3. WARRANTY: Promise (explicit or implicit) made by a product’s seller about the product’s quality. If
the product does not meet the quality promised by the warranty, the seller is liable for damages.

3. Anthony Pools v. Sheehan

Rule: Even in a predominately service transaction, if consumer goods are sold which retain their character as
consumer goods, and the loss or injury resulted from a defect in the goods, the UCC implied warranties will
apply to the goods.

Code Sections: 2-314

Vocabulary:
GRAVAMAN: The material part of a cause of action or complaint; the specific injury complained of.

4. Sieman v. Alden

Rule: Under UCC Article 2 a merchant is a person who deals in goods of the kind or otherwise holds himself
out as having knowledge or skill peculiar to the goods involved. A person making an isolated sale of goods is
not a “merchant.”

Code Sections: 2-314, 2-315

5. St. Ansgar Mills, Inc. v. Streit

Rule: Whether a written confirmation sent to satisfy the statute of frauds has arrived in “reasonable” time is
usually a question of fact for the jury.

Code sections: 1-204, 1-102 cmt. 2.

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Vocabulary:

FUTURE (POSITION): Financial instrument whose value is based on the difference in the price of a
commodity today, and in the future. Such instruments are used to hedge (protect) against price swings for
needed raw materials, or for speculation. Ex. Say you make corn meal from raw corn, and know you will need
100 tons of corn six months from now, for Anna Nicole Smith’s birthday breakfast. However, you are afraid
that corn prices may rise by that date, making performance expensive. If you bought a future, it would amount
to the right to buy 100 tons of corn at today’s price (for a fee). If the price rose, the counterparty on your future
would pay you the price difference.

MERCHANT: A professional dealer in a specific good or service. Under the UCC, Merchants are often held to
stricter standards than amateurs engaged in a rare, unfamiliar business transaction.

STATUTE OF FRAUDS: Rule requiring certain contracts to be in writing to be enforceable, to prevent error
and perjury. This rule is now codified in the UCC.

6. Columbia Nitrogen Corp. v. Royster Co.

Rule: Evidence of course of dealing and usage of trade is admissible to explain and supplement an agreement if
such evidence is consistent with the express terms of the agreement.

Code Sections: 2-202, 1-205(4)

Vocabulary:
COURSE OF DEALING: Previous conduct between the parties to a particular transaction which can be
regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
See UCC 1-205(1).

EXTRINSIC EVIDENCE: Facts or evidence outside the face of the document, such as oral statements.

USAGE OF TRADE: Any practice or method of dealing having such regularity in a vocation or trade as to
justify an expectation that it will be observed with respect to the transaction in question. See UCC 1-205(2).

Week 2: Contract Formation, Battle of the forms, Warranty of quality, Title

7. Diamond Fruit Growers, Inc. v. Krack Corp.

Rule: When an acceptance of an offer expressly conditions its acceptance on assent to the additional terms
contained therein, the additional terms become part of the contract only if the other party gives specific and
unequivocal assent to the additional terms.

Code sections: 2-207

8. Bayway Refining Co. v. Oxygenated Marketing and Trading A.G.

Rule: When an acceptance adds a term to the offer, the party challenging the addition must prove the alteration
is “material.”

Code section: 2-207

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Vocabulary:

“BATTLE OF THE FORMS”: Situation where the offer does not match the acceptance perfectly, because each
party sends its own form offer and acceptance letter, which have conflicting terms favorable to them. This
situation is resolved under the rule of UCC 2-207(2).

9. Leonard Pevar Co. v. Evans Products Co.

Rule: A buyer accepting and paying for goods does not constitute assent to additional terms proposed in a
seller’s counteroffer.

Code Sections: 2-207

10. Klocek v. Gateway

Rule: In some states an arbitration clause included with a shipped product is not binding merely because the
buyer keeps the product.

Code section: 2-207

11. Moore v. Pro Team Corvette Sales, Inc.

Rule: In order to be effective, a disclaimer of the warranty of title must state what title, if any, the seller is
transferring, instead of just saying how the seller’s liability will be limited.

12. Shaffer v. Victoria Station, Inc.

Rule: The implied warranty of merchantability requires that, in order to be merchantable, a good must be
adequately contained, packaged, and labeled.

Code section: 2-314, 2-312, 1-103

Vocabulary:

IMPLIED WARRANTY OF MERCHANTABILITY: Section 2-314 of the UCC provides that, whenever a
merchant sells a product, there is an implied warranty that the product will be fit for the ordinary purpose for
which such goods are used.

13. Daniell v. Ford Motor Company

Rule: The implied warranty of merchantability means only that goods will be fit for the purpose for which they
are ordinarily used.

Code Section: 2-314, 2-315

14. Webster v. Blue Ship Tea Room, Inc.

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Rule: The implied warranty of merchantability is not an assurance that a product will be free of defects which
may be inherent to certain products.

Code Section: 2-314, 2-315

Vocabulary:

IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE: Section 2-315 of the UCC
provides that when a seller knows that a buyer plans to use a product for a particular purpose and also knows
that the buyer is relying on the seller’s judgment to furnish a product suitable for the buyer’s needs, there is an
implied warranty that the product sold will be fit for the buyer’s purpose.

Week 3: Disclaimer and Limitations notice, Privity

15. Bell Sports, Inc. v. Yarusso

Rule: A product manual’s factual affirmations about the product may create an express warranty, which cannot
be disclaimed.

Code Sections: 2-313 cmts. 1,3,4, 2-316(1)

16. Cate v. Dover Corp.

Rule: There is an implied warranty of merchantability for all contracts for the sale of goods unless there is a
statement to the contrary which would be conspicuous to a reasonable person.

Code sections: 2-314, 2-316

Vocabulary:

DISCLAIMER: Denial of a right of another; denial or disavowal of legal claim; section 2-316 of the code
provides that unless there are reasons to believe that a buyer was aware that no implied warranty attached to a
product, a merchant may effectively disclaim an implied warranty only through a conspicuous, written
disclaimer.

17. Bowdoin v. Showell Growers, Inc.

Rule: A post-sale disclaimer of warranties is ineffective as a matter of law.

Code section: 2-316

18. Rinaldi v. Iomega Corp.

Rule: In Deleware, a disclaimer of implied warranty of merchantability may be “conspicuous” under UCC
section 2-316(2) even if it is located inside the packaging and not readable until after purchase.

Code section: 2-316(2)

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19. Wilson Trading Corp. v. David Ferguson, Ltd.

Rule: A freely negotiated term of a contract is nonetheless not enforceable if it serves to deprive the contract of
its essential purpose

Code sections: Comments to 2-719

20. Pierce v. Catalina Yachts, Inc.

Rule: In some jurisdictions, a limited warranty’s bar of consequential damages is unenforceable if (i) the
warranty “fails of its essential purpose,” and (ii) under the circumstances, enforcing the warranty would be
“unconscionable.”

Code Section: 2-719

Vocabulary:
LIMITED WARRANTY: Warranty which limits certain damages, especially consequential damages, usually
by limiting the seller’s obligations to repairing or replacing the item.

21. Reed v. City of Chicago

Rule: An action for breach of warranty may be brought against a person who is the intended beneficiary of the
warranty, regardless of whether the person is in privity with the maker of the warranty.

Vocabulary:
HORIZONTAL PRIVITY: The legal relationship between a party and a nonparty who is related to the party
(such as a buyer and a member of the buyer’s family).

VERTICAL PRIVITY: The legal relationship between parties in a product’s chain of distribution (such as a
manufacturer and a seller).

22. East River Steamship Corp. v. Transamerica.

Rule: When a product fails and causes only economic damage or damage to the product itself, the proper
remedy is under warranty law, not products liability law.

Week 4: Terms of the contract, Gap filling, Perfect tender, Installment sales, Cure, Rejection, Acceptance,
Revocation

23. Landrum v. Davenport.

Rule: The omission of the price term from a written contract does not make the contract unenforceable if both
parties intended to be bound and there is a reasonably certain basis for giving an appropriate remedy.

Elements for breach of contract:


1. The existence of a valid contract
2. the plaintiff performed or tendered performance
3. the defendant breached the agreement
4. the plaintiff was damaged as a result of the breach

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Code section: 2-204, 2-305 and (1)(a)

Vocabulary:
Parol Evidence Rule: Prior oral agreements cannot be used to change or modify the terms of a written
agreement, unless mistake or fraud exists.

24. Cherwell-Ralli, Inc. v. Rhytman Grain Co.

Rule: Failure to pay as required in an installment contract may constitute a breach of the entire contract under
2-612(3).

Code section: 2-612©.

Vocabulary:
INSTALLMENT CONTRACT: A contract that requires or authorizes the delivery of goods in separate lots to
be separately accepted.

UCC Section 2-612: Gives the buyer the right to reject a defective installment if the non conformity
substantially impairs the value of that installment and cannot be cured by the seller, or to cancel the entire
contract if the defect in the installment substantially impairs the value of the whole contract.

25. Wilson v. Scampoli.

Rule: A seller may cure a nonconforming delivery by either repairing or replacing the nonconforming good.

Code section: 2-508

Vocabulary:

UCC SECTION 2-508: Gives a seller an opportunity to cure his nonconforming tender or delivery before the
expiration of the time for the performance of the contract, or after that period if the seller had reasonable
grounds to believe that the non-conforming tender would be acceptable, regardless of whether the seller makes
a money allowance.

26. Ramirez v. Autosport.

Rule: A buyer may reject defective goods no matter how minor or trivial the defect.

Code section: 2-601, 2-608, 2-711

Vocabulary:
UCC SECTION 2-601: Gives the buyer in single delivery contracts the right to reject, accept, or accept and
reject in part goods that fail to conform to the contract “in any respect.”

UCC SECTION 2-608: Allows the buyer to revoke his acceptance within a reasonable time if the
nonconformity substantially impairs the value of the goods to him, provided that he accepted them on the
reasonable assumption that the nonconformity would be cured and it has not been, or the nonconformity was
undiscovered due to the difficulty of discovery or by seller’s assurances.

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UCC SECTION 2-711: Specifies the buyer’s remedies in general, including the right to cancel and to recover
so much of the purchase price as has been paid.

27. Plateq Corp. of North Haven v. Machlett Laboratories, Inc.

Rule: A buyer accepts goods when he signifies to the seller that they are conforming or that he will take them
in spite of their non-conformity.

Code section: 2-606: Acceptance of goods occurs when the buyer, after reasonable opportunity to inspect the
goods, signifies to the seller that the goods are conforming or that he will take or retain them in spite of their
nonconformity; or when the buyer fails to make an effective rejection under 2-602, but such acceptance does
not occur until buyer has had a reasonable opportunity to inspect them; or when the buyer does any act
inconsistent with the seller’s ownership.

28. Rester v. Morrow.

Rule: The jury decides whether the value of a good has been substantially impaired to the buyer.

Code section: 2-608 Allows the buyer to revoke his acceptance within a reasonable time if the nonconformity
substantially impairs the value of the goods to him, provided that he accepted them on the reasonable
assumption that the nonconformity would be cured and it has not been, or the nonconformity was undiscovered
due to the difficulty of discovery before acceptance or by the seller’s assurances.

Week 5: Risk of Loss: Breach, No Breach, Impossibility of Performance.

29. Cook Specialty Co. v. Schrlock.

Rule: A seller, under a “F.O.B. seller’s warehouse” delivery contract, does not have an obligation to investigate
the amount and terms of insurance held by the carrier before the risk of loss will pass to the buyer.

Code section: 2-319, 2-504

Vocabulary:
CONSEQUENTIAL DAMAGES: A loss which is not a direct result of the breach, but which is a consequence
thereof

30. Rheinberg-Kellerei GMBH v. Vineyard Wine Co.

Rule: The risk of loss under a contract not requiring delivery to any particular destination does not pass to the
buyer upon delivery to the carrier where the seller has failed to give the buyer prompt notice of shipment.

Code section: 2-509(1), 2-504

Vocabulary:

Bill of Lading: A written document from a carrier as evidence that certain identifiable goods have been
accepted by it from another for transport and delivery to another person and location.

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31. Jakowski v. Carole Chevrolet. Inc.

Rule: The risk of loss remains on the seller for non-conforming goods until he cures the defects or the buyer
accepts the goods.

Code section: 2-510(1) Provides that, where the seller delivers or tenders nonconforming goods, the risk of loss
remains on the seller until he has cured the defects or until the buyer accepts the goods.

32. Arabian Score v. Lasma Arabian Ltd.

Rule: The commercial impracticability doctrine does not excuse performance for events that are reasonably
foreseeable.

33. Louisiana Power and Light Co. v. Allegheny Ludlum Industries.

Rule: A party to a contract who is insecure about the other party’s performance may demand assurance of
performance and treat the failure to provide such assurance as repudiation of the contract.

Code section: 2-609 This section provides that ‘a contract for sale imposes an obligation on each party that the
other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity
arise with respect to the performance of either party the other party may in writing demand adequate assurance
of due performance. . . after receipt of a justified demand failure to provide within a reasonable time not
exceeding thirty days such assurance of due performance as is adequate under the circumstances of the
particular case is a repudiation of the contract.’

SECTION 2-615 (a) provides that a seller’s delay in delivery or non-delivery is excused ‘if performance as
agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic
assumption on which the contract was made.

Week 6: Sellers Remedies and Buyers remedies

34. Teradyne, Inc. v. Teledyne Industries, Inc.

Rule: All direct costs of producing a product, including the wages of testers and employee benefits, should be
deducted from the contract price to determine a volume seller’s lost profit.

Code section: 2-708(2), 2-708(1)

35. Hughes Communications Galaxy, Inc. v. United States.

Rule: In the event of a seller’s breach of contract, under UCC section 2-712 the buyer may cover; if the cover is
reasonable, the buyer may recover its increased costs from the seller.

Code section: 2-712, 2-715

Vocabulary:

CONSEQUENTIAL DAMAGES: Damages that were caused as a direct foreseeable result of wrongdoing.

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36. Tongish v. Thomas.

Rule: An injured buyer should receive market damages rather than its actual damages if there is no valid reason
for the seller’s failure to perform the contract.

Code section: 2-712, 2-713

Week 7: Anticipatory repudiation, goods oriented remedies, LDC, restitution, S/L

37. Poli v. DaimlerChrysler Corp.

Rule: Under UCC 2-725, a breach of warranty claim accrues when the breach is or should have been
discovered, not when the goods are delivered to the buyer.

Code section: 2-725(1), (2)

Vocabulary:
ACCRUE: The coming into being of the right to bring a lawsuit.

Week 8: Negotiability, HDC.

38. Triffin v. Dillabough.

Rule: Money orders which contain a promise to pay on the front but state that they will not be paid if stolen,
altered, or forged on the back still qualify as negotiable instruments under the UCC.

39. Woodworth v. The Richmond Indiana Venture.

Rule: A promissory note containing a forfeiture provision exercisable only at the option of the original issuer
makes the note non-negotiable for purposes of the UCC.

Code section: 3-101, 3-805

Vocabulary:
FORFEITURE PROVISION: A term in a contract or note which allows the divestiture of certain property
without compensation as a result of non-performance of some obligation.

40. Falls Church Bank v. Wesley Heights Realty, Inc.

Rule: A bank may achieve the status of a holder in due course of negotiable paper deposited with it by a
customer to the extent that the bank has a acquired a security interest in the paper.

Code section: 4-210, 4-211

41. General Investment Corp. v. Angelini.

Rule: A party cannot obtain holder in due course status where the circumstances show that he deliberately
evaded knowledge out of a belief that investigation would disclose a defense to the instrument.

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Vocabulary:

GOOD FAITH: as defined by the code, it is honesty in fact and the observance of reasonable commercial
standards of fair dealing. See UCC 3-303(a)(4).

42. Any Kind Checks Cashed, Inc. v. Talcott.

Rule: A holder in due course must act in good faith, which means acting according to reasonable standards
intended to result in fair dealing.

Vocabulary:
HOLDER IN DUE COURSE: A person who in good faith for a negotiable instrument that is complete and
regular on its face, is not overdue, and, to the possessor’s knowledge, has not been dishonored. Under UCC 3-
302, a holder in due course takes the instrument free of all claims and personal defenses, but subject to real
defenses.

43. Winter and Hirsch, Inc. v. Passarelli.

Rule: A co-originator of a loan is charged with knowledge of its terms and cannot claim the status of a holder
in due course.

Vocabulary:
CONFESSION OF JUDGMENT: Also called cognovit judgment. It is written permission from the debtor
which allows the creditor on default to obtain a judgment against the debtor. Such agreements are either
prohibited or greatly restricted in most states.

Week 9: HDC-defenses, Claims Contract Liability, Underlying maker, drawer.

44. Jones v. Approved Bancredit Corp.

Rule: A finance company will be denied holder in due course status where it maintains a close business
relationship with the dealer from whom it buys paper.

45. Sullivan v. United Dealers Corp.

Rule: A purchaser for value can become a holder in due course if, at the time the instrument was negotiated, the
purchaser had no notice of defenses against the instrument.

46. Triffin v. Somerset Valley Bank.

Rule: Under the shelter rule, a transferee of a negotiable instrument is a holder in due course if the transferor
was, even if the transferee had notice of defenses to the instrument.

Code section: 3-202 cmnts. 2 and 3

47. Federal Deposit Insurance Corp. v. Culver.

Rule: Fraud in factum can be asserted as a defense against a holder in due course if the maker had no
knowledge or reasonable opportunity to obtain knowledge of the instrument’s character or essential terms.

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Code section: 3-305(a)(1)(iii)-codifies the fraud in factum defense as a misrepresentation that “has induced the
party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its
character or essential terms.”
-3-305 cmnt. 7-provides that fraud in factum often occurs when the maker is tricked into signing a note in the
belief that it is merely a receipt or some other document. The test is that of excusable ignorance of the contents
of the writing signed. The party must not only have been in ignorance, but must also have had no reasonable
opportunity to obtain knowledge.

48. Sea Air Support, Inc. v. Hermann.

Rule: A promise to perform future services does not constitute taking “for value” for purposes of becoming a
holder in due course.

Code Section: 3-305(a)(ii)

49. Kedzie and 103rd Currency Exchange, Inc. v. Hodge.

Rule: Unless an instrument arising from a transaction is, itself, made void by statute, the illegality defense is
not available to bar the claim of a holder in due course.

Code section: 3-305

50. Virginia Nat’l. Bank v. Holt.

Rule: The presumption that a signature on a negotiable instrument is valid can be overcome by introducing
evidence sufficient to support a finding that the signature is forged or unauthorized.

Code section: 3-308

51. Herzog Contracting Corp. v. McGowen Corp.

Rule: Parol evidence may be introduced against a party other than a holder in due course to show that an
unambiguous instrument was not intended to create a binding contract.

Code section: 3-105(b)-provides that “an instrument that is conditionally issued or is issued for a special
purpose is binding on the maker or drawer, but failure of the condition or special purpose is a defense.” Cmnt 2
says that it “continues the rule that nonissuance, conditional issuance or issuance for a special purpose is a
defense of the maker or drawer of an instrument” and “can be asserted against a person other than a holder in
due course.”
3-117-provides that “subject to applicable law regarding exclusion of proof of contemporaneous or previous
agreements, the obligation of a party to an instrument to pay the instrument may be modified, supplemented, or
nullified by a separate agreement of the obligor and a person entitled to enforce the instrument.” It also says:
“to the extent that an obligation is. . . nullified by an agreement under this section, the agreement is a defense to
the obligation.”

Week 10: The nature of liability, Indorser Liability, Suretyship, drawee, agent

52. Ward v. Federal Kemper Insurance Co.

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Rule: Mere possession of a check, without negotiation, does not constitute acceptance of the funds.

Code section: 3-310- provides that in the case of an uncertified check, suspension of the obligation continues
until dishonor of the check or until it is paid.
3-408-provides: “A check or draft does not itself operate as an assignment of any funds in the hands of the
drawee available for its payment, and the drawee is not liable on the instrument until he accepts it.”

Vocabulary:
DONEE: One who receives a gift or bequest, or one who is given a power.
DONOR: One who gives something to another, or one who gives the power to another.
DRAWEE: The person ordered in a draft to make payment.
DRAWER: The person who signs or is identified in a draft as the one ordering payment.
HOLDER IN DUE COURSE: One who takes a negotiable instrument that does not at the time of its issuance
bear evidence of any doubt as to its authenticity, and is taken for value, in good faith, before it was overdue,
without notice that it was previously dishonored and without notice of any defect in its title.
PAYEE: The person to whom the negotiable instrument is made payable.

53. Floor v. Melvin.

Rule: If a contract guaranteeing a note is one for collection, rather than payment, there must first be an effort to
collect from, or a showing of insolvency of, the maker of the note before the guarantor may be sued.

Code section: 3-419(d)-provides that if the signature of the accommodation party is accompanied by words
indicating unambiguously that the party is guaranteeing collection rather than payment of the instrument,
liability is limited. The instrument may be enforced only if execution of judgment against the other party has
been returned unsatisfied, the other party is insolvent or in an insolvency proceeding, the other party cannot be
served with process or it is otherwise apparent that payment cannot be obtained from the other party

Vocabulary:
GUARANTOR: A person who makes a promise of payment, or performance of an obligation, under a guaranty
agreement.
OBLIGOR: A person who has entered into, and engaged to perform, an obligation.
54. Chemical Bank v. PIC Motors Corp.

Rule: A guarantor’s obligation under a payment guaranty cannot be discharged based upon impairment of
collateral where the guarantor has expressly consented to the release of the collateral.

Code section: 3-605(e)-if the holder of a negotiable instrument impairs the value of the interest in collateral, the
obligation of the indorser or accommodation party is discharged to the extent of the impairment. The holder of
the negotiable instrument has a duty to protect the collateral securing the debt. Under subsection (i) of this
section a party is not discharged if the agreement provides for waiver of discharge.

Vocabulary:
GUARANTY: An agreement whereby one promises payment, or performance of an obligation.
INTEGRATED: Where the parties to a written agreement intend it to be the final and complete expression of
the agreement.
PAROL: Something expressed orally and not in writing.

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SURETY: One who agrees to pay money or perform an obligation if another person who is obligated to pay or
perform fails to do so.

55. London Leasing Corp. v. Interfina, Inc.

Rule: Where the party personally indorsing the note consents to the agreement between the note’s maker and
payee to extend the time when payment is due, there is no discharge of the indorser on the obligation of the
note.

Code section: 3-605-provides that where one entitled to enforce an instrument agrees to extend the due date of
the obligation to pay, the extension discharges an indorser or accommodation party to the extent that there is
proof that the extension caused loss to the indorser or accommodation party with respect to the right of
discourse. The official comment says that consent “may be given in advance, and is commonly incorporated in
the instrument, or it may be given afterward. It requires no consideration, and operates as a waiver of the
consenting party’s right to claim his own discharge.” The accommodation party or surety must consent to any
change in the maker’s agreement with the payee concerning extending the due date of the obligation otherwise
the accommodation party or surety will be discharged from his obligation. In other words, if the surety consents
to a modification between the creditor and the principal, the surety will not be discharged. However, the
consent for modification need not be expressly given, but may be implied from the surrounding circumstances
or from conduct.

Vocabulary:
LETTER AGREEMENT: Used informally to mean an extension agreement whereby the creditor gives the
debtor additional time to pay the obligation due under a promissory note.
SURETYSHIP CONTRACT: An agreement whereby one party agrees to pay the debt or perform the
obligation of another, known as the principal.

56. Messing v. Bank of America, N.A.

Rule: If presentment of a check is not in accordance with the agreement of the parties, the refusal to pay does
not constitute dishonor of the instrument.

Code section: 3-501(b)(2)-provides that the person making presentment of an instrument for payment must
give “reasonable identification.” A thumbprint signature requirement is a form of reasonable identification.
First, it is an effective, reliable, and accurate way to authenticate a writing on a negotiable instrument. Second,
the process of providing such a signature is not unreasonably inconvenient in that an inkless device is used,
which leaves no ink stains or residue. Third, the procedure is reasonable and necessary in light of the growing
incidence of check fraud
Sect. 3-501 defines and describes presentment.
Sect. 3-502 describes dishonor. Dishonor of a check does not occur if the check was not properly presented for
payment.

57. Makel Textiles, Inc. v. Dolly Originals.

Rule: The requirements of presentment and notice of dishonor are not excused with respect to an indorser of
subsequent notes who had no active participation or knowledge of the note maker’s affairs.

Code Section: 3-310(b)-a check given in payment of an obligation is merely a conditional payment and does
not relieve the indorser of his liability on the obligation if the check is unpaid

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3-503-the obligations of the indorser and the drawer may not be enforced unless the indorser or drawer is given
notice of dishonor of the instrument, or notice is excused.

Vocabulary:
DISHONOR: The refusal of the presentee to pay.
INDORSER: Called “indorser” under the UCC and defined as one who makes an indorsement.
PRESENTMENT: The demand for payment made by the holder of the instrument to the maker of a note or a
drawee of a draft.

Week 11: Banks and their Customers, Checking Accounts, Stop Orders, Bank Statements

58. Norton v. Knapp.

Rule: the words “kiss my foot” written on the back of a sight draft and signed by the drawee do not constitute
an acceptance of the draft.

Code section: 3-409(a)-defines acceptance as the “drawee’s signed agreement to pay as presented,” which
involves more than a mere signature on the back of the draft.
3-408-provides that the drawee is not liable on the instrument until the drawee accepts it. Since the court
described the language here as “vulgar” and opined that it was used to express contempt, it concluded that there
was no acceptance of the sight draft.

Vocabulary:
SIGHT DRAFT: A draft that is payable at sight.

59. Galyen Petroleum Co. v. Hixson.

Rule: A payee on a check has no cause of action against the drawee bank for dishonoring a check even though
funds are in the account.

Code section: 3-408-a “check or other draft does not of itself operate as an assignment of funds in the hands of
the drawee available for its payment, and the drawee is not liable on the instrument until he accepts it. It is well
established that a check, of itself, and in the absence of special circumstances, is neither a legal nor an equitable
assignment of the drawer’s funds in the hands of the drawee. Therefore, the holder of the check has no right of
action against the drawee, and no valid claim to the fund of the drawer in its hands, even though the drawer has
on deposit sufficient funds.

60. Mundaca Investment Corp. v. Febba.

Rule: When a principal is not expressly identified in an instrument signed by an agent, the agent can be
personally liable to the holder of the instrument unless the agent proves that the original parties did not intend
the agent to be personally liable.

Code section: 3-402(b)(1)-provides that is a representative, also known as an agent, signs an instrument on
behalf of a represented person, also known as the principal, and the signature unambiguously shows that it is
made on behalf of a principal, who is identified in the instrument, the agent is not liable. Sub. (b)(2) provides
that if the signature does not show unambiguously that the agent’s signature is made in a representative
capacity, or the principal is not identified in the instrument, the agent is liable on the instrument to a holder in
due course that took the instrument without notice that the agent was not intended to be liable on the instrument.

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Vocabulary:
REPRESENTATIVE: An agent or any other person empowered to act for another.
REPRESENTED PERSON: A principal or any other person who empowers another to act on his behalf.

61. Nichols v. Seale.

Rule: Where an instrument is signed by an agent or other representative, names the person represented, but
does not show that the representative signed in a representative capacity, extrinsic evidence is admissible to
establish the capacity of the signer and whether he is personally liable.

Code Section: UCC 3-403 (pre-1990 version)-pertains to signatures by authorized representatives. If one signs
an instrument and wants to avoid personal liability, the signer had better make sure to name the principal and
indicate that he or she is signing in a representative capacity.

-case also shows that extrinsic parol evidence may be admitted to clear up any ambiguity concerning the
capacity in which the representative or agent signed the instrument.

62. Twin City Bank v. Isaacs.

Rule: Damages for mental suffering and other intangible injuries are recoverable under a cause of action for
wrongful dishonor of checks.

Code section: 4-402 – provides that a “bank is liable to its customer for damages proximately caused by the
wrongful dishonor of an item. When the dishonor occurs through mistake liability is limited to actual damages
proved. . .”
-when damages for mental suffering are sought, it is not necessary to prove the damages with exactness.
-this section also provides that if dishonor occurs through mistake, liability is limited to “actual damages
proved.”

Vocabulary:
COMPENSATORY DAMAGES: Those that will compensate an individual for the losses sustained.
PROXIMATELY CAUSED: That which produces the harm without any break by an intervening cause, and
without which the harm would not have occurred.
PUNITIVE DAMAGES: Damages awarded to an injured party to punish the defendant for acting in a
malicious, oppressive, or fraudulent manner.

63. Walter v. National City Bank of Cleveland.

Rule: A bank does not have a right of equitable setoff of an unmatured indebtedness of its insolvent depositor,
as against a judgment creditor seeking to reach the depositor’s account by a garnishment order.

Vocabulary:
GARNISHED: Where the money or property has been attached to satisfy a judgment.
SETOFF: The right of a bank, by self-help, to take priority over others claiming a right to the funds on deposit
in the depositor’s account.

64. Parr v. Security National Bank.

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Rule: A bank is given reasonable opportunity to stop payment on a check when the description received is
exact in all respects except for a single digit error in the check amount.

Code section: 4-403-provides that a customer may stop payment by giving notice that reasonably identifies the
item and is received sufficiently before payment that the bank has a reasonable opportunity to act on it.
-this section has not changed the common law rule, which requires that a stop payment order must identify the
check with reasonable accuracy.

Vocabulary:
OPEN ACCOUNT: An indebtedness that has not been settled, and is subject to future adjustment.
SUBROGATE: Derived from the doctrine of subrogation where one person is substituted in place of another
with respect to rights or a claim.
UNJUST ENRICHMENT: Derived from the doctrine of the same name that provides that one may not profit or
enrich himself at the expense of another which is contrary to justice and equity.

65. Canty v. Vermont National Bank.

Rule: A depositor has the burden of proving actual loss due to the bank’s improper payment of an item before
the bank must recredit the account.

Code section: 4-407-governs a bank’s subrogation rights. Permits a bank to be subrogated to the rights of a
payee, against its own customer, the drawer or the maker.

66. Patriot Bank v. Navy Federal Credit Union.

Rule: A customer has no right to stop payment on a cashier’s check.

67. Leeds v. Chase Manhattan Bank, N.A.

Rule: A depositary bank is strictly liable for conversion on a forged indorsement check if it makes payment
with respect to the instrument for a person not entitled to enforce the instrument or receive payment.

Code section: 3-420(a)-provides “An instrument is also converted if it is taken by transfer, other than a
negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with
respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for
conversion of an instrument may not be brought by the issuer or acceptor of the instrument or a payee or
indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-
payee.”
-official comment states that a payee cannot sue for conversion if the check has not been delivered to the payee-
such as where a thief steals the check before delivery to the payee, forges the indorsement, and obtains payment
from a depositary bank. Without delivery, the payee never becomes the holder of the check nor a person
entitled to enforce it. However, if the check is delivered to an agent for the payee, then the payee does have a
cause of action for conversion against the depositary bank.

Vocabulary:
INSTRUMENT: Referring to a “negotiable instrument” as defined in UCC 3-104(a). An executed written
document that contains an unconditional promise or order to pay a certain sum of money, payable on demand or
at a certain time, to the order of the bearer.

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UNCLEAN HANDS: Referring to the equitable doctrine of “clean hands,” which provides that one cannot seek
equitable relief or assert an equitable defense if he had “unclean hands” such as where one does not act in good
faith.

68. Price v. Neal.

Rule: A drawee who pays drafts with forged drawer signatures may not recover from the person paid.

Code section: 3-418


Vocabulary:
DRAWER: A person ordering the drawee to pay a draft.

69. Decibel Credit Union v. Pueblo Bank and Trust Co.

Rule: Presenting bank does not extend a presentment warranty to the drawee bank, which warrants all
signatures to be genuine, and thus is not liable for amounts paid by drawee bank on forged checks.

Code section: 4-208-provides in sub 1 that the warranty to a drawee assures only that there are no unauthorized
or missing indorsements on the checks. If a warranty that all signatures were genuine applied, the final payment
doctrine in Sect. 3-418 (when a drawer’s name is forged, the drawee who pays or accepts the draft bears the
loss) would be meaningless.

Vocabulary:
FINAL PAYMENT DOCTRINE: A drawee who pays an instrument with a forged drawer’s signature bears the
loss.
PRESENTMENT BANK: The bank that presents a check to the drawee bank for payment.
PRESENTMENT WARRANTY: A promise concerning the credibility of a negotiable instrument made to a
payor upon presentment for payment.
TRANSFER WARRANTY: A promise concerning the credibility of a negotiable instrument made by a
transferor to a transferee.
Sales Final Examination Professor Martin-Scott

HILLARY 2007
PART I
ESSAY QUESTION
(80 MINUTES)
On April 1, 2006, Howard (H) and Wilma (W) were happily married. The very next day they opened a joint
checking account with First American Bank (Bank). Unfortunately, by May 2006, things were not going well
between H and W. H learned that W was a compulsive spender and had written checks totaling more than $50,000
from their joint checking account.
On May 14, 2006, H discovered that W had drawn 2 large checks on the joint account. One check was for a diamond
ring in the amount of $16, 010 payable to Young Diamonds. The second check was a cashier check for $10,000
drawn on First American Bank and was payable to “Unique Boutique” for a pair of mink leather slacks.
On May 15, 2006, H called Bank on the telephone and stated the following:
“This is H, and I absolutely demand that you not pay the 2 checks my wife wrote from our joint checking account
earlier this week. One check is for $16,000, and the second one is for $10,000.” However, before H could provide
any additional information, the call was disconnected. H was a favored customer of Bank and Bank did not want to
lose his business. Bank refused to pay Unique Boutique when they tried to cash the $10,000 cashier check. However,
in spite of great effort, on May 29, 2006, the Bank computer system failed to catch the $16,010 check when it was
presented due to the fact that the system could only locate checks that reflect exact amounts.

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W sued Bank for breach of contract for dishonoring the $10,000 check. H has asked Bank to re-credit his account for
the $16,010 it paid over his orders, and Unique Boutique is suing Bank for refusing to honor the $10,000 cashier
check.
DISCUSS ALL ISSUES INCLUDING WHO WILL WIN THE ABOVE REFERENCED LAW SUITS. DISCUSS
THE LEGAL ARGUMENTS EACH SIDE WILL MAKE AND PLEASE CITE ALL RELEVANT CODE
SECTION(S).
PART II
SHORT DISCUSSION SECTION
(25 MINUTES)
DIRECTIONS FOR SHORT DISCUSSION QUESTIONS: Read each question carefully. Construct each answer as
briefly and to the point as possible. In no case should it be necessary to exceed 100 words in any one answer. Please
answer Questions 1-5 below: DO NOT WRITE YOUR ANSWERS IN YOUR BLUE BOOK.

1) Under Suretyship defenses, what is the effect on the surety when the creditor extends the due date on behalf of
the debtor ? What is the effect if the debtor subsequently files bankruptcy? Please explain the concept.

2) Who bears the risk of loss when the buyer breaches while goods are in the seller’s possession , and through no
fault of seller, the goods are destroyed by fire?

3) D owed C $500 and C threatened to sue if D did not pay the money immediately. D offered C a check and C
agreed to take the check in satisfaction of the debt. C ran into A a few hours after taking the check from D and
A told C that the check would surely bounce. C decided to not take any chances and tore the check into small
pieces. C has come to you, her attorney and asked you to handle the case on her behalf. What will you advise
her regarding the lawsuit?

4) L is an agent of Thomas M. Cooley Law School. L wrote a check to the Lansing Country Club on behalf of the
law school and on the law school’s official checks. However, L failed to indicate that he was signing in an
agent capacity. The Country Club wants to hold L personally liable. L has hired you as his personal attorney.
What legal advice will you give L regarding his liability on the check?

5) L writes a check to C for $500. C signs the check over to Mel the owner of the local
grocery store. Mel gave the check to his daughter Katherine as a graduation present.

Please explain Katherine’s status? Is Katherine a Holder in Due Course?

THOMAS M. COOLEY LAW SCHOOL


HILARY TERM 2007
SALES AND NEGOTIABLE INSTRUMENTS
FINAL EXAMINATION
ANSWER GUIDE
PROFESSOR MARTIN-SCOTT
BLUEBOOK NUMBER:_______________________________________________

I. Multiple Choice Section_____________________________/60 Points

II. Short Discussion Section____________________________/25 Points

III. Essay Section_____________________________________/115 Points

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TOTAL SCORE FOR EXAMINATION____________________/200 POINTS


SHORT ANSWER SECTION: (25 Points)
1. (5 Points) : Strictissimi Juris- per 3-605, an uncompensated surety is a favorite in the law. Under the UCC, if you
modify a contract to the extent that it hurts the surety, then whatever loss you cause by modifying the contract, the
surety will be discharged. 3-605 ( c ) If the extensions or discharge hurt the surety, he is discharged. The burden of
proof is on the surety to show the extension caused loss. Other than extension, burden to show los is on creditor.
Creditor can waive this right of surety.
2. (5 Points): 2-510 places loss on Seller but to extent seller deficient in insurance coverage treat the risk of loss as
resting on the buyer for a commercially reasonable time.
3. (5 Points) : Merger doctrine : 3-310 (b ) : If a person accepts a negotiable instrument other than official bank
checks in return for payment of a legal obligation, the underlying obligation MERGES into the instrument. The
obligation is suspended until liability on the instrument is discharged or until the instrument is dishonored.
4. (5 Points) : L is not liable on the check. Per 3-402 ( C ) , If the signer fails to indicate his agency capacity, but
check 1) does contain principal and 2) is drawn on the principal’s account. Then if the signature is authorized, the
agent is not held personally liable.
5. (5 points) Katherine is not a Holder in due Course, she takes under shelter of a holder in due course per 3-203
( b) . She might know of a defect as a non- holder

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but as long as prior holder was a HDC she succeed to his HDC rights despite her personal disqualifications.
Exception is if fraud or illegality. If prior holder regains note, gets back original status.
TOTAL SHORT ANSWER SCORE: ___________________________________.
ESSAY QUESTION:
I.
5- W will lose argue Bank violated Proper Payable Rule 4-401
5- W will argue Bank liable for wrongful dishonor per 4-402
5- Presentment : 3-501
5- Dishonor : 3-502
5- Notice of dishonor : 3-503
5- Stop-Payment order makes check not properly payable 4-403
10- Under 4-403 a party entitled to draw on an account has a unilateral right to veto the payment, and bank not
required to have W consent prior to honoring stop payment order.
II.
5-H will lose to Bank on his suit to have bank re-credit his account,
will argue Bank violated Proper Payable Rule 4-401
5- Under 4-403 H had a right to stop payment order if bank had:
5- Reasonable opportunity to act ?
5 -Identified check with reasonable certainty ? (name , account #, check #, name, date )
5- wrong amount on check.
5- Bank assumes risk of computer system failure unless inform customer of this fact at the time set up account.
10- Stop payment order is ineffective beyond 14 day stop payment order.
5- Stop payment order is for 6 months only if it is confirmed in writing within 14 days.
5- Burden of establishing loss and amount is on customer.
5- 4-407 : Bank right of subrogation.
III.
5- Bank will lose to Unique Boutique on certified cashier check per 3-414.
Bank breached its own 4-414 contract . Bank obligated to holder of check.
5- Cashier check destroys all liability of all parties except accepting bank.
10-Form
Extra points:
TOTAL ESSAY SCORE: _________________________________.

TOTAL POINTS : ____________________ .

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PART II
SHORT DISCUSSION SECTION
(35 MINUTES)
HILARY 2006

1) Who is ultimately liable when there is a forgery of the Drawer’s name, and who is ultimately liable when
there is a forgery of the Payee’s name? What legal authority supports your conclusion, and briefly explain
why.

2) General Facts: Seller sends Buyer an offer to sell used pipes, delivery date to be

October 17th. Buyer responds with a written acceptance which changes the delivery date to December the 17th. The
December 17th date is clearly typed in on the front of the acceptance form.

A. If a contract is formed by the exchange of correspondence, what is the delivery term? What is the
authority that supports your position, and briefly explain why.

B. Assume the same facts above, however, for this question only, assume that the dates are the same, but
the variation between the offer and the acceptance had been a 20% reduction in price. Would the
change in price prevent the “acceptance” from operating as an acceptance? What authority supports
your position, and briefly explain why.

C. For purposes of Subpart C only, assume the same general facts for question 2, but do not assume facts
in B or A above. Assume that the Buyer’s acceptance form had a boiler plate clause on the reverse
(clause 13 of 16 numbered clauses) which said: “This acceptance is expressly made conditional
upon offeror’s assent to all the terms of this acceptance.” Would that clause prevent an otherwise
effective acceptance from operating as an acceptance? What authority supports your position, and
briefly explain why.

3) Seller ran an advertisement offering a used lawn mower for sale which reads as follows: “5 year old John
Deere lawn mower for sale, good condition.”

Buyer purchased the lawn mower and when delivered, it was inoperable.
Is Seller liable to buyer? Please explain and cite UCC authority.

PART III
ESSAY QUESTIONS
( 70 MINUTES )
Frank, from Frank Used Cars stops by your office with a problem that he says he has never seen before. Two weeks
ago, a new customer came in and agreed to buy a used 1992 Black 325i BMW that Frank had on his lot. The next
day, the customer sent Frank a cashier’s check for the full amount of the price and told Frank that he would be in
during the next couple of days to pick up the car. A week later, when the customer still had not picked up the car,
Frank unsuccessfully tried to phone the customer several times. The car is still sitting on Frank’s lot “taking up
space,” as Frank put it.

A. Frank has a question for you. Would Frank be responsible if the car were damaged or stolen?

B . Before Frank leaves your office, he has one more “problem customer” that he needs
to discuss. It turns out that the customer, Judy B. Jones (B is for Beatrice) is a law student ( “or so she tells me,” says
Frank). Judy had purchased a 2003 Chrysler Pacifica from Frank and brought the car back a couple of weeks later

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because of major problems with the car’s brake system and a helicopter sound associated with the windows. Judy
(who had not purchased insurance on the car) had told Frank upon returning the car, “If you don’t fix the brake
problem in 2 days, I will revoke my acceptance of the car and demand my money back.” The next night, before the
brakes were fixed, vandals entered Frank’s lot after it closed (through no fault of Frank’s) and caused $3,000 worth
of body damage to the car. Frank tells you he has fixed the brakes, but needs to know whether he is responsible for
fixing the extensive body damage. What do you advise? Would your answer be different if Judy had said, “I hereby
revoke until you get the brake system working properly?

C. Seriously, this is “the last legal question” that Frank has. Frank decided to sell his
own personal used ride-mower through the classified ads. Frank was asking $3,000 for the mower, which he had
purchased in 1992. Not long after the ad appeared Frank had a potential buyer, Harry Potter, out to see the mower.
Harry told Frank he would buy it for $3,000, and Frank had Harry sign a handwritten contract that Frank had
prepared. The contract said nothing about risk of loss. Harry told Frank that he would be back with his pick-up truck
and a cashier’s check for $3,000 “in the next couple of days.” The next day, Frank discovered that the rider-mower
had been stolen from Frank’s garage. Who has the risk of loss as to the stolen mower? Who has the risk of loss if the
$3,000 cashier check was delivered to Frank, but the mower sat in Frank’s garage for 6 months before it was stolen?
DISCUSS ALL LEGAL ARGUMENTS. PLEASE CITE ALL RELEVANT CODE SECTION(S).
HILARY 2006
SALES AND NEGOTIABLE INSTRUMENTS
FINAL EXAMINATION
ANSWER GUIDE
SHORT ANSWER SECTION: (35 Points)
1. (10 Points)
Drawer is ultimately liable on forgery of the Drawers name per Price v. Neal.
Depository bank or party who has interaction closest to the wrongdoer is
ultimately liable on forgery of the Payees name. This is accomplished through
the Proper payable rule per 4-401 and Transfer and presentment warranties
2. (5 Points)
This question deals with UCC 2-207. Pursuant to UCC 2-207(2), If parties are not merchants, changes are mere
proposals. However, if parties are merchants, this term arguably materially alters the contract .

3. (5 Points)

UCC 2-207 is the issue here. A 20% reduction changes a dickered term under 2-207(1). 2-207(3) looks at conduct
and if conduct creates a contract, contract includes agreed terms and gap fillers.
4. ( 5 Points)
Per UCC 2-207 (1) the term triggers proviso language. Pursuant to 2-207(3), we look at conduct and if conduct
creates a contract, the terms of the contract are the agreed terms and the gap fillers.

4. (10 Points)

-Seller created an Expressed warranty per 2-313 with clause.


-Basis of the bargain
- Is seller Puffing
-Seller violated Implied warranty of Merchantability per 2-314

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Extra Points:
ESSAY QUESTION:
A.
5- Risk of loss is on Frank if the car is stolen?
10- 2-509(3) ROL passes to buyer on receipt of the goods if the seller is a merchant?
5- Comment 5 to 2-509 – Merchant seller cannot shift ROL even though full payment has been made and Buyer
notified that goods are at his disposal?
B.
5- Risk of loss is on Frank?
10- 2-510(1) When goods fail to conform to the contract as to give a right of rejection, risk of loss remains on Seller
until cure.
5- Revocation 2-608
5- Rejection 2-602
5- Acceptance 2-606
10- 2-510(2) Frank’s insurance will pay damages.
C.
5-Risk of loss is on Frank.
10- 2-509(3) Frank is not a merchant here. Risk of loss pass to buyer on tender of delivery.
5- 2-503(1) states that goods must be kept available for period reasonable to enable Buyer to take possession.
5- Q # 2 Harry has risk here?
10- 2-509(3) Harry failed to pick up mower this is his problem since Frank has already received all of the benefits of
contract and payment.
Extra points:

Michaelmas 2005
II. SHORT DISCUSSION SECTION
(40 MINUTES)
DIRECTIONS FOR SHORT DISCUSSION QUESTIONS:
Read each question carefully. Construct each answer as briefly and to the point as possible.
WITH THE EXCEPTION OF QUESTION #1, IN NO CASE SHOULD YOU EXCEED 50 WORDS IN
ANY ONE ANSWER. ANSWERS THAT SIGNIFICANTLY EXCEED 50 WORDS WILL NOT BE READ
OR GRADED.
Please answer questions 1-5 below: DO NOT WRITE YOUR ANSWER IN YOUR BLUEBOOK.
WRITE DIRECTLY ON THE PAPER BELOW THE QUESTION.
IT IS VERY IMPORTANT THAT YOU CITE RELEVANT CODE SECTION(S) THAT APPLY TO EACH
QUESTION.

1) What is the Holder in Due Course Doctrine? How does one become a Holder in Due
Course, and what is the significance of the status? DO NOT EXCEED 100 WORDS ON
THIS QUESTION.

2) What is a Collection guarantor (accommodation party) and a Payment guarantor


(accommodation party), what is the significance of each, and how are they different?
3) When an authorized representative (agent) signs his or her name to an instrument, that
person is prima facie liable unless two things happen. What are the two things that the agent
/representative is required to do?
4) What is the predominant purpose test, and how is it used?

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5) List the two basic types of negotiable instruments, state the difference between the two,
and label the parties involved.
III. ESSAY QUESTION SECTION
( 65 Minutes)
Superbowl Inc. Corp is in the business of selling football cleats and other sports related items
to professional football teams, sports retailers, and individual players. Its sales personnel
visit football facilities around the country, bringing with them samples of the shoes. They
readily give advice to potential customers about the shoes performance, especially in
different types of weather conditions, as well as advice on the best shoes for use on
particular types of fields.
Sales personnel are taught to emphasize to customers Superbowl’s motto:
“Shoes to count on , shoes to win on!”

A. WHAT WARRANTY OR WARRANTIES RELATING TO QUALITY ARE CREATED WHEN A


FOOTBALL PLAYER BUYS SHOES FROM SUPERBOWL INC., AFTER SUCH A SALES CALL?

PLEASE CITE ALL RELEVANT CODE SECTION(S).

B. Assume for purposes of this question only, that on December 20, 2003, Anchor
corporation, a retailer of football shoes and other sports related items, sent a printed
form purchase order to Superbowl Inc. for 50 pairs of football cleats, at a total price of
$10,000. On January 16, 2004, Superbowl Inc. shipped the cleats, accompanied by a
printed form invoice that contained a conspicicuous disclaimer of any warranties
regarding the shoes and limited the buyer’s remedy in the event of any breach to
replacement of the shoes. Superbowl’s invoice stated that “buyer’s acceptance of this
shipment shall constitute assent to all terms contained herein. This shipment does not
represent acceptance of any prior purchase order from buyer unless the terms of the
purchase order are identical to those contained here.”

On June 11, Anchor received and accepted the shoes. There is no evidence that anyone at
Anchor actually read the invoice. Two months later, Anchor discovered substantial defects in
the shoes. Now, it wishes to sue Superbowl for damages for breach of warranty. Superbowl
naturally enough, denies liability for breach of warranty, on grounds that Anchor’s
acceptance of the goods constituted an assent to its disclaimer.
DISCUSS WHETHER SUPERBOWL IS CORRECT IN ASSERTING THAT THE DISCLAIMER BECAME
A PART OF THE CONTRACT BY VIRTUE OF ANCHOR’S ACCEPTANCE OF THE SHOES.
ADDITIONALLY DISCUSS WHAT OTHER LEGAL ARGUMENTS(S) ANCHOR MAY HAVE. PLEASE
CITE ALL RELEVANT CODE SECTION(S).
END OF EXAMINATION

MICHAELMAS 2005
SALES AND NEGOTIABLE INSTRUMENTS
FINAL EXAMINATION
ANSWER GUIDE
PROFESSOR MARTIN-SCOTT
SHORT ANSWER SECTION: (30 Points)
1. (10 Points)
Pursuant To 3-302, the HDC doctrine applies to Article 3 instruments and provides that
certain special transferees of a NI acquires the right to enforce the instrument free of all

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claims and most defenses (except real defenses) that could have been asserted against the
assignor or other prior parties.
A HDC is a holder of an instrument who takes for value, in good faith and without notice of
claims or defenses to the instrument.
2. (5 Points)
Pursuant To 3-419, a collection Guarantor is a surety who is liable on a NI however, the
creditor can only collect from the collection guarantor if the creditor has made an attempt to
prosecute or unsuccessfully prosecuted the debtor first.
A payment guarantor is one that the creditor may sue immediately without attempting to
collect from the debtor first. Both are liable on a NI, the difference is when they made be
liable on the debt.
3. (5 Points) Pursuant to 3-402, an authorized representative can avoid liability when the
agent does 2 things: 1) Identify the principal, and 2) unambiguously indicate the agent is
signing in a representative capacity.

4. ( 5 Points)

The predominant purpose test is the test applied by the courts to hybrid transactions to
determine whether Article 2 or Common law applies to the transaction. Courts determine
whether the sale of goods was the primary or dominant purpose motivating the parties to
enter the contract, if answer is yes, Article 2 applies to the transaction. (5 Points) Extra
Points:
Notes : 2 party instruments- Maker and Payee
Drafts: 3 party instruments- Drawer, Drawee and Payee

ESSAY QUESTION:
A.
5-Express warranty
5-2-313
5-define
5-IWM
5- 2-314
5- define (goods fit for ordinary purpose)
5-IWFPP
5-2-315
5-define
5-Puffing
5-define
5- basis of the bargain
B.
5- 2-207 apply?
5- dickered term?
5- proviso?
10- 2-207(2) acceptance
5- between merchants
10-materially alter the contract (hardship/surprise)
5- Disclaimer does not come in
5- IWM applies 2-314
5- 2-207(3) analysis (only if correctly answered question)
5- limitation of remedy ineffective 2-316

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10- fails of its essential purpose 2-719
Extra points:

2002:PART II

ESSAY QUESTION #1

(80 minutes )

Rollers Inc. (hereinafter "R"), a retailer in Chicago Illinois, had a long and profitable business
relationship with Sportsmen of America Inc. (hereinafter "S"), owner of a manufacturing company, with
its principal place of business in Hampton, Virginia. During 1999, 2000, and 2001, R made 23 purchases
of roller blades from S. Each sale was carried out in the following manner. A partner of R telephoned S's
order department and ordered a certain quantity of roller blades at the price listed in S's catalog. After
each oral order was placed, the credit department was consulted to determine if R was paid up. Then if
the credit was okay, the order department of S typed the information from the order on one of its printed
acknowledgment forms, each of which had the following paragraphs printed on its face:

The acceptance of your order is subject to all of the terms and conditions on the face and reverse side
hereof, all of which are accepted by buyer; It supersedes buyer's order form, if any. It shall become a
contract either (a) when signed and delivered by buyer to seller and accepted in writing by seller, or (b)
at seller's option, when buyer shall have given to seller specification of assortments, delivery dates,
shipping instructions, or instructions to bill and hold as to all or any part thereof, or when buyer has
otherwise assented to the terms and conditions hereof.

The provisions on the reverse side of the form provided, among other things, that the seller disclaimed
all warranties, express or implied. Each acknowledgment form was signed by an employee in S's order
department and mailed to R. Shortly thereafter, the roller blades were shipped. R always received the
acknowledgment form before the roller blades. They placed each form in a file, accepted delivery of the
roller blades, and paid for it promptly. On the 23rd sale, the accepted and paid for roller blades proved to
be defective. R sued S for breach of warranty. S replied that its form disclaimed all warranties.

Answer the following Questions:

PART ONE

1. Was there a contract formed between R and S?

2. Was the disclaimer of warranties part of that contract?

PART TWO

Assume for purposes of this question only, the following facts:

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R and S enters into the contract above for the purchase of roller blades. The roller blades were to be
shipped on July 1, 2001, F. O. B. Hampton, Virginia. On July 1, 2001, shortly after S loads roller blades
aboard the carrier, R learns from competitors that S shipped defective roller blades to other retailers. R
immediately wires S on July 2, the following:

"Have learned your stock no good, I cancel my order P.O. 1995-97-99C.


Will do business again when your quality is good."

S responds on July 3, 2001:

"I do not know what you are referring to. Have no complaints about quality.
Will hold stock for you waiting further instructions."

On July 29,, 2001, a hurricane hits Hampton Virginia and destroys all roller blades held by S, including
those subject to P. O. # 1995-97-99C.

Assume that R is in breach. Please discuss S' remedial options both before and after the hurricane.
Include in your answer what action R might have taken once it learned of defects from competitors.

ESSAY QUESTION # 2

(45 minutes)

On August 1, 2000, Payton Manning, a former NFL superstar, now night janitor at the Indianapolis
Colt's headquarters, decided to supplement his meager wages by robbing the office. He managed to
locate the Colt's checkbook, from which he wrote a check to himself for $3,500, signing Jim Ursay, the
Colt's owner's name, to the check. Payton planned to cash the check at the Circle City currency
exchange down the street from the Colt's headquarters.

On his way to the currency exchange, Payton was mugged by Drew Bledsoe, another former NFL
superstar. Bledsoe took Payton's wallet as well as the Colt's check. Payton decided it might be a good
time to try his hand in the Canadian league and relocated to Canada.

Bledsoe, in the meantime, signed Payton's name to the check and used it to buy a $2000 watch from
Paul Swiss, owner of a local jewelry store. Paul endorsed "without recourse" and "for deposit only" and
cashed it at his bank, Citizens Bank. The check cleared through the local clearing house and was paid in
due course on August 7, 2000 by National City Bank.

In late August 2001, Ursay, was advised by his accountant , during an audit, that an unreported check in
the amount of $3,500 had cleared. Upon investigation, Ursay recovered the paid check. He immediately
notified National City Bank that he did not write a check to Payton for $3,500. And furthermore,
Payton's indorsement was forged based on his familiarity with Payton's signature.

Please discuss the following questions:

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A. May The Indianapolis Colts force National City Bank to recredit its account? Has National City Bank
any defenses?

B. May National City Bank recover from Citizens Bank?

C. May Citizens Bank recover from Paul Swiss ?

D. May Paul Swiss recover from National City Bank?

E. How would this come out if all facts are the same except that on August 7, 2000, National City Bank
paid over a valid stop payment order from Ursay received on August 5, 2000?

SALES
TRINITY TERM 2002
PROFESSOR MARTIN-SCOTT
ANSWER GUIDE

QUESTION # 1 ( part one)

This is a 2-207 problem.

Was there a contract formed between R and S?

Under the common law, an effective acceptance had to accept the offer unconditionally. That is, the acceptance
had to be the mirror image of the offer. Section 2-207 addresses the formation of the contract. It departs
radically from the mirror image rule by providing, as a default provision, that a form will operate as an
acceptance even though it contains terms different from or in addition to those set out in the preceding form, if
the response purports to be a "definite and seasonable expression" of the offer or a confirmation of the
agreement.
The first issue is whether the parties have a contract based on their exchanged writings?
This is determined by judging the exchanged writings between R and S under the provisions of 2-207(1). This is
done in a two-step analysis:
1) Determining whether the disclaimer of warranty provision changed a dickered term, ie, quantity or price; or
2) Determining whether S's acceptance was "expressly conditional" on Rs assent to the disclaimer of warranty
provision.
The disclaimer of warranty provision did not change a "dickered" term.
The acceptance was made :subject to" the acceptance of the disclaimer and did not violate the "expressly
conditional", proviso language. Therefore, a contract was formed by the exchange of writings under 2-207(1).
We must now look at 2-207(2) to determine the terms of the contract.
The proper analysis under 2-207(2) depends on whether the parties are merchants. If either party is a non-
merchant ,then the additional term contained in the acceptance are merely proposals for addition to the contract,
which may be accepted or not by the offeror.
Both R and S qualified as merchant in this case. Therefore, S terms control unless:

1) the offer expressly limits acceptance to the terms of the offer. (2-207(2)(a);
2) the additional term in the acceptance materially alter the offer. (2-207(2)(b);
3) notification of objection to the additional term by the offeror is given within
a reasonable time after notice of them has been received. (2-207(2)(c).
S acknowledgement is the same as R's offer except it contains the disclaimer of warranty clause. Based upon 2-

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207(1), S form is judged an acceptance, however, the disclaimer of warranty provision does not become part of
the contract because it materially alters the contract under 2-207(2)(b).

QUESTION #1 (part two)

This question deals with Risk of Loss.


Risk of loss is governed by 2-509 and 2-510. 2-509 is used when there is a breach and 2-510 is without a
breach.
In a shipment contract where the contract requires or authorizes the seller to ship goods by carrier, seller's only
obligation is to place the goods with the shipping company, and if the goods are destroyed in transit, buyer
bears the risk of loss. If it is unclear whether there is a shipment or a destination contract, it is presumed to be a
shipment contract. Where a tender or delivery of goods so fail to conform to the contract as to give a right of
rejection, the risk of loss remains on seller until cure or acceptance is made.
R&S have entered into a shipment contract (F.O.B. Hampton Virginia) and R bears the risk of loss of goods. S's
insurance will cover the loss in that the law places risk on the party that can best insure against it. To the degree
S's insurance can not cover liability, R will be liable.
If R had reasonable grounds for insecurity regarding S's performance under the contracts, he should have
demanded adequate assurances of performance pursuant to UCC Sections 2-610 and 2-609. R had the remedy
of anticipatory repudiation.

QUESTION #2

A. Pursuant to 4-401, The Colts may force NCB to recredit its account by arguing the payment was not properly
payable (PPR). Pursuant to 4-401, the bank, under the contract with its customer, may only pay out the
customer's money if it follows his orders exactly, if it doesn't, it must recredit the customer account. An account
is properly payable if it is authorized by the customer and is in accordance with the agreement between the
customer and the bank. A check is not properly payable if the Drawer's signature is forged. In this case the
Drawer's signature was forged and was therefore the check was not properly payable.
NCB may argue that the Colts are precluded from raising the issue of PPR in that pursuant to 4-406 the Colts
failed to examine their bank statement within 30 days as required. Indeed the Colts can no longer raise the issue
since 1 year has passed.
Pursuant to 4-407, bank may argue the bank subrogation rule. If the bank erroneously pays over the order of the
Drawer, the bank is subrogated to the right of the holder in due course, or the Payee.
NCB may also argue that pursuant to 3-405, the bank is relieved of liability because the Colts put Manning in
the position that allowed him access to Colts checks. In that they were in a better position to avoid the forgery.
Colts will of course argue that Manning was only in a janitor position and did not have the necessary
responsibility within the company and necessary per statute to make the Colts liable.

B. No. forged Drawer's signature.


Per Price v. Neale, A Drawee who pays or accepts a draft takes the risk of a forged Drawer's signature, and if
the Drawee pays or accepts the draft, it cannot pass the risk onto prior good faith parties. No warranties liability.

C. No. They may raise warranty breach, however pursuant to 3-415, Swiss is a qualified indorser, which
relieves him from being sued under 3-414 by a subsequent holder, following the dishonor of the instrument.

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D. No. Can argue conversion if he were not paid. Pursuant to 3-420. There are no holder in due course issues
here in that forgery destroys any subsequent status.

E. 4-403 states that stopping payment of an account is a service which depositors are entitled to receive from
banks. If bank erroneously fail to do so, they are liable. An oral stop payment order is effective for 14 days and
upon written request, the order is good for 6 months and can be renewed thereafter. The issue her is whether the
2 days notice was sufficient notice to the bank to allowed them to stop payment. This is a question of fact.
No subrogation to holder in due course status.

SALES PROFESSOR MARTIN-SCOTT TRINITY 2002

Released Multiple Choice Questions

1. Which of the following indorsements would be ineffective to transfer the right to be paid on the instrument?

A. A check made payable to Pamela Anderson Lee and Tommy Lee is indorsed by Tommy Lee.
B. A check written to "cash" is indorsed by Tommy Thief as "Tommy Lee."
C. A promissory note payable to Lee Credit Corporation is indorsed over to Anderson Credit Corporation by
way of a piece of paper stapled to the note and containing the signature of the authorized agent of Lee Credit.
D. A promissory note executed by Tommy Lee to Acme Credit contains an anomalous indorsement by Pamela
Lee.

The correct answer is A.

2. Ansel bought $5,000 of photographic equipment from Diane and executed a promissory note in that amount.
Diane sold the note to Eastman Credit Corporation for $4,500, but she forgot to indorse it. When the note
matured, Eastman notified Ansel that the time for payment had arrived and that he should pay them. Ansel
replied that the photographic equipment had not been of the warranted quality and that he had no intention of
paying. In preparing to meet with Eastman's counsel, the vice president of the company realized that the note
had never been indorsed. He took it to Diane, and she indorsed it. Eastman demanded payment one more time,
and when Ansel again refused, Eastman filed suit for payment. What is the most likely result?

A. As a holder in due course Eastman Credit Corporation takes free of the personal defense of failure of
consideration and will win against Ansel.
B. The $4,500 price of the $5,000 note is inherently suspicious, and so Eastman will not qualify as a holder in
due course, and the defense will be allowed.
C. Eastman did not become a holder until after notice of a claim, and so the defense will be allowed.
D. Because Diane received less money than her note was worth, Eastman did not give value and does not
qualify as a holder in due course. Therefore, the defense will be allowed.

The correct answer is C.

3. In which of the following situations is Plaintiff not a holder in due course?

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A. Bruce sold his bike to Angus. Angus wrote Bruce a $200 check. Bruce owed Plaintiff $200, so he indorsed
the check over to Plaintiff.
B. Archie received his paycheck. He indorsed it over to Plaintiff Plumbing to secure Plaintiff's promise to install
a new shower in May.
C. Angie's bank account had $3.49 in it. When she received her paycheck of $400, she deposited it immediately
in her account at Plaintiff Bank, which credited her account and let her withdraw $75.00.
D. None of the above Plaintiffs is a holder in due course.

The correct answer is B.

4. Which of the following holders is not a holder in due course?

A. Holder receives a post-dated check.


B. Holder purchases a promissory note with "late on two interest payments" written on it.
C. Holder purchases a promissory note that has been signed by an accommodation party in addition to the
maker.
D. Holder receives a check dated six months earlier.
E. None of these holders is a holder in due course.

The correct answer is D.

5. Which of the following defenses can the maker assert against a holder in due course of a note?

A. The maker fully paid the note to a previous holder.


B. The maker's mental incapacity made the note voidable under state law.
C. The failure of consideration given by the third special indorsee to the second special indorsee.
D. All of the above.
E. None of the above.

The correct answer is E.

6. Which of the following frauds would the maker of a note be able to assert against a holder in due course?

A. Maker made the promissory note payable to Vic Vendor, who promised to invest the money for maker in
Vic's Vending Machine Company, which was actually a pyramid scam.
B. Maker, a retired teacher, signed the promissory note without reading it. He believed it was a vending
machine rental agreement, because that's what that nice Vic Vendor told him it was.
C. Vic Vendor was the executor of his wife's estate. He told his wife's blind niece that he needed her signature
on some papers that would allow her to receive her aunt's shares in Vic's Vending Machine Company. What she
actually signed was the promissory note.
D. All of the above.
E. B & C only.

The correct answer is C.

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7. Alice Able lends Babs Brown $100. Which of the following written promises to pay the money back would
be a negotiable instrument?

A. I owe Alice Able $100. (signed) Babs Brown.


B. I promise to pay to the order of Alice Able $100 by next month. (signed) Babs Brown.
C. I promise to pay to the order of Alice Able $100 30 days after sight. (signed) Babs Brown.
D. All of the above.

The correct answer is C.

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Course Name: Federal Administrative Law
Professor: Nickerson

Instructions

This examination consists of two parts. One part is 20 multiple choice and fill-in the blank
questions, worth a total of 30 points. The second part consists of 6 essay questions, worth 70 points.
The total exam will be scored based on 100 points.

The examination will last two hours and forty-five minutes. Please write all of your answers in the
blue book in order. If you skip an answer, please leave space and come back. For the essay
questions, please write on one side of the page only and on every other line.

On the multiple choice and fill-in the blank questions, provide the best answer. On the essay
questions, be sure to include all reasonable responses to each question in your answer.

Good Luck!

PART I - Multiple choice and Fill-in the Blank

(30 Points/50 Minutes)

Each question is worth 1½ points. Provide the best answer to the question.

A. Multiple Choice

1. Section 551 of the Federal Administrative Procedures Act (APA) defines an agency as, "...each authority of
the Government of the Unites States, whether or not it is within or subject to review by another agency, . . ."

Identify which of the following is an agency under the APA definition:

a. The Congress
b. The courts of the United States
c. The government of the District of Columbia
d. The Executive Branch
e. The governments of the territories or possessions of the United States

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2. Administrative Law Judges (ALJs) shall be assigned to cases in rotation as far as practicable; may not
perform duties inconsistent with their duties and responsibilities as an ALJ; their compensation shall be as
prescribed by the office of management and budget; and may only be removed for good cause. These provisions
are designed to:

a. Provide separations of powers


b. Ensure uniformity among federal agencies
c. Keep ALJs compensation from agency control d. Place the ALJ under the protections of civil service
e. Support the ALJ as impartial and independent

3. The Court in Watts v. Burkhart granted immunity to the members of the Tennessee Board of Medical
Examiners. The court cited which of the following as a primary basis for the immunity doctrine it applied as:

a. The board's considerable medical background and expertise


b. The board serves a quasi-judicial function
c. The board serves in a role similar to that of a prosecutor
d. The harassment or intimidation factor concerning litigation
e. The board members' unwillingness to serve without immunity

4. Judicial review that considers an agency action on the basis of the evidence before it at the time of its
decision is referred to as:

a. The substantial evidence rule


b. Ripeness
c. Due process afforded the litigant
d. The whole record rule
e. Finality

5. The phrase "review of the whole record" found in Section 706 of the APA refers to the authority of the
reviewing court to:

a. Consider evidence on the record contrary to the findings of the agency


b. Require a full written transcript of the proceedings
c. Examine the substantial evidence as applicable
d. Grant a trial de novo
e. Consider excluded evidence for substantial compliance with the rules of evidence

6. Which of the following is not a power granted to an ALJ under the APA:

a. Administer oaths and affirmations


b. Issue subpoenas authorized by law
c. Regulate the course of the hearing
d. Issue orders of contempt
e. Rule on offers of proof and receive relevant evidence

7. The right to be heard goes back beyond the very origins of law. The Courts have based this right, as applied
to agency action on:

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a. The APA
b. The enabling statute of the agency
c. The 5th Amendment
d. Goldberg v. Kelly, the United States Supreme Court decision
e. The doctrine of the opportunity to be heard

8. Business records of a regulated industry, which are required by law to be maintained, are:

a. Protected from a subpoena by the regulatory agency under the 5th amendment
b. Protected from a subpoena by the regulatory agency under the 4th amendment
c. Subject to the subpoena authority of the agency
d. Subject to the Required Records Doctrine (RRD)
e. Both a and b

9. The courts have stated a preference in the manner in which agencies implement policy. The stated preference
is for an agency to issue policy through:

a. Adjudication
b. Orders and Opinions
c. Declaratory orders
d. Publish in the federal register
e. Rulemaking

10. The right to counsel in an administrative agency proceeding involves:

a. Agency appointed counsel in entitlement cases


b. The right to counsel on appeal
c. Agency appointed counsel in professional licensing cases
d. The right of a litigant to hire counsel of their own choice
e. The right for an opportunity to be heard

B. Fill-in the Blank (Write your answers in your bluebook)

11. When an agency acts outside of the scope of its authority, this is called _________________
________________ acts.

12. An agency enabling statute is the source of an agency's authority and its ___________________.

13. An agency regulation has the force of law, which means that a rule or regulation has the same force and
effect as a __________________.

14. "The plaintiff must establish that the injury he complains of falls within the __________ ___ ___________
sought to be protected by the statutory provision whose violation forms the legal basis of his complaint." Air
Courier Conference v Postal Workers Union.

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15. Section 553 of the APA is often called "_______________ and ______________" rulemaking.

16. The _______________ _______________ is a judicially created remedy designed to safeguard fourth
amendment rights. The court has never applied it to an administrative proceeding.

17. According to Mistretta v. United States proper delegation requires an _____________ _______________ to
govern exercises of the power delegated.

18. Under the Freedom of Information Act, _______________ and _____________ records are not subject to
disclosure because they would involve a clear invasion of privacy.

19. Publication in the ________________ is a mandatory requirement for legal effectiveness; an agency that
fails to publish renders a regulation unenforceable, except against a person with actual knowledge of the
regulation.

20. _____________ _____________ ________________ describes the Court's balancing of the hearing
requirement and the benefit involved. In short, "even if the need for advance procedural safeguards were clear
the question would remain whether the incremental benefit could justify the cost."

Part II - Essay Questions


(70 Points/115 Minutes)

Please answer the questions as asked. Use any illustrations you deem appropriate. The point value of each
question is stated. Please allocate your time accordingly.

1. Describe the doctrine of Exhaustion of Administrative Remedies. Why has the court adopted such a doctrine?
What are the exceptions to the doctrine? (10 Points)

2. In Office of Personnel Management v Richmond, Richmond sought advise from a federal employee. He
received erroneous oral and written advise. Similarly, the wheat farmer in the state of Idaho received erroneous
information from the local government agent. Federal Crop Insurance v Merrill. The Courts rejected both
claims. Richmond's claim was denied, in part, by the Court on the holding that equitable estoppel will not lie
against the government. The wheat farmer's claim was denied on the basis that the farmer is charged with
knowledge of the regulations governing crop insurance. In order to bind the agency, Richmond and the farmer
could have used what technique? Explain. (10 points)

3. Explain the conflict between APA provisions Section 701(a)(2) and Section 706(2)(A) addressed in Heckler
v Chaney and how did the Court resolve the conflict? (15 points)

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4. Goldberg v Kelly is cited as marking a watershed in the law of administrative procedure and the "opening
shot in a modern due process revolution." What issues are presented in the case, what conclusion did the Court
reach and why is it so widely recognized? (15 points)

5. In the chop shop case, New York v. Burger, the court approved a warrantless search of an automobile
junkyard for stolen vehicles. The Court held that the warrantless inspection of a pervasively regulated business
is deemed reasonable so long as three criteria are met. Identify the three criteria. In addition, the search itself
must be conducted in a reasonable manner. Explain what "Reasonable" means. (10 points)

6. A liquor control commission promulgated the following rule:

"A retail licensee shall not sell, offer for sale, accept, furnish, possess, or allow the consumption of, alcoholic
liquor on his or her licensed premises which has not been purchased by the retail licensee from the commission
or a licensee of the commission who is authorized to sell the alcoholic liquor to a retail licensee . . . "

The Commission interprets this provision as prohibiting a retailer from offering a refund for the return of any
unused or unopened alcoholic beverages. The Commission reasons that a retailer who offers a refund would be
engaged in the act of purchasing from an unlicenced source and in violation of the regulation.

You represent a retailer who has offered a refund. Applying Federal Administrative Law principles, would you
describe the Commission's interpretation of its regulation reasonable? Describe the type of hearing that would
be required under a due process analysis. Advise your client of the type of review, if an appeal to Federal
District Court is necessary. (10 Points)

End of Examination

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