evaluate the The Ultramares Doctrine discussion

For this discussion, you are asked to discuss and evaluate the The Ultramares Doctrine. Give at least three reasons why you agree or disagree with the doctrine.extra information below and PowerPoint slides please read: Liability to Third Parties: Ultramares Doctrine- In Ultramares Corp v. Touche, et. al., based on an unqualified opinion given by Touche and distributed by the borrower, Ultramares made a loan which was later defaulted upon. Judge Cardozo held that Touche could not be held liable for negligence unless the plaintiff Ultramares was in either privity of contract or a privity-like relationship with the accountant. Since the financial statements were not prepared specifically for use in obtaining a loan, the accountant was not liableNote: be on time, high quality work, free plagiarism
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BUSINESS LAW
Chapter 24
Liability, Defenses, and
Discharge
Learning Objectives
? Describe the signature liability of makers,
drawers, drawees, acceptors, and accommodation
parties for negotiable instruments.
? List the transfer and presentment warranties and
describe the liability of parties breaching them.
? Identify the universal (real) defenses that can be
asserted against a holder in due course.
© 2016 by Pearson Education, Inc. All rights reserved
24 – 2
Learning Objectives (cont.)
? Describe the Federal Trade Commission rule that
limits holder in due course status in consumer
transactions.
? Describe how parties are discharged from liability
on negotiable instruments.
© 2016 by Pearson Education, Inc. All rights reserved
24 – 3
Introduction
? If payment is not made on a negotiable instrument
when it is due, the holder can use the court system
to enforce the instrument
? Once a holder qualifies as a holder in due course
(HDC), the HDC takes an instrument free of most
defenses that can be asserted against other parties
? Uniform Commercial Code (UCC) specifies when
and how certain parties are discharged from
liability on negotiable instruments
© 2016 by Pearson Education, Inc. All rights reserved
24 – 4
Signature Liability
? Liability in which a person cannot be held
contractually liable on a negotiable instrument
unless his or her signature appears on the
instrument
? Also called contract liability
© 2016 by Pearson Education, Inc. All rights reserved
24 – 5
Signature Liability for Negotiable Instruments
? Signer: Person signing an instrument who acts in
the capacity of:
? Maker of notes or certificates of deposit
? Drawer of drafts or checks
? Drawee who certifies or accepts checks or drafts
? Indorser who indorses an instrument
? Agent who signs on behalf of others
? Accommodation party
© 2016 by Pearson Education, Inc. All rights reserved
24 – 6
Signature Liability for Negotiable Instruments
(cont.)
? Signature: Any name, word, or mark used in lieu of
a written signature
? Any symbol that is
? Handwritten, typed, printed, stamped, or made in
almost any other manner
? Executed or adopted by a party to authenticate a
writing
© 2016 by Pearson Education, Inc. All rights reserved
24 – 7
Primary Liability for Negotiable Instruments
? Primary liability: Absolute liability to pay a
negotiable instrument, subject to certain universal
defenses
? Makers of promissory notes and CDs
? Have primary liability for the instrument
? Unconditionally promise to pay amount stipulated
in the note when due
? Absolutely liable to pay the instrument, subject
only to certain universal defenses
© 2016 by Pearson Education, Inc. All rights reserved

24 – 8
Primary Liability for Negotiable Instruments
(cont.)
? No party is primarily liable when check or draft is
issued
? If drawee accepts a draft or check, the drawee is
primarily liable
? Check accepted when certified by bank
? Certification discharges drawer and all prior
indorsers
? Issuer of a cashier’s check is primarily liable on
the instrument
© 2016 by Pearson Education, Inc. All rights reserved
24 – 9
Secondary Liability for Negotiable
Instruments
? Secondary liability: Imposed on a party only when
the party primarily liable on the instrument
defaults and fails to pay the instrument when due
? Liability is similar to that of a guarantor of a
simple contract
? Unqualified indorsers: Those who are secondarily
liable on negotiable instruments they endorse
© 2016 by Pearson Education, Inc. All rights reserved
24 – 10
Secondary Liability for Negotiable
Instruments (cont.)
? Qualified indorsers: Those who disclaim liability
and are not secondarily liable on instruments they
endorse
? Presentment: Demand for acceptance or payment
of an instrument made upon the maker, acceptor,
drawee, or other payer by or on behalf of the
holder
© 2016 by Pearson Education, Inc. All rights reserved
24 – 11
Secondary Liability for Negotiable Instruments
? Notice of dishonor: Formal act of letting the party
with secondary liability to pay a negotiable
instrument know that the instrument has been
dishonored
? Requirements for imposing secondary liability
? Instrument is properly presented for payment
? Instrument is dishonored
? Notice of the dishonor is timely given to the person
to be held secondarily liable on the instrument
© 2016 by Pearson Education, Inc. All rights reserved
24 – 12
Secondary Liability for Negotiable Instruments
? Accommodation party: Party who signs an
instrument and lends his or her name (and credit)
to another party to the instrument
? Liability of an accommodation party
? Guarantee of payment: Accommodation party is
primarily liable on the instrument
? Guarantee of collection: Accommodation party is
secondarily liable on the instrument
© 2016 by Pearson Education, Inc. All rights reserved
24 – 13
Secondary Liability for Negotiable Instruments
? Agent’s signature
? Principal is bound if the agent signs either or both
names
? Agent is not liable if signature shows that the agent
signed on behalf of the principal
? Agent is liable if he or she signed only his or her
name and cannot show that the parties intended to
bind only principal
? Principal is not liable for unauthorized signature
© 2016 by Pearson Education, Inc. All rights reserved
24 – 14
Secondary Liability for Negotiable Instruments
(cont.)
? Agent’s signature
? Agent: Person who has been authorized to sign a
negotiable instrument on behalf of another person
? Principal: Person who authorizes an agent to sign a
negotiable instrument on his or her behalf
? Unauthorized signature: Signature made by a
purported agent without authority from the
purported principal
© 2016 by Pearson Education, Inc. All rights reserved
24 – 15
Forged Negotiable Indorsements
? Forged indorsement: Forged signature of a payee
or holder on a negotiable instrument
? Loss falls on party who first takes forged
instrument after the forgery
? Exceptions:
? Imposter rule: If an imposter forges the
indorsement of the named payee, the drawer or
maker is liable on the instrument to any person
who, in good faith, pays the instrument or takes it
for value or for collection
© 2016 by Pearson Education, Inc. All rights reserved
24 – 16
Forged Negotiable Indorsements (cont.)
? Fictitious payee rule: Drawer is liable on a forged or
unauthorized indorsement if the person signing as
or on behalf of a drawer intends the named payee
to have no interest in the instrument or when the
person identified as the payee is a fictitious person
© 2016 by Pearson Education, Inc. All rights reserved
24 – 17
Warranty Liability for Negotiable Instruments
? Certain warranties implied on transferors of
negotiable instruments
? Implied warranties: Certain warranties that the
law implies on transferors of negotiable
instruments
? Types
? Transfer warranties
? Presentment warranties
? Warranty liability is imposed whether or not the
transferor signed the instrument
© 2016 by Pearson Education, Inc. All rights reserved
24 – 18
Transfer Warranties
? Made by any person who transfers a negotiable
instrument for consideration to a transferee who
took the instrument in good faith:
? Transferor has good title to the instrument or is
authorized to obtain payment or acceptance on
behalf of one who does have good title
? All signatures are genuine or authorized
? Instrument has not been materially altered
© 2016 by Pearson Education, Inc. All rights reserved
24 – 19
Transfer Warranties (cont.)
? No defenses of any party are good against
transferor
? Transferor has no knowledge of any insolvency
proceeding against the maker, the acceptor, or the
drawer of an unaccepted instrument
© 2016 by Pearson Education, Inc. All rights reserved
24 – 20
Presentment Warranties
? Person who presents a draft or check for payment
or acceptance makes to a drawee or an acceptor
who pays or accepts the instrument in good faith:
? Presenter has good title to the instrument or is
authorized to obtain payment or acceptance of the
person who has good title
? Instrument has not been materially altered
? Presenter has no knowledge that the signature of
the maker or drawer is unauthorized
© 2016 by Pearson Education, Inc. All rights reserved
24 – 21
Universal (Real) Defenses
? Defense that can be raised against both holders
and HDCs
?
?
?
?
?
?
?
Minority
Extreme duress
Mental incapacity
Illegality
Discharge in bankruptcy
Fraud in the inception
Forgery & Material alteration
© 2016 by Pearson Education, Inc. All rights reserved
24 – 22
Personal Defenses
? Defense that can be raised against enforcement of
a negotiable instrument by an ordinary holder but
not against an HDC
? Breach of contract
? Fraud in the inducement
? Mental illness that makes a contract voidable
instead of void
? Illegality of a contract that makes the contract
voidable instead of void
© 2016 by Pearson Education, Inc. All rights reserved
24 – 23
Personal Defenses (cont.)
? Ordinary duress or undue influence
? Discharge of an instrument by payment or
cancellation
© 2016 by Pearson Education, Inc. All rights reserved
24 – 24
Case 24.1: Holder in Due Course
? Case
? Bank of Colorado v. Berwick
? 2011 U.S. Dist. Lexis 34373 (2011)
? United States District Court for the District of
Colorado
? Issue
? Is Sands an HDC against whom the personal
defense of fraud in the inducement cannot be
raised?
© 2016 by Pearson Education, Inc. All rights reserved
24 – 25
Discharge of Negotiable Instruments
? FTC HDC Rule: Rule adopted by the Federal Trade
Commission that eliminates HDC status with
regard to negotiable instruments that arise out of
certain consumer credit transactions
© 2016 by Pearson Education, Inc. All rights reserved
24 – 26
Discharge of Negotiable Instruments (cont.)
? Discharge: Actions or events that relieve certain
parties from liability on negotiable instruments
? Methods of discharge
? Payment of the instrument
? Cancellation
? Impairment of the right of recourse
© 2016 by Pearson Education, Inc. All rights reserved
24 – 27
Discharge of Negotiable Instruments (cont.)
? Impairment of the right of recourse: Situation in
which certain parties are discharged from liability
on an instrument if the holder:
? Releases an obligor from liability
? Surrenders collateral without consent of the parties
who would benefit by it
© 2016 by Pearson Education, Inc. All rights reserved
24 – 28
© 2016 by Pearson Education, Inc. All rights reserved
24 – 29
BUSINESS LAW
Chapter 25
Banking System and
Electronic Financial
Transactions
Learning Objectives
? Describe the difference between certified and
cashier’s checks.
? Describe the system of processing and collecting
checks through the banking system.
? Describe electronic banking and e-money.
? Define commercial wire transfer and describe the
use of wire transfers in commerce.
? Describe the banking reform provisions of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act.
© 2016 by Pearson Education, Inc. All rights reserved
25 – 2
Introduction
? Banks
? Made up of international, national, regional, and
community banks
? Highly regulated financial institutions
? Process checks with the assistance of the federal
reserve system
? Electronic financial transactions
? Includes wire transfers of money, interbank
transfers, and electronic consumer transactions
© 2016 by Pearson Education, Inc. All rights reserved
25 – 3
The Bank – Customer Relationship
? Creditor-debtor relationship: Created when a
customer deposits money into the bank
? Customer – Creditor
? Bank – Debtor
? Principal – agent relationship is created when:
? Deposit is a check that the bank must collect for the
customer
? Customer writes a check against his or her account
? Customer – Principal
? Bank – Agent
© 2016 by Pearson Education, Inc. All rights reserved
25 – 4
UCC Governs Checks and Banking
Article 3 (Commercial Paper)
• Sets forth the requirements for negotiable instruments,
including checks
Article 4 (Bank Deposits and Collections)
• Establishes the rules and principles that regulate bank
deposit and collection procedures
Article 4A (Funds Transfers)
• Establishes rules regulating the creation and collection of and
liability for wire transfers
© 2016 by Pearson Education, Inc. All rights reserved
25 – 5
Parties to a Check
? Ordinary check: Order by a drawer to a drawee
bank to pay a specified sum of money from the
drawer’s checking account to the named payee (or
holder)
? Drawer: Checking account holder and writer of a
check
? Drawee: Bank where a check drawer has his or her
account
? Payee: Party to whom check is written
© 2016 by Pearson Education, Inc. All rights reserved
25 – 6
Exhibit 25.1 – Ordinary Check
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25 – 7
Special types of Checks
? Bank check: Payment for which a bank is solely or
primarily liable
? Can be a certified check or a cashier’s check
? Bank is solely or primarily liable for payment
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25 – 8
Forms of Bank Checks
? Certified check
? Bank agrees to accept check when presented for
payment
? Pays out of funds set aside from the customer’s
account
? Cashier’s check: Check issued by a bank for which
the customer has paid the bank the amount of the
check and a fee
? Bank guarantees payment of the check
© 2016 by Pearson Education, Inc. All rights reserved
25 – 9
Exhibit 25.2 – Certified Check
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25 – 10
Exhibit 25.3 – Cashier’s Check
© 2016 by Pearson Education, Inc. All rights reserved
25 – 11
Honoring Checks
? Customer agrees to keep sufficient funds in
his/her account to cover any checks written
? If funds are adequate, bank is under a duty to
honor check
? Honor: To pay a drawer’s properly drawn check
© 2016 by Pearson Education, Inc. All rights reserved
25 – 12
Honoring Checks (cont..)
Stale checks
• Check outstanding for more than six months
• Bank has no obligation to honor
Incomplete checks
• Drawers write checks that omit certain
information
• UCC places the risk of loss of an incomplete item
on the drawer
© 2016 by Pearson Education, Inc. All rights reserved
25 – 13
Honoring Checks (cont.)
Postdated check
• Check that a drawer does not want cashed until
sometime in the future
Stop-payment orders
• Order by a drawer of a check to the payer bank
not to pay or certify a check
• Stop-payment order can be given orally or in
writing
© 2016 by Pearson Education, Inc. All rights reserved
25 – 14
Honoring Checks (cont.)
Overdrafts
• Amount of money a drawer owes a bank after it
has paid a check despite the drawer’s account
having insufficient funds
Wrongful dishonor
• There are sufficient funds in a drawer’s account
to pay a properly payable check, but the bank
does not do so
© 2016 by Pearson Education, Inc. All rights reserved
25 – 15
Federal Currency Reporting Law
? Requires financial institutions and other entities
to file Currency Transaction Report with IRS
reporting:
? Cash transactions in amounts greater than $10,000
? Suspected criminal activity by bank customers
involving financial transactions of $1,000 or more
© 2016 by Pearson Education, Inc. All rights reserved
25 – 16
Forged Signatures
? Problems associated with checks
? Signatures are sometimes forged
? Instrument may have been altered prior to
presentment for payment
? Forged signature of the drawer
? Forged instrument: Check with a forged drawer’s
signature on it
? Payer bank cannot charge the customer’s account if
it pays a check over the forged signature
© 2016 by Pearson Education, Inc. All rights reserved
25 – 17
Altered Checks
? Check that has been altered without authorization
and modifies the legal obligation of a party
? If paid, bank can:
? Charge drawer’s account for original tenor
? Original tenor: Original amount for which the
drawer wrote a check
? Recover difference between altered amount and
original tenor from party who presented check
© 2016 by Pearson Education, Inc. All rights reserved
25 – 18
One-Year Rule
? If a drawer fails to report a forged or altered check
to the bank within one year of receiving the bank
statement and canceled checks containing it, the
bank is relieved of any liability for paying the
instrument
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25 – 19
Series of Forgeries
? If a wrongdoer engages in a series of forgeries or
alterations on the same account, the customer
must report it to the payer bank within a
reasonable period of time
© 2016 by Pearson Education, Inc. All rights reserved
25 – 20
Case 25.1: Series of Forgeries of Checks
? Case
? Spacemakers of America, Inc. v. SunTrust Bank
? 609 S.E.2d 683, 2005 Ga. App. Lexis 43 (2005)
? Court of Appeals of Georgia
? Issue
? Did Spacemakers’s failure to uncover the forgeries
and failure to provide SunTrust with timely notice
of the forgeries bar its claim against SunTrust?
© 2016 by Pearson Education, Inc. All rights reserved
25 – 21
Exhibit 25.4 – Check Collection Process
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25 – 22
The Collection Process
? Collection process, involving several banks, is
governed by Article 4 of the UCC
? Payer bank: Bank where the drawer has a checking
account and on which a check is drawn
? Depository bank: Bank where the payee or holder
has an account
? Collecting bank: Depository bank and other banks
in the collection process
? Intermediary bank: Bank in the collection process
that is not the depository bank or the payer bank
© 2016 by Pearson Education, Inc. All rights reserved
25 – 23
Federal Reserve System
? System of 12 regional federal reserve banks that
assist other banks in the collection of checks
? Being a check-clearing system for banks and other
depository institutions
© 2016 by Pearson Education, Inc. All rights reserved
25 – 24
Deferred Posting
? Deferred posting rule: Allows banks to fix an
afternoon hour of 2:00 p.m. or later as a cutoff
hour for the purpose of processing items
? Applies to all banks in the collection process
© 2016 by Pearson Education, Inc. All rights reserved
25 – 25
Final Settlement
? Check is finally paid when the payer bank:
? Pays the check in cash
? Settles for the check without having a right to
revoke the settlement
? Fails to dishonor the check within certain statutory
time periods
© 2016 by Pearson Education, Inc. All rights reserved
25 – 26
Final Settlement (cont.)
? Deposit of cash: Becomes available for withdrawal
at the opening of the next banking day following
the deposit
? “On us” item: Check that is presented for payment
where the depository bank is also the payer bank
? Drawer and payee or holder have accounts at the same
bank
© 2016 by Pearson Education, Inc. All rights reserved
25 – 27
Final Settlement
? “On them” item: Check presented for payment by a
payee or holder where the depository bank and
the payer bank are not the same
? Midnight deadline: Midnight of the next banking
day following the banking day on which the bank
received an “on them” check for collection
? Presentment across the counter: Depositor
physically presents a check for payment at the
payer bank instead of depositing an “on them”
check for collection
© 2016 by Pearson Education, Inc. All rights reserved
25 – 28
FDIC Insurance of Bank Deposits
? Government agency that insures deposits at most
bank and savings institutions

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