Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 7 | Summary - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
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56

Pages:

2
Author:

bratrochanter

Key Points on Further Liability Rules and Discharge of Negotiable Instruments Under Article 3 of the UCC 1. Comparative Negligence in Employer Liability: o In cases where internal controls fail to detect fraudulent employee actions, courts may apply comparative negligence. For instance, Victory Clothing’s negligence in failing to monitor its accounts contributed to losses due to an employee’s fraudulent deposits. In this case, the court held Victory 30% liable and Wachovia Bank 70% liable, as the bank’s failure to follow its own deposit policies also contributed to the loss. 2. Conversion of Instruments: o Conversion occurs when a person wrongfully exercises ownership over a negotiable instrument, often by paying it to someone not entitled to payment (e.g., a check with a forged endorsement). o Under Article 3, if a bank pays out a check with a forged endorsement, it may be liable to the payee for conversion. The bank can then seek recovery from the person responsible for the forgery. 3. Discharge of Liability: o A party’s obligation on an instrument may be discharged by: 1. Payment: When payment is made according to the instrument’s terms and to the person entitled to enforce it. 2. Cancellation: The holder can discharge a party’s liability by physically canceling the instrument (e.g., tearing it up with intent to cancel the debt). 3. Alteration: If a fraudulent alteration changes the terms of an instrument, the altered party may be discharged from liability unless the party’s negligence contributed to the alteration. 4. Altered Instruments and Recovery: o If a fraudulently altered instrument (e.g., increased amount) is negotiated or paid in good faith without knowledge of the alteration, it may be enforceable to its original terms only. o However, if the maker’s negligence enabled the alteration, they might be liable for the altered amount. 5. Discharge of Indorsers and Accommodation Parties: o Indorsers or accommodation parties (those who endorse or back a loan for another) may be discharged if the terms of the primary obligor’s contract are modified, especially if the modification impairs their collateral or increases their liability. o A discharge does not apply if the modification was authorized or the party waived their right to discharge. Case Example: American Federal Bank v. Parker  In this case, Parker signed a blank promissory note which his associate later filled out fraudulently for a larger amount. Because Parker’s negligence in signing the blank note contributed to the fraud, the court held Parker liable for the note’s full amount.

Related Documents

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 7

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 7 - Page 1

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