ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 27
LIABILITY, DEFENSES, AND DISCHARGE
27-1A. Discharge
The jury returned a verdict for Mary Ann, and the court issued a judgment that, in part,
discharged the note. The Gardners appealed, arguing that Mary Ann’s finding the note in a file
27-2A. Unauthorized indorsements
(This case was decided under the unrevised Article 3, but the result would likely by the same
under the revised Article 3.) Ordinarily, First City would be liable to the payor bank (First
National) because First City had accepted the checks in spite of the fact that their indorsements
were not genuine or authorized [UCC 3–404(1) in the unrevised Article 3; UCC 3–403(a) in the
revised Article 3]. UCC 3–405(1)(c) in the unrevised Article 3 [UCC 3–404(b)(2) in the revised
27-3A. Unauthorized indorsements
This case was decided under the unrevised UCC 3–405. Under that section, the law firm had to
bear the loss. The court emphasized that when an indorsement is forged, “generally the bank
that first paid on the check will bear the loss.” But it also pointed out that UCC 3–405(1)(c)
provided an exception to this rule. “This section places the loss on the drawer when an
employee supplies him with the name of the payee intending that the named payee have no
interest in the check and an indorsement is forged in the name of the named payee.” The court
held that the forged indorsements in this case fell under this exception. Mowatt had never
intended the payee-partners to have any interest in the checks payable to them and forged their
names when indorsing the checks. The court stated that the reasons for the fictitious payee rule
were “that the employer is normally in a better position to prevent such forgeries by reasonable
27-4A. Unauthorized indorsements
The court concluded that the imposter rule did not apply. Wanda Snow was not the drawer of
the check but a payee suing the collecting bank for acceptance of the check bearing her forged
indorsement. The court stated that “where the payee of a check is suing a collecting bank, there
is no policy reason for shifting the risk of loss to the payee, since as between [Snow] and
Southeast, the bank was in a superior position to prevent the fraud from occurring.” The court
added that “[e]ven if the imposter rule were applicable, * * * there is evidence to indicate that
[Snow’s] former husband, Cary Byron, did not act as an imposter, within the meaning of the
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 27 B-3
3–405 and hence the banks were not liable. The court noted that the principle underlying the
fictitious payee rule rests on a fundamental public policy determination that losses arising from
unauthorized checks payable to fictitious payees are “more business risks than banking risks.”
As a general rule, the employer—in this case, the Fund—is in a better position to prevent such
forgeries by reasonable care in the selection and supervision of its employees. Furthermore,
27-6A. Defenses
In this classic case concerning the defense of fraud in the execution, the Kansas court en-
tertained three possible views. One was that since Ort never intended to execute a note, he
should not be held liable for the act. A second view is that the jury should decide, as a question
27-7A. Illegality
The trial court held for the plaintiff, and Berenyi appealed. The appellate court affirmed the trial
B-4 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 27
Mortgage & Investment Corp. had taken the note in good faith, for value, and with no notice of
the court order against Kroyden or of its violation by Kroyden’s employee. Under New Jersey
27-8A. Defenses
The court held that nondelivery was a proper defense against Vesely because Vesely was not a
27-9A. Discharge
“Intent” was the principal factor in the eyes of the court. The Supreme Court of Nebraska held
that the unintentional cancellation and surrender of a promissory note through a clerical error
1. In determining whether the bank had been negligent because it had not contacted
Parker before disbursing the loan proceeds to Kirkman, it is important to realize that the note
was complete when presented to the bank, and there were no obvious alterations on it. Also, it
is significant that the bank loan officer had known Kirkman for a number of years and knew that
he was in the horse business. In other words, there was no evidence before the bank that
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 27 B-5
2. As mentioned before in this text, an underlying goal of the UCC—and of the law
generally—is to protect innocent parties from harm. Generally, if one of two innocent parties to
a transaction must be forced to bear a loss, the UCC, in the interests of fairness, will hold that
3. If you decided that Parker should be liable for the loss, you could justify your
conclusion by referring to the UCC’s policy discussed above—that the party in the best position
to prevent the loss should bear the loss. Obviously, Parker, by signing an incomplete
instrument, opened himself to liability under the UCC. On the other hand, if you decided that the
bank should be liable for the loss, you might argue that Roundtree, as an agent of the bank,