South-Western Legal Studies in Business
SOUTH-WESTERN LEGAL STUDIES IN BUSINESS CASE UPDATES—NEGOTIABLE INSTRUMENTS AND CREDIT
SW Legal's Case Updates is a SW Legal Studies service to provide briefs of the latest state and federal court cases. Review the summaries and, for cases of interest, select the case brief. If you cannot find a case of interest, return to Topic Index .
Title
Summary
Negative Equity in Car Trade Is Part of One Financial Obligation for New Car Buy
Briefed Case
New York high court answered a question from federal courts to clarify the rule about negative equity in used cars—where the trade-in value is less than the outstanding loan. When that equity is rolled into a loan for a new vehicle, it cannot later be separated. There is only one obligation.
(Updated November 2009)
Guaranty on Notes Transfer by Operation of Law
Briefed Case
Appeals court held that, although the sale of notes from the original lender to a later holder did not specifically also transfer the guaranty on the notes that the maker of the notes had signed, the guaranty transferred by operation of law, so the maker owed the current holder due to default on the notes.
(Updated April 2009)
Check with Slash Mark between Payees’ Names Payable to Either Payee
Briefed Case
Appeals court held that a bank did not convert the funds from checks when it allowed one payee on checks made out to two payees, with names separated by a slash mark, to cash the checks. The meaning of the slash was unclear, but is usually interpreted to mean “or.”
(Updated September 2008)
Destruction of Original Note Does Not Eliminate Right to Enforce the Note
Briefed Case
Alabama high court held that the destruction of a promissory note did not mean it was not enforceable. Both the maker of the note, or an assignee who then had the same rights as the maker, could enforce the note so long as its existence could be proven.
(Updated March 2008)
Bank Liable for Accepting Embezzled Checks
Briefed Case
Appeals court held a bank liable for losses suffered by a small business when an employee of the business stole checks made out to the business and deposited them in her personal account. The bank failed to follow proper procedure.
(Updated May 2007)
Good Faith Buyer of Vehicle Obtained by Swindle Gets Good Title
Briefed Case
Colorado high court held that when a seller accepts a bad check for a vehicle, which is then sold to an innocent buyer, the innocent buyer can keep the vehicle. One of the two injured parties must suffer a loss. It falls on the one best able to prevent the loss.
(Updated February 2007)
No Conviction for Writing Bad Checks So Long as Account Holder Has Check Guarantee Card
Briefed Case
Appeals court overturned a life conviction for a defendant convicted of writing bad checks. While the defendant had insufficient funds to cover the checks, she had credit with the bank which promised to honor the checks by its check guarantee card. Hence, the check she wrote were covered.
(Updated April 2006)
Bill of Lading Must Clearly State Liability Options for Carrier to Limit Liability
Briefed Case
Appeals court held that under federal law, when a carrier prepares a standard form bill of lading for shippers to fill out, it must provide options for different levels of liability or the carrier will be presumed liable for the full value of the shipment.
(Updated July 2003)
Bank May Be Liable for Conversion for Cashing Check without Endorsement
Briefed Case
Wisconsin high court held that a financial advisor who cashed a client’s check exceeded his limited powers of attorney, and so was liable for conversion. The bank that processed the check without endorsement by the payee may be liable for conversion for failure to follow reasonable banking procedures.
(Updated May 2003)
No Cause of Action for Alleged Breach of Oral Credit Agreement in Louisiana
Briefed Case
The Louisiana high court held that the state's Credit Agreement Act expressly precludes any cause of action based on an alleged oral promise to extend credit.
(Updated March 2003)
Claims on Unregistered Copyrights Subject to State Security Interest Rules
Briefed Case
Federal appeals court held that state law governing perfection of security interests determined which creditor had a claim on the unregistered copyrights of a debtor that went into default. The fact that the copyrights were not registered with the Copyright Office was not relevant to the determination of the security interests.
(Updated March 2003)
Injunction Allowed to Block Payment by Letter of Credit When Good Legal Remedy Not Available
Briefed Case
Ohio high court held that a court may enjoin payment by letter of credit when there is evidence of fraud in a transaction and the issue of the letter would not be likely to receive adequate compensation via litigation later. Since multiple parties in several nations were involved, and fraud was shown to be likely, an injunction against payment was reasonable.
(Updated September 2002)
Waivers of Contribution by Co-guarantors of Loans May Be Valid
Briefed Case
Alabama high court held that unless there was evidence that co-guarantors of a loan, which had to be paid by the guarantors, had an agreement of joint contribution, then the waiver of rights to joint contribution in the loan documents they signed would be binding and the guarantors who contributed nothing could not be liable for contribution.
(Updated July 2002)
UCC Liability Rules Control Damages for Funds Embezzled from Accounts
Briefed Case
Appeals court held that when funds have been embezzled and a bank received the funds improperly without genuine endorsement, the bank is liable under UCC for the actual amount of funds lost, plus interest. Common law theories of damages do not apply since the UCC controls.
(Updated February 2002)
Lender's Failure to Comply with Notice to Cosigner of Note Extinguished Liability for Note
Briefed Case
A Vermont high court held that the purchaser of a note that was in default was not a holder in due course who could sue a cosigner on the note because the cosigner had not been notified by the issuer of the note of its move against collateral that backed the note. Failure to follow the terms of the agreement extinguished the liability of the cosigner.
(Updated September 1, 2001)
Payee Owed No Special Duty to Drawer of Forged Check
Briefed Case
Appeals court affirmed that a payee of a check that contained the forged signature of the boss of the employee who forged the signature, was an innocent recipient of the forged instrument and does not have to repay the funds to the drawer.
(Updated August 1, 2001)
Bank's Perfected Security Interest in Car Superior to Car Owner's Possessory Interest in Car
Briefed Case
Appeals court affirmed that a bank that owned the note on a car bought from a dealership on credit, which had perfected its security interest in the car, had the right to repossess the car when the owner defaulted on payments, the owner's complaints about the dealership notwithstanding.
(Updated May 1, 2001)
Bank Not Liable for Paying Checks on Which Stop Payment Orders Had Been Placed
Briefed Case
Appeals court held that under the UCC a drawee was not liable to a drawer for accidentally paying checks on which stop payment orders had been placed since the drawer was liable to the payee of the checks anyway.
(Updated April 1, 2001)
Gambling Voucher Is Bearer Paper
Briefed Case
A New York court held that gambling vouchers bought at racetracks to make bets is freely negotiable bearer paper that does not require identification by holders in due course. When the racetrack cashed out a stolen voucher, it was not responsible to the real owner for failing to identify the holder of the voucher.
(Updated December 1, 2000)
Bank Not Liable for Cashing Forged Checks Due to Contract Avoiding UCC Rule
Briefed Case
Appeals court upheld a lower court decision that a bank would not be held liable for cashing millions of dollars worth of forged checks against a business account. The bank customer had signed a contract that held that because the business used a machine to sign its checks, the bank would not be liable so long as it used ordinary care in the processing of its checks.
(Updated December 1, 2000)
UCC Standards Apply to International Letters of Credit
Briefed Case
Appeals court upheld a verdict against a Brazilian bank, which attempted to cancel a letter of credit and then dishonored requests for payments. The cancellation of the credit did not meet the "clear and unequivocal" notice required by the UCC. That standard applies to this letter, which was issued under International Chamber of Commerce rules for credit.
(Updated October 1, 2000)
Bank's Role Limited as to Liability for Fraud in Transaction Using Letter of Credit
Briefed Case
Court held for a bank that issued payment to a seller that engaged in fraud against a buyer. The bank followed proper procedure in reviewing documents and issued payment at the proper time. It has no duty to inspect the good involved or to understand the terms of art in the paperwork that could have triggered knowledge that something was amiss.
(Updated October 1, 2000)
Secured Creditor May Recover Funds Paid to Unsecured Creditor
Briefed Case
District court upheld the bankruptcy court determination that funds paid to a supplier of raw materials were received in bad faith, not in the ordinary course, thus enabling a secured creditor to recover the funds from the supplier due to priority of its liens.
(Updated October 1, 2000)
Security Interests in Farm Products Is Good for One Year Under the UCC
Briefed Case
While most security interests under UCC 9-307 are presumed to be good for five years, under a specific provision inserted by the legislature, security interests in farm products are good for one year, so liability for violating the security interest cannot occur after one year.
(Updated September 1, 2000)
Fraud in Application Does Not Relieve Surety of Liability
Briefed Case
Appeals court held that when a surety has been induced to offer surety bonds by a principal debtor who used fraud against the surety, the creditor is still owed payment from the surety so long as the creditor was innocent of any wrongdoing.
(Updated February 1, 2000)
Government Crop Insurance Payments Subject to UCC Rules Regarding Crop Proceeds
Briefed Case
Michigan appeals court held that government disaster payments to a farmer for lost crops were crop proceeds under the UCC security interest in the crop. As such, the order of payment to creditors was established and the farmer could not change the payment order.
(Updated February 1, 2000)
Waiver of Defenses Eliminates Defenses Against Discharge of Debt
Briefed Case
A major shareholder personally guaranteed loan to corporation. When the corporation defaulted, the shareholder placed all assets with a brokerage firm in the name of another company he owned. Appeals court held that because loan guarantee contained a waiver of all defenses against collection, he could not avoid responsibility to pay.
(Updated November 1, 1999)
Business Partners Must Make Good as Guarantors of Business Debt
Briefed Case
Partners co-signed a business loan and guaranty agreement. Appeals court affirmed verdict in favor of partners whom, when their business defaulted on loan, covered on behalf of partner who failed to contribute. The paying partners had the right, on the guaranty, to foreclose against other property of the non-paying partner.
(Updated November 1, 1999)
Automobile Lease Did Not Create Security Interest in Security Deposit
Briefed Case
Lessee of car sued GMAC for failure to pay interest on $350 security deposit on leased car. Alabama high court held that UCC §9-207 does not apply because it requires a security interest to be expressly specified in the financing agreement, which was not the case.
(Updated October 19, 1998)
Mobile Goods May Be Moved Without Losing Perfected Security Interest
Briefed Case
Landscaper had moved large equipment from Pennsylvania to New Jersey when it went bankrupt. Appeals court held that creditor's perfected security interest in the equipment in Pennsylvania was not lost by the move because the collateral consisted of "mobile goods."
(Updated May 29, 1998)
Travel Trailer Is Consumer Good
Briefed Case
Consumer defaulted on payments to seller of travel trailer, who then repossessed the trailer. New Hampshire high court held trailer is a consumer good, covered by Article 9, not a motor vehicle, which would change the nature of the security interests and the rights of the parties in the dispute.
(Updated November 14, 1997)

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