(Paralegal) If An Aggressor Is Seriously Injured During A Fight, Who Sues Whom?

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Case Study:

Teenagers Dan Daniels and Tom Thomas are in the same high-school class. Neither of them has gone through their growth spurt yet—both are about 5 feet, 5 inches tall and weigh about 140 pounds each. While walking home from a burger place one summer night, they are approached by Randy Roberts, another teenager they recognize as a football player from a rival school. He is about 5 feet, 11 inches tall and weighs well over 200 pounds. Randy begins yelling at Dan and Tom to get out of his neighborhood, screaming that Raiders do not belong there. Raider is Dan and Tom’s high-school mascot. Randy grabs Dan and punches him in the face. Dan tries to return the punch but is unable to get close enough to Randy to do so. Tom is weighing his options when he sees Randy pull something shiny out of his pocket. Thinking it is a knife, Tom rushes Randy, knocking him off his feet. Randy hits the ground head first and has a seizure. Panicking, Tom and Dan call the police. Randy is taken to the hospital and ends up with permanent brain damage. Randy’s family sues Tom and Dan who counter-sue Randy. What claims does each of the teenagers have? What defenses are available to each of them? Who is likely to prevail and why? Is there any criminal liability here? Discuss the intersection between criminal action and tort liability in this case.

Claims of each teenager:

Thomas and Daniels against Roberts: Assault (Roberts acted with intent to cause harm to Daniels and Thomas); intentional infliction of emotional distress (rRoberts was harassing Daniels and Thomas specifically because of their affiliation with a rival school; was a much larger teen who was threatening bodily harm to smaller teens).

Daniels against Roberts: Battery (to Daniels): acted with intent to cause harm and had harmful contact with Daniel’s face when he hit him. “Cause of action for assault and battery can be supported by even minimal touching” (O.C.G.A. § 51-1-14).

Roberts against Thomas: Unintentional battery when shoving Roberts. Not an intentional tort, as injury was accidental. Possibly not a reckless tort, as Thomas behaved in the heat of the moment in self-defense and to defend his friend Daniels. Likely to be a negligent tort, as Thomas’ shove was not pre-planned and not intended to maliciously injure Roberts, merely to protect Daniels and himself from Roberts’ aggression and what Thomas assumed to be Roberts’ pocket knife (Thomas was mistaken, Roberts was not carrying a knife). Roberts’ attorney will still likely try to claim it was a reckless tort, as that is punished more severely than a negligent tort, by saying that shoving Robnerts was an action committed without regard to outcome, but will have to prove satisfactorily that Thomas, as a reasonable person, could have predicted Roberts would fall and suffer a serious injury.

Roberts against Daniels: Unlikely to have any valid claim. Roberts, as aggressor, started the fight and Daniels attempted to respond with a reasonable amount of force to protect himself. Daniels is probably in the clear, as he neither directly contributed to Roberts’ injury nor instigated the conflict.

Defenses:

Thomas, mistakenly believing that Roberts was bringing a knife to a fist fight and shoving him, may be considered to have used unreasonable force (as aggressor Roberts was seriously injured when he fell and hit his head after being shoved), albeit in defense of himself and Daniels. Thomas can argue that he did not intend consciously to injure Roberts, merely to protect himself, and that shoving Roberts was not intentionally acting with conscious disregard or full awareness of potential risks shoving Roberts might have.

Thomas’ and Daniels’ lawyers might examine Georgia’s stance on a Common Law Provocation Mitigation Defense (NOTE: this is usually used with homicide / manslaughter cases, so application is limited here) has two-prong test: 1. Was defendant in fact provoked (a judge must decide, as this is subjective) and 2. Was that provocation such that a reasonable person is liable to act as defendant did in the same situation? Roberts will not be able to rely on this defense, as he was the aggressor. It is highly unlikely that “Thomas and Daniels were believed, correctly, to attend a rival school” will be considered sufficient provocation mitigation for Roberts’ bullying behavior that instigated the fracas and led directly to Roberts being seriously injured.

Robert’s lawyer can cite “Mere fact that defendant did not initiate fight does not necessarily show that he is not guilty of aggravated assault” (Ga. Code, § 26–1302(b)) and “[even assuming that] the victim initiated the “fight” […] the mere fact that the defendant did not initiate the fight does not necessarily show that he was not guilty of aggravated assault…” (Hooks v. State, 138 Ga.App. 539(1), 226 S.E.2d 765).

Roberts’ lawyer(s) may also try to claim the three boys were all in “mutual combat.” “A mutual combat situation arises when both parties are at fault and are willing to fight because of a sudden quarrel. To establish mutual combat, the mutual intention to fight need not be proved directly, but must be inferred by jury from conduct of parties. While mutual combat and self-defense are mutually exclusive by definition, where there is evidence of both the jury, as trier of fact, must select between the two propositions” (Ga. Const. Art. 1, § 1, Par. 11(a)).

Roberts’ lawyer may also try to cite Robinson v. Kroger Co., 268 Ga. 735, 736 (1) (493 SE2d 403)(1997), where a person voluntarily inserted himself into a fight as a peacemaker, though this dealt more with liability of a property owner who unwittingly had his property used as a site for a dispute. As such, it is not likely to be a compelling argument, even though the peacemaker lost in court. A better case might be Russell v. The State, 152 Ga.App. 693, 263 S.E.2d 689 (Dec. 4, 1979) (Certiorari Denied Jan. 25, 1980), as non-aggressor in a fight was still liable for aggravated assault; note, however, that defendant in Russell did not convince court that his actions were done in self-defense. Roberts’ superior size and instigator-aggressor status is likely to be a mitigating factor for Thomas.

Thomas and Daniels’ lawyer(s) may counter: “[a] defendant is engaged in “mutual combat” with other party, only if there is mutual intent to fight on part of both parties; such intent may be manifested by acts and conduct of parties, as well as by circumstances leading up to and culminating in their combat” (O.C.G.A. § 16-3-21(b)(3)). Roberts was seeking a fight, not Thomas or Daniels.

Thomas and Daniels’ lawyer(s) will also plead self-defense: per Ga. Code Ann., § 16-3-21, “use of force in defense of self or others, including justifiable homicide” can be justified “to the extent that he or she reasonably believes that such threat or force is necessary to defend himself or herself or a third person against such other’s imminent use of unlawful force.” This does not excuse death or great bodily harm, such as Roberts’ injury, but that presumes that Thomas could reasonably predict that his shove could cause serious damage to Roberts, which is unlikely, or, at least, debatable and possibly is a matter for a judge and/or jury to determine. Daniels’ lawyer(s) could point out that Roberts’ battery of Daniels is not covered under that same code, as Roberts “initially provoked” the fight as the aggressor.

Thomas’ lawyer(s) should cite O.C.G.A., § 16-2-2: “[a] person shall not be found guilty of any crime committed by misfortune or accident where it satisfactorily appears there was no criminal scheme or undertaking, intention, or criminal negligence.  The Georgia Supreme Court has held that ‘Accident’ is an affirmative defense whereby it must be established a defendant acted without criminal intent, was not engaged in a criminal scheme, and was not criminally negligent, i.e., did not act in a manner showing an utter disregard for the safety of others who might reasonably be expected to be injured thereby” (see also: Wilson v. State, 279 Ga. 104, 105(2), 610 S.E.2d 66 (2005)).

None of the teens or their lawyers will be able to drag any parents into the dispute, per Saenz v. Andrus, 195 Ga. App. 431 (April 23, 1990): “Unless common law is changed by statute, parents are not liable in damages for torts of their minor children merely because of parent-child relationship.”

Liability:

Although Roberts is the most severely injured party, and unable to provide his version of events due to his injury, it is unlikely Roberts will prevail in court. If awarded damages from Thomas, they are likely to be symbolic rather than severely punitive.

Daniels, as another injured party, did not directly fight with Roberts but was a victim of assault and battery and, arguably, intentional infliction of emotional distress by Roberts. He is not likely to be found liable for any wrong-doing.

Thomas and Daniels can pursue the injured Roberts for the damages outlined above, but are likely to do so only in response to a suit from Roberts, as a counter-suit.

That all three parties are assumed to be below the age of majority will also influence the cases, if any, as there will have to be a discussion about whether or not any of the parties’ actions should be treated with the same severity as they would be treated if the parties were legally adults. Generally, children and minors involved in disputes are treated somewhat more gently and leniently by the courts, as long as their actions are considered appropriately reasonable for their age(s).

References:

Saenz v. Andrus, 195 Ga.App. 431 (April 23, 1990).

Lau’s Corp. v. Haskins, 261 Ga. 491, 405 SE2d 474 (1991).

Robinson v. Kroger Co., 268 Ga. 735, 736 (1), 493 SE2d 403 (1997).

Sailors v. Esmail Intl., 217 Ga. App. 811, 813 (1), 459 SE2d 465 (1995).

Driver v. Leicht, 215 Ga. App. 694, 695, 452 SE2d 165 (1994).

Ga. Code Ann., § 16-3-21.

Ga. Code Ann., § 16–5–23.1.

Ga. Code, § 26–1302(b).

O.C.G.A., § 51-1-14.

O.C.G.A., § 16-3-21(b)(3).

O.C.G.A., § 16-2-2

15 A.L.R. 4th 118

18 Ga. Jur. Criminal Law § 6:71

Lawson v. Bloodsworth, 313 Ga.App. 616 (Jan. 18, 2012). [Assault and battery case. Headnote: “High school student filed suit against his teacher, asserting claim for assault and battery based on alleged incident in which teacher threw a chair at student, which hit his leg.” Student eventually prevailed, was awarded damages for emotional distress upon appeal.]

Simonton v. Sauls, 74 Ga.App. 3 (June 13, 1946). [Assault and battery case. Headnote: “Suit by Jurelle Sauls against Odessa Simonton to recover damages for alleged assault and battery, wherein defendant filed a cross-action for damages for an assault and battery allegedly committed upon the person of defendant by plaintiff.”]

Wilson v. The State, 279 Ga. 104, 105(2), 610 S.E.2d 66 (2005).

Strong v. The State, 264 Ga. 837, 838(2), 452 S.E.2d 97 (1995).

Walden v. The State, 267 Ga. 162, 163(2)(a), 476 S.E.2d 259 (1996).

Russell v. The State, 152 Ga.App. 693, 263 S.E.2d 689 (Dec. 4, 1979) (Certiorari Denied Jan. 25, 1980). [Excerpt: “The Court of Appeals, Shulman, J., held that: (1) mere fact that defendant did not initiate fight did not necessarily show that he was not guilty of aggravated assault…”]

Simmons v. The State, 172 Ga.App. 695 (Nov. 21, 1984).

Frasier v. The State, 295 Ga.App. 596 (Jan. 20, 2009).

Ga. Const. Art. 1, § 1, Par. 11(a).

Sailors et al v. Esmail International, Inc., 217 Ga. App. 811, 459 SE2d 465 (1995). [Assault and battery case. Sailors voluntarily joined an ongoing altercation while legally drunk and engaged in mutual combat while ignoring uninvolved witnesses who urged all the fighting parties to cease and desist, was wounded by a knife, sued owner of property where injury occurred. Sailors lost.]

Hansen et al v. Etheridge et al, 232 Ga. App. 408, 501 SE2d 517 (1998).

George E. Guay III & Robert Cummins, Tort Law for Paralegals, (2010). Retrieved from http://digitalbookshelf.southuniversity.edu/#/books/0558542700/pages/48710147 (January 25, 2013).

(Paralegal) Holder in Due Course

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Holder in Due Course

In our case study, Bridezilla Wedding Planning has issued two checks totaling $150,000 to BabyCakes Bakery for wedding cakes. BabyCakes endorsed the checks to Shark & Shyster law firm to pay for a retainer. Bridezilla suffered a business failure, and, as it had not received all the wedding cakes it had ordered, it stopped payment on the checks. Shark & Shyster claims to be a holder in due course and demands payment. An equipment provider disputes Shark & Shyster’s claim on the check, and asserts its interest in the checks thusly: Shark & Shyster–say the equipment provider–has not, in fact, given value for the Bridezilla checks, and thus is not a holder in due course. We are asked to determine who is correct: is Shark & Shyster a holder in due course?

The relevant article in the Uniform Commercial Code is § 3-102. A holder in due course (HDC) is anyone or any business entity which has possession of (is a “holder” of) a check (or promissory note, or any other legitimately negotiable instrument) which was accepted in “good faith” (holder has no reason to suspect, for example, that a check is overdue, has already been dishonored (example: a bank may have previously refused to honor it if the account it would draw from was already overdrawn or closed), non-negotiable, or forged, which may have a claim on it from another party or parties (see §§ 3-305(a), 3-306), or which is otherwise suspect) in exchange for services or goods of value (Malin, 2012). Rules governing HDC status are intended to protect the purchaser of a debt, typically a third party, from any legal liability or debt resulting from any dispute between the parties associated with the original transaction; a HDC can demand payment from the original drafter of the check (or note, et cetera) (USLegal, 2012).

In our case study, do Shark & Shyster have a claim? UCC § 3-102 requires that a HDC fulfill all the above guidelines (Cornell, n.d.). Shark & Shyster can argue that they were unaware of any problems with the negotiability or authenticity of the checks, so they meet that requirement. Further, Shark & Shyster can also argue that they accepted the checks from BabyCakes in good faith as a payment towards a retainer, and there does not appear to be anything untoward or illegal about the transfer of endorsed checks from BabyCakes signed over to Shark & Shyster, so Shark & Shyster can also argue that this requirement has been met. The next requirement is more complicated: has Shark & Shyster truly given “good value” for those checks?

In Carter & Grimsley v. Omni Trading, Inc., the situation was similar. Omni Trading paid Country Grain two checks for purchased grain. Country Grain endorsed those checks to Carter & Grimsley as a retainer for future legal services. Country Grain then suffered a business failure. Omni stopped payment on the checks because it had not received all the grain that the checks were intended to pay for. The Illinois Department of Agriculture professed an interest in the checks to repay a debt incurred by Country Grain, but Carter & Grimsley claimed to be a HDC. The court ruled in favor of the Department of Agriculture, ordering that the disputed funds be transferred to them. Carter & Grimsley appealed and lost the appeal.

The Court explained that there were no precedent-setting cases in Illinois where UCC § 3-303(a) had been interpreted to include retainers: “an executory promise is not value” (Black, 1999). Carter & Grimsley had not yet performed any legal services for Country Grain. One justice, P. J. Holdridge, dissented, citing Corti v. Fleisher, 93 Ill. App. 3d 517 (1981) and claiming that a payment of a fee or retainer creates a relationship between an attorney and a client, and Holdridge felt that the agreement to perform future legal services had value.

In Coventry Care, Inc. v. United States of America, the Internal Revenue Service (IRS) asserted that it was a HDC of a $35,000 note assigned to it by the CEO of Contemporary Institute, Inc., Robert C. Braumiller.  Coventry issued two promissory notes totaling $55,000 to Contemporary Institute as part consideration for purchase of a subsidiary of Contemporary. Contemporary sent the $35,000 check to the IRS and $20,000 to Western Pennsylvania National Bank (WPNB) to pay a debt to the bank. WPNB assigned the $20,000 note back to Contemporary, and Contemporary passed the note on to United Professional Data Processing (UPDP), which in turn passed the note to David Sage, Inc.

United had possession of the $20,000 note when the IRS and neglected to admit to this when the IRS asked for $10,000 on behalf of Contemporary. Sage asserted that it had promised United a 25% interest in a future not-yet-realized business venture. About a year later, Sage’s venture became Energy Management Corporation (Energy), but, at the time the dispute was tried in court, United had not yet received any stock of Energy, nor asked for the promised consideration. Because Sage had not yet provided “good value,” the IRS was found to be a HDC of the $35,000 note, and Sage was found not to be a HDC of the $20,000 note (the court cited 26 U.S.C. § 6323(b)(1)(A) or 26 U.S.C. § 6323(h)(6)). The court awarded the IRS $51,867.10; a future hearing would be required to determine the “priority of other claimants” (Knox, 1973).

In Fernandez v. Cunningham, Sam Kay gave a promissory note for $220,000 to Investments, S. A., Inc., which endorsed the note. Cunningham & Weinstein, law partners, alleged that they were HDCs of the note and that they had made a demand for payment but were denied. Sam Kay died and Marilyn Kay Fernandez was appointed administratrix of his estate; she objected to Cunningham & Weinstein’s claim, denying they were HDCs, and noting that they had failed to provide evidence that they had performed legal services for Kay.

The first court found for Cunningham & Weinstein, but the appellate court overturned this decision. The court found that the law partners had not provided “good value” for the note, as they failed to provide evidence of services provided to the late Kay (Carroll, 1972).

In Korzenik v. Supreme Radio, Inc., Korzenik and another law partner received notes “in the form of trade acceptances” as a retainer from Supreme Radio for “services to be performed.” Once again, the courts held that although Korzenik et al had spent much of the retainer, it had not provided “good value” (per the guidelines of § 3-303(a); nor had Korzenik made “an irrevocable commitment to a third person within § 3-303(c)”) to Supreme Radio and thus were not HDCs (Whittemore, 1964).

The equipment provider can thus argue that Shark & Shyster have not, in fact, given “good value”. The original check was issued by Bridezilla to pay for cakes, and though it is not Shark & Shyster’s fault that BabyCakes failed to deliver all the cakes Bridezilla paid for, the fact remains that no goods of value were ever furnished in exchange for those checks. Shark & Shyster did not provide any goods of value to Bridezilla in exchange for those checks either, unlike the equipment provider, which apparently did. Shark & Shyster also did not acquire the checks as a debtor or payee of Bridezilla, and, as far as we are told, had no prior business dealings with Bridezilla, and thus no claim on any payments from Bridezilla to satisfy a debt incurred by the wedding planning company. Shark & Shyster thus had no contract or invoice or bill directly connected with Bridezilla that would compel Bridezilla to pay the law firm for anything.

Although BabyCakes and Shark & Shyster may have had a business arrangement, assumed due to BabyCakes paying Shark & Shyster a retainer (in other words, a fee to ensure that a representative attorney from Shark & Shyster would handle a legal matter for BabyCakes), a retainer is not the same as a bill for services rendered. A retainer is given to a law firm in exchange for the firm’s promise to perform legal services in the future. Shark & Shyster has not, as far as we can tell, performed those services for BabyCakes yet. A promise to perform is of arguable value to the law firm since they place a price on retainers, but it has no actual value until the promise is kept and services provided. Therefore, Bridezilla, BabyCakes and the equipment provider can all argue that Shark & Shyster has not provided “good value” for the checks, and is thus not, by the guidelines in the UCC, a HDC.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Cornel University Law School, Legal Information Institute. (n.d.). U.C.C. – ARTICLE 3 – NEGOTIABLE INSTRUMENTS. PART 3. ENFORCEMENT OF INSTRUMENTS. § 3-302. HOLDER IN DUE COURSE. Retrieved from http://www.law.cornell.edu/ucc/3/3-302.html

Cornel University Law School, Legal Information Institute. (n.d.). U.C.C. – ARTICLE 3 – NEGOTIABLE INSTRUMENTS. PART 1.  GENERAL PROVISIONS AND DEFINITIONS. Retrieved from http://www.law.cornell.edu/ucc/3/article3.htm

USLegal. (2012). Holder In Due Course. Retrieved from http://definitions.uslegal.com/h/holder-in-due-course/

Columbia Law Review Association, Inc. (no author cited). (1968). Third Party Irrevocable Commitments as Value for a Holder in Due Course (originally published in the Columbia Law Review. Vol. 68, No. 3 (Mar., 1968), pp. 588-595). Retrieved from: http://www.jstor.org/stable/1120900

Gallinger, G. W., & Poe, J. B. (1995). Essentials of Finance: An Integrated Approach. Englewood Cliffs, NJ: Prentice Hall (excerpt). Retrieved from http://www.enotes.com/negotiable-instruments-reference/negotiable-instruments

Malin, M. (2012). What is a Holder in Due Course and Why Should You Care? Retrieved from http://www.buteralaw.com/newsletters.asp?c=46&id=313

Black, Judge B. W. (Court of Appeals, Third Appellate District). (1999). Carter & Grimsley v. Omni Trading, Inc., # 3-98-0483. Retrieved from http://law.justia.com/cases/illinois/court-of-appeals-third-appellate-district/1999/3980483.html

Knox, District Judge (United States District Court, W. D. Pennsylvania). (1973, November 1). COVENTRY CARE, INC. v. UNITED STATES: 366 F.Supp. 497, 501-02. Retrieved from http://www.leagle.com/xmlResult.aspx?page=12&xmldoc=1973863366FSupp497_1797.xml&docbase=CSLWAR1-1950-1985&SizeDisp=7

Carroll, Judge (District Court of Appeal of Florida, Third District). (1972, October 24). Fernandez v. Cunningham, 268 So. 2d 166, 169. Retrieved from http://www.leagle.com/xmlResult.aspx?xmldoc=1972434268So2d166_1408.xml&docbase=CSLWAR1-1950-1985

Whittemore, Judge (District Court of Western Hampden, Massachusetts). (1964, April 10). ARMAND A. KORZENIK & another vs. SUPREME RADIO, INC., 197 N.E.2d 702, 703-04. Retrieved from http://masscases.com/cases/sjc/347/347mass309.html

 

(Paralegal) Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

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Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

In our case study, we are asked to review Qatar v. First American Bank of Virginia, 1995 and answer the following:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account?

2)      Is a bank liable if a customer’s endorsement simply says “for deposit only”?

3)      Would any account qualify to satisfy the endorsement?

4)      Would any bank qualify?

An employee, Bassam Salous, the chief accountant at Qatar’s Ministry of Education’s Office of Cultural Attache (OCA), defrauded his employer by creating false invoices and cashing OCA checks to “pay” the fake invoices. The checks Salous presented at the banks (and for which the banks debited Qatar’s account) took four different forms (and included checks made out to corporations rather than individuals):

  • A forged fake payee’s signature, a check indorsed “in blank” (UCC § 3-204(2) makes this legally payable to the bearer).
  • A forged fake payee’s signature, with “For Deposit Only” stamped on the check
  • A forged fake payee’s signature, with “For Deposit Only” stamped on the check with Salous’ handwritten personal bank account number
  • No signature at all

From 1986 until 1992, when his scheme was uncovered, Salous deposited over a million dollars into his personal accounts at several banks (including First American Bank of Virginia).

Qatar sued the depository banks for conversion, meaning they were alleging that the banks used Qatar’s property improperly; the acceptance of the fraudulent checks (and the subsequent transfer of Qatar’s funds into Salous’ personal accounts) may have been legal, but by refusing to reimburse Qatar’s funds once the fraud was uncovered and once Qatar demanded its funds returned (Qatar argues) is conversion.  (If found liable, the banks could be forced to pay Qatar damages: not only the full amount of the stolen funds but also any interest that Qatar lost once the money was removed from its account.)

The banks, in response, cited a pre-1993 version of UCC § 3-405 — VA Code, Title 8.3, as it existed prior to the January 1, 1993 amendments (District Judge Ellis, 1995) – which would leave Qatar, as Salous’ employer (and thus, ostensibly, in a better position to monitor whether his activities were legitimate and as desired or not), holding the bag for not catching Salous’ fraud sooner.

Predictably, Qatar disagreed. Yes, UCC § 3-405 does hold that even a check with a forged signature can be considered “effective” and negotiable by a bank, but, Qatar argued, the banks did not do due diligence when they failed to respect restrictive endorsements (like “For Deposit Only”) and, Qatar alleges, when the banks failed to act in a “commercially reasonable manner.”

The banks (First American et al) objected, asserting that Qatar, as drawer, should not be able to sue a depository bank for conversion but must file against any drawee banks, and that UCC § 3-405 placed liability for an employee forging employer checks solely on the employer (here, that would mean that Salous’ fraud would be solely Qatar’s problem, not the banks’).

First American et al also cited Western Assurance Co. v. Star Financial Bank of Indianapolis in defense, claiming that they should not be liable because they allegedly obeyed the restrictive endorsement when they deposited the funds into an account, rather than, say, cashing the check, even if the checks were forged and the account was Salous’ account. Western Assurance and Connors Consulting Group (CCG) were collaborating on a contract (Indiana state government hiring both businesses for their expertise in reference to a FICA (Social Security / payroll-related) tax recovery program) and opened separate accounts at Star, but both accounts allowed officers of the other company to endorse checks and perform other transactions. The two companies had a professional disagreement and subsequent falling out. Later Western sued Star for allowing a dishonest employee at CCG to deposit “For Deposit Only” checks payable to Western into some previously fallow/disused/abandoned CCG accounts. The Court did not find Star liable for ignoring the restrictive endorsement because, notably, Western and CCG had previously included each other’s representatives on their account signature cards (Cudahy, 1993).

The Court cited UCC 3-405(1)(c) (i.e., the “fictitious payee” or “padded payroll” rule that holds employers liable for bad employees committing fraud), and noted that § 3-405 does not protect Qatar from a thieving employee cashing unendorsed (unsigned) checks.

The Court said that a forged endorsement does not serve to transfer a check’s title (§§ 3-404, 3-202) and cited Stone & Webster (Wilkins, 1962) and Kraftsman v. United (Drier, 1979). In both cases, company employees forged checks and the banks which cashed the forgeries were said not to have acted in good faith.

Citing § 8.4-401, and Prudential-Bache v. Citibank (Kaye, 1989), the Court said that the drawee bank (First American, with whom Qatar, as drawer in this situation, had an account) is not entitled to deduct funds from the drawer’s account to satisfy a fraudulent check (Ellis, 1995). In Prudential-Bache v. Citibank, dishonest Citibank employees colluded with a thieving Prudential-Bache employee and his accomplice (who opened the Citibank accounts), did not file required federal legal documents for transactions over $10,000.00, and, notably, other bank employees uninvolved in the scam had also ignored the high percentage of “niners” (checks made out for $9,999.99 specifically to circumvent the federal reporting guidelines) that the thieves deposited (and then withdrew once these stolen Prudential-Bache funds were transferred to their Citibank accounts). The Court noted that Prudential-Bache v. Citibank set a precedent whereby Qatar could possibly defeat First American’s defense (that an employee forging checks was solely Qatar’s problem) if Qatar could demonstrate that First American failed to follow established standards or failed to behave with reasonable responsibility (UCC §§ 3-406, 4-406).

The Court stated that the forged signature did not prevent the bank cashing the check per UCC § 3-405, but the accompanying “For Deposit Only” restriction should have forced the bank to “deposit the funds only into the account of the last endorser” (e.g., the payee’s account) as required by UCC § 3-205(c): “First American’s argument to the contrary is a little like saying that a store sign reading “shirts and shoes required” does not restrict a trouserless man from entering the store” (Ellis, 1995). Thus, Qatar could insist that not just “any account” should qualify when a (forged) check is restricted by “For Deposit Only.”

The Court held that First American et al failed to obey the restrictive endorsements on the “For Deposit Only” checks that they deposited into Salous’ personal accounts. Whereas Qatar is stuck taking the loss for checks Salous forged without the restrictive endorsements because a bank can’t be charged with conversion for processing unendorsed checks, even if they are forged (per § 3-405), First American et al were liable for conversion, as Qatar asserted, for the total face value of the “For Deposit Only” checks that were deposited into Salous’ accounts rather than Qatar’s (because depositary banks must comply with restrictive endorsements (UCC § 3-206).

The Court also said that if the depository bank asked Salous to write an account number on the forged checks, then the “for deposit only” endorsement would be violated, because the original assumption would have any deposit go into the payee’s account. If Salous took it upon himself to put his own account number on the check prior to handing it over to a bank representative, then the depositary bank would not be liable for conversion as Qatar asserts, because they can argue that they acted with reasonable care and complied with the restrictive endorsement as written on the check when it was presented (Ellis, 1995).

So we have our answers:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account? According to Qatar v. First American Bank of Virginia, 1995 (affirmed by an appellate court’s decision), yes, because “for deposit only” is a restrictive endorsement that requires the bank to perform a specific action.

2)       Is a bank liable if a customer’s endorsement simply says “for deposit only”? Since “for deposit only” implies that the check is to be deposited into the payee’s account per UCC § 3-206(3), then it does matter if the bank instead deposits the funds into a third party’s account. In this case, a fictional payee (or a real client to whom no payment was owed) named on the “pay to” line plus a forged payee signature do not override the basic assumption of a restrictive endorsement like “for deposit only.” As the court pointed out, it is unreasonable to assume that an account holder would want a “for deposit only” check deposited anywhere but in its own account.

3)      Would any account qualify to satisfy the endorsement? As noted above, no. The bank would not be liable if the funds went to the account holder rather than being stolen (by an employee with forged checks) from the account holder.Otherwise, they might be, if the account holder can convince a court that the bank did not follow best practices and guidelines when examining checks. The court did note that it matters when and at whose behest an account number is added to a “for deposit only” endorsement. First American will be liable only if Salous added his account number after being directed to do so by a bank representative. (If he wrote his account number down on his own without being asked to do so by a bank employee, then they are not liable.)

4)      Would any bank qualify? If a drawee bank fails to observe reasonable standards of care and due diligence, it can be liable; generally it is the depositary bank which actually accepts a forged check, but it is the drawee bank which releases the drawer’s (account holder’s) funds. This doesn’t seem fair, as part of the UCC holds employers responsible for employee theft via check forgery or fraud because the employer is supposedly in a better position to examine and curb (if necessary) the employee’s behavior directly but the depositary bank–which actually handles and allegedly examines checks–is not held to a similar standard, even though it would arguably have a better chance to examine a check for forgery or irregularities. This is an odd guideline, since the drawee bank is the one releasing funds and therefore on the hook, but such are the rules.

In short, the only checks that First American will have to refund to Qatar are those with “For Deposit Only” endorsements which First American deposited into any account other than Qatar’s, including any “For Deposit Only” checks that a bank representative may have asked Salous to endorse with an account number (even if he wrote his own account number). If Salous placed his own account number on those checks in advance, then the banks are off the hook for any of Qatar’s embezzled funds represented by those particular checks.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

USLegal. (2012). Fraudulent Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/f/fraudulent-conversion/

USLegal. (2012). Civil Causes of Action – Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/c/civil-causes-of-action-conversion/

Cudahy, Circuit Judge (United States Court of Appeals, Seventh Circuit). (1993). Western Assurance Co. v. Star Financial Bank of Indianapolis, 3 F.3d 1129 (7th Cir.1993). Retrieved from http://openjurist.org/3/f3d/1129/western-assurance-co-inc-v-star-financial-bank-of-indianapolis

Wilkins, Circuit Judge (Supreme Judicial Court of Massachusetts, Suffolk). (1962). Stone & Webster Eng’g Corp. v. First Natl. Bank & Trust, 184 NE 2d 358. Retrieved from http://scholar.google.com/scholar_case?case=7544253803203684392&q=Stone+%26+Webster+Eng%27g+Corp.+v.+First+Nat%27l+Bank+%26+Trust+Co&hl=en&as_sdt=2,11&as_vis=1

Drier, Supreme Court Justice (Superior Court of New Jersey, Law Division). (1979). Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 404 A.2d 1288, 1291 (Law Div. 1979). Retrieved from http://www.leagle.com/xmlResult.aspx?xmldoc=1979657169NJSuper488_1600.xml&docbase=CSLWAR1-1950-1985

Kaye, Judge (Court of Appeals of the State of New York). (1989). Prudential-Bache v. Citibank, 73 NY 2d 263 – NY: Court of Appeals 1989. Retrieved from http://scholar.google.com/scholar_case?case=4563867008960507921&q=Prudential-Bache+Sec.,+Inc.+v.+Citibank&hl=en&as_sdt=2,11&as_vis=1

Mann, R. A. & Roberts, B. S. (2010). Essentials of Business Law and the Legal Environment. Retrieved from http://books.google.com/books?id=sFFR3y510R0C&pg=PA437&lpg=PA437&dq=Qatar+v.+First+American+Bank+of+Virginia,+1995&source=bl&ots=If8PqNYmnx&sig=s7363hHs53IjES6TR5PC-aBDWqA&hl=en&sa=X&ei=Y6CAUL6uF4zXsgadyoHYAg&ved=0CEkQ6AEwBA#v=onepage&q=Qatar%20v.%20First%20American%20Bank%20of%20Virginia%2C%201995&f=false

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, April 4). State of Qatar v. First American Bank of Virginia, 880 F. Supp. 463 – Dist. Court, ED Virginia 1995(MEMO) [a.k.a. “Qatar I”]. Retrieved from http://scholar.google.com/scholar_case?case=2348881501872498088&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1#[8]

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, ALEXANDRIA DIVISION. (1995, May 3). STATE OF QATAR v. FIRST AMERICAN BANK OF VIRGINIA. Retrieved from http://va.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19950503_0000056.EVA.htm/qx

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, May 3). The STATE OF QATAR, et al., Plaintiffs, v. FIRST AMERICAN BANK OF VIRGINIA, d/b/a First Union National Bank of Virginia, et al., Defendants. (MEMO). Retrieved from http://scholar.google.com/scholar_case?case=1102569369018879687&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1

 

(Paralegal) Goods Lost In Transit: Who Is Responsible?

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Goods Lost In Transit: Who Is Responsible?

In our case study, Good Buy Electronics has ordered 1,000 Blueberry cell phones. Foolishly, the contract between Good Buy and Blueberry Manufacturing Company fails to specify who will bear the risk of loss or the shipping terms. A common carrier is instructed to deliver the phones to Good Buy, but the goods are lost in transit. Who should bear the loss: Good Buy or Blueberry?

In a previous case study, Big Buy (presumed to be a pseudonym for Best Buy) sold an individual named Brian a refrigerator. The refrigerator was damaged en route before Brian could examine it and determine whether to accept or reject it as conforming to the standards Big Buy promised. The “real world” retailer, Best Buy, apparently has a destination contract with individuals and with businesses (like Cornell University) — it is not difficult to find examples of Best Buy’s terms online — and it is clearly assumed that the individuals and businesses will end up personally using the items sold to them (Benson, 2012). Thus we assumed that Big Buy might also have had a destination contract which, if true, would let Brian off the hook and not force him to pay for a non-functional appliance.

It matters when the title (or ownership) of the goods transfers from seller to buyer. UCC § 2-401(2) clarifies that the buyer takes ownership, or the title, once the seller successfully physically delivers the goods and the buyer deems them to be acceptable and as advertised. Brian would be within his rights (per UCC § 2-601 and 2A-509) to refuse to accept delivery of a damaged refrigerator, and thus its title would not be passed to him because the seller, Big Buy, did not place conforming goods into his care (UCC § 2-503). Traditionally conflicts over loss were covered by two vendors’ insurance carriers, but in our earlier case study, Brian, as a non-merchant, is unlikely to have insured a refrigerator he does not yet possess, and, in fact, the UCC has had to adjust its guidelines to cover cases where Internet-based merchants sell directly to consumers online because individuals (unlike fellow vendors) probably won’t be insured. The UCC now takes into account which party can be considered to have control over the goods, and the likelihood that one is more likely to have insurance than the other (Gardenswartz, 2001).

Here, however, we have one vendor selling items to another vendor, both of which can be assumed to have insurance in place to protect themselves from losses, but we are told that no contract (destination or otherwise) has been agreed upon. We thus have to establish which party was considered to be in control of the phones when they were lost. Even if we are to assume Good Buy is another pseudonym for Best Buy, the situation can not be assumed to fall under the same destination contract guidelines that Best Buy has for individual buyers who intend to make personal use of a purchased item (or to provide supplies for the person use of employees, as Cornell does).

There is also a difference between an item that is damaged, as Brian’s refrigerator was, and an entire shipment of Blueberry phones which have simply vanished into the ether and are presumed lost in transit. In one case, a physical object, albeit non-functional, can be examined and evaluated. In this case, the phones are misplaced, so no one can judge whether they conform to Good Buy’s standards and Blueberry’s advertising or not.

Normally UCC § 2-509 and § 2-510 dictate – if there is not a delivery contract specifying otherwise (see: UCC § 2-401, § 2-503) – that any risk for damaged goods is assumed by the buyer  (as long as the goods were damaged in transit and not knowingly sold in a damaged state by the seller, which would be a breach of contract), because a buyer has the benefit of proximity to the items in question once they arrive at the buyer’s destination and s/he can examine them for conformity or damages more easily (Grewal, 1991). Per UCC § 2-509(1)(a), we would assume that Good Buy and Blueberry have a shipment contract by default, because no contract exists and when a contract is not specified, the presumption is that a shipment contract exists (Barnes, 2009). Good Buy and Blueberry failed to establish protocol that would clarify “risk of loss” guidelines (clarifying which party is required to pay if something goes wrong that is not the fault of either party). Establishing who is on the hook for a loss when selling or buying goods is vital because theft or loss of items (after the seller relinquishes possession of those goods to a carrier tasked with delivering the goods to a buyer) is not an unexpected or unprecedented possibility.

If Good Buy and Blueberry decide after the fact when, exactly, the title to the phones transferred from Blueberry to Good Buy, and thus which party should take the loss (assume it to be unlikely that either party is going to want to assume that financial burden), that simplifies the problem. As Good Buy and Blueberry (or their insurance companies) are both likely to contest who should suffer the loss, the UCC guidelines (§ 2-509) clarify that the title transfers to the buyer once the seller has reasonably fulfilled his or her obligations at his or her end of the sales contract. If there is no breach on the part of the seller, the risk of loss will then shift to the buyer once the goods are delivered; but if there has been a breach of contract (such as non-conforming goods), then UCC requires the breaching party (here, the seller) to bear responsibility (New Charter University, 2012), (Twomey, 2011). In short, UCC § 2-509(2) normally places the responsibility of loss in the hands of whichever party has legal ownership of the disputed goods at the time they were lost, but basic UCC guidelines clarify that risk of loss is not tied strictly to title ownership of goods. If two parties have a shipment contract (for example, the seller designating goods as “free on board” or F.O.B), risk of loss passes to the buyer once the seller has placed the goods into the care of a carrier. If two parties have a destination contract, risk of loss only passes to the buyer once goods have arrived at their intended destination (Klett, n.d.).

In John W. Jordan, II, v. Kentshire Galleries, Ltd., et al., Jordan appealed an earlier decision in favor of Kentshire Galleries. Jordan alleges that he purchased an antique from Kentshire and that it arrived damaged. This was a case where there was no clear contract drawn up and no language on any of the sales documents designating whether it was a shipping or destination contract; the latter would clearly hold Kentshire solely liable for the damaged furniture item. Initially the court had decided that Jordan and Kentshire had a shipping (shipment) contract, rather than a destination contract, and thus Kentshire was not responsible for the loss once the carrier picked up the antique furniture item. (The appellate court revised its opinion when Jordan clarified that the seller made him pay for insurance to cover the safe transport of the antique, that they recommended the art packer / carrier company that apparently caused the damage, and that the antique was not the age represented by Kentshire and also had inherent defects which made it susceptible to cracking and becoming damaged.) Had the antique been stolen or lost in transit, the court might still find for Jordan because the seller, Kentshire, required him to pay insurance to cover the shipping for the antique and urged him to select a specific art packer (which wound up damaging the antique). Jordan could be excused for reasonably believing that he would receive in good condition the item he bought from Kentshire. That the antique was also a “one of a kind” item may also have influenced the decision; Jordan could not exercise his right as a buyer to demand a replacement for a non-conforming item because there would likely be no comparable item available.

In Dana Debs v. Lady Rose Stores, Ltd., Dana Debs was a clothing manufacturer located in Long Island and Lady Rose was a vendor in New York City. Stuart Express Co. picked up 288 garments from Dana Debs, the seller, to deliver to Lady Rose Stores and eleven other vendor buyers. Stuart informed Debs that the entire shipment was lost, and its liability was limited to a dollar per item. Debs issued a bill for the retail cost for the lost garments to Lady Rose Stores, which disputed it and declined to pay. Both parties cited UCC 2-509, Dana Debs contending that the title for the garments passed to Lady Rose Stores once the carrier, Stuart, took possession of them. Lady Rose Stores contended that they had a destination contract, but the court disagreed, because Lady Rose Stores had designated Stuart to pick up the shipment and because Dana Debs had marked the bill of sale “Terms, FOB, NYC”. The court held that Lady Rose Stores, as buyer, assumed the risk of loss once Stuart picked up the goods, and held that they had to pay Dana Debs the requested amount in full.

Conversely, in Mark La Casse v. Stan Blaustein et al., the court found in favor of the buyer. La Casse was a student at the Massachusetts Institute of Technology (MIT) who helped defray tuition expenses by operating as a small-scale vendor, selling calculators to other students. He purchased 23 calculators for $2,744.00 from Stan Blaustein in New York City. As United Parcel Service was on strike, a Blaustein employee, Flor Perez, chose to use the United States Post Office as carrier and to pack the calculators into two separate boxes. La Casse sent Blaustein a $50.00 check to cover postage and insurance. Perez chose not to insure the packages for their full replacement value, which would have cost $16.26, and which would have been covered by the check La Casse sent Blaustein, and instead insured them for $200.00 total each, which cost $9.98. Perez also mistakenly sent one of the cartons to the wrong state. It was lost, and its replacement value was $1,663.00. La Casse did not receive a refund of the purchase price of the calculators nor the insurance payment for $200.00. Though the court found that La Casse’s instructions to use the USPS was insufficient to convert the sales contract into a destination contract as opposed to a shipping contract, and thus that he should be liable for the loss, the extenuating circumstances (Blaustein should not have insured the goods for less than their full replacement value, especially when La Casse had given Blaustein enough money to pay for full coverage, because normally the risk of shipment is placed on the purchaser and La Casse acted in good faith to mitigate that risk; as with Jordan v. Kentshire, the seller took it upon itself to interfere with the buyer’s insurance purchasing and carrier choice decisions) led the court to decide in favor of La Casse and Blaustein was ordered to refund La Casse’s money, plus interest, for the lost goods.

In our Good Buy / Blueberry case study, where there was no clarification in the sales contract determining who would bear the cost of potentially lost or damaged goods, no mitigating circumstances mentioned, and no defined shipping terms, Good Buy must bear the loss. The default contract, where none has been specified, is a shipping contract, and thus once Blueberry handed over the phones to a carrier, Good Buy was on the hook if something should go wrong, as it did.

 

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Benson, D. (Cornell University Contract Administrator). (2012). Best Buy. Retrieved from http://www.dfa.cornell.edu/supply/supplierlist/electronics/bestbuy.cfm

Barnes Jr, L. K. (2009, October). Determining Which Party Bears Risk of Loss for Shipments Governed by the Uniform Commercial Code. Retrieved from http://barnespc.com/news-risk-loss-shipments-governed-ucc.php

Abbott, B. (2012). What Does FOB in Shipping Mean? Retrieved from http://www.ehow.com/facts_7672155_fob-shipping-mean.html

Grewal, S.S. (1991, November 1). Risk of Loss in Goods Sold during Transit: A Comparative Study of the U.N. Convention on Contracts for the International Sale of Goods, the U.C.C., and the British Sale of Goods Act (Originally published in 14 Loy. L.A. Int’l & Comp. L. Rev. 93 (1991). Retrieved from http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1239&context=ilr

The American Law Institute and the National Conference of Commissioners on Uniform State Laws. (2003, January 23). Uniform Commercial Code (Hosted by: Cornell University Law School, Legal Information Institute). Retrieved from http://www.law.cornell.edu/ucc/ucc.table.html

New Charter University. (2012). Business Law and the Legal Environment, Chapter 18: Title and Risk of Loss. Retrieved from https://new.edu/resources/title-and-risk-of-loss

Supreme Court, Appellate Division, First Department, New York. (2001, April 17). John W. Jordan, II, v. Kentshire Galleries, Ltd., et al. Retrieved from http://caselaw.findlaw.com/ny-supreme-court-appellate-division/1202875.html

Gardenswartz, S. (2001). The Risk of Loss in Electronic Transactions: Vintage Law for 21st Century Consumers. Retrieved from http://www.vjolt.net/vol6/issue3/v6i3-a15-Gardenswartz.html

Boyd-White, H. S. (2010, June 29). Chapter 16: Title and Risk of Loss. Retrieved from http://www.scribd.com/doc/33716055/Ch16-SG-BLTS-8e

U.S. Supreme Court. (1964, May 4). Missouri P. R. Co. v. Elmore & Stahl, 377 U.S. 134 (1964) 377 U.S. 134. Retrieved from http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?navby=case&court=us&vol=377&invol=134&pageno=137

U.S. 2nd Circuit Court of Appeals. (1999, April). Windows, Inc. v. Consolidated Freight. Retrieved from http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/2nd/987603.html

Klett, T. (Assistant Professor at Sam Houston State University). (n.d.). TITLE, RISK AND INSURABLE INTEREST: IDENTIFICATION OF GOODS. Retrieved from http://www.shsu.edu/~klett/CHAPTER%2020%20gba362.htm

Colvin, E. (Adjunct Instructor at Campbellsville University). (2010, June). Sales & Lease Contracts: Performance, Warranties, & Remedies – Chapter 14. Retrieved from http://ecolvin.pageout.net/page.dyn/student/course/instructor_note?note_id=11474857&course_id=159878

Civil Court of the City of New York, Special term, New York County. (1970, June 24). Dana Debs v. Lady Rose Stores. Retrieved from http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19700624_0042496.NY.htm/qx

Civil Court of the City of New York, New York County. (1978, March 20). Mark La Casse v. Stan Blaustein et al. Retrieved from http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19780320_0041289.NY.htm/qx