Question

Business Law!!

Smith Gold Exchange Inc., issued a $3500 check to Mary Penchant to buy a purportedly genuine Rolex watch. The check was post-dated (assigned a date later than the actual one). Penchant indorsed the check and presented it to J&J Investments, Inc., a check-cashing service. Without verifying that the check was valid, J&J cashed it. Meanwhile, Smith issued a stop-payment order on the check based on information that the watch was counterfeit. When J&J presented the check to Smith's bank for payment, the bank refused to honor (cash) it. Is J&J entitled to payment as a holder in due course? Why or Why not?

Answer 1

Drawer of the check is Smith gold exchange Inc.

Payee is Mary Penchant

Holder in due course is J&J Investments

Drawee of the check is Smiths’ bank

As per law, the drawer (Smith gold exchange Inc) of the check is the person who signs it and orders its bank to pay the amount to the payee (Mary penchant).

As per section 30 of negotiable instruments act; in case of dishonor of the check, drawer (Smith gold exchange Inc) is liable to compensate to the holder only when he receives a notice of dishonor from the drawee (smiths bank).

Further, this check is endorsed by Mary to J&J Investments. In such case, J&J Investments becomes holder in due course and Mary becomes the endorser of the check. As per section 35 of negotiable instruments act, every endorser is liable to the parties subsequent to him. In case of dishonor of the check, endorser is liable to compensate to holder of any loss or damage caused to him by such dishonor.

In both above cases of dishonor, a notice is mandatorilly required by the endorser or the drawer for compensating the holder of the check.

As per section 138 of the negotiable instruments act, even if stop payment request was made by Smith gold exchange Inc to his bank, his liability won't be denied. As per law, stop payment request is treated as valid only in case their is insufficient funds in bank account. However, decisions may vary on case to case basis. In this case; Smith gold exchange Inc is liable even if stop payment request has been made by him, since the reason is the watch to be purchased from the check amount is counterfeit.

As per section 36 of negotiable instruments act, until the instrument is duly satisfied, every party to the negotiable instrument is liable to the holder in due course. The holder the due course (J&J Investments) can hold all the prior parties liable to compensate him. Prior parties in this case are Drawer of the check -Smith gold exchange Inc. and Payee -Mary Penchant.