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Hypothetical situation: Your company buys a computer from Midnight Computer Supplies. Unknown to your company, Midnight has removed the high storage hard drive that you ordered and replaced it with an inferior drive having inadequate storage. Your company pays Midnight with a $20,000 check. Midnight owes its vendor, Marvelous Monitors, $20,000, so Midnight endorses the $20,000 check over to Marvelous. Marvelous doesn't know that Midnight switched the hard drive. Your company then discovers that Midnight switched the drives. Meanwhile, Marvelous comes to your company for the $20,000 (or more likely goes to your company's bank to cash the check.)
Does your company (or your company's bank) have to pay Marvelous the $20,000? Why or why not? What other action could your company take to try to recoup its losses? Can your company use stop payment?
ME: (Does that mean that Marvelous is protected by the "Personal Defenses" and must be paid because they received the check in good faith and value? or my company doesn't have to pay them because of fraud from Midnight? How can the company recoup losses to prevent company payments?)
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In 620 words, this solution provides a detailed discussion regarding this hypothetical situation between two companies in which a fraud situation may be taking place. All questions are answered in depth.
Marvelous Protected by the Personal Defenses Law?
Yes, but not against your company. Marvelous is protected to get the payment from Midnight and can sue the company for payment, but not your company or your bank. Marvelous has received the cheque in good faith and needs to be paid by Midnight. In short, Marvelous has to be paid but not by your company but by Midnight.
Received the Cheque in Good Faith and Value: Again this applies to Midnight, they have received the computer from Marvelous and according their contract with Marvelous, Midnight is bound to pay Marvelous, however, your company has entered into a contract only with Midnight and your company is bound only to pay Midnight according to your contract with Midnight. In your case however, in your contract, with Midnight there is a breach of contract between your company and Midnight because Midnight has replaced the high ...
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