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Article 3 of Commercial Code Case

A bank holds two promissory notes, Note A has 5,000 balence and note B has a 10,000 balence owed. The debtor on both notes pays 7,000 and a clerk in bank sends back both notes marked '' paid'' by mistake with a letter thanking customer. Six months later the bank demands the 8,000 balence on Note B and the debtor produces the ''paid'' notes. The bank proves the clerk was not a bank officer and had no authority to cancel notes. The debtor admits only 7,000 was paid, but still claims both notes were cancelled.

Was note cancelled? Why/Why not?
Will Bank get 8,000? Why/Why not?

Refer to cases/rulings to back up answer.

Solution Preview

Hi there -
Interesting dilemma here! I believe that the most likely outcome is that the notes are not cancelled and the bank will be paid the balance. Here's why:
Courts have manipulated U.C.C. § 36-3-605(1)(b) to require that surrender of the instrument be accompanied by an intent to discharge the party. A cancellation made unintentionally or under a mistake, or without the authority of the holder, as in the situation here, is inoperative. Hence, an unintentional or mistaken cancellation of an instrument or a signature does not discharge it. Where notes are held by a bank for collection, and the notes, without the intent of the maker, owner, or purchaser, are stamped "paid" through error of a teller, such error does not have the legal effect of canceling the debt or discharging the instrument. The unauthorized act of the cashier of a ...

Solution Summary

Article 3 of Commercial Code Case is exemplified.