Legal Question in Credit and Debt Law in Georgia

I need to see the check. This sounds like a law exam question. The answer lies in Article 3 of the Uniform Commercial Code. Georgia has adopted its own version. A holder in due course (someone who gives value in exchange for the check, with no knowledge of any problems and who acts in good faith) can enforce the instrument against the person with whom they dealt and the maker of the check. See OCGA � 11-3-302.

� 11-3-302. Holder in due course

(a) Subject to subsection (c) of this Code section and subsection (d) of Code Section 11-3-106, "holder in due course" means the holder of an instrument if:

(1) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) The holder took the instrument:

(i) For value;

(ii) In good faith;

(iii) Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;

(iv) Without notice that the instrument contains an unauthorized signature or has been altered;

(v) Without notice of any claim to the instrument described in Code Section 11-3-306; and

(vi) Without notice that any party has a defense or claim in recoupment described in subsection (a) of Code Section 11-3-305.

(b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a) of this Code section, but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.

(c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding; (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor; or (iii) as the successor in interest to an estate or other organization.

(d) If, under paragraph (1) of subsection (a) of Code Section 11-3-303, the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.

(e) If the person entitled to enforce an instrument has only a security interest in the instrument and the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

(f) To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.

(g) This Code section is subject to any law limiting status as a holder in due course in particular classes of transactions.

See also OCGA � 11-3-414 and � 11-3-415 - for liability of drawer of check (person who made the check out initially) and indorser (the second party).

� 11-3-414. Obligation of drawer

(a) This Code section does not apply to cashier's checks or other drafts drawn on the drawer.

(b) If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued or, if the instrument was not issued, at the time it first came into possession of a holder; or (ii) if the drawer signed an incomplete instrument, according to the instrument's terms when completed, to the extent stated in Code Sections 11-3-115 and 11-3-407. The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Code Section 11-3-415.

(c) If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained.

(d) If a draft is accepted and the acceptor is not a bank, the obligation of the drawer to pay the draft if the draft is dishonored by the acceptor is the same as the obligation of an indorser under subsections (a) and (c) of Code Section 11-3-415.

(e) If a draft states that it is drawn "without recourse" or otherwise disclaims liability of the drawer to pay the draft, the drawer is not liable under subsection (b) of this Code section to pay the draft if the draft is not a check. A disclaimer of the liability stated in subsection (b) of this Code section is not effective if the draft is a check.

(f) If a check is not presented for payment or given to a depositary bank for collection within 30 days after its date, the drawee suspends payments after expiration of the 30 day period without paying the check, and because of the suspension of payments, the drawer is deprived of funds maintained with the drawee to cover payment of the check, the drawer, to the extent deprived of funds, may discharge its obligation to pay the check by assigning to the person entitled to enforce the check the rights of the drawer against the drawee with respect to the funds.

� 11-3-415. Obligation of indorser

(a) Subject to subsections (b), (c), (d), and (e) of this Code section and to subsection (d) of Code Section 11-3-419, if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed; or (ii) if the indorser indorsed an incomplete instrument, according to the instrument's terms when completed to the extent stated in Code Sections 11-3-115 and 11-3-407. The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this Code section.

(b) If an indorsement states that it is made "without recourse" or otherwise disclaims liability of the indorser, the indorser is not liable under subsection (a) of this Code section to pay the instrument.

(c) If notice of dishonor of an instrument is required by Code Section 11-3-503 and notice of dishonor complying with that Code section is not given to an indorser, the liability of the indorser under subsection (a) of this Code section is discharged.

(d) If a draft is accepted by a bank after an indorsement is made, the liability of the indorser under subsection (a) of this Code section is discharged.

(e) If an indorser of a check is liable under subsection (a) of this Code section and the check is not presented for payment, or given to a depositary bank for collection within 30 days after the day the indorsement was made, the liability of the indorser under subsection (a) of this Code section is discharged.

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Are you a holder in due course? I do not know as you do not relate all the details. My thoughts are why fool around with this? Also, who is the drawer of the check? For example, places like Wal Mart or grocery stores will cash employment checks and Social Security checks (although Social Security did away with checks) or other checks drawn on the state or federal government. That is because those checks are likely to be honored. Private checks are a different matter. The check could look perfectly valid but it could be stolen and/or forged. How would you know? Usually the thief will be long gone, you will be out whatever goods and services you provided and depending on circumstances you may or may not be able to enforce the check on the maker or drawer. Also, what are the circumstances here? How well or not well do you know the second party? The fact that you are asking questions makes me skeptical here. Better to be safe than sorry. If someone wants to buy goods/serivces from you, let the person to whom the check is made out go and cash it. The rules regarding checks grew out of the old days when check cashing was difficult. The law has not kept pace with the times. With all the social and technological advances in today's modern society there simply is no reason for this anymore. If all else fails and you are determined to do this deal, then at least get a copy of the check and contact the bank on which the check is drawn and see if the check is good/valid before you accept it.