Checks and You, and the Dubious Dealer of Horse Trailers

Commercial Paper is a topic on the Kentucky bar- I did not take this course in school, and much of the language was initially unfamiliar.  To help learn the concepts I applied some of them to a horse situation, naturally!

Here is one:

A note is a three party monetary instrument, most commonly known as a check from your checkbook (the parties are you, your bank, and the person you are writing the check to.)

Consider this scenario: you purchase a horse trailer for $5,000 by writing a check to the trailer dealer, you hitch up, and go on your merry way.  Meanwhile, the dubious dealer sits under a swinging solitary lightbulb and deviously adds an extra 0 to the check, and changes the wording of the amount, so that by all appearances you have written a check for $50,000 for the trailer.   If the dealer demands that you pay the larger amount- how much must you pay him? Nothing! $0!  The dubious dealer's fraudulent alteration allowed Full Discharge of the amount owed.

Source: a site with a brief description of horse trailer insurance

Consider, however, that the trailer dealer doesn't ask you to pay the $50,000 but negotiates the note (i.e., sells the check) to a collections company that has no knowledge that the original amount of the check was only $5,000 and not $50,000 (in California we often call these innocent buyers a "bona fide purchaser," but in the commercial paper world, they are "holders in due course.")  The agency then asks you to pay up- how much do you owe?  The original amount of $5,000.  Because the collections company paid for the check in good faith with no knowledge of dubious dealer's fraud, it can enforce the check on its original terms.

Lessons- take all steps possible to enter business agreements with reputable persons, always take a receipt, record the amount you paid, always check your monthly bank statements, and above all- make sure you always fill out a check completely (more on that last point later).