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46 Cards in this Set

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Assignment
The transfer of rights under a contract. It transfers rights of transferor (Assignor) to the transferee (assignee).
Because normal contract principles apply to assignment what happens to the rights in assignment?
The assignee acquires only the rights that the assignor possessed. any defenses to the enforcement of the contract that could have been raised against the assignor can also be raised against the assignee.
Negotiation
The transfer of a negotiable instrument by a person other than the issuer to a person who thereby becomes a holder.
What rights can a holder receive?
A holder receives at least the rights of the transferor and may acquire even grater rights than the transferor if he/she qualifies as a holder in due course.
Order paper
An instrument that is negotiated by 1. delivery and 2. indorsement
Example of order paper
Sam receives a weekly payroll check from his employer that says "payable to the Order of Sam Bennett". Sam takes the check to a local store, signs name on back (indorsement) gives check to cashier (delivery) and receives cash for the check.
Bearer paper
An instrument that is negotiated by delivery; indorsement is not necessary.
What is riskier order paper or bearer paper?
Bearer paper has significant risk.
Example of bearer paper
Mary draws a check for 1500 made out "pay to cash" and gives it to Peter. This is a bearer instrument because the check has not named a payee. There has been a negotiation because Mary delivered it to Peter. Carmen steals the check there has not been a negotiation because check wasn't voluntarily delivered. But Carmen physically possesses bearer instrument. Negotiation is complete if Carmen delivers to innocent third party.
What are the 4 categories of endorsements?
1. Blank indorsement
2. Special indorsement
3. Qualified indorsement
4. Restrictive indorsement
Blank indorsement
An indorsement that does not specify a particular indorsee. It creates bearer paper. Consists merely of a signature.
Example of blank indorsement
Harold draws check "pay to the order of Victoria" and delivers check to her. She indorses the check in blank by writing her signature on back of the check.
When order paper is indorsed what does it become?
It becomes bearer paper which can be negotiated by delivery without indorsement.
Special indorsement
An indorsement that contains the signature of the indorser and specifies the person (indorsee) to whom the indorser intends the instrument be payable to. This creates order paper.
Example of special indorsement
Betsy indorsed her check and wrote "Pay to Dan Jones" above her signature. check is negotiated when Betsy gives it to Dan.
To prevent risk of loss from theft which indorsement method is preferred?
Special indorsement is preferred over blank indorsement.
Qualified indorsement
disclaim or limit liability on instrument.
Unqualified indorsement
An indorser who signs an unqualified indorsement to an instrument.
Does a qualified indorsement guarantee payment if maker, drawer, or acceptor defaults?
No
How do you create a qualified indorsement?
They are created by placing a notation such as "without recourse" or similar language that disclaims liability as part of the endorsement.
Who does a qualified indorsement protect?
It protects only the indorser who wrote it on the instrument. Subsequent indorsers must also place a qualified indorsement on the instrument to avoid liability.
What can qualified indorsements be?
They can either be special qualified indorsements or blank qualified indorsement.
What does a special qualified indorsement create?
A special qualified indorsement creates order paper that can be negotiated by indorsement and delivery.
A blank qualified indorsement creates
bearer paper that can be further negotiated by delivery without indorsement.
Nonrestrictive indorsements
An indorsement that has no instructions or conditions attached to the payment of the funds.
Restrictive indorsements
An indorsement that contains some sort of instruction from indorser. Restricts indorsee's rights in some manner. An indorsement that purports to prohibit further indorsement does not destroy the negotiability of the instrument.
What is an example of a restrictive indorsement
A check indorsed "pay to Sally only" can still be negotiated to other transferees. Because of its ineffectiveness, this type of restrictive indorsement is seldom used.
What 2 types of restrictive indorsements does the UCC recognize?
1. Indorsement for deposit or collection
2. Indorsement in trust
Indorsement for deposit or collection
An indorser can indorse an instrument so as to make the indorsee his or her collecting agent. Such indorsement is often done when an indorser deposits a check or another instrument for collection at a bank.
What words indicate indorsement for deposit or collection?
for collection, for deposit only, and pay any bank.
Indorsement in trust
An indorsement can state that it is for the benefit or use of the indorser or another person.
If an indorsee doesn't comply with the instructions of a restrictive indorsement what happens if there is a loss?
The indorser is liable for all losses that occur in the case of noncompliance.
Holder
A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank.
Holder in due course
A holder who takes a negotiable instrument for value, in good faith, and without notice that it is defective or overdue.
What kind of defenses can be asserted against an HDC?
universal defenses not personal
what 4 requirements must a HDC meet?
1. Taking for value
2. Taking in good faith
3. Without notice it is overdue
4. bearing no resemblence of fraud.
Taking for value requirement
A requirement that says a holder must give value for a negotiable instrument in order to qualify as an HDC.
What conditions under the UCC constitute value given?
1. Performs agreed upon promise
2. Acquires a security interest in or lien on the instrument
3. Takes instrument in payment of or as security for antecedent claim.
4. Gives a negotiable instrument as payment
5. Gives an irrevocable obligation as payment.
Taking in good faith requirement and example
A requirement that says a holder must take it in good faith. Ex. If a holder acquires an instrument from a stranger under suspicious circumstances and at a deep discount, it could be inferred that the holder did not take the instrument in good faith.
Who does the good faith test apply to?
It applies only to the holder. It does not apply to the transferor of the instrument.
Taking without notice of defect requirement
A requirement that says a person cannot qualify as an HDC if he/she has notice the instrument is defective in certain ways.
What ways can an instrument be considered defective?
1. Overdue
2. Dishonored
3. Unauthorized or altered signature
4. Claim to it by another person
5. Defense against it
Time instrument
An instrument that specifies a definite date for payment of the instrument.
Dishonored instrument
An instrument that is presented for payment and payment is refused.
Red light doctrine
Doctrine that says a holder cannot qualify as an HDC if he/she has notice of an unauthorized signature or an alteration of the instrument or any adverse claim against or defense to its payment.
No evidence of forgery, alteration, or irregularity requirement
A requirement that says a holder cannot become an HDC to an instrument that is apparently forged or altered or is so otherwise irregular or incomplete as to call into question its authenticity.