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30 Cards in this Set
- Front
- Back
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Forms of Commercial Paper
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(1) Note - 2 party; Maker & Payee
(2) Draft - 3 party; Drawer, Drawee, Payee (A) When drawee is a bank and payable on demand, draft is a check |
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Negotiable vs. Nonnegotiable Instruments
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(1) Nonnegotiable - assignee stands in shoes of assignor subject same defenses as assignor
(2) Negotiable - If holder in due course, takes free of personal defenses |
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Negotiable Instrument Requirements
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(1) Writing
(2) Signed by maker or drawer (3) Unconditional (4) Promise to pay/Order to pay (5) Fixed Amount (6) In money (7) No other Undertaking/instruction (8) On demand or definite time (9) to Order or to Bearer |
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Negotiable Instrument: Signature
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Any symbol that party intended to operate as his consent
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Negotiable Instrument: Unconditional
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If conditional promise, then not negotiable but contract; negotiability must be clear on the face of the instrument
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Negotiable Instrument: Promise/Order to pay
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(1) IOU - not promise
(2) "I wish to pay you" - not order |
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Negotiable Instrument: Fixed Amount
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Must be able to determine from instrument itself the principal amount due, not interest due
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Negotiable Instrument: No other undertaking/instruction
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Must not be burdened with anything other that unconditional promise to pay unless promise strengths ability to collect and has no value of itself
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Negotiable Instrument: On demand/Definite time
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(1) Undated instrument payable on demand
(2) Any other date fixing payment (accelleration clause, extension clause for definite time) (3) Events certain to happen but uncertain as to time do not qualify |
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Negotiable Instrument: To Order or Bearer
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(1) Must contain magic words of order or bearer language EXCEPT CHECK
(A) I promise to pay X (B) I promise to pay to order of X (C) I promise to pay bearer (D) Pay to the order of cash/anything not definite person |
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Negotiability by Declaration
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Cannot create negotiability by statement but can preclude it EXCEPT for check
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Negotiation of an Instrument
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(1) Order paper: transfer of possession + endorsement by holder
(A) Special endorsement - specifies person whom instrument payable; becomes order paper (B) Blank endorsement - does not specify person, only signature; becomes bearer paper (2) Bearer Paper: transfer of possession |
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Order vs. Bearer Paper
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(1) Thief steals bearer paper can negotiate check to HDC and they take free of any claims
(2) Forged signature on order paper, all who had possession liable for conversion (3) Depositary bank can become holder of check even if unsigned customer check |
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Holder in Due Course Requirements
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(1) A holder
(2) Gives value (A) Must be executed consideration/ negotiable instrument/payment for antecedent debt BUT NOT PROMISE (B) Bank gives value customer draws against deposited item to extent of the withdrawal; follow FIFO (3) Good faith: honesty in fact (subjective) & observance of reasonable commercial standards (fairness of conduct) (4) Without notice (A) Irregular (over 90 days)/incomplete to call into question authenticy (B) Overdue principle/has been dishonored (C) Has unauthorized signature or altered (D) Claim on the instrument (large discount) (E) Party has claim that reduces amount payable on instrument (5) Holder has not taken by (A) legal process/execution (B) bulk transaction not in ordinary course of business of transferor (C) successor in interest to estate |
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Holder in Due Course - Shelter Rule
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HDC who transfter to non-HDC (no value etc), transferee can take shelter in transferor's status as long as he didn't participate in fraud
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Real Defenses
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I I DI FID
(1) Infancy (2) Incapacity/duress/illegality of transaction that renders obligation of the party null (3) Misrepresentation (A) Fraud in inducement (PERSONAL D) - person aware of document & terms but induced to sign due to deception of another matter induced party to sign instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms (B) Fraud in factum (REAL D) - induced party to sign instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms (4) Discharge in insolvency (5) Discharge which holder has notice when instrument taken |
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Nature of Liability: Underlying Obligation
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(1) Underlying obligation suspended once instrument is accepted and payment discharges it except cashier/teller/certified check
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Nature of Liability: Contract liability
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(1) Liability arises from signature on instrument
(2) Maker's K liability - obligated to pay instrument according to terms; if 2+ joint/severally liable (3) Indorser K liability (A) Requirements (unless excused, waived, or qualified endorsement) (I) Instrument presented to maker/drawee (reasonable time; 30 days for check) (II) That party dishonors it (III) Notice of dishonor given to indorser (30 days unless by bank for check then next day) (B) Obligated to pay according to terms of instrument at time of endorsement (B) Those signing later can get complete reimbursement from those signing prior (C) If endorsed by one to make surety, joint/severally liable (4) Drawer's K liability - (A) obligated to pay draft according to its terms when signed (B) Must be presented/dishonored (no notice) but not excused from liability for delay (5) Drawee - no K liability as did not not sign instrument |
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Accommodation Parties
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(1) Party who signs instrument for purpose of lending his name to another party to it
(2) Accommodater get complete reimbursement from maker but is not liable to maker for contribution (3) Extension/sale of collateral without accommodator's consent discharges him to extent he can prove change cased him loss (4) Can assert any defense of maker except, insolvency, infancy, and incompetence |
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Banks & Checking Accounts - Properly Payable Rule
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(1) Bank may payout customer's money only if it follows customer's orders exactly
(2) Forged drawer's signature - check not properly payable as forged signature operates as forgers signature (3) Forged/missing endorsement - Order paper, therefore forger is not holder and check not properly payable (4) Material alteration (A) Change in amount liable only for original amount (B) Blank amount, any amount written (5) Stale checks (A) After 6 months or if it creates overdraft, bank may still pay (B) Postdated checks properly payable before date unless notify bank and reasonably describe check |
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Banks & Checking Accounts - Stop Payment
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(1) Requirements
(A) Describe check with reasonable certainty (B) Received at time and in manner that affords bank to reasonable opportunity to respond (2) Burden of proving loss on customer |
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Forgery - Endorsement
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(1) Payee can recover from drawer (who will seek credit to his account as not properly payable) OR anyone taking check after forgery including drawee bank
(2) Drawee cannot recover as indorser or drawer as not holder or on grounds of mistake because payment to HDC or one who has in good faith changed position in reliance on payment is final (3) Two exceptions: (A) Party that was paid did not take for value or in good faith (B) Breach of Transfer or Presentment Warranty |
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Forgery - Endorsement - Presentment Warranty
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ONLY AVAILABLE FOR DRAWEE
TAD (1) Party obtaining payment and previous transferors warrant that (A) They are entitled to enforce instrument (good title) (B) Instrument is not altered (C) No knowledge that drawer's signature is unauthorized (2) drawee can recover from anyone of them in chain even HDC |
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Forgery - Endorsement - Transfer Warranty
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NOT AVAILABLE FOR DRAWEE
TAADK (1) Each party that transfers instrument AND recieves consideration warrants that (A) Entitled to enforce instrument (good title) (B) All signatures are authentic and authorized (C) Instrument not altered (D) No defense or claim of any party is good against warrantor (E) No knowledge of any insolvency against maker or drawer |
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Forgery - Restrictive Endorsement
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(1) Can sue depository bank or anyone who acted inconsistent with restriction
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Forgery - Drawer's Signature
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(1) Drawer can demand drawee bank to credit account
(2) Drawee cannot recover from anyone as no breach in Presentment Warranty (had good title, just in a check ordered by forger) |
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Validation of Forgery
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(1) Ratification
(2) Impostor Rule – validates forged endorsement where drawer duped to issue the instrument (3) Fictitious Payee Rule – if drawer makes instrument payable does not intend for that identified payee to have any interest in instrument or if fictitious person, endorsement in the name of payee is effective (4) Fraudulent Endorsement by Employee – employee with responsibility with respect to instrument, fraudulent endorsement by employee is effective (5) Negligence Rule – person by his negligence substantially contributes to material alteration/forgery, no defense against HDC/drawee/payor (6)Bank Statement Rule – customer does not exercise reasonable promptness in examining statement to determine unauthorized payments and give notice to bank, if bank shows it suffer loss by reason of failure bank need not recredit account |
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Material Alteration
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(1) Altered note - if holder fraudulently alters amount in note, maker is discharged as against the holder but liable for original amount to subsequent holder
(2) Altered Check - Drawee bank must recredit drawer's account for an excess over original amount but may recover from deposit bank for breach of presentment warranty |
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Negligence Rule
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Person who failes to exercise ordinary care substantially contributes to an alteration or forged instrument is precluded from asserting the alteration or forgery against a person who in good faith paid for the instrument or took favlue for it
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HDC Status Determined
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Moment the instrument is negotiated to holder and gives value, which ever is later
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