Commercial Paper

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What is a HDC

Back 1

a) Subject to subsection (c) and Section 3-106(d), "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 Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

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when is an instrument overdue?

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•(a) An instrument payable on demand becomes overdue at the earliest of the following times: ◦(1) on the day after the day demand for payment is duly made;
◦(2) if the instrument is a check, 90 days after its date; or
◦(3) if the instrument is not a check, when the instrument has been outstanding for a period of time after its date which is unreasonably long under the circumstances of the particular case in light of the nature of the instrument and usage of the trade.

•(b) With respect to an instrument payable at a definite time the following rules apply: ◦(1) If the principal is payable in installments and a due date has not been accelerated, the instrument becomes overdue upon default under the instrument for nonpayment of an installment, and the instrument remains overdue until the default is cured.
◦(2) If the principal is not payable in installments and the due date has not been accelerated, the instrument becomes overdue on the day after the due date.
◦(3) If a due date with respect to principal has been accelerated, the instrument becomes overdue on the day after the accelerated due date.

•(c) Unless the due date of principal has been accelerated, an instrument does not become overdue if there is default in payment of interest but no default in payment of principal.

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What is UCC good faith?

Back 3

Honesty in fact and observance of reasonable commercial standards of fair dealing

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When does a person have notice under tha UCC

Back 4

-Actual knowledge
- received notice or notofication
-reason to know based on facts and circumstances.

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When does a person not have notice

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-Notice of discharge other than insolvency proceeding. or
- through knowledge of public filing or recording of a document.

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What is effect notice?

Back 6

notice given that allows the receiver time and reasonable oppurtunity to act.

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When is H and HDC status determined?

Back 7

At time Holder takes the instrument.

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What is a negotiation?

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a) "Negotiation" means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder

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What is a transfer?

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a) An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.

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What is issuance?

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•(a) "Issue" means the first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person.

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What is a negotiable instrument?

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a) Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: ◦(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
◦(2) is payable on demand or at a definite time; and
◦(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor

Front 12

What effective does a restrictive indorsement have on an instrument?

Back 12

a) An indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective to prevent further transfer or negotiation of the instrument.

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What is a special indorsement?

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•(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a "special indorsement." When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.

Front 14

Anomalous indorsement?

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d) "Anomalous indorsement" means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.

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blank indorsement?

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If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a "blank indorsement." When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed

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How does the shelter rule help a Non HDC?

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any person or any later transferee to whom a holder in due course transfers commercial paper will succeed to the rights of the holder in due course. BUT transferee engaged in fraud or illigality affecting the instrument cannot obtain the rights of a HDC.

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What is an example of a Non-Holder in possession?

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Person who acquires the rights of a holder through subrogation.

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What mus the person do in order to claim payment of a chechk which has been lost or stolen?

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A claimant may assert a claim to the amount of a check by a communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check, if (i) the claimant is the drawer or payee of a certified check or the remitter or payee of a cashier's check or teller's check, (ii) the communication contains or is accompanied by a declaration of loss of the claimant with respect to the check, (iii) the communication is received at a time and in a manner affording the bank a reasonable time to act on it before the check is paid, and (iv) the claimant provides reasonable identification if requested by the obligated bank. Delivery of a declaration of loss is a warranty of the truth of the statements made in the declaration

Front 19

To what extent does the collecting bank have a security interest in an item or proceeds.

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The the extent that the bank has given value meaning ...(a) A collecting bank has a security interest in an item and any accompanying documents or the proceeds of either:

(1) in case of an item deposited in an account, to the extent to which credit given for the item has been withdrawn or applied;

(2) in case of an item for which it has given credit available for withdrawal as of right, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or

(3) if it makes an advance on or against the item.

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What is the first in first out rule?

Back 20

credits first given are first withdrawn.
In other words, the money put in the bank first gets taken out first and any overdraft will be deducted by the amt.

Front 21

How does a person incurr liability on an instrument?

Back 21

By siging it personally or by allowing an agent/representative to sign for them. (apply agency law)

Front 22

Is a maker of a note primarily or secondarily liable?

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Primarily which means there are no conditions to her liability. Put the COA will not accrue until date of payment specified on the note.

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What liability does a drawer incur?

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Secondary. Drawer only becomes liable AFTER, presentment, dishonor, and notice of dishonor.

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What liability does the drawee incur?

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Primarily liable ONLY AFTER acceptance of the draft. (will be liable for wrongful dishonor for actual damages, arrest, and prosecution).

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How does the drawee accept the check and become an Acceptor?

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Acceptance= signed promise to pay the instrument. Generally the bank will certify the check as a symbol of acceptance.

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What are the Transferor's Warranties?

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If transferor recives consideration he warrants that.
1. entitled to enforce
2. all asignatures are authentic and authroized.
3. Instrument has not been altered
4. not subject t defense or claim of recoupment
5. no knowledge of insolvency proceeding

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Indorsers liability

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Secondarily liable UNLESS disclaimed by signing w/o recourse.

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What is the liabiliity of an accomodation party?

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Accomodation party is a surety and is liable in the capacity in which he signs. ex. maker drawer etc.

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When will a party who signs as a guarantee for collection be liable?

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- upon execution of judgment against party being returned unstaisfied.
-other party is insolvent or declared insolvent through proceeding
-cannot serve process on other party
-payment cannot be obtained from the other party.

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Presentment

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•(a) "Presentment" means a demand made by or on behalf of a person entitled to enforce an instrument (i) to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank, or (ii) to accept a draft made to the drawee.

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What is dishonor of a note?

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a) Dishonor of a note is governed by the following rules: ◦(1) If the note is payable on demand, the note is dishonored if presentment is duly made to the maker and the note is not paid on the day of presentment.
◦(2) If the note is not payable on demand and is payable at or through a bank or the terms of the note require presentment, the note is dishonored if presentment is duly made and the note is not paid on the day it becomes payable or the day of presentment, whichever is later.
◦(3) If the note is not payable on demand and paragraph (2) does not apply, the note is dishonored if it is not paid on the day it becomes payable.

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How are checks dishonored?

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If a check is duly presented for payment to the payor bank otherwise than for immediate payment over the counter, the check is dishonored if the payor bank makes timely return of the check or sends timely notice of dishonor or nonpayment under Section 4-301 or 4-302, or becomes accountable for the amount of the check under Section 4-302.
◦(2) If a draft is payable on demand and paragraph (1) does not apply, the draft is dishonored if presentment for payment is duly made to the drawee and the draft is not paid on the day of presentment.
◦(3) If a draft is payable on a date stated in the draft, the draft is dishonored if (i) presentment for payment is duly made to the drawee and payment is not made on the day the draft becomes payable or the day of presentment, whichever is later, or (ii) presentment for acceptance is duly made before the day the draft becomes payable and the draft is not accepted on the day of presentment.
◦(4) If a draft is payable on elapse of a period of time after sight or acceptance, the draft is dishonored if presentment for acceptance is duly made and the draft is not accepted on the day of presentment

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When is notice of dishonor due?

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W/N 30 Days
Notice of dishonor may be given by any person; may be given by any commercially reasonable means, including an oral, written, or electronic communication; and is sufficient if it reasonably identifies the instrument and indicates that the instrument has been dishonored or has not been paid or accepted. Return of an instrument given to a bank for collection is sufficient notice of dishonor.

Front 34

What are personal defenses?

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defenses other than real defenses. these CANNOT be asserted AGAINST a HDC.
ex,.discharge from the instrument.

Front 35

What are the real defenses?

Part 1

Back 35

-Personal defense if state law does not make void and cannot be asserted against a HDC.
-Illegality
-Duress
– Must be personal to your well being cannot be killing of child.
– Matter of degree, must be imminent and is like a gun to you head.
- Discharge in insolvency proceedings
-Statute of limitations (3yrs check, 6yrs for notes)
- Discharges known to the holder in due course.
- Accommodation defenses- can be asserted against HDC.

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What are real defenses?
Part 2

Back 36

Forgery- Names necessary in title (must notify bank w reasonable promptnes not to exceed 1yr. bank not liable unless forgery is soo obvious)
-Fraud in the factum (must distinguish)
– Real Fraud w/o knowledge nor a reasonable opportunity to learn of its character or essential terms.
– Personal Fraud any fraud not real is personal.
- Alteration of the instrument
– Change in the terms
- Incapacity to contract
– Know that state law has to render the contract void.
- Lack of legal capacity
- Infancy

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Bank definitions

Back 37

} Collecting bank- Handling item/bank other than Payor Bank

}Payor- Drawee Bank
}Presenting Bank- Bank presenting check other than Payor Bank
}Depositor- 1st bank to take

Front 38

What must the bank do to staisfy its Duty of Ordinary Care?

Back 38

A collecting bank must exercise ordinary care in:

(1) presenting an item or sending it for presentment;

(2) sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank's transferor after learning that the item has not been paid or accepted, as the case may be;

(3) settling for an item when the bank receives final settlement; and

(4) notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.

Front 39

What actions may a bank take if after provisional settlement item fails to be paid?

Back 39

If a collecting bank has made provisional settlement with its customer for an item and fails to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer

Front 40

Presentment warranties

Back 40

Warrantor is entitled to enforce draft, it has not been altered, he has no knowledge that the signature of the drawer is unauthorized.

Front 41

Accord and Satisfaction

Back 41

a) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, the following subsections apply.
(b) Unless subsection (c) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.

Front 42

What is value and consideration?

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(a) An instrument is issued or transferred for value if:

(1) the instrument is issued or transferred for a promise of performance, to the extent the promise has been performed;

(2) the transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding;

(3) the instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due;

(4) the instrument is issued or transferred in exchange for a negotiable instrument; or

(5) the instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument.

(b) "Consideration" means any consideration sufficient to support a simple contract.
( determine if P is partial HDC)