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64 Cards in this Set
- Front
- Back
Note
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Instrument where maker promises to pay payee.
The two parties are: MAKER and PAYEE |
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Liability of Maker
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Primary (or unconditional)
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Liability of Co-Makers
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Joint and Several
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Liability of Co-Makers to each other
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Contractual Liability
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Draft
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Instrument where drawer orders drawee to pay payee
The three parties are: DRAWER, DRAWEE, and PAYEE |
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Liability of drawer
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Secondary (or conditional)
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Inconsistent words and figures?
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Words prevail over figures
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Indorsement
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Signature other than that of maker, drawer, or acceptor (acceptor is drawee who has agreed to pay the instrument)
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Qualities of Indorsement
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Special or Blank
Unrestrictive or Restrictive Unqualified or Qualified Nonanomalous or Anomalous |
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Special Indorsement
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Special indorsement identifies the person to whom payable (i.e., pay payee); blank indorsement does not (i.e., indorsement only)
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Restrictive Indorsement
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Restrictive indorsement (i.e., for deposit only); unrestricitive doesn't
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Qualified Indorsement
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Qualified indorsement (i.e., "without recourse") negates secondary liability; unqualified doesn't
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Anomalous Indorsement
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Anomalous indicates accommodation (i.e., "out of chain")
(i) Accommodation parties are liable in the capacity in which they sign (ii) Surety has right of recourse against accommodated party |
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Liability of indorser
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Secondary (or conditional)
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Holder v. Maker (or Drawer)
[aka HDC rule] |
1. Negotiable Instrument
2. Negotiated 3. Holder in Due Course 4. Takes free of personal defenses and claims--subject only to real defenses |
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Negotiable Instrument
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1. Writing
2. Signed by Maker (note) or Drawer (draft) 3. Unconditional Promise (note) or Order (draft) 4. To Pay a Fixed Amount of Money 5. No other unauthorized promise 6. On demand or at a definite time 7. To bearer or order at time of issue (unless check) |
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[2. Signed by the Maker (or Drawer)]
Agency? |
Principal liable if agent authorized
Agent liable only if signed without showing represented party (i.e., undisclosed principal) |
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[2. Signed by the Maker (or Drawer)]
Forgery? |
Operative as to forger; not party whose name was forged
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[3. Unconditional Promise or Order]
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A. No Express Conditions
B. Not Subject to Another writing ["secured by" okay though] C. Limitations of funds are okay (i.e., where the money comes from) |
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Conditions
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1. No express conditions (i.e., conditions written in the contract language)
2. Implied (conduct) or Constructivbe (law) conditions are permissible |
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[4. To pay a fixed amount of money]
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1. With or without interest and a fixed or variable rate okay
2. Foreign currencies okay if from a recognized government 3. If the amount is left blank and is later completed as authorized, the instrument is enforceable. If there is an unauthorized completion, an HDC can enforce the instrument as completed, but a non-HDC can only enforce the instrument to the extent that the completion was authorized |
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[6. No other unauthorized promise]
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A. No $500 + a Cow language
B. Other unauthorized promises are prohibited unless they concern: (i) collateral (security; "secured by") OR (ii) Attorneys' Fees OR (iii) an instruction to confess a judgment in case of default |
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[7. On demand or at definite time]
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A. If note is silent, it's demand paper
B. Acceleration clauses are okay |
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[8. To bearer or to order at time of issue (unless check)]
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A. Two types of negotiable instruments: ORDER (to a specific person) and BEARER (to cash, or blank)
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Negotiated
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[negotiation is a specific type of transfer]
1. Effective even if impediment (even if an infant) 2. Must transfer entire instrument (no splitting) 3. Rules: A. Order B. Bearer C. Last Indorsement Rule |
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Negotiated: ORDER
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Proper indorsement plus delivery
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Negotiated: BEARER
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Mere delivery alone
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Negotiated: LAST INDORSEMENT RULE
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1. The last indorsement determines the rules for negotiation.
2. A special indorsement makes the instrument ORDER paper (indorsement + delivery required to be negotiated) 3. A blank indorsement makes the instrument BEARER paper (delivery required to be negotiated) |
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Holder in Due Course (HDC)
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1. For Value
2. In Good Faith 3. Without knowledge or notice of overdueness (check over 90 days), dishonor, defense, forgery, irregularity (i.e., stamped, crinkled, or torn), or incompleteness which questions authenticity 4. Non-holders in due course |
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HDC: For Value
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A. Executed consideration (performed consideration)
B. Antecedent Claims (old debts) C. Partial HDC Rule (proportion) [if a person gives part of the agreed value and then obtains notice of a defense] D. Your depository bank is typically not an HDC, unless it gives value (i.e., cashes the check) |
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HDC: In Good Faith
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A. Honesty-in-fact AND
B. Observance of reasonable commercial standards of fair dealing (merchants test) |
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HDC: Without knowledge or notice of:
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1. Overdueness
2. Dishonor 3. Claim 4. Defense 5. Forgery 6. Irregularity (stamped, crinkled, or torn) 7. Incompleteness [these factors question authenticity] SELLING AT A REASONABLE DISCOUNT DOES NOT CONSTITUTE NOTICE |
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HDC: Non-holders in due course
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A. Bulk (i.e., buy a store with checks in the registers)
B. Estate C. Judicial Sale [But Shelter Rule can apply and give the rights of a HDC] |
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Free From Personal Defense and Claims, but Subject to Real Defenses
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FAIDS
1. Forgery, Fraud in Factum (switch-document fraud) 2. Alteration, Adjudicated Insanity 3. Infancy, Illegality (void illegality) 4. Duress, Discharge in Insolvency (void duress) 5. Suretyship defenses (if notice of suretyship), State of Limitations (Drafts: 3 years; Notes: 6 years, unless no demand, then 10 years) |
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FTC Ameloioration
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1. Human buys
2. Consumer goods (not farm, equipment, or inventory) 3. or Services 4. on Credit (more than 4 installments) THEN no HDC Rules |
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Shelter Rule
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Anyone who takes after HDC gets rights of HDC, except participant
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Holder v. Indorser
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Contract of Secondary Liability (at time of indorsement)
[indorser liable only up to original amount, not altered amount] |
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Conditions precedent to a contract of Secondary Liability (at time of indorsement)
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1. Presentment (Holder goes to Primary Party/Maker and demands payment)
2. Dishonor (Primary Party refuses) 3. Notice of Dishonor (Holder tells Secondary Party/Indorser) |
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If a Qualified Indorsement (i.e., "without recourse"), then discuss:
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Warranty Liability
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Warranty Liability
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"off instrument"
1. Right to enforce (title) 2. Signature genuine 3. No alteration 4. No defense 5. No knowledge of insolvency |
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Stages in life of a note/draft
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1. Issuance: no warranties
2. Transfer: warranty liability 3. Presentment: presentment liability |
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Personal defenses
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failure of consideration, shoddy work, failure to deliver goods, defective goods, etc.
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If an instrument is non-negotiable, then ...
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apply regular contract law (i.e., you can use a personal defense)
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Holder v. Drawee
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No drawee liability unless acceptance (certification)
1. If certification, drawee liable for consequential damages 2. If certification, drawer discharged |
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Drawer v. Drawee
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Drawee liable under Contractual Relationship
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Properly Payable Rule
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Drawer puts money in drawee (drawee acts as agent for collection), and drawee pays out according to drawer's order.
Bank can pay these out: A. Overdraft B. Dateless checks C. Not over stop payment D. Drawer Dead (bank can payout even if you're dead) |
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Where drawee doesn't pay, but should have ...
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Drawee is liable to drawer for wrongful dishonor
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Where drawee does pay, but shouldn't ...
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Drawee is liable to drawer for breach of contract
EXCEPTIONS: 1. Fictitious indorsements are effective 2. Drawer negligent in the drafting 3. Drawer negligent in the notifying |
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Fictitious indorsements are effective. Fictitious payees include:
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1. Imposter
2. Corporate Comptroller (accounting negligence) 3. Payroll Padding (negligence in hiring) |
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Examples of Drawer negligence in drafting
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1. Leaving amount line blank or lots of space following the word one
2. Leaving spaces and saying "I trust you to put in the right amount" USING a pencil or leaving blank checks on the top of a table in a restaurant is not negligent |
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Exception to Drawer negligent in notifying exception
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where drawee is negligent and pays out without asking for ID. But there are limits. Drawee must notify timely.
1. Forged drawer: 1 year 2. Forged indorsement: 3 years 3. Multiple forgeries by the same wrongdoer: 30 days |
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Bank Recovery (payment by mistake)
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1. Where the bamk pays on a forged drawer's signature or other mistake (e.g., insufficient funds), payment is final, and no recovery is permitted from the innocent party whom the bank paid
2. But, where the bank pays on a forged indorsement, payment is not final and the bank can recover from the innocent party whom it paid (because of breach of warranty of presentment--right to enforce /title) |
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Accord & Satisfaction
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1. Where there is an unliquidated or disputed claim
2. An instrument tendered as full satisfaction (conspicuously) 3. Collection of the instrument is discharge of the debtor's obligation (an accord and satisfaction) |
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Exceptions to Accord & Satisfaction
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1. Where there is an organization designated as the agent (conspicuosuly), no a&s unless sent to the agent
2. Claimant tenders repayment within 90 days (to avoid inadvertent a&s) |
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Lost, Destroyed or Stolen Instruments
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May still enforce if she can prover her ownership and the facts that prevent production of the instrument. But, the maker or drawer can be forced to pay again if a later person becomes an HDC of the instrument. Thus, court can require a bond or other adequate protection for the person paying
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If a certified or cashiers' check is given on an obligation ...
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the underlying obligation is discharged to the same extent as if cash were given
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If an instrument other than a certified or cashers' check is given to satisfy an obligation, ...
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the instrument suspends the party's duty to perform on the underlying obligation until the instrument is paid or dishonored
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An accommodation party is never liable to ...
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the party accommodated
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A person entitled to enforce an instrument may, even without consideration, discharge
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any party from the instrument by voluntary act, such as lining through the party's name
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Presentment Warranties
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1. Entitled to enforce
2. instrument has not been altered 3. no knowledge that the drawer's signature is unauthorized |
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An accommodation party can raise impairment of remedy as a defense against anyone who ...
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impaired a remedy of the accommodation party with knowledge of the accommodation party's status
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If an instrument is payable to more than one person (e.g., pay to the order of Alex and Becky), ...
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negotiation requires the indorsement of all specified persons
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Contract Liability
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By singing his name on the back of an instrument, an indorser enters into a contract with subsequent holders of the instrument, promising to pay on the instrument according to its terms when indorsed if the instrument is presented for payment, is dishonored, and the indorser is given notice of the dishonor.
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A transferor who indorses an instrument
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makes the transfer warranties to all subsequent holders; a transferor who does not indorse makes the warranties only to the immediate transferee
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