Commercial Paper

Front 1

Introduction

Back 1

This transaction is governed by A3 (negotiable instruments) and A4 (checks/drafts). The first question is whether the instrument is negotiable b/c if it is then an HDC will take the instrument free from personal defenses and claims subject only to real defenses

Front 2

Negotiability
Negotiable Instrument

Back 2

A negotiable instrument is in writing, signed by the maker (note) or drawer (check), containing an unconditional promise to pay, a fixed amount of money, payable on demand or at a definite time, and there must be no other additional undertaking or instruction (other than the payment of money)

Front 3

Was the negotiable instrument properly negotiated?

Back 3

For an instrument to be negotiated it must be transferred to a subsequent party who becomes a holder

Front 4

Holder Status

Back 4

Possession of the negotiable instrument..AND

Good title....the method of obtaining good title depends on the words of negotiability used

bearer = possession alone
order = possession PLUS necessary indorsements

Front 5

Negotiated

Back 5

Special indorsements - name a particular person as indorsee and it creates ORDER PAPER

Order paper is negotiated by proper indorsement and delivery

Blank indorsement is a signature that is not accompanied by the naming of a specific indorsee and creates BEARER PAPER

Bearer paper is negotiated by delivery alone

Front 6

HDC

Back 6

A holder becomes a HDC by giving value (consideration), and acting in good faith (honesty-subjective | commercial standards-objective), and w/o notice of problems w/ the instrument at time of acquisition

An HDC can sue the other parties to the instrument for payment, and those parties are able to defend against that suit only with REAL DEFENSES

Front 7

Commercial Paper

Elements of Negotiability
Rights of Holder in Due Course

WOSSUPP! if WE FUC, you'll get DAFFIDILS.

Back 7

WOSSUP - elements that make an instrument negotiable

WE FUC - an HDC takes instrument free of all claims and personal defenses

DAFFIDILS - an HDC takes instrument subject to real defenses

WOSSUP:
in WRITING (statute of frauds)
payable to ORDER of or to bearer (negotiable words)
SIGNED by the maker or drawer
SUM is certain (principal only - amount of interest flexible)
UNCONDITIONAL promise with no other promises attached
PAYABLE on demand or at a definite time
PAYABLE in sovereign currency only

WE FUC:
WAIVER
ESTOPPEL
FRAUD in inducement (impostor)
UNCONSCIONABILITY
CONSIDERATION lacking (for the note)

DAFFIDILS:
DURESS - threat of violence (not economic duress)
material ALTERATION of instrument
FORGERY
Fraud in the FACTUM (signor did not know it was a negotiable instrument)
ILLEGALITY
DISCHARGE in bankruptcy of maker or drawer
INFANCY of maker or drawer
LACK of mental capacity
STATUTE

Front 8

Shelter Rule

Back 8

Even if a holder is not an HDC, person may still have rights of HDC under shelter rule.

A transferee acquires whatever rights her transferor had and thus is said to take shelter in the status of the transferor.

No HDC Rights to those were parties to fraud or illegality

Front 9

Real Defenses

Back 9

An HDC can enforce an instrument subject only to real defenses [the HDC takes free of personal defenses and claims....the HDC ignores those and only loses to real defenses]

No person can take an instrument from and HDC - and HDC is the "perfect defendant"

Front 10

Real Defenses #2

Back 10

DAFFIDILS:
DURESS - threat of violence (not economic duress)
material ALTERATION of instrument
FORGERY
Fraud in the FACTUM (signor did not know it was a negotiable instrument)
ILLEGALITY
DISCHARGE in bankruptcy of maker or drawer
INFANCY of maker or drawer
LACK of mental capacity
STATUTE

Front 11

Personal Defenses

Back 11

Most common is that the K which the commercial paper arose out of was not properly or fully performed

Also, fraud in the inducement, breach of warranties, failure of consideration (non-delivery of goods or non-performance of services)

Front 12

Indorser of Note or Draft - Secondary Liability

Back 12

Indorser may be liable on contract and warranty theories.

K liability - before a holder can look to an indorser for payment, the holder must do 3 things: (1) presentment (w/in 30 days); (2) dishonor (must bounce); (3) Notice of dishonor (to indorser w/in 30 days)

Order of liability - Indorsers are liable to each other in order of signatures (you see PRIOR indorsers)

Front 13

Transferor - Warranty Liability

Back 13

Warranties are made by any person who transfers for consideration. Warranties DO NOT rise in a gift context, the person transferring must receive consideration before the transfer warranties are implied
Example - Firm pays clerk with check for $1 drawn on ABC bank. Clerk deposits in her bank at XYZ Bank. XYZ presents check to ABC for payment. ABC pays.....clerk made transfer warranties to XYZ when check was deposited

Warranties are made to immediate transferree, and all subsequent holders

Front 14

5 transfer warranties
[WAINN] or [ESADBK]

Back 14

1. Warrantor is entitled to enforce the instrument
2. All signatures are authentic and authorized
3. Instrument has not been altered
4. No good defenses good against her
5. No knowledge of BK proceedings

Front 15

Drawer - Secondary Liability

Back 15

If draft is dishonored, then drawer is obliged to pay according to draft's terms when the drawer signed. If bank accepts the draft, then drawer is discharged

Drawer liable only after there is (1) PRESENTMENT and (2) DISHONOR

The DRAWEE CANNOT have liablity unless she signs the instrument. Thus, a holder cannot force a drawee to pay out on a draft

example - pay water bill with check. Before water company can sue you to collect the check, the company must present the check to drawee (my bank), and it must be dishonored. MY bank cannot be forced to pay

Front 16

Presentment Warranties

Back 16

A drawee (Bank) can recover for breach of presentment warranty, even from and HDC and persons who detrimentally relied on payment.

Warranties when unaccepted draft presented to drawee (e.g., a normal check, I make these when I cash my paycheck)
(1) I am entitled to enforce draft or obtain payment
(2) NO alterations
(3) No knowledge of unauthorized signatures

Front 17

Stop Payments

Back 17

Oral stop payments are good for 14 days.
Written stop payments are good for 6 months.

Front 18

Warranty vs. Indorser's K
How does one know whether the P should bring suit against the indorser for breach of W of for breach of indorser's K?

Back 18

Determine the identity of Plaintiff.

If P is the holder: If the payor has not paid the instrument (check bounces or not paid by maker), then the holder sues the indorser on indorser's K

If P is the payor: If payor has paid and later discovers the payor should not have paid (check was forged or altered), then the payor bank will attempt to sue the indorser for breach of W (transfer OR presentment)

Front 19

hypo

Back 19

ii) Hypo: George buys a guitar from Ace Guitar Stores with a check for $400. The clerk puts the check under the register. While clerk is away from the register, customer reaches over the counter, grabs the check, and leaves. Customer indorses the check and cashes it at her bank, Depository Bank. Customer moves to Africa never to return. Depository Bank presents it to George’s bank, Payor Bank, for payment. The check is paid.
(1) Ace can sue George under breach of contract theory (George got the guitar, Ace didn’t get paid.)
(2) George can sue his bank, Payor Bank, for paying a check that was not properly payable (not authorized by George for Customer to get paid)
(3) Payor Bank can sue Depository Bank for presenting an invalid check for payment (presentment warranty)
(4) Depository Bank can sue Customer for breach of transfer warranty.
(5) Since Customer is long gone, the party dealing most closely with Customer (Depositary Bank) gets stuck with the loss

Front 20

Forgery

Back 20

i) General Rule
(1) Drawer’s signature is missing or is not authorized
(2) Payor bank is liable because the forgery renders the check not properly payable

ii) Defenses
(1) Customer expressly/impliedly authorized the signature
(2) Customer is guilty of negligence that substantially contributed to the forgery
(3) Bank Statement Rule: customer breached his duty to review statement, detect forgery, and report to the bank. Subsequent forgeries by the same wrongdoer = customer is liable
(4) One Year Rule: Any loss from forgeries one year after the issuance of the bank statement falls on the customer

Front 21

Properly Payable

Back 21

Simply, that an an authorized payment is properly payable. In authorizing a payment, the account holder orders the payor bank to pay a specific amount to either to the bearer or to the order of a named payee. If they amount of any unauthorized payment is altered, or if payment is made to wrong person the properly payable doctrine is breached. THus, the payor bank could not lawfully pay the account holder for any unauthorized payment

Front 22

Getting Sued: K or Signature Liability

Back 22

By signing it, you promise to pay it, so you can be sued
1. the maker = the promisor in the promissory note
2. the indorser = signs name on back
3. the drawer = signs the check
4. the drawee pays the draft, and is usually the bank
a. doesn't sign
b. isn't liable
c. when "without recourse" accompany the signature, this passes title but assumes no liability