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86 Cards in this Set
- Front
- Back
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What do you start by saying?
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Aricle 3 of the Uniform Commercial Code, as adopted in Massachusetts, applies to negotiable instruments, which includes checks, notes, and drafts.
Article 4 of the UCC, as adopted in Massachusetts, governs the bank/customer relationship and primarily applies to checks. |
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What do you say for Holder in Due Course? What is an HDC?
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Where a negotiable instrument is negotiated by a holder in due course (HDC), the HDC takes the instrument free of personal defenses and subject only to real defenses.
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What are the elements for a valid negotiable instrument?
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For a note to be negotiable, it must be (i) in writing; (ii) signed by the maker or drawer; (iii) containing an unconditional promise or order to pay; (iv) a fixed amount of money; (v) payable to order or to bearer; (vi) payable on demand or at a definite time; and (vii) containing no unauthorized promises or undertakings.
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If a negotiable instrument is also a note, what else must it contain? What is exempt from this requirement?
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If the negotiable instrument is a note, it must also be payable to order or bearer; checks are exempt from this final requirement.
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What is negotiation (i.e., when does it result)?
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Negotiation results when a negotiable instrument is transferred to a holder with possession, and the instrument has good title.
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Who are the parties to two-party commercial paper?
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(1) bearer ; (2) maker
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Who are the parties to three-party paper and what is an example of a three-party paper?
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Example is a check. Parties are drawer, drawee, payee
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Drawer
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party who writes the check
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Drawee
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party that actuall makes the payment (e.g., the bank)
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Payee
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party that gets the money
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What is an endorsement? When does it occur? What else do you say?
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Signature on the back of commercial paper. Signatures are made by the parties that are transferring or negotiating the instrument. Signatures are often used as part of the negotiation. These occur after the note or check has been created.
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What are the 4 types of indorsements?
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(1) special; (2) blank; (3) qualified; (4) restrictive
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What is a special indorsement?
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When a party that transfers the instrument, signs their names and indicates who the note is being transferred to
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What is a blank indorsement?
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pure signature
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What is a qualified indorsement?
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only one kind - when someone signs their names but includes the words 'w/o recourse' (meaning disclaiming all liability)
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What is a restrictive indorsement?
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only one kind - for deposit only - means the check can only go to that specific account
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What is required for negotiation of order paper? (3)
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(1) written
(2) requires payable to the order of someone (3) requires delivery |
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What is required to qualify as a holder in due course?
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For a person to qualify as an HDC, he must
(1) be a holder (2) take possession of the instrument for value (3) in good faith (4) absent knowledge of defense or problems with the instrument |
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What is the shelter rule?
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A transferee acquires wahtever rights her transferor enjoyed, taking 'shelter' in the status of the transferor, including the rights of a HDC if the transferor had such rights.
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What is the Shelter Rule Limitation?
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The shelter rule does not apply however, if the transferee is a party to fraud or illegality affecting the instrument.
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What defenses can be asserted against a holder in due course? Actually name them...
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When an instrument is negotiated to a HDC, the HDC free of any personal defenses and subject only to REAL DEFENSES (forgery, fraud in the factum, material alteration, incapacity, illegality, duress at creation, discharge in insolvency, suretyship with notice, or statute of limitations)
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What is the properly payable rule? Who bears the risk?
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The properly payable rule requires banks to pay checks that are properly payable and refrain from paying checks that are not. Between a bank and a customer, the bank will usually bear the risk of loss from forgery or alterations under this rule.
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Who bears the risk of loss for forgery and alterations under the properly payable rule?
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the bank
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What are exceptions to the properly payable rule? (4)
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A customer may be precluded from this rule's protections if (1) own negligence facilitated the fraud, (2) the instrument was issued to an imposter, (3) fraud by an employee with responsibility for check writing, or (4) client failed to properly review a bank statement.
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Forgery - Improperly review a bank statement. HOw long does customer have to give notice of forgery or alteration?
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customer has up to 1 YEAR to give notice of forgery/alteration
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What does the comparative fault rule have to do with the properly payable rule?
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Massachusetts is a partial comparative fault state, so responsibility will be apportioned between the parties. A defendant will only be responsible for the percentage of fault attributed to him.
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What are 'other wrongful honors' (i.e., drawee pays and shouldn't have) (4) and one exception?
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(1) Stop Payment Order - oral valid only for 14 days/written order valid for 6 months & renewable
(2) Stale Checks - checks only payable for 90 days after issue date (3) Post-Dated Check (written for date in future) - still payable on demand UNLESS customer notifies the bank about check with reasonable detail AND in a time & manner that bank has reasonable opportunity to act (same SOLs for oral (14 days) v. written notice (6 months)) (4) Checks paid after death - bank may continue to pay for 10 days after drawer's death (5) EXCEPTION - overdrafts are properly payable |
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When does a party become liable?
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When a party signs an instrument, he becomes liable by virtue of his signature.
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What is secondary liability? Who is secondarily liable and when?
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Indorsers are secondarily liable if the drawer bank dishonors teh instrument and the indorser has been given notice of the dishoner
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What is presentment warranty? (3 things)
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When an instrument is presented for payment, a presentment warranty arises as a matter of law. The person who obtains payment on a check (& all prior transferors) warrants to the drawee bank that (1) he has good title, (2) the draft is unaltered, and (3) there is no knowledge that the signature of the drawer is unauthorized.
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What if the presentment warranty is breached?
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drawee may sue for ACTUAL DAMAGES arising from a breach of warranty
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What is good title? It includes ___ but does not include ____
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good title includes forged signature of drawer, but not forged signature of indorser
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What is a transfer warranty? (5)
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Each person who transfers an instrument for consideration makes 5 transfer warranties:
(1) good title (2) no alterations (3) no unauthorized signatures (4) no defenses (5) no knowledge of insolvency |
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What is a transfer with/without indorsement?
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If a transfer is with indorsement (negotiation of order paper), the transfer warranty runs to all subsequent transferees
If the transfer is without indorsement (negotiation of bearer paper), it runs only to the immediate transferee. |
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How does conversion apply in this context?
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Checks and notes are personal property. One who substantially interferes with another's personal property rights has committed the tort of conversion?
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What crime may one be guilty of if alters check? what else do you need to prove?
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forgery - need to also prove intent to defraud
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What do you say regarding the underlying obligation (the contractual obligation that check/note was issued to satisfy)?
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The underlying obligation (usually contractual obligation that the check/note is issued for) is merely suspended when the instrument is issued, but springs back once an instrument is dishonored.
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What is order paper?
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must say pay to order
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what is bearer paper?
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does not identify a payee and can state 'pay to bearer' or 'cash'
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Which controls, words or numbers?
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words
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What happens if a promise to pay is contingent?
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promise to pay must not be subject to or governed by the future completion of a contingency
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What if an instrument is undated?
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can still be negotiable so long as the date of payment is specified.
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For sum in certain money requirement, can use prime rate?
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yes
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A negotiable instrument is___
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A negotiable instrument is (1) a signed writing (2) containing an unconditional promise to pay (3) to order or bearer (4) on demand or a date certain in the future (5) a sum certain in money (no undertaking).
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What if an instrument is incomplete when issued, but the signer intended it to be completed by the addition of words or numbers? Is it enforceable?
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If the maker or drawer intended for the payee to complete the instrument, the instrument is enforceable as completed. (e.g., if the date or amount are incomplete and both parties agree on the terms, the payee may complete the instrument'
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What is the first threshold issue in your answer?
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whether the instrument meets all of the NUTSS issues.
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What happens if the instrument does not meet one of the NUTSS criteria, and is thus, not negotiable?
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the holder takes subject to all contract defenses assertable against the payee
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What is a holder in due course conceptually?
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transferee of a negotiable instrument may have superior rights ot other holders -- called HDC
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What are the requirements for a holder in due course?
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(1) be a holder; (2) have taken the instrument in good faith; (3) for value; (4) without knowledge of underlying defenses or problems with the instrument.
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What is a partial HDC?
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A holder qualifies as a HDC only to the extent that consideration has been given.
Thus, if a holder agrees to pay a certain amount for the instrument and only pays a part of that amount, he is a "partial HDC" only to that extent and a mere assignee to the rest. Does not matter if he pays less than face value of the instrument, though. |
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does receiving the instrument for collateral qualify for value for HDC?
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yes
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When you see interest on a negotiable instrument, what do you say? Interest can be ___ or ___ and can be determinedby ___
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Interest can be variable or indexed, and can be determined by an outside source without destroying the negotiability of the instrument. a note must say 'interest,' or none is due. Inclusion of interst based on the primse rate does not destroy the requirement that the note be payable for a fixed amount of money.
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What is the properly payable rule? Who bears the risk of loss from forgery and why?
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Between a bank and the customer, the bank will generally bear the loss from forgery or alterations of a check because of the properly payable rule. Checks that are forged or altered are not properly payable because they are no longer payable according to the customer's instructions.
The rule requires that banks pay checks that are properly payable (otherwise a wrongful dishonor) and to refrain from paying checks that are not properly payable (a wrongful honor). |
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Altered check are not properly payable______.
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to the extent of alteration (enforceable only to the extent of its original terms)
BUT: if unauthorized completion then an HDC can enforce according to the terms AS COMPLETED |
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What are the exceptions to the properly payable rule?
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Exceptions to the properly payable rule may operate or preclude the customer from asserting the forgery or alteration against his bank: (i) negligence on the part of the customer that substantially contributes to the forgery or alteration; (ii) issuing an instrument to an imposter or a fictious payee; (iii) forgery or alterations effectuated by an employee with responsibility for check writing; (iv) failure to examine a bank statement promptly
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What are the rules for stop payment orders?
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Oral stop payment order is valid for 14 days; written is valid for 6 months.
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What is the rule for stale checks?
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check are only properly payable for 90 days after the issue date.
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What is the rule for post-dated checks?
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still payable on demand UNLESS customer either notifies the bank about the check with reasonable detail AND in a time and manner that the bank has a reasonable opportunity to act
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What is the rule for checks paid after death? When may the bank continue to pay out on them?
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Bank may continue to pay for 10 days after drawer's death.
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An instrument is negotiated when ____
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Bearer Paper: It is transferred to a holder
Order Paper: Transfer and indorsement |
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A holder is one with (2)
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possession of the instrument and good title (forged indorsement breaks chain of title).
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Good faith requires ___ and ____.
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honesty in fact AND the observance of reasoanble standards of commercial dealing.
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By what standard is knowledge of undelrying defenses or problems judged?
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both an actula and constructive standard (did know, or ought to have known)
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What is the FTC holder in due course rule?
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The FTC holder in due course rule applies to financed sales of consumer goods.
Under this rule, any subsequent holder of a note must honor the warranties of the original seller. This means, holder of a note for financed sale of consumer goods will be subject to all personal defenses. |
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Who is primarily liable on notes? Who is secondarily liable?
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makers are PRIMARILY LIABLE; indorsers are SECONDARILY LIABLE
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When does the secondary liabilty of an indorser kick in?
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Indorsers are secondarily liable if the maker dishonors the instrument and the indorsemr is given notice of the maker's dishonor.
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What do you say at the start of the transfer warranty liability
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Each person who transfers an instrument for consideration makes five tranfser warranties by operation of law:
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When does transfer warranty liaiblity arise? (without what three things)
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Transfer warranties arise (1) with or without 'negotiation'; (2) with or without indorsement; (3) regardless of whether indorsement is qualified or unqualified
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To whom do the transfer warrantis run if the transfer is 'with indorsement'?
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A transfer with indorsement makes the transfer warranties run to teh immediate transferee and to every subsequent transferee.
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To whom do teh transfer warranties run if the transfer is 'without indorsement'?
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A transfer without indorsement makes the warranty run only to the immediate transferee.
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What exactly is the presentment warranty?
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The person who obtains payment on a note (and all prior transferors) warrants tot eh person paying thenote that he is a person entitled to enforce (obtain payment)
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What is the result if the presentment warranty is breached?
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If the presentment warranty is breached, the paying party can sue the presenter or a prior trasnferor (limited to condition of instrument at time of transfer) for the amount of the payment.
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When does transfer warranty liability NOT arise?
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when the note was not transferred for consideration
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When can contract liaiblity be disclaimed?
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Contract liaiblity can be disclaimed by making a qualified indorsement (adding the phrase 'w/o recourse') to an indorsement
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If an instrument is not negotiable, then what is it governed by?
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common law of contracts
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A holder is one who has: (2 things)
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1. Possession
2. Good title Good title is based on the chain of title. A forged indorsement breaks the chain of title so no subsequent possessor can be a holder. |
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How is chain of title broken?
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Forged or unauthorized signing of a signature that is necessary to title.
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Once one signs the back of a check, he converts it to
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bearer paper.
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What is the effect of a forged/unauthorized indorsement?
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Forging the payee's name breaks the chain of title and no subsequent possessors of the instrument qualify as holders
Note: indorsement obtained by fraud or from infant is effective |
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What signatures are necessary to the chain of title?
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Signatures of specific payees
Signature of a drawer is NOT necessary to chain of title because the forged signature will operate as the signature of forger. Forging a signature to indorse bearer paper--won't break title because the signature is not necessary to the chain of title. |
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Suretyship Defenses
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If an HDC knows of an accommodation when he takes the instrument, he takes subject to the accommodation party's suretyship defenses:
-Discharge to the, extent of loss, caused by: 1. Extension of the due date 2. Material modification of the obligation; or 3. Impairment of collateral Limitations on Discharge: 1. Accommodation party not discharged by any of the grounds for discharge unless the person entitled to enforce the instrument knows of the accommodation 2. Consent ---Party will not be discharged if he consented to the conduct that is the ground for discharge |
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Accommodation Party
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If an accommodation party pays the instrument, they will have an action on the instrument against the party accommodated
Accommodation party is never liable to the party accommodated. Accommodation party liable on the instrument in the capacity in which she signs (maker, indorser, drawer, etc.) |
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Who Must Obey Restrictive Indorsements?
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Person or Depositary Bank (bank in which instrument is first deposited) must pay instrument consistently or be liable for conversion
Intermediary Bank and Payor Bank (unless it is the depositary bank) may disregard then restrictive indorsement |
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3 requirements for person not in possession of an instrument to enforce it
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1. Person entitled to enforce instrument when the loss of possession occurred
2. Loss of possession was not the result of his own transfer or lawful seizure 3. Whereabouts of the note are unknown to both parties |
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Cashier's Checks
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Like a note from bank to customer.
When customer gives cashier's check to a 3rd party, it discharges (rather than suspends as with a regular check) the obligation --Also, customer makes the transfer warranties when he gives a cashier's check |
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Cashier's Checks
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Like a note from bank to customer.
When customer gives cashier's check to a 3rd party, it discharges (rather than suspends as with a regular check) the obligation --Also, customer makes the transfer warranties when he gives a cashier's check |
