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56 Cards in this Set
- Front
- Back
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Forms of commercial paper
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Notes and Drafts
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What is a note?
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A note is a two party instrument:
a. Maker is who signs or the person undertaking to pay b. Payee: the person to whom the note is payable |
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What is a draft?
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A three party instrument:
a. Drawer: the person who signs or is identified as the person ordering the person. Drawee: Is the person ordered to make the payment Payee: the person to whom the draft is payable |
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What happens when the drawee is a bank?
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If the drawee is a bank and it is payable on demand, then the draft is a check.
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What is a cashier's check?
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A draft with respect to which the drawer and drawee are the same bank
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What is a teller's check?
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A draft where the drawer is a bank and a different bank is the drawee.
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What is a certified check?
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One drawn by the drawee bank's customer and accepted by the drawel bank (typically by stamping it certified)
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Holder in due course
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If a piece of paper is a negotiable instrument, the person holding it is the "holder in due course" and it will be governed by UCC art. 3.
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Negotiable instrument requirements
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1. Writing
2. Signed by maker (note) on drawer (check) 3. Promise to pay or order to pay 4. Unconditional 5. Fixed amount of money 6. No other undertaking 7. Payable on demand or a definite time 8. To the order or bearer (check exception...Pay to..." SWUPFONO |
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What is negotiation?
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The transfer of an instrument in a way that makes the transferee the holder.
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Holder
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Person in possession of bearer paper OR person in possession or order paper that has been properly issued or properly endorsed to her.
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How do you negotiate a note or check?
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If its order paper thru indorsement and transfer of possession (voluntary or involuntary).
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What is indorsement?
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Signature on an instrument for the purpose of negotiating it and/or making the indorses liable under indorses liability.
Words of negotiability are not required on an indorsement. |
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What is special indorsement?
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An indorsement which also names a particular person as indorsee.
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How do you negotiate bearer paper?
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By transfer of possesion alone.
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How can an order paper or bearer paper get transformed after issuance?
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1. If order paper is indorsed in blank, it becomes bearer paper
2. If bearer paper is specially indorsed, it becomes order paper A holder can convert a blanc indorsement to a special indorsement by naming an indorsee above the blank indorsement. |
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Effect of forgeries on status of holder
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General Rule: A person cannot be a holder if any necessary indorsement was forged.
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Lost, stolen or destroyed instruments
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Generally, a person who is not in possession of a negotiable instrument can pursue an action to collect on it if (1) he was entitled to enforce the instrument and (2) it was lost, stolen or destroyed.
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Liability arises when...
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1. No person or entity can be liable on a negotiable instrument unless signed by him or by authorized agent.
2. A forged signature is not effective |
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What is the maker's liability on the note?
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He is obligated to pay the note according to its terms at the time it was issued. No conditions, he is simply liable.
A maker's liability is owed to a person entitled to enforce the note (the holder) and to an indorser who has paid the note due to his indorser liability. |
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What is the drawer's liability on the check?
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He is obligated to pay according to its terms when he signed it. The drawer is liable only after (1) presentment and (2) dishonor by the drawee bank.
A drawer is generally not entitled to a notice of dishonor, he should know. He is liable to the holder and to an indorser who has paid the check due to his indorser liability. |
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What is the drawee's liability on the check?
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Not obligated to pay unless it "accepted" the draft.
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What is the effect of a certified check?
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Discharges drawer and makes the bank primarily liable because it has certified the check.
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What is the indorser's liability on the instrument?
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He is obligated to pay according to the terms of the instrument at the time of indorsement.
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An indorser's liability is conditioned upon...
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1. Timely presentment: 20 days after the day the indorsement is made
2. Dishonor of the instrument: instrument is not paid when due, with a check, midnight rule. 3. Timely notice of dishonor must be given to indorser or else he is discharged. |
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What is a qualified indorsement?
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Using language such as "without recourse" serves as a qualified indorsement and the payee is not liable on the instrument.
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Discharge
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If the instrument is paid to the proper person (the holder), payment discharges that person of the underlying obligation and on the instrument.
If the check is dishonored the holder can sue on both but can only recover on one. |
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How can a person discharge another of liability on an instrument?
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By cancellation, renunciation or discharge by contract.
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Conversion liability for a lost or stolen check
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An owner of a lost or stolen check may recover in conversion if the check is taken or paid over an unauthorized indorsement.
The owner can only recover if he had possession of the instrument. |
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Who is liable in conversion?
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The owner may recover from the drawee bank, the depository bank and anyone who took the check and didn't act in good faith.
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What is a holder in due course?
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1. A holder
2. Who gives value for the instrument 3, In good faith 4. Without noticing certain things |
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What is a holder?
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A person in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to him.
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What is value?
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Look for executed consideration. A party is a HDC to the extent that the agreed consideration has been performed. A mere promise to give value is not enough.
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What is notice?
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A HDC must take the instrument without notice (actual or reason to know that the instrument:
1. is so irregular or so incomplete that as to call into question its authenticity. 2. The instrument is overdue or has been dishonored. |
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What is overdue?
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A purchaser has notice that an instrument is overdue if she knows or has reason to know that any part of the PRINCIPAL is overdue.
A check is overdue 90 days after its date. |
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Real defenses
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A HDC takes free of personal defenses but takes subject to real defenses which are:
1. Infancy on the maker or drawer 2. Incapacity, duress or illegality 3. fraud in the execution (not in the inducement) 4. bankruptcy discharge 5. any other discharge which the holder has notice when he takes the instrument. 6. SOL (check 3 yrs, note 10 yrs, demand inst. when demand is make, on time instruments, when time is due) |
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What is the properly payable rule?
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The payor bank may pay out of the customer's money only if it follows the customer's orders exactly . If not, it must re-credit the customer's account.
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Joint payees
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If an instrument is payable to payees jointly (pay to X and Y), the signature of all payees is necessary to negotiate or to enforce the instrument.
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Several payees
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If the check is payable to either X or Y any of them can negotiate or enforce the instrument.
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Altered check
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If a check has been altered, the customer's account can only be charged for the original amount.
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Overdraft rule
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A drawee bank may honor a check even if it creates an overdraft if it has agreed to do so with its customer.
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Wrongful dishonor
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A payor bank is liable to its customer for damages caused by the wrongful dishonor of a check. Liability is limited to actual damages proved and may include damages for arrest or prosecution or other consequential damages.
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Presentment warranty liability
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The party presenting the check for payment to the drawee bank (i.e. depository bank) and each of the earlier transferors of the check (grocery store and thief) warrant to the drawee bank that:
1. they are the person entitled to enforce the draft 2. the draft has not been altered. 3. They have no actual knowledge that the drawer's signature was forged. |
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Transfer warranties
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Whenever someone transfers an instrument for consideration, transferor makes the following 5 warranties:
(1) Transferor warrants that he is a person entitled to enforce the instrument (basically that all endorsements necessary to chain of title are genuine). (2) Signatures are authentic and authorized. (3) Instrument hasn't been altered. (4) That no defense or claim of any party is good against her. (5) That he has no knowledge of any insolvency proceeding that has been instituted against the maker, acceptor, or drawer of an unaccepted instrument. |
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Effect of unauthorized signatures, VALIDATION RULE
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General rule is that an unauthorized signature is wholly ineffective as the signature of person whose name is signed, but is effective as signature of signer. Thus, unauthorized signer assumes obligations on the instrument to those who, in good faith, give value for the instrument.
Five exceptions exist where forgery or unauthorized signature will be validated because person whose name is used has done something to preclude her from raising forgery issue: (1) Fictitious payee, (2) Fraudulent endorsements by employees, (3) Failure to exercise ordinary care (negligence rule), (4) Bank statement rule, and (5) Estoppel by certification. |
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Fictitious payee rule
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If the person identified in the instrument as the payee is fictitious, then ain indorsement in the name of the payee is effective.
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The impostor rule
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This rule validates the forged indorsement of the payee's name where the maker or drawer has been duped by an impostor o issue the instrument. The validation runs in favor of a person who in GF pays the instrument or takes it for value or for collection.
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Fraudulent indorsement of employee with liability
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If an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective.
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Negligence rule
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If a person by his negligence, substantially contributes to a material ALTERATION he is precluded from asserting the alteration or lack of authority against HDC or the drawee or other payor who pays:
1) in good faith 2) according to reas. standards of the drawee's or payor's biz. |
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Comparative negligence rule
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If drawee bank or other person paying the instrument or taking it for value or for collection (dep. bank) fails to exercise ordinary care, the person bearing the loss may recover from themto the extent the failure to use ordinary care contributed to the loss.
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Bank statement rule
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1. Look at statement and promptly notify.
2. If 2nd or 3rd time wrongdoer, customer liable unless notice within 30 days of the date the returned check is made available to customer. |
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Alteration
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Unauthorized change in an instrument that purports to modify the obligations of any party.
A non fraudulent alteration does not discharge any party and the instrument may be enforced according to its original terms. But a fraudulent alteration discharges every party obligated on the instrument unless the party assents to or is precluded from asserting the alteration. |
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Rights of a HDC after alteration
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A person taking an altered instrument for value and in good faith and without notice of alteration may enforce it according to its original terms.
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Who is an accommodation party?
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An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name and credit for the benefit of another party to the same instrument (the accommodated party) Typically, the accommodation party signs either as a maker or indorser.
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Accord and satisfaction
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Gen. Rule: If a person cashes or deposits an instrument with notice that it is tendered in full payment of a disputed debt, the debt is discharged in full.
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Accord Requirements
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1. Person tendering payment must act in good faith
2. The debt must be unliquidated or subject to the BF dispute 3. Person tendering the instrument must prove either (a) the instrument statement that it was tendered in full satisfaction of debt (b) the person accepting it actually knew that it was tendered in full satisfaction of the debt. |
