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13 Cards in this Set
- Front
- Back
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What is the rule on negotiable instruments?
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When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses, and subject only to real defenses
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What are the two types of negotiable instruments?
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Promissory note
"I promise to pay to the order of X fifty thousand dollars" signed Y Promissory note is the promise maker; contains an affirmative promise to pay, not just an IOU Promisor is the "maker;" promisee is the "payee" Draft "Pay to the order of X fifty thousand dollars" signed Y Is a check Think of draft as the commander; contains an order or command Person giving the order is the "drawer;" person ordered to pay is the "drawee;" beneficiary of the order is the "payee" |
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What are the requirements of a negotiable instrument?
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Negotiable instrument requires (WOSSUPP):
Writing Payable to order or to bearer Signed by the maker or drawer Reciting a sum certain Containing an unconditional promise or order and no additional promises or orders Payable in currency |
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Who can sue to enforce a negotiable instrument?
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The maker: promisor in a promissory note
Merely by signing his name, he enters into contract and agrees to pay; if he doesn't he can be sued Primarily liable The indorser: he signs name on back of instrument By doing so, he promises that if the instrument bounces and he's notified, he'll pay; otherwise, he can be sued; is secondarily liable Holder must fulfill presentment, dishonor, and notice of dishonor before looking to indorser for payment The drawer: party who signs the check By signing, he promises that if it bounces and he's notified, he'll pay; otherwise, he can be sued Secondarily liable The drawee (usually a bank): drawee doesn't sign anything, so he isn't liable Acceptor: usually a drawee bank; acceptor signs a draft and thereby becomes primarily bound Accommodation parties: accommodation party signs an instrument to lend his credit to another party to the instrument; never liable to party accommodated but is liable on the instrument in the capacity in which he signs When words "without recourse" accompany the signature: is a term of art used by indorsers and drawers that represents a disclaimer of liability Transferor: If D indorsed the instrument, any P in possession may sue, and warranties run with the instrument |
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What are the five warranties made by the transferor?
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D promises that P has good title to the instrument
D promises that all signatures are genuine and authorized; forgery is a breach of warranty D promises that the instrument hasn't been materially altered; if it has been tampered with, it's defective D promises there is no defense or claim that is good against D, ie, instrument is enforceable D promises that she has no knowledge of any bankruptcy or insolvency action against the maker or drawer |
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What is a due negotiation?
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Due negotiation or duly negotiated: means there has been a proper transfer of the instrument; this means the transferee is a holder and may be eligible to be a holder in due course
If it hasn't been properly transferred, transferee is not a hold and can't be a holder in due course |
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How is an interest properly transferred?
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Payable to order: when the instrument is payable to the order of a specific payee, it is negotiated by delivery to that payee
Any further negotiation requires the payee to indorse the instrument and deliver it to transferee Indorsement must be authorized and valid Payable to bearer: if the instrument is payable to bearer, indorsement is not required Types of indorsements: every indorsement must be either special or blank AND restrictive or unrestrictive Special indorsement: one that names a particular person as "indorsee;" indorsee must sign in order for the instrument to be further negotiated If there's multiple indorsements, the last indorsement controls Forgery of drawer's name doesn't break chain of title; subsequent transferees may qualify as holders Blank indorsement: one that does not name a specific indorsee and can be negotiated by delivery alone Restrictive indorsement: contains a condition |
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How does a transferee qualify as a holder in due course?
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HDC is a holder who takes the instrument:
For value In good faith AND Without notice that it is overdue or has been dishonored or is subject to any defense or claim |
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What is the shelter rule as pertains to an HDC?
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Transferee acquires whatever rights her transferor had; she takes shelter in the status of her transferor
Allows transferee to step into shoes of the HDC even though she otherwise clearly fails to meet the requirements of HDC Transferee has all the rights of an HDC even though the transferee is a donee or otherwise fails to qualify |
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What are the benefits of HDC status?
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Free from claims: Claim is a right to a negotiable instrument b/c of superior ownership; HDC defeats the superior owner
Free from personal defenses: include every defense available in ordinary contract actions, such as lack of consideration, unconscionability, waiver, estoppel, fraud in inducement (personal fraud) Subject to real defenses: MAD FIFI4 Material alteration: change in the terms of the instrument Duress Fraud in the factum: real fraud Incapacity Illegality Infancy Insolvency Forgery: if instrument was forged, no subsequent taker is an HDC; but if person whose name was forged ratifies it or is estopped from denying it, subsequent taker can qualify SOL |
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What are drawer bank's remedies if instrument is forged?
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Thief is always liable
Drawer is liable if negligent |
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What is negligence?
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Negligence: Failure to exercise ordinary care
Employee endorsement rule: employer is liable for forgeries by employee who was given responsibility for handling checks Bank statement rule: customers must report wrongdoing to bank within 30 days of receiving a bank statement that shows the wrong Imposter rule/fictitious payee rule: if an imposter induces drawer to writ e check, drawer is negligent Negligence includes leaving blanks or spaces on the instrument Negligence includes failing to follow internal procedures designed to avoid forgery |
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What is the properly payable rule?
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Properly payable rule: drawee bank that honors a forged check must recredit it to the drawer's account as long as the drawer wasn't negligent
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