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32 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Requirements for negotiability: SWUPFUPP
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document must be signed, in writing, unconditional, promise to pay, a fixed amount of money, w/no other undertaking by maker (other than promise to pay $), payable on demand and/or at a definite time, & payable to order or bearer (words of negotiability).a. May mention collateral, acceleration, prepayment or limit payment to certain fund or location & still be unconditional. But if says “subject to” or “governed by” another writing→conditional. b. Not another undertaking to mention collateral, req. to confess judgment, waiver of benefit. c. Extension of time by maker OK only if to a further definite time.
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How does a person become a holder?
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A person becomes a holder through negotiation. One becomes a holder if 1) he possesses bearer paper (payable to bearer, to cash, blank indorsement) or 2) possesses order paper payable to his order or specially indorsed & transferred to him. Exception: depositary banks that take an unindorsed instrument from customer who was a holder are holders despite lack of indorser.
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If person gives value for a note w/o getting transferor’s indorsement,
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he is NOT a holder, but he has a specifically enforceable right to the transferor’s unqualified indorsement. |
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What is a holder in due course?
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An HDC is a holder who takes an apparently authentic instrument and pays value for it, it’s a negotiable instrument, holder took w/ no notice of any impropriety, defense, alteration, dishonor, or that instrument was overdue, and holder took in good faith. Shelter Rule: If elements of HDC aren’t met, recipient may have rights of an HDC if transferor was an HDC unless recipient committed fraud/illegality. Good faith & notice are determined at the time of payment. Can’t be an HDC if buy in bulk transaction not in transferor’s regular business. |
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“Value”
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discount for less than face value, for antecedent debt, security interest, swap for another instrument—but not an executory (future) promise.
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Notice” – No notice:
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if haven’t had a reasonable opportunity to act on it, e.g., teller in bank learns of defense but soon after person buys note; just b/c note was completed by transferor (unless improper); purchase for discount (unless huge – could be good faith issue, too); that note issued for executory promise. [Original parties to note could exchange note for executory promise; instrument buyer’s executory promise just won’t be “value” to get him to HDC status.]
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“Good Faith” – 2 prongs:
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1) subjective (honesty in fact) & 2) objective (observance of reasonable commercial standards for fair dealing).
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“Overdue” – Demand instrument:
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day after demand, or 90 days after date on check; Payable at a definite time: day after due date, day after accelerated date, or when an installment is missed (but not just interest payment).
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HDC – Subject only to real defenses
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HDC can enforce the instrument subject to only “real” defenses: alteration, unauthorized signatures & forgery, infancy (if it would be a defense under state law), duress (such that under state law it would make an obligation VOID, e.g., holding gun to head; if would make only voidable, defense only effective against a non-HDC), lack of capacity (incompetent, corp unauthorized to do business in state), illegality, fraud in the factum (tricked as to note’s contents b/c blind, doesn’t speak English; not just common law fraud), bankruptcy discharge, omission of required consumer protection language, SOL, valid payment to former holder].
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HDC not subject to personal defenses
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Failure of consideration, lack of consideration, breach of warranty, general fraud or claims in recoupment (claim arising from original transaction, e.g., damaged floors when delivered furniture)—takes free from others’ claims to the instrument. a. BUT if HDC pays for instrument over time & after paying part learns of maker’s defense, he only has HDC rights for the % of note’s value that he has paid. If HDC just has a security interest in note, can only collect up to amount of security interest.b. Ditto if 3P who would be an HDC buys instrument w/o getting indorsement. Can make seller indorse, but if in meantime learns of a defense or that note’s overdue, can’t be an HDC b/c didn’t become a holder until the signature.
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Maker liability
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A maker who signs (or whose agent signs) note must pay instrument when due per its terms (primary liability); liable to holder or to an indorser who paid the instrument (“contract to pay”). Signature’s validity admitted unless specially denied. Not notice of dishonor required.
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Liability of agent
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Principal who authorized agent is always bound. Agent who signed his own name w/o clearly indicating he was signing as agent will also be liable to an HDC (may seek reimbursement from principal). Agent may avoid liability to a non-HDC if he proves original parties never intended him to be liable.
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Types of indorsements
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Blank (creates bearer paper), special (“Pay to Joe Blow”), anomalous (sole purpose it to make signer also liable, e.g., co-signer).
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Indorser liability
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The indorser’s liability arises from her signature must pay a PETE or subsequent indorser who paid the instrument (“contract liability”). Unqualified indorsement transfers title & imposes secondary liability on indorser. Before indorser must pay, the holder must 1) present the instrument w/in 30 days of indorsement, 2) instrument must be dishonored, & 3) indorser must receive notice of dishonor w/in 30 days (otherwise discharged). Indorser can disclaim liability by including “w/out recourse” in indorsement. But indorser also may make transfer warranties (only if consideration) and presentment warranties (only to payor).
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must pay a PETE or subsequent indorser who paid the instrument (“contract liability”). Unqualified indorsement transfers title & imposes secondary liability on indorser. Before indorser must pay, the holder must 1) present the instrument w/in 30 days of indorsement, 2) instrument must be dishonored, & 3) indorser must receive notice of dishonor w/in 30 days (otherwise discharged). Indorser can disclaim liability by including “w/out recourse” in indorsement. But indorser also may make transfer warranties (only if consideration) and presentment warranties (only to payor).
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Drawer liability
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A drawer may not disclaim liability on checks. Liability (secondary) only occurs after presentment & dishonor (i.e., holder must present check to bank before suing drawer). If presentment to drawee is not made w/in 30 days & drawee bank later becomes insolvent, the drawer is no longer liable; otherwise drawer is not discharged.
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Drawee’s (payor bank’s) liability
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If payor bank signs or certifies a check, then drawer is discharged & drawee is liable. Once drawee finally pays check, K actions may no longer be pursued unless there is a breach of presentment warranty. Final payment occurs when drawee pays in cash or does not revoke provisional settlement by midnight next day. A drawee may be liable for conversion if it pays an instrument that is not properly payable. Check cashed by one payee when made out to him “AND” another is not properly payable (need both indorsements), so bank liable for conversion to other payee or to drawer b/c not properly payable. If not properly payable, bank has to recredit account.
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Liability on underlying contract –
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If person signs note/gives check for obligation, it’s suspended until dishonor or payment. If dishonored, contract claim reappears. If bank pays a nonPETE (thief of check), obligation remains suspended. Obligee can only sue bank for conversion (check was payable to her) or enforce the check against the drawer. |
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Transfer warranties
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Any person who transfers a negotiable instrument for consideration makes transfer warranties. Warranties run to all subsequent holders if the transfer is by indorsement, but run only to the immediate transferee if the transfer is not by indorsement. Transferor warrants that she is entitled to enforce the instrument, that all signatures are genuine or authorized, instrument has not been materially altered, no defense, no knowledge of insolvency proceedings, if the instrument is a demand draft that creation was authorized by the drawer.
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Who makes presentment warranties & what are they?
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Presentment warranties are made by any person who obtains payment or acceptance & any prior transferor. They are made to payor bank that in good faith pays or accepts. Persons obtaining payment & previous transferors of drafts warrant that the warrantor is entitled to enforce, that the draft is not altered, that there is no knowledge that drawer’s signature is unauthorized, & if the instrument is a demand draft, that creation was authorized by the person identified as drawer. On instruments other than drafts, that they are entitled to enforce. “Without warranties” disclaims warranties.
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When can a maker safely pay & avoid further liability?
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A maker can safely pay any holder unless it knows the holder acquired the instrument by theft.
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What is the general rule for forgery?
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Forged signatures are only valid as the forger’s signature & are invalid as the signature of the named person (ie, forger is liable, not the drawer/maker whose sig. is forged). If bank pays, it must recredit drawer’s account b/c check was not properly payable.
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Forged drawer’s signature –
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Check’s not properly payable, so bank will usually have to recredit. Can argue “negligence” defense (drawer left checks out). Could go against forger b/c signature good as to him. Bank may also try breach of transfer warranties (PETE warranty would be good, but not warranty of authenticity of signature, defense). Drawer’s defense is not properly payable, i.e., the bank did not pay per his instructions (cashed by someone other than payee, alteration). |
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When a forged indorsement on a check becomes valid (such that drawee bank need not recredit account of drawer who’s arguing “not properly payable”)
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When 1) imposter impersonates another & induces drawer to write check to person impersonated or lies & says he’s payee’s agent, 2) unintended payees – when person whose intent determines who check goes to never intended payee to get it (e.g., prepares checks for treasurer’s signature), 3) fictitious payees person whose intent determines payee has check written to someone who didn’t exist, 4) employee entrusted “w/ responsibility” for check’s fraudulent indorsement (on check to employer or employer’s check to a payee/vendor). Bank must have paid in good faith to legitimize the signatures & avoid recrediting account. Even if bank can show good faith, drawer may be able to show lack of ordinary care to shift some of loss.
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Negligence defense:
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person/bank whose failure to exercise ordinary care substantially contributes to forged indorsement/alteration is precluded from asserting it against bank who in good faith paid the instrument. E.g., left a big space so zeroes could easily be added to check’s $ amount, left the “pay to” blank and gave check to a stranger.
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Bank statement rule defense (doesn’t apply to fraudulent indorsements)
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If bank sends a statement, customer must review in “reasonable time” (30+ days not reasonable). If statement would show altered/unauthorized checks, customer may not assert claim against bank (that paid in good faith) for later forged/altered checks by same wrongdoer (but customer’s not liable for fraud during initial time period). If customer waits 1+ year, can’t escape liability for any of forgeries. If bank comparatively negligent, may have to take some of loss.
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What if check is stolen from payee (who had received it) and his signature is forged?
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If bank pays it, it’s liable to payee for conversion. But if payee never received check (stolen in mail), payee can only go after drawer for original obligation.
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When bank pays over a depositor’s restrictive indorsement
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“for deposit only.” If it has a blank indorsement, still negotiable, but bank is liable for conversion.
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What is the effect of an alteration?
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An HDC can enforce the original amount of the instrument when there is a change in obligation & can enforce as completed when there is an unauthorized completion. A non-HDC cannot enforce it in any amount if he was the one who fraudulently made the alteration. If it wasn’t fraudulently made, the obligor is liable under the original terms.
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Accommodation party –
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Signs instrument whose value goes only for benefit of another party to the instrument. May sign as maker, indorser (anomalous indorsement – just to incur liability), drawer. Liable to holder. Right to reimbursement from accommodated party, right to contribution from other accommodation parties. May assert any defenses accommodated party could except infancy, bankruptcy, lack of legal capacity. |
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Customer’s right to stop payment
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in TX, must do so in a signed, dated writing. Must describe item with certainty in time to give bank reasonable time to act on it. May renew stop-payment after 6 months. If bank doesn’t stop, liable for damages for dishonor, bounced checks (customer has BOP).
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SOL for commercial paper:
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Promissory note – 6 years (after demand or, if no demand made, w/in 10 years of no payment; at due date on instrument). Checks – regular (“unaccepted”) check – w/in 3 years of dishonor or 10 years after draft’s date; cashier’s/ teller’s check – 3 years after demand made.
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Provisional settlements by bank
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Bank makes provisional settlement when customer deposits check. May reverse the credit till final settlement. Bank has until midnight deadline to dishonor (midnight of next banking day following day on which it received check back).
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