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21 Cards in this Set

  • Front
  • Back
What are the kinds of commercial paper?
Notes and checks/drafts
What law governs commercial paper?
the UCC
What is a note?
Two-party paper (a maker promises to pay the money to the payee or to the bearer)
What is a draft?
aka check. 3-party commercial paper where the drawer (writer of check) orders the drawee (bank) to pay a payee.
What is an indorsement?
signature on the back of a draft or note that can create liability for the party that indorses
What kinds of indorsements are there?
SPECIAL : a special indorsement is when a person signs an indorsement and designates a payee.
BLANK: opposite of special; someone simply signs their name.
QUALIFIED: UCC only allows a “without recourse” limitation in addition to an indorsement.
RESTRICTIVE: UCC only allows a “for deposit only” limitation on indorsement.
What is negotiability?
Negotiability exists when a negotiable instrument is negotiated to a Holder in Due Course, the HDC takes the instrument free of personal defenses and claims and subject only to real defenses. A holder in Due Course is a purchaser for value who has no knowledge of problems giving rise to instrument’s creation.
What are the formal elements of negotiability?
1) Writing 2) signed by maker (drawer) 3) Unconditional (no conditions whatsoever) 4) promise or order 5) To pay a fixed amount (of principal); interest, penalties, attorneys’ fees need not be fixed; 6) Of money (no gold, silver, etc; must be any CURRENCY); 7) No other unauthorized promises, except for 3 exceptions relating to secured loans 8) demand or at a definite time and 9) To “order” or to “bearer” , magic words that are ONLY required for notes. “pay to order of __________” or “pay to bearer.
What are the 3 exceptions to having promises in a negotiable instrument?
a) promise to protect collateral b) confession of judgment c) borrower’s waiver of rights and defenses
What does on demand or at definite time mean?
Note when it will be paid but IF it will be paid. Acceleration clauses are OK, and extensions are also permitted unless extensions are infinite
What is a holder?
A HOLDER must have possession of the instrument and good title (free of forgeries, missing signatures; properly negotiated). Forged indorsements make negotiation improper, and no party who takes an instrument with such a forged indorsement can become a holder OR holder in due course
How does a holder take an instrument in due course?
DUE COURSE requires that the holder take the instrument 1) for value, 2) in good faith (honesty in fact, observance of reasonable commercial standards) and 3) without knowledge or notice (of alteration, authorized signature, dishonor, irregularity, etc).
what transactions preclude HDC status?
purchase of instrument at a judicial sale, acquiring instrument by taking over an estate, or purchasing instrument in bulk transaction NOT in the regular course of business
what is the difference between real and personal defenses?
Real defenses relate to the instrument, and personal defenses relate to the underlying contract.
What are the real defenses?
(FAIDS) are forgery (forgery of names necessary to title prohibits proper negotiation and thus precludes later HDC), fraud in the factum (switched document fraud); material alteration; incapacity (infancy, adjudicated insanity); illegality (usury: you promise to pay an illegal interest rate, but note may still be enforceable at different rate); duress; discharge in insolvency , discharge w/notice; suretyship with notice (HDC knows a prior party signed instrument as a surety; surety = as a guarantor); and statute of limitations.
Liability for breach of transfer warranty
I. ?): separate cause of action from indorser liability. A set of warranties is created by anyone who transfers for consideration and runs to anyone who immediately transfers as well as all subsequent transferees if the transfer is made by indorsement. The warranties include 1) good title, 2) genuine signatures, 3) no material alteration, 4) no defenses and 5) no knowledge of insolvency proceedings. If you pass on a check with alteration/forgeries, that is a breach of transfer warranty!!
Indorser liability
aka contract liability: (who is liable besides maker/drawer?): The action of signing one’s name on the back of an instrument makes you liable as indorser. There are 3 prerequisites: presentment, dishonor, and notice of dishonor. For checks, one is only liable for 30 days unless he has written “without recourse,” in which case he is not liable
What is the shelter rule?
a transferee acquires whatever rights her transferor enjoyed (in a gift) taking shelter in the status of her transferor. If you take instrument from HDC, you are sheltered. If not an HDC, not sheltered. You look back to the last party who gave for value. The shelter rule is limited—if the transferee is a party to fraud or illegality affecting the instrument, they are not sheltered.
What is the Federal Trade Commission rule?
FTC promulgated a regulation to preserve consumers’ personal defenses and claims relating to HDC. The rule says that the holder of a note must honor the warranties of the original seller. These include purchase or lease by human (not corp) of consumer goods and services (no land) on credit (over four installments).
What are personal defenses?
c. PERSONAL DEFENSES relate to the underlying contract and are all those available in ordinary contract actions and claims in recoupment. Examples: misrepresentation, simple fraud, breach of K, breach of warranty, payment, etc.
What is drawer's liability (checks)?
it ends upon the bank paying the check. The bank “discharges” the drawer.