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36 Cards in this Set

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What are the elements of negotiability?
Whether an instrument is negotiable depnds on its form. To be negotiable, an instrument must be a written and signed:
1. Unconditional
2. Promise or order
3. To pay a fixed amount of money (w/ or w/out interest) That:
a. Is payable to order or bearer when issued or first in possession of a holder
b. Is payable on demand or at a definite time, and
c. States no unauthorized undertaking or instruction by the person promising or ordering payment.
When is an instrument conditional (and not negotiable)?
An instrument is conditional (and not negotiable) if: (i) it expressly state a condition for payment, or (ii) it states that the promise or order is subject to or governed by another writing. A promise or order is not conditional merely because it: (i) refers to another writing regarding collateral prepayment or acceleration (ii) Limits pmt to a particuclar source of fund, or (iii) requires a countersignature of a specimen signature
What are the 3 circumstances article 3 specifically provides that a promise or order will not be deemed "conditional"?
Art. 3 proivdes that a promise or order will not be deemed conditional merely because it:
1. Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration.
2. Limits payment to a particular source or fund.
3. requires as a condition to payment a countersignatue by a person whose specimen signature appears on hte promise or order.
What is the exception to the "to order or to bearer" language required for a negotiable instrument?
A check need not contain words of negotiability. A check payable "Pay John Doe" is fully negotiable, and is covered by art. 3, and a transferee of it can become a holder in due course.
How is order paper negotiated?
Order paper is negotiated by the transfer of possession plus endorsement by the holder (the identified person to whom the instrument is payable, or to whom the instrument is properly endorsed) A check is order paper.
How is bearer paper negotiated?
Bearer paper may be negotiated by transfer of possession alone.
What are the types of endorsement?
1. Special endorsement -- Specifies the person to whom the instrument is payable.
2. Blank endorsement: Does not specify the person to whom the instrument is payable; usually just a signature.
What kinds of endorsements create what type of paper?
special endorsement -- order paper

Blank endorsement -- bearer paper.
** remember, bearer paper can be negotiated by a transfer of possession alone, and that this transfer can be voluntary or involuntary.
What is the rule for order paper and forgery?
When order paper contains a forged indorsement, none of the parties from the forger on are holders-- none have good title-- none are entitled to the money. They have converted the check, and the drawee cannot properly pay any one of them. The drawee can only pay a holder--someone w/ good title to the check.
What is the effect of qualifying an endorsement with "without recourse"?
This negates contractual liability.
What is the special rule for order paper that is not endorsed?
Ordinarily, order paper must be transferred and endorsed in order to make the transferee a "holder." But a depositary bank (a bank in which an item is first deposited) that takes an unendorsed instrument for collection becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not endorsed the instrument.
What is a holder in due course?
1. A holder (person in possession of bearer paper, or in possession of order paper that has been issued or properly indorsed to him.
2. Who gives value - executed consideration
3. In good faith -- honest in fact and the observance of reasonable commercial standards of fair dealing.
4. without notice that:
a. The instrument is so irregular or incomplete as to call into question its authenticity
b. The instrument is overdue/dishonored
c. The insturument contains an unauthorized signature or has been altered;
d. There is a claim ot the instrument
e. Any party has a defense or claim in recoupment on the instrument.
What is the close-connectedness doctrine?
The more that the holder knows about the underlying transaction, and particularly when it controls or bcomes involved in it, the less likely it is a good faith purchaser w/out notice.
What is the rule for "notice of claim" and fiduciaries?
IF the holder has knowledge that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary's own debt, or in any transaction for the fiduciary's own benefit or has otherwise breached his duty, the holder has notice of a claim, and is not a HDC
What is the "shelter rule?"
Under the "shelter rule", Where the transferor was a HDC, the transferee of an instrument takes "shelter" in the rights of the transferor.
What are the "real defenses" that can be raised against a HDC?
While an HDC takes free of personal defenses and claims, she takes subject to "real defenses", as follow:
1. infancy
2. incapacity, duress, illegaility, as renders the obligation of the party a nullity
3. misrepresentaiton (Fraud in the factum) -- misrepresentation a has induced the party to sign the instrument w/ neither knowledge nor reasonable opportunity ot obtain knowledge of its character or its essential terms
d. discharge in insolvency proceedings
e. any other discharge of which the holder has notice when he takes the instrument.
What is someone pays on an instrument, but the instrument is negotiated to a HDC?
Discharge by payment is a personal defense, so it does not apply to a HDC
What happens when an instrument offered and accepted in satisfaction of an underlying obligation is dishonored?
Generally, once an instrument is offered and accepted in satsifaction of an underlying obligation, the obligation merges with the instrument, and the underlying obligation is suspended. Payment of the instrument discharges the instrument and the underlying obligation. IF the instrument is dishonored, the party issuing the instrument is liable on the instrument and on the underlying obligation, but the payee may only recover once. A certfied, teller's, or cashier's check are instruments that discharge the underlying obligation, but a right of recourse on the instrument against the party is preserved.
What is a maker's K liability (maker = person who promises to pay on a note)?
THe maker is obligated to pay the instrument according to its terms at the time it was issued. If there is more than 1 maker, the makers are jointly and severally liable.
What is an endorser's contract liability?
An endorser is obligated to pay according to the terms of the instrument at the time of the endorsement. Those signing later in time can get complete reimbursement from those signing prior in time. However, where the parties have made an "anomalous" endorsement, the endorsers are jointly and severally liable, also when there are joint payees endorsing the instrument (instrument payable to H AND W, both must endorse, and are both J and S liable.)
What is the process for endorser liability?
An endorser is "secondarily liable. An endorser is liable only after the instrument has been presented to the maker (if a note) or the drawee (if a check), that party has dishonored the instrument , and a notice of dishonor has been given to the endorser, w/in 30 days following the day on which the dishonor occurs (unless an exception applies). If presentment and dishhonor are either not made or are delayed beyond the time when due, an endorser is excused from K'al liablity on the instrument.
Is presentment and notice of dishonor waivable in a note?
Most promissory notes contain a clause providing that all parties to the instrument waive presentment and notice of dishonor. Such waiver is permissible.
When may presentment and notice of dishonor be delayed or entirely excused?
Presentment will be excused where the maker has repudiated the obligation or is dead or insolvent, or cannot be found with reasoanble diligence, or the drawer has instructed the drawee not pay; delay in giving notice of dishoonor is excused if the delay was caused by circumstances beyond the control of the person giving notice, and the party exercised reasonable diligence after the cause of the delay ceased to exist.
What is a drawer's (check writer) contractual liability?
The drawer is obligated to pay the draft according to its terms when the drawer signed the instrument. LIke the indorser, a drawer is "secondarily" liable. The drawer is liable after presentment and dishonor. WRT the liability of a drawer, a check must be presented to the drawee for pmt, or be given to a depositary bank for collection w/in 30 days after the date of the instrument. BUT NOTE: unlike the endorser, a drawer is excused from K'al liability on the instrument due to delay in presentment only in the unlikely event that the drawee bank has become insolvent during the delay and there is no insurance to cover the loss. A drawer generally is not entitled to notice of dishoner; a drawer will or should know of the dishonor on her own b/c of her relationship w/ the drawee.
What is a drawee's (bank) K liability?
Generally not liable, unless a certified check.
What is an accomodation party's contractual liability?
An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it. The accommodation party is liable in the capacity in which he signed. (co-signor)
When can an agent with aauthority not be held liable for signing her name to a principal's check?
An agent with authority who signs her name to a principal's check cannot be held liable on the check if it is drawn on the principal's account and indicates the identity of the principal. It does not matter whether the agent indicates her representative capacity.
What is the "properly payable" rule?
A bank may pay out the customer's money only if it follows the customer's orders exactly. IF it does not do so, it must recredit the account. Examples of not properly payable instruments (checks):
a. Forged Drawer's signature
b. forged/missing endorsements
c. material alteration of check (see page 23 of the lecture handout)
What happens when a customer/drawer tenders a check with the "amount" blank for payment?
The Drawer is liable for the amount filled in the blank amount slot.
When/ what happens with a stale check?
A check is stale after 6 months. The bank is not obligated to pay, but it may, as long as the payment is made in good faith."
To what extent is a bank liable for wrongful dishonor?
A bank is liable to its customer for actual proven damages caused by the wrongful dishonor of an item. May include damages for arrest or prosecution or other consequential damages.
What is the rule for post-dated checks?
A post-dated check paid to payee too early is not properly payable if the customer gives bank notice of post-dated check, decribing the check with reasonable certainty
What is a customer's right to stop payment?
1. The stop payment order must describe the item "with reasonable certainty" a reasaonbly prudent banker with that information should be albe to find the check.
2. The stop payment order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it.
3. The burden of establishing the fact and amount of loss resulting from the payment over a valid stop payment order is on the customer.
What is the "presentment warranty"?
The party presenting a check for payment to the drawee bank and each of the earlier transferors of the check warrants to the drawee bank that they are "a person entitled to enforce the draft" If this is not the case (due to a forged endorsement), the drawee bank can recover the money it paid to the party presenting the check for payment, from any of the transferors.
What is the transfer warranty, and how does it work?
Each party that transfers an instrument and receives consideration warrants that they are "a person entitled to enforce the instrument" and that "all signatures on the instrument are authentic and genuine." The depository bank can recover for breach of the transfer warranty. The drawee bank does not receive transfer warranties because the instrument is presented to the drawee bank for payment, not transferred to it.
How may a forgery be ratified?
Ratification occurs when a party, with full knowledge of the forgery (or alteration) accepts the benefits thereof or activley assents to the wrongful activity.