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55 Cards in this Set
- Front
- Back
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Definition of a Note
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A two-party commercial paper in which the maker promises to pay the payee a sum of money.
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Definition of a Draft
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A three-party commerical paper in which the drawer orders the second party (drawer or payee) to pay a sum of money to a third party payee
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How are conflicting or contradictory terms on an instrument construed?
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Handwritten terms take precedence over typewritten terms, typewritten terms over printed terms and words over numbers.
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What are the formal requirements for a negotiable instrument?
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In order for an instrument to be negotiable it must be: 1) a writing, signed by the maker/drawer; 2) containing an unconditional promise or order; 3) to pay a fixed amount of money; 4) to order or bearer; 5) payable on demand or at a definite time; and 6) without requiring any additional undertaking or instruction.
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How are references to other documents on the negotiable instrument treated?
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If the promise or order refers to another document regarding collateral, prepayment, down payment, or acceleration, the instrument is still unconditional.
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What is an order instrument?
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An order instrument is payable only to the person named or order.
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What is a bearer instrument?
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A bearer instrument is payable to anyone who rightfully possess the instrument.
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How is a bearer instrument identified?
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A bearer instrument is payable to anyone in possession if: 1) it is payable to "bearer" or "order of bearer"; 2) no payee is identified; 3) it is made "payable to cash"
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How is an instrument identified as being payable on demand or at a definite time?
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An instrument is payable on demand if 1) it states that it is payable "on demand" or "at sight" or is otherwise payable at the will of the holder or 2) does not state a time for payment.
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How is an instrument identified as being payable at a definite time?
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An istrument is payable at a definite time if it is payable 1) on a fixed date; 2) at the end of a definite period after sight or acceptance; or 3) at a time readily ascertainable when the instrument is issued.
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What three types of undertakings may be included on a negotiable instrument?
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1) an undertaking or power to give, maintain or protect collateral; 2) an authorization or power to the holder to confess judgment or realize on or dispose of collateral; 3) a waiver of any legal benefit intended for the advantage of the obligor.
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How can one become a "holder-in-due-course" of a negotiable instrument?
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To become a HDC, on must: 1) take the instrument as the holder; 2) for value; 3) in good faith; and 4) without notice of certain infirmities with the instrument or the transaction out of which the instrument arose.
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What may preclude a holder of being a HDC when the instrument is negotiated to the holder?
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If, upon negotiating the instrument to the holder, the instrument has apparent evidence of forgery or alteration or otherwise so incomplete or irregular as to call its authenticity into place.
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What are the two ways a person can become a "holder"?
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A person can become a holder of an instrument through issuance and negotiation.
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When is an instrument issued to a holder?
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An instrument is issued when it is delivered, by the maker or drawer to either a holder or non-holder, for the purpose of giving rights in the instrument to any other person.
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When is an instrument negotiated to a holder?
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An instrument is negotiation when it is delivered, regardless of voluntariness, by a person other than the maker or drawer to any other person who as a consequence becomes the holder of the instrument.
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What right does being the holder of an instrument have?
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A holder of an instrument has the right to enforce it.
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When does negotiation occur with a bearer instrument?
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The negotation of a bearer instrument occurs upon the transfer of posessession.
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When does negotiation of an order instrument occur?
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The negotiation of an order instrument occurs: 1) upon the transfer of possession and 2) when the instrument is endorsed by the holder.
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What type of endorsement is needed in order to effect a negotiation?
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To effect negotitation, an endorsement on an instrument must be authorized and valid.
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What effect does a forged or unauthorized endorsement on an instrument have on a transferee?
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No transferee of an instrument with a forged or unauthorized endorsement can become a holder.
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Is there any effect on the transferee's rights if the maker or drawer's signature is forged?
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No. The forgery of a maker or drawer's signature does not prevent transferees of the instrument from being a holder.
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What is a special endorsement?
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A special endorsement names an identified person as endorsee.
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How is an instrument with a special endorsement negotiated?
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An instrument with a special endorsement can only be negotiated with the designated endorsee's signature.
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What is a blank endorsement?
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A blank endorsement is a signature that is not accompanied by the naming of a specific endorsee.
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What effect does a blank endorsement have on an order instrument?
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A blank endorsement on an order instrument creates a bearer instrument.
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What effect does a special endorsement have on a bearer instrument?
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A special endorsement on a bearer instrument creates an order instrument.
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What effect does an endorser's qualified endorsement disclaming liability have?
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By qualifiying an endorsement, the endorser is not liable to pay the instrument if it is dishonored.
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How can an instrument payable jointly be negotiated?
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An instrument that is jointly payable must be endorsed by all parties to be negotiated.
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How can an instrument payable severally be negotiated?
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An instrument that is severally payable may be endorsed by any payee to be negotiated.
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What types of value are sufficient for the value requirement of becoming an HDC?
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The value requirement for becoming an HDC may constitute:1) agreed performance is completed; 2) the transferee acquires a valid lien or security interest; 3) the instrument wass acquired as a result of a payment or security for an antecedent debt; 4) exchanging one negotiable instrument for another; or 5) exhanging the instrument for an irrevocable debt obligation to a third person.
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When performance is given as value, what effect does partial performance have on the amount of value given?
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When partial performance is the agreed upon value exchanged for a negotiable instrument, the holder is treated as only given the amount of value only to the extent of the consideration performed.
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What does an HDC's good faith include?
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Good faith involves honesty-in-fact and the proper observance of reasonable commercial standards of fair dealing.
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How is honesty-in-fact determined?
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Honesty-in-fact is determined by a subjective standard as to what the holder actually believed.
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How are reasonable commercial standards of fair dealing determined?
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Reasonable commercial standards of fair dealing are determined by an objective standard as to wheter the holder was attempting to take advantage of the obligor.
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How may notice be obtained under the HDC requirements?
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Notice may be obtained by actual knowledge, receipt of notification, or a reason to know.
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What are the different ways a holder "receives notification" under the notice requirement of becoming an HDC?
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A holder receives notification of an infirmity when it 1) comes to his attention, or 2) is delivered to any place held out by him as a place to receive notice.
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How can a holder have a "reason to know" of an infirmity under the notice requirement of becoming an HDC?
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A holder had a reason to know of an infirmity from all the facts and circumstances known to him at the time in question, then he had notice.
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What types of infimities would preclude HDC status, if the holder has notice of them?
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HDC status is not conferred if a holder has notice of: 1) a claim, claim in recoupment or any defense, 2) an "apparent evidence of forgery or alteration" or the instrument is so "irregular or incomplete" as to question it validty; 3) an instrument that is overdue or was previously dishonored.
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When is a check considered to be overdue?
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A check is overdue 90 days after its stated date or the day after demand for payment is made, whichever is earlier.
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When are instruments that are payable on demand, other than checks, overdue?
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Instruments that are payable on demand, other than checks are overdue at the earlier of: 1) the day after demand is made, or 2) after an unreasonable period of time, measured by the "nature of the instrument and usage in trade."
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When is an instrument payabe at a definite time overdue?
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An instrument that is payable at a definite time is overdue ont he day after the due date.
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When is an accelerated instrument overdue?
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An acclerated instrument is overdue the day after the accelerated date.
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When does a time instrument payable in installments overdue?
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A time instrument payable in installments becomes overdue upon default and remains overdue until cured.
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What are the different ways of acquiring an instrument preclude a person from becoming a HDC?
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A person cannot become a HDC if the instrument was: 1) acquired as a successor in interst to an estate or other organization. 2) purchased in an execution, bankruptcy, or creditor's sale, or under legal process, 3) purchased in a bulk transaction, not in the regular course of the transferor's business.
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How may a person become the HDC of an instrument that is acquired under the restrictions of being an estate successor, purchasing the instrument via legal process or in a bulk transaction?
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A person may become a HDC in any of these situations if the transferor or predecessor in interest held the instrument as a HDC.
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How may a non-HDC holder recover from an obligor?
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A non-HDC holder of an instrument may recover from an obligor in the abscence of a claim to the instrument, a defense, a claim in recoupment, or a discharge.
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How may an obligor refuse payment to a holder?
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An obligor may refuse payment to a holder by asserting any defense available under contract law.
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How may an obligor refuse payment to a HDC?
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An obligor may refuse payment to a HDC only by asserting a real defense.
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What are the real defenses an obligor may assert against a HDC?
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An obligor may assert the defenses of: 1) Infancy, 2) Incapacity, 3) Duress, 4) Illegality, 5) Fraud, 6) Discharge in Insolvency Proceedings, 7) Alteration and Forgery, or 8) Statute of Limitations against a HDC.
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What are the deferent types of incapacity an obligor may assert as a defense against a HDC?
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Incapacity may include incompetence, guardianship, or other statutory incapacity, such as an ultra vires act by a corporation.
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How can a defendant assert a fraud defense against a HDC?
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If there was fraud in factum, whereby the obligor was induced to sign the instrument without knowledge or reasonable opportunity to obtain knowledge of the instrument's "character or essential terms."
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What types of actions fall under the 3 year SOL which may be asserted as a defense against a HDC, if brought upon expiration of the SOL?
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Actions brought by a holder after the 3 year statute of limitations may count as a defense include: 1) actions on unaccepted drafts not brougt within 3 years of the date of dishonor or within 10 years of the draft date; 2) actions against an acceptor of a certified check- SOL starts upon demand; 3) actions for conversion- SOL start upon accrual date; 4) actions for breach of warranty- SOL start upon accrual date.
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What types of actions fall under the 6 year SOL which may be asserted as a defense against a HDC, if brought upon expiration of the SOL?
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Actions brought by a holder after the 6 year statute of limitations may count as a defense include: 1) actions on notes payable at a definite time- SOL starts on due date or date after demand; or 2) actions on CD's- SOL starts on later of demand or due date.
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What defense can an accommodation party raise against a HDC?
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When an HDC is aware of the accommodation party's status, upon taking the instrument, the accommodation party may assert a discharge defense.
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