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70 Cards in this Set
- Front
- Back
Commercial paper (definition) |
written instrument for payment of money
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Approach to Commercial Paper Problem
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1. Identify type of paper
2. Identify parties 3. Determine if the instrument is negotiable 4. Determine if the instrument was properly negotiated 5. Determine if transferee is a holder in due course 6. Determine plaintiff's course(s) of action (contract, tort, warranty) 7. Determine defendant's defenses 8. If defendant is liable, may defendant pass liability on to another party? |
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Note
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Promise to pay money: 2-party instrument (ex. student loan)
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Maker
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Person who promises to pay (note)
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Payee
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Person entitled to payment (of note)
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Certificate of deposit
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Note issued by a financial institution (FI)
1. FI acknowledges receipt of money, and 2. FI promises payee/depositor to repay the money |
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Draft
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Order to pay money: 3-party instrument (ex. checks are drafts)
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Drawer
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person ordering payment (of draft)
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Drawee
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person making payment (in check context, also called the payor bank)
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Payee
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person to receive payment (of money)
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Checks
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Requirements:
1. Financial institution is the drawee to make payment (called payor bank) 2. Payable on demand |
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Types of Checks
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1. Ordinary |
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Remotely-Created Item
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Draft not signed by drawer but created with drawer's authority so that 3rd party can get paid from drawer's account at a bank |
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Elements of Negotiability
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1. In writing |
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Elements of Negotiability - Signature Requirement
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Any symbol executed by a party with present intent to authenticate a writing; includes:
1. Traditional signature 2. Mark "X" 3. Initials 4. X, writing Y's name without authority, acts as X's signature 5. Trade/assumed name 6. Typewritten or computer generated 7. Signature stamp 8. Thumb print |
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Elements of Negotiability - Items that Make Promise/Order Conditional (and thus not negotiable)
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Presumption = unconditional promise to pay, BUT these items make promise/order conditional:
1. Express condition to payment 2. Promise or order "subject to" or "governed by" 3. Incorporation by reference (rights/obligations to with respect to the promise/order are stated in another record) |
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Elements of Negotiability - Items that Do NOT Make Promise/Order Conditional
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1. Statement of consideration
2. Reference to another record ("as per" or "in accordance with") 3. Incorporation by reference of items that would not hurt holder a. Rights regarding collateral b. Prepayment c. Acceleration 4. Countersignature (ex. traveler's checks) 5. Limitation of payment to particular fund/source 6. Consumer protection language |
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Elements of Negotiability - Fixed Amount
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1. Determine principal amount due (must be on face)
2. Interest: presumption = no interest, BUT interest may be stated 3 ways that don't violate the "fixed amount" requirement: a. Amount of money (ex. $10 interest) b. Fixed or variable rate (ex. 5% interest) c. Reference to outside source (ex. 2% above prime rate) 3. Failure to state interest rate = judgment rate (ex. note providing for "interest" is negotiable and interest will be at judgment rate) |
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Elements of Negotiability - In Money
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1. Authorized medium of exchange (domestic or foreign)
2. Cannot be payable in goods or services 3. Words versus figures - words prevail (check says payable for $550 but "five hundred dollars" in words - payable for $500) |
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Elements of Negotiability - No Other Undertaking or Instructions (and Exceptions)
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Instrument is NOT a full contract (negotiable instrument = courier without luggage) - it is just a promise or order to pay
Exceptions - permitted undertakings or instructions: 1. Promises concerning collateral 2. Confession of judgment clauses 3. Waiver of law mean to benefit obligor (maker/drawer) |
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Elements of Negotiability - Words of Negotiability
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Bearer language = "payable to Bearer"; "payable to the order of Bearer"; indication that possessor entitled to payment; no payee stated; "to cash" or "to order of cash"; not payable to identified person |
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Negotiation
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Transfer of negotiable instrument so transferee is a holder |
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Holder Status
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1. Possession of negotiable instrument AND
2. Good title (method of obtaining good title depends on words of negotiability): a. Bearer = possession alone b. Order = possession PLUS necessary indorsements |
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Indorsements (generally)
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Signature on negotiable instrument by someone other than the maker, drawer, or acceptor; normally on the back of the instrument
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Blank Indorsements
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1, How done = payee's signature only (simplest type of indorsement merely consisting of payee's signature - not particular person is named to whom instrument is now payable)
2. Effect = creates bearer paper (thus, further negotiations may be by transfer of possession alone) Example = check payable "to the order of M. Whitehead"; I sign back of check; I made blank indorsement and check is now bearer paper (so anyone in possession of check has the right to cash it) |
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Special Indorsements
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1. How done = payee's signature and designation of new person to whom instrument payable
2. Effect = creates order paper (thus, further negotiations will require the indorsement of person to whom it was made payable) Example = check payable "to the order of M. Whitehead"; I write on back, "Pay to J. LaMarca" and sign my name immediately below; I made a special indorsement and the check is order paper (so further negotiation of check will need Jim's indorsement) |
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For Deposit or Collection (Restrictive Indorsement)
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Restrictive Indorsement = limiting what may be done with instrument
Example = check payable "to the order of M. Whitehead"; I write on the back "for deposit in my Wells Fargo account # 123456 only" and sign immediately below; I made a restrictive indorsement; if depository bank does not comply with my indorsement, it will be liable to me for conversion |
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Identification of Person to Whom Instrument Payable (Payee)
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1. Intent of issuer determines initial payee (ex. I write check to "George Bush"; my intent determines whether George H.W. Bush, George W. Bush, or some other George Bush is entitled to the check)
2. Multiple payees a. "And" separates the names of payees: requires ALL payees to indorse b. "Or" or "And/Or" separates the names of payees: requires only one payee to indorse |
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Other Indorsement Issues
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1. If instrument is transferred for value, transferee has specifically enforceable right to transferor's indorsement
2. Depository bank becomes a holder even if payee deposits check in payee's account without indorsing it 3. Misspelled payee's name - payee may indorse with incorrect or real name 4. Payee lacking capacity may effectively indorse (ex. negotiation is effective even if payee was a minor who effectively indorsed) |
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Holder in Due Course (definition)
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HDC = holder (possession + good title) who takes:
- for value - in good faith, and - without notice that: a. instrument is overdue/has been dishonored b. instrument contains an unauthorized signature/has been altered c. there's a claim to the instrument d. any party has a defense on the instrument Note: instrument must not bear apparent evidence of forgery or call into question its authenticity; selling at a reasonable discount doesn't constitute notice |
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Shelter Doctrine
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Transferee has rights of transferor:
While a holder might not qualify as an HDC herself (because she got the instrument as a gift or had notice of defense when she took instrument), she may still take shelter in the HDC rights of a previous holder because a transferee generally acquires whatever rights her transferor had Having HDC rights via shelter doesn't make you a HDC Person who was party to fraud/illegality affecting instrument cannot get HDC rights by shelter Burden of proof on person who wants HDC rights (outright or by shelter) |
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Defenses (Holder versus HDC)
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If holder seeking payment isn't an HDC, person from whom payment is sought can raise any defense against payment that could be raised in a simple contract action (ex. failure of consideration; breach of warranty; fraud in inducement)
If person seeking payment is an HDC, only the REAL DEFENSES can be successfully raised against him HDC is free from claim of others to the instrument; HDC = "perfect defendant" |
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Real Defenses
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FAIDS (11) |
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Fraud in the Factum/Execution
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1. Signer lacked knowledge of instrument's character or essential terms AND |
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Contract Liability
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Merely by signing his name on back of an instrument, an indorser enters into a contract with subsequent holders (possession + good title) of the instrument, promising to pay on the instrument according it its terms when indorsed if the instrument is presented for payment, is dishonored, and the indorser is given notice of dishonor |
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Signatures by Agents (K Liability)
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If agent signs agent's name and principal is bound, is agent personally liable? |
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Liability of Agent
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1. Agent is liable to HDC unless agent can prove that holder had notice of the representative nature of agent's signature |
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Maker of Note (K Liability)
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1. Primary liability: no conditions precedent; maker must pay instrument when it is due according to its terms at the time it was issued (or when incomplete instrument completed) |
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Drawer of Draft (K Liability)
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1. Drawer may not disclaim liability on a check but may disclaim liability on other drafts
2. Drawer liable only after 2 conditions are first satisfied: a. presentment to drawee within 30 days b. dishonor - drawee refuses to pay the instrument upon a proper presentment |
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Indorser of Note or Draft (K Liability)
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1, Liability disclaimer allowed - "without recourse" prevents indorser from incurring K liability |
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Accommodation Parties
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Co-Signers, Sureties, Guarantors
Person who signs instrument to lend his credit to another party but who does not receive any direct benefit (does not receive any borrowed money) |
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Accommodation - Liability
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Liable in capacity in which accommodation party signs; no special K |
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Demonstrating Accommodation Status
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1. Express language |
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Warranty Liability
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2 Types: transfer warranty liability and presentment warranty liability
Implied warranties - arise automatically An indorsement "without recourse" doesn't negate either type of warranty Warranty liability is off the instrument since warranties are created by transfer or presentment, not the indorsement of the instrument To use a warranty, possession of the instrument is not needed as it is for K liability Warranty liability survives the final payment of an instrument |
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Transfer Warranties
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Person who transfers an instrument for consideration warrants:
1. that he is a person entitled to enforce the instrument 2. genuineness of signatures 3. that the instrument includes no material alterations 4. that no defenses are good against the transferor 5. that he has no knowledge of insolvency proceedings against the maker, drawer or acceptor Note: transferor who indorses an instrument makes these warranties to all subsequent holders; transferor who doesn't indorse makes the warranties only to the immediate transferee; drawee/maker never sue for breach of transfer warrant because they get instruments presented to them, not transferred |
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Presentment Warranties
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Person who presents an instrument (usually a check) for payment (usually to a bank) makes 3 warranties:
1. that he is a person entitled to enforce the instrument 2. that the instrument hasn't been altered 3. that he has no knowledge that the drawer's signature is unauthorized |
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Warranty versus Indorser's K (How do you know whether P should bring suit against the indorser for breach of warranty or for breach of the indorser's K?)
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If P is the Holder: if the payor has not paid the instrument (ex. check bounces or promissory note is not paid by the maker), then the holder will sue the indorser on the indorsement K
If P is Payor: if the payor has paid and later discovers that payor should not have paid (ex. check was forged or note was altered), then payor will attempt to sue the indorser for breach of warranty (transfer or presentment, as appropriate under the facts) |
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Discharge by Holder
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Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it (ex. writing "void"), etc
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Failure to Produce Original Instrument (original lost, inadvertently destroyed, stolen)
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1. Enforcement by person not in possession
a. person entitled to enforce when loss occurred, b. loss not due to transfer or lawful seizure, and c. person cannot reasonably obtain the original 2. Protection for payor required - ex. security/bond |
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Overdraft
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bank may charge customer's account even if the charge creates an overdraft
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Postdated "Check" (really a draft)
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Bank may pay postdated check unless customer gives bank an otice of the postdating which describes the check with reasonable certainty
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Stop Payment Orders
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Drawer (bank's customer) may stop payment on check:
1. must be in writing 2. requirements of writing - dated, signed, describe item with certainty 3. valid for 6 months; can be renewed 4. bank's defenses if it pays over a stop order - no loss; stop payment order did not comply with requirements |
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Wrongful Dishonor
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Drawee (payor bank) dishonoring a properly payable check |
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Payment in Full Check
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check on which drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bonafied
Effect = payment in full check operates as an accord and satisfaction if the payee cashes the check Exceptions - payee returns the money with 90 days; payee is an organization and had previously notified drawer of a particular person/address to send payment in full checks |
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Forged Maker's Signature
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1. Alleged maker not liable because maker's signature does not appear on the note; alleged maker's conduct may ratify the forgery or cause alleged maker to be precluded from denying the forgery
2. Forger is liable on the note because forger's signature appears thereon |
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Forged Drawer's Signature
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1. Alleged drawer is not liable
2. Drawee bank must recredit alleged drawer's account as check was not properly paid unless drawee bank has a defense 3. Bank unable to pass on loss unless breach of presentment warranty; normally, no presentment warranties (entitled to enforce, no alteration, no knowledge of forged drawer's signature) will be breached; parties had right to enforce the forger's obligation; forger is the real drawer because forger signed when forger forged the alleged drawer's signature; drawee takes risk that drawer's signature unauthorized unless presenter knew it was unauthorized 4. Bank's defenses to recrediting: a. drawer's negligence - if drawer's negligence substantially contributes to forgery of drawer's name, drawer may not raise the forgery b. Bank Statement Rule - Duty to Inspect Statement |
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Bank Statement Rule
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Customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and report forgeries to bank; if customer does not and bank can prove a loss beyond original mistaken payment (ex. cannot catch forger), customer precluded
Forged drawer's signatures must be reported to bank within 1 year regardless of bank's or customer's negligence |
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Repeat Offender Rule
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if same person is forging a series of checks, drawer must report the forgeries within 30 day sof when the statement was available; if drawer does not do so, bank will not recredit the account for the subsequent forgeries by the same person
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Forged Indorsements - Effect of Forgery of Payee's Name (Order Paper)
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Effect of forgery of payee's name (order paper):
Forgery breaks chain of title and check is not properly payable; accordingly, drawer may demand that drawee bank recredit drawer's account as the check was not properly payable |
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Forged Indorsements - Situations where Party Precluded from Asserting Forgery of Payee's Name
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Party precluded from asserting forgery of payee's name where:
a. imposter rule applies (drawer/maker estopped to deny validity of forged indorsement where maker/drawer acted carelessly in issuing the check and thus contributed to the forgery) b. Payee estopped from asserting forgery if payee employer entrusted employee with responsibility with respect to an instrument and employee makes a fraudulent indorsement |
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Forged Indorsements - Liability of Drawee
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a. Conversion liability of payee - payee can sue payor bank (and depository bank and non-bank converters) for conversion, OR
b. Not properly payable liability to drawer - drawer of check can sue payor/drawee bank since check with a forged payee's name is not properly payable c. Drawee protected from double liability - successful conversion action against drawee by payee will eliminate drawer's not properly payable action d. Bank's defenses - 1) imposter rule; 2) fraudulent indorsement by employee entrusted with check; 3) drawer's negligence; 4) failure to timely sue (drawer must sue within 3 years) |
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Forged Indorsements - If drawee (payor bank) pays, bank will then want to pass on liability --
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Liability of presenter - drawee bank can then sue presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (forged indorsement broke chain of title so no one could become a holder) |
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Forged Indorsements - if presenter loses to payor bank, presenter will then want to pass on liability --
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Liability of transferor - presenter who loses to payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties of:
1. entitled to enforce 2. all signatures authentic or authorized 3. no good defenses |
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Alteration - Types
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Obligor does not want to pay because instrument was altered
1. Change in obligation - any unauthorized change in an instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rate b. Unauthorized completion - instrument is completed in an unauthorized manner which affects the party's obligation |
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Alteration - Effect on HDC
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a. change in obligation - HDC may enforce for original amount
b. unauthorized completion - HDC may enforce as completed |
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Alteration - Effect on Non-HDC
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a. Fraudulently made alteration by holder - total discharge of obligor
b. Not fraudulently made alteration - obligor liable under original terms |
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Alteration - Not Properly Payable
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An altered check is not properly payable
Bank's defenses: 1. Negligence - if drawer's negligence substantially contributes to the alteration, drawer will be precluded from asserting the alteration 2. Bank statement rule - drawer must report alterations to drawee/payor bank within 1 year |
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Breach of Transfer and Presentment Warranties of No Alteration
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Example: Jim issues a check for $10 to Maeghan. Maeghan expertly alters check so it reads $100 and cashes the check. Jim timely reports the alteration after receiving his bank statement and drawee bank recredits Jim's account because this check was not properly payable. Jim's bank may now sue up the chain of banks for breach of the presentment warranty of no alteration and the presenting bank may sue up the chain for breach of the transfer warranty of no alteration
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Fictitious Payee Rule
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Prevents a drawer or maker who was careless in issuing an instrument from using the forger defense by making the resulting forgery effective where the drawer or maker issues an instrument to a payee not intended to have an interest in the instrument (ex. employee furnishes employer with phony payee names or names of payees to whom employer owes no money) |
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Fraudulent Indorsements by Employees
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if an employer entrusts an employee (including independent contractors) with responsibility with respect to an instrument, and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective (although a person who takes the instrument and fails to exercise ordinary care may be held liable to the extent the failure contributes to the loss)
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