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72 Cards in this Set
- Front
- Back
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What are the 9 requirements for a negotiable Instrument?
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SWUPFONO
S Signed W Writing U Unconditional P Promise F Fixed amount of money O On demand or definite time N No unauthorized undertaking O Order or bearer paper language (check exception) |
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Negotialbe Instrument requirement
-signed |
any symbol
intended to operate as signature |
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Negotialbe Instrument requirement
-Promise to Pay or Order to Pay |
Note - "I promise to pay John..."
Check - "Pay to Payee..." |
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Negotialbe Instrument requirement
-Unconditional |
Note/check must contain unconditional promise/order to pay money
-mere reference to underlying contract is ok --but "subject to" or "governed by" renders conditional ---exception collateral, prepayment or acceleration (security agreement) |
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Negotialbe Instrument requirement
-Fixed Amount of Money |
-applies only to principal
--not interest or charges (collection costs) --rule of construction unambigious written words over numbers |
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Negotiable Instrument requirement
-Money |
must be money not property
foreign currency fine |
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Negotiable Instrument requirement
-No other undertaking |
nothing but promise/order to pay fixed amount of money
ex: $400 & tv UCC does permit a number extra undertakings -give/maintain collateral securing payment -provision authorizing holder to confess judgment or realize on any collateral -provision waiving legal protections |
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Negotiable Instrument requirement
-On deman or a definite time |
no date - ok demand instrument
post-date check - ok treated as demand instrument acceleration clause - fine as long as know latest due date |
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Negotiable Instrument requirement
-To Order or To Bearer |
Note or check payable
(i) to the order of (ii) an identified person Promissory note order paper I promise to pay to the order of Paul Payee Check order paper: Pay to the order of Paul Payee Check Exception: "Pay to" is enough |
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Negotiable Instrument requirement
-Bearer Paper |
payable to bearer - bearer paper
to bearer or cash |
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Distinguish Assingment from Negotiation
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instrument or negotiable instrument can be assinged to a third party
assignee has no greater rights than the payee/assignor any defenses raised against payee/assignor could be raised against assignee if negotiable instrument and payee negotiates then third party is a holder |
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definition of negotiation
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Negotiation is a transfer of the instrument that makes the transferee a holder
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definition of holder
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A person in possession of bearer paper or A person inpossession of order paper that has been properly issued or properly indorsed
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How does one negotiate a negotiable instrument?
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Issued Order Paper is negotiated by
1 Indorsement by the holder AND 2) transfer of possession Issued Bearer Paper may be negotiated by transfer of possession alone |
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Definition of Indorsement
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Indorseement is a signature for purpose of negotiating it and/or making indorser liable under indorser liability
Anomalous indorsement - an indorsement by a person who is not the holder. ineffective for negotiation |
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blank indorsement
special indorsement |
blank indorsement - does not name an indorsee (person whom next payable) - convert to bearer paper
special indorsement - becomes order paper (name indorsee above blank indorsement)(don't need order language) |
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indorse an instrument "without recourse" does what?
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irrelevant to negotiation but negates indorser liability
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Special rule for banks for an order paper check
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normally order paper check must be indorsed in order to make transferee a holder
But depositary bank (bank in which check first deposited) becomes holder if depositor was a holder |
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What is the effect of forgeries on status of holder?
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General rule: person cannot be holder if any necessary indorsement was forged
Exceptions: PEN FIR Payee Rules Employee, Responsible Rule Negligence Rule Fictitious Payee Rule Imposter Rule Ratification |
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Can a person who is a holder of a note that has been lost, stolen or destroyed enforce the note?
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Generally, person not in possession can pursue an action to collect on it if (i) he was entitled to enforce the instrument and (ii) it was lost, stolen or destroyed
Ct needs to be convinced person required to pay is adequately protected |
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What are two liabilities associated with a note?
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Liability on the instrument and the underlying obligation
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Generally when is someone liable on an instrument?
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No person or entity can be liable on a negotiable instrument unless signature appears on the instrument or signature of an authorized agent appears on the instrument
-therefore forgeries or agent in excess of actual or apparent authority is not effective against the person whose name is signed exceptions: PEN FIR |
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signature of authorized agent
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valid as if made by Principal to extent a Principal bound under simple contract
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When is an authorized agent liable on negotiable instrument?
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(1) agent signs her own name and
(2) principal has given her authority to sign on its behalf, the agent is not bound if (3) signature unambigously shows that it was made on behalf of the principal and (4) principal is identified somewhere in the instrument KY rule for #3 having "president" next to name is not enough need --if P not identified - would need to prove original parties did not intend agent to be liable ---even if can prove this HDC would take free of defense if no notice |
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what is the effect of forged or unauthorized signatures on an agent?
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agent is bound
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who is maker obiligated to pay under maker's liability?
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Person entitled to enforce the note (generally holder)
and an indorser who has paid the note due to indorser liability co-maker's and co-drawers are jointly and severally liable (except otherwise specified in instrument) --party is entitled to contribution |
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who and under what conditions is a drawer liable to pay a check?
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drawer liable to person entitled to enforce the check (generally the holder)
also to an indorser who has paid check due to indorser liability -drawer only liable after presentment to and dishonor by drawee bank --generally not entitled to notice of dishonor |
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Drawee bank's liability on the check
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not obligated to pay check unless drawee bank "accepted" the check
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indorser's liability on the instrument
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indorser's liability owed to person entitled to enforce the instrument (e.g. holder)
liability is also owed to a person indorsing later in time who ahs paid the instrument due to his indorser liability (later in time can get reimbursement from earlier indorser) |
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what is indorser's liability conditioned on?
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1. timely presentment
2) dishonor 3) timely notice of dishonor |
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what are the time limits on indorser's liability?
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Presentment - check indorser discharged not presented for payment or given to depositary bank for collection within 30 days of indorsement
Dishonor - not paid when due Check - drawee bank must dishonor the check by returning check (or sending notice) by its midnight deadline (midnight next banking day) Timely notice dishonor Check: depository bank - sue indorser - midnight deadline any other person - 30 days following day received notice Note 30 days of dishonor Presentment and notice of dishonor may be waived/excused |
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What are the general rules on payment and discharge of liability?
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1. if payment to proper person (e.g. holder) payment discharges liability on instrument/underlying obligation
2. if instrument dishonored party liable on instrument and underlying obligation |
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What is tender of payment effect on indorser's liability (when holder refuses to accept payment)?
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Upon the holder's refusal of maker's tender of payment, an indorser who has a right of recourse with respect to the obligation which tender relates is discharged to extent of amount tendered
-tender of amount due discharges any duty to pay interest accrued after the due date |
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Cancellation
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PEEI discharge any party by a voluntary act
-no consideration needed |
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Renunciation
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PEEI discharge any party by signed writing
-no consideration needed |
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Discharge Simple Contract
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person liable on instrument may be discharged by act discharge party's liability simple contract
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What is the effect on the underlying obligation by a cashiers, teller, or certified check?
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cashier (bank drawer/drawee)
teller (1 bank drawer/ another drawee) certified (check "accepted") -discharged when taken by payee |
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when is a banks lilability discharged on a bank check
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when bank pays proper person (typically holder)
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Who is liable on transfer warranty?
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1. voluntary transfer of instrument
2. for consideration -don't need to indorse -not drawer of check or maker of note |
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What are the separate transfer warranties?
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1. transferor is PEEI (e.g. holder)
2. signatures authentic and authorized 3. instrument not altered 4. no defense or claim of any party is good against the transferor |
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to whom does transferor make transer warranties
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1. if indorsed - all subsequent transferors
2. if other than by indorsement, next immediate transferee |
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Conversion Liability for lost or stolen checks
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owner of a lost or stolen recover if check taken or paid over an unauthorized indorsement
2. owner of check can recover, only if taken posession -drawer may not recover - conversion 3. Liable - drawee bank, depository bank, anyone else took check and did not act in good faith |
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Holder in Due Course
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1. a holder
2. who gives value for instrument 3. in good faith 4. without notice of certain things |
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Is Holder - holder in due course
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1. Value (executed consideration) (antecedent debt, Banks - bank credit)
2. Good Faith (honest in fact & fair dealing) 3. No Notice -overdue or dishonored instrument -unauthorized signature or improper alteration or completion -property claim to instrument -personal defenses |
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when does purchaser have notice instrument is overdue?
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-knows or reason to know any party of the principal is overdue
-Check becomes overdue 90 days after date |
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what is not prohibited notice?
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-instrument antedated, undated, postdated
-incomplete instrument properly completed -notice of purchase at discount (but can be suspicious) |
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What is the shelter rule?
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instrument's transfereee acquires whatever rights her transferor had
-watch for gift not HDC but takes rights of HDC transferor had -watch buyer defense to seller - seller gifts check daughter subject to buyer's defenses |
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What are real defenses and list them
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HDC takes free of personal defenses but not real defenses
-infancy to extent defense to simple K -incapacity, duress, illegality which under other state law nullifies -fraud in the execution of instrument -any other discharge holder has notice of -SOL --checks 3 years --note 6 years ---demand instrument statutory period runs when demand for payment is made ---time instrument statutory period when payment due |
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What is the properly payable rule?
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Payor bank must follow orders exactly. Otherwise it must recredit the account
-forged drawers, forged or missing indorsements, altered check (customer liable only original amount), valid stop payment, overdrafts and stale checks (6 mo.s) |
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Customer's valid stop payment order is not properly payable. Discuss.
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Properly payable rule - bank must recredit account
1. customer describe check with reasonable certainty and 2 bank must have reasonable opportunity to act stop payment effective 6 months lapses 14 days if oral and not confirmed in writing bank can't contract out this liability burden of establishing fact and amount of loss on customer |
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Does drawer have liability on a lost or stolen check?
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Yes - see hypo pg. 34
1. drawer's liability - dishonor - bank paying wrong person so drawer's liability 2. liability owed to holder - if you can prove you were holder of lost/stolen instrument 3. having paid payee drawer can demand Drawee Bank recredit its account |
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Drawer-payee-thief-grocery store-depository bank-drawee bank (pays)
Can payee sue Drawee bank? |
Yes - conversion
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Drawer-Payee-Thief-Grocery Store-Depositary Bank-Drawee Bank (pays)
What is presentment warranty? |
Drawee bank may recover from Depositary Bank, Grocery Store, or Thief
recover under presentment warrany liability earlier transferors make three presentment warranties 1. they are PEEI (e.g. holder) 2. check has not been altered 3. no Actual Knowledge drawer's signature was forged b/c forged instrument - none is a holder and not PEEI |
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Drawer-Payee-Thief-Grocery Store-Depositary Bank-Drawee Bank (pays)
transfer warranty???? |
Depositary bank can recover under transfer warranty liability
Depositary bank can recover from Grocery Store or Thief Key Idea - loss forged indorsement - pass to earliest solvent person after the forger Payee did not voluntarily transfer the check - so no presenment or transfer warranties |
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drawee bank
-forged or otherwise unauthorized drawer signature |
can recover from earlier transferors under breach presentment warranty - if depositary bank has ACTUAL KNOWLEDGE
Note: see explanation bottom pg 36 - forger is drawer and indorser - Depositary Bank becomes holder |
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restrictive indorsement
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"for deposit only"
Drawer-Pam Payee (for deposit only)-Thief-Grocery-Depositary Bank-Drawee Bank Pam can sue Depositary, Grocery, Thief for conversion - violated restrictive indorsement Pam not sue Depositary - policy |
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Ratification of forged or unauthorized indorsement or drawer/maker signature
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with full knowledge of forgery or lack of authorization accepts the benefits thereof actively assents to the wrongful activity
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Imposter Rule
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when drawer duped by imposter to issue the instrument then duper indorses signature and bank takes in good faith - the forgery works - is properly payable
also works by pretending to be payee's agent |
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Fictitious Payee Rule
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Treasurer writes check to payee, forges payee's signature, indorses and cashes check
must drawee bank recredit - normally yes b/c forged indorsement- but validation rule: 1. he never inteded to give it to supplier 2. he forges suppliers indorsement 3. bank pays in good faith puts loss on Co. Second fact pattern Treasurer makes check to fictitious person - depositary bank - drawee bank pays generally recredit account - paid over forged signature but validation rule 1.check mad payable fictious person 2. Treasurer forged signature 3. Bank paid in good faith puts loss on Co. |
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Validation of forgery
Fraudulent Indorsement by An Employee Entrusted with Responsibility |
Validation of the forgery
1. Er entrusts EE 2. EE entrusted with responsibility for instrument 3. Er forges sigature 4. Receipent takes in good faith |
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Validation of forgery
Negligence Rule |
Negligence (sloppy business practices)
-applies to drawer's or maker's signature, indoresements, alterations -any person whose negligence substantially contributes to the making of an unuthorized signature or alteration is precluded from asserting the lack of authority or alterations |
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Validation of forgery
Comparative negligence |
If D's own negligence substantially contributes to the loss, comparative negligence applies to these five validation rules
--to extent of their negligence Applies Negligence Impostor Rule Fictitious Payee Rule Entrusted, Responsible Employee Rule Bank Statement Rule |
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Validation of forgery
Bank Statement Rule |
1. if get bank statement must use reasonable care and promptness to determine signature unauthorized or alteration of check
2. liable unless notice within reasonable period (not > 30 days) 3. if drawee negligent - comparative negligence 4. regardless of which party negligent - customer must notify bank within 1 year |
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Alteration
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-Alteration unauthorized change purports to modify obligations of any party
-a fraudulent alteration discharges every party on instrument (unless assents or is precluded(validation rule)) |
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Validation Rule
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D asserts a validation rule (forgery or alteration)
-Negligence (sloppy business practices) (negligence substantially contributes) -Imposter rule (applies to indorsements) Fictitious Payee rules (applies to indorsements) -Entrusted, Responsible Employee rule (applies to indorsements) -Bank statement rule (report unauthorized drawer signature or alteration promptly) |
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Alteration
Fraudulent Alteration of a Completed Note |
-party's obligated on the note - discharge
-person taking note for value, in good faith w/out notice of alteration may enforce according to original terms (sue transfefor -transfer warranty) |
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Alteration
Fraudulent Alteration of an Incomplete Note |
-maker gives payee note dollar amount blank - supposed to be $1,000 he fills in $5,000
--if holder knows unauthorized, not HDC, takes subject to defense of unauthorized completion --if Holder no notice and otherwise HDC takes free of Maker's personal defense - gets 5k |
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Alteration
Altered Check Fraudulent Alteration of a Complete Check |
Recall "properly payable rule" - payor bank follow customer orders exactly
-Fraudulent Alteration of a Complete Check --payor bank may properly pay check according to original terms ---200 check made to be 2,000 ----bank only recredit 1,800 |
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Alteration
Altered Check Fraudulent Alteration of an Incomplete Check |
-give check to someone with amount left blank - they put in wrong number
-Drawee bank does not have to recredit account |
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Accomodation Party
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-signs instrument for purpose of lending name and credit for accomodated party
-Accomodation co-maker -Accomodation indorser --anomalous - not necessary to negotiate note -liable in capacity signed (indorser or co-maker) --if indorser - conditioned upon dishonor and notice of dishonor -right to reimbursement from accomodated party -"collection guaranteed" - have to go after accomodated party first - |
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Accomodation Party
Suretyship defenses |
PEEI does any of these without consent of accomodation party - the obligation discharged to extent of loss
--extention of time on the note --material modifcation --impairment of collateral |
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Accord and Satisfaction
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General Rule: cashes instrument with noticeit it is tendered in full payment of a disputed debt, the debt is discharged in full
-person tendering payment - must be in good faith -debt unliquidated or subject bona fide dispute -person tendering the instrument prove --instrument contains conspicous statement OR --person accepting actually knew tendered in full satisfaction of debt -org. may designate person/office to receive -if person cashing check no actual notice - refund money in 90 days |
