Negotiable Instruments/commercial Paper

Front 1

NEGOTIABILITY
(Generally)
What four categories do negotiable Instruments issues fall into?

Back 1

1) Is the instrument negotiable?

2) Is the plaintiff a holder in due course?

3) What is the liability of the defendant?

4) Is the defense raised one that is cut off?

Front 2

What happens when the owner of an instrument loses it (or has it stolen) and it is subsequently transferred to a good faith purchaser?

Back 2

Under Art 3, the good faith purchaser will prevail against the true owner if the good faith purchaser meets all the requirements of a holder in due course.

Front 3

What is a note?

Back 3

A note is a two-party instrument in which one party (the Maker) promises to pay a second party (the Payee) a sume of money. It is a promissory instrument and generally used in connection with the extension of credit.

Front 4

What is a Certificate of Deposit?

Back 4

A Certificate of Deposit is an instrument containing a bank's acknowledgment that a sum of money has been received by the bank and a promise by the bank to repay that sum. A certificate of deposit is treated as a note of the bank.

Front 5

What is a draft?

Back 5

A draft is a three-party instrument in which one party (the Drawer) orders a second party (the Drawee or Payor) to pay a sum of money to a third party (the Payee). The most common type of a draft is a check, which is a draft upon a bank and payable on demand.

Front 6

What is the implied law when the drawee does not follow the drawer's order to pay?

Back 6

Although there is no express promise on a draft when it is initially issued, the law implies a promise on the drawer's part to pay if the drawee does not follow the drawer's order to pay.

Front 7

(Requirements of a Negotiable Instrument)

Back 7

To be negotiable, an instrument must be:
1)Written
2)Signed by a maker or drawer;
3)contain an unconditional promise or order;
4)to pay a fixed amount of money with or without interest;
5)payable to order or bearer;
6)payable on demand or at a definite time; and
7)with no undertaking or instruction given by the maker or drawer except as authorized by the Code.

Front 8

What happens if a promise or order other than a check contains a conspicuous statement that it is not negotiable or not governed by Art 3?

Back 8

It is not negotiable.

Front 9

Is a promise or order unconditional if it contains an express condition to payment, or states that it is subject to or governed by another writing, or that rights or obligations with respect to it are stated in another writing?

Back 9

NO

Front 10

Does a reference to a writing, of itself, make a promise or order conditional?

Back 10

NO

Front 11

Is a promise or order made conditional by reference to another writing which states rights with respect to collateral, prepayment or acceleration?

Back 11

NO

Front 12

Is a promise or order conditional because payment is to be from a particular fund?

Back 12

NO

Front 13

Must the instrument be payable in money and only money?

Back 13

YES

Front 14

Must the amount be ascertainable from an inspection of the instrument?

Back 14

YES

Front 15

Can a negotiable instrument be payable in foreign money?

Back 15

YES

Front 16

Can the interest be stated as fixed or variable amount of money or as a fixed or variable rate?

Back 16

YES

Front 17

How does one determine the amount or rate stated in the instrument?

Back 17

It may require reference to information not contained in the instrument.

Front 18

What happens if an instrument provides for interest but the amount cannot be ascertained?

Back 18

The interest is payable at the rate payable on judgments.

Front 19

Can the negotiable instrument state any other undertaking or instruction by the person promising or ordering payment to do anything besides pay money?

Back 19

NO

Front 20

What happens if the obligor agrees either to pay in money or to give goods or services?

Back 20

An instrument is rendered non-negotiable

Front 21

What happens if an instrument states that it is payable on demand or at sight or does not state any time for payment?

Back 21

The instrument is paybable on demand.

Front 22

Is an instrument payable at a definite time if it is payable at the end of a definite period of time after sight or acceptance or at a fixed date or at a time readily ascertainable at the time of issue.

Back 22

Yes, even if subject to rights of prepayment or acceleration.

Front 23

What happens if the time the event is to happen is uncertain?

Back 23

An instrument that is payable only upon the happening of an event is nonnegotiable even if that event is certain to happen if the time the event is to happen is uncertain.

Front 24

What is the exception that applies to the fact that the instrument must be payable to bearer or to order?

Back 24

A check, which is not payable to bearer or order but which otherwise satisfies all the requirements for negotiability, is negotiable.

Front 25

Can an instrument be payable to multiple payees?

Back 25

Yes

Front 26

How can payees be paid when an instrument is payable to two or more persons not alternatively?

Back 26

It is payable to all of them and may be negotiated, discharged or enforced only by all of them.

Front 27

How can a payee be paid when an instrument is payable to two or more persons alterantively (i.e., "X or Y")

Back 27

It is payable to any of them and may be negotiated, discharged or enforced by any or all of them.

Front 28

When is an instrument payable to bearer?

Back 28

If it states it is payable to bearer or order of bearer, does not state a payee, states it is payable to cash, or otherwise indicates it is not payable to an identified person.

Front 29

When an instrument contains both order and bearer language, which controls?

Back 29

Bearer language controls.

Front 30

When is an instrument payable to order?

Back 30

An instrument is payable to order if it is payable to the order of an identified person, or to an identified person or order.

Front 31

LIABILITY OF THE PARTIES TO A NEGOTIABLE INSTRUMENT

(Generally)

Is a person liable on an instrument if the they did not sign it?

Back 31

No, a person is not liable on an instrument unless the person signed it or the person represented by an agent who signed the instrument in such a manner to bind the person.

Front 32

Is a person who is represented by an agent bound by the agent's signature?

Back 32

Yes. When a representative or purported representative signs either her name or the presented person's name on an instrument, the represented person is bound to the extent she would be bound if the signature were on a simple contract.

Front 33

Is a person bound if someone signed the person's name without authority?

Back 33

No. Where a person signs someone else's name wihout authority, this does not operate as the signature of the person whose name was signed, but operates as the signature of the person signing.

Front 34

(Liability of the Maker)

Back 34

The liability of the maker of a note is to pay the amount promised when the instrument becomes due, unless she has a defense.

Front 35

When does a payee's cause of action accrue where the note is payable on a particular date?

Back 35

It does not accrue until the date after the due date.

Front 36

(Liability of the Drawer of a Draft)

When is the drawer liable?

Back 36

The law imposes liability on the drawer where the drawee fails to pay. The drawer does not make any express promise to do anything.

Front 37

What type of liability is imposed on the drawer?

Back 37

The liability of a drawer is generally called secondary liability, which means there are conditions to drawer's liability, namely:

1) Presentment to the drawee;
2) Dishonor by the drawee, and
3) notice of the dishonor to the drawer.

Front 38

(Liability of Drawee of a Draft)

Does the drawee have any liabilities on a draft to a payee or a subsequent holder?

Back 38

No. The drawee on a draft has no liability to the payee or a subsequent holder. The instrument is simply an order to the drawee.

Front 39

Does the drawee have any liabilities?

Back 39

Yes. The drawee's liability, if any, for wrongfully dishonoring the instrument (refusing to pay when it should pay) runs only to the drawer and must be based upon some contract between the drawer and the drawee.

Front 40

Are there any liabilities of the drawee when she "accepts" the draft?

Back 40

Yes, the drawee becomes liable as an acceptor. Acceptance is a promise by the drawee to pay the instrument when it becomes due and payment is demanded. It must be made on the instrument and may be made simply by the drawee's signature. The most familiar type of acceptance is the "certificate" of a check.

Front 41

(Accomodation Parties)

What is an accomodation party?

Back 41

A surety. One who signs commercial paper which is issued for value simply to lend his credit to some other party to the instrument, and who does not directly receive any of the value given for the instrument, is an accomodation party.

Front 42

Is an accomodation party liable on the instrument?

Back 42

Yes. An accomodation party is liable on the instrument in the capacity in which he signs (maker, drawer, acceptor, or indorser), even though the one taking the instrument knows that he is an accomodation party.

Front 43

What if the party's signature on an instrument indicates that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument?

Back 43

Then the signer is obliged to pay the amount due only if a judgment against the other party cannot be satisfied or it is otherwise apparent that payment cannot be obtained from the other party.

Front 44

What does an indorsement show when it is not in the chain of title?

Back 44

It is notice to all subsquent takers that the indorsement is for accomodation. An accomodation party is never liable to the party that he has accomodated.

Front 45

HOLDER IN DUE COURSE

(Generally)

What is a holder in due course?

Back 45

A holder in due course is a holder of a negotiable instrument who takes the instrument:
-for value
-in good faith;
-without notice that it is overdue or has been dishonored;
-without notice of an unauthorized signature or alteration; and
-without notice of any defense against or claim to it on the part of any person.

Front 46

One does not acquire rights of a holder in due course of an instrument taken in any of the following ways:

Back 46

-by legal process or by purchse in an execution, bankruptcy, or creditor's sale;
-by purchase as part of a bulk transaction not in the transferor's ordinary course of business; or
-as the successor in interest to an estate or other organization.

Front 47

Who has the burden of establishing the status of holder in due course?

Back 47

The party claiming to be a holder in due course.

Front 48

(Holder)

Who is a holder?

Back 48

A holder is the person in possession if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, the identified person.

Front 49

How do parties subsequent to the payee become holders?

Back 49

If they are in possession of bearer paper, or order paper that has been properly indorsed.

Front 50

How else does a party become a holder?

Back 50

A person is a holder if all necessary indorsements are valid; necessary indorsements are those of all parties who took the paper as order paper.

NOTE: When an instrument is properly negotiated, the transferee becomes a holder.

Front 51

(Negotiation)

How is negotiation met when an instrument is payable to an identified person?

Back 51

negotiation requires transfer of possession and its indorsement by the holder.

Front 52

How is negotiation met when an instrument is payable to bearer?

Back 52

It may be negotiated by transfer or possession alone.

Front 53

How is negotiation met when the name of the a holder is not the same as stated in the instrument?

Back 53

he may indorse the instrument either as his name as stated on the instrument or as it really is.

Front 54

Is negotiation met when a minor negotiates an instrument?

Back 54

Yes, if a minor negotiates an instrument, the negotiation is effective to transfer the instrument even though the minor may not undertake the contractual obligations of an indorser or be responsible for breach of warranty.

Front 55

Is negotation met when the indorsement is "blank"?

Back 55

Yes, the instrument becomes order paper and the transferee can further negotiate by deliver alone. A blank indorsement is simply the name of the transferor written on the back of the instrument.

Front 56

Is negotation met when the indorsement is "special"?

Back 56

Yes. if the indorsement is "special", then the instrument becomes order paper and the transferee's indorsement is necessary to further negotiation. A special indorsement names the transferee and directs payment to him.

Front 57

Can a person paying the instrument upon presentment take by negotiation?

Back 57

NO, a person paying the instrument upon presentment does not take by negotation, cannot become a holder in due course.

Front 58

Is negotation achieved after an instrument is drafted and signed by the maker or drawer and issued (generally) to the payee?

Back 58

No, this is not a transfer of the obligation but the creation of it. The issuance does not amount to a negotiation.

Front 59

(Fictitious Payee & Imposter Rules)

Is an indorsement effective even though it was forged?

Back 59

Yes, in some circumstances. When a person is named as payee by the drawer and the drawer intends that the named payee have no interest in the instrument, then any person can indorse in the name of the payee.

Front 60

Can the person bearing the loss recover from a the person who failed to exercise ordinary care?

Back 60

Yes. If a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in doing so and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person who failed to exercise ordinary care.

Front 61

(Value)

What is value?

Back 61

The second requirement for being a HDC is that the take the instrument for value. An instrument is issued or transferred for value if:

-the instrument is issued or transferred for a promise of performance to the extent the promise has been performed;
-the transferee acquires a security interest or other lien in the instrument;
-the instrument is issued or transferred as payment of, or as security for, an antecedent claim;
-the instrument is issued or transferred in exchange for a negotiable instrument; or
-the instrument is issued in exchange for the incurring of an obligation to a third party bgy the one taking the instrument.

Front 62

What does value mean?

Back 62

Value, generally means the giving of something, other than a promise, for the instrument or the acquiring of a security interest in the instrument.

Front 63

What if a holder "cashes" his check or sells a note at a bank with the bank giving him the face amount (or somewhat less)?

Back 63

The bank is a holder for value to the full amount of the check.

Front 64

What if a bank takes the instrument "for deposit" crediting the holders' account?

Back 64

The bank is not a holder for value until it has actually paid out to the holder some or all of the money it credited to the holder's account.

Front 65

(Good Faith & Without Notice)

What is good faith?

Back 65

Good faith is defined as honesty in fact and the observance of reasoanble commercial standards of fair dealing.

Front 66

Who is one who takes wihtout notice?

Back 66

A person who takes an instrument without actual knowledge of a defect cannot attain holder in due course status if a reasonable person would have notice of the defect.

Front 67

What are the different types of notice that can destroy a transferee's potential for becoming a holder in due course?

Back 67

1)Notice that the instrument is overdue;
2)Notice that the instrument has been dishonored;
3)Notice of an uncured default with respect to payment of another instrument issued as part of same series;
4)notice that the instrument contains an unauthorized signature;
5)notice that the instrument has been altered;
6)notice that there is a claim to the instrument; and
7)notice that any party has a defense or claim in recoupment.

Front 68

When does a person have a "notice" of a fact?

Back 68

A person has a "notice" of a fact when:
-He has actual knowledge of it (a subjective test); or
-He has received a notice of it; or
-From the facts and circumstances known to him at the time in question, he has reason to know that it exists.

Front 69

When does a person have a notice of a claim or defense?

Back 69

A person has a notice of a claim or defense if the instrument bears such apparent evidence of forgery or alteration, or is otherwise so irregular or incomplete as to call into question its authenticity.

Front 70

(The "Umbrella" or "Shelter" Doctrine)

What is the umbrella and shelter doctrine?

Back 70

A transferee of an instrument takes any right of the person transferring the instrument to enforce it, including any right as a holder in due course, except a person cannot obtain the rights of a holder in due course from his transferor if the transferee engaged in fraud or illegaility affecting the instrument.

Front 71

RIGHTS OF AN HDC-REAL AND PERSONAL DEFENSES

(Adverse Claims & Defenses)

Does a holder in due course take the instrument free from all claims to it by others?

Back 71

Yes, a holder in due course takes the instrument free from all claims to it by others.

Front 72

What happens if an instrument is stolen while it is bearer paper?

Back 72

The "true" owner cannot recover it from a holder in due course.

Front 73

A holder in due course takes free of all the defenses except the "real defenses" of:

Back 73

-Infancy
-Duress, lack of legal capacity, or illegaility of the transaction;
-Fraud that induced the party to sign the instrument;
-Discharge in insolvency proceedings; and
-Any other discharge of which the holder has notice when he takes the instrument

Front 74

Is the minority of the defendant a valid defense?

Back 74

Yes, a minority of a defendant is always a real defense and available even as against a holder in due course.

Front 75

When are duress, mental capacity, or illegality real defenses?

Back 75

When they can be said to render the contract a nullity (void)under the law of the state.

Front 76

When can misrepsentation or fraud be a real defense?

Back 76

Only when the fraud is fraud in the factum. Fraud in the inducement is not a real defense. the distinction is based upon whether the individual signing knew that he or she was signing a negotiable instrument.

Front 77

Does the fact that a person does not quality as an HDC automatically defeat their right to recover on a negotiable instrument?

Back 77

No. A nonholder in due course may recover where the obligor has no valid defense.

Front 78

(Alteration, Unauthorized Completion, and Forgery)

What is an alteration?

Back 78

An alteration is an unauthorized change in an instrument that purports to modify a party's obligation, or an unauthorized addition to an incomplete instrument relating to a party's obligation.

Front 79

What happens when the alteration is fraudulent?

Back 79

When an alteration is fraudulent, a party whose obligation is affected by the alteration is discharged, except as to holders in due course, unless the party raising the defense is estopped from raising it.

Front 80

Can a holder in due course enforce its orginal tenor even where the alteration is fraudulent?

Back 80

Yes

Front 81

What if the alteration consists of an unauthorized completion?

Back 81

Then a holder in due course may enforce it as completed.

Front 82

Is one whose negligence substantially contributed to an alteration estopped from raising the alteration?

Back 82

Yes provided that the person, in good faith, paid the instrument or took it for value or for collection.

Front 83

Is forgery available as a defense even against a person who in good faith pays the instrument or takes it for value?

Back 83

Yes. Although forgery is not listed as a real defense, it is available even as against a person who in good faith pays the instrument or takes it for value because the person whose name is forged did not sign the instrument and thus is not liable on the instrument.

Front 84

Is the agent or forger liable as if they signed their own name?

Back 84

Yes, where there is a forgery, or where an agent signs without authority.

Front 85

What happens if the party's negligence substantially contributed to the unauthorized signature?

Back 85

If the party's negligence substantially contributed to the unauthorized signature, he or she is estopped from raising it against a holder in due course.

Front 86

(Lack of Delivery)

When does the defense of lack of delivery arise?

Back 86

The defense of the lack of delivery arises when an instrument is stolen from the drawer or maker before the maker or drawer delivers it to the payee. It also arises when the maker or drawer loses the instrument before it is issued.

Front 87

Is lack of delivery a personal defense?

Back 87

Yes, lack of delivery is a personal defense. However, if the instrument was order paper, i.e., payable to the payee or order, no party will ever be a holder of it, unless it was stolen or found by the payee who then indorses it.

Front 88

LIABILITIES OF PERSONS TRANSFERRING A NEGOTIABLE INSTRUMENT

(Contract of Indorsement-Qualified Indorsements)

Is the transferor of an instrument liable if he indorses the instrument?

Back 88

Yes. If the transferor of an instrument indorses, whether or not the indorsement is necessary to negotiate the instrument, the indorser becomes liable to pay the instrument if, upon demand, the maker or drawer does not and the indorse is given notice of the refusal to pay. This is usually stated by saying the indorser becomes "secondarily liable" on the indorsement.

Front 89

What is a "qualified indorsement" and how does this effect liability?

Back 89

Indorsing the instrument "without recourse". And indorser may disclaim liability on her indorsement by a "qualified indorsement"

Front 90

(Presentment, Dishonor, and Notice of Dishonor)

How is an indorser discharged from liability on his contract of indorsement?

Back 90

If the holder fails to meet the conditions of presentment, dishonor, and notice of dishonor. Presentment, dishnor and notice of dishonor generally are conditions to the liability of an indorser.

Front 91

Can an indorser still be held liable on transfer warranties even when the conditions mentioned above are not met?

Back 91

Yes.

Front 92

What is a presentment?

Back 92

Presentment is a demand upon the obligor. Presentment may be made at the place of payment of the instrument and must be presented at such a place if payable at a bank. It can be made by any commercially reasonable means including electronic communications.

Front 93

What must be done to establish a presentment?

Back 93

Unless the demand for payment is made on time, it does not constitute a presentment.

Front 94

When does dishonor occur?

Back 94

Dishonor occurs when a presentment for payment is made and payment is refused.

Front 95

Does a dishonor occur when payment is refused because the instrument lacks a necessary indorsement?

Back 95

No.

Front 96

How can notice of dishnor be made?

Back 96

By any commercially reasonable manner.

Front 97

(Warranties of Transferor)

Who makes them and what are they?

Back 97

The transferor of a negotiable instrument who receives consideration, whether or not he indorses, makes these warranties to his immediate transferee:

-the transferor is entitled to enforce the instrument;
-all signatures are authentic and authorized;
-the instrument has not been altered;
-the instrument is not subject to a defense or claim in recoupment of any prty against the transferor; and
-the transferor has no knowledge of any insolvency proceeding commenced with respect to the maker, acceptor, or the drawer of an unaccepted draft.

Front 98

What happens if the transferor does indorse?

Back 98

The warranties run to all subsequent holders who take the instrument in good faith.

Front 99

(Accomodation Indorsers)

What is an accomodation indorser?

Back 99

An accomodation indorser has no liability on the warranties of a transferor because

1. The accomodation indorser does not transfer the instrument; and
2. the accomodation indorser does not usually receive consideration.