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99 Cards in this Set

  • Front
  • Back
What four categories do negotiable Instruments issues fall into?
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?
What happens when the owner of an instrument loses it (or has it stolen) and it is subsequently transferred to a good faith purchaser?
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.
What is a note?
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.
What is a Certificate of Deposit?
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.
What is a draft?
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.
What is the implied law when the drawee does not follow the drawer's order to pay?
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.
(Requirements of a Negotiable Instrument)
To be negotiable, an instrument must be:
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.
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?
It is not negotiable.
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?
Does a reference to a writing, of itself, make a promise or order conditional?
Is a promise or order made conditional by reference to another writing which states rights with respect to collateral, prepayment or acceleration?
Is a promise or order conditional because payment is to be from a particular fund?
Must the instrument be payable in money and only money?
Must the amount be ascertainable from an inspection of the instrument?
Can a negotiable instrument be payable in foreign money?
Can the interest be stated as fixed or variable amount of money or as a fixed or variable rate?
How does one determine the amount or rate stated in the instrument?
It may require reference to information not contained in the instrument.
What happens if an instrument provides for interest but the amount cannot be ascertained?
The interest is payable at the rate payable on judgments.
Can the negotiable instrument state any other undertaking or instruction by the person promising or ordering payment to do anything besides pay money?
What happens if the obligor agrees either to pay in money or to give goods or services?
An instrument is rendered non-negotiable
What happens if an instrument states that it is payable on demand or at sight or does not state any time for payment?
The instrument is paybable on demand.
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.
Yes, even if subject to rights of prepayment or acceleration.
What happens if the time the event is to happen is uncertain?
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.
What is the exception that applies to the fact that the instrument must be payable to bearer or to order?
A check, which is not payable to bearer or order but which otherwise satisfies all the requirements for negotiability, is negotiable.
Can an instrument be payable to multiple payees?
How can payees be paid when an instrument is payable to two or more persons not alternatively?
It is payable to all of them and may be negotiated, discharged or enforced only by all of them.
How can a payee be paid when an instrument is payable to two or more persons alterantively (i.e., "X or Y")
It is payable to any of them and may be negotiated, discharged or enforced by any or all of them.
When is an instrument payable to bearer?
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.
When an instrument contains both order and bearer language, which controls?
Bearer language controls.
When is an instrument payable to order?
An instrument is payable to order if it is payable to the order of an identified person, or to an identified person or order.


Is a person liable on an instrument if the they did not sign it?
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.
Is a person who is represented by an agent bound by the agent's signature?
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.
Is a person bound if someone signed the person's name without authority?
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.
(Liability of the Maker)
The liability of the maker of a note is to pay the amount promised when the instrument becomes due, unless she has a defense.
When does a payee's cause of action accrue where the note is payable on a particular date?
It does not accrue until the date after the due date.
(Liability of the Drawer of a Draft)

When is the drawer liable?
The law imposes liability on the drawer where the drawee fails to pay. The drawer does not make any express promise to do anything.
What type of liability is imposed on the drawer?
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.
(Liability of Drawee of a Draft)

Does the drawee have any liabilities on a draft to a payee or a subsequent holder?
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.
Does the drawee have any liabilities?
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.
Are there any liabilities of the drawee when she "accepts" the draft?
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.
(Accomodation Parties)

What is an accomodation party?
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.
Is an accomodation party liable on the instrument?
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.
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?
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.
What does an indorsement show when it is not in the chain of title?
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.


What is a holder in due course?
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.
One does not acquire rights of a holder in due course of an instrument taken in any of the following ways:
-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.
Who has the burden of establishing the status of holder in due course?
The party claiming to be a holder in due course.

Who is a holder?
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.
How do parties subsequent to the payee become holders?
If they are in possession of bearer paper, or order paper that has been properly indorsed.
How else does a party become a holder?
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.

How is negotiation met when an instrument is payable to an identified person?
negotiation requires transfer of possession and its indorsement by the holder.
How is negotiation met when an instrument is payable to bearer?
It may be negotiated by transfer or possession alone.
How is negotiation met when the name of the a holder is not the same as stated in the instrument?
he may indorse the instrument either as his name as stated on the instrument or as it really is.
Is negotiation met when a minor negotiates an instrument?
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.
Is negotation met when the indorsement is "blank"?
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.
Is negotation met when the indorsement is "special"?
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.
Can a person paying the instrument upon presentment take by negotiation?
NO, a person paying the instrument upon presentment does not take by negotation, cannot become a holder in due course.
Is negotation achieved after an instrument is drafted and signed by the maker or drawer and issued (generally) to the payee?
No, this is not a transfer of the obligation but the creation of it. The issuance does not amount to a negotiation.
(Fictitious Payee & Imposter Rules)

Is an indorsement effective even though it was forged?
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.
Can the person bearing the loss recover from a the person who failed to exercise ordinary care?
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.

What is value?
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.
What does value mean?
Value, generally means the giving of something, other than a promise, for the instrument or the acquiring of a security interest in the instrument.
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)?
The bank is a holder for value to the full amount of the check.
What if a bank takes the instrument "for deposit" crediting the holders' account?
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.
(Good Faith & Without Notice)

What is good faith?
Good faith is defined as honesty in fact and the observance of reasoanble commercial standards of fair dealing.
Who is one who takes wihtout notice?
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.
What are the different types of notice that can destroy a transferee's potential for becoming a holder in due course?
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.
When does a person have a "notice" of a fact?
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.
When does a person have a notice of a claim or defense?
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.
(The "Umbrella" or "Shelter" Doctrine)

What is the umbrella and shelter doctrine?
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.

(Adverse Claims & Defenses)

Does a holder in due course take the instrument free from all claims to it by others?
Yes, a holder in due course takes the instrument free from all claims to it by others.
What happens if an instrument is stolen while it is bearer paper?
The "true" owner cannot recover it from a holder in due course.
A holder in due course takes free of all the defenses except the "real defenses" of:
-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
Is the minority of the defendant a valid defense?
Yes, a minority of a defendant is always a real defense and available even as against a holder in due course.
When are duress, mental capacity, or illegality real defenses?
When they can be said to render the contract a nullity (void)under the law of the state.
When can misrepsentation or fraud be a real defense?
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.
Does the fact that a person does not quality as an HDC automatically defeat their right to recover on a negotiable instrument?
No. A nonholder in due course may recover where the obligor has no valid defense.
(Alteration, Unauthorized Completion, and Forgery)

What is an alteration?
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.
What happens when the alteration is fraudulent?
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.
Can a holder in due course enforce its orginal tenor even where the alteration is fraudulent?
What if the alteration consists of an unauthorized completion?
Then a holder in due course may enforce it as completed.
Is one whose negligence substantially contributed to an alteration estopped from raising the alteration?
Yes provided that the person, in good faith, paid the instrument or took it for value or for collection.
Is forgery available as a defense even against a person who in good faith pays the instrument or takes it for value?
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.
Is the agent or forger liable as if they signed their own name?
Yes, where there is a forgery, or where an agent signs without authority.
What happens if the party's negligence substantially contributed to the unauthorized signature?
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.
(Lack of Delivery)

When does the defense of lack of delivery arise?
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.
Is lack of delivery a personal defense?
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.

(Contract of Indorsement-Qualified Indorsements)

Is the transferor of an instrument liable if he indorses the instrument?
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.
What is a "qualified indorsement" and how does this effect liability?
Indorsing the instrument "without recourse". And indorser may disclaim liability on her indorsement by a "qualified indorsement"
(Presentment, Dishonor, and Notice of Dishonor)

How is an indorser discharged from liability on his contract of indorsement?
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.
Can an indorser still be held liable on transfer warranties even when the conditions mentioned above are not met?
What is a presentment?
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.
What must be done to establish a presentment?
Unless the demand for payment is made on time, it does not constitute a presentment.
When does dishonor occur?
Dishonor occurs when a presentment for payment is made and payment is refused.
Does a dishonor occur when payment is refused because the instrument lacks a necessary indorsement?
How can notice of dishnor be made?
By any commercially reasonable manner.
(Warranties of Transferor)

Who makes them and what are they?
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.
What happens if the transferor does indorse?
The warranties run to all subsequent holders who take the instrument in good faith.
(Accomodation Indorsers)

What is an accomodation indorser?
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.