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151 Cards in this Set
- Front
- Back
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The Basic Idea of Commercial Paper |
Written Instruments for the payment of money
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Fundamental Issues
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1) person with the instrument wants to get paid
2) the person obligated to pay on instrument does not want to pay 3) person whp paid the instrument now wants to recover the money from the person paid or someone else. |
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Approach to a commercial paper answer:
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1) Identify the type of paper (representation of money)
2) Identify the parties 3) Determine if instrument is negotiable. 4) Determine if instrument was properly negotiated 5) Determine if Transferee is a HIDC 6) Determine plaintiff's CoAs such as contract, warranty, tort, or not properly payable 7) Determine Defendant's defenses If defendant is held liable, may defendant pass liability on to another party? |
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Identify the parties
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The first step in your analysis of any commercial paper problem is to identify the type of instrument involved and the parties
The rules are often different based on the type of paper and parties involved so it is essential to make correct identifications |
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Promise to pay
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A promise to pay money- a 2 party instrument
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Parties: Maker and Payee
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Maker- the promisor (obligor)- person who promises to pay
Payee- the promisee- the person entitled to payment (the money) |
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Certificate of Deposit
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Note issued by a financial institution
1) Financial Institution ACKNOWLEDGES receipt of money, and 2) Financial Institution promises the payee/depositor to repay the money |
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Draft
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1) an Order to pay money- an order to pay money- a 3 party instrument
2) Parties- Drawer (ordering payment), Drawee (person to make the payment- bank), and Payee (person to receive payment from drawee) 3) Check 4) Remotely Created Item |
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Check- Requirements and Types
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1) Requirements- (a) financial institution is the drawee, and (b) payable on demand
2) Types of checks- (a) ordinary check, (b) certified check (ordinary check which the bank accepted it already-agreed to pay), (c) Cashier's check (drawer and drawee are same bank, person buying the check is the remittur), (d) Teller's check (check drawn by one bank on another bank, person buying the check is the remittur), (e) Traveler's check (demand instrument requiring a countersignature by a person whose specimen signature already appears on the instrument) |
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Remotely created Item
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(formerly called a demand draft)
A draft NOT SIGNED BY THE DRAWER BUT CREATED WITH THE DRAWER'S authority so that a third party can get paid from the drawer's account at a bank. The third party is usually a seller on the internet transaction or when you pay bills over the telephone by giving creditor your checking account number. |
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Negotiability
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After ascertaining the type of paper and the identity of the parties, the next step is to determine whether the paper is negotiability
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Meaning of Negotiability
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1) Refers to the form of the instrument
2) determined at issuance |
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Opting Out
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if the instrument says it is non-negotiable, it is non-negotiable (unless it is a check). Cannot expressly opt in.
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Importance of Negotiability
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In normal K law, a transferee gets no better rights than the transferor. Thus, the obligor may arise ALL of the defenses it had against the transferor against the transferee..
If the paper is negotiable (form) and properly negotiated (transferred), it may reach the hands of a special good faith purchaser called a HIDC HIDC obtains better rights than the transferor and thus can get paid from obligor even though the obligor has defenses. If instrument is not negotiable, it is not invalid or unenforceable, it is just a regular K. |
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Elements of negotiability
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1) in writing
2) signed by the maker of drawer 3) Unconditional promise or order to pay 4) Fixed amount 5) in money 6) no other undertaking or instruction 7) payable on demand or at a definite time 8) contains words of negotiability |
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Requirement #1- In writing
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no requirement what it is to be written with or written on
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Requirement #2- Signed by maker or drawer
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Any symbol executed or adopted by a party with PRESENT INTENT to authenticate a writing
Examples- traditional signature, trade or assumed name, mark "x", initials, X, writing Y's name with authority, acts as X's signature (forgery), typewritten, signature stamp, thumb print, computer generated. |
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Requirement #3- Unconditional promise or order to pay
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must be more than a mere acknowledgment of a debt such as an IOU.
1) presumption of unconditional promise or order 2) items that make promise or order conditional (and thus not negotiable) 3) ITems that do not make promise or order conditional |
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Req 3- Unconditional promise or order to pay
Items that pake promise or order conditional (thus not negotiable) |
1) expressed condition to payment
2) Promise or order "subject to " or "governed by" another record 3) incorporation by reference (rights and obligations with respect to the promise or order are stated in another record) |
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Req 3- Unconditional promise or order to pay
Items that do NOT make promise or order conditional |
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-right of obligor to pay earlier (c) acceleration-right of holder to get pay upon some event 4) limitation of payment to a particular fund or source. 5) countersignature 6) consumer protection language (this lang. will, however, prevent holder from being a HIDC |
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Requirement #4- Fixed Amount
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1) Determine Principal Amount Due (must be able to look at instrument and determine the principle amount due)
2) Interest (Presumption not interest) |
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Requirement #4- Fixed Amount
Interest Presumption=no interest |
A silent instrument bears NO interest
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Requirement #4- Fixed Amount
Interest Ways in which interest may be stated which do not violate the "fixed amount" requirement? |
1) amount of money
2) Fixed or variable rate 3) Reference to outside source |
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Failure to state interest rate
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Judgment Rate
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Requirement #5- in money
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1) authorized medium of exchange (medium of exchange authorized or adopted by a domestic or foreign GOVERNMENT as part of its currency
2) Includes foreign money (may be payable in foreign money. Unless limited to payment in foreign money could also be paid with equivalent u.s. money 3) cannot be payable in GOODS or SERVICES 4) Words v. Figures=Words prevail (think of the personal check.) |
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Requirement #6- No other undertaking or instruction
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1) instrument not a full contract- negotiable instrument are just promises or order to pay money. they are often called "couriers w/out luggage"
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Requirement #6- No other undertaking or instruction
Exceptions |
1) promises concerning collateral
2) Confession of Judgment Clauses (note that confession of judgment clauses are unenforceable under Texas law 3) Waiver of Law Meant to Benefit obligor (maker/drawer) |
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Requirement #7- Payable on Demand or AT a DEFINITE TIME
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1) on demand
2) At definite time |
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Requirement #7- Payable on Demand or AT a DEFINITE TIME
Payable on Demand |
1) express statements- says "on demand"
2) Silent statements- if the instrument does not state the date it is due, it is a demand instrument |
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Requirement #7- Payable on Demand or AT a DEFINITE TIME
AT A DEFINITE TIME |
1) express statements- date stated in the instrument, fixed period after sight or acceptance, time readily ascertainable at the time the promise or order is issued.
2) Permitted date change matters that do NOT prevent instrument from being payable at a definite time- (a) prepayment of instrument (right of obligor to pay earlier than stated date), (b) acceleration of due date (right of holder to demand pymt earlier than stated date upon certain named events, (c) Provisions in instrument extending the due date (by holder- to holder time, by obligor- to a later definite time stated in the instrument) Automatically upon condition stated in instrument- to a later definite time stated in the instrument. |
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Requirements #8- Contains words of Negotiability
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1) Bearer language
2) Order Language 3) If both order and bearer language=bearer controls 4) Exception for checks (if this is the only missing requirement for a check to be negotiable, then this requirement is waived and it is bearer paper. |
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Requirements #8- Contains words of Negotiability
Examples of Bearer Language |
payable to bearer, payable to the order of bearer, indication that possessor entitled to payment, no payee stated, to cash or to the order of cash, not payable to identified person
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Negotiation
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transfer of negotiable instruments of transferee is a holder;
the payee transfers the instrument to a 3rd party rather than just getting the money, e.g. as payment for a sale, to donee as a gift, to bank to deposit in payee's account, etc. |
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Holder status
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1) Possession of the negotiable instrument
AND 2) Good title |
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What is the method of obtaining good title?
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Depends on the words of the negotiability used:
1) bearer- possession alone gives good title 2) Order- possession PLUS the necessary indorsement |
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Indorsements- generally
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Signature- an indorsement is a signature on a 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 consisting merely of payee's signature, i.e. no particular person is named to whom the instrument is now payable.
2) Effect=Creates bearer paper- thus, further negotiation may be by transfer of possession alone. |
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Special Indorsements
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1) How done? Payee's signature designation of new person to whom instrument payable.
2) Effect=Creates order paper. Thus, further negotiations will require the indorsement of the person to whom it was made payable. |
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For deposit or collection
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A RESTRICTIVE INDORSEMENT limiting what may be done with the instrument.
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Identification of person to whom instrument payable (the payee)
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1) intent of issuer determines the payee
2) multiple parties- (a) "AND" separates the names of the payees (requires all payees to sign); (b) "or" or "and/or" separates the names of the payees (requires one , ne one, of the payee's signatures) |
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Other Indorsements Issues
Transferee's Right to Transferor's Indorsement |
If the instrument is transferred for value, transferee has specifically enforceable right to the transferor's indorsement
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Other Indorsements Issues
Depositary Bank Become Holder Even Without Transferee's Signature |
Depository bank becomes the holder even if payee deposits check in payee's account without indorsing it.
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Other indorsement issues-
Misspelled Payee's name- payee may indorse with incorrect or real name |
A person giving value for the check may require her to indorse in both names to make the chain of title clear. or sign either way (correct or incorrect way)
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Other Indorsements
Payee lacking capacity may effectively indorse |
negotiation is effective even is the payee was a minor, incompetent, duly influence, duress, corporation exceeding powers.
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HIDC
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Rights of a mere holder- being a mere holder is normally all that one needs to because a holder has lots of rights, such as the right to get paid.
When HIDC status is relevant- when the obligor raises a defense to pymt. If a HIDC, holder can obtain better rights than the transferor and take free of this and most other defenses. |
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Elements of HIDC
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1) negotiable instrument
2) holder 3) Authenticity not apparently questioned 4) holder must pay "for value" 5) good faith 6) without notice at time of instrument acquisition |
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Elements of HIDC
Holder Element |
Proper negotiation- (a) possession and (b) good title
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Elements of HIDC
Authenticity not apparently questioned |
Instrument does not bear such evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call its authenticity into question.
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Elements of HIDC
Holder must pay value |
the holder must pay value for the instrument to deserve the special protection. look for an excessive difference.
donee does NOT pay value |
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Elements of HIDC
Good faith |
1) honesty in fact (subjective)
PLUS 2) observance of reasonable commercial standards of fair dealings (objective) |
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Elements of HIDC
Without notice at time of instrument Acquisition- |
Later notice does NOT matter- ince you get HIDC status, it cannot be taken away.
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Elements of HIDC
Without notice at time of instrument Acquisition- Notice Means- |
1) actual knowledge- a subjective test
2) receipt of a notice coupled with a reason to act on the notice 3) from all the facts and circumstances known to the person at the time in question (subjective element), the person has reason to know that it exists (objective text) Merely filing in the public records does NOT put a person on notice. |
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Elements of HIDC
Without notice at time of instrument Acquisition- Instrument (principal) overdue |
Due date has passed
for a check, 90 days after issuance overdue interest is NOT notice, only have notice if principal is overdue |
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Elements of HIDC
Without notice at time of instrument Acquisition- Instrument is dishonored |
instrument not paid upon proper demand such as a check marker insufficient funds
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Elements of HIDC
Without notice at time of instrument Acquisition- Uncured Default with respect to payment of another instrument issued as part of the same series |
you can't know about this
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Elements of HIDC
Without notice at time of instrument Acquisition- Others facts that you cannot know in order to be a HIDC |
1) unauthorized signature
2) alteration 3) any claim 4) any defenses or claim in recoupment (any reason obligor does not want to pay, recoupment is like a counterclaim, that is, obligor's claim against payee arising out of the transaction giving rise to the paper) |
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The SHELTER RULE
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Transferee has rights of transferor.
1) even if the holder does not qualify as HIDC, person may still have rights of HIDC by- the transfer of an instrument vests in the transferee the right that the transferor had. 2) Warning- having HIDC rights via shelter does not make you an HIDC. 4) exception- a person who was a party to fraud or illegality affecting the instrument cannot get HIDC rights by shelter. |
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Burden of Proof
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on the person who wants to be the HIDC.
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Rights of a HIDC
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1) Subject to "Real defenses"
2) Protected from "personal defenses" 3) HIDC if free from claims of others to the instrument |
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Real Defenses
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1) Infancy (infancy of obligor is a RD to the extent it is a defense to a contract under state law)
2) duress which voids obligation 3) lack legal capacity making Obligation void 4) illegality making obligation void 5) fraud in the execution (fraud in the factum) 6) Discharge in insolvency (bankruptcy) 7) omission of required consumer protection language 8) Statute of Limitations 9) Payment to former holder 10) Alteration 11) Unauthorized Signatures & forgeries |
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Fraud in the execution- fraud in the factum
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1) signer lacked knowledge of the instrument's character or essential terms and
2) signer lacked reasonable opportunity to learn the instrument's character or essential terms --Thus person lacked intent to sign a promise or order to pay --Note that this is an excusable ignorance test; merely stating that you signed something without knowing what it is is not enough --Courts will look at a variety of factors such as the signer's intelligence, education, business experience, and ability to read and understand English. |
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Omission of Required Consumer Protection Language
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Texas and/or Federal law requires that certain instrument in consumer transactions to contain language stating that a transferee remains subject to claims or defense that the issuer could assert against the original payee.
--if the instrument does not contain this language, the instrument is treated as if it actually stated that language and thus the issuer may assert against a HIDC all claims and defenses that would have been available if the instrument had included the required language. |
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Statute of Limitations
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1) Note- 6 yrs. from the due date (not the issue date)
2) Unaccepted Draft (e.g. check)- Earlier of 3 yrs. after dishonor or 10 yrs after issue. |
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Payment of Former Holder
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The liability of a person obligated to pay on an instrument may be discharged by payment to a person who was formally entitled to enforce the note unless the obligated party has received a proper notification that the note was transferred and that pymt is to be made to the new holder (the transferee)
A notification is adequate only if it is signed by the transferor or the transferee, reasonably identifies the transferred note, and provides an address at which payments subsequently are to be made. The defense of payment to a person who is no longer entitled to enforce is effective against the HIDC. But, the HIDC can prevent this defense from being effective by giving proper notice. |
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Protected by Personal Defenses
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The HIDC prevails over all other defenses of the obligor, either under the U.C.C. or common law, that are not real defenses.
Examples- Failure of consideration, breach of warranty, fraud in the inducement |
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HIDC is free from claims of others to the instrument
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no claimant can take instrument from the HIDC; HIDC is the "perfect defendant. NOT EVEN THE TRUE OWNER
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fraud in the inducement
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maker knows maker is signing a Promissory note but is misled regarding quality of goods or maker signs note without reading it because maker was in a hurry
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Contract Liability.
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Basis of Liability- the primary basis of contract liability on an instrument is a person's signature.
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Signatures by an Agent
Considerations |
1) Binding Principal-follow general law
2) Binding Agent 3) If Agent is NOT authorized |
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Signatures by an Agent
Considerations Binding Agent |
Assume that agent signs agent's name and that principal is bound. Ley issue=is the agent personally liable?
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Agent escape personally liability If
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1) principal identification in instrument; and
2) signature unambiguously shows it made on behalf of principal. |
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Liability of agent if above two elements not satisfied
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1) to HIDC- agent is liable to HIDC unless the agent can prove that the holder had notice of the representative nature of agent's signature.
2) to Non-HIDC- agent is liable to a non-HIDC unless the agent can prove that the original parties did not intend the agent liable. |
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Special Rule for checks
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no liability if principal's name on check. Agent for drawer is NOT personally liable if principal's name is on check (even if agent did not indicate agency capacity)
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If agent not authorized
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actually, it is then a forgery; alleged agent is bound but not purported principal.
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Maker of the Note
Consideration |
1) Primary Liability
2) Liable to Holder or Indorser Who Paid Instrument 3) Defenses |
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Maker of the note
Primary Liability |
Maker must pay instrument when its due according to its terms at the time it was issued (or when incomplete instrument completed).
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Defenses
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Maker may make defenses; effectiveness depends on the status of the Holder (e.g. HIDC or not)
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Drawer of Draft
Disclaiming Liability (aka "without recourse") |
Drawer may not disclaim liability on a CHECK but may disclaim liability on other drafts.
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Drawer of Draft
Secondary Liability |
Drawer liable only after 2 conditions are first satisfied:
1) presentment (to drawee within 30 days), and 2) dishonor (drawee refuses to pay the instrument upon proper presentation) |
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Indorser of Note Draft
Liability Disclaimer Allowed |
FOR INDORSERS AND MAKERS!!!
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Order of Liability
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Indorsers are liable to each other in the order of their signatures
sue prior indorsers for payment liable to later indorsers |
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Secondary Liability indorser of Note Draft
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Indorser liable only after 3 conditions are first satisfied
1) presentment (w/in 30 days) 2) dishonor (refusal to pay) , and 3) notice of dishonor (w/in 30 days of dishonor). |
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Drawee (Your Bank)
General Rule |
A drawee makes NO negotiable instruments Contract. They didn't sign the check thus no liability.
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Drawee-
Acceptance or Certification |
the drawee bank may agree to pay the draft by signing the draft
the drawee has no obligation to accept a draft and cannot be used for failing to accept Certification discharges the drawer and all prior indorsers. |
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Drawee-
Final Payment |
Once a drawee bank finally pas the check, contract actions may no longer be pursued and the drawee bank may not recover on the check from the persons it paid unless there is a breach of a presentment warranty.
Final payment occurs when the drawee bank (1) pays the item in cash or (2) does not revoke a provisional settlement by the "midnight deadline" that is, midnight of the next banking day after the banking day of receipt. |
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Drawee-
Conversion (tort) liability if Drawee pays on Forged Indorsement |
Drawee who pays on forged indorsement is liable to the payee in conversion
Person suing in conversion must HAVE received delivery of the instrument. No conversion action if check never reaches payee b/c it was lost in the mail. |
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Drawee-
Payment of Check After the Drawer's Death General Rule |
Drawee bank may continue to pay checks until it knows that the drawer has died and has reasonable opportunity to act with that knowledge.
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Drawee-
Payment of Check After the Drawer's Death Effect of Notice of Death |
Drawee bank may pay no more than 10 days after the drawer's death if the bank knows of the drawer's death.
But, if someone claiming interest in the account requests that the drawee bank stop paying the drawer's checks immediately, the drawee bank must comply. |
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Accommodation Parties liability in contracts.
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Definition- co-signors, sureties, and guarantors. A person who signs an instrument to lend his or her credit to another party but who does not receive any direct benefit. i.e. does not receive any of the borrowed money.
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Accommodation Parties liability in contracts.
The Party Identification |
1) Accommodated Party- principal/obligor (the person with bad credit)
2) Accommodated Party- surety/co-signor (the person with good credit) 3) Holder- creditor/obligee (the person who wants payment assured. |
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Accommodation Parties liability in contracts.
Liability (Generally) |
Liable in capacity in which accommodation party signs; no special contract. Presumed to be a guaranty of pymt.
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Accommodation Parties liability in contracts.
Limiting Liability to collection Only |
The accommodation party may include express language limiting the contract to a guarantee of collection only.
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Accommodation Parties liability in contracts.
Reimbursement |
If the accommodation party (surety) pays the instrument, the accommodation party is entitled to reimbursement from the accommodation party (maker, indorser)
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Accommodation Parties liability in contracts.
Demonstrating Accommodation Status |
1) express language
2) Anomalous Indorsement (an indorsement by a person who was not the holder of instrument, i.e. an indorsement outside the chain of title, is notice of its accommodation character. |
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Warranty Liability
Introduction |
1) These are implied warranties- they arise automatically
2) Warranty liability is off the instrument since warranties are created by transfer or presentment, not the indorsement of the instrument. 3) To use a warranty, possession of the instrument is NOT needed as it is for contract liability 4) warranty liability survives the final payment of an instrument |
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Transfer Warranties-
Who makes the transfer warranties? |
(defendant)- Tranferor who receives consideration. Transfer warranties do not arise in a gift context; the person transferring must receive consideration before the transfer warranties are implied.
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Transfer Warranties
To whom are transfer warranties made? |
(plaintiff)-
1) immediate transferee, and 2) Subsequent Transferee if transferor indorsed (note that in a banking context, the liability runs to any subsequent collecting bank even without indorsement) 3) Drawee and maker never sue for breach of transfer warranty (they get instruments presented to them, not transferred |
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Transfer Warranties-
What are these warranties? |
1) Warrantor is entitled to enforce the instrument (warranty of holder)
2) allsignatures authentic and authorized 3) no alterations 4) no good defenses against transferor 5) No knowledge of insolvency proceedings 6) If remotely-created item, the person identified as the drawer authorized the item. |
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No good defenses against transferor
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(the instrument is not subject to any defenses which could be successfully asserted against the transferor. thus, transferor warrants that if transferor were a plaintiff on the instrument, no defense that anyone has could defeat transferor. a perfect plaintiff warranty)
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No knowledge of insolvency proceedings
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the warrantor has no KNOWLEDGE of insolvency proceedings against the maker, acceptor, or drawer of an unaccepted draft.
Note that this is the only warranty where the warrantor's lack of knowledge is relevant |
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Disclaiming Warranties
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1) Checks- cannot disclaim
2) Non-checks- may disclaim ("without warranties") |
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Presentment Warranties
When? |
Made on presentment- Warning- do not confuse presentment warranties and transfer warranties. they are mutually exclusive.
A plaintiff can only have one of these warranty causes of action although a person might make both warranties. |
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Presentment Warranties
Who Makes? |
1) presenter, and
2) previous transferors |
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Presentment Warranties
To Whom? |
Made to parties who in good faith, that is, maker, drawee, acceptor (plaintiff)
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Presentment warranties
Warranties when unaccepted draft presented to drawee |
Example- a normal check- you make these when you cash your paycheck.
1) Warrantor Entitled to enforce Draft or Obtain Payment 2) no Alteration 3) No knowledge of Unauthorized Drawer's signatures 4) If a remotely-created item, that person identified as the drawer authorized the item. |
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Presentment warranties
Warranty when other instruments presented |
Example- dishonored draft to indorser; mote to maker
warrantor entitled to enforce draft or obtain payment. |
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Warranty v. Indorser's Contract
How do you know whether the plaintiff should bring suit against the indorser for breach of warranty or for breach of the indorser's contract? |
Determine the identity of the plaintiff.
If the plaintiff is the holder? If the payor has NOT paid the instrument (e.g. a check bounces or a promissory note is not paid by the maker), then the holder will sue the indorser omn the indorser's contract. If Plaintiff is Payor- If the Payor HAS paids and later discovers the payer should not have paid (e.g. the check was forged or the note was altered), then the payor will attempt to sue the indorser for warranty (transfer or presentment, as appropriate under facts). |
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Other Issues
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1) Discharge by holder- cancellation, destruction, etc.
2) Effect of instrument on underlying obligation 3) failure to produce original instrument 4) overdrafts 5) postdated "check" 6) stop payment orders 7) Wrongful dishonor 8) Payment in full check |
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Discharge by holder- cancellation, destruction, etc.
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Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it.
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Effect of instrument on underlying obligation
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1) Pymt by certified check, cashier's check or teller's check=underlying obligation is discharged as if the person paid in cash.
2) uncertified checks and notes-underlying obligation only suspended: (a) if check or not later paid, underlying obligation is discharged; (b) if the check or note is dishonored, holder may sue on either instrument or underlying obligation. |
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failure to produce original instrument
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Examples- original lost, inadvertently stolen, or destroyed.
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failure to produce original instrument
Enforcement by person NOT in possession |
1) person entitled to enforce when loss occurred,
2) loss not due to transfer or lawful seizure, and 3) person cannot reasonably obtain original ***Protection for PAYOR required- e.g. security or bond*** |
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Overdrafts
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Bank may charge customer's account even if the charge creates an overdraft
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Postdated "check"
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bank may pay postdated check unless customer gives bank a notice of the postdating which describes the check with reasonable certainty.
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Stop Payment Orders
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Drawer (bank customer) may stop payment on check. Other parties have no authority to do so.
1) must be in writing (oral stop pymts order are unenforceable in TEXAS always!!!! but, bank may still stop payment if they want to be nice to the customer.) 2) Requirements of writing: (a) dated (b) Signed (c) Described item with certainty (account #, Check #, amt) 4) Valid for 6 months; can be renewed |
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Stop payment Orders
Banks defense's if it pays over a stop payment order |
1) Stop payment order bot comply with requirements
2) no loss (customer would have to pay the check even if payment had been stopped) |
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Stop payment Orders
Cashier's and Teller's Checks |
1) Remittur cannot stop payment
2) Bank may stop payment But, the bank then risks liability for expenses, lost interest, and consequential damages |
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Wrongful dishonor-
Defined |
Drawee dishonoring a properly payable check
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Wrongful Dishonor-
Who has standing to complain? |
1) the drawer may bring an action against the drawee for bouncing a check it should have been paid
2) the payee may not sue the drawee bank even if the drawee bank should have paid the check and the drawer had sufficient funds to cover the check. |
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Wrongful Dishonor-
Damages- |
the drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing hot checks.
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Wrongful Dishonor-
Drawee's Bank's Defenses? |
1) Payments would overdraw the drawer's account
2) the check is more than 6 months old Bank may honor the "stale check" as long as it does so in good faith. |
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Payment in full check
Defined |
A check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of existing obligation which is unliquidated or subject to a bona fide dispute.
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Payment in full check
Effect |
The payment in full check operates as an accord and satisfaction if the payee cashes the check
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Payment in full check
Exceptions |
1) Payee returns the money within 90 days
2) payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks. |
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Forgery and alteration
Introduction |
It is essential when dealing with forgery to determin "whose signature" was forged because different rules apply based on the identity/status of the person whole name is forged.
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Forgery and alteration
Forged Maker's Signature |
1) Alleged Maker NOT liable- b/c 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 b/c 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 PAYABLE action unless drawee bank has a defense. 3) Bank unable to pass on loss unless breach of presentment warranty. |
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Forged Drawer's Signature
Bank unable to pass on loss unless breach of presentment warranty |
1) Normally, no presentment warranties (entitled to enfoce, no alteration, no knowledge of forged drawer's signature) will be breached; parties had right to enforce the forger's obligation.
2) Forger is the real drawer b/c the forger signed when the forger forged the alleged drawer's signature 3) drawee wakes the risk that drawer's signature unauthorized unless presenter KNEW it was unauthorized. |
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Forged Drawer's Signature
Bank's Defenses to ReCrediting (defenses to the alleged drawer's not properly payable action) |
1) Drawee's Negligence
2) Bank stmt rule- duty to inspect statements |
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Forged Drawer's Signature
Defense- Drawee's Negligence |
If drawer's negligence SUBSTANTIALLY contributed to the forgery of the drawer's name, the drawer may not raise the forgery
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Forged Drawer's Signature
Defense- Bank stmt Rule |
G/R- Customer (drawer) has duty to inspect bank stmt and canceled checks in timely manner and report forgeries to bank. If customer does not and the bank can prove a loss beyond original mistaken payment, (e.g. not catch forger) customer precluded
Warning- Forged drawer;s signatures must be reported to bank within 1 year regardless of bank;s or customer's negligence. |
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Forged Drawer's Signature
Defense- Bank Stmt Rule Repeat Offender Rule |
If the same person is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available. If the drawer does not do so, the 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 |
1) bearer paper- since indorsement is not necessary to negotiate barer paper, forgery of an indorsement is NOT relevant
2) Order Paper- Forgery breaks chain of title and check is not properly payable. Accordingly, the drawer may demand that the drawee recredit the drawer's account as the check was not properly payable. |
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Forged Indorsements
Situations Where a party is precluded from assertinf forgery of payee's name |
1) Impostor Rule- drawer/maker estopped to deny validity of forged indorsement
2) Fraudulent Indorsements by Employees- Payee Estopeed 3) |
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Forged Indorsements
Impostor Rule |
The issuer, maker or drawer, will be estopped from denying validity of a forged indorsement
These are situations where the maker or drawer is deemed to have acted carelessly is issuing the check and thus to have contributed to the forgery |
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Forged Indorsements
Fraudulent Indorsements by Employees- Payee Estopped |
If an employer entrusts and employee (or independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective. Payee is estopped to assert the forgery.
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Forged Indorsements-
Liability of Drawee |
1) conversion liability to payee
2) Not properly payable liability to drawer 3) drawee protected from double liability 4) there are bank defenses |
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Forged Indorsements-
Liability of Drawee conversion liability to payee |
Payee can sue the payor bank (as well as the depositary bank and non-bank converters) for conversion.
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Forged Indorsements-
Liability of Drawee Not properly payable liability to drawer |
the drawer of a check can sue the payor/drawee bank since a check with a forged payee's name is not properly payable.
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Forged Indorsements-
Liability of Drawee Drawee is protected by double liability |
A successful conversion action against the drawee by payee will eliminate drawer's not properly payable (NPPR) action.
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Forged Indorsements-
Liability of Drawee Bank's Defenses |
1) Imposter Rule (NPPR suit)
2) Fraudulent Indorsement by Employee Entrusted with check (Conversion suit) 3) Drawer's Negligence (NPPR suit) 4) Failure to Timely Sue (NPPR suit) DRAWER MUST SUE WITHIN 3 YRS. 4) |
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Forged Indorsements-
Liability to the Presenter |
If the bank has to pay, the bank will want to pass on the liability. The drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (the forged indorsement broke the chain of title so no one could become a holder)
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Forged Indorsements-
Liability of Transferor |
The presenter who loses to the payor for breach of presentment warranty of good title may sue entities further up the chain of title for breach of the various indorsement warranties of:
1) entitled to enforce 2) all signatures authentic or authorized, and 3) no good defenses. |
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Alteration
Definition and Generally the types |
Obligor does not want to pay b/c the instrument was altered.
Types: 1) Change in obligation 2) Unauthorized Completion |
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Alteration
Change in the Obligation |
Any unauthorized change in the instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rates.
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Alteration
Unauthorized Completion |
Instrument is completed in an unauthorized manner which affects the party's obligation.
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Alteration
Effect on HIDC Change in Obligation |
HIDC may enforce for original amount
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Alteration
Effect on HIDC Unauthorized Completion |
HIDC may enforce as completed
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Alteration
Effect on non- HIDC |
1) fraudulenty made by holder=total discharge of obligor
2) Not fraudulently made=obligor liable under original terms |
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Alteration
Not Properly Payable |
G/R- an altered check is not properly payable.
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Alteration
NPPR Bank's Defenses |
1) Negligence (if the drawer's negligence SUBSTANTIALLY CONTRIBUTED TO THE ALTERATION, the drawer will be precluded from asserting the alteration
2) Bank Statement Rule- the drawer muse report alterations to the drawee bank within 1 year. |
