Tn Commercial Paper

Front 1

Note

Back 1

Two-party instrument - between maker and payee

Front 2

Maker

Back 2

Person who signs or is identified in a note as the person undertaking to pay

Front 3

Payee [note]

Back 3

Person to whom the note is payable

Front 4

Check

Back 4

Three party instrument; Between Drawer and Drawee and Payee

Front 5

Drawer

Back 5

Person who signs or is identified in a check as the person ordering payment

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Drawee

Back 6

Person ordered in a check to make payment (bank)

Front 7

Payee [check]

Back 7

Person to whom check is payable

Front 8

Cashier's check

Back 8

a check with respect to which the drawer and drawee are the same bank

Front 9

Teller's check

Back 9

a check where the drawer is a bank and a different bank is the drawee

Front 10

Certified check

Back 10

one drawn by the drawee bank's customer and accepted by the drawee bank

Front 11

Article 3's requirements for a negotiable instrument

Back 11

Writing, Signed by Maker or Drawer, Promise to pay (note) or Order to Pay (check), Unconditional, Fixed Amount, Money, No Other Undertaking or Instruction, Payable On Demand or at a Definite Time, Payable To Order or To Bearer

Front 12

Writing

Back 12

No such thing as an oral negotiable instrument. Must be something tangible. Almost always a piece of paper, but need not be (e.g., a T-shirt)

Front 13

Signed

Back 13

by Maker (if note) or Drawer (if check): Signed includes any symbol executed or adopted by a party with a present intention to authenticate a writing

Front 14

Promise to Pay money (if note) or Order To Pay money (if check)

Back 14

Note must have a promise by the maker to pay money ("I promise to pay John..."); NB: An IOU or other acknowledgement of the debt is not a promise to pay. NOT NEGOTIABLE; A check is an order from the drawer to the drawee to pay money. NB: "I wish you would pay" is not an order; NOT NEGOTIABLE

Front 15

Unconditional promise or order to pay money

Back 15

Note must contain unconditional promise to pay money (reference to an underlying contract does not render the promise conditional); check must contain unconditional order to pay money

Front 16

Fixed Amount of Money

Back 16

Holder must be able to determine from the instrument itself the principal amount due. ONLY principal. Does not apply to interest, collection costs and attorney's fees

Front 17

Money

Back 17

Promise or Order must refer to money, not something else (i.e. flour, apples, etc.)

Front 18

NO other undertaking

Back 18

Negotiable instrument must not have anything other than a simple, clean unconditional promise or order to pay a fixed amount of money

Front 19

On Demand or at a Definite Time

Back 19

Holder of an instrument must be able to tell when it comes due or the instrument is non-negotiable

Front 20

Payable to Order or to Bearer

Back 20

A promissory note or a check must be EITHER order paper or bearer paper. If not, the instrument is not negotiable and is not governed by Article 3

Front 21

Order Paper

Back 21

A promissory note or a check made payable "to the order of" an identified person ("I promise to pay "to the order of Paul Payee""); NB: Check exception - A check need not say "to the order of"

Front 22

Bearer Paper

Back 22

A promissory note or a check made payable to the bearer of the instrument is called bearer paper (I promise to pay bearer or to the order of bearer or to the order of cash)

Front 23

SWUPFONO

Back 23

Signed Writing, Unconditional, Promise or order, Fixed amount of money, On demand or at definite time, No unauthorized undertaking or instructions, Order or bearer

Front 24

Payee-initiated demand drafts

Back 24

New TN Negotiable Instrument. This is a check not signed by a customer and that is created by a third party under the purported authority of the customer to charge the customer's bank account. Ex. it would be used by a telemarketer to charge a customer's bank account for goods purchased over the phone; Must meed all of the normal requirements for a negotiable check, EXCEPT need not be signed by drawer (can have printed or typed name or acct number, or notation that drawer authorized, or statement no sig required, auth on file, sig on file, etc.)

Front 25

Assignment

Back 25

Negotiable and non-negotiable instruments can be assigned under contract law principles to a third party. That party is an assignee and has no greater rights than the payee/assignor does on the instrument. Any defenses that could be raised against the payee/assignor also could be raised against the assignee

Front 26

Negotiation (compared to assignment)

Back 26

Compared to a mere assignment; If instrument is negotiable under Art 3, and the payee negotiates the negotiable instrument to a third party, then that third party is not a mere assignee, but is the holder of the instrument

Front 27

Negotiation (defined)

Back 27

A transfer of an instrument in a way that makes the transferee a holder

Front 28

Holder

Back 28

A person in possession of BEARER PAPER or a person in possession of ORDER PAPER that has been PROPERLY ISSUED or PROPERLY INDORSED to her

Front 29

Negotiating a negotiable instrument

Back 29

Issued Order Paper is negotiated by a two-step process: a) Indorsement by the holder AND b) Transfer of possession

Front 30

Indorsement

Back 30

An indorsement is a signature on an instrument for the purpose of negotiating it and/or making the indorser liable under indorser liability

Front 31

Special Indorsement

Back 31

An indorsement which also names a particular person as indorsee (the person to whom the instrument is next payable) NB: Words of negotiability (pay to the order of) are NOT required on an indorsement

Front 32

Blank Indorsement

Back 32

Does not name an indorsee (the person to whom the instrument is next payable); generally consists of a mere signature

Front 33

Anomalous indorsement

Back 33

An indorsement by a person who is not the holder; NB: Not effective for negotiation

Front 34

Transfer of possession

Back 34

may be voluntary or involuntary

Front 35

Negotiating Issued Bearer Paper

Back 35

May be negotiated by transfer of possession alone (may be voluntary or involuntary)

Front 36

When order paper is indorsed in blank

Back 36

It becomes Bearer Paper

Front 37

When bearer paper is specially indorsed

Back 37

It becomes Order Paper

Front 38

Depositary Bank

Back 38

Bank in which a check is first deposited for collection; can become a holder w/out signature of the depositor if the depositor was a holder at the time of deposit

Front 39

Indorsing "without recourse"

Back 39

While most indorsements are unqualified, a party can indorse an instrument "without recourse" This is irrelevant to negotiation, though it does negate indorser liability

Front 40

Forgeries

Back 40

General rule: A person cannot be a holder if any necessary indorsement was forged. The reason: An unauthorized signature is ineffective as the signature of the person whose name was signed. Exceptions: Ratification, imposter rule, fictitious payee rules, responsible employee rule, negligence rule

Front 41

Lost, stolen or destroyed instruments

Back 41

General rule: A person who is not in possession of a negotiable instrument CAN pursue an action to collect on it if (i) he was entitled to enforce the instrument and (ii) it was lost, stolen or destroyed. (usually this person MUST post a bond)

Front 42

Signatures by agents

Back 42

A signature by an AUTHORIZED AGENT is valid just as if made by a principal

Front 43

When liability arises

Back 43

General rules: No person or entity can be liable on a negotiable instrument UNLESS its signature appears on the instrument or the signature of an authorized agent appears on the instrument. A forged or otherwise unauthorized signature is not effective as the signature of the person whose name is signed.

Front 44

Avoiding agent's liability

Back 44

If an agent SIGNS HER OWN NAME and the principal has GIVEN HER AUTHORITY to sign on its behalf, the agent is NOT BOUND if the signature UNAMBIGUOUSLY SHOWS that it was made on behalf of the principal and the principal is identified somewhere in the instrument

Front 45

Maker's liability on a note

Back 45

Obligated to pay the note according to its terms at the time it was issued. Maker's liability is owed to a person entitled to enforce the note (holder). A maker's liability is also owed to an indorser who has paid the note due to his indorser liability

Front 46

Co-maker liability

Back 46

Except as otherwise specified int he instrument, two or more persons who sign an instrument as co-makers are jointly and severally liable.... then they are entitled to contribution

Front 47

Drawer's liability on a check

Back 47

Obligated to pay the check according to its terms when the drawer signed the instrument. Liable to pay a check only after PRESENTMENT TO and DISHONOR (NONPAYMENT) by the drawee bank; Drawer not entitled to NOTICE OF DISHONOR (drawer should know). Drawer's liability is owed to a person entitled to enforce the check (holder) also to an indorser who has paid the check due to his indorser's liability

Front 48

Drawee Bank's liability on a check

Back 48

Not obligated to pay the check unless the drawee bank accepted the check

Front 49

Indorser's liability on the instrument (note or check)

Back 49

Obligated to pay according to the terms of the instrument at the time of the indorsement; Owed to a person entitled to enforce (holder); Also, owed to a person indorsing later in time who has paid the instrument due to his indorser liability (this later-in-time indorser who pays on his indorser liability CAN get complete reimbursement from any earlier indorser)

Front 50

Triggers for indorser's liability

Back 50

Three: 1) Timely presentment (formal demand for payment), Dishonor of the instrument (it isn't paid when due), Timely notice of dishonor must be given to the indorser or else the indorser is discharged

Front 51

Timely notice of dishonor of a check

Back 51

A depositary bank which wants to sue on a person's indorser liability must give the indorser notice of dishonor with respect to a check BEFORE THE BANK'S MIDNIGHT DEADLINE (midnight of the next banking day following the banking day on which the depositary bank itself received notice of dishonor from the drawee bank); Others must give notice of dishonor within 30 days following the day on which she herself received notice

Front 52

Timely notice of dishonor of a note

Back 52

Must be given within 30 days after the dishonor occurs. Ordinarily, this occurs when the note is presented to the maker and payment is not made then; Exception: A note due at a definite time is deemed dishonored w/out presentment if not paid when due; NB: Present and notice of dishonor may be waived or excused

Front 53

Four ways liability is discharged

Back 53

Payment, Cancellation, Renunciation, Discharge on a Simple Contract

Front 54

Cancellation

Back 54

Any person entitled to enforce the instrument may discharge any person by a voluntary affirmative act such as surrendering the instrument to the party to be discharged, writing words like "void", "paid" or "discharged" on the instrument, striking out the signature of the party to be discharged,or tearing up the instrument. No consideration is required for cancellation

Front 55

Renunciation

Back 55

Any person entitled to enforce the instrument may discharge any party by a signed writing agreeing not to sue or otherwise renouncing rights against the party to be discharged. No consideration is required for renunciation

Front 56

Discharge on a Simple Contract

Back 56

Any person liable on an instrument can be discharged by any act or agreement that would discharge that party's liability on a simple contract

Front 57

Payment

Back 57

General rule: IF the instrument is paid to the proper person (holder), payment discharges the paying party's liability on the instrument and liability on the underlying obligation. If the instrument is dishonored, the party is liable on the instrument and on the underlying obligation (only one recovery)

Front 58

Discharge of Bank Checks

Back 58

When the instrument is a CASHIER'S CHECK (same bank is both drawer and drawee), or a TELLER'S CHECK (a bank is the drawer and a different bank is drawee), or a CERTIFIED CHECK (a check "accepted" by the drawee bank on which it is drawn), the underlying obligation is discharged when the check is taken by payee; NB: For cashier and teller checks, issuing bank is liable on the check. For certified check, accepting drawee bank is liable on the check. Bank's liability on a bank check is discharged when the bank pays the proper person (typically, holder)

Front 59

Transfer warranty liability

Back 59

Whenever a person VOLUNTARILY TRANSFERS an instrument (note or check) for CONSIDERATION, transferor makes a number of transfer warranties. Examples: transferor is entitled to enforce (holder), all signatures are authentic and authorized, instrument has not been altered, no defense or claim of any party is good against the transferor and, in the case of a payee-initiated draft, creation of the instrument according to the terms on its face was authorized by the person on whose bank account the instrument is drawn.

Front 60

Transfer warranty liability for drawer of check or maker of note

Back 60

None. Transfer warranties are not made by the drawer of a check or maker of a note

Front 61

To whom does the transferor make transfer warranties?

Back 61

If by indorsement, then to all subsequent transferees. If by something other than indorsement (mere transfer), then only to immediate transferee.

Front 62

Conversion liability for lost or stolen checks

Back 62

Gen Rule: An owner of a lost or stolen check may recover in conversion if the check is taken or paid over an unauthorized indorsement. The owner of the check can recover, but only if she had taken possession of the instrument. NB: Possession through an agent is sufficient. Can recover from drawee bank, depositary bank and anyone else who took the check and did not act in good faith

Front 63

Holder in due course

Back 63

A holder who gives value for the instrument in good faith without notice of certain things; Holder - person in possession of bearer paper or in possession of order paper that has been issued or properly indorsed; Value - Look for executed consideration, a mere promise to give value is not enough; Good faith - honesty in fact in the conduct or transaction concerned (just what person has in head); No notice - actual knowledge and reason to know that 1) instrument is so irregular or incomplete as to call into question its authenticity, 2) the instrument is overdue or has been dishonored, 3) instrument contains an unauthorized signature or has been altered, 4) There is a (property) claim to an instrument, 5) any party has a defense or a claim in recoupment

Front 64

HDC - What is NOT prohibited notice

Back 64

Notice that an instrument is antedated, undated, or postdated, Notice of an incomplete instrument that has been properly completed, Notice of purchase at discount

Front 65

Shelter Rule

Back 65

An instrument's transferee acquires whatever rights her transferor had

Front 66

Personal Defenses v. Real Defenses

Back 66

While an HDC takes free of the obligated party's personal defenses and claims, the HDC takes SUBJECT TO the Real Defenses

Front 67

Real Defenses

Back 67

1) Infancy of the maker or drawer, to the extent that it is a defense to a simple contract, 2) Incapacity, duress, or illegality of the transaction, which, under other law, nullifies the party's obligation, 3) Fraud in the execution of an instrument (fraud in fact), 4) Any other discharge of which the holder has notice when he takes the instrument, 5) Statute of limitations (check 3 years, note 6 years)

Front 68

Duress as a real defense

Back 68

If economic duress, then it is a personal defense. If it is extreme duress (physical), then it is a real defense

Front 69

Properly payable rule

Back 69

The payor bank may pay out the customer's money only if it follows the customer's orders exactly. If it does not do so, it must recredit the customer's account

Front 70

Is a check with a forged drawer's signature properly payable?

Back 70

No. Drawee bank must recredit drawer's account

Front 71

Is a check with a forged indorsement properly payable?

Back 71

No. Drawee bank must recredit drawer's account

Front 72

Is a payment over a customer's valid stop payment order properly payable?

Back 72

No. As long as customer 1) described the check with REASONABLE CERTAINTY and 2) gave it to the bank at a time and in a manner that affords the bank a reasonable opportunity to act on it (depends on bank's check processing technology)

Front 73

How long is a stop payment order effective

Back 73

6 months, but lapses after 14 calendar days if the order was oral and not confirmed in writing within that period

Front 74

Can a bank contract out of liability for negligently failing to honor a valid stop payment order?

Back 74

NO

Front 75

Who has the burden of establishing the fact and amount of loss resulting from the payment over a valid stop payment order?

Back 75

The customer!

Front 76

Overdraft rule

Back 76

A drawee bank may honor a check even if it creates an overdraft. But a drawee bank does not have to honor a check that creates an overdraft, unless it has agreed to do so with its customer (overdraft protection)

Front 77

Stale check rule

Back 77

Bank has no obligation to a customer to pay a check more than 6 months old, but it may charge the account thereafter in good faith

Front 78

Postdate rule

Back 78

Drawee bank may charge a customer's account for an otherwise properly payable check that is postdated unless the customer has given the bank notice of the postdating, describing the check with reasonable certainty and allowing the bank a reasonable time to act on this notice.

Front 79

Legend

Back 79

If a check contains a legend such as "void after 60 days", it is not clear if the check is still properly payable after the 60-day period

Front 80

Wrongful dishonor

Back 80

Payor bank is liable to customer for damages caused by the wrongful dishonor of a check; liability is limited to actual damages proved and may include damages for arrest or prosecution or other consequential damages

Front 81

Presentment warranty liability

Back 81

The party presenting the check for payment to the drawee bank and each of the earlier transferors of the check makes THREE presentment warranties: 1) they are a person entitled to enforce the check, 2) the check has not been altered, 3) they have no ACTUAL KNOWLEDGE [that the signature was forged]

Front 82

Restrictive Indorsement - "For deposit only"

Back 82

Enforceable! Drawer can sue all violating parties in conversion, except drawee bank (code lets drawee bank off the hook)

Front 83

Ratification of forgery

Back 83

Ratification of a forged or otherwise unauthorized indorsement or a forged or otherwise unauthorized drawer's/maker's signature occurs when a party, with full knowledge of the forgery or lack of authorization, accepts the benefits thereof or actively assents to the wrongful activity; NB: Ratification covers alterations as well

Front 84

Imposter Rule

Back 84

This rule validates the forged indorsement of the payee's name where the maker or drawer has been duped by an imposter to issue the instrument. The validation runs in favor of a person who, in good faith, pays the instrument or takes it for value or for collection

Front 85

Fictitious payee rules

Back 85

If, at the time that instrument is issued, the maker of a note or drawer of a check did NOT intend that identified payee have any interest, an INDORSEMENT in the name of the payee is effective... in favor of a person who, in good faith, pays the instrument or takes it for value or for collection. If the person identified in the instrument as the payee is FICTITIOUS, then an INDORSEMENT in the name of the payee is effective.

Front 86

Fraudulent Indorsement by an Employee Entrusted with Responsibility

Back 86

If an employer entrusts an employee (including an indep contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective - Scenario 1) Indorsements made in the name of the employer to instruments made payable to the employer, Scenario 2) Indorsements in the name of payees of instruments issued by the employer

Front 87

Negligence rule

Back 87

If a person, by his negligence, substantially contributes to a material ALTERATION or to the making of an unauthorized SIGNATURE, he is precluded from asserting the alteration or lack of authority against an HDC or the drawee or other payor who pays in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business.

Front 88

Comparative negligence

Back 88

If the drawee bank or other person paying the instrument or taking it for value or for collection (a depositary bank) itself fails to exercise ordinary care, the person bearing the loss may recover from the drawee bank or other person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss (THIS COMPARATIVE NEGLIGENCE ASPECT ONLY APPLIES TO THIS NEGLIGENCE RULE IN TN)

Front 89

Bank Statement rule

Back 89

When a bank makes a bank statement (or returned check) available to its customer, the customer must use reasonable care and promptness to determine whether the customer's signature was unauthorized on a check or there was an alteration, and must promptly notify if there was. The CUSTOMER is liable for any loss where the same wrongdoer forges or alters subsequent checks, unless the customer gave the bank notice w/in a reasonable period (no more than 30 days) after statement (or returned check) is made available; LOSES right to recover if fails to notify w/in 1 year

Front 90

Material alteration

Back 90

An alteration is an unauthorized change in an instrument that purports to modify the obligations of any party. A nonfraudulent alteration does not discharge any party, and the instrument may be enforced according to its original terms. In contrast, a fraudulent alteration discharges EVERY PARTY obligated on the instrument unless the party assents to or is precluded from asserting the alteration

Front 91

Fraudulent alteration of a completed note

Back 91

A person taking the altered instrument for value, in good faith and without notice of alteration, may enforce it according to its ORIGINAL TERMS

Front 92

Fraudulent alteration of an incomplete note (blanks)

Back 92

If transferee takes with notice of alteration, he can collect nothing. If no notice, then he takes free of Maker's defense

Front 93

Fraudulent alteration of a complete check

Back 93

A payor bank paying a fraudulently altered check may properly pay the check according to its original terms

Front 94

Fraudulent alteration of an incomplete check

Back 94

It is all properly payable. No recredit.

Front 95

Accomodation parties

Back 95

One who signs the instrument in any capacity for the purpose of lending his name and credit for the benefit of another party to the same instrument (the accommodated party). Typically, the accommodation party signs as either a co-maker or an indorser; accommodating party that pays holder on the instrument is entitled to reimbursement from the accommodated party; NB: Accommodation party has all defenses normally associated w/ capacity in which he signed indorsement;

Front 96

HDC v. Accommodated parties

Back 96

HDC strips the accommodation party's and accommodated party's personal defenses.

Front 97

Suretyship defenses

Back 97

If a person entitled to enforce an instrument w/out gaining the consent of the accommodation party, does any of the following, the ccommodation party's obligation to pay is discharged to the extent of the loss: an extension of time on the note, any other material modification of the obligation unless the creditor can show the accommodation party did not suffer a loss, impairment of collateral securing the obligation; NOTE THAT all suretyship defenses can be waived

Front 98

Accord and Satisfaction

Back 98

If a person cashes or deposits an instrument with notice that is tendered in full payment of a disputed debt, the debt is discharged in full; Requirements: person tendering payment must act in good faith, debt must be unliquidated or subject to a bona fide dispute, person tendering the instrument must prove either that the instrument contained a CONSPICUOUS statement that it was tendered in full satisfaction of the debt OR the person accepting it actually knew that it was tendered in full satisfaction of the debt, an organization may designate a person to which such checks must be sent, if person cashing did not have notice that it was tendered to satisfy debt, they can avoid discharge by tendering repayment w/in 90 days