Tx Bar '14 - Commercial Paper

Front 1

[NEGOTIABILITY]

Terminology?

Back 1

Makers make Notes; Drawers draw Drafts

Note = promise to pay (2 parties: Maker, Payee).

Draft = order to pay (3 parties: Drawer, Drawee, Payee)

Front 2

[NEGOTIABILITY]

What are the requirements for negotiability?

Back 2

To be negotiable, a document must be:

1) In writing,

2) Signed by maker or drawer,

3) Be an unconditional promise to pay,

4) A fixed amount,

5) In money,

6) W/ no other undertaking,

7) Payable on demand or at a specific time, &

8) Contain words of negotiability (bearer or order language).

Determined at time of issuance; once established, nothing done after changes its status as negotiable.

Front 3

[NEGOTIABILITY]

How does a person become a holder?

Back 3

1) Must have possession of a negotiable instrument +

2) good title.

Method of obtaining good title depends on words of negotiability used.

Bearer paper = possession only.

Order paper = possession + necessary indorsement.

EXCEPTION: banks can take unendorsed instrument if the customer was a holder at time of delivery.

Front 4

[NEGOTIABILITY]

How does person become holder in due course?

Back 4

A holder in due course (HDC) is:

1) a holder who:

2) takes for value,

3) in good faith, &

4) w/out notice of any impropriety.

W/O notice of: overdue instrument, unauthorized signature or alteration, a claim to instrument, or a defense to payment.

Shelter Rule: if transferor is HDC, recipient is also a HDC unless the recipient was part of the fraud or illegality w/respect to instrument.

Good Faith & Notice: determined at time of payment.

Front 5

[NEGOTIABILITY]

What are HDC’s rights?

Back 5

HDC can enforce the instrument subject to only “real” defenses:

FAIDS:

1) forgery/fraud,

2) alteration,

3) infancy/illegality/incapacity,

4) duress/discharge bnkrptcy,

5) surety/SoL;

HDC also free from claims of others in the instrument! Very powerful!

Front 6

[NEGOTIABILITY]

Methods of indorsement?

Back 6

[Basis of Liab=Signature]

1) Blank: Payee Signature Only (bearer paper);

2) Special: Payee’s Signature + Designation of New Owner (order paper);

3) Forgery: does NOT break title, later ppl = holders;

4) Restrictive: limits what may be done w instrument (“for deposit only”);

5) Multiple: if “&” need all to indorse, if “OR” any 1 is suf.

6) Ambig Name: issuer intent controls

Front 7

[K LIABILITY]

Maker (of note) liab?

Back 7

By signing name, note maker Ks to pay the instrument according to its terms at time of issue.

Promise is unconditional, but proper defenses ok.

Front 8

[K LIABILITY]

Drawer’s liability?

Back 8

If draft dishonored, drawer must pay according to the draft’s terms when drawer signer.

If bank accepts draft, drawer is discharged and cannot be held liable if bank fails to pay.

Secondary liability only occurs after presentment & dishonor.

Note: if drawer signs “w/o recourse,” not liab if dishonor! However, CHECKS may NOT be drawn w/o recourse!

Front 9

[K LIABILITY]

Indorser’s liability?

Back 9

Arises from her signature & is the obligation to pay according to the terms of instrument.

CAN disclaim liability by signing “w/out recourse” in indorsement.

Before a holder can look to an indorser for payment, the holder must present the instrument, there must be dishonor, & there must be notice of the dishonor.

Indorser NOT liable unless:

1) presentment of check w/in 30 days of indorsement;

2) drawee dishonors; &

3) notice of dishonor given by commercially reasonable means w/in 30 days after dishonor.

Front 10

[K LIABILITY]

Drawee (Bank)’s liability?

Back 10

Generally, drawee is NOT liable unless & until she signs/accepts the instrument.

Thus, holder can’t force drawee to pay draft.

NOTE: other tort/K liab may arise for failure to rightfully pay.

Front 11

[K LIABILITY]

Payor (Acceptor) Bank liability?

Back 11

Payor (usually, but not necessarily, will be drawee bank) signs draft & agrees to be primarily bound on the instrument.

If payor/drawee ACCEPTS check: drawee is liable & drawer is discharged (note: certification discharges drawer+all prior indorsers!).

Deposit results in provisional settlement; depositor’s account is credited but may be reversed until payment final.

If check is dishonored, payor has until midnight of next banking day after receipt to dishonor.

Once drawee finally pays, drawer/indorser no longer liable unless breach of PW.

Front 12

[K LIABILITY]

Surety liability?

Back 12

Guarantor is NEVER liable to the party accommodated, but IS liable in the capacity in which she signed (ie maker, co-maker, indorser, etc).

[WARRANTY LIAB] (one or other, not both)

Front 13

[WARRANTY LIAB]

Transferor liability?

Back 13

Any person, bank, or customer who transfers a negotiable instrument for consideration makes a transfer warranty (warrants your holder status).

If transfer by indorsement:

1) warranties run to all subsequent holders;

2) if not, then Ws only run to the immediate transferee.

Transferor warrants:

1) entitled to enforce instrument;

2) all signatures are genuine or authorized;

3) instrument not materially altered;

4) no defenses;

5) no knowledge of bankruptcy;

6) if instrument is created by 3rd party other than payor bank, then Ws that the creation was authorized by the drawer.

Front 14

[WARRANTY LIAB]

Presentment warranty (π=Payor bank who paid in GF)?

Back 14

Any person, customer, forger, etc. who presents an instrument for payment makes PW (warrant item should be paid).

PW on Unaccepted Draft = Person obtaining payment & any prior transferor warrant:

1) entitled to enforce;

2) draft is not altered;

3) no knowledge that drawer’s signature is unauthorized; &

4) instrument created by 3rd P auth’d by drawer.

Front 15

[WARRANTY LIAB]

Suit for warranty v. indorser’s K?

Back 15

Identify π! W suit brought when π is Payor bank & paid an item they shouldn’t have (forgery, etc.);

Indorser suit brought when π is holder & Drawee bank has NOT paid instrmt

Front 16

[FORGERY]

What is general rule for forgery?

Back 16

Forged signatures are only valid as the forger’s signature, NOT valid as signature of the person whose name is signed!

Unauthorized signer therefore assumes all obligations to any party who gives value for instrument; subject to 5 EXCEPTIONS:

1) fictitious payee’s signature forged;

2) entrusted employee forges signature;

3) negligence contributes to forgery;

4) bank statement rule violated; or

5) bank certifies.

Front 17

[FORGERY]

Imposter or Fictitious Payee?

Back 17

Issuance to Imposter:

1) if person pretends to be someone else & induces drawer to issue him a check,

2) the imposter’s forgery is effective as the person whose name is signed!

Issuance to Fictitious Payee:

1) if instrument is payable to fictitious payee (ie someone who does not exist) or to person whom payment not really intended (ie EE dupes employer into signing check payable to supplier no $ is owed to), then

(i) anyone in possession is a holder &

(ii) the forged indorsement is effective as an indorsement as to anyone who takes in GF for value.

Front 18

[FORGERY]

Fraudulent Indorsement by EE?

Back 18

If employer entrusts an EE (or agent) w/ responsibility for an instrument (ie company cashier, accountant, etc.) & the EE fraudulently indorses, indorsement IS effective!

Front 19

[FORGERY]

Failure to Exercise Ordinary Care (Negligence)?

Back 19

If person’s negligence substantially contributes to an alteration or forgery, that person is precluded from raising alteration/forgery against GF Payor or transferor.

Examples: leave blank space on instrument, mailing to one w/ same name or wrong person, etc.

Front 20

[FORGERY]

Bank Statement Rule?

Back 20

Customer’s failure to examine monthly bank stmt & notify bank of any wrong charges = negligence!

Customer precluded from forgery/ alteration defenses; also no recredit until notice given.

Front 21

[FORGERY]

Estoppel?

Back 21

Because bank has best opportunity to check identification, it is estopped from claiming named payee was not the original payee against later parties.

Front 22

[FORGERY]

What are the 2 types of Alteration?

Back 22

1) Change in Obligation: modify amount, date, names of payees, etc.

2)Unauthorized completion: thief completes instrument

Front 23

[FORGERY]

What is effect of Alteration?

Back 23

Depends on π ‘s status!

HDC:

(i) change in obligation: can enforce the original amount;

(ii) Unauthorized completion: enforce as completed.

Non-HDC:

fraudulently made by holder = obligor totally discharge;

non-fraudulently made = obligor liable under original terms.

Front 24

[FORGERY]

Liability summarized?

Back 24

FIRST DETERMINE WHOSE SIGNATURE WAS FORGED!!

If drawer’s signature:

1) drawer not liable,

2) drawee bank must recredit account (b/c not properly payable),

3) bank unable to pass on loss unless PW,

Bank Defenses: drawer neg or bank stmt rule.

Forged indorsement:

1) payee can sue drawee for conversion,

2) drawer can sue b/c not properly payable (only 1 or the other),

Bank defenses: imposter rule, EE fraudulent indorsement, drawer’s neg, SoL 3 years.

Drawee bank can sue presenter on PW, transferor can sue prior transferors under TW.

Alteration: not properly payable, bank defenses: neg, bank stmt, SoL=1yr

Front 25

[FORGERY]

Rules summarized?

Back 25

Forged Check: loss rests on Payor bank that paid check;

Forged Indorsement: loss ultimately rests on party who took instrument directly from the forger (1st party downstream of the villain);

Theft by Alteration: Same as Forged Indorsement;

Theft of check in bearer form (ie blank indorsed): party holding at time of theft bears loss (b/c only possession required for bearer paper).

Front 26

[PAYMENT]

Stop Payment Order?

Back 26

TX provides broad latitude for customer to requires stop order on check issued from own account; Can do so for any or no reason at all.

Reqs:

1) in writing &

2) dated, signed, describe item w/ certainty.

Valid for 6 months, can be renewed.

Bank defenses: invalid order or no loss

Front 27

[PAYMENT]

Improper Payment?

Back 27

Bank may only pay items that are properly payable;

paying any item that is not properly payable results in recredit customer’s account.

Improperly payable items include:

(i) forged drawer signature;

(ii) 3rd party alters amount of check;

(iii) bank pays wrong person (forger of payee/indorsee’s signature);

(iv) postdated items properly notified.

Front 28

[PAYMENT]

Wrongful Dishonor?

Back 28

When a Payor bank refuses to honor an item that is properly payable.

Payor bank liable to customer for damages proximately caused.

Refusal of certified, teller, or cashiers check entitles π to expense + interest; if bank has notice then conseqtnls

Front 29

[PAYMENT]

Drawee Bank duties to Customer?

Back 29

1) Must Honor Drafts:

i) if sufficient funds present,

ii) bank must pay draft,

iii) failure results in K/tort (conversion) damages

(NOTE: if insufficient funds, bank MAY pay check anyway at town discretion & customer liable for any overdraft;

2) postdated checks: if customer notifies bank of postdate, bank can’t pay before stated date

3) only pay Properly Payable charges: forged, altered, erroneous payments create potential liability for K/tort, etc (see);

Front 30

[PAYMENT]

When can Payor/Acceptor safely pay & avoid further liability?

Back 30

Payor can safely pay any holder unless they know the holder acquired the instrument by theft. If holder is HDC, Payor can pay him.