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65 Cards in this Set
- Front
- Back
Indorsement "without recourse"
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Protects indorser from contractual liability
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When paper contains a forged indorsement...
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There can be no valid HDC
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Exception for banks and indorsements
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If bank takes unindorsed check it still becomes a valid holder if the customer is the holder at time of delivery.
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Instrument specially indorsed...
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is order paper
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A holder in due course is...
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a holder
who gives value in good faith without notice |
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Holder (defined)
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A holder is in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to him
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Value
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A party is an HDC to the exten that the agreed consideration has been performed. A mere promise is no enough
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FIFO
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First in, first out:
value and bank accounts - series of deposits/withdrawals |
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HDC - honsesty/good faith
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honesty - subjective
fair dealing - objective |
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HDC - Notice
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Includes both actual knowledge and reason to know (ie instrument so irregular, overdue, unauthorized signature, claim, etc.)
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Knowledge of a default in interest or principal
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Interest - harmless
Principal - deprives HDC status |
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Check overdue
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A check becomes overdue after 90 days
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Large discount on negotiated instrument
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Transferee is probably not an HDC - shows lack of good faith
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Close connectedness doctrine
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The more the holder knows about the underlying transaction, the less likely they will be an HDC
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Not and HDC if
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Instrument taken by:
legal process or purchase in an execution, bkr, C's sale purchase as part of bulk transaction not in ordinary course of business of transferor as the successor in interest to an estate |
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The shelter rule
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A subsequent transferee can take shelter in the defenses of their transferor so long as that transferor was an HDC. The transferee need not be and HDC, can even know of fraud, so long as did not participate.
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FTC shelter rule
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Any holder or assignee is subject to all claims and defenses that the debtor could assert against the seller of the goods or services covered by the K.
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HDC "real defenses"
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Infancy
incapacity, duress, illegality misrepresentation inducing party to sign discharge in insolvency proceedings any other discharge of which holder has notice |
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Fraud in the inducement
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Personal defense - cannot be raised against HDC
Person is aware of character of document and terms, but induced to sign by deception as to some other matter |
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Fraud in the factum (aka in the execution)
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Real defense - person induced to sign by deception with respect to the writing's character or terms
Also have to show excusable ignorance |
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Payee as an HDC
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Payee can be an HDC, but where issuer and payee are the only two parties, the buyer can assert any defense agains the seller regardless of the HDC doctrine
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Recovery against indorsers
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Indorser can get complete reimbursement from those signing prior in time
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Exception to order of indorsement rule
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Where parties made an anomalous indorsement - J&S liability regardless of order
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Secondary liability
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Indorser liable only after the instrument has been presented to the maker or drawee, that party has dishonored the check, and a notice of dishonor has been given to the indorser
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How to avoid secondary liability as indorser
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Write "without recourse" when indorsing the check
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Drawee's K liability
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No K liability on the check unless certified check
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Accommodation party
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When accom party is one who signs instrument in any capacity for the purpose of lending his name to another party to it, that party is liable in the capacity in which he signed
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Remedy for accommodation party
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Can seek complete reimbursement, not simply contribution
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Defenses for accommodation parties
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Can raise any defenses the other party has except
insolvency infancy lack of legal capacity |
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"Collection guaranteed" language
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The signor agrees to be liable if:
execution of j against other party unsatisfied other party is insolvent other party cannot be served with process otherwise apparent that payment cannot be obtained from the other party |
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Signature by agent
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Depends on language
"Company" Co: Yes, A: No "Company, by Pres" Co: Yes A: No "Name, Pres" Co: Yes A: Probably not, parol evid ok except against HDC "Name" Co: Yes, so long as auth A: No |
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Properly payable rule
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Bank may pay out customer's money only if it follows the customer's order exactly
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Forged drawer's signature
Missing/Forged indorsement |
Not properly payable
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Wrongful dishonor
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damages limited to actual damages
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Check issued to X AND Y
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BOTH must indorse
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Death or incompetence
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Bank may continue to pay for 10 days after notice, generally do not
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Customer's stop payment
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Effective for 6 months, but lapses after 14 calendar days
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Stop payment - bank messes up
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If they paid HDC, customer would have had to pay anyway, thus they have a valid defense to their mistake
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To be an HDC...
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...one must take the instrument for value, in good faith, and without notice of any defenses on the instrument
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HDC rule
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If a negotiable instrument is negotiated to an HDC, he takes free of personal defenses and claims and is subject on ly to real defenses
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Alteration defense
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..is available as a real defense except where the person's negligence substantially contributes to the alteration.
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Negotiation of order paper...
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...requires indorsement of the named payees plus delivery
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Negotiation of bearer paper..
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...requires only delivery
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Warranty arising when someone transfers an instrument for value
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A warranty of transfer arises, whereby the transferee warrants that he is entitled to enforce the note
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What is a negotiable instrument under Article 3?
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It must be
1. signed by the maker or drawer 2. be unconditional 3. contain a promise to pay or order to pay 4. a fixed amount of money with or w/o interest 5. to bearer or to order 6. on demand or at a definite time, and 6. without any undertaking or instruction not authorized by law |
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Liability for contribution where one co-maker has been discharged.
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Discharge of a co-maker does not affect the liability for contribution of one co-make to another.
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Fictitious payee rules
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A holder is entitled to enforce a check only if the indorsements of the payee and any special indorsee are genuine.
However, where the drawer draws the instrument payable to a fictious payee, any person in possession of the instrument is a holder and any indorsement in a name substantially similar to the fictitious payee is effective as an indorsement of the named payee or taker in good faith and for value. |
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Liability of a drawer on a draft
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A drawer of a draft can be held liable on the draft unless the drawer has a defense to the payment.
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Discharge of a party from an instrument by a person entitled to enforce the instrument
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A person entitled to enforce an instrument may, even without consideration, discharge any party from the instrument by a voluntary act.
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A party entitled to enforce an instrument is deemed to know of an accommodation if...
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the accommodating party's signature is anomalous (made by someone who was not the holder) or otherwise indicates that the party signed as a surety.
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An accommodation party's liability discharged when collateral is involved if...
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..the person entitled to enforce an instrument impairs collateral securing the instrument and the accommodation party had a right of recourse against the collateral.
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Obligor's obligations once an instrument is given for payment on an obligation
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The obligor's obligation is suspended to the same extent as if cash were given. If the isntrument is lost or stolen, the origial obligation is permanently suspended and the obligee's rights are limited to enforcement of the instrument.
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Subsequent transferee's liability for conversion when receiving instrument from depositary bank
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Only the depositary bank can be held liable for paying the instrument inconsistent with the trust, unless the subsequent transferee has notice that the fiduciary breached his duty
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Maker's discharge of liability on payment of a note
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If to a holder, then discharged; if payment is made to someone who is not a true holder, then there is no discharge
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When a note is payable to a psecific payee...
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...a later transferee cannot become a holder of the note unless the specific payee has indorsed the note by signing his name on the back of the instrument.
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Enforceability of stolen instruments
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Maybe enforceable even if not in possession of he payee as long as
he can prove ownership; the terms of the instrument; the facts that prevent him from producing it (although he may be required to indemnify the maker against losses) |
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Finality of payment rule
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When a maker pays out on a note, payment is final and the maker cannot recover money paid out on the instrument, except where the person who presents a note for payment makes a warranty of enforceability; if he breaches this warranty, the maker can recover money paid to the presenter under a breach of warranty theory.
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Presentment warranty
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Any party presenting a NI for payment warrants that he has a right to enforce the instrument, and no missing or fraud. terms.
A bank may only make payment on a properly indorsed check under the presentment warranty. |
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Obligation on a certified check
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A certified check becomes the obligation of the issuing bank and discharges the liability of the drawer (check-writer).
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Drawer
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Check-writer
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Properly payable rule
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A bank may only charge a customer's checking account for those items properly payable.
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Effect of a forged endorsement on title
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A forged necessary indorsement destroys title to the instrument and makes it not properly payable
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A bank that pays to a person not properly payable...
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becomes liable for conversion on the check
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To be negotiable an instrument must be in writing and signed and
(memorize) |
1. unconditional
2. promise or order to pay 3. a fixed amount of money (with or without interest that: a. is payable to order or bearer; b. on demand or at definite time; c. states no unauthorizedundertaking or instruction |
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Value means
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1. Performance of the agreed upon consideration
2. Holder acquires a lien or security interest in the instr. other than judicial proceeding 3. payment of or security for an antecedent debt 4. trading one neg. instr. for another 5. third party obligation |