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164 Cards in this Set
- Front
- Back
- 3rd side (hint)
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HDC Rule
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If an instrument is negotiable and transferred thru negotiation to one who takes for value, in good faith, and without notice of defenses or claims, the HDC can enforce unless there is a real defense.
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What does and doesn't the UCC apply to?
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- notes and drafts
- money |
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What is a note?
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- promise to pay
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Who are the parties to a note?
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Maker - person promising to pay
Payee or bearer - person to whom payment is promised |
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What is a certificate of deposit?
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A note
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What is a draft?
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an order to pay
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Parties to a draft
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Drawer - orders another party to pay
Drawee - (often a bank) party ordered to pay Payee - party paid |
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Reqs of negotiability 3
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1. Unconditional
2. Promise or order to pay 3. A fixed amount of money (with or without interest) that: (3 on side 3) |
a. is payable to order or bearer when issued or first in possession of a holder
b. is payable on demand or at a definite time, and c. states no unauthorized undertaking or instruction |
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An instrument is conditional (thus not negotiable) if it: 2
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1. expressly states a condition for payment, or
2. states that the promise or order is subject to or governed by another writing |
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A promise is not conditional merely because: 4
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1. refers to another record regarding collateral
2. limits payment to a particular source of funds 3. reqs a countersignature 4. contains a statement required by law that the holder is subject to claims and defenses of the original payee |
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Is an instrument conditional if it recites the consideration out of which the instrument arose?
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No
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What does "a fixed amount of money" mean exactly?
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Principal due under the instrument must be fixed. Variable or indexed interest rates are acceptable as is lack of a specified rate.
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When is an instrument payable to order?
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if it is payable to the order of an identified person
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An instrument payable to bearer if it: 3
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1. states it is payable to bearer or otherwise indicates the possessor is entitled to payment
2. does not state a payee, or 3. is payable to cash or otherwise indicates it is not payable to an identified person |
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Identification of payee
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governed by the intent of the maker
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When is an instrument payable on demand?
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If it fails to state a time for payment or states that is payable on demand or at sight.
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An instrument payable at a definite time if it is payable: 3
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- on a fixed date
- after elapse of a specified period after sight, or - at a time readily ascertainable when the instrument is issued |
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Do acceleration clauses destroy negotiability?
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No
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Only three undertakings or instructions authorized by the UCC that do not destroy negotiability
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1. to protect collateral
2. to dispose of collateral 3. a waiver of the benefit of the law that protects the obligor |
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Opting out
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negotiability is destroyed by a conspicuous statement on the instrument that it is not negotiable
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How are bearer instruments negotiated?
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Merely by transferring possession of the instrument
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How are instruments payable to an identified person negotiated?
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by transferring possession with the identified person's endorsement
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The right to enforce payment will not pass with the instrument unless:
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the payee's endorsement is authorized and valid
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Multiple payees
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Jointly - each must endorse
Severally - just one needs to endorse |
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Effect of transferring an order instrument without endorsement
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may transfer possession but it is not a negotiation
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Rights of transferee without endorsement
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until she obtains endorsement, she does not have the status of a holder
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How can the transferee compel endorsement?
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she can sue in equity to compel if she paid value for the instrument or if the instrument is due
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When does a depository bank become a holder even without endorsement?
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if the bank takes the instrument for collection and the customer was a holder at the time of delivery
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When does the transferee become a holder?
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upon obtaining endorsement
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Endorsement that attempts to convey less than the complete amount of the instrument
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not a negotiation and the transferee is not a holder
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Three questions where if the answer to any is 'yes' then the person is a holder. If all are 'no,' then the person is not a holder.
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1. Is the instrument a bearer instrument?
2. Is the person in possession a named payee? 3. Are all necessary signatures on the instrument and genuine? |
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Special endorsement
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names a particular person as endorsee
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Are words of negotiation required in endorsements?
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no
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do extra words in endorsements impair negotiability?
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no
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blank endorsement
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a signature that is not accompanied by the naming of a specific endorsee
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What do blank endorsements create and what is the effect of that?
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Creates bearer paper which then may negotiated by delivery alone
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Forgery of names not necessary to the chain of title
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will not keep later takers from becoming holders
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Does forgery of the drawer's name break the chain of title?
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no
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Multiple endorsements
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last endorsement controls
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Qualified endorsements
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those with the words "without recourse" limit the K liability imposed on endorsers
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restrictive endorsements
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endorsements with any other language added
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effect of restrictive endorsements
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generally ineffective to limit transfer, negotiation or to condition payment
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anomolous endorsement
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made by a person who is not a holder but then becomes liable on the instrument
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Two step process for determining HDC status
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1. Is the person a holder?
2. Does the person hold in due course? |
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Due course reqs 3
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value
good faith without notice |
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things that constitute value 5
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1. performance of the agreed consideration
2. acquisition by the holder of a lien or security interest in the instrument 3. taking the instrument as payment of or security for an antecedent debt 4. trading a negotiable instrument for another, or 5. giving the instrument in exchange for incurring an irrevocable obligation to a 3rd person |
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Is an executory promise value?
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No. Not unless it is an irrevocable obligation to a 3rd person
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IS consideration for the underlying K value?
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no
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Does the value need to be equivalent to the face amount?
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No. An instrument purchased at a discount is sold for full value.
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what happens if one pays less than the agreed upon value?
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on becomes a partial HDc in proportion to the % of the value paid
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Two prongs of good faith
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1. honesty in fact (subjective)
2. observance of reasonable commercial standards (objective) |
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Facts constituting notice 5
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1. Instrument is overdue due to principal being overdue, acceleration, more than reasonable time has elapsed
2. Notice of alterations 3. Notice of unauthorized signatures 4. notice of claims to the instrument 5. notice of defenses |
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Facts not constituting notice 9
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1. instrument is antedated, postdated or undated
2. instrument was issued in return for an executory promise 3. any party signed for accommodation 4. incomplete instrument has been completed 5. any person negotiating was a fiduciary 6. default in payment of interest 7. public filing or recording 8. instrument was sold at a discount 9. a party was discharged |
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A holder does not become an HDC of an instrument taken by: 3
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1. legal process or purchase at judicial sale
2. acquiring it as a successor in interest to an estate, or 3. purchasing it as part of a bulk transaction not in the regular course of business |
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Time at which HDC status is determined
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at the moment the instrument is negotiated to the holder or when she gives value, whichever occurs later
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Shelter rule
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transferee acquires rights her transferor had and thus is said to take shelter in the status of her transferor
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exception to shelter rule
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no HDC rights to parties to fraud or illegality
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What defenses can a party assert if the holder is not HDC?
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ordinary K defenses
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What defenses can a party assert if the holder is HDC?
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real defenses
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Claim defined
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affirmative right to a negotiable instrument because of superior ownership
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Real defenses mnemonic
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FAIDS
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Real defenses 10
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1. Fraud in the factum
2. forgery 3. Alteration 4. adjudicated incapacity 5. Infancy 6. Illegality 7. Duress 8. Discharge thru bankruptcy or those known to HDC 9. Suretyship defenses 10. Statute of limitations |
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Forgery
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forgery of names not necessary to title does not affect the right to enforce but forgery of necessary names does affect enforcement unless the person whose name was forged ratifies
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Fraud in the factum
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fraud that causes the obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms
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Diff btw alteration an unauthorized completion (filling in blanks)
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Maker will not be liable for the altered amount but will be liable for the full amount of the unauthorized completion
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Incapacity to K
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If a party lacks capacity under state law and the K is void, this is areal defense. But if the obligations of the incompetent are merely voidable at the option of the incompetent, is it just a personal defense.
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Infancy
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Not a real defense unless state law makes such Ks void or voidable
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Three year SoL actions 4
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1. unaccepted drafts
2. against issuers/acceptors f cashier's checks 3. for conversion 4. breach of warranty |
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Six year SoL actions 2
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1. notes payable at a definite time or on demand
2. on certificates of deposit |
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Suretyship defenses
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an accommodation party is, in effect, a surety who incurs liability without being a direct beneficiary
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Most common personal defense on the bar exam
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the K out of which the commercial paper arose was not properly or fully performed
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Personal defenses
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1. simple K defenses like lack of consideration, failure of consideration, breach of warranty, fraud in inducement, etc..
2. must be one's own defenses |
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theft exception
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defense that the non-HDc acquired the instrument by theft and the person holding the instrument is in wrongful possession must be raised if known
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claims in recoupment
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claim of the obligor on an instrument against the original payee of the instrument that arises from the transaction for which the instrument was given
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Who may enforce? 3
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1. a holder
2. a nonholder in possession with rights of the holder, or 3. person not in possession but entitled to enforce (i.e. lost, stolen or destroyed instruments) |
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Prima facie case requires proof that: 2
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1. signatures are genuine, and
2. the person presenting the instrument is entitled to enforce it |
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Presumption of validity of signatures
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validity must be specifically denied or it is admitted
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When can one enforce is a check is lost, stolen or destroyed?
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if she can prove ownership, terms, and the facts that prevent production of the instrument
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Process of dealing with liability of parties
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First identify the status of each party and then discuss each party's liability.
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Can one be held liable if her signature is not on the instrument?
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Generally, no
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Purposes for endorsing an instrument 3
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1. negotiating the instrument
2. restricting payment 3. incurring endorser's liability |
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Liability of endorser
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secondary, enforcer looks first to drawer or maker
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How can an endorser's liability obligation be negated?
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if the endorser includes the words "without recourse"
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Three reqs before a holder can look to an endorser for payment
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presentment
dishonor notice of dishonor |
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Presentment
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demand for payment made by one entitled to enforce on the drawee or the maker
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An endorser's liability on a check discharged unless:
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the check is presented for payment within 30 days after endorsement
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Presentment is excused if: 5
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1. person entitled to present cannot with reasonable diligence do so
2. maker or acceptor has repudiated the obligation 3. by the instrument;s terms, presentment is unnecessary 4. the obligor has waived presentment 5. the drawer instructed the drawee not to pay |
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Dishonor
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occurs when the maker or drawee does not pay within the allowed time after presentment
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Notice of dishonor
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endorser is not liable unless she is given timley notice that the instrument has been dishonored
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Notice of dishonor must be given:
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within 30 days of dishonor
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Who is notice of dishonor made to?
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the endorser, not the maker or drawer
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multiple endorsers
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Endorser is liable for the full amount at the time she endorsed it to any holder or later endorser
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Warranty transfers are made by any person who
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transfers the instrument for consideration
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When do transfer warranties run to all subsequent holders?
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If the transfer is by endorsement, but run only to the immediate transferee if the transfer is not by endorsement
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what is irrelevant to warranty liability
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presentment, dishonor, etc..
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A transferor warrants that: 6
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1. She is entitled to enforce the instrument
2. all signatures are genuine or authorized 3. no material alterations 4. no defense or claim is good 5. no knowledge of insolvency proceedings against maker, acceptor, or drawer 6. If instrument is a "remotely created item," creation was authorized by the drawee |
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Importance of consideration to warranty
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Transferor who gratuitously transfers the instrument warrants nothing
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What cannot be drawn without recourse?
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checks
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Liability of drawer
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liable if draft is dishonored and obliged to pat according to draft's terms when they signed unless the draft is accepted by a bank
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liability of drawee
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no liability unless she signs the instrument
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Duties of drawee bank to customer
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bank may be liable to its customer for failure to honor the draft is there are sufficient funds
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Insufficient funds
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bank may pay and customer is liable for overdraft
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Duties of customer to bank
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discover and notify bank of any unauthorized payments
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How is loss from unauthorized payments allocated?
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btw the bank and customer in proportion to the fault of each
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Death of a customer does not revoke bank's authority to pay a check until the bank: 2
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1. knows of the death, and
2. has a reasonable time to act on the knowledge (10 days) |
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Subrogation
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Bank that pays a check has rights of the person it pays against the customer. Thus, if a bank pays an HDC, it assumes the position of an HDC in attempting to charge it's customers accounts.
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How long is a written stop payment order binding in Texas and can it be renewed?
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6 months, yes
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Effect of stop payment orders
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bank must be given reasonable time to act and does not have to stop payment on cashier's checks
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Burden if bank pays despite stop payment
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on customer to prove loss has occurred and amount of the loss
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Effect of HDC in chain in stop payment situation
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customer cannot recover because even if payment had been stopped, customer would have had to pay HDC
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Bank's right to recover payment from party paid
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generally may not recover unless breach of transfer warranty
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acceptor
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one who signs a draft and therby becomes primarily bound to pay the instrument
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Certification of a check
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acceptance of a check by the bank on which it was drawn that discharges the drawer and all prior endorsers
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accomodation party
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signs an instrument for the purpose of incurring liability without being a direct beneficiary, she is really a surety
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What if an accommodation party pays the instrument
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she will have an action against the accomodated, irrespective of the parties formal positions on the instrument
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liability of accomodation party
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never liable to the party accomodated but is liable in the capacity in which she signed
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Proof of accomodation status
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if signature is anomalous or otherwise indicates that the signer is acting as surety or guarantor
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collection guaranteed means the signed will be liable only if: 2
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1. the person entitled to enforce has reduced his claim to judgment, or
2. seeking judgment would be futile |
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If drawee signs the instrument
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the drawee becomes acceptor and is primarily liable on the instrument while drawer's liability is discharged
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Liability of principal if agent signs
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bound if the agent had authority to sign
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Liability of principal where agent did not have authority to sign 2
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ratification
estoppel |
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Liability of agent in signing principal's name
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none
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agent signs own name but discloses principal
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not bound
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agent signs own name but does not disclose principal
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agent is liable to HDCs who take without notice
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agent signs check
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not liable if it is drawn on the principal's account and indicates the principal's identity
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effect of unauthorized signatures
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ineffective as the signature of the person whose name is signed but is effective as the signature of the signer so the signer assumes all obligations to any party who gave value
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five circumstances in which a forgery or unauthorized signature will be validated
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1. Issuance to impostor or to a payee not intended to have an interest
2. Fraudulent endorsement by employees 3. Negligence contributes to forgery (leaving blanks or mailing to person with same name as payee) 4. bank statement rule violated 5. estoppel by certification |
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Bank statement rule
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failure to discover forgeries and alterations within a reasonable time after receiving bank statement
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effect of non-fraudulent alteration
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do not discharge parties and instrument may be enforced according to original terms
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effect of fraudulent alteration
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discharges all parties except payor bank, drawee, or an HDC may enforce according to original terms
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When can maker safely pay and avoid further liability?
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If party seeking payment is a true holder
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For a third party to protect his claim to an instrument he can: 2
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1. offer to indemnify the maker while the other parties fight it out, or
2. seek an injunction |
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When can a maker definitely not safely pay the holder
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if she knows the holder acquired the instrument by theft
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PAyment is final excpet that: 2
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1. the payor can pursue those who breach transfer warranties; and
2. the rule of finality operates only in favor of persons who took for value in good faith |
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two types of presentment warranties
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1. those made on unaccepted drafts
2. those made to payors of other instruments |
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Unaccepted draft - oerson warrants that:
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1. he is entitled to enforce
2. no knowledge that drawer's signature is unauthorized 3. no material alterations 4. for remotely created instrument, creation must be authorized by drawer |
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Effect of forged endorser's signature
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desrorys good title
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Effect of forged drawer's signature
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des nto destroy good title
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What if bank pays out on forged drawer signature
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payment is final and bank cannot recover the money from the party paid because no presentment warranty is broken
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What if bank pays out on forged endorser signature
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A presentment warranty is broken
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Who makes warranties? 2
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- any person who obtains payment or acceptance, and
- any prior transferor |
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effect of discharge on an instrument
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never dies by discharge bc discharge of a party is a personal defense which an HDC can cut off
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When certified, cashier's or te;;er's check is given to fulfill an obligation
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obligation is discharged but does not affect endorse liability of the obligor
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any other instrument given to fulfill an obligation
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underlying obligation is suspended until the instrument is paid or certified
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lost, stolen or destroyed instruments
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obligation remains suspended and obligee is limited to enforcement (no discharge)
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Accord and satisfaction
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tender of instrument stating it is tendered in full satisfaction of a disputed claim discharges
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Discharge by payment
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payment discharges even if made with knowledge of a claim against the instrument unless the claimant indemnifies the payor or enjoins payment
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no discharge by payment when:
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payor knows the instrument is stolen and pays one she knows is in wrongful possession
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effect of discharge by payment on interest
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discharges any duty to pay interest after the due date
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Even w/o consideration, enforcers may discharge a party through: 2
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- intentional voluntary acts, or
- renouncing rights in a signed writing |
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Effect of discharge on secondary obligor 2
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- discharges principal from any duty owed to secondary, and
- discharges secondary to the same extent as principal |
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Effect of extension or modification on secondary obligor 2
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- extends time for performance or modifies any duty owed to secondary by principal
- secondary is discharged to extent extension or modification would cause him a loss |
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effect of impairment of collateral
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obligation of secondary is discharged to the extent of impairment
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When is secondary not discharged? 2
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if person entitled to enforce does not know of secondary or has no notice of accomodation signing
or if secondary consents and waives defenses |
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burden of proof of discharge
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party asserting discharge
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discharge by reacquistion
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reaqcuirer may cancel endorsements made btw time she formerly held instrument and present
Cancellation also discharges as against subsequent holders including HDCs |
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discharge by delay in presentment of check
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if check is not presented or deposited w/in 30 days of endorsement, endorser is discharged
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other types of discharge
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- by failure to give notice of dishonor
- by acceptance of a draft by a bank - by alteration |
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Check offered as accord and satisfaction, five elements
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1. tendered in good faith
2. claim was unliquidated or subject to bona fide dispute 3. other party obtained payment of the check 4. check or accompanying statement contained conspicuous statement that check was tendered in full satisfaction, and 5. return of the check was not w/in 90 days or if it was that it did not prevent a&s bc agent knew it was tendered in satisfaction |
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How does a party whose agent accepts a check as accord and satisfaction disprove acceptance? 2
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- return the funds w/in 90 days
- agent did not have direct responsibility with respect to the disputed obligation. |
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What prevails if a not contains contradictory terms (like two different dates)?
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handwritten terms prevail over typewritten terms
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When is negotiability determined?
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at issuance
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can anything done subsequently to a negotiable instrument change its negotiability status?
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no
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would an indorsement conditioning payment on a negotiable instrument destroy negotiability?
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no
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