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59 Cards in this Set

  • Front
  • Back
Accord and Satisfaction
i. Person tendering payment must act in good faith
ii. Debt must be unliquidated or subject to bona fide dispute
iii. Person tendering instrument must prove either
1. Instrument contained a conspicuous statement that it was tendered in full satisfaction, or
2. The person accepting it actually knew it was tendered in full satisfaction
iv. Organization may designated a person/office to which such checks be sent

If met, debt is discharged in full
Transfer Warranty Liability - 6 Elements
1. The transferor is a person entitled to enforce the instrument (the holder)
2. All signatures are authentic and authorized;
3. The instrument has not been altered
4. No defense or claim of any party is good against the transferor; and
5. No knowledge of any insolvency on the part of maker,acceptor or drawer
5. In the case of a payee-initiated draft, that the creation of the instrument according to the terms on its face was authorized by the person on whose bank account the instrument was drawn
Transfer Warranty Liability - who liable?
Whenever a person (i) voluntarily transfers an instrument (note or check), (ii) for consideration, the transferor makes a number of separate transfer warranties as of the time of transfer. Five are:
Payee-Initiated Demand Drafts
All elements of negotiability except signature

Must have:
i. The drawer’s printed or typewritten name or account number, or
ii. A notation that the drawer authorized the check; or
iii. The statement “no signature required” “authorization on file” “signature on file” or words to that effect
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
Maker's Liability on a Note
1. Obligated to pay the note according to its terms at time it was issued. No conditions on maker’s liability to pay the note; he is simply liable when it comes due.

2. Liable to a person entitled to enforce the note (the holder). Also owed to an indorser who has paid the note due to his indorser’s liability

3. Except as otherwise specified in the instrument, two or more persons who co-make or co-draw are jointly and severally liable

4. Unless otherwise agreed, a party having joint and several liability is entitled to contribution from his joint and several co-makers/co-drawers
Drawer's Liability on a Check
Obligated to pay the check according to its terms when drawer signed the instrument.

Drawer is liable to pay a check only after presentment to and dishonor (nonpayment) by the drawee bank. Drawer generally NOT entitled to notice of dishonor.

A drawer’s liability is owed to a person entitled to enforce the check (holder). A drawer’s liability is also owed to an indorser who has paid the check due to his indorser liability.
Drawee Bank's Liability on a Check
1. Not obligated to pay the check unless drawee bank accepts the check
2. Note – certified check means they signed and thus accepted the check
Fraudulent alteration of a completed note
i. Maker signs note to Payee, who then changes the dollar amount to higher. Maker doesn’t have to pay Payee anything when due

1. A person taking the altered instrument for value, in good faith and without notice of alteration (aka an HDC), may enforce it according to its original terms.

2. HDC may then recover difference from higher fraudulent amount from Payee for breach of transfer warranty
HDC defined and consequences of being an HDC
holder who gives value for the instrument in good faith and without notice of certain things

-takes free of personal defenses (WE FUC) but subject to real defenses (FAIDS)
Liability on an Instrument Generally
i. No person/entity can be liable unless his/its signature appears on the instrument or the signature of an authorized agent appears on the instrument
1. A forged or otherwise unauthorized signature is not effective as a signature of a person whose name was signed. See Exceptions below (negligence, Imposter rule, entrustment, fictitious payee, etc.)
Signature by Agent is valid if
a. Is valid just as if made by principal; generally doesn’t make agent personally liable, unless:

If agent signs her own name, and the principal has given her authority to sign on behalf, agent is not bound if: the form of signature shows unambiguously that it was made on behalf of principal and the principal is identified in the instrument

If agent fails this rule, she must show the original parties didn’t intend for her to be liable on the instrument. If HDC who took without notice of that will be free of agent’s personal defense and she remains liable

If agent is not authorized, then it’s not effective as signature of person whose name is signed, unless they ratify it

If agent is not authorized, her signature, or the forged signature of another, binds the agent.
Discharge of Liability by Payment
If 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 instrument is dishonored, the party is liable on the instrument and on the underlying obligation (only one recovery)
Discharge By cancellation or renunciation
i. Cancellation: any person entitled to enforce the instrument may discharge any party by a voluntary affirmative act such as surrendering the instrument to the party to be discharged, writing words like void, paid, discharged on instrument, striking out signature, or tearing up instrument. No consideration required for cancellation
ii. Renunciation: 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
Discharge on Simple Contract
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
Conversion Liability for Lost/Stolen Checks
i. owner of a lost or stolen check may recover in conversion if check is taken or paid over an unauthorized indorsement

ii. Owner of check can recover, but only if she had taken possession of instrument (even through an agent)

iii. A drawer of a check may not sue and recover in conversion

iv. The owner of the check may recover from drawee bank, depositary bank, anyone else who took check and did not act in good faith
Personal Defenses
fraud in the inducement,
consideration lacking
HDC - Value
a. executed consideration. Mere promise to give value is not enough. This includes old debt satisfaction (different from Ks).

i. Partial value: pay some now; promise to pay more later = only partial HDC to that amount

ii. Bank deposits: depositary bank doesn’t become holder “for value” simply by provisionally crediting a depositor’s account for a deposited check. It does give value when it allows customer to withdraw against the credited amount on a first-in, first-out basis.
HDC - Good Faith
honesty in fact in conduct or transaction concerned. Person need not exercise due care or follow reasonable commercial standards in order to be in good faith (pure heart empty head)
HDC - No Notice of obvious inauthenticity or ODDSAP - actual knowledge or reason to know of
i. The instrument is so irregular or incomplete as to call into question its authenticity, or

a. Rule: purchaser has notice instrument is overdue if she knows or has reason to know that any part of the principal amount is overdue
b. Rule: a check becomes overdue 90 days after its date

Dishonored upon presentment

Defenses or claim in recoupment (basically, personal defenses)
a. Notice of failure of consideration
b. Notice of breach of warranty
c. Notice of breach of fiduciary duty

Signature that is unauthorized
Property claim to instrument
Lost, Stolen, Destroyed Instrument
a. A person who is not in possession of a negotiable instrument can pursue an action to collect on it if he was entitled to enforce, and it was lost, stolen or destroyed.

Must prove right to enforce, terms, explain what prevents production. Court must protect person required to pay from other claims by other people seeking to enforce.
How to Negotiate Bearer Paper
negotiated by transfer of possession alone (can be involuntary - watch for thief example)
How to Negotiate Order Paper
Indorsement + Transfer of Possession (may be voluntary or involuntary)
Types of Indorsement - Special, Blank, Anamolous
i. Special Indorsement: An indorsement which also names a particular person as indorsee. Words of negotiability (pay “to the order of”) not required on indorsement

ii. Blank Indorsement: does not name an indorsee; generally consists of holder’s mere signature

iii. Anomalous Indorsement: indorsement by a person who isn’t the holder. Not effective for negotiation
HDC - Things that don't constitute prohibited notice
1. Notice that instrument is antedated, undated, postdated

2. Notice of incomplete instrument that has been properly completed
a. Notice of improper completion is notice of a defense (above).

3. Notice of purchase at discount
a. Large discount alone is not bad faith per se. Look to other circumstances
HDC - Shelter Rule
an instrument’s transferee acquires whatever rights her transferor had
1. Exception: if transferee engaged in fraud with original transferor to HDC, she cannot shelter

ii. No Shelter where transferor is original payee to underlying transaction
Banks - Properly Payable Rule
Payor Bank may pay out customer’s money only if it follows customer’s orders exactly. If it doesn’t do so, it must recredit the customer’s account

i. Check with Forged Drawer’s Signature not Properly Payable

ii. Check with Forged Indorsement not Properly Payable

iii. Altered Check: where a check has been altered, the customer/drawer’s account can be charged only original amount of the check

iv. Payment over Customer’s Valid Stop Payment Order not Properly Payable
1. A customer may stop payment of a check drawn on customer’s account by an order to drawee bank 1) describing the check with reasonable certainty and 2) the order must be received by the bank at a time and in a manner that affords bank a reasonable opportunity to act on it
2. Stop payment order is effective for 6 months, but lapses after 14 calendar days if the original order was oral and wasn’t confirmed in writing during that period
3. The bank may not contract out of liability for negligently failing to honor a valid stop payment order
4. Burden of establishing fact and amount of loss resulting from payment over valid stop payment order is on customer
Overdrafts, Stale Checks, Provisional Credit, Postdated Checks, and Legends
i. Overdrafts, Stale Checks, And Postdated Checks, Legends

1. Overdraft Rule: 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 already agreed to do so with customer.

2. Stale Checks: Bank is under no obligation to a customer to pay a check more than 6 months old, but it may charge the account thereafter in good faith

3. Postdate Rule: A 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 bank a reasonable time to act on this notice

4. Legend: If check contains legend such as void after 60 days, it is not clear if check is still properly payable after 60-day period

5. Provisional Credit: credit made to a customer’s account for items deposited by customer is only provisional, and may be revoked before midnight of the following banking day.
Wrongful Dishonor by Bank
payor bank is liable to its customer for damages caused by wrongful dishonor of a check. Liability is limited to actual damages proved and may include damages for arrest/prosecution/other consequential damages
Restrictive Indorsement ("for deposit only")
i. Payee may sue Depositary Bank, thief, etc. if thief steals check with “for deposit only, Pam Payee” indorsement because they failed to deposit check proceeds in Payee’s account

ii. Not valid: cannot restrict an indorsement “only to X”. If X is the holder, he may still transfer it as he pleases, without regard to the “only to” language.
Ratification of Forgery
a. 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

i. Note: covers alterations as well
Imposter Rule
i. 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.

ii. Note: if imposter doesn’t really claim to be the payee, but merely obtains the check by falsely claiming to be the payee’s agent, the imposter’s forged indorsement of the payee’s signature is effective
Fictitious Payee Rules
i. If maker of a note or drawer of a check does not intend at the time the instrument was issued for the person identified as the payee to have any interest in the instrument, any indorsement in the name of the payee is effective. Indorsement is effective in favor of a person who, in good faith, pays the instrument or takes it for value or collection
ii. If person identified in instrument as the payee is fictitious, then an indorsement in name of the payee is effective. The indorsement is effective in favor of a person who, in good faith, pays the instrument or takes it for value or collection
Negligence Rule
i. If person by his negligence substantially contributes to a material alteration or to making of unauthorized signature, he is precluded from asserting the alteration or lack of authority against an HDC or drawee or other payor who pays in good faith and in accordance with reasonable commercial standards of drawee’s or payor’s business

ii. If drawee bank or other person paying instrument or taking it for value or for collection (depositary bank) itself fails to exercise ordinary care, person bearing the loss may recover from drawee bank or other person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
Fraudulent Indorsement by Entrusted Employee Rule
i. If an employer entrusts an employee (including independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, indorsement is effective.
ii. Typical scenarios:
1. Indorsement made in name of employer to instruments made payable to employer
2. Indorsement in name of payees of instruments issued by employer
Bank Statement Rule
i. When bank makes bank statement (or returned check) available to its customer, customer must use reasonable care and promptness to determine whether customer’s (drawer’s) signature was unauthorized on a check or there was an alteration of a check and must promptly notify bank if customer discovers such a problem
ii. Customer is liable for any loss where the same wrongdoer forges or alters a second (third, etc.) check, unless customer gives bank notice within a reasonable period (max 30 days) after the statement (or returned check) is made available to the customer
iii. Customer can still recover if it shows the bank did not pay the item in good faith
iv. Customer is precluded from asserting unauthorized drawer signature or any alteration on face of instrument if he doesn’t notify bank within 1 year after bank statement or checks are made available to customer
Fraudulent alteration of a completed note
i. Maker signs note to Payee, who then changes the dollar amount to higher. Maker doesn’t have to pay Payee anything when due

1. A person taking the altered instrument for value, in good faith and without notice of alteration (aka an HDC), may enforce it according to its original terms.

2. HDC may then recover difference from higher fraudulent amount from Payee for breach of transfer warranty
Fraudulent alteration of an incomplete note
i. Maker gives payee note with dollar amount left blank and payee later fraudulently filled in larger amount than Maker intended. Payee then negotiates note to Holder
1. If Holder knows of unauthorized completion when note is negotiated to him, Holder is not an HDC and takes subject to Maker’s defense. Holder can collect nothing from Maker.
2. If Holder had no such notice of unauthorized completion, and otherwise qualifies as an HDC, he takes free of Maker’s defense, and can collect full amount
Fraudulent alteration of a complete check
Payor bank must credit account the full amount of fraud; and drawee Bank may recover full amount of fraud from depositary bank for breach of presentment warranty
Fraudulent alteration of an incomplete check
payor bank may charge customer’s account full amount of fraudulently altered but incomplete check (like blank price)
Real Defenses (FAIDS)
Fraud in the factum, Forgery

Alteration, Adjudicated Insane

Illegality, Infancy, Incapacity

Discharge through Bankruptcy, Duress, Discharge known to HDC

Suretyship Defenses, Statute of Limitations

SOL: i. Check: 3 years; note: 6 years
ii. On a demand instrument, statutory period runs when demand is made
iii. On time instrument, period runs when payment is due
Negotiable Instrument Requirements
(1) Writing
(2) Signed by maker or drawer
(3) Unconditional
(4) Promise to pay/Order to pay
(5) Fixed Amount
(6) In money
(7) No other Undertaking/instruction
(8) On demand or definite time
(9) to Order or to Bearer
Negotiable Instrument: To order or to bearer
(1) Must contain magic words of order or bearer language EXCEPT CHECK

Order Paper:
(A) I promise to pay X
(B) I promise to pay to order of X
(C) Pay to the order of X -

Check exception: Pay X is sufficient (to the order of not needed)

Bearer Paper
(C) I promise to pay bearer/to the order of bearer
(D) Pay to the order of cash/anything not definite person
NI: No other Undertaking or Instruction
nothing other than a simple, clean unconditional promise or order to pay.

i. Permitted extra undertakings:
1. Provision to give or maintain collateral
2. Provision to confess judgment or realize on any collateral
3. Provision waiving legal protections
4. Promise to pay costs of collection/attorney’s fees
NI: Unconditional
i. Conditional promise/order NOT OK

ii. Mere reference to underlying contract accompanying instrument does not render instrument’s promise to pay conditional

iii. If instrument is subject to or governed by terms of another agreement: that’s not ok

iv. Writing is unconditional even if it limits payment to particular source of funds
Negotiation of Order/Bearer Paper Consequences
1. If order paper is indorsed in blank, it becomes bearer paper

2. If bearer paper is specially indorsed, it becomes order paper.

3. A holder can convert a blank indorsement to a special one by naming an indorsee above the blank indorsement

i. Special rule for Banks: A depositary bank (a bank in which a check is first deposited for collection) can become a holder without the signature of the depositor if the depositor was a holder at the time of deposit.

ii. Without recourse: A party may indorse “without recourse” which negates indorser liability.
Bank Checks
i. 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 the drawee), or a certified check (a check “accepted” by the drawee bank on which it is drawn), the underlying obligation is discharged when payee takes check.

ii. With respect to the liability on the instrument for cashier and teller checks, the issuing bank is liable on the check, and for certified check, the certifying (accepting) drawee bank is liable on the check. The bank’s liability on bank check is discharged when the bank pays the proper person.
Accommodation Parties
(1) Party who signs instrument for purpose of lending his name to another party to it

(2) Accommodater get complete reimbursement from maker but is not liable to maker for contribution

(3) Extension/sale of collateral without accommodator's consent discharges him to extent he can prove change cased him loss

(4) Can assert any defense of
maker except, insolvency, infancy, and incompetence
AP - Collection Guaranteed
if “collection guaranteed” is on signature, dealer must go after accommodated party first unsuccessfully before collecting from AP.
AP - vs. HDC
HDC a. will strip accommodation party/accommodated party of their personal defenses. However, even an HDC will take subject to AP’s suretyship defenses if HDC knew at the time she took note that AP existed.

b. Dealer’s release of accommodated party’s payment does not discharge AP; can still recover, but AP retains right of reimbursement from accommodated party.
When Transfer Warranties Apply
i. The transferor need not have indorsed the instrument to incur transfer warranty liability

ii. Transfer warranties are not made by the drawer of a check or maker of a note

If the transfer is by indorsement, the transfer warranties run to all subsequent transferees. If the transfer is other than by indorsement, the warranties run only to the transferor’s immediate transferee
Indorser's Liability on Instrument
i. obligated to pay according to terms of instrument at time of indorsement.

1. Owed to a person entitled to enforce the instrument AND to a person indorsing later in time who has paid the instrument due to his indorser’s liability

Conditioned on presentment + dishonor + notice of dishonor
Effect of Forgery on Status as a Holder
i. a person cannot be a holder if any necessary indorsement was forged. The reason is because an unauthorized signature is ineffective.
ii. Exceptions: see Validation of Forgery below
iii. Order paper can be negotiated only by indorsement by the holder and transfer of possession. A person cannot become a holder if any necessary indorsement was forged.
Indorser Liability: Presentment and Dishonor
a. Timely presentment: a formal demand for payment. With a check, the indorser is discharged if the check is not presented for payment or given to a depositary bank for collection within 30 days after indorsement is made
b. Dishonor of the instrument: instrument isn’t paid when die. With a check, drawee bank must dishonor the check by returning it (or sending notice of dishonor if check is not available) by its midnight deadline. Otherwise, indorser’s liability is not triggered. Drawee bank’s midnight deadline expires midnight of next banking day following the banking day on which the drawee bank received the check.
Indorser Liability: Notice of Dishonor
a. Timely notice of dishonor: must be given to the indorser or else the indorser is discharged
i. Checks: 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 (see above).
1. Notice of dishonor by any other person with respect to a check must be given within 30 days after dishonor occurs.
ii. Notes: notice of dishonor must be given within 30 days after the dishonor occurs. Ordinarily, dishonor of a note occurs when the note is presented to the maker and payment is not made on the day of presentment. Exception: A note due at a definite time is deemed dishonored without presentment if it not paid when due.
b. Presentment and notice of dishonor may be waived or excused
Indorser's Liability: Qualified Indorsement
1. Qualified indorsement: indorsement “without recourse” negates indorser liability
Presentment Warranty Liability
1. : Party presenting the check for payment to Drawee Bank and each of the earlier transferors of the check each make three presentment warranties to Drawee Bank:

a. It is a person entitled to enforce the check (aka the holder)
b. The check has not been altered

c. It has no ACTUAL KNOWLEDGE that the drawer’s signature was forged

d. In case of payee-initiated draft, creation of instrument according to the terms on its face was authorized by person on whose bank account the instrument is drawn
Forged Indorsement
i. Drawee Bank may recover under presentment warranty liability

1. Because of the forged indorsement, none of the parties from the forger on is a holder entitled to enforce. Thus Drawee can recover

If Drawee Bank recovers from Depositary Bank for breach of presentment warranty, then Depositary Bank can recover from transferors before back to the forget for breach of 2 of 5 transfer warranties:
a. No one from forger on was entitled to enforce (aka the holder)
b. All signatures on instrument were NOT entitled and genuine
Forged/unauthorized Drawer's Signature
i. When drawee bank pays a check with a forged drawer’s signature, it can seek recovery from earlier transferors under breach of the presentment warranty that each of these earlier parties at the time of transfer had no actual knowledge drawer’s signature was forced

ii. Absent negligence on Drawer’s part, Drawee Bank will have to recredit her account since forged check is not properly payable

iii. Drawee Bank typically suffers the loss in forged’ drawer’s scenario (since depositary bank would likely not have actual notice)

iv. If Drawee Bank had dishonored the check because of the forged drawer’s signature (or because stop payment order was received), depositary bank would be left with the dishonored check and loss from any payments they made to forger. Depositary Bank can seek to recover from forger for breach of his transfer warranty or his indorser’s liability