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61 Cards in this Set

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  • Back
Negotiable Instruments: Article 3
Applies to two kinds of instruments:
1) Notes
2) Drafts
Note: Generally
Two party commercial paper: a written and signed promise by one party (maker) to pay money to another party (payee or bearer).
Note: Certificate of Deposit:
CD is like a note in that two parties are involved. Code specifically defines CD as an instrument made by a bank, containing: 1) Acknowledgment that a sum of money has been received by a bank; and 2) Promise by the bank to repay.
Drafts: Generally
A 3 party commercial paper. A written and signed instruction by one (drawer) to a second person (drawee) demanding that drawee pay money to a THIRD person (payee or bearer) .
AKA Bill of Exchange.
Drafts: Checks
Specific type of draft: drawn on bank and payable on demand. Instrument will be deemed a check, even if it's called on its face by another term (e.g. money order)
IF a paper qualifies as both a note and a draft, a person entitled to enforce the instrument may enforce it as either.
Other kinds of instruments:
-Investments securities (UCC 8)
-Documents of title (UCC 7)
Stocks, bonds, warehouse receipts, bills of lading: All are negotiable, but not governed under UCC 3.
Analogize if you encounter one.
First delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person.
Maker or Drawer is the "Issuer"
Formal Requisitites of Negotiability:
1) Written and signed
3) Promise or order
4) to pay a fixed amount of money as described in the promise or order--e..g interest, other charges) THAT:
a) Is payable to order or to bearer
b) Is payable on demand or at a definite time.
c) Does not state any unauthorized undertaking or instruction by the person promising or ordering payment.
Unconditional: When is it Conditional
1) when it expressly states a condition to payment (If the Pats win the Superbowl, I will pay you $100.) ; or
2) States that the promise or order (or rights and obligations subject thereto) is subject to or governed by another writing. ("This note is subject to the sales agreement between the parties dated August 15.)
When Promise or Order NOT Conditional:
1) Mere reference to another writing ("This instrument is a down payment on the K to rent a building.") does not make it conditional
2) Limits payment to a particular source or funds: ("I promise to pay you out of the funds from my next wheat crop.") OR
3) Requires as a condition to payment a countersignature from the person whose specimen signature appears on the promise or order (e.g Traveler's Checks)
Effect of Reference to Separate Writing:
A negotiable instrument cannot be subject to another writing, but it may REFER to another writing. Mere reference is irrelevant to negotiability and rights of Holders in Due Course are not limited by the terms of the separate writing (unless HDC knows of the terms of the writing). However, as between the two parties, the terms of the negotiable instrument may be modified and controlled by the separate writing. Watch out for parol evidence rule issues!
Promise or Order to Pay:
Note must contain promise to pay. Draft must contain order to pay.
A promise is a written undertaking to pay money signed by the person undertaking to pay. (e.g. "I promise to pay") An order is a written instruction to pay money signed by the person giving the order (e.g. "Pay to the order of John Q. Public)
Promise or Order to Pay must be in writing
"Writing" very liberally construed--may be print, typing or any other "intentional reduction to tangible form."
Promise or Order to Pay must be signed
Any mark intended to identify, whether real or assumed name.
Fixed Amount of Money
Still negotiable if it calls for foreign currency, or any other government authorized medium of exchange.
Non-negotiable if it calls for payment with something other than gov't authorized currency, or a combination of currency and/or non-currency.
What is "Fixed"
Principal must be fixed.
Interest need NOT be fixed UNLESS the instrument calls for payment of interest
Payable to Order or to Bearer
Order paper is payable to person named.
Bearer paper is payable to anyone legitimately possessing instrument.
Payable to Order:
Payable to order of an identified person
Payable to Bearer
Payable if:
1) states that it is payable to bearer, order of bearer, order and bearer, etc.
2) Does not state payee
3) States that it is payable to cash, or otherwise indicates not payable to identified person.
ID of Payee:
The payee is governed by the intent of the maker or drawer. If more than one person issues the instrument (agent signs for maker/drawer) then any person intended by the signer may properly be paid.
Means of ID'ing Payee
Any: name, office, account number, etc.
Checks missing the magic words NOT payable to order or bearer, still negotiable.
Payable on Demand or at a Definite Time
On demand: states "on demand" or "on sight" or does NOT state time for payment.
At a definite time: States either a date or an ascertainable time OR on elapse of a specified period of time after sight or acceptance.
Time stated may be subject to rights of prepayment, acceleration, extension at the option of the holder, or extension to a further definite time either automatically or at option of maker or acceptor.
Payable at Definite Time:
Events certain to happen but uncertain as to time:
"Payable at Uncle Sam's death" or "30 days after Sam's death" non-negotiable.

Uncertain as to time
Payable at Definite Time:
Acceleration clause
"Payable 100 years from date, but if Sam should die, payable on his death." is negotiable

Certain. Acceleration clause does not destroy negotiability or certainty.
Payable at Definite Time:
Extension clause: 3 Types
1) Extension at option of maker
2) Extension on occurrence of event
3) Extension at option of holder
Payable at Definite Time: Extension Clauses Effect
Extension at option of maker / Extension on occurrence of event
MAY be included without affecting negotiability IF: extension is to further definite time stated in instrument.
"this instrument can be extended at the option of the maker"--no good: not definite.
"this instrument can be extended 30 days after the original due date at the option of the maker." Definite, therefore negotiable.

At option of holder ALWAYS negotiable. However, holder may not exercise this option if maker or drawer objects and tenders payment.
No Unauthorized Undertaking or Instructions:
Three undertakings or instructions MAY be included
1) Undertaking or power to give, maintain or protect collateral
2) Authorization or power to holder to confess judgment or realize on or dispose of collateral; and
3) Waiver of the benefit of any law intended for the advantage or protection of the obligor (waiver of presentment, notice of dishonor, homestead exemption, trial by jury, etc.)
Rules of Construction:
If terms are contradictory: typewritten controls over printed, handwritten controls over typewritten.
Words control figures UNLESS words are ambiguous or uncertain (illegible).
Opting Out
Promise or order that otherwise appears to be negotiable will NOT be negotiable if it contains conspicuous statement that it is NON-NEGOTIABLE. Rule does not apply to checks.
Two or More Signers in Single Capacity
Unless instrument specifies otherwise, two or more persons who have the same liability on an instrument (makers, acceptors, drawers or indorsers who indorse as joint payees or anomalous indorsers are jointly and severally liable in the capacity in which they sign.
E.g. if two people sign as makers of a note, either one can be held fully liable for the value of the note.
Negotiation: Process
Think of holder as person in possession of the instrument with a right to enforce it.
Negotiation: Holder Status
Bearer Paper
Negotiable instrument issued as bearer paper is negotiated simply by transferring possession of the instrument. Once transferee has possession, she technically qualifies as "holder."
E.g. Drawer writes a check to "Cash" which makes check bearer paper. If Drawer transfers check to Grocer, Grocer becomes a holder.
Negotiation: Holder Status
Order Paper: Specific Payee
Instrument payable to identified person is transferred by transfer of possession with indorsement of ID'ed person.
EX: Drawer writes a check payable to Payee. On receiving her check, Payee qualifies as the holder. If Payee subsequently wishes to negotiate the check, she must indorse it and deliver possession to her transferee who will then also qualify as a holder.
Negotiation: Holder Status
Order Paper: Specific Payee
Valid Indorsement:
Forgery breaks the chain of title and no subsequent holder can qualify as holder.
Genuine signature from infant or by fraud IS effective.
All necessary signatures must be included
Negotiation: Multiple Payees Indorsement
"George AND Martha Washington" requires indorsement by both.
"George OR Martha Washington" or "George AND /OR Martha" can be negotiated by signature of EITHER payee.
Negotiation: Location of Indorsement
ON the instrument. Typically on the rear but may also be placed on the front OR on a paper affixed to the instrument.
Negotiation: Effect of Transfer without Indorsement
Delivery may be effective to transfer possession, but not a negotiation without indorsement.
Negotiation:Transfer without Indorsement: Right of Transferee
Unless and until he obtains the indorsement, transferee does NOT qualify as a holder or have HDC status.
CAN: Sue to compel indorsement if transferee paid value
Sue to enforce instrument w/o indorsement. Would have to prove his ownerships
Negotiation:Transfer without Indorsement: Different Rules for Banks
Depositary bank that takes an unindorsed instrument for collection becomes a holder of the instrument if the CUSTOMER was a holder at time of delivery, even if customer has not indorsed the instrument.
Rule applies ONLY to instruments taken for collection. If bank held an instrument as collateral for a loan to a customer--no way to supply customer's indorsement.
Does NOT insulate bank from mishandling funds represented by the instrument.
(EX: Check drawn payable jointly to A and B cashes on A's signature only and forwards for collection. Bank liable to B for conversion of her interest in the check.
Negotiation:Transfer without Indorsement : Indorsement Later Obtained
Transferee becomes holder, may qualify as HDC if other requirements for due course are met.
Notice of Adverse Claim or Defense: for the purpose of determining whether transferee lacked notice of any adverse claim or defense to the instrument (essential element for HDC) her knowledge is measured at the time she obtained the missing indorsement. Knowledge of claim or defense arising between receipt of transfer and indorsement prevents HDC.
Negotiation: Indorsement of Partial Interests NOT a Negotiation
If indorsement attempts to convey less than the full amount of the instrument, transferee does not qualify as holder.
EX: D draws check payable to P, who indorses it "Pay 2/3 to George Washington, 1/3 to Martha Washington." Fuhgeddaboudit. Neither G nor M qualifies as a holder.
Indorsement "Pay to George and Martha Washington /s/ Paula" IS valid.

IF partial payment has been made on an instrument, indorsement of all that remains will be an effective negotiation.
Types of Indorsement:
Special or Blank
Qualified or Unqualified
Restrictive and Unrestrictive.
Special or Blank
Qualified or Unqualified
Restrictive and Unrestrictive.
Types of Indorsement:
Special or Blank
Special: Names a particular person as indorsee (e.g. "pay John Smith") Indorsee must sign for instrument to be negotiated further.
Blank: Becomes payable to the bearer, may be negotiated by delivery alone. (e.g. D writes check to P, who indorses "/s/ P" The check blows away and is picked up by F who takes it to G grocery store and indorses it "Mark Money" for groceries. G is a holder because the instrument was bearer paper at the time of F's forgery, and COULD have been negotiated by delivery alone. Forgery of names not necessary to chain of title will not prevent later takers from being "holders."
HOWEVER: Forgery of signature breaks the title if it's of someone necessary.
Multiple Indorsements:
Last Indorsement controls.
Qualified Indorsement:
Indorsement that adds the words "without recourse" qualifies the indorsement and limits legal liability otherwise imposed on indorsers under UCC.
Restrictive Indorsements:
Limit Transfer or Negotiation: Limiting payment to a particular person or otherwise preventing further transfer or negotiation not effective to prevent further transfer or negotiation.
Conditional indorsement stating a condition to pay: No-go.
"For Deposit" or "For Collection" indicate the intent of having the instrument collected by a bank for the indorser, then person or depositary bank must pay the instrument consistently with indorsement or will be deemed to have converted the instrument.
Anomalous Indorsement:
Indorsement made by person who is not a holder of the instrument. Anomalous indorsement does not affect manner in which instrument may be negotiated, but does make the signer liable on the instrument.
1) Holder
2) Authenticity Not Questionable
3) Gave Value
4) Good Faith
5) Without Notice
Shelter Rule
If transferee takes from an HDC, then they derivatively take HDC rights, even if they do not meet HDC requirements.
EXCEPT: where transferee engaged in some fraud or illegality affecting the instrument
Rights of HDC
Subject to Real Defense (work against HDC)
-obligor is a minor and can't enter Ks
-Lack of legal capacity
-Illegality making obligation void
-Fraud in fact
-Discharge of obligor in bankruptcy
Protected from Personal Defenses
Free From Claims to Instrument
HDC: Real Defenses: Forgery
Names necessary to title
Name of payee or any special indorsee forged. NO subsequent taker can be HDC
However, if person whose name was forged ratifies, or is estopped from denying the signature, subsequent takers can be HDC.
HDC: Real Defense: Real Fraud
Fraud that induced the obligor to sign with neither knowledge nor reasonable opportunity to learn of its character or its essential terms. Any OTHER type of fraud is most likely personal.
E.g. J, a non-English speaker, signs a promissory note after her accountant assures her it's credit application. REAL fraud.
E.g. H tells C that the car he's selling was driven only by a little old lady to church. C finds out that it was a demolition derby car. She stops payment on the check, if HDC now holds check, then C's defense can't be asserted--fraud defense is personal only.
HDC: Real Defense: Alteration of Instrument
Change in terms of the instrument--e.g. thief alters check amount from $10 to $1000 by removing decimal point. HDC may be able to collect only the real amount, however, in other situations, HDC may be able to collect on the instrument as altered.
HDC: Real Defense:Incapacity to K
Corporations failing take steps to transact business in the J.
However, K must be void from inception rather than merely voidable.
HDC: Real Defense: Infancy
If infancy would be a defense under state law in a simple K action, it is a real defense. If state law does not make K by infant void or voidable, infancy is only a personal defense and not assertable against HDC.
HDC: Real Defense: Duress
Instrument signed at gunpoint void, even in hands of HDC. However, one signed under threat to prosecute the son of the maker for theft may merely be voidable and that defense therefore not available against HDC.
HDC: Real Defense: Discharge in Insolvency Proceedings
Including assignment for benefit of creditors (state liquidation proceeding) and any other proceeding intending to liquidate or rehabilitate estate.
If SOL has run, even a HDC can't enforce.
Actions on unaccepted drafts must be brought within 3 years after date of dishonor or 10 years after date of draft (whichever is earlier)
Certified checks, traveler's checks, cashier's checks: 3 years from demand for payment to acceptor or issuer.
Conversion actions, etc. 3 years.

6 years: Actions on notes payable at a definite time, or on demand must generally be commenced within 6 years of demand is made, but SOL does not begin to run until stated due date.
HDC: Real Defense: Accommodation (Suretyship) Defenses:
Accomodation party is one who signs an instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the instrument.. Accomodation party is a surety. If HDC knows of accommodation when he takes the instrument, he takes subject to accommodation party's suretyship defenses (i.e. discharge to the extent of loss caused by extension of due date, material modification of obligation or impairment of collateral.)
HDC: Real Defense: Discharges Known to HDC
Takes subject to any discharge he's aware of (usu. personal defenses: e.g. P finally pays off mortgage on his house. He asks the mortgagee, Bank for his promissory note and is upset to learn that Bank sold it long ago but failed to tell P. If note is later presented to Peter by HDC for payment, he must pay again--since DC by payment is only a personal defense, however, he should be able to pass his additional liability to Bank in quasi K action fro money had and received.