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74 Cards in this Set

  • Front
  • Back
two party instrument

maker = person who signs or is identified in a note as the person undertaking to pay

payee - person to whom the not is payable
three party instrument

drawer - person who signs or is identified in a check as the person ordering payment

drawee - person ordered in a check to make payment

payee - person to whom the check is payable
bank check - cashier's check
check with respect to which drawer and drawee are the same
bank check - teller's check
check where drawer is a bank and a different bank is the drawee
bank check - certified check
drawn by drawee bank's customer and "acccepted" by drawee bank (e.g. stamped "certified")
requirements for negotiable instrument

1. writing - must be tangible
2. signed by maker (note) or drawer (check) - can include any symbol made with present intent to authenticate
3. promise to pay (note) or order to pay (check) - not an "IOU" and not precatory language
4. unconditional
5. fixed amount - principal (interest and charges can vary)
6. money
7. no other undertaking
8. payable on demand or at definite time - if no time specific, payable on demand
9. payable to order or to bearer
unconditional promise - requirements for negotiable instrument
negotiable instrument can limit payment to a particular source of funds

and can refer to underlying conditional contract

BUT if instrument is "subject to" or "governed by" terms of another agreement, NOT negotiable

UNLESS the second agreement addresses rights concerning collateral, prepayment, or acceleration (security interest situation)
permissible "other" undertakings - requirements for negotiable instrument
UCC permits:
* provision by maker or drawer ot give or maintain collateral securing payment
* provision authorizing holder to confess judgment or realize on any collateral
* provision by maker or drawer waiving legal protections

also ok for maker or drawer to promise to pay costs of collection and attys' fees
order paper - definition and types
note or check made payable to:
* "to the order of"
* an identified person

promissory note order paper = I promise to pay "to the order of Paul Payee"

check order paper = pay "to the order of Paul Payee" (does not need "to the order of")
bearer paper - definition and types
note or check made payable to the bearer of the instrument

promissory note bearer paper - "I promise to pay 'bearer'" (or "to the order of bearer" or "to the order of cash" or "to cash")

check bearer paper - "Pay 'to the order of cash'" (or "to the order of bearer" or "to bearer")
assignment v. negotiation
it is possible to assign a non-negotiable instrument to a 3d party

negotiable instrument can only be assigned under K law to 3d party

3d party assignee only gets the rights that the payee/assignor had

if payee negotiates the instrument to a 3d party, the 3d party is a holder
negotiation - definition
transfer of an instrument in a way that makes transferee a holder
holder - definition
person in possession of bearer paper


person in possession of order paper that has been properly issued or properly indorsed to her
negotiatinon of order paper
NEED indorsement AND (voluntary or involuntary) transfer of possession
indorsement- types - negotiation of order paper
indorsement = signature on instrument for purpose of negotiating it (and/or making indorser liable)

special indorsement = indorsement that also names a particular person as indorsee (pay to the "order of" - not necessary)

blank indorsement = does not name indorsee (person to whom instrument is next payable) - generally just a signature

anomalous indorsement = indorsement by person not the holder - NOT effective for negotiation
negotiation of bearer paper
can be negotiated by possession alone (voluntary or involuntary)
converting paper
if order paper is indorsed in blank, it becomes bearer paper

if bearer paper is specially indorsed, it becomes order paper

holder can convert blank indorsement to special indorsement by naming an indorsee above the blank instrument
banks and indorsemenet of order paper checks
GENERALLY, order paper check must be indorsed by holder and possession transferred tot he identified payee in order to make the transferee the holder

BUT a depositary bank (where check is first deposited for collection) can become holder without signature if the depositor was a holder at the time of deposit
indorsement "without recourse"
negates indorser liability

BUT does not affect negotiability
effect of forgeries on holder
GENERALLY, a person cannot be a holder IF ANY necessary indorsement was forged - none of the parties from teh forger on are holders, none are entitled to the money (if note, maker need not pay - if check, banker cannot pay)

EXCEPTIONS to general rule- ratification, imposter rule, fictitious payee rules, responsible employee rule, negligence rule

BUT bearer paper can be negotiated by transfer of possession alone (voluntary or involuntary)
lost, stolen, or destroyed instruments
GENERALLY, a person who is not in possession of the instrument can pursue an action to collect IF
* he was entitled to enforce the instrument
* AND it was lost, stolen, or destroyed

must prove right to enforce, instrument's terms,a nd explain what prevents its production

ct might require bond to protect against claim by another person who shows up to enforce the instrument
liability on instrument - generally
NO person is liable unless his signature or that of his authorized agent appears on the instrument

unauthorized signature is not effective (subject to exceptions)
liability on instrument - signature by authorized agent
If agent signs her own name

AND principal has given her authority (actual/apparent)

agent is not bound IF signature unambiguously shows that it was made on behalf of the principal

AND principal is identified somewhere in the instrument
liability on instrument -
signature by unauthorized agent
signature binds the agent but not principal (unless ratification)
maker's liability on a note
maker is simply liable to pay when its due

duty owed to person entitled to enforce the note

and to indorser who has paid the note due to his indorser liability

(unless instrument provides otherwise) two or more peoplepeopel who sign as co-makers are jointly and severally liable (entitled to contribution against one another)
drawer's liability on a check
drawer is liable to pay only after (trigger) presentment to and dishonor by the bank

not generally entitled to notice of dishonor

drawer liability owed to person entitled to enforce the check (holder) and to inderoser who has paid the check due to indorser liability
drawee's liability on a check
bank is not obligated to pay the check UNLESS the drawee bank "accepted" the check (e.g. certified check)
indorser's liability on the instrument (note or check)
obligated to pay according to terms of the instrument at the time of indorsement

indorser's liabiltiy owed to person entitled to enforce the check and to person (indorsing later in time) who has paid the instrument due to his indorser liability (reimbursement)

* timely presentment (formal demand for payment 30 days)
* dishonor of the instrument (bank must dishonor by midnight of next banking day following receipt of the check)
* notice of dishonor - IF check, bank has midnight deadline and other people have 30 days - IF a note, notice required in 30 days

presentment and notice of dishonor can be waived / excused
qualified indorsement
"without recourse" - disclaims indorser liability
discharge by payment
IF instrument is paid to the proper person (the holder) - payment discharges the paying party's liability on the instrument and liability on the underlying obligation

IF the instrument is dishonored, the party is liable ont he instrument and on the underlying obligation (but only for one recovery)
discharge by tender of payment
IF holder refuses tender of payment, indorser who has right of recourse is discharged to the extent of the amount tendered

a tender of the amount due discharges any duty to pay interest accrued after the due date
discharge by cancellation
any person entitled to enforce (holder) can discharge any party by voluntary affirmative act

no consideration is reuired
discharge by renunciation
any person entitled to enforce (holder) can discharge any party by a signed writing agreeing not to sue or otherwise renouncing rights

no consideration is required
discharge of contract and security interest liabilty
any person liable on an instrument can be discharged by any act or agreeement discharging that party's liability on a simple K
bank check liability
IF cashier's check, teller's check, or certified check - underlying obligation is discharged when taken by payee

for cashier and teller checks, issuing bank is liable on the check

for certified check, certifying (accepting) drawee bank is liable on check

if you indorse a cashier's check, you would be liable as an indorser even if underlying transaction would be discharged
transfer liability
IF person voluntarily transfers an instrument for consideration - transferor makes warranties (even if he hasn't indorsed):

1. transferor is a person entitled to enforce the instrument
2. all signatures are authentic and authorized
3. instrument has not been altered
4. no defense or claim of any party is against the transferor

only applies to transferors, not original drawers / makers

warranties run to all subsequent transferees UNLESS the transfer is other than by indorsement
conversion liability and stolen checks
an owner of a lost or stolen check can recover in conversion if check is taken or paid over an unauthorized indorseemnt

owner of check can recover BUT only if she had taken possession

owner of check can recover from drawee bank, depositary bank, and anyone else who took the check and did not act in good faith
holder in due course - definition
who gives value for the instrument
in good faith
without notice of certain things
holder - definition
holder is a person in possession of bearer paper

OR in possession of order paper that has been issued or properly indorsed to him
value (commercial paper) - definition
look for executed / performed consideration

a party is an HDC to the extent that the agreed consideration has been performed (can be a "partial HDC")

promise to give value is not enough

depositary bank does not become a holder for value until it allows customer to withdraw against the credited amount (first-in, first-out rule)
good faith - definition
honest in fact in the conduct or transaction concerned

subjective inquiry - what did the holder know at the time she was negotiated the instrument
no notice - definition
HDC must take instrument without knowing (or should have knowing) that:

* instrument is so irregular or incomplete as to call into question its authenticity
* instrument is overdue or has been dishonored (or any part of the principal is overdue) - checks are overdue 90 days after date
* instrument contained an unauthorized signature or has been altered
* there is a claim to the instrument
* any party has a defense or claim in recoupment on the instrument (e.g. failure of consideration, breach of warranty, breach of fiduciary duty)
NOT prohibited notice
notice that instrument is antedates, undated, postdated

notice of incomplete instrument that has been properly completed

notice of purchase at discount (but coupled with other circumstances, a huge discount could make you suspicious)
shelter rule
instrument's transferee acquires whatever rights her transferor had

BUT IF you engage in fraud with payee, no rights of HDC

AND NO shelter if transferor is the original payee to the underlying transaction - seller is the original payee to the goods transaction giving rise to the check
real defenses & HDC
HDC takes free of obligated party's personal defenses and claims but takes subject to real defenses
real defenses
infancy of maker or drawer - to the extent that it is a defense to a simple K

incapacity, duress, or illegality of the transaction which nullifies party's obligation (probably must be pretty bad)

fraud in the execution of an instrument (fraud in the factum)

any other discharge of which holder has notice when he takes the instrument

statute of limitations (3 yrs for check, 10 yrs for note) - on demand instrument period runs when demand is made - on time instrument, runs when payment is due
properly payable rule
payor bank can pay out customer's money ONLY if it follows customer's orders exactly.

IF it doesn't, it must recredit customer's account

1. check with forged drawer's signature is not properly payable

2. check with forged or missing indorsement is not properly payable

IF an instrument is payable to payees jointly, signature of all payees is necessary to negotiate or to enforce the instrument

IF instrument is payable to payees severally, any payee who is in possession of the instrument can negotiate or enforce the instrument

3. IF check has been altered, customer/drawer's account can only be charged original amount of check

4. payment over a valid stop payment order is not properly payable

5. drawee bank can honor overdraft but doesn't have to - no obligation to hnor a check more than 6 mos old but can charge account in good faith
stop payment order
you have to describe the check with reasonable certainty and order must be received by bank at a time and in a manner that afford bank reasonable opportunity to act

effective for 6 mos but lapses after 14 calendar days if original order was oral and not confirmed in writing within that period

bank cannot contract around liabilty for negligently failing to honor a valid stop payment order

burden of establishing fact and amount of loss resulting from payment over a valid stop payment order is on the customer
wrongful dishonor
payor bank is liable for damages caused by wronful dishonor of a check

liabiltiy is limited to actual daamges proved and can include damages for arrest or prosecution or other consequential damages
forged indorsement and bank liability
IF you havd been holder and it was stolen, you can sue the Drawer

Drawer can then sue bank for cashing check that was not properly payable
presentment warranty liability
party presenting check to depostiary bank and each of earlier transferors of the check, make three presentment warranties to drawee bank:
* they are entiteld to enforce the check (they are the holder)
* the check has not been altered (forgery is not an alteration)
* they have no actual knowledge that drawwer's signature was forged

if drawee bank recovers from earlier transferor, that transferor can recover from previous transferor on transfer warranty liability theory
loss for a forged indorsement
GENERALLy should pass to the earliest solvent person after the forger (or the forger herself if possible)
forged or otherwise unauthorized drawer signature
drawee bank can seek recovery from earlier transferors under breach of presentment warranty that each of the earlier parties had no actual knowledge the drawer's signature was forged.

Typically they have no actual knowledge so drawee bank bears loss.
restrictive indorsement
ex: indorsed, "for deposit only"

if subsequent parties do anything but deposit - indorser can sue them
party, with full knowledge of the forgery or lack fo authorization, accepts the benefits thereof or actively assents to the wrongful activity

(covers alterations as well)
imposter rule
if imposter dupes maker/drawer into issuing instrument, imposter’s forged indorsement is validated as to person who, in good faith, paid the instrument or took it for value or collection

if the imposter merely obtains check by falsely claiming to be payee's agent (instead of claiming to be payee), impsoter's forged indorsement of payee's signature is effective
fictitious payee rules
1. IF maker of a note or the drawer of a check does not intend at the time that the instrument was issued for the person identified as the payee to have any interest int eh instrument, then an 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

2. IF the person idetnified int eh instrument as the payee is fictitious, then an indorsement in the name of the payee is effective

indorsement is effective in favor of a person who, in good faiht, pays the instrument or takes it for value or collection

(check-writing machine wouldn't make a difference)
fraudulent indorsement by employee entrusted with responsibility
IF employer entrusts employee (inlcuding independent Kr) with responsibility with respect ot an instrument and employee makes a fraudulent indorsement on the instrument, the indorsement is effective

1. indorsement made in name of employer to instruments made payable to temployer
2. indorsements in name of payees of instruments issued by employer
negligence rule
IF a person, by his negligence, substantially contributes to a material alteration or the making of an unauthorized signature, he is precluded from asserting the alteration or lack of authority against a HDC or the drawee or other payor who pays in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business

any form of slovenly business practice may be negligent
comparative negligence
IF drawee bank or other person paying instrument or taking it for value or collection...

and fails to exercise ordinary care...

the person bearing the loss may recover from drawee bank or other person failing to exercise ordinary care tot he extent the failure contributed to the loss
bank statement rule
1. when bank makes statement (or returned checks) available to customer, customer must use reasonable care to determine whether signature was unauthorized or there was an alteration on check and promptly notify

2. customer liable for loss where same wrongdoer forges or alters a repeated check unless customer gives bank notice within reasonable time (<30days) after statement is made available

3. if drawee bank fails to exercise ordinary care in paying check, loss is allocated between drawee bank and customer

4. without regard to which is negligent, customer is precluded from asserting unauthorized drwawer signature or any alteration ont eh face of the instrument if he does not notify bank w/i1 yr of statement being available
alteration - definition
unauthorized change in an instrument that purports to modify the obligations of any party

nonfraudulent alteration doesn't discharge any party or terms of instrument - can be enforced

fraudulent alteration discharges every party obligated on the instrument unless party assets to or is precluded from asserting the alteration
fraudulent alteration of a completed note and enforcement
person taking altered instrument for value, in good faith, and without notice of alteration may enforce according to original terms only
fraudulent alteration of an incomplete note
if you leave a blank on a note and somebody fills it in - you are screwed against an HDC
what does bank pay on an altered check?
payor bank paying a fraudulently altered check may properly pay the check according to its original (not altered) terms
fraudulent alteration of an incomplete check
if you leave a blank in a check - you are screwed
accommodation party - definition
signs instrument in any capacity to lend name/creditor for the benefit of another party to he same instrument (accommodated party)

typically signs as either co-maker (accommodation co-maker) or an indorser (accommodation indorser)

like a guarantor
accomodation party liability by type
IF indorser - obligation conditioned upon dishonor and notice of dishonor

IF accommodation maker - no condition
"collection guaranteed"
dealer must go after accommodated party first before trying to collect from accommodator
accommodated party liability
accommodation party is entitled to reimbursement from accommodated party

accommodated party cannot seek reimbursement from accommodation party
accommodation party - defenses
entitled to all defenses associated with capacity in which he signed


defense (real or persoal) that accommodated party could assert against holder (except discharge in bankruptcy, infancy, lack of capacity, and cancellation / renunciation)

IF HDC has the instrument, no personal defenses
suretyship defenses
IF a person entitled to enforce an instrument without getting the consent of the accommodation party does any of these things, accommodation party is discharged to extent of his loss:
* extension of time on the note
* any other rmutual modification fo he obligation unless creditor can show accommodation party did not suffer a loss
* impairment of collateral securing the obligation

suretyship defenses can be waived in the instrument
accommodation party & asserting suretyship defenses
accommodation party can only assert suretyship defenses against a party who has notice of the accommodation
accord and satisfaction
if a person acashes or deposits an instrument wiht notice that it is tendered in full payment of a disputed debt, the debt is dischrged in full

* person tendering payment acting in good faith
* debt is unliquidated or subject to a bona fide dispute
* person tendering instrument must provie EITHER the instrument contained a conspicuous statement that it was tendered in full satisfaction fot he debt OR the person accepting it actually knew that it was tendered in full satisfaction fo the debt

organization can designate a person or office to which such checks must be sent

IF the person cashing the check did not have actual notice that the check was tendered in full satisfaction of the debt,t hey can avoid the discharge by tendering repayment of the check amount wihtin 90 days