Ucc Article 3 Commercial Paper Mnemonics

Front 1

One 'MUST SOW' to be a negotiable instrument.

Back 1

• The 7 elements of negotiable instrument (NI) are “MUST SOW”
o (1) M – must be paid in MONEY only (US/foreign currency)
o (2) U – promise to pay must be UNCONDITIONAL
o (3) S – the instrument must be payable in a SUM certain (so that by looking holder can determine the amount owed).
 The instrument can contain an interest rate that can’t be calculated by looking at the instrument (i.e. prime interest rate, variable interest rate) provided the interest rate is readily accessible by quick check at index or a rate set by a financial institution.
 Post-default interest or a cost providing for reasonable attorneys fees in the event of litigation does not render the amount uncertain.
o (4) T – must be payable on demand or at fixed TIME or payable after some fixed future event
 Q: Is the term 60 days after my aunt’s death, fixed or determinable?
• A: No. Article 3 says that although death is certain, when death occurs is not a fixed time that can be easily determined just by loo

Front 2

'T-SAID' he warrants the endorsement

Back 2

• An endorser who transfers a NI and whose signature appears thereon warrants to his immediate transferee and to any subsequent holder: T-SAID
o T: has good TITLE
o S: all SIGNATURES are original and not forgery
o A: not materially ALTERED
o I
 has no knowledge of INSOLVENCY proceedings of the maker/drawer
o D:
 that no DEFENSES to the instrument are good against her

Front 3

A Holder in Due Course cannot know that the negotiable instrument is 'ODD'

Back 3

A Holder in due course is one who takes a negotiable instrument for VALUE, in GOOD FAITH and without ACTUAL NOTICE that the instrument is OVERDUE, DISHONORED or that there are any DEFENSES to the negotiable instrument. ['ODD']
O: OVERDUE
• Ex: A note due on 5/1/09 is overdue on 5/2/09.
o Note: Think about why someone is selling an instrument that is overdue.
• A check is STALE 30 days from the date of issuance and no HIDC can take the negotiable instrument after the 30th day.
o Note: This doesn’t mean you can’t cash old checks. 6 year SoL for checks.
o Checks are stale after 30 days. Can’t get HIDC if you got a check that is more than 30 days old!!!
• A holder who takes the check on a 31st day after check cannot take HIDC status – but may have recourse under SHTELTER DOCTRINE.
• 30 Day Rule applies to CHECKS only (put into bank for collection). 30 Day Rule doesn’t apply to NOTES.
o Checks involve 3 parties (maker of the note, payee, bank)
o Notes involve 2 parties (maker of note

Front 4

a 'MUFFIN' are personal defenses that will not prevail against a Holder in Due Course

Back 4

• A holder in due course (HIDC) takes free from all MUFFIN defenses of the 3rd party with whom the holder has not dealt.
o PERSONAL DEFENSES THAT WILL NOT PREVAIL AGAINST A HOLDER IN DUE COURSE (HIDC)
 Mistake
 Unconscionability of the underlying transaction
 Failure of consideration
 Failure of a condition subsequent or condition precedent
 Inducement fraud (fraud in the inducement of the contract - SIR M)
 Non-completeness of a completed instrument

Front 5

'DAFFIDILS' are real defenses and they prevail against and stop a Holder in Due Course

Back 5

• A HIDC takes subject to the following real defenses “DAFFIDILS”
o D – DURESS (threat of violence) (not economic duress)
 Ex: gun to your head
o A – material ALTERATION
 Ex: putting in extra zeroes on the check, changing numbers on the check
o F – FORGERY
o F – FRAUD IN THE FACTUM
 Fraud in the factum : arises when a person signs a NI believing that she was signing something entirely different
• Fraud in the factum is of no effect!
 Fraud in the inducement: fraudulently convincing a person to knowingly sign a negotiable instrument
o I – ILLEGALITY
o D – DISCHARGE in bankruptcy of the maker/drawer
o I – INFANCY of the maker/drawer/endorser
o L – LACK of mental capacity
o S – STATUTE of Limitations
 What’s SoL for NI?
• Check for wages: 6 years
• Check for personal loan: 6 years
• If for sale of goods: 4 years