Artice 3 - Negotiable Instruments (UCC) Flashcards
Promises to Pay
Notes: Maker (obligated to pay) & Payee (lender)
CDs: Maker (bank) & Payee (customer)
Orders to Pay
Checks: Drawer (customer writing check) & Drawee (Bank) & Payee (Rent/Mortgage Co Etc.)
Drafts: Drawer (Seller) / Drawee (Buyer) / Payee (to seller, third party)
Holder in Due Course (HDC)
To get to this, must meet all 6 requirements of negotioable instruments;
Draft
Three party instrument drawn by one party as a means of ensuring payment - Seller is drawer, buyer is drawee, seller or sellers bank is the payee
Check
A draft drawn on a bank - payable on demand - Do not need “to the order of”
Note
A written promise by a maker to pay money to another party or to bearer
Certificate of Deposits (CDs)
A not made by a bank acknowledging that it has a deposit of funds payable to the holder (usually payee)
Non-Negotiable Instruments
- Letters of Credit
- Warehouse Receipts
- Bills of Lading
- Stocks and Bonds
- Contracts
Requirements of Negotiability
- Written
- Signed
- Unconditional promise or order to pay
- Payable on demand/ or definite time
- Sum certain in money
- Words of negotiability
Bearer paper
made payable to bearer, an identified person, cash or some unidentified person
Order paper
“Pay to the order of” …. an identified person, an agent, trust, estate, office, or organization.
Examples of bearer paper
"pay to the order of cash" "Pay to joan smith or cash" "Pay to joan smith or bearer" "Pay to the order of joan smith or cash/bearer" "Pay to cash/bearer"
Examples of Order paper
“Pay to the order of joan smith”
“Pay to the order of joan smith and cash”
Bearer Instrument
Negotiated by mere delivery to a holder
Order Instruments
negotiated only by a delivery PLUS indorsement
Blank indorsement
Specifies no particular holder receive payment, converts order instrument into bearer instrument, transfers warranties
Special indorsement
Specifies a person/s to whom payment or to whose order payment is to be made- requires signature of person specified + delivery to negotiate further
- Converts a bearer instrument into or continues an order instrument as an order instrument for furthr negotiation
Qualified Indorsement
Indorsement without recourse; disclaims contrat signature liability; transfers warranties
Restrictive Indorsement
- Conditional - payment is conditional upon the happening of an event
- Prohibitive - Purports to prohibit further transfer of the instrument
- For deposit collection - Makes the indorsee (bank) a collection agent of the indorser
HDC
- Has greater rights than an assigne in seeking payment
- Usually determined if one or not at the time they receive the instrument
HDC REQIREMENTS
- Must be a holder
- Must take the instrument for value
- In good faith
- Without notice that the instrument is overdue, previously dishnored, or have any claim or defense
Holder
someone in possession of an instrument that runs to them - bearer paper, payable to their order, or indorsed to them
Value (HDC Requirement)
A holder takes value IF they give:
- Consideration
- Antecedent debt - a holder takes value if they take the instrument in payment of or as a security for this
- Negotiable Instrument - the holder takes value if holder gives this in payment for it
Without Notice
- Overdue
- Previously dishonored
- Claim or defense
Shelter Provision
Any holder who cannot qualify as an HDC but took the instrument through an HDC has the same rights as if an HDC
Presentment
HDC or hoolder _____ the instrument to the primary party for payment, this is the contractual obligation of the holder/HDC,
Primary parties
Maker or Drawee
Secondary parties
Payee, indorser, drawer
Time restrictions on presentment
30 days in order to be able to go back to secondary parties
- 6 month presumption of good faith by banks for cashing checks
Dishonor
The bank has until midnight of the following day to give notice, all other person/s have 30 days to give notice.
Contract Liability
depends on the role that the party plays with regards to the instrument, Primary parties are the makes of CDs and notes and the Drawees of drafts or checks; Secondary part liability lies with the drawers or indorsers; there is also accomodation party liability where the party has the same level of laibilty as the party he/she is accomodating
Warranty Liability
Presenters Warranties: 1. Has good title 2. Signatures are authorized/genuine 3. Instrument has not been altered Transferors Warranties: 1., 2., & 3. + 4. no claim or defense (without recourse gives up this liability) 5. No knowledge of insolvency proceeding
Defenses of obligation to pay
PERSONAL: Misktake, misrepresentation, fraud in the inducement, lack of consideration - (HDC still gets paid)
REAL: Forgery, fraud in factum, minority, insolvency, bankruptcy, illegality, mental incapacity, possibly duress if crime (can be assererted against all holders)
MIXED: duress no crime and material alteration (HDC can collect on orginal terms. holder gets nothing)
Unauthorized Signature Liability
- OF drawers signature: liability ultimately rests with th drawee
- OF payee/indorsers signature: “ with the first party to accept the instrument after the forged signature because the party had face to face
EXCEPTIONS to general rule
Bank is NOT liable is forgery is due to ficticious payees caused by a lack of internal controls, Negligence, or by an imposter.
