Artice 3 - Negotiable Instruments (UCC)

Question 1

Promises to Pay

Answer 1

Notes: Maker (obligated to pay) & Payee (lender)
CDs: Maker (bank) & Payee (customer)

Question 2

Orders to Pay

Answer 2

Checks: Drawer (customer writing check) & Drawee (Bank) & Payee (Rent/Mortgage Co Etc.)

Drafts: Drawer (Seller) / Drawee (Buyer) / Payee (to seller, third party)

Question 3

Holder in Due Course (HDC)

Answer 3

To get to this, must meet all 6 requirements of negotioable instruments;

Question 4

Draft

Answer 4

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

Question 5

Check

Answer 5

A draft drawn on a bank - payable on demand - Do not need “to the order of”

Question 6

Note

Answer 6

A written promise by a maker to pay money to another party or to bearer

Question 7

Certificate of Deposits (CDs)

Answer 7

A not made by a bank acknowledging that it has a deposit of funds payable to the holder (usually payee)

Question 8

Non-Negotiable Instruments

Answer 8

• Letters of Credit
• Warehouse Receipts
• Bills of Lading
• Stocks and Bonds
• Contracts

Question 9

Requirements of Negotiability

Answer 9

1. Written
2. Signed
3. Unconditional promise or order to pay
4. Payable on demand/ or definite time
5. Sum certain in money
6. Words of negotiability

Question 10

Bearer paper

Answer 10

made payable to bearer, an identified person, cash or some unidentified person

Question 11

Order paper

Answer 11

“Pay to the order of” …. an identified person, an agent, trust, estate, office, or organization.

Question 12

Examples of bearer paper

Answer 12

"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"

Question 13

Examples of Order paper

Answer 13

“Pay to the order of joan smith”

“Pay to the order of joan smith and cash”

Question 14

Bearer Instrument

Answer 14

Negotiated by mere delivery to a holder

Question 15

Order Instruments

Answer 15

negotiated only by a delivery PLUS indorsement

Question 16

Blank indorsement

Answer 16

Specifies no particular holder receive payment, converts order instrument into bearer instrument, transfers warranties

Question 17

Special indorsement

Answer 17

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

Question 18

Qualified Indorsement

Answer 18

Indorsement without recourse; disclaims contrat signature liability; transfers warranties

Question 19

Restrictive Indorsement

Answer 19

1. Conditional - payment is conditional upon the happening of an event
2. Prohibitive - Purports to prohibit further transfer of the instrument
3. For deposit collection - Makes the indorsee (bank) a collection agent of the indorser

Question 20

HDC

Answer 20

• Has greater rights than an assigne in seeking payment

- Usually determined if one or not at the time they receive the instrument

Question 21

HDC REQIREMENTS

Answer 21

1. Must be a holder
2. Must take the instrument for value
3. In good faith
4. Without notice that the instrument is overdue, previously dishnored, or have any claim or defense

Question 22

Holder

Answer 22

someone in possession of an instrument that runs to them - bearer paper, payable to their order, or indorsed to them

Question 23

Value (HDC Requirement)

Answer 23

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

Question 24

Without Notice

Answer 24

• Overdue
• Previously dishonored
• Claim or defense

Question 25

Shelter Provision

Answer 25

Any holder who cannot qualify as an HDC but took the instrument through an HDC has the same rights as if an HDC

Question 26

Presentment

Answer 26

HDC or hoolder _____ the instrument to the primary party for payment, this is the contractual obligation of the holder/HDC,

Question 27

Primary parties

Answer 27

Maker or Drawee

Question 28

Secondary parties

Answer 28

Payee, indorser, drawer

Question 29

Time restrictions on presentment

Answer 29

30 days in order to be able to go back to secondary parties

- 6 month presumption of good faith by banks for cashing checks

Question 30

Dishonor

Answer 30

The bank has until midnight of the following day to give notice, all other person/s have 30 days to give notice.

Question 31

Contract Liability

Answer 31

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

Question 32

Warranty Liability

Answer 32

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

Question 33

Defenses of obligation to pay

Answer 33

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)

Question 34

Unauthorized Signature Liability

Answer 34

1. OF drawers signature: liability ultimately rests with th drawee
2. OF payee/indorsers signature: “ with the first party to accept the instrument after the forged signature because the party had face to face

Question 35

EXCEPTIONS to general rule

Answer 35

Bank is NOT liable is forgery is due to ficticious payees caused by a lack of internal controls, Negligence, or by an imposter.