Article 3 and $

Question 1

Questions to Ask if Holder Sues Maker for Payment of a Note

Answer 1

I. If a subsequent holder sues maker for payment of note, to what extent, if any, will they prevail? QUESTIONS TO ASK:
A. HDC?
B. Shelter?
C. ∆se that they can raise? real or personal?
D. how much money, if any, can they recover?

Question 2

Payment Systems Issues

Answer 2

II. payment systems:
A. What type of negotiable instrument are we dealing with?
B. Does it qualify as a negotiable instrument under 3-104(a)?
C. Has that negotiable instrument been properly transferred/negotiated?
D. What rights and responsibility do subsequent holders or HDC have? shelter rule/defenses
E. What is the liability of the maker, indorsers?
F. K relationship between banks and their customers when there’s wrongdoing
G. when you pay by plastic

Question 3

Types of Negotiable INstruements

Answer 3

III. TYPES OF NEGOTIABLE INSTRUMENTS
A. note: a 2 party instrument in which maker promises to pay the payee
B. draft: a 3 party instrument in which the drawer orders the drawee to pay money to the payee

Question 4

Negotiable Instrument Definition

Answer 4

IV. NEGOTIABLE INSTRUMENT: if any doubt, presumption that it’s non-negotiable
A. Writing:
B. Signed:
1. manual or by device or machine, any name, symbol, mark adopted or executed w/ present intention to authenticate a writing; can even be preprinted letterhead
C. Unconditional Promise or Order to Pay a
1. can’t state:
a) express condition to payment (“if,” “subject to,” etc.)
b) that it is governed by another record
c) that rights or obligations are stated in another record
2. not made conditional by
a) mere reference to another document for collateral, prepayment, acceleration
b) payment limited to resort to a particular fund or source
c) consideration being stated
d) statement that holder is subject to all claims & ∆ses issuer could assert against orig. payee (no one can be HDC)

D. Fixed Amount of Money:
1. fixed amount of principal, amount of interest doesn’t have to be fixed
2. can be payment in foreign currency
E. That States No Unauthorized Undertakings
1. can contain: undertaking to give, maintain, protect collateral, profession of a judgment, or waiver of a benefit of any law intended for the protection of an obligor
F. Payable on Demand or at a Definite Time
1. on demand: if note undated, payable at any time, on sight, at will of holder
a) postdated: not payable before time on instrument, banks can pay postdated check unless customer gives bank prior timely notice of postdating
2. at a definite time: fixed time, date readily ascertainable even if stated time subject to prepayment, acceleration, extension
G. Payable to Bearer or Order
1. bearer: not payable to any specific person, enforceable by person in possession
2. order: payable to an identified person or order, or payable to the order of an identified person
3. bearer or order→ bearer language controls
4. bearer paper can become order paper if specifically indorsed,
5. order paper can become bearer paper if indorsed in blank
6. exception for checks: if it meets all requirements except not payable to order/bearer, is a negotiable instrument

Question 5

Negotiation

Answer 5

V. Negotiation: need proper negotiation for someone to be a holder
A. Negotiation: transfer of possession, voluntary or involuntary, of an instrument by a person other than issuer to a person who thereby becomes a holder
1. order paper: negotiated by indorsement & delivery
2. bearer paper: negotiated by delivery
B. types of indorsement
1. blank: payee signs black of instrument→ turns into bearer paper
2. special: payee specifies new payee→ turns into order paper
C. forgery of payee’s name: breaks chain, no one down the line can be a holder
1. forgery of non-necessary signature doesn’t break chain (i.e. signature on bearer paper)
D. Lost, Destroyed, or Stolen Instrument:
1. must prove BOTH (1) terms & (2) right to enforce
2. can do so if you didn’t lose possession because of lawful seizure, didn’t transfer possession and can’t reas. obtain possession of the instrument

Question 6

Holder in Due Course

Answer 6

VI. HOLDERS IN DUE COURSE:
A. requirements:
1. negotiable instrument- 7 requirements above
2. negotiated: delivery (& indorsement for order paper)
3. holder: if properly negotiated
4. for value:
a) not a gift
b) promise to perform in future is only value to the extent holder has performed
c) bank gives value when they’re out of pocket something, NOT when they provisionally credit accts
d) payment of antecedent debt
e) get SI or negotiable instrument in exchange
f) incur irrevocable obligation to a third party
5. in good faith
a) honesty in fact and
b) observance of commercial standards of fair dealing
6. without notice: actual or constructive notice: that the instrument is
a) overdue: when principal, not interest, is overdue
(1) day after due date or demand made
(2) checks overdue when not deposited w/I 90 days
b) dishonored
c) unauthorized signature/alteration
d) possible ∆ses or claims in recoupment:
(1) real and personal ∆ses
(2) claims in recoupment: arise from same tx as instrument, legal ability to subtract from payment due the amount the collector owes the debtor
e) payee can be HDC, rare because HDC must be innocent of problems w/ tx & probably wouldn’t be

Question 7

Shelter Rule

Answer 7

B. Shelter Rule

1. transferee steps into the shoes of the transferor and gets their rights/status even though there is no proper negotiation (if you get instrument as a gift & don’t pay value, for example)
2. sheltering under someone’s HDC status:
   a) only subject to real ∆ses when going against primary obligor
   b) but when going against who you got note from, or transferors w/ no HDC between you, are subject to real and personal ∆ses (why you’d rather be HDC in your own right)
3. can shelter even w/ notice as long as you’re not in cahoots w/ orig. payee, no fraud or illegality

Question 8

Real Defenses

Answer 8

C. HDC is subject to Real Defenses

1. infancy = voidable
2. duress
3. illegality: underlying tx: drugs, gambling = void
4. fraud in factum: sign w/ no knowledge it is an instrument
5. discharge in insolvency proceedings like bankruptcy
6. forgery- not a party to the instrument
7. incapacity

Question 9

Personal Defenses

Answer 9

D. HDC is NOT subject to Personal Defenses

1. claims in recoupment
2. fraud in inducement: you’ve been duped, lied to, misrepresentation made you write check or issue note, even if you didn’t know what you were signing but had the opportunity to find out
3. failure of consideration
4. misrepresentation
5. mistake
6. lack of delivery

Question 10

Merger Doctrine

Answer 10

A. Underlying Obligation/Merger Doctrine:

1. once instrument was offered and accepted in satisfaction of an underlying obligation, the obligation merged with the instrument and until the instrument is dishonored the underlying obligation is suspended
   a) presentment: demand made by or on behalf of a person entitled to enforce the instrument to pay the instrument
   b) dishonor: when not paid on demand, or when due and present (when not payable on demand)
2. when the instrument is dishonored, COA for underlying obligation and on the instrument
3. when the instrument is discharged, both obligations go away

Question 11

Unauthorized Signatures

Answer 11

B. Obligation arises from your signature on the instrument
1. unauthorized signature: ineffective to render name of person signed liable because it was a forgery, not actually a party to the instrument, but makes forger liable on instrument

Question 12

Maker Liability on a Note

Answer 12

C. Maker Liability: absolute, primary liability- payee goes to maker for payment first
1. co-makers: joint & severally liable, have contribution rights from co-makers in equal shares – discharge of one co-maker does not affect the right of contribution

Question 13

Indorser Liability

Answer 13

D. Indorser Liability: secondary liability

1. anyone who signs in an ambiguous capacity is presumed to be an indorser
2. requirements for indorser liability
   a) presentment to primarily liable party (maker, draweee)
   b) dishonored
   c) notice must be given of dishonor to indorser
   (1) within 30 days of note being dishonored or
   (2) collecting bank giving notice must do so by midnight of the next banking day following the day the bank receives notice of dishonor
3. effect of late presentment or failure to timely give notice of dishonor= indorser liability is discharged
4. to shield from liability can indorse “without recourse”
5. multiple indorsers: jointly & severally liable w/ contribution rights

Question 14

Drawer Liability

Answer 14

E. Drawer Liability: secondary- try to get drawee to pay frist

1. requirements for drawer liability
   a) presentment
   b) dishonor
2. drawer can’t sign own check “without recourse”
3. drawer liable even after late presentment unless bank goes out of business

Question 15

Drawee/Acceptor Liability

Answer 15

F. Drawee/Acceptor Liability: drawee didn’t sign instrument so isn’t liable on the instrument until/unless they sign on as acceptor

1. sign across the front of the instrument, are certifying funds & agreeing to make payment
2. acceptance discharges drawer & all prior indorser’s obligations!!! puts all liability on drawee

Question 16

Accomodation Party Liability

Answer 16

G. Accomodation Party Liability

1. accommodation party: one who signs on/incurs liability on an instrument without receiving any benefit
   a) are liable in the capacity they sign on as (maker, indorser, etc.)
   (1) sign on front = presumption of accommodation maker
   (2) sign on back = presumption of accommodation indorser (reqs. presentment, dishonor & notice)
   b) get reimbursement rights & suretyship ∆ses
2. reimbursement: accommodation party gets 100% of what he paid back from accommodated party
   a) vs. co-maker: jointly & severally liable so only gets contribution & no suretyship ∆ses
3. suretyship ∆ses: are often waived in real life
   a) release of principal obligor releases the accommodation party
   b) binding extension of time: surety discharged to the extent they suffered a loss
   c) modifications to the agreement: surety discharged to the extent they suffered a loss
   d) impairment of collateral

Question 17

Discharge - Payment in Full

Answer 17

VIII. DISCHARGE: ∆se when payment demanded, not effective against HDC
A. payment in full: entitled to surrender of note by person entitled to enforce note
1. thief or later transferor’s of thief are not entitled to enforce
2. if maker doesn’t have notice of transfer & pays transferor, maker’s obligation is discharged

Question 18

Limited Discharge by Tender of Payment

Answer 18

B. limited discharge by tender of payment: refusing tender of payment discharges indorser or accommodation party to the extent of the amount of tender (doesn’t discharge primarily liable party)

Question 19

Cancellation or Renunciation

Answer 19

C. cancellation or renunciation: voluntarily surrendering note to maker, destroying it, striking out obligated party’s signature, canceling instrument, agreeing not to sue on the instrument, or otherwise renouncing your rights by a signed record
1. maker’s possession of note gives rise to rebuttable presumption that note was surrendered/maker discharged

Question 20

Other Discharge Issues

Answer 20

D. other UCC provisions on discharge

1. release, extension, modification of principal, impairment of collateral
2. cancelling indorsement when prior holder reacquires instrument
3. late presentment of checks
4. failure to give indorser timely notice of dishonor
5. drawer discharged when draft/check accepted
6. fraudulent alteration of an instrument

Question 21

Accord and Satisfaction

Answer 21

E. Accord & Satisfaction:

1. when:
   a) person in GF tendered check to claimant in full satisfaction
   b) amount of claim unliquidated or subject to bona fide dispute
   c) claimant obtained payment of the check
   d) check or accompanying writing contained conspicuous statement that check was tendered in full satisfaction of claim
2. exceptions:
   a) prior notification of process for disputing debts (send checks to particular office, etc.)
   b) tendering a refund of payment to avoid accord & satisfaction w/I 90 days after payment
   c) exceptions don’t apply if person seeking discharge proves agent had prior actual knowledge of check being full satisfaction

Question 22

Properly Payable Rule

Answer 22

IX. Properly Payable Rule: a check is properly payable if it is (1) authorized by the customer and (2) in accordance with any agreement between the customer & bank
A. violated when:
1. customer’s check is forged
B. not violated when:
1. post-dated check: paying before date due does NOT violate properly payable rule unless customer has given the bank notice
2. stale checks: (more than 6 months old): banks can pay stale checks as long as in GF
3. causes an overdraft: still properly payable, though bank is not required to pay when overdraft will result

Question 23

Wrongful Dishonor

Answer 23

X. Wrongful Dishonor: when bank is obligated to pay a check & fails to do so
A. customer can bring action against a bank:
1. can recover ALL actual damages, including decrease in reputation, mental anguish, etc.
B. when bank in doubt, should pay check bc wrongful dishonor damages are greater than damages for breach of properly payable rule (only have to put the money back in the account)

Question 24

Death or incompetence of Customer

Answer 24

XI. Death or Incompetence of Customer
A. no duty to stop payment if bank has no actual notice of death/incompetence
B. even w/ notice can pay checks for 10 days (usually doesn’t do that)
C. anyone who claims an interest can tell bank to stop paying checks

Question 25

Stop Payment

Answer 25

XII. Stop Payment: customer can order bank to stop payment on regular checks for any reason
A. must have reasonable certainty
1. info. reasonably necessary to identify the check (check date, number, payee, amount, etc)
2. & give bank reasonable opportunity to act
B. lasts for 6 months, can be renewed for 6 month periods
C. oral: last for 14 days unless followed by written order
D. Bank pays check by mistake: breach of properly payable rule & bank must recredit account
1. bank will argue subrogation: bank steps into shoes of holder/HDC: customer had no valid ∆se and would’ve had to pay it anyways
E. no right to stop payment for cashier’s check, teller’s check, certified checks: if bank does, bank is liable for consequential damages
1. can stop payment if bank that issues check has claim or ∆se of bank (such as failure of consideration)- won’t work against HDC

Question 26

Bank Statement

Answer 26

XIII. Bank Statements:
A. bank has to return sufficient info. about check (item #, amount, date of payment)
1. keep copy of checks for 7 years
B. customer has a duty to examine the bank statement for unauthorized signatures or alterations and must promptly report any problems

Question 27

Bank’s Right to Set-Off

Answer 27

XIV. Bank’s Right to Set-Off
A. right to unilaterally debit the account of its customer to pay a debt owed to the bank
1. only against general accounts
2. can only set-off when debt becomes due- not earl

Question 28

Bank’s Right to Charge Back

Answer 28

XV. Bank’s Right to Charge Back
A. when deposit ory bank makes provisional credit, then check is dishonored, depository bank has right to get reimbursement from its customer
B. right to charge back ends when settlement is final

Question 29

Final Payment

Answer 29

XVI. Final Payment: after final payment, payor bank is on the hook for any mistaken payment, can’t dishonor the check & must pay it
A. drawer & indorser are off the hook!
B. occurs when:
1. paid in cash
2. settling for a check without right to revoke
3. (provisional credit) by payor bank holding check past deadline to return it: midnight on the next banking day
a) midnight on the next banking day following the day it receives the item, receives notice of dishonor, or from which time for taking action starts to run, whichever is later

Question 30

Presentment Warranties

Answer 30

XVII. Warranties
A. Presentment Warranties: when check is presented for payment/deposit
1. π: drawee
2. ∆’s: presenters of item for payment or any previous transferor’s of the instrument
3. warranties:
a) entitled to enforce instrument (good title to instrument), holder, HDC
b) no alteration
c) no knowledge of forged drawer’s signature
4. breach: amount bank paid – amount bank received + expenses
5. generally can disclaim by “without recourse” language

Question 31

Transfer Warranties

Answer 31

B. Transfer Warranties

1. π:
   a) by indorsement: all subsequent transferees
   b) without indorsement: only the immediate transferee
2. ∆: transferor’s for consideration
3. warranties:
   a) entitled to enforce
   b) *all signatures are genuine & authorized
   c) no alteration
   d) no ∆se or claim in recoupment
4. breach: loss suffered as a result of the breach + expenses

Question 32

Notice of breach of Warranty

Answer 32

C. Notice of Breach of Warranty: should be given by depository bank within 30 days
1. failure to do so is okay unless there is some loss because of it

Question 33

Price v. Neal Rule

Answer 33

A. Misc.

1. Price v. Neal Rule: drawee cannot pass risk of drawer’s signature being forged back off onto prior parties
   a) payee bank that pays a draft written by its customer is in the best position to prevent the fraud and thus is liable to the customer
   b) sole remedy against payor bank/drawee
2. Conversion: civil action for misappropriation of one’s party
   a) π: person whose property or possessory interests has been violated, generally the payee
   b) ∆: thief, subsequent parties who take instrument
3. Restitution: payor bank that pays under mistaken belief that signature is authorized can get restitution/recover amount of check from the person who received payment
   a) NOT from GF taker for value or from someone who changed their position based on payment

Question 34

Forged Drawer’s Signature

Answer 34

B. Forged Drawer’s Signature: bank liable because not properly payable→ bank has to recredit account; forged drawer not transferor or presenting it- no transfer or presentment W’s

Question 35

Bank’s Defenses

Answer 35

1. Bank’s ∆ses:
   a) customer failed to exercise ordinary care in monitoring account/supervising employee, then precluded from asserting forgeries against bank if bank paid in GF
   (1) if payor bank is also negligent, use comparative fault, not negligent by processing checks using automated means; must comply w/ bank’s own policies
   b) customer failed in their duty to review bank statements promptly and report checks w/ forged alterations within 30 days
   (1) Repeater Rule: can’t assert unauthorized signature or alteration by same wrongdoer on subsequent checks when you failed to report within 30 days of receiving bank statement
   (2) Absolute Bar: not reported within one year customer precluded even if payor bank/drawee failed to exercise due care

Question 36

Altered Checks

Answer 36

C. Altered Checks

1. discharges a party whose obligation is affected by the alteration except:
   a) may be able to enforce the check according to its original terms, or as completed
2. can pay check, if bank acted in GF & without notice, can charge customer’s account for original amount of check; can pass loss upstream for breach of presentment & transfer warranties
3. bank ∆ses
   a) customer failed to exercise ordinary care
   b) failed to review bank statements & report (repeater rule, absolute bar)

Question 37

Forged or Unauthorized Indorsements

Answer 37

D. Forged or Unauthorized Indorsements most common

1. no valid negotiation takes place, and no one is a holder→ former holder of stolen check is person entitled to enforce
2. drawer’s obligation is not discharged
3. presentment & dishonor or waived

Question 38

Bank Defenses

Answer 38

4. bank ∆ses:
   a) failure of customer to exercise ordinary care (not likely)
   b) failure of customer to review bank statements and report (rarely applies
   c) faithless employee ∆se: forged by employee of payee who had responsibility with respect to checks→ employee’s fraudulent indorsement in payee’s name is effective as payee’s

Question 39

Drawer, Depository Bank and Conversion Claims

Answer 39

5. Drawer has claim against payor bank
   a) ∆ses:
   (1) failure to exercise ordinary care,
   (2) faithless employee ∆se
   (3) failure to report forgeries of drawer’s signature
   (4) breach of presentment & transfer warranties
6. Depositary Bank has a claim for breach of transfer warranty
7. Conversion: payee has conversion action against payor bank & depositary bank (payee must have received delivery of check directly or through delivery to an agent)

Question 40

Defenses to Avoid Liability for Paying/Transferring Check with Forged Indorsement

Answer 40

8. ∆ses to avoid liability for paying/transferring check with forged indorsement

a) failure to exercise ordinary care
b) failure to review bank statements & report forgeries
c) faithless employee indorsement: forged employer’s indorsement, indorsement is effective as payee’s indorsement
d) imposter ∆se: imposter induces drawer to issue check by impersonating payee or person authorized to act for payee→ indorsement by any person in name of payee effective
(1) drawer in better position to determine if imposter is payee/bears risk of loss
e) fictitious payee ∆se: person authorized to sign checks for drawer signs a check payable to a fictitious or unintended payee, indorses payee’s name and cashes check→ indorsement effective
f) padded payroll ∆se: employee w/ responsibility to supply name & address of employer’s payees
(1) gives names of entities not entitled to payment
(2) steal checks and
(3) forges indorsements, cashes & deposits into personal account