BAR ESSAYS

Question 1

A person becomes a holder either through…

Answer 1

issuance or through negotiation. An instrument is issued when it is delivered by the maker or drawer.

Question 2

Negotiation is…

Answer 2

the delivery of an instrument, regardless of voluntariness, by a person other than the maker or drawer to any person who, as a consequence, becomes the holder of the instrument.

Question 3

If the instrument is bearer paper, negotiation occurs upon…

Answer 3

the transfer of possession. It does not have to be voluntary.

Question 4

Bearer paper is

Answer 4

an instrument that does not attempt to pay a specific person; payable to any person who possesses the instrument.

Question 5

Negotiation of order paper

Answer 5

If the instrument is payable to order, in addition to the transfer of possession, the instrument must be indorsed by the holder in order to be negotiated.

Question 6

Order paper is…

Answer 6

an instrument payable to a specific person that requires specific language such as “pay to the order of…”

Question 7

A transferee is entitled to specific performance to obtain the transferor’s indorsement as long as the transferee…

Answer 7

gave value for the note, in good faith, and without notice of any deficiency with the instrument or the transaction.

Question 8

A blank indorsement is…

Answer 8

a signature that is not accompanied by the naming of a specific indorsee. A blank indorsement of an order instrument creates a bearer instrument.

Question 9

A thief or finder of a bearer instrument becomes a…

Answer 9

holder of the instrument even though the transfer of possession was involuntary. An indorser is secondarily liable on the instrument, but is only required to pay if the instrument is dishonored.

Question 10

To be a holder in due course of a negotiable instrument, the holder must…

Answer 10

take the instrument as a holder, for value, in good faith, and without notice of certain deficiencies in the instrument or the transaction. A HDC is not subject to personal defenses. In addition, a person cannot become a HDC if the instrument is purchased in a bulk transaction, not in the regular course of the transferor’s business.

Question 11

A time instrument payable in installments becomes overdue…

Answer 11

upon default, and it remains overdue until the default is cured. For default, a payment in principal must be missed, not a payment of interest.

Question 12

To be negotiable, an instrument must be…

Answer 12

in writing, signed by the maker or drawer, containing an unconditional promise to pay a fixed amount of money to order or bearer, payable on demand or at a definite time, without any additional undertaking. A provision that a payment must be from an identified source does not render the promise conditional.

Question 13

An indorsement stating a condition to the right of the indorsee to receive payment…

Answer 13

does not affect the right of the indorsee to enforce the instrument. A person paying the instrument or taking it for value may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.

Question 14

Generally, an unauthorized signature…

Answer 14

is ineffective as the signature of the person whose name is signed. Such a signature may be a forgery or the signature of an agent that exceeds the agent’s authority. However, an unauthorized signature is effective as the signature of the unauthorized signer in favor of a person who, in good faith, pays the instrument or takes it for value or collection.

Question 15

If the amount of interest cannot be ascertained from the description, the rate is…

Answer 15

the established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues.

Question 16

If an instrument has been lost, destroyed, or stolen, a person who was entitled to enforce the instrument when loss of possession occurred may…

Answer 16

bring an action to enforce the instrument despite her current lack of possession of the instrument. Generally, this is a conversion action. An action for conversion may not be brought by a payee or indorsee who did not receive delivery of the instrument.

Question 17

An instrument is converted if…

Answer 17

it is taken by a transfer, other than a negotiation, from a person not entitled to enforce the instrument, or a depository or payor bank makes payment with respect to the instrument for a person not entitled to enforce the instrument or obtain payment.
The thief of a bearer instrument is also liable for conversion.

Question 18

If a check is taken for an obligation, the obligation…

Answer 18

is suspended to the same extent that the obligation would be discharged if an amount of money equal to the amount of the instrument were taken. In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified.

Question 19

A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, if…

Answer 19

the check is presented more than six months after its date or if there are insufficient funds.

Question 20

Stop payment orders must be…

Answer 20

in writing, signed and dated, and describe with certainty the item upon which payment is to be stopped. A bank may choose to obey a verbal order, but is not required to honor it. A bank incurs no liability if it chooses to disobey a verbal stop payment order.

Question 21

The transferor warrants that…

Answer 21

he is entitled to enforce the instrument, all signatures are authentic and authorized, the instrument has not been altered, there are no defenses, the drawer is not insolvent, to his knowledge, and the person on whose account the check is drawn has authorized the issuance.

Question 22

The requisites of a negotiable instrument (6)

Answer 22

(1) must be in writing and signed; (2) the promise or oder to pay must be unconditional; (3) the principal amount must be fixed, but the interest rate can be variable; (4) payable to order or bearer; (5) payable on demand or at a definite time that is readily ascertainable; (6) no additional undertakings (the obligor’s sole obligation is to pay money).

Question 23

FTC notice on notes that debtor may raise certain defenses against an HDC is required when:

Answer 23

(1) the maker/drawer is signing the note in a consumer transaction; (2) the transaction in question must be for the sale or lease of goods or services; and (3) the seller must be one who sells the item in question in his ordinary course of business.

Question 24

Shelter Rule

Answer 24

Whatever rights the transferor had transfer to the transferee UNLESS the transferee commits fraud or otherwise engages in some type of illegal activity as it relates to the instrument; then cannot acquire rights as a holder in due course.

Question 25

Plaintiff seeking enforcement of an instrument must prove:

Answer 25

(1) that P is a person entitled to enforce the instrument and (2) that the signatures on the instrument are valid.

Question 26

Who is a “person entitled to enforce” an instrument?

Answer 26

A holder; a non-holder in possession of the instrument who has the rights of a holder; a person not in possession but who has the right to enforce.

Question 27

Real Defenses

Answer 27

Available against a holder and HDC; Infancy (where Ks with minors are void or voidable); Incapacity (state law must render a K with these parties void); Duress (must be extreme and make Ks void); Illegality (usually for gambling debts); Fraud in the factum (signer is not aware that he is signing a NI and he did not have a reasonable opportunity to become aware); debts discharged via bankruptcy; alteration and forgery; and statute of limitations.

Question 28

Statute of Limitations for enforcing negotiable instruments

Answer 28

Drafts- 3 years from dishonor or 10 years from date of draft, whichever is earlier; Certified checks - 3 years after demand for payment; Notes payable at a definite time - 6 years from the note’s due date; Notes payable on demand - within 6 years after the demand for payment.

Question 29

Personal Defenses

Answer 29

Only effective against holders; fraud in the inducement (signer is aware that he is signing a NI but signer is induced into signing based on representations); Non-issuance (issuer did not issue the note); Contract defenses (breach of K, failure of consideration, breach of warranty); Claims in recoupment (an offset against the amount owed on the instrument; must arise from the transaction that gave rise to the incident).

Question 30

If the issuer is duped into issuing an instrument to an impostor:

Answer 30

the issuer may nonetheless be liable on the instrument; an indorsement of the instrument by any person in the name of the payee of the instrument may be effective as the payee’s indorsement.

Question 31

If an EE entrusted with check writing privileges forges indorsements, then the employer is… (liability)

Answer 31

responsible for the loss.

Question 32

If a bank or a good-faith purchaser for value takes an instrument that is fraudulently indorsed or issued to an imposter, the benefitted party (bank or purchaser) may be liable to the issuer if:

Answer 32

the parties fail to exercise ordinary care in taking the instruments, and that failure substantially contributes to loss resulting from the payment of the instrument. In these cases, the persons bearing the loss may recover from the benefitted party to the extent the failure to exercise ordinary care contributed to the loss.

Question 33

Legal effect of an altered instrument

Answer 33

The obligor is discharged on the instrument if words or numbers are modified without authorization. A payor bank, HDC, or drawee may enforce rights with respect to the instrument according to its original terms before alteration.

Question 34

When a signed writing that shows that the signer intended the instrument to be completed by the addition of words or number is completed…

Answer 34

the instrument is enforceable if the completion was authorized and the obligor is discharged on the instrument if the completion was unauthorized. A payor bank or HDC can enforce an unauthorized completion instrument as completed.

Question 35

Contradictory terms

Answer 35

When conflicting or contradictory terms exist within an instrument, handwritten terms take precedence over typewritten terms, typewritten terms over printed terms, and words over numbers.

Question 36

Presentment

Answer 36

A demand for payment made to a maker or drawee (bank) by the person entitled to enforce the instrument.

Question 37

Preconditions for liability for other parties that have potential liability on the instrument (indorsers, etc.)

Answer 37

Presentment and dishonor

Question 38

Presentment is excused as a precondition for liability when…

Answer 38

the presenter cannot locate the one liable to whom presentment must be made; the maker or the acceptor has repudiated the obligation to pay; the instrument’s terms do not require presentment; the drawer or indorser has waived the presentment requirement; or the drawer has instructed the drawee not to pay.

Question 39

Presentment warranties come into play when…

Answer 39

a thief of forger enters into the chain.

Question 40

The breach of presentment warranty allows…

Answer 40

a payor bank to sue upstream those through whose hands the check has passed for breach of one of the warranties.

Question 41

When a person presents an item for payment, the presentment comes with all of the following warranties:

Answer 41

(1) the warrantor is a person entitled to enforce the instrument (there are no unauthorized or missing indorsements); (2) the draft has not been altered; (3) the warrantor has no knowledge that the drawer’s signature is unauthorized.

Question 42

Maker’s liability

Answer 42

Maker has primary liability, which means that the maker must pay the instrument when it comes due.

Question 43

Drawer’s liability

Answer 43

Drawer has secondary liability. The drawer’s obligation to pay only ripens upon presentment and dishonor.

Question 44

Drawee’s liability

Answer 44

A drawee is not legally obligated on the instrument unless the drawee signs the instrument for the purpose of accepting liability on the instrument; generally do not sign the instrument so liability is not on the instrument itself but to the drawer who has funds deposited at the bank.

Question 45

Indorser’s liability

Answer 45

By indorsing an instrument, you agree to pay the instrument in the event one who has primary liability does not pay; ripens when the note is dishonored and the indorser receives notice of dishonor.

Question 46

Accommodation Party

Answer 46

basically a surety/guarantor/cosignor

Question 47

Two key things for accommodation status:

Answer 47

(1) the party signs the instrument for the purpose of incurring liability on the instrument and (2) the party is not a direct beneficiary of the value given for the instrument.

Question 48

Accommodation parties are entitled to:

Answer 48

reimbursement from the maker (full repayment); contribution from co-accommodation parties; and the same defenses against payment that an accommodated party would have; not liable to accommodated parties that pay the instrument.

Question 49

HOW TO APPROACH A COMMERCIAL PAPER PROBLEM

Answer 49

(1) Is the instrument a negotiable instrument? (2) Was there a proper negotiation? (3) Are we dealing with a holder or a holder in due course? (4) What defenses can the obligor assert? (5) Who else can be held responsible?

Question 50

A drawee bank may seek restitution from the one to whom payment was made when:

Answer 50

the drawee pays a check on the mistaken belief that the drawer’s signature was an authorized signature or when the drawee pays a check on the mistaken belief that a stop payment order had not been issued. Restitution is not available when payment was made to a HDC, when the one entitled to enforce the instrument is a good faith purchaser for value, or who is one who in good faith changed position in reliance on the payment.

Question 51

A holder cannot become an HDC if he has notice of:

Answer 51

(i) infirmities in the instrument itself, or (ii) infirmities in any underlying transaction in which the instrument was issued or negotiated.

Question 52

Types of notice of infirmities by holder that prevent HDC status

Answer 52

Notice may be obtained by actual knowledge, receipt of notification, or the existence of a reason to know. If a holder has actual knowledge of an infirmity, he cannot be an HDC. A holder receives notification of an infirmity when it (i) comes to his attention, or (ii) is delivered to any place held out by him as a place to receive notice. A holder has reason to know of an infirmity if, under the circumstances, reasonable diligence would have uncovered the infirmity.

Question 53

In limited circumstances, an unauthorized signature is treated as though it was authorized. Those circumstances include…

Answer 53

the issuance of an instrument to an imposter or a fictitious payee, an employee’s violation of an employer’s trust, negligence that contributes to an alteration or forgery, and the failure of a bank customer to examine his bank statement and report any alteration or forgery.

Question 54

Bank Statement Rule

Answer 54

A customer, upon receipt of his bank statement, must exercise reasonable care and promptness to discover any unauthorized payments resulting from a forgery of the customer’s signature or an alteration of a check and promptly notify the bank. The failure of a customer to meet this duty gives the bank the right to refuse to re-credit the customer’s account for the unauthorized payments if the bank suffered a loss due to the customer’s failure.

Question 55

Liability of an Indorser

Answer 55

When a person signs her name on a negotiable instrument, her liability to pay depends on the capacity in which she signs. An indorser promises that, if an instrument is dishonored, she will pay the amount of the instrument according to its terms at the time of the indorsement.

Question 56

Generally, a person entitled to enforce an instrument may bring a conversion action. An action for conversion of an instrument may not be brought by:

Answer 56

(i) the issuer or acceptor of the instrument, or (ii) a payee or indorsee who did not receive delivery of the instrument, either directly or through delivery to an agent or co-payee.

Question 57

Situation in which check is issued to imposter and then accepted by third party bank.

Answer 57

Generally, a bank can only charge a customer’s account for checks that are properly payable. A check that contains a forged drawer’s signature or a forged indorsement is generally not properly payable. However, drawers must take care when they issue instruments. If they are deceived by an imposter, they may be liable on the instrument. If the imposter induces the drawer to issue the instrument to him by impersonating the payee of the instrument, then the imposter’s indorsement of the instrument in the name of the intended payee may be effective as an indorsement of the payee. Once the drawer issues the instrument to the impostor, anyone may indorse the instrument as the payee.