Bus. Law: Negotiable Instruments Flashcards
Is the endorser/intended payer of a negotiable instrument liable to the holder of the instrument?
- The endorser is secondarily liable for the original amount of the instrument.
- The company on which the instrument is drawn is not bound unless they agree to be bound.
- The person to which the instrument was endorsed has the ability to negotiate the instrument to the original holder.
essential elements of a check
A check is always drawn on a bank, payable on demand, and payable in money only.
W/a check, is the drawee or the drawer bank expected to pay? Which bank incurs liability? Which type of liability?
- Drawee bank is expected to pay, but assumes no liability. If signs, though, drawee becomes primarily liable.
- Drawer bank assumes secondary liability.
drawer bank
issues check; assumes secondary liability.
drawee bank
pays check; assumes no liability unless it signs the check
fictitious payee rule
- No party can become a holder unless the instrument is properly endorsed.
- In this case, the party in the best position to detect the fraud – the company w/in which an employee is committing fraud – should bear the loss.
incomplete instrument
- A signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.
- Such an instrument can be enforced according to its terms which are completed.
promissory note
Drawer of the note serves as the maker by promising payment to the stated payee.
cashier’s check
draft with respect to which the drawer and drawee are the same bank or branches of the same bank.
traveler’s check
instrument that is drawn on or payable at or through a bank, payable on demand, and requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.
certificate of deposit
promissory note of a bank
blank endorsement
does not name the person to whom the instrument was negotiated
nonrestrictive endorsement
does not include the words “For Deposit Only”
qualified endorsement
endorsement includes words eliminating contractual liability (“without recourse”)
An endorser of a nonnegotiable draft makes all of the following assurances:
- He will pay the draft if it is dishonored (secondary liability).
- All signatures prior to his are genuine.
- The instrument has not been materially altered.
liability of the maker of the note
- If maker signs note, maker is primarily liable.
- If maker does not sign, endorser has warranty liability.
- If makers signature is fraudulent, endorser is liable to endrosee.
Under the UCC article on negotiable instruments, which of the following parties is primarily liable on an instrument?
- Acceptor, or drawee that signs the note.
2. Otherwise, the maker has primary liability.
When someone endorses a note, what type of liability does s/he assume?
Secondary liability.
bearer paper
- An instrument is given a restrictive endorsement.
- The person to whom that endorsement was addressed can endorse it and turn it into bearer paper, but not necessarily a draft.
Under the UCC, how can an instrument be dated?
- An instrument can be antedated or postdated.
- The date stated on an instrument determines the time of payment if the instrument is payable at a fixed period after date.
- If an instrument is undated, its date is the date of its issue, or in the case of an unissued instrument, the date it first comes into possession of a holder.
defenses for a holder in due course
- duress
- bankruptcy (after signing note)
- infancy
How long are these stop orders valid (oral vs. written)?
- Oral stop order is valid for 14 days.
2. Written stop order is valid for 6 mos.
A valid stop order means that…
a holder in due course has no right to demand payment from the drawee’s bank.
Does the right to stop payment cease once a bank has certified a check?
Yes.
The burden of establishing a loss resulting from payment of an item contrary to a stop payment order is on the…
customer/drawer.
In the case of check fraud, who bears the loss?
- The fraudster.
2. OR, the fraudster’s bank.
A holder of a negotiable document of title acquires:
- Title to the document.
- Title to the goods.
- Issuer’s obligation to deliver the goods according to the terms of the document.
Does a holder in due course (HDC) have the right to demand payment in the face of a stop payment order?
No.
HDC and original instrument liability
- The issuer of an instrument is liable for the original amount of the instrument.
- This liability cannot be changed by later alteration, even if the instrument is in the hands of a HDC.
check
- Written order for the payment of money.
2. Not a promise to pay, an IOU, or an indication that payment will be made upon the completion of specified actions.
In order for a financial instrument to be negotiable, it must be…
- Written.
- Signed by the maker.
- Contain in it an unconditional promise to pay a stated amount.
Regulation E (UCC)
applies to consumer EFTs
UCC Article 4A
applies to commercial EFTs
Ways in which a party can be discharged from his/her liability on a note:
- Intentional destruction by the holder discharges all parties primarily and secondarily liable.
- The holder’s cancellation of an endorsement in writing will discharge that party from liability.
- When the primary party makes payment, all other parties are discharged.
- Oral revocation DOES NOT work.
