Business Law III: UCC Article 3 Flashcards
UCC Article 3
Negotiable Instruments
Orders to pay
Drafts/Checks - 3 party instruments consisting of drawer, who orders drawee, to pay a payee
Promises to pay
Notes/CDs - 2 party instruments consisting of maker, who promises to pay a payee
Drafts
- Sight draft - payable on demand immediately
- Time draft - payable at specific time
- Trade/Banker’s acceptance
Checks
- Cashier’s check - drawer/drawee are same bank
- Teller’s check - draft drawn by one bank on another
- Traveler’s check - draft payable on demand that requires countersignature
- Certified check - check drawn by drawer on which drawee bank accepts primary/absolute obligation to pay
Notes
Promissory - note payable on demand/within definite time to a specific payee or bearer
CDs
A note made by a bank acknowledging it has a deposit of funds payable to holder (most are time-interest instruments)
Negotiation of Bearer Instruments
negotiated by mere delivery to a holder
Negotiation of Order Instruments
negotiated by delivery plus an indorsement
Blank Indorsement
Specify no particular holder to receive payment
- Converts order instrument to bearer instrument
- Transfer warranties extended to subsequent holders
- Blank indorser has secondary liability to pay all subsequent holders
Special Indorsement
Specify person to whom payment or to whose order payment is to be made
- Converts bearer into order or continues order instrument
- Transfer w/ consideration extends warranties to subsequent holders
- Indorser has secondary liability to pay all subsequent holders
Qualified Indorsement
“without recourse”
- disclaims contract signature (secondary party) liability
- Transfer warranties extended to all subsequent holders
Restrictive Indorsement
- Conditional (conditioned upon happening of event)
- Prohibitive (prohibits further transfer of instrument)
- For deposit/collection (makes indorsee bank collection agent of indorser)
Holder in Due Course (HDC)
1. must be a holder 2 must take the instrument for value 3. in good faith 4. without notice that instrument is - overdue - been previously dishonored - of any claim or defense on the part of any person
Holder
anyone who takes possession of a negotiable instrument that is made payable to him/her, the bearer or is negotiated to him/her
Holder as HDC
only to extend agreed-upon consideration has actually been paid, or in the case of actions required, actually been performed
Shelter Rule
Holder who cannot qualify as HDC, but took instrument through a HDC has same rights as if HDC
Overdue Time Instrument
If one minute after due date
Overdue Demand instrument
If taken after instrument has been outstanding for unreasonable period of time or one day after day demand for payment has been duly made
Overdue Check
> 90 days
Overdue if payable in installments
when an installment has been missed
Proper Presentment
holder must present instrument to right person for correct reason in right timely manner
Primary Parties to Negotiable Instruments
- Notes - Payor/Debtor
- CDs - bank that agreed to accept CD deposit
- Check - Person with checking account
- Drafts - drawee of draft
Dishonor
any refusal to pay or accept, except where holder refuses to show evidence of authority to receive payment
Notice of Dishonor
- must be given w/in 30 days of dishonor
2. for banks dishonor notice must be given by midnight of next banking day
Contract Liability of Primary Party
- Makers of CDs and Notes
2. Drawees of Drafts/Checks
Contract Liability of Secondary Party
- Drawers of ordinary check/draft
2. Indorsers (unqualified)
Contract Liability of Accommodation Party
- Accommodation party - signs instrument to lend his/her name to guaranty liability of accommodated party
- same level of liability as party for whom he/she is accommodating
- treated as surety or guarantor
Transferor warranty liability
Results from role party plays in transferring the instrument:
- General/qualified indorsers make following transfer warranties to all subsequent holders
- transferor has good title
- signatures are authorized/genuine
- instrument has not been altered
- instrument not subject to claim/defense by any party that can be asserted against transferor
- transferor has no knowledge of any insolvency proceeding - Nonindorsers make same transfer warranties but only to immediate transferee
Presentment Warranties
- anyone who obtains payment/acceptance of draft/check warrants to party who pays/accepts:
- person obtaining payment/acceptance is authorized to do so
- instrument has not been altered
- person obtaining payment/acceptance has no knowledge that signature of drawer is unauthorized - Cannot be disclaimed by presenters of checks
Personal Defenses of Secondary Parties to Obligation to pay
Only ordinary holders (not HDC)
- mistake
- misrepresentation
- fraud in inducement
- lack of consideration
- breach of contract
- product warranty issues
Real/Universal Defenses
Can be asserted against all holders (even HDC)
- forgery
- fraud in execution/factum (person deceived into signing)
- minority (being a minor)
- inability to pay (lack of solvency) and/or discharge decree in bankruptcy
- void events (i.e. illegality, mental incapacity, duress)
Effect of Material Alteration on Contractual/Warranty Duties to Pay
Can be:
- complete defense - against both ordinary holder/HDC (i.e. cross-out changes obligations of indorser)
- partial defense - altered amount (i.e. changing $7-$700)
- no defense - original instrument incomplete, but later completed in unauthorized manner
Unauthorized Signature Liability
How agent signs instrument controls whether principal/agent will be liable or whether additional evidence can be used to establish liability
Forged Signature Liability
liability depends on role forger played in forgery
- Forged drawer’s signature - liability rests on drawee who is presumed to know signature of drawer
- Forged payee/indorser signature - liability rests on first party to accept instrument after forged indorsement (should have checked id)
- Imposters (exception) - although fraudulent, indorsement is effective
- Fictitious Payee - Indorsements to payees not entitled to payment (fraudulent) are effective in favor of whoever pays the instrument or taxes it for value in good faith.
