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MN 464 Exam 2 > Chap 27 > Flashcards

Chap 27 Flashcards

1
Q

holder

A

person in possession of an instrument drawn, issued or endorsed to him or his order or to bearer or n blank

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2
Q

negotiation

A

transfer of possession, voluntary or involuntary, by a person other than the issuer of a negotiable instrument in a way that the transferee becomes a holder

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3
Q

assignment

A

voluntary transfer of rights arising from a contract

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4
Q

can’t be a holder

A

without negotiation

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5
Q

a bearer instrument

A

transferred by mere possession and is therefore comparable to cash

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6
Q

because bearer paper is payable

A

to whoever is in possession of it, a finder (or thief) can be holder of bearer paper

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7
Q

an instrument endorsed in blank

A

is also bearer paper

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8
Q

if the instrument is order paper

A

ie an instrument payable to order, possession and endorsement (signature) by all necessary parties are both required for the transferee to be a holder

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9
Q

in a transfer for value

A

of an instrument not payable to bearer, the transferee has the right to have the unqualified endorsement of the transferor

otherwise, the transferee has nothing more than the contract rights of an assignee

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10
Q

impostor rule

A

deals with situations where someone impersonates another person and deceives a third party into delivering a negotiable instrument to the impostor in the name of the other person

the UCC provides in this situation that the endorsement of the impostor in the name of the named payee is effective thus blaming the drawer for failing to detect the impersonation

the drawee bank therefore will not be required to credit the drawers account for the amount of the check

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11
Q

the fictitious payee rule

A

applies to a situation similar to the impostor situation, but involves a disloyal agent instead

under the fictitious payee rule, an endorsement by any person in the name of the named payee is effective, as long as the agent or employee of the maker or drawers supplied the name of the payee or issued the instrument used for fraudulent purposes

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12
Q

the UCC places the risk of employee disloyalty/fraud

A

on the party employing the agent

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13
Q

there can’t be a holder of

A

a nonnegotiable note

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14
Q

even where the employee steals checks payable to his employer

A

forges the employers signature and cashes the checks, the employer will lose as agains the drawee bank, provided the employees job duties included processing the employers checks for bookkeeping purposes

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15
Q

negotiations subject to rescission

A

if the transfer conforms to the technical requirements, it is an effective negotiation even if the underlying situation involves a void or voidable transaction

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16
Q

indorsements

A

revised article 3 defines endorsements as a signature, other than that of a signer as maker, drawer or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of 1 negotiation the instrument 2 restricting payment of the instrument or 3 incurring endorsers liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an endorsement unless the accompanying words, terms of the instrument, place of signature or other circumstances unambiguously indicate that the signature was made for a purpose other than endorsement

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17
Q

every endorsement is either

A

1 blank or special
2 restrictive or nonrestrictive
3 qualified or unqualified

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18
Q

all endorsements must disclose 3 things

A

the method to be employed in subsequent negotiations (depends on whether the indorsement is blank or special)

the kind of interest that is being transferred (depends on whether the indorsement is restrictive or nonrestrictive)

the liability of the indorser (depends on whether the indorsement is qualified or unqualified)

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19
Q

blank indorsement

A

consists of the endorsers signature alone and transforms order paper into bearer paper

note that this bearer paper may then be negotiated by mere delivery or the holder may convert it back into order paper

this is done by altering the blank endorsement with words “pay to x” above the blank indorsement

a special indorsement is thereby created, and the holder does not have to be as concerned about the theft of the instrument

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20
Q

restrictive indorsements

A

a restrictive endorsement attempts to restrict the rights of an indorsee

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21
Q

types of restrictive indorsements

A

indorsements for deposit or collection
indorsements in trust
conditional indorsements
indorsements prohibiting further transfer of the instrument

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22
Q

indorsements for deposit or collection

A

in a bank account effectively limit future negotiations the banking system

**effective

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23
Q

indorsements in trust

A

the endorsee becomes the trustee while the beneficiary is the individual designated by the indorser to ultimately receive the funds (e.g. “pay mary in trust for mark”)

**effective

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24
Q

conditional indorsements

A

require the happening or non happening of an event to effect the endorsees rights (e.g. “pay jones if the repair of my roof is satisfactory to me”)

**not effective i.e. the person making payment, such as maker, does not need to check to see that the condition has been satisfied

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25
Q

indorsements prohibiting further transfer of the instrument

A

such as a “pay a only”

is treated as an unrestricted endorsement

**not effective i.e. the instrument may continue to be negotiated to others without regard to the restriction

26
Q

qualified and unqualified indorsements

A

ones signature on a negotiable instrument is the shortest contract known to law

indorsement without recourse, however, disclaims the endorsers contract liability on the instrument

even though payment is not guaranteed by the indorsee a qualified indorsement does not prevent future negotiation of the instrument

note that the transferor may still be liable under a warranty theory

27
Q

formal requirements of endorsements place of indorsement

A

an indorsement must be written on the instrument or on a separate piece of paper called an allonge that has been so firmly affixed to the instrument so as to become a part thereof

an allonge may be used even if there is sufficient space for an endorsement on the document itself

Fed regulations describe with particularly the place where an endorsement is to be placed on the reverse of a check, however, no penalties are prescribed for violation of the regulation

28
Q

incorrct or misspelled indorsements

A

if the name of the payee or indorsee is misspelled or incorrect the indorsee may indorse the instrument in that name or in his correct name or both

one giving value for the instrument can require endorsement in both the incorrectly and correctly spelled names

29
Q

both negotiable and nonnegotiable instruments

A

can be transferred by assignment, but only negotiable instruments allow a transferee to be a holder

furthermore, only a holder can become a holder in due course

30
Q

requirements of a holder in due course

A

a holder in due course must:
1 be a holder of a negotiable instrument
2 take it for value
3 take it in good faith
4 take it without notice that it is overdue or dishonored, or that the instrument contains an unauthorized signature or an alteration, or that any person has any defense against it or claim to it
5 take it without reason to question its authenticity due to apparent evidence of forgery, alteration, incompleteness or other irregularity

31
Q

holder

A

a holder must have in his possession negotiable instrument that is payable to bearer or payable to himself by name

the instrument must have al necessary (valid) endorsements

if order paper, a forged endorsement will preclude someone from being a holder

32
Q

value

A

the law requires that a holder in due course give value for instrument; it cannot be received as a gift with no exchange of value

33
Q

value, for purposes of negotiable instruments, is defined as:

A

1 the actual performing of the agreed promise
2 the acquiring of a security interest or a lien in the instrument, other than a judicial lien
3 the taking of the instrument in payment of or as security for an antecedent debt
4 the giving of a negotiable instrument
5 the giving of an irrevocable obligation to a third party, such as a letter of credit

34
Q

executory promise

A

because an executory promise has yet to be performed, it does not constitute value for the purpose of article 3 of the UCC, and cannot confer holder in due course status on the person who makes the executory promise.

one gives value to the extent that she performs the agreed upon consideration

under the common law of contracts, however, a executory promise would constitute consideration

35
Q

the UCC does provide exemptions

A

to the executory promise rule in 2 situations
1 the giving of a negotiable instrument and
2 the making of an irrevocable obligation to a third party

36
Q

security interest

A

where an instrument is given as a security for an obligation, the lender is regarded as having given value to the extent of his security interest

37
Q

antecedent debt

A

under the UCC a holder does not give value when she takes an instrument in payment of or as security for an antecedent best (that is a preexisting obligation)

this would not constitute consideration under the common law of contracts

38
Q

good faith

A

revised article 3 defines good faith as honesty in fact (subjective test) and the observance of reasonable commercial standards of fair dealing (objective test)

39
Q

lack of notice

A

a holder in due course must take the instrument without notice that it has been dishonored, that it is overdue, that is forged or altered, or that it is subject to any claims or defenses

visible evidence of a forgery or alteration will make the instrument irregular and will require a transferee to question its authenticity

under the code, a person has notice of fact when he a has actual knowledge of it or b he has received notice or notification of it or c from all the facts and circumstances known to him at the time in question he has reason to know that it exists

40
Q

notice an instrument is overdue

A

to become a holder in due course, an instruments purchases must take the instrument without notice that it is overdue, which would give a suspicion that something is wrong. one has notice that an instrument is overdue if he has any reason to know that any part of the principal amount is overdue , or that there is an uncured default in an instrument of the same series

one does not have notice that an instrument is overdue if he merely has a notice that instrument is overdue

41
Q

time paper is due

A

on the stated due date (or the next business day)

42
Q

demand paper is due

A

when a demand is made or after it has been outstanding for an unreasonable length of time

a check is presumed overdue if it is outstanding more than 90 days

43
Q

notice an instrument has been dishonored

A

dishonor refers to the refusal to pay or accept an instrument when it becomes due; notice of a dishonored instrument prohibits the holder from becoming a holder in due course

44
Q

notice of a claim or defense

A

a defense protects a person from liability on an instrument, while a claim is an assertion of ownership of the instrument

45
Q

without reason to question its authenticity

A

an instrument cannot bear such apparent evidence of forgery or alteration or otherwise be so irregular as to call into question its authenticity. thus a signature spelled “schmitt” for the makers name “smith” would indicate a bad forgery, or crossing out the $100 and writing $1000 above it would be a crude alteration, both of which would cause one to question the authenticity

46
Q

a payee may be a holder in due course

A

if he satisfies all of the above requirements for an HDC. nevertheless, the holder in due course doctrine will not provide a payee with the benefits of a holder in due course where the issuer and the payee are the immediate parties to the instrument

for example D in payment of a debt which D owes to C, issues a check in payment for an automobile which C purchased from P. if P (the payee) meets the requirements of an HDC, P although a payee will qualify as an HDC. if they check were payable to C, however, C (the payee) could not be an HDC because C is an immediate party, and as such would have reason to know of claims or defenses which D may have against him

47
Q

the shelter rule

A

someone who has not satisfied the HDC requirements may asset such rights if the instrument was received from a previous part who did qualify as an HDC.

an exception to this rule provides that a prior holder who himself has been a party to any illegality may not improve his legal standing by taking the instrument from an HDC. in other words, one who has been a party to fraud or illegality regarding the instrument cannot wash the instrument clean through the hands of the HDC or one having the rights of an HDC and thereby acquire the rights of an HDC

48
Q

in a nonconsumer transaction, a HDC takes the instrument

A

1 free from all claims and
2 free from all defenses of any party with whom she has not dealt, except for a few real defenses available against anyone, including the HDC

49
Q

defenses that may not be asserted

A

against a HDC are called personal or contractual defenses

50
Q

real defenses can be applied

A

against anyone

51
Q

real defenses

A 
infancy
void obligations
fraud in the execution
discharge in insolvency proceedings
discharge of which the holder has notice
unauthorized signature
fraudulent alteration
52
Q

infancy

A

state law recognizes a public policy of protecting minors in contractual arrangements

the UCC recognizes this defense against a holder in due course to the extent that it is a defense to a simple contract under state law

53
Q

void obligations

A

any incapacity, duress or illegality are valid defenses against a holder in due course if they are void under state law

54
Q

fraud in the execution

A

misrepresentation that induced the person to sign the instrument without knowledge or without reasonable opportunity to obtain knowledge of its character or its essential terms

the defense is not available if the deceived party knew or should have known of the fraud

renders a contract void

55
Q

discharge in insolvency proceedings

A

a discharge in bankruptcy creates a real defense valid against a holder in due course

56
Q

discharge of which the holder has notice

A

any other discharge of which the holder has notice when he taks the instrument creates a real defense valid against a HDC.

e.g. when the holder takes the instrument he sees that a signature of an endorser has been cancelled (crossed out)

57
Q

unauthorized signature

A

a person will not be held liable on a negotiable instrument where their name has been forged.

exceptions: if he has not reported a known forged signature, that forged signature is assumed to be valid. also forged signatures may be considered valid if substantial negligence contributes to their being made (such as an automatic signing device or signature stamp which is not properly safeguarded)

an unauthorized signature may be ratified and therefore validated

58
Q

fraudulent alteration

A

an alteration is
1 any unauthorized change that modifies the obligation of any party to the instrument or
2 an unauthorized addition or change to an incomplete instrument concerning the obligation of the party

a fraudulent alteration discharges the affected party, unless negligence in writing the instrument allowed the alteration

**remember that an HDC can always enforce the altered instrument according to its original amount

with respect to an incomplete instrument, the HDC can enforce the instrument as completed

59
Q

personal defenses

A

these defenses are not valid against an HDC

the most common personal defenses include lack of consideration, breach of contract, fraud in the inducement, economic duress, mistake, undue influence, and misrepresentation

these transactions are typically voidable, as opposed to void, under state law

60
Q

limitations on HDC rights

A

the FTC has made a special rule affecting consumer credit contracts that affects HDC status

in such contracts a provision must be included that warns any holder that she takes the instrument subject to all claims or defenses, whether real or personal, that the consumer could assert against the seller

the rule is intended to prevent consumer purchase transactions from being finance in such a manner that the purchaser is legally obligated to a third party for the full payment price, even though the dealer for whom the purchaser bought the goods committed fraud or the goods were sold defective

**relegates the holder of a consumer credit contract to the status of a mere holder i.e. one cannot be a holder in due course of consumer credit contract instrument

MN 464 Exam 2 (3 decks)

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