Commercial Law - UCC Article 3 & 4

Question 1

Negotiability

Answer 1

Determined at the time the item is issued
(SWUP OF PAN)
•	Signed  - by maker or drawer
•	Written 
•	Unconditional Promise or Order – (1) statements of consideration, (2) reference to another record (as, per or in accordance with), (3) incorporation of collateral, prepayment, acceleration, (4) limitation of payment to a particular source, (5) countersignature, and (6) consumer protection language are NOT conditions
•	Fixed Amount of money
•	Payable to bearer or order
•	At a specified time (or on demand)
•	No other pressure or undertaking

Question 2

Accommodation Party

Answer 2

Surety
• Incurs liability without being direct benefit
• Entitled to reimbursement if pay on instrument from accommodation party

Question 3

Anomalous Indorsement

Answer 3

An indorsement by person who’s is not holder of the instrument. Make liable as an indorser.

Question 4

Holder Status or Party entitled to enforce

Answer 4

Possession and good title.
• Bearer Paper: Possession
• Oder paper: Possession plus necessary indorsments

Question 5

Allonge

Answer 5

Typically, the indorsement is placed on the reverse side of the instrument, but it may also properly be placed on the front or on a paper affixed to the instrument

Question 6

How initial payee determined:

Answer 6

The intent of the issuer

Question 7

Types of Indorsements

Answer 7

• Blank: Becomes bearer paper
• Special: Payee’s signature plus designation of new person who instrument is payable – creates order paper
• Restrictive: Limits what is done on the check
• Qualified: without recourse – limit the legal liability otherwise imposed on the indorser

Question 8

What happens when the check is not indorsed and deposited into an account with the bank?

Answer 8

• Depository bank becomes a holder even if payee deposited check into payee’s account without indorsing it.

Question 9

Holder In Due Course

Answer 9

• Holder – in possession & good title
• Took for value
• In good faith – looked at when value given or instrument negotiated, whatever is later
• Without notice that:
• Overdrawn or dishonored – check 90 days after issue
• Instrument contains and unauthorized signature or been altered
• There is a claim to the instrument or
• Any party has any defense or claim in recoupment

Burden of proof on person claiming HDC status

Question 10

Shelter Rule

Answer 10

Transferee has the rights of the transferor – vesting of rights
• Not make you a HDC, just shelter you
• Exception: A person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter

Question 11

Rights of a Holder in Due Course and Real Defenses

Answer 11

HDC NOT resistant against - 11 real defenses (FAIDS)

1. Fraud in the execution (fraud in factum)
2. Alteration
3. Infancy, Insanity
4. Illegality making obligation void
5. Duress which voids obligation
6. Statutes of limitations (note: 6 years from due date; unaccepted draft: earlier of (1) 3 years after dishonor or (2)10 years after issue)
7. Lack of legal capacity
8. Insolvency
9. Omission of required consumer protection language
10. Payment to former holder (item transferred without notice to issuer)
11. Unauthorized signatures & Forgeries

Question 12

Signatures by Agents on Negotiable Instruments – when not liable

Answer 12

Agent escapes personal liability if:

1. Principal is identified in the instrument and
2. Signature unambiguously shows it made on behalf of the principal.

Liability if above two elements are not satisfied:

1. To Holder in Due Course – agent is liable to HDC unless the gent can prove that the holder had NOTICE of the representative nature of agent’s signature.
2. To Non-Holder in Due Course – agent is liable to a non-HDC unless agent can prove that original parties did not INTEND the agent to be liable.

Checks – no liability if principal’s name is on the check.

Question 13

General Statutes of Limitations on Notes and Drafts

Answer 13

Note: 6 years from due date;

Unaccepted Draft: earlier of :

(1) 3 years after dishonor or
(2) 10 years after issue

Question 14

Claims of Recoupment

Answer 14

A claim of recoupment is a claim by the obligor against the original payee of the instrument arising form the transaction that gave rise to the instrument.
• The claim can be asserted against the transferee only to reduce the amount owed on the instrument at the time the action is brought.
• A HDC takes free of claims of recoupment.

Question 15

When an instrument is lost or destroyed or stolen:

Answer 15

A person entitled to enforce an instrument keeps that right if an item is lost, destroyed, or stolen. MUST PROVE:

1. Person entitled to enforce – (1) in possession, (2) payable to him/her or bearer
2. Directly or indirectly acquired ownership
3. Loss not result of transfer or lawful seizure
4. Can’t reasonably obtain

Still must give indemnity for any additional claims that may result due to the loss of the instrument, and protection for payor required – security or bond.

Question 16

Conversion:

Answer 16

A person entitled to possession of an instrument may bring an action for conversion of the instrument.
• Occurs when an instrument is taken by transfer (other than negotiation) from a person NOT entitled to enforce.
• May NOT be brought by: (1) issuer or acceptor; OR (2) payee or indorsee who did NOT receive DELIVERY
• Who can enforce: Payee/Special Indorsee if have DELIVERY

NOTE: Drawee who pays on forged indorsement is liable to payee in conversion.

Bank’s defenses:

1. Imposter rule
2. Fraudulent indorsement by EE entrusted with check
3. Drawer negligence
4. Failure to timely sue – Drawer must sue within 3 years.

Question 17

Primary Liability on an Instrument:

Answer 17

1. Maker
2. Maker must pay instrument when it is due
3. Acceptors: Drawee/payor bank when accepts item
   • Need presentment – how present:
   • Exhibit instrument within 30 days
   • Give reasonable identification - Sign/surrender instrument

Both have an absolute obligation to pay the negotiable instrument.

Question 18

Secondary Liability on an Instrument

Answer 18

1. Indorser
   • To create liability need:
   • Presentment within 30 days of indorsement
   • Dishonor AND
   • Notice of dishonor to indorser within 30 days of dishonor
2. Drawer
   • Presentment to drawee within 30 days and dishonor by drawee with notice to indorser within 30 days

Question 19

Drawee’s acceptance or certification

Answer 19

• Drawee may agree to pay the draft by signing the draft

* Certification discharges the drawer and all prior indorsers

Question 20

Final Payment by Drawee

Answer 20

Once a drawee bank finally pays a check, contract actions (e.g., drawer’s and indorser’s contracts) may no longer be pursed and the drawee bank may not recover on the check form the person it paid UNLESS there is a breach of presentment warrant.

Final Payment: Occurs when the drawee bank:

(1) pays the time in cash or
(2) does not revoke a provisional settlement by the midnight deadline, that is, midnight of the next banking day after the banking day of receipt.

Question 21

Payment of checks after Drawer’s Death

Answer 21

Drawee bank may continue to pay checks until KNOWS of death

Effect of Notice of Death: Drawee may pay no more than 10 days after drawer’s death if bank KNOWS of death
• BUT – if someone claiming an interest in the account requested and the drawee bank stop payment the drawer’s checks immediately, the drawee must comply.

Question 22

Transfer Warranties:

Answer 22

Who makes them: Transferor who receives consideration

Who made to: Immediate transferee and subsequent transferees if transferor indorsed – with bank liability runs to any subsequent collecting bank even without endorsement
NOTE: Drawee and Maker not sue under

Warrantees make:

1. Person entitled to enforce
2. Signatures are authentic
3. No alterations
4. No defenses
5. No knowledge of insolvency
6. Authority of creator of demand

Question 23

Transferor Warrants to Transferee:

Answer 23

1. Person entitled to enforce
2. Draft NOT altered
3. Warrantor has NO knowledge of forged drawer signature

Question 24

Presentment Warrantees

Answer 24

Who makes them: Presenter and pervious transferors

Made to: Maker of a note, drawee of a draft, acceptor

Warrantees to Drawee:
1. Warrantor entitled to enforce draft or obtain payment
2. No alteration
3. No knowledge of unauthorized drawer signature
4. Remotely created check – person identified as drawer authorized the item
5.
Warrantee to maker: Warrantor entitled to enforce

Question 25

Properly Payable

Answer 25

• Authorized by the customer

* In accordance with the terms

Question 26

Post Dated Check

Answer 26

Bank has NO liability if pay ahead of stated date UNLESS:

1. Prior notice AND
2. Notice describes the check with reasonable certainty

Question 27

Stop Payment Orders

Answer 27

MUST BE IN WRITING
Oral stop payments are UNENFORCIBLE in TX.

Requirements of writing:

1. Dated
2. Signed
3. Describe item with certainty: Account number, check number, and amount.

Valid for 6 months

Bank’s Defenses:
• Stop payment not comply with requirements
• No loss – customer would have to pay check if stopped

Question 28

Wrongful Dishonor

Answer 28

Properly payable check dishonored.

Who has standing to complain: Drawer

Must show harm caused by dishonor.

Damages:
Drawer recover all damages cased by wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing hot check.

Bank Defenses:
• Payment would overdrawn drawer’s account
• Check is more than 6 months old – bank may honor stale check as long as does so in good faith

Question 29

What is the effect of payment in full of a check on which drawer conspicuously indicates cashing the check acts as payment in full of existing obligation which is unliquidated or subject to a bonified dispute?

Answer 29

Effect: The payment in full check operates as an accord and satisfaction if the payee chases the check.

EXCEPTIONS:
• Payee returns the money within 90 days
• Payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks

Question 30

Forged Maker Signature

Answer 30

• Maker is NOT liable
• Drawer is NOT liable
• Forger is liable because the forger’s signature appears on the note or draft.

Bank is NOT able to pass the loss on a draft through presentment warranties because parties had a right to pass on forger’s obligation. Forger becomes the real drawer.
• Exception: If presenter knew forgery then bank can pass loss to presenter.

Bank’s defenses:
• Drawer’s negligence: Negligence substantially contributes to the forgery of drawer’s name
• Bank Statement Rule: Customer duty to inspect in timely manner and report forgeries. If customer does not and bank can prove a loss beyond original mistaken payment, customer precluded. Forger signature must be report to bank within 1 year.

Question 31

Continued Wrongdoer

Answer 31

• If the same person is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available. If the drawer does not do so, the bank will not recredit the account for the subsequent forgeries by the same person.

Question 32

Forged Indorsement

Answer 32

• On bearer paper: Irrelevant
• On order paper: Breaks the chin of title and check is not properly payable. Drawer may demand drawee to recredit the account.

NOTE: Fraudulent indorsements by an EE that is entrusted with duty to collect checks/instrument estopps ER (drawer) from making forged indorsement claim against drawee.

Drawer must sue within 3 years.

Question 33

Imposter Rule

Answer 33

Drawer/maker estopped to deny validity of forged indorsement.

When applies: Drawer/maker issues draft/note to:

1. An imposter
2. Someone that misrepresents the agency it is from and check issued to agency
3. When EE that is entrusted with check stock writes a check to a person not entitled to payment

Question 34

Alteration – types and effect on HDC

Answer 34

Types:
(1) Change in obligation: Any unauthorized change in instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rates
• Effect on HDC – may enforce for original amount
(2) Unauthorized completion: Instrument is completed in an unauthorized manner which affects the party’s obligation.
• Effect on HDC – may enforce as completed

Question 35

Alteration – types and effect on Non - HDC

Answer 35

Fraudulently made by Holder = TOTAL discharge of obligation

Not fraudulently made by Holder = Obligor Liable under original term

Question 36

Alterations in general

Answer 36

• Are not properly payable

* Bank’s defenses: Negligence or Bank statement rule – alteration must be reported within 1 year