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Question 1

UCC Article III

Answer 1

UCC Article III governs negotiable instruments.

A negotiable instrument is a signed writing that orders or promises the payment of money.

Two major categories of instruments — notes & drafts.

Question 2

Requirement of a Negotiable Instrument #2 — Unconditional Promise or Order

Answer 2

Cannot include any express conditions or be subject to any other writing.

Mere reference to other documents is okay as long as the instrument is not “subject to” that document.

Question 3

Note

Answer 3

A two-party instrument in which a MAKER promises to pay money to the PAYEE.

Question 3

Requirements of a Negotiable Instrument/Is it Negotiable?

Answer 3

The determination of whether an instrument is negotiable must be made from within the 4 corners of the document.

An instrument is negotiable and thus UCC Art. III applies if —
1. It is in writing and signed.
2. It contains an unconditional promise or order.
3. It requires payment of a fixed amount of money, with or without interest.
4. It is payable to order, when issued (specific), or bearer, when it comes into possession of the holder (general).
5. It is payable on demand or at a definite time.
6. It does not state any undertaking or instruction other than to pay money.

Question 4

Draft

Answer 4

Three-party instrument in which the DRAWER orders the DRAWEE/PAYOR to pay money to the PAYEE.

A check is a type of draft in which the bank stands in the shoes of the drawee.

Question 5

Requirement of a Negotiable Instrument #1 — Signed Writing

Answer 5

A signature can be any name or mark indicating a present intent to authenticate. Can be as simple as an “X”.

If forging someone’s signature without authority, the forged signature binds the writer/forger, not the name they are signing.

Question 6

Requirement of a Negotiable Instrument #3 — Fixed Amount of Money

Answer 6

The instrument must be payable in money (official currency) and money, only.

The instrument is not a negotiable instrument and UCC Art. III will not apply if the instrument purports to pay in goods or services.

Interest can be variable, but money must be a set amount.

Question 6

Requirement of a Negotiable Instrument #4 — Payable to Order or to Bearer

Answer 6

Payable to order = payable to a specific person.

Payable to bearer = payable to whoever has possession of the instrument.

If payable to more than one person in the form of “and/or” = treated as “or”.

Question 7

Requirement of a Negotiable Instrument #5 — Payable on Demand or Definite Time

Answer 7

Exact date must be clear or readily ascertainable. Can still be subject to prepayment/acceleration/extensions at the holder’s option, or at the maker’s option if the extension is another definite time.

The instrument is not a negotiable instrument and UCC Art. III will not apply if the instrument is only payable upon the happening of an event with no definite time (condition).
Examples: “Payable at death”, not permitted, no definite time. “Payable at Christmas 2024”, permitted, definite time.

Question 8

Requirement of a Negotiable Instrument #6 — No Additional Undertaking or Instruction

Answer 8

The person promising or ordering payment cannot promise or order anything other than the payment of money.

Exceptions: To protect collateral to secure payment, or promising to confess judgment instead of filing suit.

Question 9

Presentment

Answer 9

When the demand is made upon the person expected to pay the instrument.

The party upon whom presentment is sought has the right to demand that the instrument be exhibited, party be identified, and instrument be surrendered or a receipt collected after payment.

Presentment may be excused if —
- The drawer or indorser waived it;
- The presenter can’t present after reasonable diligence;
- The maker is dead or insolvent.

Question 9

Negotiation/”Transfer”

Answer 9

Negotiation is the transfer of the instrument by a person other than the issuer, to a person who ultimately becomes the holder.

“Bearer” instruments are negotiated upon transfer of possession.

“Order” instruments are negotiated upon transfer of possession and indorsement by the holder.

Question 10

Fictitious Payee

Answer 10

When a person, usually an employee, writes a check to an unintended or fake payee, anyone in possession can indorse the instrument with the payee’s name.

This instrument is still enforceable, and the risk of loss is on the employer.

Question 11

Indorsement

Answer 11

The negotiation of an order instrument requires both the transfer of possession and indorsement.

Blank indorsement — includes just the name of the transferor, and will turn the instrument into bearer paper.

Special indorsement — specifies the name of the transferee and direct payment to them. Remains order paper.

Question 12

Imposter

Answer 12

When someone impersonates the payee and induces the drawer/maker to issue an instrument, a subsequent indorsement by anyone in that name is effective.

Fraud in the inducement is not a “real” defense against holders in due course.

Question 12

Rights of a Person Not in Possession of the Instrument

Answer 12

Someone who is not a holder or in possession of the instrument may still enforce the instrument if —
- The person was entitled to enforce it before they lost it;
- The loss was legitimate; and
- The instrument can’t be possessed due it having been destroyed or the whereabouts cannot be determined.

Question 13

Holder in Due Course

Answer 13

A holder who is a good faith purchaser.

1. Must hold an instrument that was validly negotiable and properly negotiated.
2. Must take the instrument for value. (Must have given performance, payment, or forgiveness/security for an obligation; not a gift.)
3. In good faith. (No knowledge or reason to know of a defect).
4. Without notice – that the instrument is overdue or dishonored.
5. Without notice – of unauthorized signature or alteration.
6. Without notice – of any defense or claim to the instrument.

Question 14

Umbrella/Shelter Rule

Answer 14

If a person isn’t a holder in due course, they may still have the same rights as a holder in due course derivatively under the umbrella/shelter doctrine.

The transferee of an instrument obtains all rights of the transferor.

If the transferor was a HDC, the transferee does not become a HDC but enjoys all of the same rights as one.

Does not apply to a transferor who is engaged in fraud or illegality (can’t launder the instrument).

Question 14

Holder

Answer 14

The person in possession of the instrument with rights to enforce it.

A person in possession of an instrument which has been issued or validly indorsed, or is a bearer instrument.

A forged indorsement prevents the possessor from being a holder and the chain of title is broken.

Question 15

Liability for Signatures/Representative Liability

Answer 15

A person is not liable for an instrument unless they sign it, or was represented by an agent who did.

A representative signing for someone else will not be liable as long as it was unambiguous that they were signing in a representative capacity. If ambiguous, the representative is personally liable.

Question 16

Liability for the Maker of a Note/”Primary Liability”

Answer 16

Note = two-party instrument.

The make of a note has primary liability and is obliged to pay according to the instrument’s terms at the time of issue.

Question 16

Liability of the Drawer of a Draft/”Secondary Liability”

Answer 16

Draft = three-party instrument.

The drawer does not have primary liability because they are ordering someone else to pay.

However, the second party also doesn’t have any liability unless and until they accept it. Once accepted, they have primary liability, and the drawer has secondary liability.

Question 17

Indorser Liability

Answer 17

If the transferor indorses an instrument, they have secondary liability.

If the maker does not pay after presentment and dishonor, and is given notice of the dishonor, the transferor can be liable.

A “qualified indorsement” will disclaim liability by indorsing “without recourse”.

Question 18

Presentment Warranties

Answer 18

The presenter demanding payment makes three warranties —

1. That the presenter is entitled to enforce the instrument.
2. That the draft hasn’t been altered.
3. That they have no knowledge of an unauthorized or forged signature.

Question 19

Transferor Warranties

Answer 19

The transferor warrants that to the best of their knowledge and upon reasonable belief, —

1. They are entitled to enforce the instrument;
2. That all signatures are authentic and authorized;
3. That the instrument is unaltered;
4. That no defenses or claims can be asserted;
5. That the transferor has no knowledge of insolvency proceedings.

If the transfer is indorsed, these warranties extend to all subsequent transfers.

Question 20

Dishonor

Answer 20

When payment is refused.

Notice of dishonor must be given within 30 days and in any commercially reasonable manner.

Question 21

Burdens of Proof

Answer 21

The plaintiff has the burden of establishing that the signature is valid and that they are entitled to enforce the instrument.

The burden then shifts to the ∆ to prove a defense or claim in recoupment.

If a defense or claim for recoupment is proven, the burden then shifts again to the HDC to prove their HDC status in which they took free from all personal claims or defenses.

Question 22

Forgery

Answer 22

Where a forgery exists, the forger is liable as if they signed their own name.

A HDC can hold the forger liable.

The person whose name was forged has a defense against all holders, including HDCs, since they never signed the instrument in the first place.

Question 22

“Real” Defenses

Answer 22

HDC are subject to the following “real” defenses —

1. Infancy.
2. Lack of capacity, illegality, or duress (only where there is a physical threat)
3. “Fraud in the Factum” — If a party was fraudulently induced into signing an instrument without knowing that it was an instrument and without reasonable opportunity to determine if it was one. Other types of fraud (in the inducement) not defenses against a HDC.
4. Insolvency discharged in bankruptcy
5. Any other discharge that the HDC had notice of when taking the instrument.

Question 23

Defenses, in General

Answer 23

A HDC generally takes free from all defenses except “real” defenses.

However, other holders may be subject to the following:
- Non-issuance/lack of delivery;
- Lack of consideration;
- Infancy/illegality/incapacity;
- No title or lost instrument;
- Discharge.

Question 24

Alterations

Answer 24

When an alteration is fraudulent — the HDC can enforce it for the original amount but other holders cannot enforce.

When the alteration is not fraudulent — All holders can enforce.