Commercial paper Flashcards
What is an indorser’s liability on a check?
Secondarily liable
HDC is subject to the real defense of
Infancy
How does a note become negotiable?
1) a writing signed by its maker,
2) containing an unconditional promise to pay a fixed amount of money to the bearer
3) on demand without stating any additional undertaking or instructions.
Bearer paper can be negotiated simply by
Transfer to another person
A person entitled to enforce an instrument who loses the instrument can nevertheless enforce it, provided
Person is able to prove terms of instrument and their right to enforce it
Consequence of including the words “Collection guaranteed.” On note
limits co-maker’s liability, generally making him liable only if the finance company is unable to compel maker to pay the note through judicial process.
When an employee, such as the treasurer here, is entrusted with responsibility with respect to a check, a fraudulent indorsement of that check by the employee is treated as an
Effective indorsement… it is treated as if the payee to whom the check is written had signed the check in the favor of a person who, in good faith, pays the check or takes it for value or for collection.
Shelter principle
transferee generally has the same rights to enforce an instrument as the transferor had.
Is a personal defense (lack of consideration) valid in an action against an HDC
No
Is a personal defense (lack of consideration) valid in an action against an HDC
No
Is An authorized agent who signs his own name as drawer of a check of the principle personally liable if the check is drawn on the principal’s account and identifies the principal?
No
Principal is liable on an instrument signed by
Agents or an agent
If agent is authorized to sign for P, P is liable irrespective of whether
Agent signed P’s name, agent’s name or a combo thereof
Accommodation party
Type of surety or one who guarantees debt of another
To be an accommodation party, accommodator cannot
Have received a direct benefit from the instrument
A co-signer is presumed to be
An accommodation party
Accommodation party is liable on instrument in
Whatever manner he signed… to limit liability there must be express language of such
Alteration
Unauthorized change that purports to modify obligation of a party
can an alteration modify an incompleted instrument?
yes
If alteration is done fraudulently, it
Discharges liability of obligor
What happens if alteration is not done fraudulently
Obligor remains liable only on original terms of the instrument
When does a security interest become enforceable
When it attaches to collateral
An accommodation party is liable on an instrument if
1) person entitled to enforce instrument has reduced their claim to judgment and it returned unsatisfied
2) other party has become insolvent
3) other party can’t be served w process
4) appears useless to proceed against them
Holder in due course
Someone who took for value, in good faith and without notice that instrument had some kind of defect or had been dishonored
In absence of HDC elements, person is
Simply a holder
A regular holder is entitled to enforce the instrument against
The drawer
A regular holder is subject to what kind of defenses
Breach of K and lack of consideration defenses
What kind of instrument is a check
Order instrument, which requires there be a signature and transfer to a different party to be enforceable
How to create a security interest
Collateral must attach and interest must perfect
Default means of perfecting for tangible personal property like a motorcycle
Filing UCC financing statement in jx where debtor is located
Does UCC1 statement need to be signed?
No it is created to put others on notice of security interest in collateral
What are the types of negotiable instruments?
1) promissory note
- an affirmatiev promise to pay
2) Draft
-order to pay money
What meets the signature requirement for a negotiable instrument?
Any initial, defining mark , nick name
What does not meet the unconditional requirement for an instrument to be negotiable?
1) Express conditions
- ex. promise to pay f x occurs
- not merely limiting payment to a source
2) Govnd by or subject to other agreements
- ex. instrument is actually govnd by terms of another agreement rather than merely referring to the agreement
what constitutes a sum certain/definite amount?
able to calculate amount to be paid from what writing says or reference to outside source
What meets PAYABLE requirement
moeny, foreign currency, goods
No additional promises means that writing cant include
other promises than the promise to pay money
Payable on demand: instrument must specifically state is ppayable
- on demend
-at sight - on presentation
If instrument is silent as to time of payment, is it still negotiable?
Yes, payment is due on demand
Payable at definite time requirement means that payment is made
on a specific date
-before a specific date
-at a fixed period after a specific date
Does an acceleration clause impact the payable at a definite time requirement for a negotiable instrument?
No this does not destroy negotiability
For the payable to order requirement for negotiable instrument to be met, instrument must use words ___ or ___
“order” or “assigns” in connection w payee’s name
Pay to order of Mark
Pay to assigns of mark
What meets payable to bearer requirement for a negotiable insyriment
Instrument must be payable to anyone who has it
Pay to Mark or bearer
Pay to cash
pay to order of bearer
pay to order of cash
If instrument says Pay to MArk is it negotiable?
only if t is a check… otherwise not negitiable–it is a K
In commercial paper context, D can get sued based on ___ liability or ____ liability
1) Contract or signature liability
- you signed instrument, so you’re liable to pay
2) warranty or transfer liability
- you sold the instrument, so you’re liable for warranty
Can drawee (the bank) be liable under K or signature liability?
No, drawee doesnt sign
What phrase disclaims K or signature liability?
signature is accompanied by words “w/o recourse”
Who can sue d for breach of warranty?
Any P in possession if D indorsed the instrument
If did not indorse, only D’s immediate transferee …warranty does not run w the instrument
Are warranty or transfer liabilities imputed if D was a donor?
NO…If D was merely a donor - ie did not actually sell the instrument in transfer
Seller of negotiable instrument warrants that
1) P has good title
2) all signatures are genuine and authorized (not forged)
3) instrument has not been materially altered
4) There are no defenses or claims against D (instrument is enforceable)
5) D has no knowledge of any bankruptcy or insolvency action against maker or drawer
Negotiable instrument is properly transferred when payable to order when
1) payor delivers to payee
2) payee indorses (must be valid and authorized)
3) Payee delivers to transferee
Is mere possession by bearer sufficient for a Negotiable instrument to be considered properly transferred? do they need to indorse?
Yes, indorsement not required
What is a holder in due course
holder who takes instrument:
1) for value
2) in good faith
3) without notice that it is overdue, dishonored, or subject to any defense or claim
What meets the for value requirement to be a holder in due course
Holder must give value, which is different than consideration bc mere promise is not value and old value is good value
What meets good faith requirement to be a holder in due course
Good faith requires
1) Honesty in fact
- holder does not actually know of any reason why the obligor may have trouble paying
2) observance of reasonable commercial standards of fair dealing
- ex a reasonable person in the business wouldnt know any reason the obligor might have trouble paying
What meets the WITHOUT NOTICE requirement to be an HDC
holder must not know or have reason to know that instrument was
overdue, dishonored, subject to any defense or claim
If on Jan. 5, someone buys an instrument that is payable on Jan. 1, is the buyer a holder in due course?
No he had reason to know it was overdue
Can you be an HDC if you know or should know than an instrument is in arrears for a:
Principal payment?
Interest payment?
Principal payment
- No you cant be a HDC
Interest payment
- you can be an HDc
What is shelter rule?
Transferee acquires whatever rights her transferor had.
So, if the transferor was an HDC, the transferee steps in transferor’s shoes, even if he had notice of a defense or otherwise wouldnt qualify
HDC takes an instrument Free from:
and subject only to:
Free From: claims, personal defenses
Subject only to: real defenses
A claim is a right to a negotiable instrument based on
superior ownership
What are personal defenses (LUW EF)
defenses available in contract, including,
A) lack of consideration
B) unconscionability
C) Waiver
D) Estoppel
E) Fraud in the Inducement
What are real defenses?
MAD FIFI^4
M-Material Alteration
D-Duress
F-Fraud in FACTUM
I-Incapacity
I-Illegality
I-Infancy
I-Insolvency
How would a material alteration work as a real defense?
How would it not work
Valid real defense
- Change in terms of the K by payee
Invalid Real defense
Change in terms of K by payee after maker was negligent–eg, leaving blanks in check
Fraud in factum occurs where payor doesnt know
what he is signing
What happens if a Bank wrongfully dishonors a check (there actually are sufficient funds)
Customer can recover damages for harm caused by dishonor
If a bank customer dies, bank can still draw on the customer’s account until
1) Bank knows of death &
2) Has reasonable time to act on knowledge
4 Times bank cannot draw on a customer’s account for a check
1) Forged drawer signature
2) Bank is drawing for more than original order
3) Bank is paying wrong person
4) Check is postdated and customer gave bank notice
How long is a stop payment order binding on a bank?
Oral- 14 days unless renewed in writing during period
Written: 6 months, unless renewed in writing during period
Drawee that honors a forged or materially altered check must recredit drawer’s account as long as ___. What is this rule called?
drawer was not negligent…Properly payable rule
What are drawee bank’s remedies under the properly payable rule
Thief is always liable
Drawer is liable if negligent
When is a drawer negligent?
1) leaving blanks or spaces on instrument
2) Failing to follow internal procedures designed to avoid forgeries
- ex leaving signature stamp in same drawer as checks
3) Failing to examine bank statement for errors
4) Being induced to write a check
Fictituous payee rule
if an imposter induces the drawer to write a check, drawer is negligent
An employer is liable for forgeries by an employee who
who was entrusted w responsibility for handling checks.
An employer must monitor employees
Define negotiation
transfer of an instrument by a person other than the issuer to a person who gains possession of the instrument and has the right to enforce it…
ie to a holder
Defense of infancy be asserted against an HDC only if
state law makes the K of an infant void or voidable….if not infancy is only a personal defense
Define alteration
an unauthorized change or addition that purports to modify the obligation of any party in any respect…
Effect of an alteration depends on whether
alterer’s intent was fraudulent or non fraudulent
What happens if alterer’s intent was not fraudulent? Fraudulent?
party is not discharged, the instrument may be enforced according to its OG terms…
If fraudulent, alteration discharges every party obligated on the instrument, unless the party assents to or is precluded from asserting the alteration
What is consequence of indorsement w phrase “without recourse” ?
does not create a restrictive indorsement
CREATES a qualified indorsement
may a bank choose to honor a check according to its terms as presented when there are insufficient funds?
Yes
The customer is liable to bank for the overdraft
Collateral is impaired if
1) A SECURITY INTEREST is not perfected or otherwise filed
2) It is RELEASED w/o obtaining substitute collateral
3) There is FAILURE TO PERFORM ACTS required to preserve the collateral’s value
4) There is FAILURE TO DISPOSE of collateral as the law requires
What is difference between a presentment and transfer warranty?
W a presentment warranty, presenter warrants that he is not aware of any forged signatures….
With a transfer warranty, transferor warrants that all signatures are authorized
Note
two party negotiable instrument where maker promises to pay sum of money to payee
Draft
3 party negotiable instrument where drawer orders second party to pay sum of money to a 3rd paarty
Draft: check
check is a type of draft drawn upon a bank and payable on demand
traveler’s check is a draft that must be countersigned by
a person whose “specimen signature” appears on it
cashier’s check is a draft where drawer and drawee are
the same bank
Teller’s check is a draft drawn by
a bank or payable at or through a bank
Contradictory terms: handrwritten, type written
Handwritten take precedence over type written, type written over printed, words over numbers
Person cant become an HDC if instrument is
- Acquired as a successor un interest to an estate or other organization
- Purchased in an execution, bankruptcy, or creditor’s sale, or under legal process; or
- Purchased in bulk transaction outside of ordinary course of transferor’s biz
Transfer of an instrument involves
delivery of an instrument by a person, other than the maker or drawer, for purpose of giving the person receiving it the right to enforce the instrument
Exception to shelter rule that a person to whom an HDC transfers an instrument acquires the rights of an HDc
transferee who engaged in fraud or illegality affecting the instrument cant acquire rights of an HDC
To whom does a transferor who indorses instrument makes warranties to?
all subsequent transferees
Transferor who does not indorse instrument makes warranties only to
immediate transferee
What is calculation for damages for breach of transfer warranties
the amount of instrument plus expenses and loss of interest
Transfer warranties may be disclaimed unless the instrument is a
check
For P to mkae a prima facie case to enforce and instrument, they must prove
i) entitlement to enforce instrument and
ii) validity of signatures
Conversion: an instrument is converted if
a person not entitled to enforce the instrument takes it by transfer
or bank makes/obtains payment for a person not entitled to enforce it or obtain payment
What kind of defense is a claim in recoupment
personal defense that must arise from a transaction that gave rise to the instrument and is limited to the amount owed at time action is brought
An unauthorized signature is ineffective against ___ but effective to __
person whose name is signed but effective as to person who actually signed it
Incomplete instrument occurs where
instrument signer intends instrument to be completed after signing by the addition of words or numbers
- If completion is authorized, instrument may be enforced as completed
-if unauthorized, then obligor is generally discharged but a payor bank or HDC can enforce the instrument as completed
Presentment is a demand for payment made by
the maker of a note or the drawee of a draft by a person entitled to enforce the instrument
Dishonor occurs where
drawee of a draft or maker of a note fails to pay within the required time after presentment
Who is primarily liable on the instryment
Issuer of note or cashier’s check
Who is secondarily liable on instrument
The drawer of an unaccepted draft…liable upon dishonor
A drawee is not liable on an instrument unless
he accepts the draft
What is acceptor’s liability
primary liability on the instrument upon acceptance
To what degree of liability is an indorser of a note
secondarily liable
Joint signers liability
joint and severally liable
Principal is not liable on note signed by unauthorized agent unless
the principal ratified the note or estoppel applies
Accord and satisfaction
when a claim is unliquidated or otherwise subject to dispute, it can be discharged if the person against whom claim is asserted in good faith tenders an instrument or accompanying written statement that:
Contains conspicuous statement that the instrument in full satisfaction of the claim
Claimant obtains payment of the instrument
