Commercial Paper Flashcards
Who can enforce a negotiable instrument?
An instrument may be enforced by: (1) a holder; (2) a nonholder in possession with rights of a holder; or (3) a person not in possession but entitled to enforce (if the instrument is lost, stolen, or destroyed).
What determines if an obligated party must pay?
Whether an obligated party will be forced to pay depends on (1) whether the holder is an HDC, and (2) the nature of the obligated party’s defenses.
What are the limitations on defenses if the holder is an HDC?
If the holder is an HDC, the obligated party is limited to ‘real defenses’.
What can an obligated party assert if the holder is not an HDC?
If the holder is not an HDC, the obligated party may assert ordinary contract defenses.
What are real defenses?
Real defenses can be asserted against an HDC. Remember the mnemonic ‘FAIDS’: Forgery, Fraud in the factum, Alteration, Adjudicated incompetency, Infancy, Illegality, Duress, Discharge in insolvency proceedings, Statute of limitations.
What is the statute of limitations for unaccepted drafts?
3 years after date of dishonor or 10 years after date of the draft (whichever is earlier).
What is the statute of limitations for notes payable at a definite time or on demand?
6 years after due date or demand for payment.
What is a suretyship defense?
An accommodation party is a surety who incurs liability without being a direct beneficiary.
What are personal defenses?
Personal defenses can’t be asserted against one having rights of HDC but apply to any transferee of a negotiable instrument without HDC rights.
What are examples of personal defenses?
Personal defenses include lack of consideration, failure of consideration, breach of warranty, and fraud in the inducement.
What happens if there is a forgery issue?
Determine whose signature was forged because different rules apply based on the identity/status of the person whose name is forged.
What is the liability for a forged maker’s signature?
The maker isn’t liable, and the forger is liable.
What happens if there is a forged drawer’s signature?
The purported drawer is not liable, and the drawee bank must recredit the drawer’s account unless they have a defense.
What are the bank’s defenses to a not-properly-payable action?
Drawer’s negligence substantially contributed to alteration or forged signature.
What is the effect of forgery on bearer paper?
Forgery of indorsement is irrelevant.
What is the effect of forgery on order paper?
Forgery breaks the chain of title and the check is not properly payable.
What constitutes an alteration of an instrument?
An alteration is an unauthorized change that purports to modify the obligation of any party.
What are the two types of unauthorized changes?
- Alteration of complete, existing instrument 2. Unauthorized completion of an incomplete instrument.
What is the effect of alteration on HDC?
If alteration changes obligation on instrument, HDC may enforce instrument according to original terms.
What is the effect of alteration on Non-HDC?
If holder fraudulently alters an instrument, obligor is totally discharged.
What happens if an instrument is altered nonfraudulently?
If altered nonfraudulently, obligor remains liable on original terms.
What is required to enforce a lost, destroyed, or stolen instrument?
Prove: (1) possession and entitlement to enforce when loss occurred, (2) terms of the instrument, (3) facts preventing production of the original.
How can a party discharge another through cancellation or renunciation?
Through intentional voluntary acts or renouncing rights in a signed writing.
What is the effect of a payment in full check?
Acts as payment in full of an existing obligation if the payee cashes the check.
