Commercial Paper Flashcards
Commercial Paper
A holder in due course (HDC) is holder who takes: (FIN)
- For value
- In good faith
- Notice, without
Commercial Paper
HDC cannot have notice that: (5 things)
O A C D I
- Instrument is overdue or has been dishonored.
- The instrument contains an unauthorized signature or has been altered.
- There is a claim to the instrument; or
- Any party has a defense on the instrument; or
- The instrument is so irregular or incomplete as to call into question its authenticity.
Commercial Paper
Checks are stale ___ months after being drawn
6
Commercial Paper
If person seeing payment is HDC only real defenses can be asserted against him. What are they? FAIDS (11)
- Fraud in the factum AND forgery
- Alteration and Adjudicated Incapacity
- Infancy and Illegality
- Duress, Discharge through insolvency, Discharges known to HDC.
- Suretyship and SOL.
Commercial Paper
Personal defenses cannot be raised against:
an HDC.
Most prevalent personal defense is failure of consideration.
Commercial Paper
A maker:
‘makes’ a note.
Commercial Paper
A drawer:
‘draws’ a draft.
Commercial Paper
Forgery: If a forger steals a check and forges a person’s name, the drawer is:
generally not liable.
An unauthorized signature is ineffective as the signature of the person who’s name was signed and is effective only as the signature of the forger.
Commercial Paper
Fictitious Payee Rule: Forgery liability will be imputed on the drawer when: (2)
- Issue of instrument to an impostor
- Makes the instrument payable to someone who was not intended to have an interest in the money.
(Always look for intent)
Commercial Paper
Negligence rule: Applies in one of three situations where a drawer’s negligence contributes to a forgery or alteration.
Because of the negligence the forgery imputes liability on to the drawer. When a drawer:
- Leaves blanks in the instrument.
- Sends instrument to someone with the same name as the payee.
- Fails to follow internal procedures designed to avoid forgery.
or ANY form of slovenly business practices may be negligent.
Commercial Paper
Drawee liability general rule is that:
no one is liable on an instrument unless he signs it.
Commercial Paper
Endorser’s liability:
Can arise from 3 situations
- Contract liability
- Presentment warranties
- Transfer warranties
Commercial Paper
Transfer warranties:
A person who transfers an instrument for consideration warrants: (5 things)
Dak Me
Defenses or claims of any party are NOT good against warrantor.
Authentic and authorized signatures
no Knowledge of insolvency proceedings against maker, drawer or acceptor.
no Material alterations on the instrument
Entitled to enforce the instrument, warrantor is
Commercial Paper
Presentment warranties:
A person who presents an instrument for payment makes three warranties:
- Person is entitled to enforce the instrument;
- The instrument has not been altered, and
- He has no knowledge that the drawer’s signature has been altered or was unauthorized
Commercial Paper
Accommodation party:
Basically a surety.
Nine requirements of a negotiable instrument:
Sums of Now
Signed by maker or drawer
Unconditional
Money (not property, etc.)
Special language (‘to order’ or ‘to bearer’)
Order or promise to pay
Fixed amount
No other undertaking or instruction
On demand or at a definite time
Writing, it must be in
How to negotiate an order paper:
By transfer of possession plus indorsement by the holder.
Good faith: (2 types)
Honesty in fact (subjective) and
Observance of reasonable commercial standards of fair dealing (objective).
Fraud in the factum: (Real defense that may be used against HDC)
Deception w/ respect to writings character and terms plus excusable ignorance.
The Bank Statement Rule:
Customer must exercise reasonable promptness in examining the statement or items to determine whether any payment was not authorized because of an alteration or purported signature of the customer.
A note is:
a two party instrument.
- Maker (who is going to pay)
- Payee (who will be paid.)
Payee:
The person to whom a note or draft is payable.
A draft is:
A three party instrument
- Drawer: Person ordering payment
- Drawee: Person (or bank) ordered to actually make payment
- Payee: the person to be paid.
When the drawee is a bank and the draft is payable on demand, then the draft is:
a check.
Certificate of deposit:
An acknowledgement by a bank that a sum of money has been received, and a promise by the bank to repay the sum of money.
UCC Art. 3 specifically provides that a promise or order will not be deemed conditional merely because it: (3)
- Refers to another writing for a statement of right regarding collateral, prepayment, or acceleration
- Limits payment to a particular source or fund. (e.g. “I promise to pay out of the funds I receive from the sale of my next crop.”)
- Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise order. (e.g. Traveler’s checks.)
Generally a negotiable instrument must not be burdened with anything other than a simple, clean, unconditional promise or order. However, UCC Art. 3 does permit at least three extra undertakings or instructions. A promise or order may contain: (3) CAW
(What the three provisions have in common is that they strengthen the promise to pay but have no independent value.)
- An undertaking or power to give, maintain, or protect collateral to secure payment;
- An authorization or power to the holder to confess judgment or realize on or dispose of collateral;
- A waiver of the benefit of any law intended for the advantage or protection of the obligor. (e.g. waiver of homestead exemption, trial by jury, or right to notice of dishonor.)
“On demand at a definite time” trick hypo: A note is payable on July 15, 2020, but provides “If my Uncle dies prior to July 15, 2020, payment is due upon his death.” Is this a negotiable instrument?
Yes. Because there is a definite date. July 15, 2020.
What magic words must a negotiable instrument contain?
ORDER language or BEARER language.
Important exception is a CHECK. It need not contain words of negotiability.
Assignment:
A payee who has been issued a negotiable instrument can simply assign it to a 3d party.
The 3d party (now assignee) has no greater rights than the assignor does on the instrument. Any defenses that could have been raised against the original payee can also be raised against the assignee. (Basically, will NOT create an HDC)
Benefits of negotiation over assignment:
If the payee negotiates the instrument to the third party, then 3d party is not a mere assignee but a HOLDER.
If the holder gives value, in good faith, and w/ no notice then the holder is an HDC, who takes free of most of the defenses that could have been raised against the payee.
The customary way of transferring an instrument is:
negotiation.
Special indorsement:
Specifies the person to whom the instrument is payable.
Blank indorsement:
Does not specify the person to whom an instrument is payable; generally consists of a MERE SIGNATURE.
Order paper v. bearer paper: Different rule for banks. A depository bank (the bank in which the item is first deposited) that takes an unindorsed instrument for collection becomes:
a holder of the instrument if the customer was a holder at the time of delivery, EVEN IF the customer has not indorsed the instrument.
HDC: Value: Look for:
EXECUTED CONSIDERATION.
A party is an HDC to the extent that the agreed consideration has been performed.
A mere PROMISE to give value IS NOT ENOUGH.
HDC: Value: Bank deposits: A bank does not become a holder for value merely by:
crediting the depositor’s account.
Note: Bank does not need HDC protection b/c it can take back the credit from customer’s acct if the check is dishonored.
HDC: Value: Five things constituting ‘value’
Absolute memorization not important. More cards later in the deck.
- Performance of the agreed consideration
- Acquisition by the holder of a lien or security interest in the instrument (other than a judicial lien);
- Taking the instrument as payment of or security for an antecedent debt.
- Trading a negotiable instrument for another instrument; or
- Giving the instrument in exchange for an irrevocable obligation to a third person by taking the instrument.
NOTE: An executory promise is NOT VALUE.
HDC: Value: Bank deposits: The bank becomes a holder for value when: (and to the extent)
that it permits withdrawals of the amount credited to the depositor’s account - using first money in - first money out rule to determine whether the particular item has been credited.
HDC: Value: Difference b/t a purchase at a discount and partial failure of consideration:
In the DISCOUNT case the holder pays LESS THAN the face value of the instrument (e.g. pays $5k for $6k note) but pays the FULL AGREED CONSIDERATION. ($5k) - This holder is HDC for full value of instrument ($6k)
But if a holder pays only PART OF WHAT HE AGREED TO PAY (e.g. pays $2500 of the agreed $5k for $6k note) the holder is an HDC only IN PROPORTION to the consideration paid. ($3k - half.)
HDC: Good faith: Knowledge of a default in an ______ is harmless, but knowledge of any part of ______ being overdue deprives one of HDC status.
interest payment
principal amount
HDC: Good Faith: Close connectedness doctrine:
The more a holder knows about the underlying transaction, and particularly when it controls or becomes involved in it, the LESS it fits the role of a good faith purchaser w/o notice.
Transactions precluding HDC status: A holder does not become an HDC of an instrument taken by: (3)
LPS
- Legal process or by purchase in an execution, bankruptcy, creditor’s sale, or similar proceedings.
- Purchase as a part of a bulk transaction not in the ordinary course of business of the transferor, or
- As the successor in interest to an estate or other organization.
HDC: The Shelter Rule:
A transferee acquires whatever rights her transferor had and thus is said to take “shelter” in the status of her transferor.
HDC: The Shelter Rule: Illustration: Maker is fraudulently induced to issue a note to Payee. Payee negotiates to Harold, a HDC. Harold then indorses the note to Carl as a gift. Carl demands payment from Maker who raises fraud as a defense. Is Carl a HDC? Does he take free of the fraud defense?
Carl is holder but not HDC (no value)
BUT
Carl took from Harold who WAS an HDC so he ‘shelters’ in Harold’s rights and takes free of the defense.
Real Defenses: Fraud in the factum: (fraud in the execution)
Deception with respect to the writing’s character and essential terms PLUS excusable ignorance.
Underlying obligation: Generally, once an instrument is offered and accepted in satisfaction of an underlying obligation, the obligation:
merges w/ the instrument and the underlying obligation is SUSPENDED.
Payment of the instrument discharges the instrument AND its underlying obligation.
Contract liability: Maker obligated to:
pay the instrument according to its terms at the time it was issued. If there is more than one maker, the makers are jointly and severally liable on the instrument.
Contract liability: General Rule: Indorser is obligated to:
pay according to the terms of the instrument at the time of indorsement.
THOSE SIGNING LATER IN TIME CAN GET COMPLETE REIMBURSEMENT FROM THOSE SIGNING PRIOR IN TIME.
An indorser is considered to be __________ liable.
secondarily
When an instrument is made payable to joint payees and both parties indorse they are:
jointly and severally liable.
An indorser is liable only after: (3) PDN
- the instrument has been presented to the maker (if a note) or drawer (if a check)
- that party has dishonored the instrument, and
- a notice of dishonor has been given to the indorser
Contract liability: Indorser: Presentment is due:
within a reasonable time after such party becomes liable thereon.
In the case of a check, an indorser is discharged unless the check is presented for payment or given to a depositary bank for collection w/i
30 days after the indorsement was made.
Notice of dishonor with respect to a check must be given by a bank before:
its ‘midnight deadline’
midnight of the next banking day following the banking day on which the bank received notice
Notice of dishonor with respect to any instrument other than a check, notice must be given:
w/i 30 days following the day on which the dishonor occurs.
If presentment and notice of dishonor are either not made or are delayed beyond the time when due:
an indorser is excused from contractual liability on the instrument.
The discharge of an indorser’s obligation b/c a failure to make a timely presentment/give a timely notice of dishonor is not effective:
against an HDC.
Contract liability: A drawer is obligated to:
pay the draft according to its terms when the drawer signed the instrument.
Secondarily liable.
Unlike the indorser, the drawer is excused from K liability on the instrument due to delay in presentment ONLY in the VERY UNLIKELY EVENT that:
the drawee bank has become insolvent during the delay and there is no insurance to cover the loss.
Signature by an agent: An agent WITH AUTHORITY who signs her name to a principal’s check cannot be held liable on the check if:
its drawn on the principal’s account and indicates the identity of the principal. Does not matter whether the agent indicates her representative capacity.
The Checking Account: “Properly Payable” Rule:
The bank may pay out the customer’s money ONLY if it follows the customer’s orders exactly. If not, it must recredit the account.
The Checking Account: Forged drawer’s signature:
Bank must recredit the acct b/c customer never authorized bank to pay.
The Checking Account: Drawer issues a check to two people jointly (Him AND Her), the check is indorsed by only one person, must bank recredit the Drawer’s account?
Yes. Both signatures are necessary.
The Checking Account: Drawer issues a check to two people jointly (Him AND/OR Her), the check is indorsed by only one person, must bank recredit the Drawer’s account?
No. Check was properly payable because it only required one indorsement.
The Checking Account: Material Alteration: Hypo: Drawer issued $50 check to B who altered the amount to $500. B presented the check to Drawee Bank who paid $500, how much can Drawee Bank properly charge Drawer’s acct?
Only $50 is properly payable. The rest must be recredited back to Drawer’s acct.
Is a bank obligated to pay on stale checks?
No, but it can do so as long as payment is made in good faith.
Is a bank obligated to pay on overdrafts?
No. (unless customer had overdraft protection.) but it may if it chooses to.
The Checking Account: Wrongful dishonor: Who’s liable and for what?
A bank is liable to its customer for damages caused by wrongful dishonor.
Liability is limited to actual damages proved and may include damages for arrest or prosecution or other consequential damages.
The Checking Account: Does the death or incompetence of a customer revoke a bank’s authority to pay a check?
The death or incompetence of a customer does not revoke the bank’s authority to pay a check UNTIL the bank knows of the death or adjudication of incompetence AND has had a reasonable opportunity to act on it.
Even with knowledge of death or incompetence the bank may for ______ after the date of death keep paying checks, unless a person claiming an interest in the account orders payment to be stopped.
10 days.
Stop payment orders must: (2)
- describe the item with reasonable certainty - a reasonably prudent banker w/ the info should be able to find the check.
- and be recieved at a time and in a manner that affords the bank a reasonable opportunity to act on it.
A stop payment order is effective for ______, but it lapses after ________ if the original order was oral and was not confirmed in writing w/i that time period.
6 months
14 calendar days
Stop payment orders: The burden for establishing the fact and amount of loss resulting from the payment over a valid stop payment order is:
on the customer.
Ratification of a forgery occurs when:
a party, with full knowledge of the forgery (or alteration) accepts the benefits thereof or actively assents to the wrongful activity.
The impostor rule: Where the maker or drawer has been duped by an impostor to issue the instrument the forgery of that name:
Validates the forged indorsement of the payees name and the instrument is properly payable.
Fraudulent indorsements by employees:
If an employer entrusts an employee w/ responsibility w/ respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective.
Fraud: Comparative negligence: If the drawee bank or other person paying the instrument or taking it for value fails to exercise _____ _______, then:
fails to exercise ordinary care,
the person bearing the loss may recover from drawee bank or other persons failing to exercise ordinary care to the extent the failure contributed to the loss.
The Bank Statement Rule: If customer fails to adhere to this rule and the bank can show it suffered a loss by reason of this failure:
the bank need not recredit the customer’s account.
In GA a customer is precluded from asserting and unauthorized signature or any alteration on the face of the instrument if he does not notify the bank w/i :
60 days after the statement or the items are made available to the customer.
SOL: Ordinary checks or other unaccepted drafts.
Action must be brought w/i 3 years after the date of dishonor.
SOL: Notes payable at a definite time:
Action must be brought w/i 6 years of the due date or dates stated in note.
SOL: Sealed instruments:
In GA 20 years but governed outside of the UCC
Fraudulent alterations:
discharge all parties. EXCEPT that an HDC may enforce the instrument according to its original terms or in the case of unauthorized completion, according to its terms as completed.
Restrictive indorsements:
don’t do shit.
Forgery of the payees name means:
that no valid negotiation has taken place and so no one taking the instrument thereafter can qualify as a holder.
HDC: What does NOT constitute ‘value’?
An executory promise is NOT VALUE.
HDC: Value can be the __________ of the agreed consideration.
performance
HDC: Ways to find Value: When a holder acquires a _____ or _____ in the instrument.
lien or security interest in the instrument (other than a judicial lien)
HDC: Ways to find Value: When holder takes the instrument as payment of or security for an:
antecedent debt.
HDC: Ways to find Value: Trading a:
negotiable instrument for another instrument
HDC: Ways to find Value: Giving the instrument in exchange for incurring an:
irrevocable obligation to a third person by the person taking the instrument.
How to negotiate bearer paper:
Just transfer of possession. (voluntary or involuntary)
A drawer is secondarily liable after:
presentment and dishonor.
When does the negligence rule apply?
When the negligence ACTUALLY “contributes” to the forgery or alteration.
The negligence rule is an exception that:
imputes forgery liability on drawer.
What are the eleven real defenses that can be asserted against an HDC?
IF SAD IF ADDS
Infancy
Fraud in the facutm
Suretyship
Alteration
Duress
Illegality
Forgery
Adjudicated incapacity
Discharge through insolvency
Discharges known to HDC
SOL
If a forger steals a check and forges a person’s name, the drawer is generally not liable. An unauthorized signature (including a forgery) is ineffective as the signature of the person who’s name was signed and is effective only as:
the signature of the forger.
