Commercial Paper Flashcards
8 step approach of commercial paper
- Identify type of paper (representation of money)
- Identify the Parties
- Determine if instrument is negotiable
- Determine if instrument was properly negotiated
- Determine if transferee is a holder in due course
- Determine plaintiffs causes of action(s) such as contract, warranty, tort or not properly payable
- Determine defendants defenses
- If defendant is held liable may defendant pass liability on to another party?
Note
Promise to Pay
- A promise to pay money: a two party instrument
Parties
A. The maker - The promisor (obligor)- Person who promises to pay
B. The payee- The promisee- person entitled to payment (the money)
Parties to a Note
A. The maker - The promisor (obligor)- Person who promises to pay
B. The payee- The promisee- person entitled to payment (the money)
Certificate of Deposit
Certificate of Deposit (CD)- note issued by a financial institution
Financial institution acknowledge receipt of money
Financial institution is promising the payee/depository to repay the money
Draft
An order to pay money- a three party instrument
Example: Check
Parties
The drawer- person ordering payment
The drawee- person to make the payment
- In a check context, also called the payor bank
The payee- person to receive the payment (person to receive payment, money)
Parties to a Draft
The drawer- person ordering payment
The drawee- person to make the payment
- In a check context, also called the payor bank
The payee- person to receive the payment (person to receive payment, money)
Check’s additional requirements
- A financial institution is the drawee and
2. Payable on demand (payable whenever the payee wants the money)
Types of Checks
- Ordinary Checks
- Certified Check
- Ordinary check which bank has accepted it ie agreed to pay (become liable) - Cashiers Check
- Drawer and Drawee are same bank
- Person buying the check is the remitter - Tellers Check
- Check drawn by one bank on another bank
- Person buying the check is the remitter - Travelers Check
- Demand instrument requiring the countersignature by a person who specimen signature already appears on the instrument
Remotely-Created Item (Formerly Demand Draft)
A draft is not signed by the drawer but created with the drawers authority so that a third party can get paid from the drawers bank account
- The third party is usually a seller in an internet transaction or when you pay bills over the telephone by giving creditor your checking account number
Meaning of Negotiability
- Refers to the form of the instrument
- Determined at time of issuance, cannot later change it
Opting out: If instrument says it is non-negotiable, it is non-negotiable (unless it is a check cannot expressly opt out of checks
Importance of Negotiability
- In a normal contract law, a transferee gets no better rights than the transferor.
Thus the obligor may raise all of the defenses (ie failure of consideration, fraud) it had against the transferor against the transferee - If the paper is negotiable (form) and properly negotiated (transferred) it may reach the hand of a special good faith purchaser called a holder in due course
- Holder in due course obtains better rights then transferor and thus can get paid from obligor even though the obligor (maker or drawer) has defenses (good reasons not to pay under normal contract law)
- If instrument is not negotiable it is not invalid or unenforceable it is just a regular contract
Elements of Negotiability
- In Writing
- Signed by maker or drawer
- Unconditional Promise or Order to Pay
- Fixed Amount
- In Money
- No other undertaking or instructions
- Payable on Demand or At a Definite Time
- Contains words of Negotiability
In writing requirement of Negotiability
- No requirement what it is to be written with or written on
Signed by maker or drawer requirement of Negotiability
- Any symbol executed or adopted by a party with present intent to authenticate a writing
Ex: Traditional signature, trade or assumed name, mark x, initials, someone writing someone else’s name with that persons permission, typewritten, signature stamp, thumb print, computer generated - If someone forgers your name that’s the real signature of the forger
Unconditional Promise or Order to Pay requirement of Negotiability
- Must be more than a mere acknowledgment of a debt such as I.O.U
Presumption of unconditional promise or order
Items that make promise or order conditional (and thus not negotiable):
- Express Condition to Payment: ex: I will pay if I make the highest score on the bar, payment conditioned and not negotiable
- Promise or order “Subject to” or “Governed by” another record
- Incorporation by Reference: rights or obligations with respect to the promise or order are state in another record
Items that do not make promise or order conditional:
- Statement of Consideration: can state consideration of monetary payment as long as it’s not conditional on paying the note
- Reference to another record “ as per“ or “in accordance with”
- Incorporation by reference of items that would not hurt holder
1. Rights Regarding collateral
2. Pre-payment- Right of obligor to pay early
3. Acceleration- Right of holder to get paid early upon some event - Limitation of payment to a particular fund or source: stating the account money is to come from is ok
- Countersignature: if you need countersignature its ok, Ex: travelers check
- Consumer Protection Language: Language only there because its required, This language will however prevent holder from being a holder in due course
Items that make promise or order conditional (so not negotiable)
- Express Condition to Payment: ex: I will pay if I make the highest score on the bar, payment conditioned and not negotiable
- Promise or order “Subject to” or “Governed by” another record
- Incorporation by Reference: rights or obligations with respect to the promise or order are state in another record
Items that do not make promise or order conditional (negotiable)
- Statement of Consideration: can state consideration of monetary payment as long as it’s not conditional on paying the note
- Reference to another record “ as per“ or “in accordance with”
- Incorporation by reference of items that would not hurt holder
1. Rights Regarding collateral
2. Pre-payment- Right of obligor to pay early
3. Acceleration- Right of holder to get paid early upon some event - Limitation of payment to a particular fund or source: stating the account money is to come from is ok
- Countersignature: if you need countersignature its ok, Ex: travelers check
- Consumer Protection Language: Language only there because its required, This language will however prevent holder from being a holder in due course
Fixed Amount element of Negotiability
Determine principal amount due Must be able to look at instrument and determine the principal amount due Ex: $450 Interest Presumption= no interest A silent instrument bears no interest Ex: an ordinary check
Ways in which interest may be state which do not violate the fixed amount requirement
1. Amount of money: $20 a month
2. Fixed or variable rate: 2% this year
3. Reference to outside source: A note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Failure to state interest rate (say there is interest but don’t state rate)= judgment rule
Ex: a note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Interest on an obligation
Presumption= no interest
A silent instrument bears no interest
Ex: an ordinary check
Ways in which interest may be stated which do not violate the fixed amount requirement
1. Amount of money: $20 a month
2. Fixed or variable rate: 2% this year
3. Reference to outside source: A note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Failure to state interest rate (say there is interest but don’t state rate)= judgment rule
Ex: a note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Payable in Money element of Negotiability
Authorized medium of exchange
Medium of exchange authorized or adopted by a domestic or foreign government as part of its currency
Includes Foreign money
- May be payable in foreign money. Unless limited to payment in foreign money, could also be paid with equivalent US money
-Cannot be payable in goods or services
Words v. Figures=Words Prevail
Ex: a check provides that it is payable for 550.00 in numerals but five hundred dollars is in words. Check is payable for $ 500
No other undertaking or instruction element of negotiability
- Instrument not a full contract
- Negotiable instruments are just promises or orders to pay money. They are often called “couriers without luggage”
Exceptions: Permitted Undertakings or Instructions
- Promises Concerning Collateral
Ex: a note which provides that “the maker will provide additional collateral” under circumstances stated in the note is a permissible additional promise
- Confession of judgment Clauses
Note that confession of judgment clauses are unenforceable under Texas law
- Waiver of Law meant to benefit the obligor (maker/drawer)
Payable on Demand or At Definite Time
Express Statement: A note is payable on demand if an express statement is used providing for payment on demand or at sight
Silent instrument
If the instrument does not state the date it is due, it is a demand instrument
Ex: An ordinary check is a demand instrument because it does not state a due date, it merely states the date it was issued
At a definite time
Express: Date stated on instrument, Fixed period after right or acceptance, time readily ascertainable at time promise or order is used
Ex: note that says it is due the first day of fall 2011 is payable at definite time
Ex: Note payable when someone dies is not payable at definite time
Permitted date change matters that do no prevent instrument from being payable at a definite time
- Prepayment of instrument: right of obligor to pay earlier then stated date
- Acceleration of due date: right of holder to demand payment earlier then stated date upon named events
Provisions in instrument extending the due date
By holder = to any time
By obligor= to a later definite time stated in the instrument
Automatically upon condition stated in instrument= to a later definite time stated in the instrument
Contains Words of Negotiability
Bearer Language
- Payable to bearer, payable to the order of bearer, indication that possessor entitle to payment, no payee stated, to cash or to order of cash, not payable to identified person
Ex: A check which the drawer signs but does not fill in the name of a payee is bearer paper
Ex: a check payable to good luck on the bar exam is bearer paper because it does not identify a person as the payee
Order language
Ex: a check payable to the order of Frank Smith is order paper. Order language is typically pre-printed on checks
If both order and bearer language= bearer controls
Ex: A check payable to the order of Frank Smith or bearer is barer paper
Exception of Checks
If this is the only element of negotiability missing for a check, the order or bearer language requirement is waived
- Only for checks
Ex: note payable to Maria is not negotiable because it lacks bearer language (a person is named) and does not contain order language
Ex: check payable to Frank Smith is negotiable despite lacking order or beaer language
-Nonnegotiable = regular contract law
Bearer Language
- Payable to bearer, payable to the order of bearer, indication that possessor entitle to payment, no payee stated, to cash or to order of cash, not payable to identified person
Ex: A check which the drawer signs but does not fill in the name of a payee is bearer paper
Ex: a check payable to good luck on the bar exam is bearer paper because it does not identify a person as the payee
Order Language
Ex: a check payable to the order of Frank Smith is order paper. Order language is typically pre-printed on checks
If both order and bearer language= bearer controls
Ex: A check payable to the order of Frank Smith or bearer is barer paper
Check Exception of Bearer or Order Language
If this is the only element of negotiability missing for a check, the order or bearer language requirement is waived
- Only for checks
Ex: note payable to Maria is not negotiable because it lacks bearer language (a person is named) and does not contain order language
Ex: check payable to Frank Smith is negotiable despite lacking order or beaer language
What happens if something is nonnegotiable?
Regular contract law applies
Negotiation
Negotiation: Transfer of negotiable instrument so transferee is a holder
The payee transfers the instrument to a third party rather than just getting the money ie as payment for a sale, to donee as a gift, to bank to deposit in payees account, etc
Holder Status
- Possession of negotiable instrument and
- Good title
The method of obtaining good title depends on the words of negotiability used
Bearer= possession alone gives you good title (possession=holder)
Order= possession plus necessary indorsements
What gives a holder good title for bearer paper?
possession alone gives you good title (possession=holder)
What gives a holder good title for order?
possession plus necessary indorsements
Indorsement
An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument
Blank indorsements
Blank Indorements
- Payees Signature only
Simplest type of indorsement consisting merely of payees signature ie no particular person is named to whom instrument is now payable
Effect = Creates Bearer paper
Thus further negotiations may be by transfer of possession alone
Special Indorsements
- Payees signature plus designation of new person to whom instrument payable
- New owner of instrument
Ex: check payable to frank smith, frank writes on the back payable to Susan Cortez and signs his name immediately below. Frank has made a special endorsement and the check is order paper. Further negotiation of the check will need Susan’s indorsement
Effect= Creates Order Paper
Thus, further negotiations will require the indorsement of the person to whom it was made payable
For Deposit or Collection/ Restrictive Collection
For Deposit or Collection
A restrictive indorsement limiting what may be done with instrument
Ex: check payable to frank, frank writes on back for deposit in my bank account #343 only and then signs his name immediately below it. Frank has made deposit indorsement
- If depositary bank does not comply with the indorsement that depositary bank will be liable to frank for conversion
What determines the initial payee?
Intent of Issuer Determines Initial payee
Multiple Payess
“and” separated the names of the payees. Requires all payees to indorse
“or” or “and/or” separates the names of the payees. Requires any one of the payees
Transferees Right to Transferors Indorsement
If instrument is transferred for value transferee has specifically enforceable right to the transferors indorsement
Depositary bank becomes holder even without transferees signature
Depositary bank becomes a holder even if payee deposits check in payees account without indorsing it
Misspelled Payees Name
payee may indorse with incorrect or real name
- A person giving value for the check may require person to indorse both names to make the chain of title clear (real and misspelled name)
Payee Lacking Capacity May Still Effectively Indorse
Negotiation is effective even if the payee was a minor (incompetent)
Rights of Mere Holder
Being a mere holder is normally all that one needs because a holder has lots of rights, such as the right to enforce payment
When is holder in due course status relevant?
Holder in due course status is important when the obligor raise a defense to payment
Ex: assume that maker of note does not want to pay because the produce purchased was defective
- A mere holder, holder would lose to this defense, if it is valid under basic contract law
- If holder is holder in due course, holder can obtain better rights than the transferor and take free of this and most other defenses
Elements of Holder in Due Course
- Negotiable Instrument
- Holder
- Authenticity not apparently questioned
- Holder Must pay Value
- Good Faith
- Without notice at time of instrument acquisition
Authenticity Not Apparently Questioned / HDC
- Instrument does not bear such evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call its authenticity into question
Ex: taped note
Holder must pay Value/ HDC
- The holder must pay value for the instrument to deserve the special protection
- Negotiable instruments are often traded (brought and sold) at amounts different from their face values. If the value difference is excessive, such as paying $100 for $10,000 note, the holder is unlikely to be in good faith. But paying less then amount still means you brought for value
- IF you get note as gift you are not a holder in due course, didn’t pay value
- Can be a holder in due course for ½ the note if you only paid 1/2 the value. Only holder in due course proportional to what you pay
- Past consideration is considered value
Good Faith/ HDC
A. Honesty in fact (subjective) plus
B. Observance of reasonable Commercial Standards of fair Dealing (objective)
Without Notice at time of instrument Acquisition/ HDC
- Later notice does not matter, once you get holder in due course status it cannot be taken away
Notice means:
Actual Acknowledge: Subjective test
Receipt of a notice coupled with a reasonable time to act on the notice
From all the facts and circumstances known to the person at the time in question (subjective element) the person has reason to know that it exists (objective element)
Merely filing in the public record does put a person on notice (don’t need to check public records as holder in due course) constructive notice is not notice
Things you can’t know:
A. Instrument (principal) overdue- Due date has passed
- For a check days 90 after issuance
- Overdue interest is not notice, only have notice if principal is overdue
B. Instrument dishonored
Instrument not paid upon proper demand such as check marked insufficient funds
C. Uncured default with respect t otpayment of another instrument issued as party of the same series
D. Unauthorized Signature
E. Alteration
F. Any Claims
G. Any Defense or claim in recoupment
- Any reason obligor does not want to pay (minority, lack of capacity, fraud etc)
Recoupment is like a counterclaim, that is, obligors claim against payee arising out of the transaction giving rise to the paper
Things you can’t know in order to take without notice as Holder in Due Course
Things you can’t know:
A. Instrument (principal) overdue- Due date has passed
- For a check days 90 after issuance
- Overdue interest is not notice, only have notice if principal is overdue
B. Instrument dishonored
Instrument not paid upon proper demand such as check marked insufficient funds
C. Uncured default with respect to payment of another instrument issued as party of the same series
D. Unauthorized Signature
E. Alteration
F. Any Claims
G. Any Defense or claim in recoupment
- Any reason obligor does not want to pay (minority, lack of capacity, fraud etc)
Recoupment is like a counterclaim, that is, obligors claim against payee arising out of the transaction giving rise to the paper
Shelter Rule for Holder in Due Course
Transferee has rights of transferor
Even if a holder does not qualify as holder in due course, person may still have rights of holder of due course by shelter rule
- The transfer of an instrument vests in the transferee the rights that the transferor had
Warning: having rights via shelter does not make you a holder in due course
Exception: A person who was party to fraud or illegality affecting the instrument cannot get holder in due course rights by shelter
Burden of proof is on person claiming holder in due course status
Rights of Holder in Due Course
Subject to Real Defenses, Protected from Personal Defenses
Real Defenses
Subject to real defenses
1. Infancy
Infancy of obligor is a real defense to the extent it is a defense to a simple contract under state law
2. Duress which voids obligation
3. Lack of legal capacity making obligation void
4. Illegality making obligation void
5. Fraud in the execution (fraud in the factum)
- Signer lacked knowledge of the instruments character or essential terms and - Signor lacked reasonable opportunity to learn of the instruments character or essential terms
- Thus person lacked the intent to sign a promise or order to pay
- Note that this is an excusable ignorance test merely stating that you signed something without knowing what it was is note enough. Courts will look at a variety of facts such as the signers intelligence, education business experience and ability to read and understand English
6. Discharge in Insolvency (Bankruptcy)
7. Omission of Required Consumer Protection Language
Texas and/or Federal law requires certain instruments in consumer transactions to contain langue starting that a transferee remains subject to claims or defense that the issuer could assert against the original payee
- If an instrument does not contain this language the instrument is treated as if it actually contains that language and thus the issuer may assert against an holder in due course all claims and defenses that would have been available if the instrument had included the required language
8. Statue of limitations
Note: 6 years from the due date (not the issue date)
Unaccepted draft. Earlier of 3 years after dishonor or 10 years after issue
9. Payment to former holder
The liability of a person obligated to pay on an instrument may be discharged by payment to a person who was formerly entitled to enforce the note unless the obligated party has receive a proper notice that the note was transferred and that payment is to be made to the new holder
- A notification is adequate only if its signed by the transferor or the transferee, reasonable identifies the transferred note and provides an address at which payments subsequently are to be made
- The defense of payment to a person who is no longer entitled to enforce is effective against a holder in due course. But the holder in due course can prevent this defense from being effective by providing proper notice
10. Alteration
1. Unauthorized signatures & forgeries
Real Defenses List
- Infancy
- Duress which voids obligation
- Lack of legal capacity making obligation void
- Illegality making obligation void
- Fraud in the execution (fraud in the factum)
- Discharge in Insolvency (bankruptcy)
- Omission of required consumer protection language
- Statute of Limitations
- Note: 6 years from the due date (not the issue date)
- Unaccepted draft. Earlier of 3 years after dishonor or 10 years after issue - Payment to former holder
- Alteration
- Unauthorized Signature & Forgeries
Holder in Due Course Protected from Personal Defenses
The holder in due course prevails against all other defense of the obligor either under UCC or common law that are not real defenses
Ex:
- Failure of consideration (nondelivery of goods, nonperformance of services)
- Breach of warranty
- Fraud in the inducement (ie maker knows maker is signing a promissory note but it is mislead regarding quality of goods or maker signs note without reading it because maker was in a hurry)
Holder in Due Course is free some claims of others to the instrument
- Holder in due course as defendant
No claimant can take an instrument from holder in due course, holder in due course is a perfect defendant - Even a true owner cannot recover an instrument from a holder in due course
Contract Liability
Basis of liability: The primary basis of contract liability on an instrument is a persons’ signature
Signature by Agents
Binding principal: follow general law
Binding Agent:
Assume agent signs agents name and that principal is bound
Key issue= is agent personally liable
Agent escapes personal liability if: Principal identified in instrument and Signature unambiguously shows it made on behalf of principal
- Used words like ‘by” “agent for” “treasurer”
Liability of Agent if not properly disclaimed
Liability of agent if not disclaimed properly depends on status of plaintiff
- TO holder in due course: agent is liable to holder in due course unless the agent can prove that the holder had notice of the representative nature of agents signature
- To non-holder in due course: agent is liable to a non-holder in due course unless agent can prove that the original parties did not intend the agent to be liable
Rule for Agent Liability on Checks
Special rule for checks- no liability if principals name on check
Agent for drawer is not personally liable if principals name is on check (even if agent did not indicate agent capacity)
If agent is not authorized to make deals, who is liable?
Actually, it is then a forgery; alleged agent is bound but not purported principal
Maker of Note Liability
Primary liability: no conditions precedent
Maker must pay instrument when it is due according to its terms at the time it was issued (or when incomplete instrument completed)
- Liable to holder or indorser who paid instrument
Defenses: maker may raise defense; effectiveness depends on status of holder (ie holder in due course or not)
Drawer of Draft Disclaiming Liability
Drawer may not disclaim liability on a check by may disclaim liability on other drafts
Secondary Liability
Drawer liable only after two conditions are first satisfied: presentment and dishonor
- Presentment to drawee within 30 days
Ex: You pay your telephone bill with a check. Before the telephone company can sue you to collect the check, the company must first present the check to the drawee (your bank). If the company waits more than 30 days to present, you are still liable unless the drawee (your bank) has become insolvent
- Dishonor the drawee refuses to pay the instrument upon a proper presentment
Liability Disclaimer Allowed
Ex: The payee of a check, Paul Parsons indorses the check “without recourse, Paul Parsons”. This indrosement prevents Paul from incurring the contract liability of an indorse; The indorsement is effective merely to pass title
Order of Liability
Indorsers are liable to each other in the order of their signatures
Sue prior indorseres for payment
Liable to later indorders
Secondary Liability
Indorser liable only after three conditions are first satisfied: Presentment, dishonor and notice of dishonor
- Presentment to maker or drawee within 30 days of indoresment
- Dishonor: The bouncing of the check in the previous example is a dishonor, that is, the drawee did not pay the check because the drawer did not have sufficient funds in the drawer’s account to cover the check
- Notice of dishonor to indorser within 30 days of the dishonor
Drawee Liability
A drawee makes no negotiable instruments contract
Ex: Dan draws a check on Bank of Texas for $300 payable to Paula. The check bounces when Paula attempts to cash it. Paula may not sue Bank of Texas to collect the $300 because bank of Texas, the drawee, did not sign the check and thus has no liability on the check
Final Payment
Once a drawee bank finally pays a check, contract actions (ie the drawers and indoresers contracts) may no longer be pursues and the drawee bank may not recover on the check from the persons it paid unless there is a breach of a presentment warranty
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
Conversion (tort) Liability if drawee pays on forged indorsement
Drawee who pays on forged indorsement is liable to the payee in conversion
Person suing in conversion must have received delivery of the instrument. No conversion action if check never reaches payee because it was lost in the mail
Payment of Checks after the Drawers Death
Drawee bank may continue to pay checks until it knows that the drawer has died and has a reasonable opportunity to act on that knowledge
Effect of notice of death:
Drawee bank may pay for no more than 10 days after the drawers death if the bank know of the drawers death
But if someone claiming an interest in the account request that the drawee bank stop paying the drawers checks immediately, the drawee bank must comply
Accommodation Parties
Definition: co-signers, surities, guarantors
A person who signs an instrument to lends his or her credit to another party but who does not receive any direct benefit ie does not receive any of the borrowed money
Accommodated Party
principal/debtor/obligor
- Person with the bad credit
Accommodation Party
surety/co-signer
- The person with good credit
Holder (in accommodation parties)
creditor/obligee
- The person who wants payment assured
Liability Generally in Accommodation Parties
Liability: generally
Liable in capacity in which accommodation party signs, no special contract
Presumed to be a guaranty of payment
- Can go after either party without having to attempt to collect from one person
Exception: Limiting liability to collection only
The accommodation party may include express language limiting the contract to a guarantee of collection only, would have to try and recover from the other party first
Reimbursement in Accommodation Parties
If the accommodation party (surety) pays the instrument the accommodation party is entitled to reimbursement from the accommodated party (maker, indorser)
Demonstrating Accommodation Status
- Express Language
- Anomalous Indoresement: an indorsement by a person who was not holder of instrument (ie an indorsement outside of the chain of title, is notice of its accommodated character)
Ex: a check is payable to Paul. The first indorsement on the back of the check is Arthur. Arthur’s indorsement is anomalous because it is not in the chain of title. Accordingly, we can deduce that Arthur is an anomalous Indorsement
Warranty Liability
(get money back you shouldn’t have paid, defective instrument)
- None upon issuance, some when you transfer, some when you present
These are implied warranties that is they arise automatically (don’t do anything to get them)
Warranty liability is off the instrument since warranties are created by transfer or presentment not the indrosement of the instrument
To use a warranty, possession of the isnturemnt is not needed as it is for contract liability
Warranty liability survives the final payment of an instrument
Who Makes Transfer Warranties
Defendant= transferor who receives consideration
Transfer warranties do not arise in a gift context; the person transferring must receive consideration before the transfer warranties are implied
To Whom are Transfer Warranties
Plaintiff= Immediate trasnferee and
Subsequent transferes if transferor indorsed
- Note that in banking context liability runs to any subsequent collection bank even without indroesement
Drawee and maker never sue for beach of transfer warranty, the get instruments presented to them, not transferred
Transfer Warranties
Warrantor is entitled to enforce the instrument
- Basically this is a warranty of your holder status
All signatures authentic and authorized
No alteration
No good defenses against transferor
- The instrument is not subject to an defenses which could be successfully asserted against the transferor
- Thus transferor warrants that if transferor were a plaintiff on the instrument, no defense that anyone has could defeat transferor
- A perfect warranty
No knowledge of insolvey proceedings
- The warrantor has no knowledge of insolvency proceedings against he maker, acceptor or drawer of an unaccepted draft
- Note that his is the only warranty where warrantors lack of knowledge is relevant
If remotely-created item, the person identified as the drawer authorized the item
Disclaiming warranties
- Checks: Can’t disclaim
- Non-Checks: Can disclaim (“without warranties”)
Presentment Warranties
Made on Presentment
- Do not confuse presentment warranties with transfer warranties. They are mutually exclusive
- A plaintiff can only have one of these warranty causes of action although a person might make both warranties
Who makes Presentment Warranties?
Defendant
Presenter and Previous Transferors
Whom are presentment warranties?
Made to parties who pay in good faith, that is maker, drawee, acceptor (plaintiff)
Warranties when unaccepted draft presented to drawee
Ex: Check, you make these when you cash your paycheck
Warrantor entitled to enforce draft or obtain payment
No alteration
No knowledge of unauthorized drawers signature
If remotely-created item, that person identified as the drawer authorized the item
Warranty when other instruments presented
Ex: dishonored draft to indorser, not to maker
- Warrantor entitled to enforce the draft or obtain payment
Warranty v. Indorsers contract
How do you know whether the plaintiff should bring suit against the indorser for breach of warranty of for breach of indorers contract? Determine the identity of the plaintiff
IF plaintiff is the holder: if the payor has not paid the interment (a check bounces or a promissory note is not paid by the maker) then the holder will sue the indroser on the indorsers contract
IF plaintiff is payor: if the payor has paid and later discovers the payor should not have paid (ie the check was forged or the note was altered) the payor will attempt to sue the indoreser for breach of warranty (transfer or presentment as appropriate under the facts)
Effect of instrument on underlying obligation
Payment by certified check, cashiers check or tellers check= underlying obligation is discharged as if person paid cash
Uncertified checks and notes- underlying obligation suspended
IF check or note later paid, underling obligation discharged
If check or note is dishonored, older may sue on either instrument or underlying obligation
Failure to Produce Original Instrument
Ex: original lost, Destroyed or stolen
- Enforcement by person in possession
- Person holder when loss occurred, Loss not due to transfer or lawful seizure and
- Person cannot reasonably obtain original
Protection for Payor required ie: Security or Bond
Overdrafts
Bank may charge customers account even if the charge creates an overdraft
Postdated Check
Bank may pay postdated check unless customer gives bank a notice of the postdating which describes the check with reasonable certainty
Stop Payment Orders
Drawer (banks customer) may stop payment on check. Other parties have no authority to do so
1. Must be in writing
Oral stop payment orders are unenforceable in Texas
But bank may stop payment if it so desires to be nice to customer (but cant sue if they don’t)
2. Requirements of writing: Dated, Signed, Describe item with certainty
Ex: Account number, check number, amount
3.Valid for 6 months can be renewed
4. Banks defenses if it pays over a stop payment order.
- Stop payment order not comply with requirements
- No loss
- Customer would have to pay a check even if payment had been stopped
5. Cashiers and tellers check
- Remitter cannot stop payment
- Bank may stop payment
- But bank then risks liability for expenses, lost interest, and consequential damages
Wrongful Dishonor
- Drawee dishonoring a properly payable check
- Who has standing to complain?
- The drawer may being action against drawee for bouncing a check it should have paid
- The payee may not sue the drawee bank even if the drawee bank should have paid the check and the drawer had sufficient funds to cover the bank - Damages : the drawer may recover all damages caused by the wrongful dishonor such has the bounced check fee and expenses incurred defending prosecution for writing hot check
- Drawee banks defenses
- Payment would overdraw the drawes account
Check is more then 6 months old
- Bank may honor stale check as long as it does so in good faith
Payment in Full Check
- A check or accompanying communication on which the drawer conspicuously (obviously) indicates that cashing check acts as payment in full of an existing obligation which is either unliquidated or subject to a bona fide dispute
- 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 drawer of a particular person or address to send payment in full checks
What should you determine with forgery?
It is essential when dealing with forgery to determine whose signature was forged because different rules apply based on the identity/ status of person whose name is forged
Forged Makers Signature
Alleged maker is not liable
Alleged maker is not liable because makers signature does not appear on the note
Alleged makers conduct may ratify the forgery or cause alleged maker to be precluded from denying the forgery
Forger is liable
Forger is liable on the note because forges signature appears thereon
Forged Drawers Signature
- Alleged Drawer is not liable
- Drawee bank must recredit alleged drawers account as check was not properly payable unless drawee bank has a defense
Is a bank able to pass on loss unless breach of presentment warranty?
- Normally no breach of presentment warranties (entitle to enforce, no alteration, no knowledge of forges drawers signature) will be breached; parties had right to enforce the forgers obligation
- Forger is the real drawer because forger signed when the forger forged the alleged drawers obligation
- Drawee takes risk that drawers signature unauthorized unless presenter actually knew it was unauthorized
Banks Defenses to Recrediting List
Drawers Negligence, Bank Statement Rule- Duty Inspect Statement, Repeat Offender Rule
Banks Defense to Recredting List
Drawers Negligence
- IF drawers negligence substantially contributes to the forgery of the drawers name, the drawer may not raise the forgery
Bank Statement Rule: Duty to inspect statement
- Customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and report forgeries to bank
- If customer does not and bank can prove a loss beyond original mistaken payment (not catch a forger) customer precluded
- Warning: Forged drawers signature must be report to bank within 1 year regardless of banks or customers negligence
Repeat offender rule
- 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 credit the account for the subsequent forgeries by the same person
Effect of forgery of payees name on Bearer Paper
Since indorsement is not necessary to negotiate bearer paper, forgery of an indoresement is irrelevant
Effect of forgery of payees name on Order Paper
Forgery breaks chain of title and check is not properly payable. Accordingly the drawer may demand that the drawee bank recredit the drawers account as the check was not properly payable
Situations where a party is precluded from asserting forgery of payess name
Imposter rule: drawer/maker estopped to deny validity of forged indorsement
The issuer maker or drawer will be estopped from denying the validity of forged instrument
These are situation where the maker or drawer is deemed to have acted carelessly in issuing the check and thus to have contributed to the forgery
- Corporations should have properly supervised employees and they will be held liabe
Fraudulent Indorsements by Employees – payee estopped
If an employer entrusts an employee (or independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indoresement is effective. Payees is estopped to assert the forgery
- only effective when employee is trusted with the money, not if he is in position where shouldn’t have had access to money (ie janitor)
Liability of Drawee on Forged Instrument
Conversion Liability to Payee
Payee can sue the payor bank (as well as the depository bank and non-bank converts) for conversion or
Not properly payable liability to drawer
- The drawer of a check can sue the payor/drawee bank since a check with a forged payess name is not properly payable
Drawee protected from double liability
A successful conversion action against the drawee by payee will eliminate drawers not properly payable action
Banks defenses
Imposter Rule
Fraudulent Indoresement by employee entrusted with check
Drawers negligence
Failure to timely sue
- Drawer must sue within 3 years
IF bank pays, banke will then want to pass on liability
Liability of Presenter on Forged Instrument
The drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (the forged indoresemnt broke the chain of title so no one could become a holder)
Liability of Transferor on Forged Instrument
The presenter who loses to the payor for breach of presentment warranty of good title will sue entites further up the chain for breach of the various transfer warranties of: entitle to enforce, all signatures authentic or authorized, no good defenses
- Usually first person to trust forger takes loss (it would be forger but they are usually gone by then)
Alteration on Forged Instrument
Obligor does not want to pay because the instrument was altered
Types:
1. Change in obligation
- Any authorized change in an instrument that purpose to modify the obligation of a party such as the amount, date, names of payess, or interest rate
2. Unauthorized completion
- Instrument is completed in an unauthorized manner which affects the parties obligation
Effect on Holder in Due Course because of Alteration on Forged Instrument
- Change in obligation- holder in due course may enforce for original amount
- Not amount it was altered for but the original amount - Unauthorized completing- holder in due course may enforce as completed
- Full amount (ex: here is a check don’t spend more then $100 and they spend $1000, you are liable for full amount)
Effect on non-holder in due course
Fraudulently made by holder = total discharge of obligor
Not Fraudulently made= obligor liable under original terms
- Still liable for the original amount
Banks Defenses To altered Forged Instrument
Negligence: if the drawers negligence substantially contributes to the alteration the drawer will be precluded from asserting the alteration
- Ex: not drawing line all the way to payee so they can’t write anything in (same with amount)
Bank Settlement Rule: The drawer must report alterations to the drawee bank within 1 year
Breach of transfer and presentment warranties of no alteration
Ex: Bank can sue up to chain it for breach of presentment warranty of no alteration and the presenting bank may sue up the chain for breach of the transfer warranty of no alteration
