Commercial Paper (j) Flashcards
Benefits of HDC Status
When a negotiable instrument is duly negotiated to a holder in due course, that holder takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
Note
A promise to pay. Only two parties.
- the person promising to pay (maker), and
- the person to whom payment is promised (payee or bearer)
Draft
A draft is an order to pay. Three parties:
- one person (drawer) orders another party (drawee-bank) to pay money to a third person (payee or bearer)
Negotiability
Whether an instrument is negotiable depends on its form. To be a negotiable instrument, an instrument must:
(1) Be in writing
(2) Be signed by the maker or drawer
(3) Contain an unconditional promise to pay a sum certain in money and no other promise
(4) Be payable on demand or at a definite time, and
(5) Be payable to order or bearer
- must use “order” or “assigns”
Holder In Due Course (HDC)
A holder in due course is a holder who takes the instrument:
(1) For value, and
(2) In good faith, and
(3) Without notice that is is overdue/dishonored/subject to any defense of claim
Without Notice Requirement for HDC
Objective Test: Did the holder know or have reason to know of the problem?
- notice that a payment of principal in arrears (cannot qualify as HDC)
- notice that a payment of interest in arrears (CAN lead to HDC)
- notice that the obligation of any party is voidable (no hdc)
- notice that fiduciary breach his duty (HDC as long as no ACTUAL notice)
Central Theme of Article 3
A central theme of Article 3 is to provide a safe alternative to cash. That safety provided by Article 3 is available only to an HDC. A person becomes a holder through a transfer that qualifies as a negotiation.
HDC and the Shelter Rule
A transferee acquires whatever rights her transferor has and as such, the transferee takes shelter in the status of the transferor
Claim
A right to a negotiable instrument because of superior ownership
Personal Defenses
Ordinary contract defenses:
- lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement
Real Defenses
MaD FifI4:
Material Alteration
Duress
Fraud in the Factum (lie about the instrument)
Incapacity, Insolvency, Infancy, Illegality
Duties of Drawee Bank
- A bank must honor its customer’s check if there are sufficient funds to cover it.
- Bank must honor a check as drawn (cannot charge cust. account if signature was forged, more money than original order, bank pays wrong person or paid before post-dated)
- If the bank wrongfully dishonors a check, the customer can recover damages for whatever harm is proximately caused by the wrongful dihonor
- the death of a customer does not revoke the bank’s authority to pay a check until the bank knows of the death and has reasonable time to act on it
Stop Payment Orders
- oral stop payment is binding on bank for 14 days unless renewed in writing within that period
- a written stop payment order is binding for 6 months, renewable every 6 months in writing
- if the bank pays despite the order, the customer has the burden of proving that a loss has occurred (and the amount)
Properly Payable Rule
The drawee bank that honors a forged or materially altered check must re-credit the drawers account, as long as the drawer was not negligent
When is the drawer negligent?
- leaving blanks or open spaces
- failing to follow internal procedures designed to avoid forgeries (employer leaves checks and stamp in same unlocked drawer)
- failing to examine one’s bank statement
- if an impostor induces the drawer to write a check, the drawer is negligent
- an employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks
