Commercial Paper/Security Devices Flashcards
Security interest?
Secured party’s [creditor] interest in collateral
to secure repayment of funds
to another party [debtor].
Collateral?
prop a secured party may take possession of
& apply toward balance owed on debt;
PROPERTY SUBJECT TO A SECURITY INTEREST
UCC Article 9 catagories?
- certain lease-purchase agreements;
- consignments;
- sales of accounts receivable, chattel paper, negotiable instruments, promissory notes, & payment intangibles;
- agricultural liens; &
- any transaction that creates a security interest in personal prop or fixtures by K.
Goods?
Movables at time security interest attaches &
fixtures
if movable when fixture filing covering them is made.
Types:
- consumer goods:
- inventory;
- farm products; &
- equipment
Consumer goods?
goods used for primarily
personal, family or household purposes.
Inventory?
Goods, other than farm products, that are:
- Held for sale or lease;
- Goods furnished or to be furnished under contract of service; or
- Raw mat’l, work in progress or mat’ls used or consumed in a business.
Farm products?
crops, livestock, unmanufactured products of livestock,
& supplies
used or produced in farming operations i
f in the possession of the farmer
Equipment?
goods that are
NOT
consumer goods,
farm products,
or
inventory
Fixtures?
Goods so related
to a particular real estate
that an interest in those goods
arise under real prop law.
[good incorp. into real property]
Accession?
Perfection re: same?
Priority re: same?
Good physically united w/ another good
where the identity of original good is NOT LOST.
[good incorporated into another good]
- Perfection doesn’t matter if it is before or after its attachment
- Priority determined in same manner as in any other collateral, except: security interest in an accession subordinate to a security interest in whole that is perfected by compliance w/ the requirements of a certificate of title statute [e.g., motor vehicle]
Commingled goods?
Secuity Interest re: same?
Multiple Security Interest re: same?
Goods physically united w/ other goods where their IDENTITY is LOST in a product/mass. [good incorporated into an end product, but is unidentifiable as its original form]
- security interest does not exist per se in commingled goods, but attaches to product that results when goods become commingled goods.
- Multiple security interests in commingled goods: will rank equally in proportion to the value of the collateral at time it became commingled goods.
Tangible Intangibles?
tangible items that represent an intangible
- instruments: negotiable instrument or writing evidencing right to payment of monetary obligation.Ex. promissory note, collateral mortgage note, or CD.
- documents: doc of title that represent right to receive goods Ex. Bill of lading
- chattel paper: record(s) evidencing both:
- Monetary obligations &
- Security interest in or lease of specific goods, excluding charter of vessel.
- Electronic chattel paper: chattel paper stored in electronic instead of tangible form
Intangible Intangibles?
intangible rights that need not be represented in tangible form
- general intangibles: intangible not previously listed, ex. copyrights, goodwill
- tort claim: both consumer & commercial tort claims w/in its scope
- accounts: right to payment of monetary obligation, not evidenced by an instrument or chattel paper. Includes:
- Property that has been or to be sold, leased or disposed of
- Services rendered or to be rendered
- Insurance policy issued or to be issued
- Secondary obligation incurred or to be incurred
- Use or hire of a vessel under charter or K
- Energy provided
- Use of credit card
- Lottery winnings
Investment Property?
Stocks, bonds, mutual funds
(not collateral mortgage note)
Proceeds?
Types?
what is received upon sale, lease, exchanged, license, collection, or other disposition of collateral or proceeds
- Types: cash or noncash
- Can go through several transformations (Bank has security interest in debtor’s car. Debtor trades car for truck. The truck is a proceed. Debtor trades pickup for boat. Boat is still a proceed of the original collateral (car) (*2nd generational proceed)
- Claims arising out of loss of, defects in or damage to collateral are proceeds
Security Agreement?
agreement creating/providing for
security interest in certain collateral
Security interest MUST be in writing and:
- contain a granting clause [e.g., state that it is creating a security interest];
- contain a description of the collateral; &
- be authenticated by debtor.
Pledge?
- oral security agreement coupled w/
- possession
[only time security agreement can be oral]
Collateral description in the security agreement is sufficient if it reasonably identifies?
the collateral
- Security agreement must I.D. collateral by using collateral categories such as inventory, equipment, general intangibles, but not consumer goods
- Consumer goods: must denominate such specifically [e.g., my flat screen or my foreman grill.]
- Super generic description: insufficient [Ex: “All debtor’s prop.”]
- Security interest attaches to whatever debtor received for OR on account of collateral (proceeds), like money or another thing, if proceeds are identifiable/linked to original collateral.
Validity?
security agreement binding b/w parties,
against purchasers of collateral, and against creditors
Attachment?
Security interest attaches to collateral
when it becomes enforceable
against Borrower w/ respect to collateral.
- VALUE must have been given by secured party [creditor];
- Debtor has RIGHTS in collateral; &
- Parties must AGREE create security agreement.
How is ATTACHMENT evidenced?
- Creditor takes POSSESSION of collateral
- creditor must use reasonable care in storing & preserving
- Right to reimbursement
- Risk of lost or damage is on the debtor
- Must accnt for collateral profits(except money that must be given to debtor)
- Right to replege (must not impair debtor’s right of redemption)
- AUTHENTICATED SECURITY AGREEMENT: writing (1) contain granting clauses; (2) description of the collateral; & (3) authenticated by debtor.
- Creditor CONTROLs collateral
- Deposit account
- Electronic chattel paper/docs (needs authoritative copy)
- Investment property
- Creditor must account for profits
- Right to replege (can’t impair debtor’s right of redemption)
After-acquired collateral?
valid security agreement may create security interest in prop to be acquired in future that will attach to prop as soon as Debtor acquires interest in prop.
(Must specifically include in agreement an after-acquired property clause: “this security agreement is secured by debtor’s equipment now owned or acquired in the future”).
After-acquired collateral:
Inventory and accounts receivable?
Security interest in constantly depleted & replenished, automatically attaches to the new individual items
After-acquired collateral:
Consumer goods?
After acquired property clause
ineffective re: consumer goods,
UNLESS, debtor acquires rights in goods w/in 10-days after creditor gives value.
After-acquired collateral:
Future advances?
Security agreement can cover future advances on present or future collateral;
New security agreement is NOT needed
w/ respect to the future advances/loans.
Does a securirty agreement need
to provide for proceeds?
NO
security interest attaches to identifiable proceeds of collateral whether OR not security agreement specifically provides for it
A secured party’s security interest in collateral will continue regardless of whether the collateral is ________.
SOLD
Secured party ends up w/ both: a security interest in the original item and the proceeds of the sale, BUT may only chose one to satisfy the debt
Purchase-Money Security Interest?
Security interest in goods
that are PURCHASE-MONEY COLLATERAL.
[Automatic Perfection: security interest perfected simply by attachment of security interest.]
Purchase-Money Security Interest
in Consumer Goods?
Security interest in consumer goods
that are PURCHASE-MONEY COLLATERAL.
- Attaches: when debtor receives goods.
- Perfected: when it attaches
PMSI arises when creditor: sells goods to debtor on credit & reserves a security interest [e.g., buy dryer from Sears, it doesn’t have to file stmt; it’s automatically perfected] OR advance funds used to purchase goods & reserve security interest.
PERFECTION?
- Process by which creditor’s security interest becomes effective against 3rd parties;
- occurs ONLY
- when attachment has occurred &
- requirements for perfection are met.
4 Methods for Perfection?
FPCA
- Filing Financing Statement
- Possession[Pledge]
- Control
- Automatic Perfection
Perfection:
Filing Financial Statement?
Financing statement MUST be filed to perfect security interest, which must provide:
- Name & mailing address of debtor;
- Name & mailing address of secured party; &
- Indicate collateral covered by financing statement.
May identify specifically OR by types, category, or quantity OR Indicate that it covers “all assets” or “all personal property”
Perfection:
Filing Financing statement:
Special Rules for Fixtures?
Fixture filing must:
- Describe immovable to which it is attached;
- State that it covers component parts (fixtures);
- File in separate real estate records;
- All elements of financing statement; &
- Filing made BEFORE component parts becomes affixed, or no security interest at all.
Financing statement MUST NOT contain ________________ errors.
SERIOUSLY MISLEADING
-
failure to provide debtor’s ACCURATE name: seriously misleading
- Exception: Standard search logic: misspelling still lead to accurate name in system [Note facts have to tell you this, do not assume it]
- Minor errors in secured party’s name: NOT seriously misleading; will not invalidate it
Changes that can affect the effectiveness of a financing statement?
- Proceeds: 20 days to update filing if not listed exception
- Name changes: if new name seriously misleading, then only effective 4 months after change, during which time financing statement can be amended.
- Debtor moves: creditor must file in new state’s filing office w/in 4 months of move
Financing statement effective ____ years, but can file continuation during last ____ months of effective period in same office of original filing. Continues for another ____ years, & only the secured party needs to authorize
Financing statement effective 5 years, but can file continuation during last 6 months of effective period in same office of original filing. Continues for another 5 years, & only the secured party needs to authorize
Filing a financing statement can be done where?
What jurisdiction governs the securirty interest?
Secretary of State’s office.
Real estate related [fixtures]: county mortgage records
- Jurisdiction: where debtor is located
- Debtor is located:
- a) debtor’s principal residence [human being]
- b) where its registered [corp]
- c) partnership that doesn’t require registration [at PPB]
Filing a financing statement is not required for perfection when?
certificate of title,
deposit account,
letter-of-credit &
money.
Exception: If collateral is a titled motor vehicle NOT held as inventory for sale or lease, filing is to be w/ Department of Public Safety & Corrections, Office of Motor Vehicles.
Perfection: Possession [Pledge]?
Taking possession of collateral is possible only when collateral is tangible, but MUST
- take reasonable care of collateral &
- may add expenses to maintain collateral to debtor.
Ex. (1) Negotiable docs; (2) Goods; (3) Instruments; (4) Money; & (5) Tangible chattel paper
Perfection:
Possession [Pledge]:
Actual possession?
security interest perfected at moment of possession,
&
continues as long as possession is retained
Perfection:
Possession[Pledge]:
Collateral in hand of person other than debtor (Bailee)?
secured party deemed in possession at moment
Person in possession authenticates record acknowledging he’s holding collateral for secured party’s benefit
OR
takes possession of collateral after having authenticated a record.
Perfection:
Control?
Security interests in (1) investment ; (2) nonconsumer deposit accounts, & (3) electronic chattel paper may be perfected by “control”.
-
deposit account/letter-of-creditor rights (savings or passbook accounts)
- secured creditor is bank
- get control agreement w/ bank to follow
- creditor’s instructions
- become a control account holder
-
life insurance policy
- creditor is ins. co that issues policy
- ins co. authenticates a record acknowledging grant of S.I to creditor
-
investment property (stocks & bonds) (may be perfected by filing or possession, but control is better)
- certificated securities held directly: perfect either by filing, possession or control
- indirect holdings (held by a broker – Charles Schwab): same as deposit account
-
electronic chattel paper secured party has control of electronic chattel paper if the records comprising the chattel paper are created, stored, and assigned so that:
- 1) single authoritative copy that is unique, identifiable & unalterable exists
- 2) authoritative copy identifies secured party as assignee of records
- 3) copies are readily identifiable as copies
- 4) authoritative copy is communicated to and maintained by the secured party
Perfection:
3 Types of Automatic Perfection?
- Permanent Automatic Perfection;
- Temporary Automatic Perfection; &
- Purchase Money Security Interests
Permanent Automatic Perfection?
If S.I. is PMSI in consumer goods:
perfect automatically &
permanently once attached
Temporary Automatic Perfection?
Proceeds: If secured party has perfected security interest in collateral & debtor sells, exchange or disposes of collateral, secured party has
temporally perfected interest for 20-days
in whatever proceeds debtor receives.
Temporary Automatic Perfection:
Continuation of perfection of interest in proceeds?
security interest will continue to perfect beyond 20 days if:
- Filed financing statement covering original collateral, proceeds are collateral that can be perfected by filing in same office original financing statement was filed, and proceeds are not acquired w/ cash proceeds;
- Proceeds are identifiable cash proceed; OR
- New security interest in proceeds perfected w/in 20-day period.
Perfection: Automatic Perfection:
Purchase Money Security Interests?
perfection relates back to date S.I. attached
if financing statement is filed w/in 20 days
- Lien creditors: the relation back is only applicable against intervening buyers, lessees, and lien creditors.
- Other secured creditors: it still prevails over all other security interest, provided that it was perfected w/in 20 days of the time of possession is given to Debtor
If a security interest is perfected by one method, and later perfected by another method: w/o an intermediate unperfected period, the security interest is ______________?
If a security interest is perfected by one method, and later perfected by another method: w/o an intermediate unperfected period, the security interest is perfected continuously.
Priorities?
Generally, “First in time, first in right.”
- Unperfected security interest – 1st to attach
- Perfected vs. Unperfected – Perfected party wins
- 2 Perfected Interest – 1st to file or perfect
If collateral is an instrument or chattel paper: secured party who perfects by taking possession will have priority over the secured party who perfects by filing
PRIORITIES: EXCEPTION:
SUPERPRIORITY?
PMSI perfected w/in 20 days of debtor’s receiving collateral beats all other secured creditors. (PMSI: extends to proceeds)
PRIORITIES: EXCEPTION:
Perfected PMSI?
Perfected PMSI will prevail over a conflicting security interest
PRIORITIES:
PMSI in inventory?
creditor must do 2 things before collateral delivered:
- perfect PMSI w/in 5 years BEFORE debtor RECIEVES POSSESSION of inventory AND
- authenticated notification to any conflicting secured creditors in writing that PMSI creditor has/expects to have PMSI priority in described inventory
PMSI in inventory only extends to proceeds that are instruments, chattel paper & identifiable cash proceeds. NOT proceeds that are account.
Buyers vs. Secured Parties?
security interest survives a sale of collateral; Exceptions:
- 1) buyer of an instrument;
- 2) buyer who takes delivery;
- 3) buyer in ordinary course of business;
- 4) buyer of consumer goods;
- 5) buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest
Perfection:
Special Rules for Fixtures?
General priority rule: mortgage interest will succeed, b/c its almost always 1st to be recorded.
However, PMSI can trump mortgage
if w/in 20 days of goods becoming fixtures
there is a fixture filing [in mortgage records]
Buyers vs. Secured Parties: Exceptions:
Buyer in ordinary course of business?
Exception to priority in S.I.; factors:
- GF;
- w/o knowledge sale violates another’s rights in goods; &
- buys in the ordinary course of business from a person in the business of selling goods of that kind
Buyers vs. Secured Parties: Exceptions:
Buyer of consumer goods?
security interest survives a sale of collateral, exception:
- w/o knowledge;
- for value:
- for use as a consumer good; &
- before filing of financing statement covering goods
Buyers vs. Secured Parties: Exceptions:
Buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest?
Buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest if:
- GF
- give value
- take possession
- doesn’t on its face state that someone else has rights to it
Upon default, a secured party may?
- reduce a claim to judgment, foreclose, otherwise enforce the claim, OR
- repossess tangible collateral if it can do so w/o breach of the peace
Default:
If collateral consists of accounts receivable, instruments, or chattel paper:
(1) _________; and (2)_________.
- contact account debtor directly &
- inform them of the repossession
Default:
Debtor’s Right to Redeem?
by tendering to Secured Party amount of obligation, interest, w/ reasonable expenses & atty’s fees caused by default. [have until sold OR collected upon]
Waiver: can only waive after default in writing
After default and repossession,
a secured party may?
sell, license, or otherwise dispose of any or all of the collateral in its present condition, or following any commercially reasonable preparation or processing.
Before disposing of collateral Secured Party
must send to Debtor?
- Notice: reasonable authenticated notification of disposition [at least 10 days & reasonable details of sale]
- Consumer-goods transaction: notice must additionally include: if sold & doesn’t cover debt then debtor owes balance
Cash proceeds of collection, enforcement, or disposition shall be applied as follows:
- Expenses [auctioneer]
- Pay of owed debt
- Jr. debtors
- Debtor receives surplus
If collateral does not bring enough at sale or collection to pay all outstanding obligations,
then ___________________?
If the collateral does not bring enough at sale or collection to pay all outstanding obligations, then debtor owes for deficiency
- If sale is conducted in a commercially unreasonable manner: rebuttable presumption rule: debtor can raise rebuttable presumption that creditor would have received owed debt but for commercially unreasonable manner of sale and the deficiency us erased, but creditor can rebut said presumption
- In a non-consumer transaction, the deficiency can be reduced according to “rebuttable presumption rule.”
Perfection: Stocks?
When a creditor has a security interest in stocks, a creditor may perfect its security interest by either:
- FILING a financing statement with Secretary of State OR
- taking CONTROL of the stock.
This applies whether those stocks are in the form of a certificate or in electronic form.
Note?
- 2-party instrument,
- Written & signed instruction by Maker
- Promising to pay another party, the Payee
Ex: “I promise to pay to the order of Paul $1,200.00 on May 5, 2004. /s/ Mary”
Draft?
- 3-party instrument,
- Written & signed order by Drawer to Drawee
- Demanding payment toward Payee
Ex.
Pay to order of Paul $1,200.00 5/5/15
Twelve hundred and 00 Dollars
1st Insatiable Bank /s/ Mary
MAKER?
DRAWER?
PAYEE?
BEARER?
DRAWEE?
- MAKER: person making promise [individual or legal entity]
- DRAWER: person giving the order
- PAYEE: particular person payment promised to “the order of”
- BEARER: person when payment promised to anyone w/ physical possession of note
- DRAWEE: person to whom the order is given (i.e. bank)
Check?
Cashier’s Check?
Teller’s Check?
Traveler’s Check?
- Check: draft drawn upon a bank & payable on demand.
- Cashier’s: bank is both drawer & drawee
- Teller’s: draft drawn by a bank on another bank
- Traveler’s: requires counter-signature by a person whose specimen signature appears upon the instrument before payment
Negotiable Instrument requires?
Negotiability
- determined by 4 CORNER’S of instrument
- *States that it’s non-negotiable on face of instrument in conspicuous place, then it’s not negotiable*
Negotiability?
MUST PO
SIGNED, writing:
- UNCONDITIONAL promise OR order to pay
- Fixed amount of MONEY, w or w/o interest/other charges, that is
- PAYABLE to order/bearer at time it’s issued or comes into possession of holder
- Payable on demand OR at definite TIME, &
- State no OTHER instruction by issuer to do but receive payment of money
Negotiable Instruments:
Signed, writing?
- Signature: written w/ intent to authenticate doc
- Forging or signing w/o authority: still constitutes a signature; however, it only hold the forger liable not the party’s whose name was forged
- Writing: any physical form
Negotiability:
Unconditional promise OR order to pay must not?
- State a condition to payment (Express condition: I promise to pay if …)
- Governed by another writing
- Rights/obligations w/respect to promise/order are stated in another writing/record
May:
- Refer/governed by another writing regarding collateral, acceleration, or prepayment.
- Limits payment to a particular source or fund.
- Require a condition to payment, a countersignature.
- Contain Instruction of acts if it’s power to give, maintain, or protect collateral to secure pymnt
- Give a right which holder would have w/o the clause
Negotiable:
Payable in Fixed amount of money, w or w/o interest/other charges, that is?
- MUST be payable in money [foreign or otherwise]
- Requirement of a “fixed amount” only applies to the principal
- If interest UNascertainABLE, it’s payable at the judgment rate.
Be PAYABLE to BEARER?
Payable to bearer if:
- States it’s payable to bearer
- Does not state a payee
- States it is payable to cash
- Indicates it is not payable to an identified person
Be PAYABLE to ORDER?
instrument specifies that it is
payable to the order of an identified person
Multiple payees jointly [Joe AND Shayla]?
payable to all those noted
AND
can only be negotiated by
all those noted on instrument
Multiple payees in the alternate [Joe OR Shayla]?
payable to
any of them
AND
may be negotiated
by any or all of them in possession of instrument
Ambiguity in payees [and/or]?
then it presumed to be in the alternatively;
presumed OR
Payable on demand?
Payable on demand, if:
- Payable to the will of holder
- Does not state any time for payment
- Holder can extend payment indefinitely
Payable on definite time?
Payable at a definite time:
- At end of a definite time period [in 90 days
- Fixed date [Nov. 1, 1984]
- Time is readily ascertainable at time of issue
- Holder can extend payment indefinitely
- Non-negotiable, if payable only upon happening of an event if time is UNCERTAIN
Negotiability:
Take no other instruction by maker/drawer to do but receive payment of money:
EXCEPTION?
- Undertaking or power to maintain or protect collateral to secure payment
- Authorization or power to confess judgment or realize on or dispose of collateral
- Promise or provision waiving benefit of any law intended for the obligor’s protection [e.g., present, notice of dishonor, etc]
Negotiation?
transfer of possession, [in]voluntary, of instrument by person other than issuer to person who thereby becomes its holder.
Only a holder can enforce the right to payment.
Negotiability vs. Negotiation?
Negotiability refers to form
vs.
Negotiation refers to transfer
Negotiation:
Holder?
Bearer paper: person in possession of instrument
Order Paper: person in possession of instrument, if indorsed to identified person
3 basic stages in the life of instrument?
- Issuance: creation of note or draft
-
Transfer: delivery to a person other than issuer for purpose of giving right to enforce instrument to receiver
- When transfer occurs, if new possessor is holder, then transfer is a negotiation.
- Presentment for payment: when instrument is paid, and its life usually ends
Indorsement?
signature, other than maker/drawer/acceptor,
that is made on an instrument for the purposes of
negotiating the instrument,
restricting its payment, OR
incurring indorser’s liability
Types of indorsements?
- Blank
- Special
- Anomalous
- Restrictive
Name on instrument differs from holder:
can indorse it as your real name or name on check
Blank Indorsement?
makes instrument payable to
no specified payee
[converts to bearer paper]
Special Indorsement?
makes instrument payable to a particular person
Anomalous Indorsement?
indorsement by someone that is not a holder
[e.g., accommodation party]
Restrictive Indorsement?
restraints on alienation are illegal,
ineffective, & won’t prevent further transfer of instrument
[e.g., “pay Shayla Pierre and her only” or
“No further negotiation permitted”]
Rescission for Illegality or Incapacity?
negotiable instruments is enforceable
but may be rescinded/voided;
- However, if party it was indorsed to, then indorses it to another [HDC], then minor/incompetent/etc cannot rescind payment, but MUST wait until called upon to pay to use defense of incapacity, fraud, infancy, etc
Presentment?
Demand for payment made by PETE
upon person expected to pay
PERSONS ENTITLED TO ENFORCE THE INSTRUMENT?
- Holder or holder in due course
- Non-holder in possession of instrument who has the rights of a holder; &
- Person not in possession who is nonetheless entitled to enforcement
Subsequent holder requires?
- possession of instrument &
- all necessary VALID indorsements
Forged Necessary Indorsement?
_Ineffective against person whose name is forged, effective for forger._
[forgery breaks chain of title]
Fictitious Payee?
The signature of the fictitious name is an effective indorsement
- If payee of an instrument is a fictitious person, anyone in possession of the instrument is the holder and the person can properly negotiate the instrument by endorsing the instrument with that fictitious name.
Impostor?
The signature of the imposter is an effective endorsement and the loss will fall on maker/drawer.
- indorsement of an imposter who induces issuer to issue instrument to an imposter by impersonating the payee is effective negotiation and properly payable.
Fraudulent Alteration?
Changed, can be enforced against maker/drawer according to original terms if taken by HiDC
Fraudulent Completion?
Filled in,
can be enforced against maker/drawer
according to completed terms,
if taken by HDC
Holder In Due Course?
holder of a negotiable instrument,
its authenticity is not called into question
by apparent evidence
- taken for value, [not mere executory promise or gratuitous]
- in good faith, &
- w/o notice that it’s overdue, unauthorized signature/alteration or any of claims or defenses
Holder In Due Course:
Value?
given for instrument when its issued/transferred
- For a promise of performance, to extent that promise has been performed;
- as payment of, or as security for, an existing claim against any person, whether or not the claim is due;
- in exchanged for a negotiable instrument; OR
- in exchange for the incurring of an irrevocable obligation to a 3rd party by the person taking the instrument
Holder In Due Course:
Good Faith?
honesty in fact and observance of
reasonable commercial standards of fair dealing
Holder in Due Course:
Without notice that it is
overdue/dishonored/dishonored/claims?
Payable on Demand “Notice” when: day after the day demand for payment is made; 90 days after the instrument’s date, if it is a check; or if not a check, when it’s been outstanding for an unreasonably long period after its date, based instrument’s nature & usage of trade.
Payable at Definite time “notice” when: Installments: principal payable in installments, upon default under instrument for nonpayment of installment; Payable on a date: day after due date; or if due date for principal accelerated, on day after accelerated due date
Dishonor: knowledge of refused to payment, even prior to payment date
W/o notice of an unauthorized signature or alteration
W/o notice of defenses against or claims to it by any person: Taking from a fiduciary: is notice of a potential claim
Even if requirements met,
a taker will not be a HDC, if?
- By legal process or by purchase in an execution, bankruptcy, or creditor’s sale;
- By purchase as part of a bulk transaction not in the transferor’s ordinary course of business [e.g., buying whole business]; or
- As the successor in interest to an estate or other organization.
“Umbrella” or “Shelter” Doctrine?
transferee acquires any right of transferor to enforce it,
UNLESS brought about w/ fraud or illegality
Non-Holders in Possession?
lack HDC status; HOWEVER, even though value was not given [gift] or knew of a claim & lack HiDC status, the giver’s HiDC status will be transferred, UNLESS, you committed fraud or an illegality to fall under the shelter doctrine
Persons Not in Possession of Negotiable Instrument are still PETE [§ 3-309] when?
- Person was in possession of instrument & entitled to enforce it when possession lost;
- Loss of possession was not result of a voluntary transfer by person or a lawful seizure; &
- Person cannot obtain possession of instrument b/c it’s destroyed, location can’t be determined, OR in wrongful possession of unknown person or person who cannot be found or is not amenable to SoP.
Negotiable Instruments:
Liability of Signatures?
party not liable on an instrument
UNLESS
person signed it
OR
represented by an agent who signed it in a manner to bind the person
Negotiable instruments:
Liability of principal?
bound by Agent’s signature on an instrument
that Principal authorized OR
his negligence substantially contributed to
Negotiable Instruments:
Representative [AGENT] Liability?
- Agent signs & authorized to do so: NOT LIABLE
-
Agent avoids liability:
- I.D. of representative capacity & I.D. of principal OR
- Proof original parties did not intend agent to be liable
- Careless agent: Ambiguous authorization: liability for agent to HDC, but not a mere holder
EXCEPTION: Checks payable from Principal’s account & state the Principal’s name
NEGOTIABLE INSTRUMENTS:
Unauthorized Signatures?
- Ineffective against person whose name is forged, effective for forger. [forgery breaks chain of title]
- However, person paying on instrument must take it in GF for value to hold forger liable.
Liability of the Maker of a Note?
- Primary Liability: Absent defense, discharge, or claim in recoupment that is effective against the person seeking payment, Maker MUST pay note when it becomes due, even w/o demand for payment.
- Incomplete Instrument: liable for fraudulent Completion, if taken by person in GF [HiDC].
Liability of the Drawer of a draft?
2ndary Liability;
[not a promise] only liable after bank dishonors instrument
- Presentment to Drawee’
- Dishonor by Drawee; &
- Notice of the dishonor to Drawer
Liability of Drawee of a Draft/Acceptor?
- liable for wrongfully dishonoring instrument, but only to Drawer & must be based on a K b/w Drawer & Drawee; OR
- if Drawee accepts draft, it becomes liable as an acceptor. [primary]
- Acceptance: promise by drawee to pay the instrument when it becomes due and payment is demanded [e/g/, certified check: can’t be stopped, b/c bank is liable on the instrument based on its own promise to pay, and the customer himself no longer has any liability on the instrument]
Transferors WARRANTIES?
Warranties accompanying an instrument:
- Entitled to Enforce
- Signatures Authentic & Authorized
- Not Altered
- No Defenses against Transferor
- No Knowledge of Insolvency Proceedings
Transferors WARRANTIES re: Indorsements?
- If NOT indorsed: warranties only run to immediate transferre,
- If indorsed: warranties run to all subsequent holders that take the instrument in GF.
Indorsers Liability?
2ndary Liability
- presentment for payment
- dishonor by Maker or Drawer
- notice of dishonor to Indorser
Qualified indorsement?
limits liability;
however, may remain liable on transfer warranties
[i.e. “w/o recourse”]
Accommodation Parties?
[surety]
person who signs instrument
solely for purpose of incurring liability on it
w/o being direct beneficiary of value given for instrument
Liability of an accommodation party?
- Signed as maker/acceptor: PRIMARY liablity
- Signed as drawer/indorser: 2ndary liablity
- DRAWER: Liability arises only after
- presentment AND
- dishonor and in case of indorser
- INDORSER: Liability arises only after
- presentment
- dishonor and in case of indorser
- notice of dishonor
- DRAWER: Liability arises only after
Accommodation party NEVER liable on instrument to party accommodated.
Accommodation Parties:
Transfer warranties?
not applicable,
b/c outside of chain of title
Liability to accommodated party?
If an Accommodation party pays on an instrument,
she is
- entitled to reimbursement from accommodated party &
- entitled to enforce instrument against accommodated party.
NEGOTIABLE INSTRUMENT:
Presentment?
demand for payment made to Maker of a note OR Drawee of a draft by a PETE the instrument.
Unless demand for payment is made on time,
it is not a presentment.
Timeliness of Presentment?
- Demand instrument: reasonable time.
- Definite time: date due
When instrument presented,
party to whom presentment is made has the right to require?
- Instrument be exhibited,
- demand identification of party, &
- require receipt of payment
Demand for Payment Effective When?
PRESENTED, but may have cut off time such as banks. Presented after 2:00 pm, is applied to the following banking day.
Presentment for payment OR acceptance
is EXCUSED when?
- Cannot make presentment w/ reasonable diligence
- Insolvency proceedings
- Waived
Warranties to Drawee?
- Entitled - transferor is PETE
- Signatures - all appearing on instrument are authentic and authorized.
- Unaltered - Instrument has not been altered.
Drawee mistakenly pays a check
that had been forged or ordered stop?
Drawee may recover funds paid
OR
revoke acceptance regardless of its own negligence in paying
Presentment:
Dishonor?
proper presentment for payment
is made and payment is refused
OR
required or optional presentment for acceptance
is made and acceptance is refused
Dishonor does not occur if
payment refused b/c of?
The instrument lacking a necessary indorsement
Notice of dishonor from Bank? Other person?
- Bank: When instrument has been taken for collection by a collecting bank, bank must give notice of dishonor before midnight of banking day following banking day on which bank receives notice of dishonor.
- Other persons: w/in 30 days after day they received notice of dishonor.
Notice of Dishonor excused when?
if delayed due to circumstances
beyond party’s control
&
exercised reasonable diligence circumstances
causing delay ended
ENFORCE THE INSTRUMENT:
Burdens of Proof?
- π’s Status: validity of signatures & that he’s PETS
- Defenses or Claims in Recoupment: ∆ burden to prove
- Holder in Due Course Status: π’s proof that he’s HDC
Negotiable instruments:
Adverse Claims?
claims of property or possessory rights in
instrument or its proceeds
[Not applicable to a HDC, b/c HDC takes instrument
free from all claims to it by others]
Negotiable instruments: Adverse Claims:
Claim in recoupment?
2 parties to a particular transaction have claims against each other based on that transaction.
[Not defense to a HDC]
ENFORCE THE INSTRUMENT:
Defenses:
HDC?
HDC takes instrument free of personal defenses,
but NOT real defenses
ENFORCE THE INSTRUMENT:
Real Defenses?
- Infancy: unemancipated minor
- Duress, Lack of Legal Capacity, or Illegality: Duress: use/immediate threat of violence, not annoyance or personal embarrassment
-
Fraud in the Factum: induced obligor to sign w/ neither (1) knowledge nor (2) reasonable opportunity to learn of that it was a negotiable instrument
- Not Fraud in inducement (personal def): lies induce you to personally sign [ex. sign for 10 chickens, but get ducks]
- Discharge in Insolvency Proceedings: bankruptcy
- Discharge of which the holder has notice of when takes the instrument
- Forgery: forger becomes liable, just as though he signed in his own name
ENFORCE THE INSTRUMENT:
Alterations?
unauthorized change in an instrument that purports to modify a party’s obligation,
OR
an unauthorized addition to an incomplete instrument relating to a party’s obligation
ENFORCE THE INSTRUMENT:
Fraudulent Alteration?
enforced a/g Maker/Drawer per its original terms,
but only by a person who took instrument
(1) for value (2) in GF and (3) w/o notice of unauthorized alteration [HiDC];
otherwise, discharged from obligation.
- Fraudulent party would be liable for amount in excess of original terms [transfer warranty]
ENFORCE THE INSTRUMENT:
Unauthorized Completion?
enforced a/g Maker/Drawer per its completed terms, but ONLY by a person who took instrument
(1) for value (2) in GF and (3) w/o notice of unauthorized alteration [HiDC]
ENFORCE THE INSTRUMENT:
Negligence?
if substantially contributed to alteration
is precluded (estopped) from raising alteration
as a defense
against HDC
ENFORCE THE INSTRUMENT:
Forgery:
Forger [agent w/o authority] liability?
- forger becomes liable, just as though he signed in his own name
- forgery is a REAL defense against HDC
ENFORCE THE INSTRUMENT:
Forgery:
Negligence?
if substantially contributed to alteration
precluded (estopped) from raising alteration
as a defense against a HDC
Defenses of Accommodation Parties:
Types?
Derivative Defenses
Suretyship Defenses
Derivative Defenses?
in an action to enforce an obligation of an accommodation party to pay an instrument,
accommodation party may assert
against PETE the instrument
any defense or claim in recoupment that
accommodated party could assert against such person, except defenses of discharge in insolvency, infancy, and lack of legal capacity.
Suretyship Defenses?
- if due date of instrument extended, instrument modified, or value of collateral impaired by PETE instrument; AND
- accommodation party suffers loss as a result, accommodation party’s obligation is discharged to extent of the loss.
Security Devices:
Default:
If sale is conducted in a
commercially unreasonable manner?
- Debtor can raise rebuttable presumption that creditor would have received owed debt but-for commercially unreasonable manner of sale & deficiency is erased, but Creditor can rebut said presumption
- In a non-consumer transaction, deficiency can be reduced according to “rebuttable presumption rule.”
