Commercial Papers Flashcards
Lost check
to enforce a lost check, must show:
(1)he is a person entitled to enforce;
(2) reason no longer in possession is not because of a purposeful transfer or lawful seizure;
(3) cannot obtain possession of the instrument because its whereabouts are unknown; and
(4)
properly payable
a check is properly payable when it is authorized by the customer and not in violation of the bank’s agreement.
A bank may dishonor a check that is not properly payable, such as: (1) when check is payable to two people and only one person endorses the check; (2) check contains a forged payee’s endorsement; and (3) forged drawer’s signature
presentment warranty
(1) warrantor is a person entitled to enforce;
(2) draft has not been altered; and
(3) warrantor has no actual knowledge that the signature is unauthorized
Forged drawer signature
(1) not properly payable; and
(2) drawee bank is generally liable for paying check
Impostor
forgery is effective and drawee is precluded from raising the forgery in a “not properly payable action” against the drawer. it is the drawer’s fault for not recognizing the impostor.
no warranties are breached because he is a person entitled to enforce
impostor is liable to drawer in common law fraud and conversion for misrepresenting his identity and lying about any additional money
bank statement rule
customer must exercise reasonable promptness in examining the statements to determine any unauthorized alteration or signature, and, if customer should have reasonably discovered an issue, he must promptly notify the bank. Otherwise, he is precluded from asserting against the bank the alteration or signature if the bank suffered a loss
without regard to negligence, customer must report forgery within 1 year of when bank statement was made available. Must show at least the check number, payment date, and amount of the check
drawer negligence
if drawer failed to exercise ordinary care and this failure substantially contributed to the forgery, he is precluded from asserting the alteration or signature against a person who, in good faith, pays the instrument
Holder in Due Course
(1) negotiable instrument;
(2) took for value;
(3) in good faith; AND
(4) without notice of:
(a) the instrument being overdue or dishonored;
(b) an unauthorized signature; or
(c) any defenses or claims
past consideration is considered for value, but an unexecuted promise does not constitute value
can only be a holder in due course for the amount of value actually rendered (if note is for $1000, but gave value of $500 plus promised $500 in future performance, only HIDC in extent of $500)
Blank indorsements
signature not accompanied by the naming of a specific indorsee
operates to turn a check into a bearer payer so that anyone in possession of the check would have good title and the ability to enforce payment. if that check is stolen from the holder, holder’s only remedy is to seek recovery based on common law fraud and conversion
The drawee is not liable to that person because check suspends the underlying contract obligation and, once the check is paid, the obligation is discharged altogether
overdraft
absent an agreement otherwise, payor bank has no obligation to pay a check which would cause the customer’s account to become overdrawn
stale check
bank has no obligation to honor a check that is older than 6 months
negotiable instrument
(1) in writing;
(2) signed by maker;
(3) unconditional promise to pay/order;
(4) fixed amount of money;
(5) no other undertaking or instruction;
(6) payable on demand or at a definite time; AND
(7) is payable to “order” or to “bearer”
implied warranty of merchantability
a warranty that goods are fit for ordinary use is implied in a contract if the seller is a merchant who deals in goods of that kind
“as is”
negates implied (not express) warranties. Between merchants an additional term in a confirmation is included unless the term materially alters the contract
perfect tender
buyer can accept all goods, reject all goods, or accept some and reject the rest. If the buyer does not reject the goods in a reasonable time, he has impliedly accepted them
transfer warranties
when commercial paper is transferred for consideration, and runs to the immediate transferees and to subsequent transferees if the transferor indorsed the check. Does not apply to gifts (no consideration)
Warrants that:
(1) transferor is a person entitled to enforce the paper;
(2) all signatures are authentic and authorized;
(3) check has not been altered;
(4) no one has a defense that could defeat the transferor; AND
(5) transferor has no knowledge of insolvency proceedings against the drawer
loss suffered from breach
a person who takes the check in good faith may recover the loss suffered from the breach, but not more than the amount of the check plus expenses and lost interest
agency powers
an agent has the power to bound the principal on a check and/or note.
For an agent to escape liability on an instrument, instrument must both (1) state the name of the principal and (2) unambiguously show that it was made on behalf of the principal. On checks, all that is necessary is for the principal’s name to appear on the check.
IF the party is not a holder in due cause, the agent can introduce evidence that the party did not intend for the agent to be personally liable
statute of limitations to enforce a promissory note
6 years from due date
indorsor liability
indorsor is secondarily liable (on the check to the holder) only if the holder presents the check to draw within 30 days of the indrosement
final payment
if (1) paid in cash;
(2) check is settled and there is no right to revoke settlement; OR
(3) provisional settlement was made and the settlement was not revoked in the time permitted (by midnight of the next banking day)
holder
requires proper negotiation. a holder is a person with possession of an instrument with a right to enforce it.
Bearer paper = possession ONLY
order paper = possession + necessary indorsements
special indorsement
has the payee’s signature + designates a new person to whom instrument is payable
Transferee’s right to transferor’s indorsement
if the instrument is transferred for value, transferee has specifically enforceable right to the transferor’s indorsement
HIDC notice
(1) actual knowledge; OR
(2) from all the facts and circumstances known to the person at the time of the question (subjective), the person has reason to know it exists (objective)
HIDC notice of claims and defenses
(1) instrument overdue (due date has passed, 90 days for check);
(2) instrument dishonored;
(3) uncured default;
(4) unauthorized signature;
(5) alteration;
(6) any claim; AND
(7) any defense or claim in recoupment
recoupment
obligor’s claim against payee arising out of the transaction giving rise to the paper
shelter rule
transferee has rights of the transferor - the transfer of the instrument vests in the transferee the rights the transferor had
having HDIC rights through shelter does not make you an HIDC, but does provide the rights
Real defenses
an HDIC is still subject to the following “real” defenses:
(1) infancy
(2) duress/illegality
(3) lack of legal capacity making the obligation VOID
(4) illegality making the obligation VOID
(5) fraud in the execution/factum
(6) discharge and insolvency proceedings
(7) alteration (HIDC can enforce to original tender)
(8) unauthorized signatures and forgeries
fraud in the execution
signer lacked:
(1) knowledge of the instrument’s character or essential terms; AND
(2) reasonable opportunity to learn of the instrument’s character
drawee liability
general rule = no liability
exception = acceptance or certification: when the bank signs the check
Accommodation party liability
accommodation - a person who signs an instrument to lend his or her credit to another party but does not receive any direct benefit
general rule = liable in the capacity in which they sign
can limit liability to collection only through express language
reimbursement - accommodation party is entitled to reimbursement from the accommodated party
stop payment orders
(1) in writing;
(2) dated;
(3) signed;
(4) describes the item with certainty (account #, check #, amount)
valid for 6 months
wrongful dishonor
standing: only the drawer (not the payee)
Drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing a hot check
Bank defenses: (1) payment would overdraw account; (2) payee is an organization and has previously notified drawer of a particular person/address to send payments
note
two-party instrument where one party (the maker) promises to pay the second party (the payee) a sum of money
draft
three-party instrument in which one party (the drawer) orders a second party (the drawee) to pay a sum of money to a third party (the payee)
fictitious payee
one who is not intended to have an interest in the draft or is a fake payee
where payee is fictitious, indorsement by any person in name of payee is effective if bank pays in good faith
accord and satisfaction
requires: (1) instrument tendered in good faith; (2) as full satisfaction of claim; (3) amount of claim is unliquidated or disputed; (4) claimant obtain payment of instrument
must contain conspicuous statement that instrument is tendered as full satisfaction of the claim
claim is not discharged by accord and satisfaction if claimant tenders payment in 90 days UNLESS the claimant or agent knew it was tendered in full satisfaction
