Commercial Papers (Delaware) Flashcards
Instruments: Note + Party Names
A note is a promise to pay money between TWO PARTIES
Borrower (owes money) = Maker
Person Who Receives Payment = Payee
Instruments: Draft + Party Names
A draft is an order to pay between THREE PARTIES
Person Ordering Payment = Drawer
Person to Make the Payment = Drawee
Person to Receive the Payment = Payee
***Instruments: Draft - Check Requirements
A draft will qualify as a check if: (i) a BANK is the drawee, and (ii) the instrument is payable on DEMAND
Negotiability: Elements
To be negotiable, an instrument must be a WRITTEN and SIGNED, UNCONDITIONAL ORDER TO PAY A FIXED AMOUNT OF MONEY, and:
1) Is payable TO ORDER or bearer ON DEMAND or at a definite time, and
2) States no unauthorized undertaking or instruction by the person promising or order payment
Negotiability: Unconditional Element - Items that Make A Promise or Order Conditional
An instrument is conditional if:
1) It contains an EXPRESS CONDITION to payment, or
2) It states the promise or order is “SUBECT TO” “GOVERNED BY” another record, or
2) The RIGHTS OR OBLIGATIONS with respect to the promise are stated in ANOTHER RECORD (not just merely referencing another record)
Negotiability: Fixed Amount Element - Principal Amount Due
You MUST be able to see the PRINCIPAL AMOUNT DUE on the face of the document.
Negotiability: Fixed Amount Element - Silent as to Interest + Ways That Do Not Violate Fixed Amount
A silent instrument ASSUMES NO INTEREST.
Interest stated in the following ways would NOT violate the “fixed amount requirement”:
1) Amount of Money (e.g., $20 interest),
2) Fixed or Variable Rate,
3) Reference to Outside Source (e.g., 2% above the prime rate reported in the Wall Street Journal), and
4) Plus Interest
Negotiability: In Money Element - Goods or Services + Words Inconsistent With Figures
The payment CANNOT be in goods and services
Words prevail over inconsistent figures.
Negotiability: No Other Undertaking or Instruction Element + Exceptions
Negotiable instruments are SOLELY for the purpose of paying money and NO OTHER obligation, EXCEPT for the following:
1) Promise to GIVE, MAINTAIN, OR PROTECT COLLATERAL,
2) An authorization or power given to the holder to CONFESS JUDGMENT or to realize on or dispose of collateral (one party agrees to let another party enter a judgment), and
3) WAIVER OF LAW meant to benefit obligor
Negotiability: Payable On Demand Or At A Definite Time Element - Permitted Date Change Matters
The following date change matter’s don’t prevent an instrument from being payable at a definite time:
1) PREPAYMENT of instrument,
2) ACCELERATION of due date,
3) A LATER DEFINITE TIME STATED IN THE INSTRUMENT.
Negotiability: Payable to Order or Bearer Language - To Bearer
An instrument is payable to bearer if it: (i) states that it is “payable to bearer,” (ii) does not name a payee, or (iii) is payable to “cash” or otherwise indicates an unidentified person
Negotiability: Payable to Order or Bearer Language - To Order
An instrument is payable “to order” if it is payable to the order of an IDENTIFIED PERSON or to an identified person or order.
Negotiability: Payable to Order or Bearer Language - Both Order and Bearer Language is Present + Check Exception
If both order and bearer language is on the document, BEARER paper controls
If this is the ONLY element of negotiability missing, the order or bearer language is WAIVED.
Holders: What Is A Holder + How To Become A Holder
A holder is a person in POSSESSION of an instrument with a RIGHT TO ENFORCE IT.
Holder status is: (i) POSSESSION of the negotiable instrument, and (ii) GOOD TITLE, which depend on the words of negotiability used (BEARER = possession alone for good title/ORDER = possession + necessary endorsements for good title).
Holder: Transfer of Instrument - Bearer Instruments
Bearer instruments are negotiated by TRANSFERRING POSSESSION of the instrument.
Holder: Transfer of Instrument - Order Instruments
Order instruments are negotiated by POSSESSION PLUS NECESSARY INDORSEMENTS, meaning a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor, normally on the back
Holder: Transfer of Instrument - Indorsement - Blank v. Special + Bearer Paper
A blank indorsement is a signature that isn’t accompanied by the naming of a specific indorsee (e.g., back of a check)
A special indorsement is accompanied by PAYEE’S SIGNATURE PLUS A DESIGNATION OF A NEW PERSON to whom the instrument is payable
Once this occurs, the paper is turned into BEARER PAPER, regardless if original was order paper.
Holder: Transfer of Instrument - Indorsement - Qualified Indorsement
An indorsement with the words “WITHOUT RECOURSE” is a qualified indorsement and LIMITS LIABILITY imposed on indorsers.
Holder: Transfer of Instrument - Indorsement - Restrictive Indorsement
Any OTHER LANGUAGE added to an indorsement creates a restrictive indorsement, and are GENERALLY INEFFECTIVE to limit transfer
Holder: Transfer of Instrument - Indorsement - Anomalous Indorsements
An anomalous indorsement is an indorsement made by a person who is NOT A HOLDER of the instrument, usually for accommodation (suretyship) purposes, who then BECOMES LIABLE on the instrument.
Holder: Payee Lacking Capacity
Negotiation is EFFECTIVE EVEN IF the payee is a minor, incompetent, or unduly influenced
Holder In Due Course
A HDC takes FREE OF MOST DEFENSES
Holder In Due Course: Due Course
“Due course” requires the holder to take FOR VALUE, IN GOOD FAITH, AND WITHOUT NOTICE.
Holder In Due Course: When HDC Status Is Relevant
This comes into play when the obligor RAISES A DEFENSE to payment.
Holder In Due Course: Requirements
Requirements to become a holder in due course:
1) Must be a NEGOTIABLE INSTRUMENT,
2) Must be a HOLDER (possession + good title),
3) AUTHENTICITY of the instrument IS NOT QUESTIONED,
4) HOLDER PAYS VALUE (no gifts),
5) IS IN GOOD FAITH (subjective + objective standard), and
6) WITHOUT NOTICE of certain facts at the time the instrument is required
Holder In Due Course: Holder Pays Value Requirement - What Constitutes Value
Any one of the following constitutes value:
1) PERFORMANCE of the agreed consideration,
2) ACQUISITION by the holder of a lien or a security interest in the instrument,
3) Taking the INSTRUMENT AS PAYMENT of or security for an ANTECEDENT DEBT,
4) TRADING for another negotiable instrument, or
5) Giving the instrument in exchange for incurring an IRREVOCABLE OBLIGATION to a THIRD PERSON by the person taking the instrument.
Holder In Due Course: Holder Pays Value Requirement - Proportional Value to Payment of Consideration
If one pays LESS THAN THE AGREED UPON VALUE (not to be mistaken with less than the note), one becomes a PARTIAL HDC in proportion to the percentage of the value paid.
Holder In Due Course: Good Faith Requirement
To be an HDC, the holder must take the instrument in good fait, meaning: (i) HONESTY in fact (SUBJECTIVE TEST), plus (ii) observance of REASOANBLE COMMERCIAL STANDARDS (OBJECTIVE TEST).
Holder In Due Course: Without Notice Requirement - Types of Notice
Notice includes both ACTUAL and REASON TO KNOW from the facts and circumstances.
Holder In Due Course: Without Notice Requirement - Facts Constituting Notice
1) Instrument Overdue (if: (i) any part of the principal is overdue, (ii) acceleration has been made, or (iii) more than a reasonable time has elapsed after issue of a demand instrument.
2) Instrument dishonored (instrument not paid upon proper demand)
3) Unauthorized signature or alteration,
4) Claims to the instrument, and
5) Defenses or claims in recoupment.
Holder In Due Course: Shelter Rule + Exception
Even if a holder doesn’t qualify as an HDC, they may have the rights. A transferee acquires whatever rights their transferor had.
Exception: No HDC rights are given to persons who were parties to FRAUD or ILLEGALITY
HDC Rights: Defenses That Will Apply to the HDC (Real Defenses)
(FIDDLE FIA, like a baby (infancy) saying Philadelphia)
1) Forgery
2) Infancy (minor)
3) Duress
4) Discharge & Insolvency
5) Lack of Legal Capacity (e.g., incompetent
6) Expiration of SOL
7) Fraud in the Factum (signor lacked knowledge of terms and did not have a reasonable opportunity to learn of its essential terms)
8) Illegality
9) Alteration
HDC Rights: Real Defenses - SOL (3 years v. 6 years)
Six Years - (1) notes payable at a definite time or on demand, and (2) certificates of deposit
Three Years - All Other Claims – (1) on unaccepted drafts, (2) against issuers/acceptors of cashier’s checks, certified checks, etc., (3) for conversion, (4) for breach of warranty, and (5) to enforce other Article 3 rights.
HDC Rights: Personal Defenses + Exception
Personal defenses CAN’T be asserted against one having rights of an HDC, but any transferee of a negotiable instrument without HDC rights takes the instrument subject to all personal defenses, they are as follows:
1) Lack of Consideration
2) Breach of Warranty
3) Fraud in the Inducement (arises when a party knew what they were signing, but were lied to)
4) Claims or Defenses of Another
Exception to Claims or Defenses of Another: Theft - a defense that the non-HDC acquired the instrument by theft must be raised IF KNOWN BY THE PERSON PAYING
Contract Liability: Signature By Agents - Liability of Principal
If an agent signs their own name or the name of the principal, the PRINCIPAL IS BOUND if the agent had authority to sign.
Contract Liability: Signature By Agents - When Agent Would Not Be Found Liable
An agent is NOT LIABLE IF: (i) the PRINCIPAL IS IDENTIFIED in the instrument, and (ii) the signature unambiguously shows it was MADE ON BEHALF OF THE PRINCIPAL.
Contract Liability: Signature By Agents - When Agent Would Be Found Liable
If the principal isn’t identified in the instrument, the agent is personally liable on a contract if: (i) the holder IS AN HDC, unless the agent can prove that the HDC had notice of the representative nature of the agent’s signature, or (ii) the holder IS NOT AN HDC and the agent can’t prove that the original parties did not intend the agent to be liable
Contract Liability: Signature By Agents - Agent Not Authorized
If the agent is not authorized to act for the principal, it amounts to FORGERY. Purported agent is bound, not purported principal.
Contract Liability: Maker of Note Liability + Parties The Maker Is Obligated To
By signing their name, the maker of a note (the person who promises to pay) is obligated to pay the instrument according to its terms.
The maker is obligated to: (i) A PERSON ENTITLED TO ENFORCE the instrument, and (ii) An INDORSER WHO PAID the instrument.
Contract Liability: Drawer of Draft Liability
A drawer has secondary liability, and can only be found liable if: (i) the draft is a CHECK, presentment within 30 days, and (ii) DISHONOR (drawee refuses to pay upon proper presentment)
Contract Liability: Drawer of Draft Liability - Disclaiming Liability
A drawer can disclaim liability on any instrument EXCEPT FOR CHECKS
Contract Liability: Indorser Liability - Disclaimer + Order of Liability
A liability disclaimer IS ALLOWED if the words “WITHOUT RECOURSE” are present.
Indorsers are liable TO EACH OTHER IN THE ORDER of their signatures
Contract Liability: Indorser Liability - Secondary Liability
Before a holder can look to an indorser for payment, the holder must fulfill the following prerequisites:
1) Presentment (demand for payment),
2) Dishonor (drawee doesn’t pay), and
3) Notice of Dishonor
Contract Liability: Indorser Liability - When Presentment Is Excused
Presentment is excused if: (1) the person entitled to present CANNOT DO SO within reasonable diligence ; (2) the maker has REPUDIATED the obligation to pay or is dead or insolvent; (3) by the instrument’s terms, presentment is UNNECESSARY; (4) the obligor has WAIVED presentment; or (5) the DRAWER INSTRUCTED DRAWEE NOT TO PAY or the drawee was not obligated to pay
Contract Liability: Indorser Liability - Notice of Dishonor + Excusal for Delay in Notice
Notice of dishonor may be given by any commercial reasonable means, and generally must be given WITHIN 30 DAYS AFTER DISHONOR.
Delay in giving notice is excused if caused by circumstances BEYOND THE CONTROL of a notifier who exercised reasonable diligence after the cause of delay ceased to exist OR notice is entirely excused if the terms of the instrument make it UNECCESSARY or the OBLIGOR WAIVES NOTICE
Contract Liability: Indorser Liability - Drawee
The drawee of a draft (bank) makes no negotiable instruments and CANNO BE FOUND LIABLE unless and until they sign the instrument.
Contract Liability: Indorser Liability - Drawee - Acceptance and Certification
The drawee may agree to pay the draft by signing (acceptance)
Contract Liability: Indorser Liability - Drawee - Final Payment Rule
Once a drawee bank finally pays a check, contract actions may NO LONGER be pursued and the drawee can’t recover from the person it paid UNLESS there is a breach of a presentment warranty.
Contract Liability: Indorser Liability - Drawee Liability to Customer + Conversion Liability
A bank may be liable to the customer for failure to pay
A drawee who pays on a forged indorsement is LIABLE TO PAYEE in conversion
Contract Liability: Indorser Liability - Death of Customer + Timing After Death
The customer’s death DOESN’T REVOKE the bank’s authority to pay a check until the bank: (1) KNOWS of the death, and (2) has a REASONABLE TIME TO ACT on the knowledge
After death, bank MY CONTINUE PAYING CHECKS 10 DAYS after death, even with knowledge of death, UNLESS someone claiming an interest in the account orders payments to stop.
Contract Liability: Accommodation Parties
An accommodation party signs an instrument to lend credit to another party, but does not receive any direct benefit (i.e., SURETY)
Contract Liability: Accommodation Parties - Liability
The accommodation party may sign in any capacity and IS LIABLE in the capacity they signed.
Contract Liability: Accommodation Parties - Limiting Liability to Collection
The accommodating party may include express language limiting the contract to a guarantee of collection only (i.e., language present stating “COLLECTION GUARANTEED”). This will only make an accommodating party liable where there is a judgment claim or seeking judgment would be futile.
Contract Liability: Accommodation Parties - Reimbursement
If an accommodating party pays the instrument, they will have an action against the party accommodated.
Contract Liability: Accommodation Parties - Proof of Accommodation Status
A person signing an instrument is presumed to be an accommodation party, therefore language on the instrument may either EXPRESSLY state the accommodater or just by anomalous indorsement (signature of a person who wasn’t a holder)
Warranty Liability: Transfer Warranties + Who They Run To
When a person transfers an instrument or a customer transfers an item for consideration, the transferor makes TRANSFER WARRANTIES
These run to:
1) The IMMEDIATE TRANSFEREE, whether or not the transfer is by indorsement,
2) All SUBSEQUENT TRANSFEREES, if the transfer is by indorsement, and
3) For banks, the liability runs to ANY SUBSEQUENT collecting bank, even without indorsement.
Warranty Liability: Transfer Warranties - Drawees and Makers
Drawees and makers COULD NEVEER sue for breach of transfer warranty since they RECIEVE, NOT TRANSFER instruments.
Warranty Liability: Transfer Warranties - Warranties Made
The transferor warrants:
1) The transferor is ENTITLED TO ENFORCE the instrument, meaning all indorsements are genuine,
2) Signatures are AUTHENTIC and AUTHORIZED,
3) NO DEFENSES OR CLAIMS of any party is good against the transferor, and
4) Transferor HAS NO KNOWLEDGE of any INSOLVENCY PROCEEDINGS against the maker
Warranty Liability: Transfer Warranties - Disclaimers
Warranties can’t be disclaimed for checks, otherwise, warranty liability can be negated by a transferor by placing words that effect on the instrument (i.e., “WITHOUT WARRANTIES”)
Warranty Liability: Presentment Warranties + Exclusive to Transfer Warranties
These warranties are made ON PRESENTMENT of the instrument.
A plaintiff can ONLY MAKE one claim of breach for either presentment or transfer warranty against ONE PERSON. A plaintiff may make either claim against more than one person, however.
Warranty Liability: Presentment Warranties - Who Makes Presentment Warranty?
The defendants in an action on a presentment warranty are the presenter and previous transferors.
Warranty Liability: Presentment Warranties - Who Is The Presentment Warranty Made To?
The plaintiffs in a presentment warranty action are parties who PAY IN GOOD FAITH (i.e., maker, drawee, or acceptor)
Warranty Liability: Presentment Warranties - Warranties When Unaccepted Draft Presented
A drawee (i.e., bank) can recover for breach of a presentment warranty on unaccepted drafts. On unaccepted drafts, persons obtaining payment and previous transferors warrant that:
1) The warrantor is ENTITLED TO ENFORCE the draft or is authorized by one who is,
2) The draft has NOT BEEN ALTERED, and
3) The warrantor has NO KNOWLEDGE that the drawer’s signature is unauthorized.
Warranty Liability: Presentment Warranties - Difference Between Forged Drawer’s Signature and Forged Indorsers Signature
On a forged drawer’s signature, if the drawee (bank) pays out, payment is FINAL and the bank cannot recover because no presentment is broken.
On a forged indorser’s signature, a presentment warranty is broken because the presenter didn’t have the right to enforce against the drawer because of the forgery.
Warranty Liability: Presentment Warranties - Breach of Warranty v. Breach of Indorser’s Contract
To determine whether the plaintiff should bring suit against the indorser for breach of warranty or for breach of contract, determine the IDENTITY OF THE PLAINTIFF
Plaintiff is Holder - If the payor hasn’t paid the instrument (i.e., check bounces), then the holder will sue the INDORSER on the INDORSER’S CONTRACT
Plaintiff is Payor - If the payor has paid and later discovers the payor shouldn’t have (i.e., check was forged), the payor will attempt to sue the indorser for BREACH OF WARRANTY
Other Issues: Discharge by Cancellation or Renunciation by Holder
The holder may discharge the obligation by DESTROYING an instrument, STRIKING OUT SIGNATURE, or RENOUNCING RIGHTS in a signed writing.
Other Issues: Discharge - Payment By Certified Check v. Uncertified Checks & Notes
Certified Checks - If payment is made by certified check, the underlying OBLIGATION IS DISCHARGED as if the person paid in cash.
Uncertified Checks & Notes - For payment with uncertified checks and notes, the underlying OBLIGATION IS SUSPENDED, if later paid the obligation is discharged or if later dishonored the holder may sue
Other Issues: Failure to Produce Original Instrument (Enforcement By A Person Not In Possession)
If a person can’t produce an instrument (i.e., lost or stolen), they can still enforce if they can prove:
1) They were ENTITLED TO ENFORCE when the loss occurred,
2) They were IN POSSESSION of the instrument when the loss occurred,
3) The TERMS of the instrument permit recovery, and
4) Facts that PREVENT PRODUCTION of original instrument.
Other Issues: Overdrafts
A bank is obliged to honor its customer’s check even if there are insufficient funds, the customer would then be liable for the overdraft.
Other Issues: Postdated Checks
A bank may pay a postdated check UNLESS the customer gives bank notice.
Other Issues: Stop Payment Order + Elements + Cashier’s & Teller Checks Exception
A drawer may stop payment on a check for UP TO 6 MONTHS. The request must:
1) Be in WRITING,
2) In a REASONABLE TIME
A cashier’s check and teller check CANNOT BE STOPPED (remember, they are the drawer’s in that instance, not the customer), only a bank can stop it.
Other Issues: Wrongful Dishonor + Defenses
If a bank dishonors a properly payable check, the customer may bring an action and collect damages for harm proximately caused by the wrongful dishonor.
Bank’s defenses:
1) payment would OVERDRAW the drawer’s account, and no obligation to pay when customer has insufficient funds, and
2) The check is MORE THAN 6 MONTHS OLD.
Other Issues: Payment In Full Check + Exceptions
Here, drawer conspicuously indicates that cashing check is payment in full of an existing obligation that is subject to a bona fide dispute (i.e., accord and satisfaction)
Exceptions:
1) Payee RETURNS MONEY WITHIN 90 DAYS
2) The payee is an ORGANIZATION and NOTIFIES the payer to address payment in full checks
Forgery: Marker’s Signature + Ratification
The purported maker IS NOT LIABLE because the maker’s signature doesn’t appear on the note (it is the FORGER’S SIGNATURE)
The maker’s conduct may ratify the forger’s signature as their own.
Forgery: Drawer’s Signature + Bank’s Defenses + Repeat Offender Rule
If the drawer’s signature is forged, he CANNOT BE LIABLE, unless one of the following defenses are available to the bank:
1) Drawer was negligent in allowing the forgery to occur, or
2) Bank Statement Rule - if customer fails to promptly report forgery or alteration that shows up on the bank statement WITHIN 180 DAYS, they cannot recover
Repeat Offender Rule - If the SAME PERSON forges a series of checks, the drawer must report the forgeries WITHIN 30 DAYS of when the statement was available.
Forgery: Forged Indorsements - Bearer v. Order
Bearer Paper - Since indorsements are NOT necessary to bearer paper, forgery on them is IRRELEVANT
Order Paper - Forgery BREAKS THE CHAIN OF TITLE and the check is NOT PAYABLE and drawer may demand drawee recredit account
Forgery: Impostor Rule + Employees-Payee Rule
If an issuer, maker, or drawer is deemed to have ACTED CARELESSLY in issuing the check, they are PRECLUDED from denying validity of the indorsement
If an employer entrusts an employee with responsibility to an instrument (i.e., accountant), the employee’s fraudulent indorsement WILL BE EFFECTIVE
Forgery: Liability of Drawee - Conversion Liability
The Payee whose name was forged can sue the payor bank for conversion
Forgery: Liability of Drawee - Drawer
The drawer of a check with a forged indorsement can sue the payor/drawee bank since a check with a forged payee’s name is NOT properly payable
Forgery: Liability of Drawee - Double Liability Protection
A successful conversion action by payee will PRECLUDE drawer’s not properly payable action
Forgery: Liability of Drawee - Bank’s Defenses
1) Impostor rule,
2) Fraudulent indorsement by employee entrusted with check, and
3) Drawer’s negligence
Forgery: Liability of Presenter
The drawee bank can sue the presenter for breaching the presentment warranty
Forgery: Liability of Transferor
The presenter who loses to the payor for breach of presentment may sue entities further up the chain for breach of the various TRANSFER WARRANTIES of:
1) Entitled to enforce,
2) All signatures authentic and authorized, and
3) No good defenses
Alterations + Types
An alteration is an UNAUTHORIZED change that purports to modify the obligation of any party
There are two types of alteration: (1) alteration of an existing instrument, and (2) unauthorized completion of an incomplete instrument.
Alterations: Effect on Holder in Due Course
If the obligation on the instrument has been changed, an HDC MAY ENFORCE the instrument according to its ORIGINAL TERMS
If the instrument was completed in an UNAUTHORIZED manner, an HDC may enforce the instrument according to its terms as completed.
Alterations: Effect on Non Holder in Due Course
If an alteration is fraudulently made by the holder, the obligor is TOTALLY DISCHARGED
If an alteration is NOT FRAUDULENTLY MADE, then the obligor remains liable to the original terms
Alterations: Altered Check
An altered check is NOT PROPERLY PAYABLE
Alterations: Defenses
1) negligence
2) Bank statement rule
Alterations: Breach of Transfer and Presentment Warranties
Altered instruments breach the transfer and presentment warranties promising there have been no alterations.
