Commerical Paper Flashcards
Accommodation Party
An accommodation party is a type of surety who guarantees the debt of another. In order to be an accommodation party, a person cannot receive a direct benefit from the value given for the instrument.
To be an accommodation party a person must (1) be a party to the instrument (maker, drawer, indorser) (2) not receive any value, and (3) sign for the purposes of lending name or credit.
When “for collection only” is added to the accommodation parties’ signature, the accommodating party will not be primarily liable. The note holder will have to sue the accommodated party first. If the accommodated party cannot satisfy the judgment, has become insolvent, cannot be served with process, or appears useless to proceed against then the holder can sue the accommodating party.
Accommodation party cannot be liable under a transfer warranty because they usually do not transfer the instrument.
Agent Indorsement
Representative/agent signatures must identify who the principal is and that they are signing as an agent and the agent must clearly indicate the principal/agency relationship. If this does not happen the agent is personally liable to the HDC.
An agent may not be liable to a non-HDC if he can establish that the parties never intended for the agent to be personally liable.
Company checks automatically disclose the principal/agency relationship.
Defenses
If the holder is not an HDC, a person liable on the instrument can raise any defense to liability that could be raised against liability on a simple contract (personal defenses).
However, the right of an HDC to enforce the obligation of a party to an instrument is subject to real defenses but is not subject to any other defenses.
Real defenses include: infancy, incapacity, illegality, duress, discharge in insolvency proceedings, fraud (fraud in the factum), forgery and alteration, suretyship defenses, and statute of limitations.
Further, any unauthorized indorsement of the payee’s name is not a valid negotiation and gives subsequent transferees no legal rights in the instrument no matter how innocent or how far removed from the forgery.
***stop payment order is a valid defense for a drawee bank
Fraud in the factum is a type of fraud where the obligor was induced to sign the instrument without knowledge or reasonable opportunity to obtain knowledge of the instrument’s “character or essential terms.”
Holder in Due Course
In order for a holder to become a holder in due course, the holder must inspect to make sure that it is facially valid and there is nothing that would call into question the authenticity of the instrument.
Next, the holder must take the instrument (1) for value (2) in good faith (commercial reasonableness standard) (3) without notice of certain infirmities of the instrument.
Certain infirmities include an overdue or dishonored instrument, unauthorized signature or alterations, another person claims ownership, or is subject to any defenses.
Once a person qualifies as an HDC they can enforce the instrument against the obligor and will not be subject to any personal defenses.
Shelter Rule
Under the Shelter Rule, a person to whom an HDC transfers an instrument will acquire the rights of the HDC, even if the transferee would not otherwise qualify as an HDC.
The Shelter Rule will not apply if the transferee has engaged in fraud or illegality affecting the instrument. Further, a transferee who is merely aware of an earlier fraud perpetrated by another can still enjoy the right of a previous HDC.
Intro
Florida’s adoption of Article 3 of the Uniform Commercial Code (“UCC”) governs negotiable instruments.
Negotiable instruments are divided into two general categories – notes and drafts. A note is a two-party instrument in which one party (the maker) promises to pay a second payee (the payee) a sum of money.
A draft is a 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).
A check is a draft drawn upon a bank and payable on demand.
Types of Checks
Multi-party check: Under Article 3, an instrument payable to more than one payee is payable to them jointly or severally. If it is payable jointly (A and B) must be indorsed by both parties, if it is payable severally (A or B) can be indorsed by either party. — When there is an ambiguity as to whether the instrument is payable jointly or severally, it is payable severally.
A cashier’s check is purchased from the issuer and made payable to a third party. The drawer of a cashier’s check (drawer and drawee same bank) has the same liability as the maker of a note and must pay upon presentment unless they have a valid defense.
Negotiability
The first issue is to determine if the instrument is negotiable.
In order for an instrument to be negotiable it must be in (1) writing, (2) signed by the maker or drawer, (3) contain an unconditional promise to pay (4) a fixed amount money (5) to order or to bearer (6) payable at a certain date or on demand.
Negotiation
A person can become a holder in two ways: through issuance or negotiation
Issuance occurs when the issuer (maker or drawer) first transfers the instrument. If the instrument is negotiable, it may thereafter be negotiated (i.e., transferred) to others. When an instrument is properly negotiated the transferee becomes a holder.
An instrument is properly negotiated if it is payable “to order” and there is delivery (transfer of possession) and proper indorsement by the holder (i.e., signature on the back of the instrument) or if payable “to bearer” only transfer of possession is required.
Transfer Warranty
A transfer warranty applies when the transferor transfers the instrument to another for the purpose of giving the right to enforce the instrument.
A transfer warranty warrants that at the time of transfer: (1) they are entitled to enforce the instrument (2) all signatures are authentic and authorized (3) no alterations (4) there are no defenses or claims that can be asserted against the transferor, and (5) the maker, acceptor, or drawer is not subject to insolvency proceeding.
The transfer requires consideration and the transferor who indorses the instrument makes the transfer warranties to all subsequent transferees unless the transfer is made “without recourse.”
Presentment Warranty
Under the presentment warranty, a holder warrants in good faith that they are entitled to enforce the instrument, the draft has not been altered, and there is no knowledge of any unauthorized signatures (this occurs when the check is presented to the drawee bank).
Negligence
Under 3-406, a person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument, or to the making of a forged signature on an instrument, is precluded from asserting the alteration or forgery against a person who, in good faith, pays the instrument or take it for value or for collection. Further, the person asserting negligence has the burden of proving the failure to exercise ordinary care.
