Enforcement of Instruments Flashcards
Who is entitled to enforce a negotiable instrument?
1) the holder of the instrument
2) a non-holder in possession of it (this is like the agent of the company or of whoever the holder is
3) a person who is not in possession but who is entitled to enforce the instrument (Example given - payee of promissory note in a drawer, the house is burglarized and the note is stolen. Even though payee no longer the holder, the borrower still owes him money.)
Who is a holder?
The person in possession of an instrument that is either: (1) payable to bearer or (2) payable to identified person and that person is in possession of the instrument
The holder has both POSSESSION OF and RIGHTS TO the instrument.
How do parties subsequent to payee become holders?
they are in possession of BEARER PAPER or of PROPERLY INDORSED ORDER PAPER
What are typical problems with the Holder Status?
1) Fictitious Payee Rule - if a check was made payable to a fictitious person or is not intended on having any interest in the instrument, then anyone in possession of the check can effectively negotiate it by indorsing it in the name of the ficitious payee, essentially allowing the check to be passed on as if the payee’s signature is valid. Usually applies when the drawer of the check intended to defraud the payee from the beginning.
- (Ex: ER writes a check to non-existent employee to embezzle funds and then indorses the fake employee’s signature to deposit the check. The “fictitious payee” rule would allow the embezzler to pass on the check to another party.
2) Imposter - when a person impersonates the payee and induces the drawer or maker to issue the note/draft to the imposter payable to the name of the impersonated person - same result as ficititious payee.
When is a holder in possession of bearer or order instrument?
Bearer instrument - through possession of the instrument
Order instrument - possession of the instrument + it identifies the holder as payee
What are the requirements to be Holder in Due Course (HDC)?
1) holder
2) takes negotiable instrument FOR VALUE, in GOOD FAITH, and
3) without notice that it’s overdue or been dishonored or notice of any defense against it or claim to it.
- Preferred status
- minimal/reduced value ok, but gratuitious transfer is not
What does Value mean for HDC status?
it’s given when instrument is issued or transferred - (1) for a promise of performance, (2) as payment of or as security for an existing claim (3) in exchange for a negotiable instrument (4) in exchange for the incurring of an irrevocable obligation to a third party
- discounted value is ok - holder will still be considered to have paid in full
What does Good Faith mean for HDC status?
honesty in fact and fair dealing
a person who takes instrument without actual knowledge of defect cannot attain HDC status if reasonable person would have notice of the defect
Even if requirements of HDC are met, who does not require HDC status regardless?
1) if taken by legal process or purchased in an execution/bankruptcy/ creditor sale
2) it’s purchased as part of a bulk transaction not in the transferor’s ordinary course of business
3) as the successor in interest to an estate or other organization
What is the umbrella or shelter doctrine?
A transferee takes any right to the instrument that the transferor had, including HDC status. BUT - if a transferee engaged in fraud or illegality w/regard to the instrument, they cannot claim HDC rights from the transferor
What is so great about being an HDC?
1) HDC takes free of personal defenses (but not free of real defenses)
2) HDC takes free of all claims to it that might have existed between previous parties to the instrument
What is accord and satisfaction under UCC Art. 3?
If a person against whom a claim is asserted proves that:
1) that person, in good faith, tendered the instrument as full satisfaction of that claim
2) the amount of the claim was unliquidated (they don’t know what they owe) or there legitimate dispute as to amount owed, and
3) claimant obtained payment of instrument, and
4) there was an accompanying communication with a conspicuous statement that the tendered amount is satisfaction fo the claim,
then considered satisfied.
- gimmick check does not satisfy - where someone pressured in bad faith to take lesser amount
- must be a legit K dispute
