Exam 1: Negotiable Instruments Flashcards
What articles of the UCC govern negotiable instruments?
Article 3 - negotiable instruments
Article 4 - banking
What is a negotiable instrument?
“a signed writing containing an unconditional promise to pay an exact sum of money”
What are the parties to a draft?
Drawer, Drawee and Payee
What defines a check?
The Drawee is a financial institution
Cashier’s Check
A check when the financial institution is both a Drawer and Drawee
Trade Acceptance
Seller is drawer and payee
Promissory Notes Parties
Maker (Promisor)
Bearer (Promisee)
Certificate of Deposit
Promissory Note where the Maker is a financial institution
Requirements for Negotiability
Written Unconditional commitment to pay Signed by the maker or the drawer Sum certain payable in money Definite time or payable on Demand Order of someone or bearer
What rules when handwritten and typewritten are present
Handwritten
What rules when words and numbers disagree
Words Prevail!
What interest rate applies if the instrument says with interest and does not specify?
Judgement rate: the rate of interest fixed by the state statute that applies to a monetary judgement awarded by the court
Transfer by negotiation creates a holder who at the very least
received the rights in the instrument of a previous possessor
Holder is
anyone who possess instrument with all necessary endorsements
- payable to bearer: possessor is holder
- payable to specific person: specific person is holder w/o endorsement
What is an Order Instrument?
Either:
- an instrument that is payable to a certain person (an order instrument) OR
- Orders to Pay (drafts) [vs. promises to pay]
Negotiating Order Instruments
requires endorsement and delivery
Negotiating Bearer Instruments
requires delivery only
What is a Bearer Instrument?
Payable to anyone who properly possesses the instrument {Bare of endorsement need}
Blank endorsement
Signature without additional words
-converts a order instrument into a bearer instrument
Special endorsement
Payable to a specific person {human life is special, people are special}
Qualified Endorsement
Signature with the words “Without Recourse”
-nullifies the transfer warranty
Restrictive Endorsements
Restricts what can happen to the check - “includes specific instructions regarding the funds involved or states a condition to the right of the indorsee to receive payment”
- For Deposit/Collection Only
- Pay to BLANK as agent for BLANK
- Pay to BLANK in trust for BLANK
Do misspelled names affect negotiability
Nope as long as the misspelling is within reason
Instruments Payable to Legal Entities
Negotiable by authorized representative of the entity
Alternative Payees: BLANK or BLANK
either payee may indorse
Joint Payees: BLANK and BLANK
both must endorse which provided evidence that at a minimum the other party knew about payment
Multiple payee ambiguity: Pay BLANK BLANK 2
presumed alternative payees, meaning “or”
Holder in Due Course (HDC) requirements
- Takes for Value
- Takes in Good Faith
- Takes without Notice of Payment or a Defect in the Instrument (a reasonable person would be on notice of defect)
Holder can take for value by:
- Performing the instrument’s promise
- Acquiring a security interest or other lien in the instrument
- Taking instrument in payment for an antecedent debt
- Giving a negotiable as payment
“Good faith” is
honesty in fact and the observance of reasonable commercial standards of fair dealing.
Holder takes the instrument with notice if she knows/has reason to know:
- instrument is overdue
- instrument has been dishonored
- actual knowledge or any suspicious event
- that a claim or defense exists
- very irregular, incomplete or bears such evidence of forgery
Shelter Principle
Person is not an HDC but derives title through HDC
What is discharge of a negotiable instrument mean?
terminate the liability associated with an instrument
Discharge from liability on an instrument can occur by:
- Payment
- Cancellation or Surrender
- Reacquisition
- Impairment of Collateral
Two kinds of liability related to negotiable instruments
Signature Liability
Warranty Liability
What is signature liability?
liability that arises from a party’s signature on an instrument
What is warranty liability?
Liability that arises by operation of law and may be implied /applied to a party who handles an instrument but does not sign the instrument
What kind of liability do Makers and Acceptors have for their signature?
Primary liability - unconditional
What kind of liability to Drawers/Endorsers have for their signature?
Secondary liability - only kicks in after the instrument is dishonored
Explain Maker’s Primary Liability
- Promises to pay the note
- Obligated to pay terms of instrument at the time of signing
Explain Acceptors’ Primary Liability
-Drawee promises to pay an instrument when presented for payment
> Certified Check
>Also known as Guaranteed funds/payment
What are the requirements for Secondary Liability to apply?
- Proper Presentment (must be timely)
- Dishonor (the instrument is not paid)
- Proper Notice (reasonable manner)
What do Accommodation Parties do?
Sign instruments to lend name as credit to another party on the instrument (liability is identical to the party who is accommodated)
