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

Exam 1: Negotiable Instruments Flashcards by Andi Hayes

What articles of the UCC govern negotiable instruments?

Article 3 - negotiable instruments

Article 4 - banking

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What is a negotiable instrument?

“a signed writing containing an unconditional promise to pay an exact sum of money”

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What are the parties to a draft?

Drawer, Drawee and Payee

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What defines a check?

The Drawee is a financial institution

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Cashier’s Check

A check when the financial institution is both a Drawer and Drawee

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Trade Acceptance

Seller is drawer and payee

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Promissory Notes Parties

Maker (Promisor)

Bearer (Promisee)

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Certificate of Deposit

Promissory Note where the Maker is a financial institution

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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

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What rules when handwritten and typewritten are present

Handwritten

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What rules when words and numbers disagree

Words Prevail!

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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

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Transfer by negotiation creates a holder who at the very least

received the rights in the instrument of a previous possessor

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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

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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]

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Negotiating Order Instruments

requires endorsement and delivery

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Negotiating Bearer Instruments

requires delivery only

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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)