FL Commercial Paper Flashcards
Commercial paper is governed by what articles of the UCC?
Articles 3 & 4
What are the fundamental issues that arise in commercial paper?
- person with negotiable instrument wants to get paid
- person obligated on instrument does NOT want to pay; OR
- person who pays the instrument will now want to recover the money from the person who has paid or someone else
What are the steps to attacking a commercial paper MCQ?
- ID type of paper
- ID parties
- determine whether instrument negotiable
- determine whether instrument property negotiated
- determine whether transferee is HDC (holder in due course)
- determine P’s cause of action (contract, warranty, tort, or not properly payable claim)
- determine D’s defenses
- if D liable, can D pass liability to another party?
What are the types of instruments/paper of commercial paper?
1 - NOTE
- promise to pay $$
- examples: promissory note & certificate of deposit
2 - DRAFT
- an order to pay
- example: check
Who are the parties to a NOTE?
2 party instrument
1 - MAKER
- person who promises to pay
- example: promisor or obligor
2 - PAYEE
- person entitled to payment
- example: promisee
Who are parties to a draft?
3 party instrument
1 - DRAWER
- person ordering payment
2 - DRAWEE
- person to make payment
- if check, also called payor bank
3 - PAYEE
- person to receive the payment
When will a draft qualify as a check?
- bank is the drawee
- instrument is payable on demand
What are the types of checks?
1 - CERTIFIED CHECK
- regular check bank has accepted (bank agreed to pay)
2 - CASHIERS CHECK
- draft where drawer & drawee are same bank (person buying check = remitter)
3 - TELLERS CHECK
- draft drawn by one bank on another bank (person buying check = remitter)
4 - TRAVELERS CHECK
- demand instrument requiring a counter signature by a person whose signature already appears on instrument
What happens if an instrument does NOT meet all elements to be negotiable?
Still valid, but governed by contract law NOT UCC article 3 or 4
What does negotiability refer to?
The form of the instrument, determined at the time of issuance
What elements are required to make an instrument negotiable?
- written instrument
- signed by maker or drawer
- promise or order to pay unconditional
- principal a sum certain in money (NOT goods/services)
- payable on demand or at definite time
- contains words of negotiability (bearer or order language)
- no unauthorized undertakings or instruction by person promising or ordering payment
When is a promise or order to pay conditional?
An instrument is conditional if:
1. it contains an express condition to payment (i promise to pay if)
2. states promise or order “subject to” or “governed by” another record; OR
3. rights or obligations with respect to promise or order are state in another record
What items do NOT make promise or order conditional?
- states consideration required for payment
- referes to another record (NOT conditioned on terms of K)
- incorporates rightst hat would NOT hurt holder
- limits payment to particular fund or source
- requires countersignature of a speciment signature (travelers check)
- contains statement required by law that holder subject to claims/defenses of payee
What money amount must be fixed?
Principal amount
interest rates do NOT need to be fixed
If an instrument is silent as to interest, what is the presumption?
There is no interest
When dealing with the amount of money listed in an instrument, if there is a conflict between the words of money and the figure of money what prevails?
The words
What undertakings or instructions are authorized by UCC to be on an instrument?
- promise to give, maintain, or protect collateral
- party agrees to let another enter judgment
- waiver of law meant to benefit obligor/maker/drawer
any other render instrument non-negotiable
When is instrument payable on demand?
IF:
1. states “on demand”, “at sight”, etc.
2. fails to state a date or time for payment
example: ordinary check
When is an instrument payable at a definite time?
If payable:
1. on a fixed date (Aug 1, 2024)
2. on a fixed periof after sight or acceptance (90 days after sight)
3. at a time readily ascertainable when instrument issued
What are words of negotiability & when are they present?
1 - TO BEARER
- instrument states “payable to bearer”
- instrument does NOT name payee
- instrument states payable to “cash” or indicates that it isn’t payable to an identified person
2 - TO ORDER
- instrument states identified person as payee
If instrument contains both bearer and order language what happens?
Bearer language controls
What happens if check is missing words of negotiability?
Requirement WAIVED, if it meets every other element required
Who is a holder?
A person:
1. in possession of negotiable instrument; AND
2. who has Good Title
When does holder have good title?
Depends on words of negotiability used
1. BEARER PAPER –> good title = possession
2. ORDER PAPER –> good title = possession + indorsement
Explain the types of indorsments
1 - BLANK INDORSMENT
- payee signature only, bearer paper created
2 - SPECIAL INDORSMENT
- payee signature + designation of new person to who instrument is payable
- indorsee MUST sign for instrument to be further negotiated
3 - QUALIFIED INDORSMENT
- without recourse included
- limits contract liability imposed on indorsers
4 - RESTRICTIVE INDORSMENTS
- “for deposit” or “for collection”
- an instrument with required words MUST be paid consistently with indorsment by any person or the first bank into which instrument deposited or deemed converted
5 - ANOMALOUS INDORSMENT
- indorsement made by person who is NOT holder
What determines who the initial payee is?
Intent of issuer
Can an instrument be payable to more than 1 payee?
YES! Either:
1. jointly –> each must indorse (“pay to order of Bob & Sid”)
2. severally –> any may indorse (“pay to order of Bob OR Sid”)
What happens if payee’s name is mispelled? How do they indorse?
Payee may indorse with either:
1. real name; OR
2. incorrectly written name
Is negotiation effective even if payee lacking capacity?
YES, negotiation effective even if payee was a minor, incompetent, or unduly influenced, or subject to duress
What are the steps for determining whether someone has HDC (holder in due course) status?
- STEP 1 –> is person a holder?
- STEP 2 –> does person hold in due course?
What are the requirements for holder in due course (HDC) status?
- instrument negotiable
- person has holder status (possession + good title)
- authenticity of instrument NOT apparently questioned (no evidence of forgery, alteration, or no irregularities to question authenticity)
- holder pays value
- instrument taken in good faith
- without notice of certain facts
last 3 = “due course”
Who has burden of proof in establishing HDC status?
Person claiming HDC status
What does “due course” require?
Requires the holder to take:
1. for value
2. in good faith
3. without notice of certain facts
What constitutes value?
- performance of agreed consideration
- acquisition by holder of a lien or a security interest in instrument (other than judicial lien)
- taking the instrument as payment of or security interest for an antecedent debt
- trading a negotiable instrument for another instrument
- giving instrument in exchange for incurring an irrevocable obligation to a 3rd person by person taking instrument
If holder satisfies all requirements to be an HDC, when will they still NOT be an HDC?
If the holder:
1. purchases the instrument at judicial sale or takes it under legal process;
2. acquires instrument taking over an estate; OR
3. purchases instrument as part of bulk transaction NOT in regular course of business of transferror
What facts must holder take without notice?
- notice that instrument overdue
- notice that check bounced
- notice that instrument altered or had unauthorized signatures
- notice that there are claims to instrument
- notice of defenses or claims in recoupment by obligor
if holder takes with notice of any, NOT a HDC
What does the shelter rule do?
Gives rights to a holder that doesn’t qualift as an HDC, if sheltered by previous HDC
- HDC transfers instrument to transferee & any that come after will get original HDC’s rights (doesn’t make transferee an HDC)
What is an exception to the shelter rule?
No HDC rights given to persons who were parties to Fraud or illegality, affecting the instrument
What are rights of a HDC?
HDC can enforce an instrument subject ONLY to real defenses
- HDC takes free of personal defenses & claims
What are real defenses?
FAIDS x 2:
1. Fraud in the factum (i didn’t know what i was signing)
2. forgery (of names necessary to title)
3. adjudicaated incompetent (through judicial proceeding)
4. alteration (partial defense to $ altered)
5. illegality (if void; if voidable its a personal defense)
6. infancy (if in simple contract action voidable)
7. discharge in bankruptcy proceedings
8. duress (if 1 party acts involuntarily in K situation under extreme duress)
9. surety defenses (HDC must know of accomodation)
10. SOL (5 years)
When is fraud in the factum present?
Fraud that causes obligor to sign an instrument:
1. without knowledge of instrument character or essential terms; AND
2. without reasonable opportunity to learn of the instruments character or essential terms
What are personal defenses?
Defenses that CANNOT be asserted against HDC:
1. lack of consideration
2. breach of warranty
3. fraud in inducement (party knew what was signed, but lied)
4. claims or defenses of another (other than accomodation party claims)
5. unconscionability
6. failure of condition precedent
When is contract liability invoked, as opposed to warranty liability?
- contract liability –> invoked to get payment
- warranty liability –> invoked to get money paid back
What is the primary basis for contract liability on an instrument?
A persons signature:
- NO ONE can be held liable unless their signature or the signature of an authorized representative is on instrument
When is principal liable for signature of its agent?
- principal bound if agent had authority to sign
- principal bound if principal ratifies signature
- principal bound if principals negligence contributed to the making of the unauthorized signature (ESTOPPEL)
can be liable even if signature of principal NOT on paper
Liability of agent who signed instrument depends on what?
Whether agenct & principals ID disclosed
When is agent NOT personally liable?
- principal is ID’d in instrument; AND
- signature unambiguously shows it was made on behalf of principal
When is agent personally liable?
- when they do NOT comply with requirements needed to avoid personal liability; AND EITHER
- (a) holder HDC (unless HDC had notice of representative nature of the agents signature) OR (b) holder NOT HDC & agent can’t prove that the original parties did NOT intend the agent to be liable
What is the special rule on agent liability & checks?
Agent for drawer NOT personally liable if principals name on check
even if agent did NOT indicate agency capacity
What happens if agent NOT authorized to act for principal?
AMOUNTS TO FORGERY
agent bound NOT principal
When does maker of note make a contract to pay instrument?
by signing their name
Who is primarily liable on a note?
THE MAKER
- must pay not when it is due
- liable to holder or indorser who paid the note
effectiveness of maker defenses depends on whether holder a HDC
When is a drawer liable?
ONLY after the following conditions are satisfied:
1. if draft a check, presentment made to drawee in 30 days; and
2. drawee refuses to pay upon proper presentment (if draft previously accepted by bank drawer is discharged & CANNOT be held liable if bank fails to pay)
Does a drawee of a draft have a duty to pay holder?
NO! Drawee has duty to drawer
What happens when a drawee refuses to pay holder?
The drawer is obliged to pay according to drafts terms when drawer signed
Can a drawer disclaim liability on an instrument?
YES!
EXCEPTION: cannot disclaim liability for CHECKS
Who has secondary liability on a draft?
- drawer; and
- indorser
What is an indorser’s contract?
how does it arise?
The basic obligation to pay according to the terms of the instrument at the time of indorsement
- arises merely from indorsers signing their name on the instrument
What is the order of liability for indorsers?
- indorsers are liable to each other in the order of their signatures
- an indorser may sue prior indorsers for payment, and are liable to later indorsers
When can a holder look to an indorser for payment?
When holder fulfills the following prerequisites:
1. presentment –> demand for payment
2. dishonor –> maker or drawee does NOT pay in time
3. notice of dishonor –> usually w/in 30 days of dishonor
When is presentment excused?
- person entitled to present cannot do so, even with reasonable diligence
- maker has repudiated obligation to pay/is dead/insolvent
- instruments terms make presentment unnecessary
- obligor waived presentment
- drawer instructed the drawee not to pay or that drawee was NOT obligated to pay
Who needs to be given notice of dishonor?
Indorser ONLY, no notice required for maker of note or drawer of draft
When is a delay of giving notice of dishonor excused?
If delay caused by circumstances beyond the control of a notifier who exercised reasonable diligence after cause of delay ceasted to exist
When is notice of dishonor excused?
- terms of instrument make it unnecessary; OR
- obligor waives notice
Does a drawee of a draft have liability to holder of draft?
NO, holder cannot force a drawee to pay out
- EXCEPTION: they sign the instrument
What happens when drawee signs draft?
Check accepted, it’s a certification & it dischargers the drawer & all prior indorsers
What happens if a drawee pays on a forged indorsement?
drawee liable to the payee (person whose indorsement was forged) in conversion
- person suing in conversion must have received instrument (if check never reaches payee because lost in mail, no conversion)
Does a customer’s death revoke the banks authority to pay check?
NO, unless:
1. bank knows of death; and
2. bank has reasonable time to act on knowledge
even if bank knows they can continue paying checks for 10 days after date of death (unless ordered to stop by person with interest in account)
Who is an accomodation party?
A party that signs an instrument to lend credit to another party to the instrument & receives no direct benefit
like a surety
Who are the parties in an accommodation?
1- ACCOMODATED PARTY
- person with bad credit (principal/debtor/obligor)
2 - ACCOMMODATION PARTY
- person with good credit (surety/co-signer)
3 - HOLDER PARTY
- person who wants payment assured (creditor/obligor)
Is an accomodation party liable to the party accommodated?
NO!
Can an accommodation party limit liability to collection?
They may include express lanaguage limiting the contract to a guarantee of collection only
–
party that clearly (collection guaranteed) indicates that they only a guaranter will be held liable ONLY if:
1. person entitled to enforce has reduced their claim to judgment against maker & execution refunded unsatisfied; OR
2. seeking judgment would be futile
If accommodation party pays the instrument, what can they do?
They have an action on instrument against party accommodated
they can acquire rights accommodated party did
What are the implied warranties that arise automatically?
- Transfer Warranties –> arises when instrument transferred; OR
- Presentment Warranties –> arise when instrument presented
When does a transferor of an instrument make transfer warranties?
WHENEVER:
1. person transfer an instrument (other than issuance or presentment); OR
2. customer or collecting bank transfer an item for consideration
Transfer warranties run to who?
- immediate transferee (whether or not indorsed)
- all subsequent transferees IF the transfer is by indorsement
- for banks, runs to any subsequent collecting bank, even without indorsement
Who can NEVER sue for breach of transfer warranty?
DRAWERS & MAKERS because they get instruments presented to them, NOT transferred
What does a transferor warrant?
- transferor entitled to enforce instrument (warrant that all indorsements necessary to chain of title are genuine AND that transferor is proper person to make presentment)
- all signatures are authentic & authorized
- instrument or item has NOT been altered
- no defense or claim of any party is good against transferor (T perfect P warranty)
- transferor has no knowledge of any insolvency proceedings have been lodged against maker, acceptor, or drawer of unaccepted instrument (only one where knowledge matters)
Can warranties be disclaimed?
YES, warranty liability can be negated by transferor by placing words to that effect on the instrument (“without warranties”)
- CANNOT be disclaimed for checks
- a customer to a bank CANNOT disclaim obligation to pay a dishonored item
Can a P sue on both transfer & presentment warranties?
NO, P can only have one or the other (even if person makes both)
What are the different sets of presentment warranties?
- warranties made to drawee’s on unaccepted drafts
- warranties made to payors of other instruments or items
Who makes presentment warranties?
D’s in an action on a presentment warranty is:
1. presenter; AND
2. previous transferors
Who is presentment warranty made to?
P’s in an action on presentment warranty are parties who pay in GOOD FAITH (maker drawee, or acceptor)
What are the warranties when unaccepted draft is presented?
On unaccepted drafts, persons obtaining $ & previous transferors warrant that:
1. warrantor is entitled to enforce the draft or is authorized by one who is
2. draft has not been altered; AND
3. warrantor has no knowledge that the drawer’s signature is unauthorized
bank can recover from HDC’s & ppl who detrimentally relied on payment
Can a person that is entitled to enforce instrument discharge a party?
YES, through:
1. intentional voluntary acts (surrendering or destroying an instrument or striking alternate signature); OR
2. renouncing rights in signed writing
NOT effective against a subsequent HDC without notice
How do you know whether P should bring suit against indorser for breach of warranty or breach of contract?
Determine ID of Plaintiff
- P is HOLDER = CONTRACT liability (if payor hasn’t paid the instrument, like check bounces or note isn’t paid by maker, then holder will sue indorser on K)
- P is PAYOR = WARRANTY liability (payor paid & later discovers payor shouldn’t have b/c check forged or note altered, payor will sue indorser for breach of warranty)
What type of instrument will discharge the underlying obligation as if person paid in CASH?
If payment made by:
1. certified check
2. cashier’s check
3. teller’s check
What happens if A buys laptop from B for $1000 in a check, and check is stolen (lost/destroyed) before cashing it?
A CANNOT sue on underlying obligation because check has NOT been dishonored by bank
__
A entitled to enforce instrument if they can prove
1. they were entitled to enforce instrument when loss occurred
2. the terms of the instrument; AND
3. the facts that prevent production of original instrument
court can require bond to protect D
When can a bank clear a check even though it has a date in the future posted?
ALWAYS, unless customer gives bank notice of postdating
Who can stop payment orders?
DRAWER (banks customer)
- other parties do NOT have authority to do so
How must a stop payment order be made & how long is it effective for?
stop payment order MUST be:
1. in writing
2. signed
3. dated
4. received at a time & in a manner that affords the bank a reasonable opportunity to act
EFFECTIVE FOR 6 MONTHS (can be renewed)
What happens if bank pays an item in spite of stop payment order?
1 - Customer has BURDEN
- must prove that a loss occurred & the amount of loss
2 - Banks DEFENSES
- stop payment order did NOT comply with requirements OR that there was no loss
Who can stop payment on cashiers or tellers checks?
BANK (not customer/remittur)
- if bank stops, risks liability for expenses, lost interest, and consequential damages
What happens if a bank wrongfully dishonors a properly payable check?
Customer (drawer) can bring action & collect damages for harm proximately caused by dishonor
Payor CANNOT sue bank
What are the banks defenses for a wrongful dishonor of check?
- payment would overdraw drawer’s bank account
- check is more than 6 months old
When will a check with the words “full payment” NOT account as an accord & satisfaction?
- payee returns $ within 90 days; OR
- claimant/payee is an organization & sends notice before instrument tendered, requiring that such instrument be tendered to a designated person, office, or place to be effective
How do you know what rules to follow when dealing with forgery?
Determine whose signature was forged (identity/status of the parties)
What are some forgeries I can see on exam?
- forgery of PAYEE’s name –> breaks chaiin of title
- forgery of names NOT necessary to chain of title won’t keep later takers from becoming holders
- forgery of DRAWER’S name –> does NOT break chain because forgery operates as the genuine signature of FORGER
What happens when Maker’s signature forged?
1 - purported maker NOT liable
- EXCEPTION: makers conduct ratifies or precludes maker from denying forgery
2 - FORGER is liable on note
What happens if Drawer’s signature is forged?
- purported drawer NOT liable
- drawee bank MUST recredit the drawer’s account (unless bank has a defense)
Are presentment warranties breahed with a forged signature of drawer?
NO
What defenses does a bank have to the purported drawer’s (their signature forged) no properly payable action, to avoid recrediting account?
1- Drawer’s Negligence
- substantially contributed to an alteration or forged signature
2 - Bank Statement Rule (Duty to Inspect Stmnt)
- forged signature must be reported within 180 days from date instrument became available to customer (if same person forging checks, customer has 30 days of when stmnt available)
What constitutes drawer negligence?
- leaving blank spaces on instrument
- mailing instrument to someone with same name as payee
- failing to follow internal procedures designed to avoid forgeries
What is the effect of forging indorsements/payees name?
- BEARER paper –> forgery is irrelevant
- ORDER paper –> forgery breaks chain & check NOT properly payable (drawer may demand recredit)
When is a party precluded from asserting forgery?
1 - IMPOSTER rule
- issuer, maker, or drawer acted carelessly in issuing check
2 - Fraudulent Indorsement by Employee
- payee estopped
- indorsement effective
If payee named forged, who can they sue?
- payor bank
- depositary bank
- non-bank converters
CONVERSION
What happens if there is a successful action by payee against drawee?
Drawer cannot sue on not property payable action (no double liability)
What is an alteration?
an unauthorized change that purports to modify the obligation of any party
What are the types of alterations?
- alteration of an existing, complete instrument
- unauthorized completion of an incomplete instrument
What terms may an HDC enforce when instrument altered?
- if obligation changed –> HDC may enforce original terms
- if instrument completed –> HDC may enforce terms as completed an unauthorized manner
What happens if alteration made by holder?
Obligor totally discharged
What warranties does altered instruments breach?
Transfer & presentment
When does an extend in time for payment NOT affect negotiability?
As long as the extension is to a further definite time stated in instrument
Who makes presentment warranties?
- anyone who obtains payment on instrument
- anyone who obtains acceptance of an instrument
- any prior transferor of an instrument that was paid or accepted
