Negotiable Instruments

Question 1

Negotiable Instruments Opening Statement

Answer 1

The Uniform Commercial Code (UCC) Article 3 governs transactions involving negotiable instruments, and Article 4 controls bank-consumer relations.

Question 2

Types of instruments

Answer 2

Two-party instruments (typically promissory notes) have a maker and a payee. Three-party instruments (typically checks) have a drawer, a drawee bank, and a payee.

Question 3

Requirements to be an negotiable instrument

Answer 3

For an instrument to be negotiable, it must have been properly issued and contain NUTSS: (1) negotiable words (“pay to the order of” or “to bearer”; not necessary for checks) (2) an unconditional promise to make payment (no contingencies, even if occurs before due date), (3) a time certain for payment (can be determined), (4) a sum certain in money (of principal), and (5) a signature by the maker or drawer (any intent to authenticate).

Question 4

What is the difference between order paper and bearer paper?

Answer 4

Order paper identifies a payee, and negotiation (transfer) requires proper indorsement and delivery by the payee. Bearer paper does not identify a payee, and negotiation requires only transfer and delivery by the bearer (no sig).

Question 5

What happens if an instrument doesn’t meet the NUTSS requirements?

Answer 5

If an instrument is not negotiable, the holder takes subject to all contract defenses assertable against the payee.

Question 6

When is an instrument issued?

Answer 6

An instrument is issued when the maker or drawer first delivers (voluntarily transfers possession) to a payee or bearer. There must be intent to give enforceable rights on the instrument to some other person.

Question 7

What happens with an incomplete instrument?

Answer 7

If the maker or drawer intended for the payee to complete the instrument, it is enforceable when completed. (Party who left instrument incomplete takes loss if altered!)

Question 8

Why do you want to be a holder in due course?

Answer 8

A holder in due course is entitled to receive payment even though the maker or payor might not be required to pay the payee. Personal defenses are not good against a holder in due course.

Question 9

What do you need to be a holder in due course?

Answer 9

FINNS: for value (no gift/future performance; can be split), in good faith (no actual knowledge of claims/defenses), no notice (even constructive of defects), negotiation (order: delivery w/ indorsement; bearer: just transfer), shelter rule (HDC if one higher in ladder, even if gift)

Question 10

What are you if you’re not a holder in due course?

Answer 10

A holder who fails to meet the FINNS requirements is a mere assignee who takes subject to personal defenses.

Question 11

What if negotiation was improper (such as a forged instrument)?

Answer 11

Subsequent holders are mere assignees, unless the maker’s or drawer’s employee negligence contributed to the improper indorsement and they were in the best position to prevent this from occurring (fictitious payee or transfer from imposter), in which case, HDC status is still recognized.

Question 12

What personal defenses to having to pay are available to a maker against mere assignees?

Answer 12

MUUFFO: mutual mistake, unauthorized completion by payee, uncompletion of a condition precedent, fraud in the inducement (FIRD), failure of consideration (negligent performance of services, unconforming/undelivered goods), and other claims (catch-all, UCC favors defenses being personal)

Question 13

What real defenses to having to pay are available to a maker against even an HDC?

Answer 13

FIDDLS FUM: fraud in execution, illegality (usurious interest rate?), discharge in bankruptcy, duress, lack of capacity (usually infancy), statute of limitations (6 yrs from due date or demand), forgery (of maker’s/drawer’s/special indorsee’s sig), unauthorized signature, material alteration (HDC gets original amount)
*FUM defenses subject to special exception where maker’s/drawer’s/indorser’s negligence substantially contributed to defense (converts to personal defense).

Question 14

How may a holder sue to get that money?

Answer 14

Under contract liability, breach of warranty, conversion of the instrument, or the underlying obligation.

Question 15

Who has primary liability for payment?

Answer 15

The maker (note), drawer (check), drawee bank (certified check), or acceptor (draft) should pay in the ordinary course if delivery. The drawee is liable if they accept the instrument.

• J/S liability applies to co-makers.
• Drawer of dishonored check is penalized unless justifiable stop payment order.

Question 16

Who has secondary liability for payment?

Answer 16

Secondary liability normally rests with the third-party indorsers if timely presentment and notice of dishonor. (Sue one step up the ladder, though HDC can also sue maker/drawer.)
*The character of the indorsement determines the extent of liability.

Question 17

What are the types of indorsement and their impact on liability?

Answer 17

Unqualified/blank (no indorsee): converts order paper to bearer
Special (IDs transferee): converts bearer to order
Restrictive: ineffective to prohibit assignment, can be “for deposit only”
Qualified w/o recourse: eliminates K liability (but still warranty of no known defenses)
Payment guaranteed: signer liable if not paid
Collection guaranteed: signer only liable after bona fide attempt to collect judgment from maker/drawer
Accommodation indorser: liable but due reimbursement (no implied warranties)
Payment in full: effects accord and satisfaction

Question 18

What warranty liability claims can be brought against a transferor (including a presenter)?

Answer 18

Breach of warranty of GANDS: good title, alterations not present, no knowledge of insolvency, defenses not present, and signatures are genuine and authorized.

Question 19

What warranty liability claims can be brought against a presenter only?

Answer 19

Breach of warranty of GAD: good title, alterations not present, and drawer’s signature is authorized.

Question 20

Can warranties be disclaimed?

Answer 20

Warranties may be disclaimed with specific reference, except in the case of checks.

Question 21

What happens if the maker’s/drawer’s signature was forged?

Answer 21

If bank wrongfully honors, it must return money to the drawer, but it may recover from the presenter (warranty theory), except where the owner’s negligence contributed to the forgery.

Question 22

What happens on unauthorized completion of the payee name?

Answer 22

The maker/drawer is not liable to the thief but will be liable to subsequent HDCs.

Question 23

What happens if the indorser’s signature is forged?

Answer 23

No liability to indorser who was falsely represented (unless negligence); chain of title is broken and no transferee can become HDC.

Question 24

What happens if the instrument is lost, destroyed, or stolen?

Answer 24

The payee can still enforce the contractual amount against the maker/drawer with a sworn declaration.

Question 25

What are additional concerns when a check is involved?

Answer 25

Bank responsibilities: negligence for wrongful honor, no duty to a presenter (return by next day if not certified), can create overdraft, hold periods on deposit, liability for wrongful dishonor.
Customer may make stop payment order (14 days if oral, six months if written), report unauthorized signature w/in 60 days if business, one year for consumers.