Negotiable Instruments Flashcards
What are provisions which does not affect the Negotiability of Instruments?
a) authorizes the sale of collateral securities in case the instrument is not paid at maturity;
b) authorizes a confession of judgment if the instrument is not paid at maturity;
c) waives the benefit of any law intended for the advantage or protection of the obligor; or
d) gives the holder an election to require something to be done in lieu of payment of money
What are the omissions which do not affect the negotiability of instruments?
a) it is not dated;
b) it does not specify the value given or that any value has been given;
c) it does not specify the place where it is drawn or where it is payable;
d) it bears a seal;
e) designates a particular kind of current money in which payment is to be made
What is the Shelter rule?
As a GR, if a holder is NOT a holder in due course, he is subject to the same defenses as if it were non-negotiable.
As an exception, the SHELTER RULE states that if he derives his title through a HIDC and if he is not a party to any fraud or illegality affecting the instrument, he has all the rights of such former holder in respect of all parties prior to the latter.
This exception is subject to the rule under Sec. 58. This does not apply if the holder was a previous holder not in due course who had subsequently repurchased the instrument either personally or through an agent.
What are the rights of a holder NOT in due course?
1) He may sue on the instrument in his own name;
2) He may receive payment and if the payment is in due course, the instrument is discharged;
3) He holds the instrument subject to the same defenses as if it were non-negotiable; and
4) Shelter rule is applicable
When a party SECONDARILY LIABLE may be bound to pay?
After the following conditions have been fulfilled:
1) Due presentment for payment or acceptance of primary party;
2) Dishonor by such party; or
3) Taking of necessary proceedings on dishonor.
Who are parties PRIMARILY LIABLE?
A) Maker - the maker engages to pay according to the tenor of the instrument.
Due presentment for payment and due notice of dishonor are NOT necessary for the purpose of charging the maker with liability. These are only necessary in order to fix the liability of any drawer or indorser.
B) ACCEPTOR - engages to pay according to the tenor of his acceptance, which may not be the same as the tenor of the bill itself because the acceptance may be qualified.
Who are parties SECONDARILY LIABLE?
A) Drawer
B) General Indorser/Unqualified Indorser
C) Irregular indorser
Instances when Notice of Dishonor is excused.
1) When notice is waived:
a) before the time of giving notice; or
b) after the omission to give due notice
2) When dispensed with under Sec. 112 (after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged
3) As to the drawer under Sec. 114
4) As to the indorser under Sec. 115
5) Where due notice of dishonor by non-acceptance has been given
6) As to the Holder in Due Course without notice
When notice of dishonor need not be given to the drawer under Sec. 114.
a) When the drawer and the drawee are the same person;
b) when the drawer is the person to whom the instrument is presented for payment;
c) the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
d) where the drawer has countermanded payment; and
e) when the drawee is a fictitious person or a person not having capacity to contract
When notice of dishonor need not be given to an indorser under Sec. 115
a) the drawee is a fictitious person or does not have the capacity to contract and the indorser was aware of that fact at the time he indorsed the instrument;
b) indorser is the person to whom the instrument is presented for payment; and
c) Instrument was made or accepted for his accommodation.
Distinguish a Protest from a Notice of Dishonor.
1) WHEN REQUIRED P - Foreign bill ND - Inland bill 2) FORM P - Always written ND - Oral or written 3) BY WHOM MADE P - By a notary public or respectable resident in the presence of a witness ND - May be made by a party or agent 4) WHEN MADE P - on the day of dishonor ND - usually within 1 day after dishonor 5) WHERE MADE P - made in the place of dishonor ND - made in the residence of the parties
How discharge of persons secondarily liable may take place.
1) by the discharge of a prior party;
2) by the intentional cancellation of his signature by the holder;
3) by a valid tender or payment made by a prior party;
4) by any act which discharges the instrument;
5) by the release of the principal debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved;
6) by an agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument.
How Presentment for Payment is excused
1) When the drawer has no right to expect or require that the drawee or acceptor will pay the instrument;
2) Where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented;
3) When the delay is caused by the circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence;
4) Even after the exercise of due diligence, presentment cannot be made;
5) The drawee is a fictitious person; and
6) There is a waiver, express or implied
How Presentment for Acceptance is excused
1) The drawee is dead, absconded, a fictitious person or a person not having the capacity to contract by bill;
2) After the exercise of due diligence, presentment cannot be made;
3) Although presentment was irregular, acceptance has been refused on some other ground.
State the Fictitious Payee Rule
An actual, existing, and living payee may also be fictitious if the maker of the check DID NOT INTEND for the payee in fact receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activitiy.
In the fictitious payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. One cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. Since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery.
XPN: Commercial bad faith on the part of the bank
