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Negotiable Instruments Flashcards

1
Q

What is the difference between a negotiable instrument and a nonnegotiable instrument?

A

Nonnegotiable instruments are not able simply to be transferred by the will of its owner, but are restricted by some sort of contract rights

Thus, while the Uniform Commercial Code (UCC) governs negotiable instruments, the contract law of assignments governs nonnegotiable instruments

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2
Q

What different ways can negotiable and nonnegotiable instruments be transferred?

A

Nonnegotiable instruments can be transferred only by assignment, but negotiable instruments can be transferred by either assignment or negotiation

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3
Q

How is negotiation superior to assignment regarding transferability?

A

Negotiation involves full transferability, while assignment has restrictions that make certain types of assignments void

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4
Q

How is negotiation superior to assignment regarding property rights transferred?

A

Assignment does not allow the assignee to acquire greater property rights than the assignor, but negotiation does allow the transferee to have greater rights

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5
Q

How is negotiation superior to assignment regarding defenses against other claims?

A

An assignee assumes any defenses against the assignor, while a transferee in a negotiation is free of any such defenses against the transferor

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6
Q

What is a draft?

A

A kind of negotiable instrument: a written order (by a drawer to a drawee) to pay money to a third party (the payee)

Most common type of draft today is a check, where the owner of the checking account is the drawer, the bank is the drawee, and the recipient of the check is the payee. The drawer orders the bank (drawee) to pay money from his account to the payee.

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7
Q

What is a note?

A

A kind of negotiable instrument: a written unconditional promise to pay the payee, either at some particular future time or on demand

Most essential to a note is the fact that it is a promise to pay (rather than a mere acknowledgment of debt)

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8
Q

If there is ambiguity whether an instrument is a draft or a note, how is it legally treated?

A

However the holder desires to treat it

Even if it is clearly a draft, the holder can treat it as a note if the drawer and drawee are the same person (because it would then effectively be a note)

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9
Q

What are some rules for interpreting ambiguous terms in an instrument?

A

All other things being equal…

(1) Handwritten terms carry more weight than typewritten and preprinted terms
(2) Typewritten terms > preprinted terms
(3) Words > figures

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10
Q

If multiple people sign an instrument (whether as maker, drawer, etc.), are they jointly or severally liable for their end of the bargain?

A

Both, unless the instrument itself specifies which

The words “I promise to pay” do not count as specifying either one

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11
Q

What does it mean if an instrument is payable to two people “in the alternative”?

A

It means it is payable to EITHER one person or the other (rather than both)

They are “alternative payees” rather than “joint payees,” and thus either can exercise his rights without the other

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12
Q

What is a holder in due course (HDC)?

A

The purchaser of a negotiable instrument who is free of any claims that can be used against the original holder of the instrument

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13
Q

What is an alteration of a negotiable instrument?

A

Not just any change, but any unauthorized change in a negotiable instrument, changing the duties of the parties involved

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14
Q

What is a letter of credit?

A

A type of nonnegotiable instrument: a buyer can request his bank to send a letter (i.e. a letter of credit) to a seller, assuring the seller that the buyer’s payments will be made

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15
Q

What is the statute of limitations for liabilities on bank deposits and collections?

A

Any suit to enforce such a liability must be within three years from the cause of the breach

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16
Q

What is the difference between a sight draft and a time draft?

A

Sight draft = payable on demand (i.e. when presented to the drawer bank)

Time draft = payable within a certain time period

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17
Q

What is a trade acceptance?

A

A draft drawn directly on the buyer by the seller, payable to the seller in the future

Basically, a promise by the buyer to pay the seller in the future, which is written by the seller for the buyer to accept (i.e. sign)

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18
Q

What is a banker’s acceptance?

A

Very similar to trade acceptances, but they are drawn on the buyer’s bank

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19
Q

When someone draws a check on a bank, is there a principal-agent relationship involved?

A

Yes, the drawer/depositor is the bank’s principal, and the drawee/bank is the depositor’s agent

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20
Q

What does it mean to say that a check is a “conditional payment”?

A

It means that giving a check does not automatically count as payment or discharge the buyer’s duty – the buyer’s duty is discharged only when (i.e. only on the condition that) the bank pays it

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21
Q

What is a bank draft?

A

A draft (or check) which one bank draws upon another

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22
Q

What is a cashier’s check?

A

A check which a bank draws upon itself, ordering itself to pay a third person

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23
Q

Who are the different parties involved with a note?

A

The promisor is the maker; the promisee is the payee or bearer

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24
Q

What is a certificate of deposit?

A

A type of note: a promise by a bank to repay a particular amount of money

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25
Q

What is check certification?

A

When a bank assures that an account has enough funds deposited and set aside to be paid through a check

The bank is not usually obligated to certify checks

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26
Q

Does certification change the liability of the parties involved?

A

Yes, depending on who certifies

If the check holder certifies it, the drawer and any other endorsers are not liable (the bank is)

If the drawer certifies it, only endorsers lose liability – the drawer remains liable (secondarily to the bank)

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27
Q

To whom is a bank obligated to honor checks?

A

To the depositor, but not to the payee

Thus if a bank wrongly dishonors a check, the payee should act against the drawer (who should then act against the bank), UNLESS the check is certified by the bank

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28
Q

Is a bank obligated to honor stop-payment orders from depositors?

A

Yes, so long as the bank has a reasonable time after the order to do so

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29
Q

How long is a bank obligated to honor a stop-payment order?

A

Six months if written, 14 days if oral

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30
Q

What is the depositor’s duty towards the bank?

A

To check monthly statements for mistakes or forged checks

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31
Q

How does liability work for a forged check if a bank is negligent?

A

The bank is liable even if the drawer was negligent too

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32
Q

When is the drawer liable for negligence regarding a forged check?

A

If he negligently does not discover the forgery, or if he fails to report a forgery within 30 days

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33
Q

What guarantees a drawer to be liable for a forged check?

A

Either:

(a) if he fails to report an unauthorized alteration within a year of receiving the bank statement
(b) if he fails to report an unauthorized endorsement within three years of the statement

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34
Q

What are the six prerequisites for an instrument to count as negotiable?

A

(1) Signed and in writing
(2) Unconditional promise/order to pay
(3) Fixed amount of money
(4) Payable to order or to bearer at issuance (except for checks)
(5) Payable on demand or at some definite time
(6) No other promise (or order or duty) except as the UCC authorizes

(These are very important requirements to memorize, especially #4.)

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35
Q

Does the maker or drawer’s signature need to be a handwritten name?

A

No, it can be printed, and it can be any symbol intended as a signature

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36
Q

What is a general rule of signatories’ liability?

A

No one is liable for an instrument without his name signed

This is very relevant for agent-principal situations

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37
Q

Under what circumstances is an agent personally liable for a negotiable instrument?

A

If his name is signed on it

As long as the principal’s name is on it, however, he could then recover any damages from him

The agent’s name does not need to be on the instrument, for agency can be established orally

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38
Q

What does not count as an order to pay?

A

A mere request or authorization for someone else to pay does not count as an order for a negotiable instrument

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39
Q

What makes a promise/order conditional (and thus makes an instrument nonnegotiable)?

A

If the instrument is subject to another agreement or requires another act to be performed

Look especially for terms “subject to”

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40
Q

When can a promise/order be conditional but still count as negotiable?

A

(a) if the condition cannot be found in the writing of the instrument (i.e. if it’s oral)
(b) if the instrument is subject only to implied or constructive conditions

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41
Q

For a negotiable instrument, what does it mean for a payable amount to be a “sum certain”?

A

The payment amount is fixed, and this satisfies that requirement for negotiability

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42
Q

When does a payment date NOT count as a “definite time”?

A

If the payment date is subject to some uncertain event – this would make an instrument nonnegotiable

However, if the date is definite but allows prepayment in case of an uncertainty (e.g. “July 1, 2012, or the death of the holder, whichever is sooner”), then it still counts as a definite time

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43
Q

What are the specific words of negotiability that must be on all negotiable instruments besides checks?

A

They must be payable “to order” or “to bearer”

E.g. if an instrument is merely payable to a particular person, but not “to the order of” that person, then it is nonnegotiable

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44
Q

What would be an invalid way to make an instrument payable to its bearer?

A

If it is payable to a particular person WHO IS the bearer (e.g. “payable to John Smith, bearer”) – this would make it nonnegotiable

If it is payable to a particular person OR the bearer, then it is negotiable

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45
Q

Can an instrument be payable to order AND to bearer?

A

An instrument can say so – but it is automatically payable to order unless the words for the bearer are typed or handwritten (rather than printed), in which case it is payable to bearer

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46
Q

What are the two ways a negotiable instrument can be transferred after being originally issued?

A

Negotiation – the transferee becomes a holder

Assignment – the transferee becomes an assignee

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47
Q

Is it possible for an endorsement to be partial?

A

No, it must be for the entire instrument or else it is considered a partial assignment (i.e. not even a negotiation)

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48
Q

If it is ambiguous as to which role someone signed an instrument as (e.g. drawer, endorser, maker, etc.), how should it be understood?

A

That person is deemed to be an endorser

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49
Q

What does endorsement ordinarily establish?

A

It makes the endorser secondarily liable for the instrument (i.e. bound to pay it if the maker or drawee do not)

50
Q

What are bearer paper and order paper, and how are they negotiated?

A

Bearer paper = paper payable to bearer; negotiated only by physical delivery

Order paper = paper payable to order; negotiated by endorsement + delivery

51
Q

How can bearer paper become order paper and vice versa?

A

Bearer –> order = if the most recent endorsement is a special endorsement

Order –> bearer = if the most recent endorsement is a blank endorsement

52
Q

What are special endorsements and blank endorsements?

A

Special endorsements = specify the person to whom the instrument is now payable

Blank endorsement = no person is specified; only the transferor’s signature is present

53
Q

Do drawees (banks) bear the loss if an endorsement is forged?

A

No, but they do if the drawer’s signature is forged, since they are responsible for recognizing that

54
Q

What are restrictive endorsements?

A

Endorsements which decrease the rights of transferees with respect to the instrument (e.g. “for deposit” or “pay only upon” a certain condition)

Endorsements which restrict later negotiation are invalid

55
Q

What is a qualified endorsement?

A

An endorsement which disclaims the endorser’s secondary liability to pay the instrument, usually with the words “without recourse”

56
Q

What is an anomalous endorsement?

A

An endorsement by a non-holder in order to claim liability on the instrument

Can be called an “accommodation endorsement,” because made by an “accommodation party”

57
Q

What endorsements can a holder strike out?

A

Any which are not necessary to his title

58
Q

What are the requirements for a holder to be a holder in due course (HDC)?

A

He takes the instrument

(1) in exchange for value
(2) in good faith, and
(3) without notice of dishonor, defense, or claim

59
Q

What sort of consideration counts as “value” exchanged for a negotiable instrument?

A

Only actually performed consideration – not mere promises to perform

Exception: negotiable instruments can count as value, even though they are unfulfilled promises

60
Q

How might a bank give value (and this fulfill a prerequisite to become a HDC)?

A

(1) if, when someone deposits a negotiable instrument, the bank credits the depositor and also permits his withdrawal of that deposited instrument
(2) if the bank takes an instrument at a discount from its face value

61
Q

Is it possible to be a HDC only to part of an instrument?

A

Yes – if someone receives notice that an instrument has been dishonored (or is overdue, etc.) after becoming its holder but before completing performance, then he is a HDC to the extent performance was completed before the notice

62
Q

When is an instrument payable on demand considered to be overdue?

A

After a reasonable time – 90 days max for domestic checks

63
Q

What is the shelter provision?

A

Applied to HDCs, a transferee obtains the rights which transferors had – and thus a transferee can have the rights of a HDC so long as a transferor was a HDC before him

64
Q

What are exceptions to the shelter provision?

A

(1) A person cannot acquire HDC rights by negotiating an instrument to a HDC and then negotiating again to re-obtain it
(2) A person who is part of the fraud or illegality related to the instrument (or part of the defense) cannot obtain HDC rights

65
Q

Can a holder be a HDC if he is informed that one of the parties to an instrument has been discharged of his duty?

A

Yes – a holder is disqualified from being a HDC only if he is informed that ALL parties were discharged

66
Q

If someone is not a HDC or a transferee of some chain with a HDC, what does that mean?

A

He is subject to all claims against the instrument and any defenses to the instrument

67
Q

Against whom do personal defenses and real defenses apply?

A

Personal defenses = good only against non-HDCs

Real defenses = good against non-HDCs and HDCs

68
Q

What characterizes a personal defense?

A

The defense usually deals more with an excuse a promisor has not to perform his contractual duty (regarding the negotiable instrument) than with the validity of the instrument itself

69
Q

For negotiable instruments, what is the difference between fraud in the inducement and fraud in the factum?

A

Inducement = fraud to get someone to sign an instrument, even though the instrument is exactly as it claims to be (e.g. signing an instrument in exchange for a shoddy car that is passed off as good); this is a personal defense

Factum = fraud concerning the instrument itself; this is a real defense

70
Q

What are other phrases for “fraud in the factum”?

A

Fraud in the essence

Fraud in the execution

71
Q

If an instrument is fraudulently completed by someone else (e.g. stealing an unfinished check and writing yourself in as recipient), how would it affect the parties involved?

A

As a personal defense, this would remove any duty from the parties involved EXCEPT unto HDCs

E.g. the original signer of a stolen unfinished check would owe the HDC the amount of the check

72
Q

What defense does a material alteration to an already-completed instrument provide?

A

If an already-completed instrument is materially altered, then the original party has a PERSONAL defense as to the original conditions (“original tenor”), but a REAL defense as to the alteration

E.g. an HDC could enforce the instrument to be paid for the original amount, but not for the altered amount

73
Q

What defense does a material alteration to an incomplete instrument (i.e. a fraudulent completion of the instrument) provide?

A

The instrument had no “original tenor,” and there is no real defense – a HDC can enforce the instrument as is

Most material alterations provide a real defense, but unauthorized completion is the exception to the rule

74
Q

If a material alteration ordinarily provides a real defense (e.g. for altering an already-completed instrument), when could the original party still not use the alteration as a defense?

A

If he was negligent in such a way that substantially contributed to the fraud

75
Q

Does insolvency or bankruptcy count as a real defense?

A

Yes

76
Q

When does incapacity (e.g. being an infant) count as a real defense?

A

Most types of incapacity are real defenses only if they would make a contract void (not voidable), but infancy can be a real defense even though it makes one voidable

77
Q

Does illegality count as a real defense?

A

Yes, it renders an instrument void

78
Q

How do forged signatures act as defenses?

A

A forged signature creates no liability for anyone to anyone, but simply acts as the signature of the forger himself

Exception: someone whose signature was forged can be liable if his negligence facilitated the forgery

79
Q

How do endorsements by impostors relate to forgery?

A

They do not count as forgery, so the liability still falls on the drawer

80
Q

When does fraud in the factum not count as a real defense?

A

If the defrauded party (who signed the instrument) had no reasonable chance to learn of the instrument’s forgery

81
Q

How does duress count as a defense?

A

Duress which renders a contract void is a real defense, but duress which renders a contract voidable is only a personal defense

82
Q

What is presentment?

A

Demanding acceptance or payment for an instrument

Refusing to pay upon presentment is dishonor

83
Q

What is the holder’s duty if his instrument is dishonored?

A

Notifying the drawer or the endorser that it was dishonored

This is not always required, however

84
Q

How does acceptance of an instrument affect a drawee’s (e.g. a bank’s) relation to it?

A

The drawee is not primarily liable for the instrument until it accepts it

85
Q

What kind of instruments are ordinarily presented for acceptance rather than for payment?

A

Time drafts are ordinarily presented for acceptance

Demand drafts (i.e. checks) are ordinarily presented for payment

86
Q

Besides fixing a drawee’s primary liability, what does acceptance do?

A

It is sometimes required to fix secondary liability for drawers and endorsers

  • when the draft itself requires it
  • when the place of payment is elsewhere than the drawee’s residence or business
  • when the payment date requires a presentment for acceptance (e.g. “payable 15 days after sight”)
87
Q

When must a check be paid or dishonored after it is presented?

A

By midnight of the next business day

88
Q

When is a check considered overdue?

A

Either the day after payment has been demanded, or 90 days after the check’s date, whichever is earlier

89
Q

When is an endorser of a check free from liability?

A

If the check is not presented within 30 days of the endorsement

90
Q

What are different ways for an instrument to have a payable date?

A

It can mention a specific date, a fixed time period after a specific date, or a fixed time period after sight/acceptance

91
Q

What is an accelerated instrument?

A

It must be presented for payment within a “reasonable time” after its acceleration

Works out to 30 days after issuance or after the instrument’s date, whichever is later – or 30 days after endorsement

92
Q

What are different means of presenting an instrument?

A
  • by mail
  • through clearing house
  • at place specified
  • if no place specified, at place of business/residence
93
Q

If a presented instrument is dishonored, what is the holder’s usual recourse?

A

To seek restitution from the secondarily liable parties (which usually also requires notifying them of dishonor)

94
Q

A notice of dishonor is ordinarily needed to hold which parties responsible?

A

(1) maker of a bank note
(2) acceptor of a bank draft
(3) any drawer
(4) any endorser

95
Q

Does a failure to give notice of dishonor discharge the relevant parties absolutely?

A

It discharges endorsers absolutely, but not the rest

The rest are discharged only insofar as the lack of notice – especially of a party’s insolvency – causes that party to suffer further loss

96
Q

How soon must a notice of dishonor be given?

A

Banks must give notice by midnight of the next banking day; others within 30 days

The notice is effective when sent, not when received

97
Q

What is a protest?

A

A formal certificate of an instrument’s dishonor

98
Q

Is a protest necessary for all dishonored instruments?

A

No, only for foreign drafts

99
Q

Who can make a protest?

A

Only someone legally authorized to certify an instrument’s dishonor (e.g. a notary)

100
Q

Who are the primarily liable parties for notes and drafts?

A

The maker of a note, and the acceptor of a draft

This should be intuitive: the one who makes a promise for the note – the maker – is primarily responsible, while the one who accepts (or certifies) a draft, like a check – the acceptor, or drawee – is primarily responsible

101
Q

When do makers (for notes) and acceptors (for drafts) become primarily liable?

A

Makers become liable when the note is originally executed (when the promise is made)

Acceptors become liable when they actually accept/certify the draft – and this requires their signature

102
Q

Is the acceptor of a draft liable for any alterations made to the draft after acceptance?

A

No, since he becomes liable only to pay the draft as it was accepted

103
Q

What can occur if a drawee wishes to change the terms of a draft?

A

The holder can either treat the draft as dishonored, or agree to the changes

However, agreement to the changes discharges any other drawer and endorser who did not agree

104
Q

When are secondarily liable parties to an instrument responsible to pay for it?

A

When the primarily liable party fails to pay for it, and when the various prerequisite conditions have been fulfilled: presentment of the instrument, notice of dishonor, and (sometimes) protest

105
Q

How does a drawer or endorser disclaim any liability on an instrument?

A

By signing/endorsing it “without recourse”

106
Q

When an endorser endorses an instrument, what is his liability?

A

His liability is to pay the instrument, according to its terms when he endorsed it, if the instrument is dishonored

107
Q

What does it mean if an endorsement is signed with the words “payment guaranteed”?

A

When the endorser’s secondary liability kicks in, the endorser becomes primarily liable in the event of nonpayment – and thus conditions precedent (like presentment and notice of dishonor) are not relevant to the endorser’s liability

108
Q

What is an accommodation party?

A

Basically a surety – he signs an instrument simply to become liable (in whatever capacity in which he signs)

109
Q

Can an accommodation party sign an instrument as a maker or acceptor?

A

Yes, and the accommodation party thereby becomes primarily liable for the instrument

110
Q

How does the liability work regarding the accommodation party and the accommodated party?

A

The accommodation party will be liable for the instrument even if payment is not first demanded from the accommodated party – yet, because he is effectively a surety, he can then be reimbursed for this by the accommodated party

111
Q

What are the two main kinds of warranties for instruments?

A

Transferor’s warranties and presenter’s warranties

112
Q

What does a transferor warrant to a transferee (and later holders) of an instrument?

A

That the signature is genuine, that it’s not been materially changed, that no other party has a defense against him, that the maker is not insolvent, etc.

113
Q

Can accommodation endorsers be held liable for a transferor’s warrant?

A

No, for implied warranties exist only when there’s been a sale, i.e. an exchange of the instrument for consideration – but an accommodation party receives no consideration from the transferee

114
Q

What does a presenter (who is not a HDC) warrant to a presentee (i.e. acceptor or payor)?

A

That the presenter has a good title, that the instrument hasn’t been materially altered, and that the signature is good

A HDC merely warrants that he has a good title

115
Q

Can these implied warranties be disclaimed?

A

Yes, so long as they are disclaimed by an agreement between the parties involved

116
Q

If a HDC gets payment (or acceptance) for an instrument when the maker’s/drawer’s signature was actually forged, what are his obligations?

A

None – the payment (or acceptance) is final

The rationale is that though the maker or drawee did not have to accept the fraudulent instrument, if he did, it was likely due to negligence

117
Q

If the promisor for an instrument tenders payment to the holder when the instrument is due (or after), and the holder wrongly refuses the payment, is the promisor then discharged?

A

No, he is still liable to pay – although he is then discharged from later interest, legal fees, etc.

118
Q

If the holder refuses a tendered payment from a promisor, does it affect any other parties?

A

Yes, it discharges parties who have a right of recourse against the party who tendered payment

119
Q

What is the most common way for a holder to cancel an instrument?

A

Writing “paid” on its face

120
Q

If an instrument is reacquired by a prior party, how does it affect others’ liability?

A

All intervening parties are discharged from liability to the reacquirer, as well as to any subsequent parties (except for an applicable HDC)

REG (43 decks)

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