Negotiable Instruments (Art. 3 UCC)

Question 1

What are the key things to remember regarding making a negotiable instrument? (6)

Answer 1

1. The document must be in writing and signed
2. the promise or order to pay must be unconditional
3. the principal amount must be fixed, but the interest rate can be variable
4. Payable to order or bearer (remember “words of negtiability” for order paper)
5. the writing must be payable on demand or at a definite time (payment time must be readily ascertainable)
6. No additional undertakings (i.e., the obligor’s sole obligation is to pay money)

Question 2

Approach to a negotiable instrument questions? 6 things

Answer 2

1. Determine if the instrument is a negotiable instrument
2. determine whether the instrument was properly negotiated
3. determine whether the instrument’s holder is a holder in due course (HDC)
4. determine whther the individual who is obligated to pay has any defenses against payment
5. Determine whether those defenses are real or personal defenses
6. can the one who paid the instrument hold anyone else responsible

Question 3

Formal requirement for a negotiable instrument?

Answer 3

1. In writing and signed by the maker or drawer
2. the promise or order to pay must be unconditional
3. the payment obligation must be a for a fixed amount of money (interest is permitted to accrue though)
4. the writing must be paybale to order or bear
5. the writing must be payable on demand or at a definite time
6. the writing must obligate the payor to do one thing which is to pay (i.e., no additional undertakings or instructions)

must meet these requirements upon issuance

Question 4

How does someone become a holder? How does someone become a holder in due course?

Answer 4

1. A person can become a holder either by issuance or negotiation (i.e., possession through voluntary or involuntary transfer)
2. A holder is a HDC through proper negotiation

Question 5

What does the method of proper negotiation depend on?

Answer 5

Depends on whether the instrument is a order instrument or a bearer instrument

Question 6

What formal instrument requirements for proper negotiation for a bearer instrument?

Answer 6

The transfer of possession

Question 7

What are the formal instrument requirements for proper negotiation for an order instrument?

Answer 7

Requires (1) transfer of possession and (2) a proper indorsement of the instrument before transfer (e.g., Pay to the order of Harry /s/ Paul)

Question 8

What else other formalities are required to be a HDC? (4)

Answer 8

1. Must first acquire status as a holder
2. must pay value for the instrument (value explained below)
3. Must take the instrument in good faith
4. Without notice that there are any problems that might affect the obligor’s obligation to pay the instrument.

Value: the person must give something of value, do something of vlaue, or forgive something of value

Question 9

What is the key difference between personal and real defenses?

Answer 9

Personal defenses are only valid against Holders

Real defenses are valid against Holder and HDCs alike

Question 10

What are the real defenses? (8)

Answer 10

1. Infancy
2. Incapacity
3. Duress (must be extreme otherwise it is personal)
4. Illegality
5. Fraud in factum (didn’t know it was an instrument)
6. Discharge of indolvency proceedings (bankruptcy)
7. Alteration and forgery: any type of alteration or forgery that is apparent enought to cause a reasonabl perso nto question its authenticity
8. Statute of limitations

Question 11

What are personal defenses?

Answer 11

1. Non-issuance (issue to A, B steals it and presents it to you)
2. Contract defenses (breach of K, failure of consideration, breach of warranty)
3. Claims of recoupment: Seller sells boat for 50K knowing there is a 1K repair needed (recoup the 1K)

Question 12

When is the Holder’s status as HDC established?

Answer 12

Holder in due course status is not changed by subsequent notice – Billy’s status is defined when he accepts the check in exchange for the value he provides, taking in good faith, without notice of irregularities or defects.

Question 13

What is the shelter doctrine?

Answer 13

A holder who is not HDC (e.g., they are endoresed the check from a HDC as a gift [no value]) obtains the status of the person that transfered so long as they are not personally engaged in wrongdoing affecting the instrument.

The holder can enforce a dishonored instrument under a contract theory against the maker, the payee, and the first holder that transferred to them (unless holder writes “without recourse” in the endorsement).

Question 14

What is an accommodation party?

Answer 14

Basically a guarantor. They sign a note for the purpose of incurring liability without being a direct beneficiary of the value given.

Question 15

What does the accommodation party’s liability on the instrument depends on?

Answer 15

The capacity in which they sign. E.g.:

“guarantees collections:” lender must seek payment from the maker/drawer first

“guarantees payment:” lender can seek payment from either maker/drawer or the accommodation party. (e.g., “guarantor of all amounts due”). Obligated to pay even if the person entitled to enforce knows of the accommodation.

Question 16

What is required beside signing and no direct benefit, for an accommodation to be valid?

Answer 16

Notice to person entitled to payment.

Question 17

What is the impact of impairment of collateral?

Answer 17

If a party’s obligation to pay an instrument is secured by collateral, and the person entitled to enforce the instrument impairs the value of the interest in the collateral (e.g., fails to perfect the interest and a perfected security holder and forecloses the collateral), then the indorsers and accommodation party’s obligation to pay is discharged to the extent of the impairment.

Question 18

Can the impairment of collateral rule be waived?

Answer 18

Yes, either by consent to the acts that impaired, or by express agreement.