Negotial Instruments Flashcards
Q: Is negligence to fail to restrict access to a checkbook (it was in drawer in depositors home) a defense a bank could assert against the negligent party? (4x) (also asked in a different way, access to checkbook and allowed person to become familiar with his signature)
The banks argument of negligence is relevant to its defense, but it would likely lose. If the drawers failure to exercise ordinary care substantially contributes to the making of a forgery, the drawer is precluded from asserting that forgery in an improper payment action against the bank that paid the forged instrument in good faith. Bank acked in good faith and followed its standards, so defense is available. (Person in hypo did not fail to exercise ordinary care, keeping a checkbook I n a drawer seems like a reasonable level of security for a private person in her own home)
Q: As a general rule does the bank or the depositor suffer the loss for payment of an instrument bearing a forged signature? (5X)
Generally the bank suffers loss for payment of an instrument bearing a foreged signature. Only a person who signs an instrument is liable, so a check not signed by depositor is “not properly payable” from depositor’s account, and the bnaks improper payment must generally be recredited to the depositors account. Similarly, if the depositary bank pays on a check over the payee’s forged endorsement, the proper payee has a cause of action for conversion against the depositary bank or the payor bank to recover the fraudulently converted funds.
Q: Does bank have any defense to justify not reimbursing depositor for forged checks included in the monthly bank statements? (5x) Also seen as, discuss bank statement rule.
Aside from the ordinary care argument, bank might assert a defense based on depositors failure to review monthly bank statements. This defense would allow bank to refuse to a portion. Account holders have a duty to review their statements timely, within about 30 days of mailing of statement. If holder fails to do this and doesn’t notify bank of forged item on statement, account holder is precluded from asserting later forgeries that the bank later pays in good faith after 30 day review period. (applies to same wrongdoer)
Bank statement rule: drawers of checks review bank account statements within one month (reasonably promptly) to discover and report forged checks paid by bank. Normally risk of paying forged checks falls on bank, who must refund to drawer the money paid out on not properly payable forged checks. If drawer fails to comply with statement review, the drawer can be precluded from asserting a forgery challenge to the banks payment of the checks.
Q: Does bank have any defenses to justify not reimbursing depositor for tax refund check (check was sitting on depositors table) that bears foreged endorsement of depositor?
The only defense to the banks improper payment on forged endorsement on tax check is that depositor failed to exercise ordinary care in leaving her refund check out in the open on a table. Bank might be more successful with this negligence argument, as leaving checks lying around may constitute a failure of ordinary care, even for a private person in their own home.
Q: What effect if depositor could prove bank failed to follow its own internal policy of reviewing and comparing signature cards for checks in excess of $500? (4x) (also asked with different policy)
If bank failed to follow its internal standards, it would likely be liable for failure to exercise ordinary care. If bank establishes depositors negligence contributed to forgery, then banks own negligence would reduce amount bank could refuse to recredit depositors account.
Q: If depositor gave X a blank check from his checkbook, telling him to fill in and sign his name to purchase items at
grocery for him, would X’s signing of name constitute forger or unauthorized signature? (3x) (also asked about payment to X’s self with permission)
The signing of depositors name would not be a forgery or unauthorized signature. A signature by a representative (agent/ mandatary) in either the name of the agent/ mandatary or name of the represented party is binding on the represented party. As long as he did not exceed extent of authority, it was not a forgery.
Q: If account requires two signatures on check and only one signed, who bears risk of loss between two banks if check is honored when presented?
Payor bank usually bears risk of loss for payment of an instrument bearing a foreged or inadequate signature. A check not signed as required is “not properly payable” from the account, and the banks improper payment must be recredited to depositors account. The payor bank cant recover the amount of check from presenter because the liability would be discharged on payment of the check by payor bank, and there was no breach of presentment warranty to payor bank so long as they did not know the check required two signatures.
Assume Stop payment due to being stolen, and that theif was presenting check. Can one stopping payment defend liability to bank if bank honors it?
Depositor does nto appear to be personally liable. The check is drawn on corporation account, and depositor has signed as a representative of corporation. Whether as a shareholder, director, or officer of corporation depositor has no personal liability for the check unless the veil is pierced, and there seems to be no basis for this.
If bank dishonored pursuant to stop payment order, but other bank advanced funds to theif, the drawer of the check could successfully defend its liability on the check. Only a holder can enforce an instrument including against the drawer of a dishonored check. The check was order payer, payable to XXX. The thief, and bank, could become holders of check only if XXX endorsed, and does not seem they did. Neither thief nor ABC bank would become a holder of check, and cannot enforce check against drawer.
Q: Assume stop payment due to intent to use money on vacation that for what it was issued, can he defend liability on bank?
Drawer of check would not be able to defend against liability of ABC on check if payment stopped based on XXX’s fraud. As discussed above, ABC is most likely a holder in due course, so they can enforse it free of any defenses to payment other than the “real” defenses. The defense that they induced B into issueing check through fraudulent assurances regarding intended purpose is NOT a real defense. So drawer of check would not be able to assert the personal defense of fraud in the inducement against the holder in due course.
Q: Explain fraud in the factum and it has as a defense against a holder in due course
A fraud that goes to the very nature of the document. For example, maker of a note might claim he was defrauded in the factum in that he had no idea the paper was a promissory note (as opposed to some other document) and he had no reasonable opportunity to discover the true nature of the document. It is rare, but it is a “real defense” that can be asserted even against a holder in due course.
Q: Explain fraud in the inducement and what effect it has as a defense against a holder in due course
Fraud in the reason why an instrument was issued. Maker of a note might claim he was induced into signing a note when he was told proceeds used for X, which was just a fraudulent scheme. Fraud in the inducement is not a real defense, and cannot be asserted against a holder in due course.
Q: What are the requirements for an instrument to be negotiable? (4x)(also in essay specific form)
(WOSSUPP)
(WOSSUPP)
- Writing
- Order- (or bearer-payable to)
- Signed- by maker or drawer
- Sum Certain- fixed amount
- Unconditional- and no extra requirements
- Payable on demand or definite time
- Payable in currency
What are requirements for a holder of negotiable instrument to qualify for holder in due course status? (4x)(also in essay specific form)
Holder must have taken instrument: FOR VALUE, GOOD FAITH, Without notice that: ODD
- Overdue
- Dishonored or Forged (unauthorized signature)
- Defenses or claims free
Q: What are advantages of being holder in due course?(3x)
A holder in due course can enforse the enstrument free of claims to the instrument and not subject to most defenses to payment. Even a holder in due course is subject to real defenses: Infancy, Illegality, Fraud in Factum, Discharge in bankruptcy.
explain personal and real defenses
A personal defense can be asserted against an ordinary holder trying to enforce a negotiable instrument, but cannot be asserted against a holder in due coruse. A real defense can be asserted even against a holder in due course. Personal defenses are generally basic contract defenses personal to the obligor, such as failure of cause or fraud in inducement. The four REAL defense are infancy, illegality, fraud in fact, and discharge in bankruptcy.
Q: Melchoir owes spike $100, which he says he will pay on August 4, 2007. Draft the one sentence body of a negotiable promissory note to evidence the obligation.
