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NY Sec Trans/Comm Paper > NY UCC Art 3 > Flashcards

NY UCC Art 3 Flashcards

1
Q

NY UCC Art 3 is about?

A

Commercial paper = i.e., negotiable instruments = writings calling for the payment of $

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2
Q

Promissory note def/parties

A

Affirmative promise to pay the payee, the noteholder.

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3
Q

Define “draft.” Parties to draft?

A

Typically a draft is a check - it contains an order or command. Drawer gives the order. Drawee ordered to pay. Payee is beneficiary. Indorser signs on back.

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4
Q

Reqs of a negotiable instrument: WOSSUPP

A
  1. Writing;
  2. Payable to Order or to bearer;
  3. Signed by the maker or drawer;
  4. Reciting a Sum certain;
  5. Containing an Unconditional promise or order
  6. Payable on demand or at a definite time; and
  7. Payable in currency
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5
Q

Who signs note? Who signs draft?

A

• Instrument must be signed by maker if it is a note; by the drawer if it is a draft.

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6
Q

If instrument states that it is governed by or subject to another agreement, is it negotiable instrument?

A

No, that’s non-negotiable, so it’s conditional, so it’s not commercial paper.

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7
Q

If instrument states that it is to be paid out of particular source or funds, is it negotiable instrument?

A

No, that’s non-negotiable, so it’s not commercial paper.

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8
Q

• To be negotiable, instrument must be payable on demand or at a definite time. – what language for each permissible? Impermissible?

A

o Instrument specifically says “on demand,” or “at sight,” or “on presentation.”
o Definite Time—by the instrument’s terms, it is payable on or before a stated date OR at a fixed period after a stated date.
• Accelerated clauses are permissible.
• But “payable when my first grandchild is born” is non-negotiable because the future event is not linked to a date certain.

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9
Q

• Writing must be payable to order or bearer. Define each. Trick question is _____

A

o Payable to order: instrument must use the word “order” or “assigns” in connection to payee’s name.
o Payable to bearer: instrument must be payable to bearer, meaning that it is payable to anyone who has it. Pay to “bearer,” “order of bearer,” “cash” or “order of cash.”
o Trick Question: Payable to Andy Garcia—without the magic words—this is NOT negotiable.

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10
Q

Define each
Maker
Indorser
“Without Recourse”

A
  • Maker: Promisor in the promissory note. By signing his name to the instrument, maker enters into a contract to pay the instrument. If he fails to pay, he can be sued.
  • Indorser: Signs his name on the back of the instrument. If the check bounces and he is notified, he will pay. If he pays to do so, he can be sued.
  • “Without Recourse” accompanies signature: Used by indorsers and drawers. It is a disclaimer of liability. Signor passes the title, but assumes no signature liability.
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11
Q

define
Drawer
Drawee

A
  • Drawer: party who signs the check. By signing, you promise that if it bounces, and you are notified, you will pay. If you fail to do so, you will be sued.
  • Drawee: Pays the draft. Typically the bank. Drawee does NOT sign, and therefore, is not liable.
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12
Q

Five Warranties Made by ∆ w/r/t a negotiable instrument

A
  • (1) π has good title to the instrument.
  • (2) All signatures are genuine and authorized. Thus, forgery is a breach of warranty
  • (3) The instrument has NOT been materially altered. Instrument is defective if tampered with.
  • (4) There is no defense or claim good against the ∆, meaning that the instrument is enforceable.
  • (5) She has no knowledge of any bankruptcy or insolvency against the maker or drawer.
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13
Q

Who is ∆ with negotiable instruments?

A
  • Any transferor who sells the negotiable instrument. If transferor is not a donor, he can be sued.
  • When ∆ indorses, warranties run with the instrument.
  • If ∆ did NOT indorse instrument, only ∆’s immediate transferee may sue. Warranties will not run with the instrument.
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14
Q

• Due negotiation = ?

A

• Due negotiation = transfer of instrument

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15
Q

For payee to transfer instrument….

A

• Any further negotiation requires that the payee indorse the instrument and deliver it to transferee. (Due negotiation = transfer of instrument)

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16
Q

B. Payable to Bearer requires indorsement for negotiation (transfer) of instrument?

A

No

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17
Q

C. Types of Indorsements?

A

• Must be either special or blank; and restrictive or unrestrictive.

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18
Q

Def of 1. Special Indorsement

A

One that names a particular person as indorsee. Indorsee must sign in order for the instrument to be further negotiated.

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19
Q

Def of 2. Blank Indorsement

A

One that does NOT name a specific indorsee. It may be negotiated by delivery alone.

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20
Q

Def of 3. Restrictive Indorsement

A
  • One that contains a restriction.

* If transfer is not proper, indorsee can recover from drawee in conversion.

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21
Q

• A holder in due course (HDC) is a holder who takes the instrument…. (reqs)?

A

. For value; and
• Holder must give value. Value ≠ consideration.
• Mere promise is not value.
• Old value is good value.
o 2. In good faith; and
• Subjective test→Means honesty in fact. Rule of “the pure heart and the empty head.”
o 3. Without notice that it is overdue or has been dishonored or is subject to any defense or claim.

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22
Q

Test of “without notice” for HDC (holder in due course)?

A

• Objective Test: Did holder know or have reason to know of the problem?

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23
Q

Instances where notice makes holder not an HDC?

A
  1. Notice That the Instrument Is Overdue
  2. Notice of Any Defense or Claim Against the Negotiable Instrument’s Enforcement:
    (1) When the instrument’s appearance gives notice
    (2) Notice of competing claim to the negotiable instrument
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24
Q

B. Shelter Rule w/r/t neg instru?

A

• Transferee acquires whatever rights her transferor had. Transferee takes shelter in the status of transferor.

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25
Q

C. Benefits of being an HDC?

A

• A holder in due course (and subsequent transferees who take “shelter” in that status) takes the instrument free from claims (of superior ownership), free from personal defenses (K defenses), and subject only to real defenses (MAD FIFI).

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26
Q

Real defenses for negotiatble instrument (applicable to HDC and transferee): MAD FIFI

A
  • Material (not a defense if maker was negligent and left blanks on check)
  • Alteration
  • Duress
  • Fraud in the factum (lie in the instrument)
  • Incapacity
  • Illegality
  • Infancy
  • Insolvency
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27
Q

“Real” Fraud v. Personal Fraud

A
  • Real fraud = fraud in the factum. Lie in the instrument—did not know he was signing a negotiable instrument. Defense can be asserted against HDC.
  • Personal fraud = fraud in the inducement. Knew she was signing a negotiable instrument. Enforceable in the hands of an HDC.
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28
Q

Think of the draft as a___

A

Commander. It contains an order or command

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29
Q

What does WOSSUPP test?

A

Whether you’re dealing with a negotiable instrument.

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30
Q

Where must you sign a negotiable instrument? How must you sign it?

A

It’s not very formal. It could be your initials, even, or some defining mark, or a nickname in the margins.

31
Q

If a piece of paper says “I promise to pay if the Mets win the World Series”, is that negotiable instrument or a contract?

A

That’s a contract because it’s conditional. If something is governed by or subject to some outcome or some other writing in a material fashion, then it’s nonnegotiable.

32
Q

A negotiable instrument should be contained _____________ and should not require the examination of another document or event to determine the rights of payment.

A

Within the 4 corners

33
Q

A piece of paper says “this note is secured by a security interest in collateral described in the security agreement between the payee and the maker. The rights and duties with respect here to are stated in the security agreement.” Is that a contract or negotiable instrument?

A

Referring to another writing does not of itself make the promise or order conditional

34
Q

If I say “I promise to pay from the funds I realize on my sale of wheat”, is that negotiable?

A

No, that’s nonnegotiable because it states a particular payment source.

35
Q

If your note says “$50,000 principal plus interest from the date hereof”, is that negotiable? Or is it too uncertain?

A

Adding interest rates is negotiable. That does not render it uncertain.

36
Q

If I hand you a piece of paper that says “I promise to pay by remitting $5000 or a Rolex watch” is a negotiable instrument?

A

It must be paid in currency. Goods are not appropriate. So a Rolex does not create a negotiable instrument.

37
Q

If an instrument is silent as to time of payment, is a negotiable? Instruments must be payable on demand or specifically say at sight or on presentation.

A

Silence as the time means it’s still negotiable.

38
Q

If I deliver an instrument that says “payable on February 2, 2015, but becomes immediately doable if the Bears win the Super Bowl”, is that a negotiable instrument?

A

Yes ACCELERATION CLAUSES are PERMISSIBLE, and do not destroy negotiability.

39
Q

On what basis is someone sued over negotiable instrument? On this basis, who avoids suit for negotiable instruments?

A

You are sued when you sign it. Your signature is the promise to pay. Endorsers can be sued, makers can be sued, drawers can be sued. The drawee, the bank, cannot be sued.

40
Q

What happens when you use the words “without recourse” in connection with your signature on a negotiable instrument?

A

Without recourse means the endorser or drawer disclaims signature liability. Thus, he passes title but has no signature liability.

41
Q

When a defendant endorses an instrument, ___________ run with the instrument.

A

Warranties. Therefore, the endorser can be sued by any subsequent plaintiff for warranty or transfer liability.

42
Q

Who may sue for warrantee or transfer liability if the defendant did not endorse the instrument?

A

Only the defendant’s immediate transferee may sue, if the defendant did not endorse the instrument.

43
Q

Paula loses her paycheck, payable to her order. Simon finds it, signs Paula’s name on the back and cashes it at Randy’s music store. Is Randy a holder?

A

No, Randy is not a holder because the endorsement is not AUTHORIZED and VALID.

44
Q

If Paul’s paycheck were “payable to bearer” and Simon cashes it Randy’s music shop, is Randy a holder?

A

Yes, because an instrument payable to bearer does not require endorsement.

45
Q

If an instrument has a blank endorsement that doesn’t name and endorsee, how is it negotiated? Does it require a signature?

A

No signature required. It may be negotiated by delivery alone.

46
Q

If I endorse a check “for deposit only, Max” and someone steals the check from me and cashes it in a bank, is the bank holder?

A

The restrictive endorsement has a condition that has not been met; so, the bank is not a holder.

47
Q

How do you call by is a holder in due course? 3 requirements.

A

A holder in due course is a holder who takes the instrument:

  1. For value, and
  2. In good faith, and
  3. Without notice that is overdue, has been dishonored, or is subject to any defense or claim.
48
Q

For a holder in due course to give value, he must give consideration?

A

No. Consideration is from contract law. Value is different. A mere promise can be consideration, but not value.
Further, old value is good value. You can pay someone today for something they did last year, and they will remain a holder in due course.

49
Q

What is it mean for a holder in due course to take “in good faith”?

A

Pure heart and empty head. It’s a subjective test – it means honesty in fact.

50
Q

What does it mean for a holder in due course to take without notice? Is the standard objective or subjective?

A

The standard is objective. The requires of the holder acquire the instrument without notice that is overdue, has been dishonored or is subject to any defense or claim. It asks of the holder to or had reason to know of any of those things.

51
Q

You have to be a_______ before you can be a holder in due course

A

Holder

52
Q

If an instrument is lost or stolen from the true owner, under what conditions can transferee be a holder in due course?

A

If the instrument has been duly negotiated in the transfer he did not have notice or reason to know of the theft or loss.

53
Q

The take shelter rule can protect ______ as a holder in due course, even without value.

A

A donee receiving the instrument from a holder in due course

54
Q

The benefits of being a holder in due course are?

A

You take the instrument free from claims (superior to yours), free from personal defenses, and ONLY SUBJECT to real defenses (mad fifi).

55
Q

What are the personal defenses that a holder in due course takes free from?

A

All ordinary contract personal defenses, such as: no consideration, unconscionability, waiver, estoppel, fraud in the inducement

56
Q

The holder in due course takes subject to real defenses, which are the following: MAD FIFIIII

A
  1. Material
  2. Alteration
  3. The rest
  4. Fraud
  5. In
  6. Factum
  7. Incapacity
  8. Illegality
  9. Infancy
  10. Insolvency
57
Q

When is the maker estopped from asserting material alteration as a defense against a holder?

A

When the maker was negligent: leaving blanks are leaving wide-open spaces on the check.

58
Q

What is the difference between real fraud and personal fraud (a holder in due course can overcome personal fraud)?

A 
Real fraud (fraud in factum) is when someone doesn't know their signing a negotiable instrument (like tricking someone into signing it while telling them their son in a different document).
Personal fraud involves someone knowing their signing a negotiable instrument, but not knowing what they're getting in return, for example. Imagine being sold a fake antique, for example. A holder in due course would still have a legitimate claim against me if it bought the negotiable instrument with which I paid for the fake antique.
59
Q

Based on sufficiency of funds, what can a bank do in response to a customer check?

A

If there are sufficient funds, the bank must honor the check.
If there are insufficient funds, the bank may CHOOSE to honor the check, in which case the customer is liable to the bank for the overdraft

60
Q

If the bank wrongfully dishonors a check, what is the customers remedy?

A

The customer may recover damages for whatever harm is proximately caused by the dishonor

61
Q

The death of a customer does not revoke the bank’s authority to pay check until?

A
  1. The bank knows of the death, and

2. Has reasonable time to act on that knowledge

62
Q

The bank must honor a check as drawn. Thus it cannot charge the customer’s account in the following for circumstances. (IMPORTANT)

A
  1. If the signature was forged
  2. If the check is altered to require more money than the original order
  3. If the bank pays the wrong person (forgery of the payee or indorsee’s signature)
  4. If the check is postdated the bank must not pay it before its due date
63
Q

How long is an oral stop payment order binding on a bank?

How long is a written stop payment order binding on a bank

A

An oral stop payment order is good for 14 days

a written stop payment order is binding for 6 months

64
Q

If the bank honors a forged or materially altered check, it must recredit the drawer’s account, as long as the drawer ______

A

Was not negligent

65
Q

What is the bank’s remedy if it pays a forged check? Whom may the bank collect from?

A
  1. The bank may always recover from the thief

2. The bank may recover from the drawer, if the drawer was negligent!

66
Q

When is the drawer negligent?

A
  1. Leaving BLANKS or spaces on the instrument
  2. Failing to follow INTERNAL PROCEDURES to avoid forgery (e.g., keeping a signature stamp in the same unlocked drawer as the checks)
  3. The BANK STATEMENT rule: negligence includes not examining one’s bank statements in time to report a forgery or alteration in a reasonable period, after which he is estopped from demanding recredit from the bank.
  4. The FICTITIOUS PAYEE rule: if an imposter induces the drawer to write a check
  5. The EMPLOYEE ENDORSEMENT rule: an employer is responsible for forgery by an employee who was entrusted with the responsibility for handling checks
67
Q

What is the difference in number of parties for a note and a draft?

A

A note has 2. A draft has 3.

68
Q

What are the elements of becoming a holder? (4 elements)

A
  1. Possession
  2. The instrument is a BEARER instrument
  3. The person in possession is the NAMED PAYEE
  4. All NECESSARY SIGNATURES (payee and any special indorsee) are genuine
69
Q

If you are holder, what can you do with the instrument by way of transferability?

A

You can duly negotiated

70
Q

If a contract out of which the commercial paper arose was not properly or fully performed, against whom is a defense against whom is not a defense?

A

It is a defense against a non-HDC. It is NOT a defense against a holder in due course!

71
Q

When tracking liability in a negotiable instrument question, what is the 1st step?

A

Figure out who each of the parties is (e.g., maker, endorser, etc.), and then discuss each party’s liability

72
Q

What warrants pass if a transferor transfers the negotiable instrument gratuitously?

A

A gratuitous transfer warrants nothing, but this does not shield her from contract liability if she endorses it.

73
Q

When asked about the liability of endorser, there are 2 types of liability.

A
  1. Contract liability

2. Warranty liability

NY Sec Trans/Comm Paper (2 decks)

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