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Secured Transaction > Payment (Commercial) > Flashcards

Payment (Commercial) Flashcards

1
Q

Approach to Payment (aka Consumer Question)

6

A
  • Determine if instrument is negotiable (technical formal req.)
  • Determine if instrument was properly negotiated (special type of transfer process)
  • Determine if transferee is holder in due course (like a BFP, has super rights)
  • Determine P’s cause of action such as contract, warranty, tort or not properly payable
  • Determine D’s defenses
  • If D is held liable, may D pass liability on to another party?
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2
Q

What is a Note

A

One type of major type of instrument (the other is a draft)
•Ex: student loan, car loan, CD

  • A Promise to pay
  • Parties
  • -Maker: promisor (obligor), person who promises to pay
  • -Payee: promisee. Peron entitled to payment (the money)
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3
Q

What is a Draft

A

Order to pay money
ex: Check

Parties
–Drawer: person ordering payment (directing/commanding payment)

–Drawee: person to make payment (person handing over money) aka payor bank for check

–Payee: person to receive payment. The person to get payment (the money)

  • Financial institution is the drawee (ex: Banks, savings/loans, credit union)
  • Payable on demand (Whenever payee wants money)
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4
Q

Check Types

A

Ordinary checks: check of individual or business

Certified Check: ordinary check which bank accepted (agreed to pay)

Cashier’s Check: drawer/drawee are same bank (drawn on themselves)
-Person buying the check is the remitter

Teller’s Check: check drawn by one bank on another bank
-Person buying the check is the remitter

Traveler’s Check: req counter signature by person whose specimen already on instrument

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5
Q

What does it mean if something is ‘negotiable’

A

Refers to the form (technical formal requirements) of the instrument

Determined at time it is issued—at creation you know if it’s negotiable or not

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6
Q

list 8 requirements for negotiability

A

writing

signed by maker/drawer

unconditional promise/order to pay

fixed amount

of money

no other undertaking or instruction

payable or demand or definite time

contains the words of negotiability

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7
Q

writing-as element 1 of 8 of negotiability

A

no req what it must be written with/on

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8
Q

signed by maker/drawer-as element 2 of 8 of negotiability

A

any symbol executed or adopted by party with present intent to authenticate

initials, marks, thumbprints, stamp, computer generated, really anything

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9
Q

unconditional promise/order to pay–as element 3 of 8 of negotiability

A

you presume that it’s unconditional and then look to see if there is anything that would make it unconditional

like: express condition, the promise is subject to something else, or governed by something else, incorporates something by reference

but some things don’t make it conditional, like:
stating consideration
incorporation by reference items that don’t hurt the holder (right to pay early, or acceleration clause)
limit payment to particular fund/source
countersignature (travelers checks)
consumer protection language

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10
Q

Fixed Amount–as element 4 of 8 of negotiability

A

must be able to look at the instrument and determine the principal amount due

but it’s ok if interest is tricky

  • could just state it
  • could give fixed/variable rate
  • could reference outside source

if you provide for interest but don’t say the rate or you can’t figure it out, then you use the judgment rate

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11
Q

Money–as element 5 of 8 of negotiability

A

authorized medium of exchange

can use foreign money and unless it is limited to foreign money you can also use US money

can’t be payable in goods/services

words v. figures, the words win

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12
Q

no other undertaking/instruction–as element 6 of 8 of negotiability

A

can only be the promise/order to pay

but can have promises concerning collateral
can have confession of judgment clauses (not in texas, but will be negotiable still)
waiver of law to benefit obligor

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13
Q

payable on demand or definite time–as element 7 of 8 of negotiability

A

on demand: demand/sight. any old time
–if its silent, presume demand

definite time
-express statement. must be definite and ascertainable

can change the time through prepayment, acceleration, and clauses extending due date and that’s ok

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14
Q

contains words of negotiability–as element 8 of 8 of negotiability

A

bearer language:

  • payable to bearer
  • pay to the order of bearer
  • to cash, to the order of cash
  • -some indication that possessor gets payment
  • no payee in a check

order language
-to the order of

if it has both, bearer wins

if this is the only thing missing from a check it’s ok and can still be a check

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15
Q

what does ‘negotiation’ mean

A

the transfer of the negotiable instrument (which has all 8 elements) so the transferee is a holder

whenever the payee transfers the instrument to a third party rather than just getting money

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16
Q

2 req to have Holder Status

A

possession of the negotiable instrument and
good title
–bearer: possession along good enough (just needed delivery)

–order: possession plus necessary endorsement

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17
Q

so what is an endorsement?

A

signature on a negotiable instrument by someone other than the maker or drawer

usually on the back

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18
Q

what is a blank endorsement?

A

payee’s signature–just signing your name on the back w/o naming who the instrument is now payable to

effect: makes it bearer paper–the holder has the right to it, whoever that is

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19
Q

Special endorsement

A

payee’s signature + designation of new person to whom instrument is now payable

makes order paper

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20
Q

Endorsement for Deposit or Collection

A

restrictive endorsement limiting what may be done with the instrument

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21
Q

When you’re not sure who the payee is (who gets the instrument) what do you look at?

A

the intent of the issuer determines who the initial payee is

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22
Q

what if there are multiple payees?

A

if ‘and’ separates their names
–requires all payees to endorse

if ‘or’ separates their names
–requires any one of them to endorse

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23
Q

what if someone forgets to endorse?

A

the transferee has the right to go back and get them to

if the instrument is transferred for value, the transferee has a specifically enforceable right to get the endorsement if its missing

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24
Q

Depository Bank and Endorsements

Misspelling of Payee’s name and Endorsements

A

you can deposit the check in your account even w/o endorsing it and it’s ok

can endorse it either way but the person who is giving value for the instrument may ask you to sign it both ways so the title is clear

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25
Q

can ppl lacking capacity endorse?

A

yep (minor, incompetent, etc)

26
Q

what is a HIDC?

A

so being a mere holder is usually all a person needs b/c a holder has lots of rights, like the right to enforce payment

BUT, when the other party doesn’t wan to pay and raises a defense against payment the holder would lose to most defenses, where a HIDC may not

27
Q

list 6 elements to be a HIDC

A
  1. must be a neg instrument (those 8 elements)
  2. holder (bearer: possession. Order: possession and endorsement)
  3. authenticity isn’t questioned
  4. holder must pay value
  5. 2 part test for good faith
  6. w/o notice at the time of instrument acquisition
28
Q

explain the ‘authenticity isn’t questioned’ element of HIDC

A

no evidence of forgery/alteration or so irregular or incomplete as to call it’s authenticity into question

29
Q

explain the ‘value’ element of HIDC

A

it’s ok if it’s less, but can’t be excessively less b/c then its a question of good faith

not a present

can be HIDC for partial amount

past consideration is value

30
Q

explain the ‘2 part test of good faith’ element of HIDC status

A

honesty in fact (subjective)

observance of reasonable commercial standards of fair dealing (objective)

31
Q

explain the ‘w/o notice at time of instrument acquisition’ element of HIDC status

A

notice could be actual or constructive (but filing is not enough here)

can’t be on notice that it is

  • overdue
  • dishonored
  • uncured default w/respect to payment of another instrument issued in part of same series
  • unauthorized signature
  • alteration
  • any claims of superior right
  • any defenses or claims in recoupment
32
Q

shelter rule

A

even if the holder doesn’t have HIDC status, the person may get it

the transfer of an instrument vests in the transferee the rights the transferor had

but it doesn’t make you a HIDC, just gives you those rights

33
Q

When HIDC loses (meaning the person with the issue still doesn’t have to pay)

A

-infancy (of obligor)
-duress
-illegality (drug sale)
-fraud in execution (didn’t know terms, no way to find them out)
-discharge in solvency (bankruptcy)
-omissions of req. consumer protection lang
-SoL (6 years)
-payment to former holder
-alteration
unauthorized signatures and forgeries

34
Q

When HIDC will win (have to pay even though you have an issue)

A

everything that doesn’t make them lose

  • failure of consideration
  • non-delivery
  • non performance
  • breach of warranty
  • fraud in inducement

free from claims of others to the instrument
–no claimant can take it from the HIDC (perfect defendant) –classic example of someone finding a check and selling it to someone. then the original owner wants it back. too bad.

35
Q

how someone is liable in contract law in commercial paper

A

by signing their name on the instrument

36
Q

signature and agent/principle issues

A

to bind the principal follow regular agent law

agent escapes personal liability if

  • principal is identified in the instrument
  • signature unambiguously on behalf of principal

agent will be liable to a HIDC unless he can prove the holder had notice he was an agent

so HIDC had to know.
no HIDC just have to show the intent of the principal and third party weren’t to bind the agent

if agent doesn’t have any authority to sign then it is a forgery and the agent is bound but not the principal

37
Q

contract liability for the maker of the note

A

ex: if you, the student, sign a student loan
primary liability

must pay when due according to terms

liable to holder or endorser

38
Q

contract liability for the drawer of the draft

A

ex: liability if you write a check

you can’t disclaim liability on a check but you can on other documents by writing w/o recourse on them before signature

drawer only liable if there is presentment to the drawee in 30 days and there has been dishonor (the drawee/bank refuses to pay instrument)

39
Q

contract liability for endorsers of note/draft

A

endorser can disclaim liability by writing ‘w/o recourse’ on it

endorsers are liable to each other in the order of their signatures
–can sue prior endorsers for payment but not later ones

liable only if there has been:

  • presentment w/in 30 days
  • dishonor (bouncing/insufficient funds)
  • notice of dishonor (to endorser w/in 30 days of dishonor)
40
Q

contract liability for the drawee

acceptance, certification, final payment, conversion

A

generally none (can’t sue the bank if you were supposed to get 300 from a check and it bounces)

Acceptance: drawee may agree to pay the draft by signing it (but can’t be sued for failing to accept it)

Certification: discharges drawer and all prior endorsers

Final Payment: once drawee bank pays the check the contract actions can’t be pursued and the drawee can’t recover on the check from ppl unless breach of presentment warranty

occurs when

  • pays in cash
  • doesn’t revoke provisional settlement by midnight deadline

Conversion: drawee who pays on forged endorsement is liable to payee in conversion

41
Q

payment of check after drawer’s death

A

drawee may continue to pay checks until it knows that the drawer is dead and had reasonable opportunity to act on it

but can’t pay more than 10 days after drawer’s death if it knows he’s dead

42
Q

Contract Liability of Accommodation Parties

A

depends on how they sign
–sign like a maker, liable like maker (so the person wanting money can collect from either party)

–sign limiting liability collection only. they have to try to collect from the accommodated party first

reimbursement: if accommodation party pays, he is entitled to reimbursement from the accommodated party

random signature outside the chain of title will be considered accommodation

43
Q

Transfer Warranties

A

not for a gift: person transferring must get consideration before warranty is implied

who are they made to?
-immediate transferee: person you transfer it to and subsequent transferees if the transferor endorsed it

–subsequent collecting banks

(not for drawees or makers)

The Transfer Warranties:

  • -warranty of good title
  • -signatures are authentic/authorized
  • -no alteration
  • -no good defense against transferor
  • -no knowledge of insolvency
  • -if it’s remotely created, person identified as drawer authorized the item
44
Q

Transfer Warranty Disclaimers

A

on a check you can’t disclaim any transfer warranties

but on non checks you may disclaim by saying w/o warranties

45
Q

Presentment Warranties

A

made by the presenter and the previous transfers

made to parties who pay

presentment warranties:

  • -basically that it’s a normal check
  • -warrantor is entitled to enforce draft/obtain payment
  • -no alteration
  • -no knowledge of unauthorized drawer’s signature
46
Q

Warranty v. Endorsers Contract

A

how does P know to bring suit against endorser for breach of warranty or breach of endorser’s contract

If P is the holder

  • -the person with the instrument
  • -if payor hasn’t paid the instrument (check bounces or note not paid by maker) then the holder should sue endorser on contract (trying to get the money in the first place)

If P is the payor
–if the payor has paid and later discovers the payor should not have paid (ex: it was forged or the note was altered) then payor should sue endorser for breach of warranty (transfer or presentment)

47
Q

how can the holder discharge the obligation?

A

by surrendering the instrument to the obligor, destroying it or canceling it

48
Q

effect of the instrument on the underlying obligation

A

payment of the thing means that the underlying obligation is discharged

49
Q

failure to produce original instrument

A

when you can’t enforce it b/c you don’t have it

(lost, destroyed, stolen)

enforcement by person not in possession
–person who was the holder when the loss occurred
–loss not due to transfer or lawsuit seizure
person can’t reasonably get the original

protection for payor req (security or bond)

50
Q

overdrafts

A

bank may charge the customer’s account even if the charge creates an overdraft

51
Q

postdated checks

A

bank may pay postdated check at the current, earlier date unless:

the customer gives the bank notice of the postdating
the notice describes the check with reasonable certainty

52
Q

stop payment orders

A

drawer, bank’s customer, may stop payment on a check. other parties have no authority to do so

must be in writing

  • dated
  • signed
  • describe with certainty

valid for 6 months, can be renewed

53
Q

banks defenses if it pays despite the stop payment

A

stop payment order didn’t comply with the requirements

no loss–the customer would have to pay the check regardless (like it reached hands of HIDC)

it was a cashier’s/tellers checks (the person who made it can’t stop payment)

54
Q

Wrongful Dishonor

A

when the drawee dishonored a properly payable check (they bounced the check, and they shouldn’t have)

the drawer can bring action against the drawee for bouncing the check it should have paid

the payee can’t sue the drawee

damages: drawer may recover all damages caused by the wrongful dishonor (bounced check fees, expenses incurred defending prosecution, writing hot checks)

55
Q

the Drawee Bank’s defenses for wrongful dishonor

A

payment would overdraw the account

check is more than 6 months old

56
Q

a payment in full check

A

check on which the drawer conspicuously indicates that cashing it will be payment in full satisfaction

it will be accord and satisfaction of the obligation

Exception: payee returns money w/in 90 days, then not in accord/satisfaction (have to have time to look it over)

57
Q

If the maker’s signature is forged

A

the alleged maker is not liable (b/c that’s not his signature)

but the alleged maker conduct may ratify or cause alleged maker to be precluded from denying forgery

forger is liable:
–forger is liable on the note b/c forger’s signature appears on the paper

58
Q

if the drawer’s signature is forged

A

when someone finds your check and starts spending money

alleged drawer is not liable (b/c didn’t really sign)

drawee bank must re credit the drawer’s account as check is not properly payable (unless there is a defense)

59
Q

Banks defense to not re-credits an account after forgery

A

drawer’s negligence

bank statement (must inspect w/in 1 year 
--unless repeat offender
60
Q

forged endorsement

A

not relevant for bearer paper

forgery breaks chain of title for order paper so the drawer may demand the drawee bank to recredit account as check not properly payable

61
Q

Fraudulent Endorsement by Employees

A

if employer entrusts the employee w/the responsibilities w/respect to instrument and the employee makes a fraudulent endorsement then it will be effective

Secured Transaction (2 decks)

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