Payment (Commercial) Flashcards
Approach to Payment (aka Consumer Question)
6
- 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?
What is a Note
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)
What is a Draft
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)
Check Types
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
What does it mean if something is ‘negotiable’
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
list 8 requirements for negotiability
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
writing-as element 1 of 8 of negotiability
no req what it must be written with/on
signed by maker/drawer-as element 2 of 8 of negotiability
any symbol executed or adopted by party with present intent to authenticate
initials, marks, thumbprints, stamp, computer generated, really anything
unconditional promise/order to pay–as element 3 of 8 of negotiability
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
Fixed Amount–as element 4 of 8 of negotiability
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
Money–as element 5 of 8 of negotiability
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
no other undertaking/instruction–as element 6 of 8 of negotiability
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
payable on demand or definite time–as element 7 of 8 of negotiability
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
contains words of negotiability–as element 8 of 8 of negotiability
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
what does ‘negotiation’ mean
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
2 req to have Holder Status
possession of the negotiable instrument and
good title
–bearer: possession along good enough (just needed delivery)
–order: possession plus necessary endorsement
so what is an endorsement?
signature on a negotiable instrument by someone other than the maker or drawer
usually on the back
what is a blank endorsement?
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
Special endorsement
payee’s signature + designation of new person to whom instrument is now payable
makes order paper
Endorsement for Deposit or Collection
restrictive endorsement limiting what may be done with the instrument
When you’re not sure who the payee is (who gets the instrument) what do you look at?
the intent of the issuer determines who the initial payee is
what if there are multiple payees?
if ‘and’ separates their names
–requires all payees to endorse
if ‘or’ separates their names
–requires any one of them to endorse
what if someone forgets to endorse?
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
Depository Bank and Endorsements
Misspelling of Payee’s name and Endorsements
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
can ppl lacking capacity endorse?
yep (minor, incompetent, etc)
what is a HIDC?
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
list 6 elements to be a HIDC
- must be a neg instrument (those 8 elements)
- holder (bearer: possession. Order: possession and endorsement)
- authenticity isn’t questioned
- holder must pay value
- 2 part test for good faith
- w/o notice at the time of instrument acquisition
explain the ‘authenticity isn’t questioned’ element of HIDC
no evidence of forgery/alteration or so irregular or incomplete as to call it’s authenticity into question
explain the ‘value’ element of HIDC
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
explain the ‘2 part test of good faith’ element of HIDC status
honesty in fact (subjective)
observance of reasonable commercial standards of fair dealing (objective)
explain the ‘w/o notice at time of instrument acquisition’ element of HIDC status
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
shelter rule
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
When HIDC loses (meaning the person with the issue still doesn’t have to pay)
-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
When HIDC will win (have to pay even though you have an issue)
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.
how someone is liable in contract law in commercial paper
by signing their name on the instrument
signature and agent/principle issues
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
contract liability for the maker of the note
ex: if you, the student, sign a student loan
primary liability
must pay when due according to terms
liable to holder or endorser
contract liability for the drawer of the draft
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)
contract liability for endorsers of note/draft
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)
contract liability for the drawee
acceptance, certification, final payment, conversion
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
payment of check after drawer’s death
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
Contract Liability of Accommodation Parties
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
Transfer Warranties
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
Transfer Warranty Disclaimers
on a check you can’t disclaim any transfer warranties
but on non checks you may disclaim by saying w/o warranties
Presentment Warranties
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
Warranty v. Endorsers Contract
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)
how can the holder discharge the obligation?
by surrendering the instrument to the obligor, destroying it or canceling it
effect of the instrument on the underlying obligation
payment of the thing means that the underlying obligation is discharged
failure to produce original instrument
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)
overdrafts
bank may charge the customer’s account even if the charge creates an overdraft
postdated checks
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
stop payment orders
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
banks defenses if it pays despite the stop payment
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)
Wrongful Dishonor
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)
the Drawee Bank’s defenses for wrongful dishonor
payment would overdraw the account
check is more than 6 months old
a payment in full check
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)
If the maker’s signature is forged
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
if the drawer’s signature is forged
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)
Banks defense to not re-credits an account after forgery
drawer’s negligence
bank statement (must inspect w/in 1 year --unless repeat offender
forged endorsement
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
Fraudulent Endorsement by Employees
if employer entrusts the employee w/the responsibilities w/respect to instrument and the employee makes a fraudulent endorsement then it will be effective
