Payment Systems

Question 1

Notes

Answer 1

1. A promise of payment has been made.
2. 3-103(a)(12) - definition of promise - written undertaking to pay money signed by the person undertaking to pay. An acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation.
3. 2 party instrument.
   a. Party 1 is the maker - the promisor. 103(a)(7)
   b. Party 2 - the payee - the one being paid.

Question 2

Drafts (checks)

Answer 2

1. 3-103(a)(8) - order definition - written instruction to pay money signed by the person giving the instruction.
   
   2. Drafts are a 3 party instrument. 1st person ordering the 2nd to pay a 3rd.
      a. 1st person - the drawer - person who signs or orders the payment. 103a5.
      b. 2nd person - the drawee - the person being responsible for paying out the money. 103a4.
      c. 3rd person - the payee - whom the drawee is required to pay.

Question 3

General Rules of Negotiable Instrument

(memorize the list)

Answer 3

1. Writing
   
   • not required to be written on paper
     2. Must be signed
   • broad definition per article 1
   • the above two are requirements from the definition of promise and order
     3. Sets forth an unconditional promise or order - see 3-106
   • want it to be freely transferrable.
     4. to pay a fixed amount of money
     5. That states no unauthorized undertaking or instructions
     6. Payable on demand or at a definite time
     7. Payable to bearer or a definite order

Question 4

Notes - Unconditional Promise

Answer 4

1. Saying the promise is subject to or governed by some other document will destroy negotiability.
   
   2. A reference to another promise that does not in itself make the order conditional is allowable. 3-106(a).
   3. Reference to another document for prepayment, collateral, and acceleration rights is okay. 3-106 (b)
      - paid early, collater if you don’t get paid, and being able to pay early encourage you to take the paper. which is why its allowable.
   4. “void after 90 days” is really conditional - problem 87. not negotiable.

Question 5

Negotionable Notes - Fixed Amount of Money

Answer 5

1. Little more broad than just dollars. Can be in a different currency.
   
   • Currency is defined by one recognized by a government.

Question 6

Negotionable Instruments - No Unauthorized Undertakings or Instructions

Answer 6

1. “Courier without luggage” requirement.
   
   2. Exceptions - that which is authorized
      a. Collateral
      b. Prepayment
      c. Acceleration

“when in doubt” then nonnegotiable. “Where there is doubt, the decision should be against negotiability.”

Question 7

Payable on Time or at a Definite Time

Answer 7

1. Holder must be able to clearly tell when the instrument comes due.
   
   • when can i get present to maker or payee and get paid on it.
     2. No requirement that instrument be dated
   • but not having a date could affect negotiability
     3. May be Payable on demand = on presentation; payable at any time. at the will of the holder.
     4. May be payable after an elapsed time.
     5. May be payable on a fixed date.
     6. If undated instrument - then deemed to be payable on demand.
   • if are trying to set up a time, but fail to do so, there may be doubt and therefore not a negotiable instrument. Problem 91 (b)

Question 8

Bearer Paper

Answer 8

1. Bearer Paper - general situation in which anybody in possession can get paid on the instrument.
   a. 3-109(a) - if you actually use the word “bearer” or “payable to order of bearer,” or payable cash
   
   • not specifying an identified person
   • want holders to rely on the bearer language

Words “bearer” and “order” are words of negotiability. However, they are not required in checks and fall under the exception found in 3-104(a)(c)
4. Bearer language controls over “order of”

Question 9

Order Paper

Answer 9

Order paper - specifically directing who the person is who can get paid on it.

a. 3-109(b)  - if you signify that a payment is to made to an identified person or to that identified person's order.
b. "pay to"  or "pay to the order of"

Words “bearer” and “order” are words of negotiability. However, they are not required in checks and fall under the exception found in 3-104(a)(c)
4. Bearer language controls over “order of”

Question 10

Negotiation of the Instrument (how to do it)

Answer 10

a. If bearer paper, all you need is delivery or possession
b. If Order paper, need delivery or possession AND an endorsement.

2. Negotiation can happen voluntarily or involuntarily.
   a. A thief can take bearer paper and it would still be enforceable.
3. A blank indorsement converts order payment into BEARER paper
   
   • if all you do is sign the back of a check
4. Special Indorsement = preserves order payment
   
   • if saying “pay to Ann”
   • must also indorse
5. Holder is someone who can enforce the negotiable instrument.

Question 11

Labels

Answer 11

1. Drawer - 3-103(a)(5) -the person ordering payment
   
   2. Drawee - 3-103(a)(4) - a person who is ordered to pay
   3. Maker - person who makes the promise in the note.
   4. Payee - whom the note is made payable
   5. Depository Bank - first bank in which the draft is being deposited
   6. Holder - is someone who can enforce the negotiable instrument.

Question 12

Notes and Forgery

Answer 12

1. Until get the real indorsement, then no one can become a proper holder
   
   • No one qualifies as holder if a their forges a name.
     2. Forgery of a payee’s name breaks the chain so that no subsequent transferee can qualify as a holder of the instrument.
     3. Forgery of a special indorser’s name - still breaks the chain.
     4. If paper is bearer paper - then the forgery doesn’t matter because it’s bearer paper.

Question 13

Holder in Due Course - Generally

Answer 13

1. (a)(1) No apparent forgery
   
   • no suspicious character of the instrument on its face
     2. (a)(2) Holder took instrument for: (note: must be able to be a holder in order to be a HDC.)
     a. value
     b. in good faith
     c. without notice that instrument is over due, been dishonored, or uncured default
     d. Without notice that instrument contains unauthorized signature or has been altered

Question 14

HDC - notes

Answer 14

3. Sometimes ‘good faith’ and ‘without notice’ are intertwined.
   
   4. Can be a holder, but not a HDC. Don’t confuse the two.
      - can be a holder for a certain amount, and a HDC for another amount on the SAME note.
      - must be able to distinguish a holder issue and a HDC issue.
      - HDC really only seems to apply to the defenses available to the maker/drawer
   5. For final - discuss each requirement and how it is met.
   6. HDC evaluation is made at the moment value is given.
      - if instrument is negotiated, but no value given, then not a HDC
   7. In contrast, if value given early, but never becomes a proper holder, if notice of problem is given between that time company becomes a holder, can’t be a HDC.

Question 15

HDC - Value

Answer 15

1. Consideration != value
   
   2. a(1) Promise to act in the future to the extent those services have been performed.
      a. Must have performed.
   3. a(2) - a security interest or lien in the note - for banks
   4. a(3) - taking an instrument as payment for preexisting debt can qualify as value
      a. taking 150k note for 100k debt, just discounting the note. HDC full note.

Question 16

HDC - Bank accounts and Value

Answer 16

• First in, first out rule. Whatever goes in the account first will be withdrawn first.
  
  • if deposit 500, then 1500, and withdraw 500, the first 500 will be withdrawn.
  • allows for bank to not be a HDC because not giving value and to recoup any loss it may have sustained by giving money to its customer.

Question 17

HDC - Without Notice

Answer 17

1. What do you have to be without notice of?
   
   • talking about ACTUAL knowledge and REASON to know. See 1-205(25)
   • also should not have constructive knowledge
     2. That the instrument is overdue
     3. That the instrument has been dishonored
   • presented the instrument to maker or drawee and they have refused to pay it.
     4. No unauthorized signatures or alterations
     5. Possible defenses or claims of recoupment
   • no personal or real defenses

Question 18

HDC - Overdue Instruments

Answer 18

1. (a)(1) If payable on demand, it’s overdue the day after demand for payment has been made.
   
   2. (a)(2) if a check, 90 days after the check was dated
   3. (a)(3) if not a check, reasonable period of time after dated
   4. (b)(1) - if installment payment, overdue on default to any one of the installment payments.
   5. (b)(2) - non-installment, non-acceleration, making one payment, then overdue the day after the due date.
   6. (b)(3) - non-installment, with acceleration, making one payment, overdue the day after the accelerated due date.
   7. (c) overdue applies only FOR PRINCIPAL ONLY, not the interest payment.

Question 19

HDC - Good Faith

Answer 19

1. Honesty in fact and the observance of reasonable commercial standards of fair dealing.
2. Honesty in fact is a subjective based test
3. Courts are reluctant to give HDC status to holders who have intentionally closed their eyes to possible defenses.
   - a reasonable business person should go through and investigate whether the work was completed or whatever. General Investment Corp v. Angelini - pg 346

Burden is on the person asserting they are HDC to prove they are such.

Question 20

Shelter Rule

Answer 20

When you take an instrument from a HDC, you take those rights. But can’t be a HDC yourself.

allows confidence that even if not HDC in own right, can still have the same benefits.

If shelter rule, may be subject to both personal and real defenses subject to the entity you are going against in the chain.

Shelter rights may be transferred to subsequent holders, but still not HDC.

Question 21

Real Defenses

Answer 21

real defenses that are successful against a holder in due course. infancy, duress, lack of legal capacity, illegality of the transaction, fraud with no reasonable opportunity to investigate nature or terms, discharge of obligor in insolvency proceedings.

Fraud as a real defense v. Fraud as a personal defense.
-knowledge of what you’re doing is personal fraud. knowledge that youre actually signing an instrument.

Question 22

Personal Defenses

Answer 22

if you have other defenses that are available in Article or Article 3, then those are not successful against a HDC. They only become personal defenses.

claim in recoupment - when you reduce how much you owe because of the things that have gone wrong in the underlying transaction.

Question 23

Rescission of instrument against a holder

Answer 23

1. Can’t be asserted against a HDC
   
   2. Negotiation effective even if obtained form
      a. infant
      b. person without capacity
      c. duress or mistake
      d. breach of duty as part of an illegal transaction (illegality)
      e. fraud in factum
      f. discharge due to insolvency or bankruptcy

Question 24

Forgery

Answer 24

Forgery of Payee’s name or special indorsers name:

a. No one else further down the line can become  a holder, therefore can't be a HDC.    2. Of maker/drawer's name:
a. doesn't affect holder or holder in due course status.
 - however, do take subject to the defense that their signature appears nowhere on the instrument. (real defense)

Question 25

Merger Doctrine

Answer 25

Once an instrument is offered and accepted in satisfaction of an underlying obligation, the obligation merges with the instrument, and until the instrument is dishonored the underlying obligation is suspended.

when you give the note, the obligation is suspended AS IF gave the actual amount.

a. Once instrument has been dishonored, obligee has right to proceed to sue under ONE of the obligations. Not both.
b. (b)(2) Merger stays with you until note dishonored or paid. If note paid, both obligations are discharged

Willful destruction of the note = discharging of the obligation.

Question 26

Cashier’s Checks

Answer 26

discharges the underlying obligation because no chance that the tenant won’t pay. If accepting the check, the person receiving takes the chance that the bank won’t pay. It effects as obligor gave cash.

but MAY have indorser liability dependent on who the cashier’s check was made to and if it went further down the line

Question 27

Maker’s Liability

Answer 27

Primarily liable because that’s the first person you go to payment. Don’t have to jump through any hoops.

2. If don’t get it from them, then you look to see indorsers
3. Joint and several liability if multiple makers.
   a. Presumption - Any one of the makers fully liable for full amount. But contribution rights are set up by equal share.

Question 28

Indorser liability

Answer 28

By giving indorsement, in some respects guaranteeing payment. Similar to surety but not exact. Obligation is secondary if primary won’t pay.

2. Must be: (must jump through hoops)
   a. presentment to the maker (if note) or drawee (if draft)
   b. a dishonor by the maker or drawee
   c. notice to the indorser that there was dishonor (unless excused). Any way sufficient to give notice.

if a check, presentment or deposit must occur within 30 days of the indorsement.

Indorsers can raise ANY defenses it has to keep itself from having to pay if a dishonor occurs. The success of those defenses are dependent upon the enforcer is a HDC or not.

Question 29

Timing of Notice of dishonor

Answer 29

1. If talking about draft or check taken in by a collecting bank (one who is handling the item for collection except the drawee/payee bank.) Must give notice to someone before midnight of the following banking day after receiving notice of dishonor. -
   
   2. collecting bank situation, but someone else is giving notice to indorser, must give notice 30 days following receipt of notice of dishonor.
   3. Any other situation, within 30 days of notice of dishonor.

Question 30

Surety - Generally

Answer 30

Where surety has actually signed the negotiable instrument.
-can have surety arrangement in a contract, but separate from the K is the promisory note. If surety is only on K, but not on note, than that surety is only governed by common law, not sec 3. If surety on the note, current 3-605 is going to apply.

Question 31

Accomodation Party

Answer 31

Co-signing on the note.

2. If co-signing on the front, then accommodation maker.
3. if co-signing on the back, then an accommodation indorser.
4. If signing as an accomodation party, look for language determinig what is signing for.
   a. guarantor = surety

Question 32

Surety Rules

Answer 32

if surety is guaranteeing collection, then creditor must go against principal first - going through all legal procedures. aka surety indorser. (default rule)

if surety is guaranteeing payment, then creditor can go against surety. aka surety maker - principally liable on the instrument.

Question 33

Surety Relationship - Exoneration, Subgrogation, and Contribution

Answer 33

Exoneration - when creditor goes to surety to payment (if signed as a maker), the surety still has the right to compel the principal to pay first. Does not interfere with right of creditor to go against surety first.
Subrogation - when a surety pays on the principals behalf, he steps into the shoes of the creditor.
Contribution - if multiple sureties who are liable, creditor can go to any surety for full amount. But surety can collect contribution from oth

Question 34

Surety Release

Answer 34

1. When the principal and the creditor, decide that principal can pay less to be released from liability, principal is discharged.
   
   2. As above, with regards to surety (2ndary obligor) discharged to the same extent as to principal. UNLESS the release states otherwise.

An offer to pay the note by a surety on the date of maturity, discharges surety obligation to pay anything more than which the full amount called for.

Question 35

Surety modification/extension

Answer 35

1. If an agreement between principal and creditor to extend time, then
   
   2. if surety can show that they suffered a loss because of the extension, then they are discharged to the extent of that loss.
      a. must be able to prove a loss.
      b. loss includes what the surety is NOW required to pay because of principal’s later insolvency or financial problems.
2. If agreement between principal and creditor dealing with any OTHER type of modification,
   
   2. surety discharged in the same manner as if there was a modification of extension to pay.
      a. if proof of loss, liable only to the extent of that loss.

Question 36

Surety - Collateral

Answer 36

when a principal gives a creditor a security interest in some collateral to secure payment of the note, if the creditor has impaired the collateral, then the surety’s liability is discharged to the extent of that impairment.
a. If surety consents, then surety still liable. (surety can waive any of the defenses listed above)

Question 37

Drawer Liability

Answer 37

1. Presentment to Drawee (see 3-501)
   
   2. Dishonor by the drawee (see 3-502)
   3. Notice is not required unless specific context - when dealing with non-bank acceptor who later dishonors the draft.
   4. Can sign on as a drawer as “without recourse” but only when dealing with a NON-CHECK draft.
   5. If non-bank acceptor, then comes back and dishonors the instrument, notice must be given if dishonor occurs.
2. Waiver of presentment is also a waiver of notice of dishonor

Question 38

Drawee Liability

Answer 38

Drawee not liabile to the person presenting unless accepted.
Drawee liable only to drawer if the draft was properly payable.

To accept:
Signing the front of the instrument - certifying the fund and agreeing to make payment on those funds. Acceptance by a drawee discharges all of the drawer and all prior indorsers obligations.

To certify:
Certification is not full equivalent of acceptance - drawee not required to certify and may do so without dishonoring the check. If refuses to certify, then should cash the check

Question 39

Bank Liability

Answer 39

1. Banks have responsibility to pay ONLY those checks which are in fact properly payable.
   
   2. Properly payable means - a negotiable instrument authorized by the customer and is in accordance with any agreement between the customer and bank.
      a. 3-114 if an instrument has contradictory terms - hand written term rule over printed/typed terms & words trump over numbers.
      b. forgery does not create a properly payable instrument.
   3. post-dated checks - no violation if bank doesn’t have notice.

Question 40

Old checks

Answer 40

1. Bank not obligated to pay checks older than 6 months
   
   2. Can be paid in good faith - but just immediately paying without some sort of due diligence does not seem like good faith.

Question 41

Liability on Death

Answer 41

Death of customer: Bank not liable for payment of a check before it has actual knowledge of death or incompetance of the drawer. And with knowledge, can still pay for 10 days after date of death unless told to stop payment by a person CLAIMING an interest in the account.

Death of drawer – if someone (anyone) claims interest and says to hold, bank must hold. Bank doesn’t have to determine validity of the claim.

Question 42

Bank’s Right of Setoff

Answer 42

1. if you owe the bank money, and you have money sitting in an account with the bank, bank may have right to siphon money from account to pay your debt to the bank.
   
   2. Any debt must be due. Can’t debit account when the note/debt has not matured.
      a. However, insolvency can trump maturity date rule.
      - knowledge of insolvency when granting debt negates the insolvency exception.

Question 43

Stop Payment

Answer 43

1. When bank pays a check over a stop payment order, bank violates properly payable rule.
   
   2. Can be oral or written order to stop payment.
      a. Oral orders 14 days
      b. written orders 6 months.time begins when oral given.
   3. Information stop payment orders must include:
      a. Describing the item with reasonable certainty and it is received by the bank in enough time that it has a reasonable opportunity to act.
      b. An amount off in the description will generally not be enough. ‘
      c. in a way that is reasonable and allows the bank to identify check.

Question 44

Subrogation

Answer 44

1. Bank can step into the shoes someone to prevent unjust enrichment.
   a. Holder in due course - drawer would have had to pay it anyway unless there is a real defense. Although check paid improperly, don’t have to recredit because all you have is personal defenses.
   b. Holder/payee - if no personal or real defense, won’t have to recredit. Because would have to pay holder/payee anyway.
   c. drawer if recredit the account

Question 45

Final Payment

Answer 45

1. Once final payment made, discharges liability from drawer/maker and indorsers. Payor / drawee bank loses right to dishonor the instrument and MUST pay it.
2. When check is paid out in cash. Final payment can be split between cash and credit. Only cash is considered final payment.
3. Provisional settlement and fail to what you’re supposed to do with the check before able to dishonor.
   a. have till midnight of the next banking day from when receive notice of the dishonor.

Question 46

Charge Back

Answer 46

When depository bank has given provisional settlement to customer, and that check is later dishonored, allows bank to go to customer and get money back.

Question 47

Presentment Warranty

Answer 47

1. Only Plaintiff is the drawee or payor bank (everyone else uses transfer warranty) - action available against everyone who transferred though
2. The warrantors are the entity who actually presents the check.
   a. and also any entities who have transferred the check after issuance.
3. warrantying that you are entitled to enforce the instrument.
   • good title
   • no forced or missing indorsements required for negotiation
     4. that the draft has not been altered (on the front of the instrument)
     5. that you have no knowledge that drawer’s signature is unauthorized
     a. MUST have knowledge of the forgery for there to actually be a breach.
     b. NOT that the signature was forged.
     6. Generally get the amount of the check
     a. maybe expenses as a result of the breach

Question 48

Forgery of Payee’s name

Answer 48

A. Forgery of a payee’s name means that no valid negotiation takes place

1. no one else can qualify as a holder.
2. does not apply to bearer paper because no indorsement needed

Question 49

Transfer Warranty

Answer 49

1. If the instrument was transferred by indorsement (even if indorsement turns it to beaer paper), then all subsequent transferors can be a plaintiff
   a. if no indorsement and just bearer paper, only the immediate transferee can be a plaintiff.
   
   2. Must have transferred for consideration. NOT value.
   3. Warrantying that you are
      a. entitled to enforce
      b. all signatures are genuine and authorized
      c. no material alteration
      d. no defense or claim in recoupment that can be made in regards to the instrument.
   4. generally talking about the amount of the loss suffered + interest that may have run

Question 50

Warranty Rules Generally

Answer 50

1. Should be given notice within 30 days, but waived if really no loss that occurs because of the failure to give notice.
   
   2. SOL is 3 years - accrues when they have reason to know of the breach

Question 51

Conversion

Answer 51

1. Plaintiff is a person who’s property interest violated (payee or holder)
   
   2. Defendant is the thief, anyone not entitled to enforce the instrument, or any bank making / obtaining payment for non-holder
   3. After first conversion. subsequent parties who transfer the instrument are subject to being liable for conversion. No other transfer was properly negotiated because never had the proper indorsement.

Question 52

People who can’t bring conversion action

Answer 52

a. the issuer/drawer can’t because the check doesn’t really belong to you. Payee is the real owner.
b. someone who never RECEIVES the instrument. MUST have been in your hands or constructively in your hands (mailbox - deemed to have been delivered.)
c. if neither payee or drawer can bring an action, then no conversion action available.
a. just recredit and warranty actions.

Question 53

Forgery of Drawer’s name

Answer 53

1. No authorization means breach of properly payable rule, account can be re credited to victim.
   
   2. Generally drawee bank bears the lost resulting from forged drawer’s signature.
      a. bank is in best position to know what drawer’s signature looks like.
   3. Problem with presentment warranty - really don’t have a breach. issue of “no knowledge”
   4. Problem with transfer warranty, because theif is the drawer and therefore not a proper transferer. then no break in holder / hdc chain.
   5. If thief forges check out to himself, then presentment warranty is breached.