Payment Systems Flashcards
What types of negotiable instruments do article 3 cover?
Notes and drafts
What is a note?
A note is a written promise to pay money
What is a draft?
A draft is a written order by a drawer to the drawee directing the drawee to pay money to a payee
What is a drawee ?
An entity directed to pay a sum if money on an instrument usually a bank.
A draft written on a bank and payable on demand is called what?
A check
What is a negotiable instrument?
- An unconditional
- promise or order to pay,
- A fixed amount of money
- With or without interest or other charges
- Payable to bearer or order
- Payable on demand or at a definite time.
- Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to payment of money.
What is an order?
A written instruction to pay money signed by the person giving the instruction (drawer)
What is a maker?
A person who signs or is identified in a note as a person undertaking to pay
What is the difference between a note and a draft?
An instrument is a note if it is a PROMISE to pay and a Draft if it is an ORDER to pay.
What is the holding in Triffin v Dillabough ? Is a money order a NI?
The court said a money order is a negotiable instrument and the holder Triffin was holder in due course.
A money Oder fits the NI rules:
1. Be signed by the maker or drawer
2. Contain an unconstitutional promise or order to pay a certain sum of money and no other power given by maker
3. Payable on demand or at a definite time.
4. Payable to the order or to bearer.
Define condition?
- An event
- Not certain to occur
- That must occur
- Unless excused
- Before performance is due
Define a holder
A person
- In possession
- Of a negotiable instrument
- Payable to either bearer or identified person that is the person in possession (himself)
Payable to Bearer means
A promise or order is payable to bearer if it per 3-109
- Indicates that the person in possession is entitled to payment
- Does not state a payee
- State that it is payable to the order of cash.
Three stages of negotiable instruments
- Issuance
- Transfer
- Presentment
What is a negotiation?
Per 3-201
- A transfer of possession
- Whether voluntary or involuntary
- By a person other than the issuer
- To a person who thereby becomes its holder.
When is a negotiation subject to rescission?
If obtained from:
- An infant
- A corporation exceeding its powers
- A person without capacity
- By fraud, duress or mistake
- In breach if duty or as part of an illegal transaction.
What is a holder in due course
- Must have possession
- Of a negotiable instrument
- Who took it for value
- In good faith
- Without notice of certain problems with the instrument.
What are words of negotiability?
Words making a promise or order payable to bearer or to the order
What are the qualification for not payable to bearer per 3-109
Per 3-109
A promise is not payable to bearer and payable to order if it is
1. Is payable to the ORDER OF an identified person
Or to an identified person or order (
2. Payable to bearer becomes payable to an identified person if it is specially endorsed.
Does notes that are subject to acceleration or prepayment prevent the note from being a NI?
A statement if rights and obligations concerning collateral prepayment or ac creation does not prevent the note from being an NI if the statement is in the note itself.
What does payable on demand mean?
- An instrument payable at sight
- Or payable at the will of the holder
- Or Does not state a time of payment
Define payable at a definite time
Means payable on elapse of a definite period of time after sight or acceptance. Or payable on a fixed date
What is payable on a fixed date mean?
Payable upon demand made before the fixed date, or payable on demand until the fixed date
What are the two types of endorsements?
Blank and special endorsements
What is a super-plaintiff ?
A holder in due course who can sue the parties of an instrument who are not permitted to defend the lawsuit
Who is required to pay a note or cashiers check or any draft drawn drawn on the drawer
The issuer.
- According to its terms at the time it was issued or, if not issued, at the time it came in possession of the holder
- If the issuer signed an instrument an incomplete instrument, according to its terms when completed.
The obligation is owned to the person entitled to enforce the instrument.
Can a non payee (forger) become a holder?
Only an instrument payable to the order of a named payee, that payee can become a holder
Things that happen after value is given destroy holder in due course status true or false
False things that happen after holder on due course happens does not destroy holder on due course once status is achieved.
What are real defenses
- Infancy
- Duress
- Lack of legal capacity
- Illegality of the transaction
- Fraud (no knowledge of it)
- Insolvency discharge
Recoupment?
Legal ability to subtract from any payment due the amount trying to collect the debt
Holder in due course is liable for personal defenses
False. HDC is not liable for personal defenses
Is a maker of Note obligated to pay the instrument
A maker is obligated to pay the instrument on the terms at the time the note was issued.
Are multiple indorsers on a note liable?
Yes they are jointly and serverally liable. A party who pays more than their share may pursue the other party for the difference
Drawee obligation
A drawee is not liable on an instrument unless the drawee singed the instrument
Is a principle bound by the signature of an agent?
The principle is bound weather or not the agent identified his/herself as agent
What is a carrier without luggage requirement?
An instrument must not state any other undertaking by the person promising or demanding payment
Forgery of payees name makes note negotiable?
- Only a named payee can become a holder
- An unauthorized signature is not effective to negotiate an instrument
- No one can be a holder unless payee indorsers the instrument
Depository bank
The first bank to take an item, the payor bank
Issue
The first delivery of an instrument by the maker or drawer to a holder
What is the obligation of the indorser?
Must pay amount due according to the terms
Who is entitled to enforce instrument
- The holder of the instrument
- A non holder in possession of the instrument who has the right if a holder
- A person not in possession of the instrument who is entitled to endorse the instrument
What is an agent?
An agent is a person authorized to act on behalf of another person the “principal”
Apparent authority is arises when
- A third party
- Reasonably believes
- The actor (the agent)
- Has authority to act on behalf if the principle
- That belief is traceable to principle manifestations
What are the ways an agent can have authority
- Apparent authority
2. Actual authority
Actual authority arises when
- At the time of taking action that has legal consequence for the principle
- The agent
a. Reasonably believes
b. in accordance with the principles manifestations to the agent
c. That the principle wishes the agent so to act
What are the ways someone is liable on an instrument
A person is not liable on instrument unless
- That person signs it or;
- Or that persons agent per 3-402(a) signs it.
What is requirement for a legal signature
- By hand or machine
- By using a name, word, or symbol
- Adopted with present intent to authenticate a writing.
4 Types of liability
Marker of note (3-412)
Drawer of check or draft (3-414)
Acceptor of check or draft (3-413)
Indorser (3-415)
Determining liability
Liability is determined by what capacity the person has signed maker, drawer, acceptor, indorser
As indicated by;
Specific language
Position of signature on instrument
Extent of liability is determined by
Number of signatures in the same capacity
What is the liability by representatives signature
Authorized representatives can bind represented person
- If the signature is authorized by represented person
- If the representatives unambiguous indicate representatives capacity
- If the represented person is identified in the instrument
What is the indorsers obligation?
- Promise to pay a person entitled to enforce or subsequent indorsers who paid the instrument
- According to the instruments terms when indorsed or completed
- Only of maker or drawer do not pay the instrument
Subject to requirement of
Presentment
Dishonor
Notice of dishonor
What is the presentment requirement?
- Presentment for payment or given to a depository bank for collection
- Within 30 days of the indorse meant
Otherwise the indorsers liability is discharged.
what is the dishonor requirement?
- Dishonored after presentment by refusal to accept or pay the instrument
- Unless presentment or notice of dishonor is waived per 3-504
Under the suretys obligation what is an accommodation party’s obligation
- Acts as a surety by guaranteeing payment of instrument for a person signing
- Is liable along with the accommodated party
- Does not receive direct benefit from value given for the instrument
- Need not receive consideration
What are the types of accommodation parties?
An accommodation party may sign as
- Maker
- Drawer
- Acceptor
- Indorsers
How do we determine accommodation party’s capacity
Depending on how the accommodation party signs the instrument
- Maker and drawer sign in the same place as maker or drawer
- Indorsers sign where indorsers typically sign and may be anomalous indorsement per 3-205(d)
What are the surety rights?
- Subrogation
- Reimbursement
- Contribution
What are the surety reimbursement, subrogation, and contribution
Accommodation who party pays an instrument is entitled
- Reimbursement from an accommodated party and
- To enforce the instrument agonist the accommodation party
Surety discharge?
Tender of payment can discharge sureties with right of recourse in two circumstances
- Tender by surety or indorsers
- Tender by principle
If surety or indorser tender payment at instrument maturity and person entitled to enforce refuses payment what happens
Surety or indorser is liable for
- Full amount of instrument
- But not subsequent interests
If payment is made by principle or party against whom indorser has a right of recourse but payment is refused
Then the surety or indorser is discharged up to the amount owed
Drawers technical procedure rights under presentment
Presentment is
Demand for;
1. Payment of an instrument or
2. Acceptance of a draft
3. By a person entitled to enforce the instrument
4. To a party obligated to pay the instrument
– The maker or the drawer
Rights of presentee
When presentment is made; A presentee (maker or drawer) May demand 1. Instrument 1. Identification 2. Evidence of presenters authority 3. Reasonable time and place for presentment 4. A receipt 5. Surrender of instrument If demands are not met presentee may refuse payment
What is the dishonor of a note?
- If demand note is not paid upon presentment to the maker
- If a non-demand note is not paid on the later of (1) the day of presentment (2) the due date when payment may be made at a bank or note term require presentment.
Dishonor of an unaccepted draft occurs
A. If after presentment the payor bank
1. Makes a timely dishonor or
2. Becomes accountable for the check
B. if after presentment to the drawee a demand draft is not paid
C. If a non-demand draft is not
1. Paid after the later of presentment or the due date
2. Accepted on presentment before due dates
C if when draft is payable after an elapse of time after sight or acceptance after the time lapses
Notice of dishonor
- May be given by any person
- Orally in writing or electronically
Sufficient if
A. Reasonably identifies the instrument and
B. indicates the instrument has been dushonored or not paid or accepted
If it is a return of an instrument
What is necessary to bind endorsers and drawers? How are drawers’ not liabile?
Presentment and dishonor are necessary to bind indorsers and drawers
Drawer is not liable if :
a. A draft is accepted by a bank
b. notice of dishonor is required but not given or
c. Presentment occurs more than 30 days after date of check and drawer becomes insolvent during delay
When is a drawee liable on an instrument ?
A drawee has no liability on an instrument:
- The drawer has not signed the instrument
- Unless the drawee accepts the instrument
Drawer as acceptor means what,
An acceptor is a
- Drawee
- Who becomes liable on an instrument
- By signing the instrument
What is an acceptance by drawee
- Acceptance is an agreement
- Signed by drawee
- To honor the draft as presented
When the draft is a check the drawer bank acceptance is called what?
Certification
If a bank certifies a check
1 the bank is primarily liable as acceptor and
2. The drawer cannot stop payment
If a bank refuses to pay a certified check it may be liable to the holder.
What is the liability of an agent?
- A person is not liable on instrument until that person signs the instrument
- An agent may sign an instrument on behalf of a principle.
Authority of agent?
Without authority from the principle the agents signature binds only the agent not the principle
Personal liability of agent?
An ambiguous signature binds an agent
To avoid liability an agent :
- Name the represented person
- Indicate the agents representative capacity.
An agents signature on the represented person’s check, does not bind the agent if the signature is authorized.
What is a surety?
- A contractual relationship
- Whereby one person
- Engages to be answerable for the debt or default of another
What is a warranty?
- A promise
- Express or implied
- That something in furtherance of the contract
- Is guaranteed by one of the contracting parties
What is an express promise?
Is a promise that is found in spoken or written words
What is an implied promise?
A promise created by the law
What are the main type of implied warranties?
- Warranty of habitability-a house should not have any material defects
- Warranty of merchantability-goods sold will be fit for the ordinary purposes
- Warranty of fitness-buyer is relying on seller judgement to select or furnish suitable goods.
Properly payable rule?
A bank may only charge a customers account if it pays a holder.
Note: a bank has not paid a holder if it pays an instrument with
- A forged signature
- A forged indorsement
Forgery of a payees name means?
A. The forger is liable on the instrument
B. everyone taking an instrument after an invalid negotiation of an item with the forged instrument
Forgery of a special indorsees name means?
A. No valid negation takes place
B. no one who takes instrument is qualified as a person entitled to enforce the instrument
Warranty liability
Liability loss on the party best able to detect a defect in the instrument
Two types:
- Presentment warranties
- Transfer warranties
What is the presentment warranty?
Warranties that can be enforced against:
1. The presenter and all transfors
By;
2. The drawee and only drawee
Transfer warranty?
These warranties can be enforced
- Against all transfors for consideration
- by all transferee
The drawee does not receive transfer warranties because the instrument is presented to the drawee nor transferred
Does drawer have warranty liability?
- Drawers do not make these warranties
- Drawers do not transfer instruments
- Drawers issue instruments
Presentment path
- Drawer
- Payee
- Check cashier
- Depositary bank
- Drawee
Transfer warranties
- Drawer
- Payee
- Check casher
- Depository bank
- Drawee
Rules of transfer warranties
- Warrantor is a person entitled to enforce
- All signatures are authentic and authorized
- The instrument has not been altered
- The amount of a remotely created consumer item is authorized by the drawer
Rules if presentment
- Warrentor is a person entitled to enforce or authorized to accept payment
- The draft has not been altered
3 no knowledge that the signature of the drawer is unauthorized - The amount of a remotely created consumer item is authorized by the drawer
Who makes a transfer and to whom
A made by transferor of the instrument
- For consideration to the transferee
- If indorsed to any subsequent transferee
Who makes the presentment and to whom?
For an unaccepted draft
Made by:
1. The person obtaining payment or acceptance and
2. A previous transfor of the draft at the time if transfer and in good faith
What is a conversion liability?
Conversion is when a person not entitled to enforce the instrument receives payment for an instrument
- Thief
- Forged indorsement
- Missing indorsement
- Not immediately depositing checks with a for deposit only indorsement
Forgery of drawers name
A drawer is not liable when drawers signature is forged
- Drawee who pays, or accepts for payment, bears the loss against drawer unless drawer is negligent
- Drawee who pays or accepts for payment, bears the loss as against presenter who has no knowledge of forgery
- Drawee can refuse to pay if it discovers the forgery
Can one be paid if the endorsement is missing?
No. An instrument with a forged or missing indorsement is not properly payable.
- Drawee who pays or accept for payment bears the loss to drawer
- Drawer who pays or accepts for payment does not bear the loss against all prior transferor
Forgery of payee name
An instrument with a forged or missing indorsement is not payable
- Drawee who pays or accepts for payment bears the loss to drawer
- Drawee does not bear the loss tu all prior transferors
How to validate forgery?
In a situation where person indorsing deceptively intends that named payee receives no benefit from instrument the loss is placed upon the maker;
Impostor (3-404) Fictitious payee (3-404 b) Entrusted employees fraudulent indorsement
What is the imposter rule?
Carelessness of a drawer or maker in issuing a instrument may pass good title
- Issuance to an imposter will validate a forged indorsement
- An imposter does not need to communicate with the drawer
- The forger does not have to be the impostor.
Employee indorsement rule
An employer bears the lost for employer forgeries if the employee is trusted with responsibility of that instrument
Responsibility;
- Bookkeeping
- Perp and mailing
- Check reconciliation
Rules are for checks by the employer and checks to employer naming employer payee
Negligence rules
If a person fails to do ordinary care and that failure
Substantially contributes to an
1 alteration or forgery
That person is precluded from asserting the alteration or forgery
Against a person who
Pays the instrument
Takes it for value or for collection.
Person entitled to enforce an instrument other than a holder or non holder in possession is?
One in possession of an instrument who is not a holder because the person acquired rights by subrogation or by assignment from the holder.
Drawer on an instrument is only secondary liable why?
The promise to pay only if the order bears no fruit.
When is a drawer free from obligation on to pay a check
If it is not presented for payment within 30 days.
