SU 19 Negotiable Instrument Flashcards
Promissory notes
promise
maker promises unconditionally to pay fixed amnt to order of payee or bearer on demand or definite time
maker signs or is ID’d in a note as person undertaking to pay
CD
form of promissory note issued by bank
receipt of # w/ unconditional promise to repays
bears interest
Draft
contains order
unconditional written order by 1 person (drawer) to another person to pay fixed amnt of $ to a 3rd person (ID’d person-payeer or bearer)
drawer
drawee
orders pmt (person writing check) ordered to make pmt (bank)
Types of drafts
time- payable @ definite time in future -trade acceptance -post dated check sight- payable on demand (presentation to drawee) -check
certified check vs cashier’s check
certified- accepted by drawee bank, even if funds aren’t sufficient
-more = to $
cashier’s- drawn by bank on itself (bank = drawer & drawee)
Transfer
delivery (voluntary transfer of possession) by non issuer to give recipient right to enforce instrument
Negotiation
special transfer allows transferee to take instrument w/o personal defense
-transfer of possession (voluntary/invol by person that isn’t issuer)
transferee = holder
Elements of negotiability
written/signed by maker/drawer unconditional promise or order to pay fixed amnt of $ payable to order/bearer payable on demand or definite time can't state adtl undertaking
Promise or order is payable to bearer if
doesn't state payee indicates not payable to ID'd person payable to cash or order of cash payable to bearer or order of bearer indicates person in possession gets pmt
Examples of bearer paper
pay bearer pay to order of bearer pay to order of P.Cruz or bearer pay any person presenting pay $500
blank endorsement
not special
IDs not particular payee
only signature of endorser
order instrument endorsed in blank becomes payable to bearer
Special endorsement
ID’s person to whom instrument is payable
becomes payable to the order or special endorsee & requires his/her endorsement for further negotiation
Convert blank endorsement into special endorsement
write above the signature words ID’ing the payee
if payee is Blanche Dorser, she can endorse it then write above her endorsement Pay to Heidi Holden
Restrictive endorsement
restrict or further limit the negotiation; can’t prevent furth transfer or negotiation
examples
-conditional
-endorsement prohibit further transfer/negotiation
-endorsement for deposit or collection
-endorsement to fiduciary
Conditional endorsement
rights of endorsee depend on occurrence/non occurrence of specific event
maker, drawee, subsequent endorser must pay when due regardless if condition was satisfied
endorsement for deposit or collection
forces instrument into banking system
-for deposit only
-for collection
-pay any bank
limits negotiation; gives notice that they must comply w/ endoresement
-notice given to nonbanking persons, depositary bank, bank that makes immediate pmt OTC
qualified endorsement
disclaims or limits contractual liability (doesn’t get secondary liability if primary doesn’t pay)
“without recourse”
transfer of order for value gives transferee enforceable right to unqualified endorsement
-unqualified endorsement guarantees pmt of instrument if primarily liable party doesn’t pay
anomalous endorsement
made by person who isn’t the holder
anomalouse endorsement or sig w/ words indicating suretyship gives notice instrument was signed for accomodation
-accomodation endorser signs for benefit of another party
Holder
possession of negotiable instrument payable to bearer or ID’d person if ID’d person is the person in possession
Order instrument negotiated by
transfer of possession and endorsement by holder
-holder doesn’t endorse, only transfer (assignment of transferor’s rights)
HDC
holder becomes HDC when holder takes
- in good faith
- for value
- w/o notice of dishonor of instrument (overdue), alteration of signature, defense or claim
Value part of HDC
receiving instrument as gift or inheritance isn’t HDC
value isn’t consideration
-unperformed contractual promise isn’t value
HDC based on partially performed
amnt payable under instrument * value of part performance/value of full perf
Value given
promise has been performed or security interest/lien is acquired
taking instrument in pmt of or security for pre-existing claim against person
issue/transfer NI
incur an irrevocable obligation to 3rd party
Demand instrument overdue at earliest of
day after demand for pmt
90 days after date for check
os for pd after its date for noncheck
instrument payable at definite time is overdue
default on installment pmt of principle
day after due date if instrument isn’t payable in installments
day after accelerated due date for principal
Shelter principle
person who doesn’t qualify as HDC receives title thru HDC gets rights/privilege of HDC
transferee party to fraud affecting instrument can’t get HDC rights
awareness of fraud won’t prevent acquisition of rights of HDC
Holder
HDC
real defense and personal defense
HDC only real defense
Primary liability
req to pay by terms of instrument (unconditional)
maker is primarily liable
drawee that accepts draft is primary
-if don’t accept breached contractual duty to drawer (drawee owes no duty to payee or any holder)
issuer of draft that is drawer and drawee is primary (i.e. bank that issuers cashier’s check)
draft doesn’t have primarily liable party until accepted by drawee
Secondary Liability
drawer
obligation to pay arises if primary liable party fails to pay
drawers and endorsers have secondary liability
drawer-not liable unless drawee refuses to pay
-drawee dishonors unaccepted draft, drawer must pay
disclaim liab by drawing w/o recourse unless draft is check
Secondary liability
endorser
not liable unless drawee, maker, other endorsers don’t pay
unqual endorser liable to sub endorser or party entitled to enforce instruments
liable in order endorsed (top down)
avoid liab by qualified endorsement
Affect of acceptance on secondary liability
drawer discharged when accepted by bank (certification)
accepted by nonbank drawer liab = endorser
acceptance of draft by bank after endorseent discharges endorser
acceptance varies terms, holder may refuse & treat as dishonored
-holder agrees, obligation of drawer or endorser who doesn’t expressly agree is discharged
Warranty liability
breach of warranty- transfers/presents for pmt an instrument that is defective (forged)
may be only remedy for some ppl
ppl w/ warranty liab w/o contractual liab
-qualified endorser (w/o recourse)
-negotiates instrument w/o endorsement
-endorser discharged bc of holder’s unexcused delay in making presentment
Transfer warranties
warrantor can enforce instrument
signatures are authentic and authorized
instrument not altered
no defense or claim of any party is good against warrantor
warrantor doesn’t have knowledge of insolvency proceedings against maker, drawer, acceptor
Presentment
demand for pmt/acceptance to party obliged to pay (or bank)
endorser’s liab (not guarantor’s) discharged if check isn’t presented for pmt w/in 30 days after day of endorsement
lack of endorsement justifies return w/o dishonor
Dishonor
refusal to pay
triggers secondary liability
person entitled to enforce can proceed directly against secondary party
unaccepted drafts (ordinary checks) are dishonored by being returned or timely notice
Notice of dishonor
must give adequate notice (w/in 30 days after day of dishonor) to all prior endorser (not guarantors) or they are discharged
-don’t have to notify drawer
Real Defenses
defense to liab, stop collection from those with primary/secondary liability
asserted against HDC & holder
illegality extreme duress, legal incapacity (all 3 make obligation void), fraud in ex, unauthorized sig, fraud alteration, minority/infancy, discharge in insolvency, discharge when holder has notice
Personal Defense
traditional contract defenses are personal def
effective only against holder & holder thru HDC(not HDC)
fraud in inducement, unauth completion, failure of condition, lack/failure of consideration, theft, restrictive endorsement violated, pmt w/o instrument surrendered, breach of contract/warranty
Methods of discharge
pmt/tender
cancellation- voluntary act by party entitled to enforce
-surrender instrument
-destruction
-strike out signature (doesn’t affect rights rec’d from endorsement)
-add words to instrument
renunciation-agree not to sue, renouce rights via signed writing
reacquisition-transfer to ex-holder, who can cancel intervening endorsement
Other methods of discharge
fraudulent discharge certification of check impairment of collateral impairment of recourse unexcused delay in presentment or notice of dishonor
Document of title
record that allows transfer of ownership of goods in storage/transist
3 functions- receipts for good, contract between bailor & bailee, evidence of title to goods
bailor-entrusts goods to bailee
bailee-receives ppty & holds in trust
DOT is negotiable if
states goods are delivered to bearer or order of named person
bearer- control of doc or doc payable to bearer or endorsed in blank
How are Negotiable docs negotiated
tangible docs negotiated by endorsement/delivery (electronic-no endo) bearer docs- delivery blank endo- converts to bearer doc special endo (specific person)- converts bearer to order doc forged- no negotiation (forgery is real defense) endorser not liable for default of bailee or prior endorser
Negotiable vs non negotiable doc
negotiable- must be delivered to holder of doc, agent, assignee
holder- control of doc
non negotiable- deliver to person named in doc
Warehouse receipts
issued by warehouse to person who deposits goods for storage
depositor- bailor
warehouse- bailee
must exercise same care as reasonable person
liable for damages from ordinary negligence/lack of due care
can’t limit liability if convert goods to its own use
Warehouse receipts must include
location of whouse date of issue, unique ID description of goods person (bearer, etc.) to whom goods are to be delievered whouser's sig
Bill of Lading
evidence of receipts of goods for shipment
bailee- carrier
bailor- shipper
carrier has lien on good (enforce by public/private sale)
Common carriers liability
special bailees are subject to strict liability for losses for goods in transit not liable for damages caused by -act of God -fault of shipper -act of public enemy -act of public authority -inherent nature of goods limit liab by contract & notation on BOL (doesn't apply if carrier converts good to its own use)
