TBE COMMERCIAL PAPER--Quick & Dirty Rules

Question 1

two basic instruments for commercial paper

Answer 1

(1) Notes; and

(2) Drafts or bill of exchange.

Question 2

Notes have two parties

Answer 2

(1) Maker (promising to pay); and

2) Payee (person entitled to payment

Question 3

Drafts on the other hand have three parties.

AKA checks

Answer 3

(1) The drawer (writer of check/person ordering payment);
(2) The drawee (bank/person or institution ordered to pay); and
(3) The payee (person entitled to payment).

Question 4

What is a negotiable intrument?

elements of negotiability:

UPFPON

when is negotiability detemined?

Answer 4

A:

(1) Written and signed (by maker or drawer);
(2) Unconditional;
(3) Promise or order;
(4) To pay a fixed amount of money (with or without interest);
(5) Payable to order or bearer;
(6) On demand or at a definite time; and
(7) No unauthorized promise or undertaking.

UPFPON

At Time of issuance

Question 5

How to tell if an instrument is conditional and thus non-negotiable:

Answer 5

(1) It expressly states a condition for payment; or,
(2) States that the promise or order is subject to or governed by another writing.

If an instrument recites the consideration, then it is not
conditional.

If a note fails to state a time for the payment or states that it is payable on demand , or on sight, a note is payable on demand.

Question 6

How to determine whether an instrument is payable at a definite time

Answer 6

look to see if it is payable: 
(1) On a fixed date; 
(2) After elapse of a fixed period; 
(3) At a time Readily Ascertainable
when issued.

Question 7

HDC [Basic] Rule

FIW

Answer 7

holder in due course rule states: If a negotiable instrument is transferred

1) for value,
2) in good faith,
3) without notice of any defenses or claims,

the holder in due course can force someone to pay on the instrument.

FIW

Question 8

How to become a holder (NOT HDC)

Answer 8

Person in possession of an instrument with a right to enforce it.

Question 9

Steps needed to negotiate an instrument?

Answer 9

Depends on whether instrument is payable to order or bearer

Bearer instruments are negotiated by merely transferring possession.

Question 10

A Negotiable Instrument CANNOT:

Answer 10

One: Make payment subject to an express condition. Therefore, statements such as “if and only if” something happened and “provided however” are not valid in a negotiable instrument.

Two: Use phrases “subject to” or “governed by.”

Or three: Incorporate the terms of any agreement except that the instrument can incorporate another document referring to rights regarding collateral, prepayment, and acceleration.

Question 11

A Negotiable Instrument CAN:

Answer 11

1) Contain details or consideration of underlying contract.
2) Contain a reference to another writing. Therefore, phrases like “as per” or “in accordance with” another writing is valid.
3) Refer a particular fund or source where the payment will come from.
4) And use consumer protection language that is not Holder in Due Course.
5) Moving on to the fixed amount in a negotiable instrument. Only the principal has to be fixed, while the interest can be a variable.
6) It also does not matter how the interest is calculated. If the note provides for interest but is silent as to the amount, the interest is at the judgment rate.
7) Furthermore, money is the medium of exchange authorized or adopted by a domestic or foreign government as part of its currency. It cannot be payable in goods or services.
8) If words and figures do not match, the words will prevail.
9) A negotiable instrument must also contain no other undertaking or instruction. This means that it cannot state any other promise or undertaking by the maker or drawer.

For Example, “a promise to pay $500 and deliver goods” is nonnegotiable.

10) In contrast, the instrument can:

a) Make promises concerning collateral.
b) Contain confession of judgment clauses.
c) And waive state rights that protect the maker or drawer.
d) The amount is payable on demand or at a definite time.
e) To differentiate the timing, an instrument is on demand if it:
- -States that it is payable on demand or at sight,
- -Does not state a date,
- -Or is a check.

And it is payable at a definite time if it states that it is
payable:
–On elapse of a definite period of time after sight or acceptance,
–At a date stated in the instrument,
–Or at a time readily ascertainable at the time the promise or order is issued.

11) Furthermore, a negotiable instrument can include prepayment or acceleration.

Example of Acceleration: “payable on November 8, 2010, but the holder may demand payment at any time prior thereto if he deems himself insecure”.

12) A negotiable instrument can include extension options. Here, if the holder has the option to extend payment obligation, and the instrument does not have to state a time limit.

However, if the maker or drawer has the option to extend payment obligation, then the instrument needs to state a definite time limit.

Extension Statement Example: “Payable on November 8, 2010, but if my crop fails that year, then I should have until November 8th of the following year”.

Question 12

Negotiability and NOTES

Answer 12

1) Next, the general rule for the words of negotiability is that only NOTES require words of negotiability, which could be payable either to bearer or order.

For the word “bearer”, it could be:

Payable to bearer or to the order of bearer.

Payable to cash or to the order of cash.

Blank.

Not payable to an identified person.

For Example, “payable to Merry Christmas”.

Or payable to both bearer and order.

For Example, “to order of Apple Smith or bearer”.

2) Also, a negotiable instrument that is NOTES must have the word order on the instrument.

This includes:

Payable to order of an identified person, such as payable to order of Joe.

Payable to an identified person or order, such as payable to Apple Smith or order.

Payable to the order of an estate.

For Example, “pay to order of Apple Smith’s estate”.

And payable to the order of a person holding official office.

Question 13

How to destroy Negotiability

Answer 13

Negotiability is destroyed if it does not meet all elements.

Example: A note stating that it is payable to Apple Smith is not negotiable because it does not contain words of negotiability.

It is not bearer or order paper.

Negotiability can also be destroyed with a bold statement on the note that it is non-negotiable.

Now, a check is still negotiable even though it does not contain words of negotiability, as long as it meets all other requirements listed above. This means that the statement payable to Apple Smith is negotiable even though it does not contain words of negotiability.

This also means that the negotiability of a check cannot be destroyed by:

Scratching out the words to the order Or writing non-negotiable on it.

Question 14

How to negotiate an instrument

Answer 14

The General Rule is that for an instrument to be negotiated, the instrument will be transferred to a third party who becomes a holder.

who has holder status: Person in possession of an instrument with a right to enforce it.

Question 15

Difference between holder of order and holder of bearer paper

Answer 15

1) A person is the holder of bearer paper if he has possession of the instrument,
2) whereas he is the holder of order paper if he has both the possession and proper endorsements (not forged).

Question 16

Who can’t be a holder?

Answer 16

a person or an institution cannot be a holder if:

1) It is a drawee bank.
2) Or he is a person receiving instrument that has been forged.

Question 17

What are the 7 issues regarding endorsements?

Answer 17

1) The blank endorsement.
A signature not accompanied by the naming of a specific endorsee creates bearer paper which may then be negotiated by delivery alone.

And if the payee endorses the back and does not name a new payee, it converts the instrument into bearer paper, and any person, including a thief, just needs possession to be the holder.

However, the holder can convert it into order paper by writing the name of a new payee above the last endorsement.

2) Special endorsement.
Here, the payee endorses the back and then specifies a new payee above his endorsement. It is order paper even if special endorsement does not contain order language.

3) Restrictive endorsements.
Writing phrases such as “for deposit only” or “for collection only” makes it a restrictive endorsement and depository bank has to comply with it or will be liable for conversion.

4) Possession without endorsement.
If there is no endorsement, then it is not a negotiation and the transferee is not a holder.

However, if a value is given, the transferee has a right to get the transferor’s endorsement and will become a holder when he finally gets the endorsement.

In a depository bank, if the bank’s customer is a holder and deposits instrument in the bank, the bank becomes a holder even if it is not endorsed.

5) Misspelled name.
If the payee’s name is misspelled, the instrument can be endorsed in either his correct name, the misspelled name, or in both, and the person taking the instrument may require signature in both names.

6) Persons with the same name.
If the payee’s name is confusing because there are more than 1 person with the same name, then the intent of the issuer determines who is entitled to the instrument.

7) Instrument may be payable to 2 or more persons.
In cases of to Apple or Banana, either of them can sign.
In cases of to Apple and Banana, both of them must sign.
And in cases of to Apple, comma, Banana, either of them can sign.

Now, the endorsement must be on the instrument or on a separate document affixed to the instrument.

Also, an endorsement is valid even if the payee lacks capacity.

Examples of Payee Lacking Capacity: The payee is a minor or if the payee is under duress.

Question 18

What about forged endorsement with respect to Order v. Bearer paper?

Answer 18

Generally, only forgery of ORDER paper affects negotiability.

Forgery of BEARER paper does not matter.

If there is a forgery of the payee’s or special endorsee’s name, then no later transferee can qualify as a holder or holder in due course, because there is no valid negotiation.

As for claims to the instruments, if the payee’s name is forged, the payee is entitled to recover the instrument.

Question 19

Whats a HDC? How does someone become one? Whats so special about HDC? Personal v. Real defenses?

Answer 19

To be a holder in due course, the holder needs to satisfy
certain requirements, and these requirements need to be met AT THE POINT VALUE IS GIVEN.

Things that happen AFTER do not destroy the holder in due course status once the status is achieved.

In summary, the holder in due course WILL take free of any PERSONAL defenses.

Personal defense include:

1) Mistake
2) Unauthorized completion
3) Condition precedent
4) Fraud in inducement
5) And lack of consideration

However, a holder in due course WILL NOT take the negotiable instrument free of any REAL defenses.

Real defense include:

1) Fraud in factum
2) Illegality
3) Bankruptcy
4) Duress
5) Lack of capacity
6) Statute of limitations
7) Forgery
8) Unauthorized signature
9) And material alteration

Question 20

Who can’t be an HDC?

Answer 20

1) The original payee. Only subsequent transferees can be a holder in due course.

2) The drawee bank. It does not get the check through
negotiation, it gets negotiation through a presentment.

3) Subsequent transferees of forged order papers.

Question 21

Expanded HDC Definition.

When someone isn’t an HDC

When is authenticity not questionable?

Answer 21

The holder in due course is a holder who takes for value, in good faith, with no notice of defects, and the negotiable instrument is properly negotiated to him or he is protected by the shelter rule.

A person is not a holder:

1) If the order paper was forged.
2) Or if he is a drawee bank or original payee.

The authenticity is not questionable if the instrument does not contain the evidence of forgery, alteration, or incomplete so as to raise suspicions.

Question 22

How can HDC give VALUE for instrument?

Answer 22

The holder in due course can give the value for the instrument in the following ways:

1) The holder in due course can pay less than the face value of the instrument, unless it is excessive.

Here, the note with the face value of $5,000 can be discounted for $4,800.

If the holder paid the full $4,800, then he has given the value for $5,000.

And if the holder paid $2,400, then he has given value for $2,500.

Two: The holder can make a promise and perform that promise.

Three: The holder can make an irrevocable obligation to perform the promise.

And four: The value can be based on the past consideration or debt.

Question 23

How can HDC take for value in GOOD FAITH?

Answer 23

The holder in due course must take for value in good faith.

Good faith means that the holder must act with honesty in fact and in the observance of reasonable commercial standards for fair dealing.

For Example, there should be no steep discounts

Question 24

How does HDC take WITHOUT NOTICE?

Answer 24

A holder must also take without notice of defect AT TIME VALUE WAS GIVEN.

The kinds of notice include:

1) Actual knowledge, where holder has to actually know about the instrument defect of any sort, and instrument’s merely being filed in the public records is not enough.
2) Receipt of notice,
3) Circumstances where the holder should have known the defect.

Question 25

Six common defects of instrument that will consist of NOTICE:

Answer 25

The common defects of instrument that will consist a notice are:

1) Instrument that is overdue.

In general, checks are overdue 90 days after issuance.
The holder only has notice if the principal is overdue.
And the instrument is not overdue if only the interest is
overdue.

2) Instrument is dishonored, where the demand was made and payment was refused.
3) Unauthorized signature.
4) Alteration.
5) Any claim against the instrument.
6) Any defense or claim for recoupment.

Again, these six are common defects of an instrument with notice.

On the failure to endorse, if there is no endorsement of order paper, the transferee is not a holder. However, if the transferee gave value, he has the right to obtain an endorsement.

If the transferee receives notice of problems before the
endorsement is made, he cannot be a holder in due course because he is not a holder until it is endorsed, and by then he already has notice of the problems.

Question 26

What is the Shelter Rule?

Answer 26

Shelter Rule

Under the Shelter Rule, a transferee who takes an instrument from a holder in due course derivatively takes holder in due course rights even if they do not meet the holder in due course requirements.

Question 27

3 Rights of the HDC.

Answer 27

HDC Rights

The transferee does not actually become a holder in due course.

He just has the holder in due course rights.

Nevertheless, the transferee cannot get holder in due course rights if he engaged in fraud or illegality affecting the instrument.

Also, the person who acquires an instrument by fraud or
illegally cannot become a holder in due course by passing the instrument onto a holder in due course and repurchasing it.

Lastly, here are the Rights of a Holder in Due Course.

1) a holder in due course is only SUBJECT to REAL DEFENSES.

2) a holder in due course is PROTECTED from PERSONAL defenses, which are any defenses other than a real
defense.

3) a holder in due course is free from claims to the
instrument. This means neither the maker nor drawer can seek to recover the physical note or check from the holder in due course.

=================================

1) a holder in due course is only subject to REAL DEFENSES.

Real defenses include:

a) The obligor is a minor and cannot enter into contracts.
b) The obligor was under duress.
c) The obligor has lack of legal capacity.
d) There is illegality making obligation void.
e) There is fraud in the factum:

In a fraud in the factum, the signer lacked knowledge of the instrument’s character or essential terms, and the signer lacked reasonable opportunity to learn of the instrument’s character or essential terms.

f) discharge of the obligor in bankruptcy.
g) Alteration.
h) Forgeries.

2) a holder in due course is protected from PERSONAL defenses, which are any defenses other than a real
defense.

Personal defense include:

a) Mistake
b) Unauthorized completion
c) Condition precedent
d) Fraud in inducement
e) And lack of consideration

3) a holder in due course is free from claims to the
instrument. This means neither the maker nor drawer can seek to recover the physical note or check from the holder in due course.

Question 28

What are Real Defenses?

Answer 28

Real defenses include:

1) Fraud in factum
2) Illegality
3) Bankruptcy
4) Duress
5) Lack of capacity
6) Statute of limitations
7) Forgery
8) Unauthorized signature
9) And material alteration

Question 29

What are Personal Defenses?

Answer 29

Personal defense include:

a) Mistake
b) Unauthorized completion
c) Condition precedent
d) Fraud in inducement
e) And lack of consideration

Question 30

Liability and Agent’s Signature

Answer 30

Liability of Parties

Agent’s Signature First, a signature by an agent can give the principal or agent liability.

If an agent is AUTHORIZED to sign and signs an instrument by either signing their name or the name of the principal, the principal is liable.

However, if the agent’s signature is NOT AUTHORIZED, the agent is personally liable, but the principal is not.

The AGENT NOT PERSONALLY liable for a promissory note if:

The principal is identified in the instrument, And the signature unambiguously shows that the person is signing as an agent.

Example Cases:

“ABC Corporation, Apple Smith, the President”: Clear that Apple Smith is an agent for ABC Corporation.

“ABC Corporation, by Apple Smith”: Clear that Apple Smith is an agent for ABC Corporation.

“ABC Corporation, Apple Smith”: No agent status is indicated, and Apple Smith may be personally liable.
Moving on, the agent is then liable to any holder in due course unless the holder in due course had notice that the agent was not intended to be liable.

And the agent is also liable to any non-holder unless he proves that the original parties did not intend for the agent to be liable.

For checks, the agent is not personally liable if the
principal’s name appears on the check.

For Example, if it appears as “ABC Corporation, Apple Smith”, then Apple Smith is not personally liable as an agent for ABC Corporation.

Question 31

Liability and the Maker

Answer 31

Liability of Parties

Maker

As the primary liability, a maker must pay the note when it is due according to the terms when it was issued or when an incomplete instrument is completed.

The holder can sue the maker without satisfying any conditions first.

Also, the maker is liable to the holder and any endorser who paid the instrument.

If 2 or more persons sign as co-makers, they are jointly and severally liable.

In cases of co-makers, a regular co-maker has a right of
contribution from the other co-makers if he is forced to pay more than his share.

Example: Apple, Banana and Candy all sign a note as makers in return for a $3,000 loan, and the holder collects all $3,000 from Apple. In this case, Apple has a right of contribution for $1,000 each from Banana and Candy.

Furthermore, an accommodation co-maker, signed as a surety for another co-maker, has right of reimbursement or contribution.

For Example:
Apple, Banana and Candy sign a note for $3,000, and Apple signed as a surety. In other words Banana and Candy got all the loan money.

Then, the holder collects all $3,000 from Apple.
In this case, Apple has a right of reimbursement and can collect full $3,000 from Banana or Candy.

Question 32

Liability of Drawer

Answer 32

3) Drawer

A drawer cannot disclaim liability on a check, but he can
disclaim liability on other drafts. An example of disclaiming liability on drafts is putting the phrase “without recourse” on a draft.

As a secondary liability, the drawer is liable only if a check was presented and dishonored.

A check must be presented to the drawee within 30 days.

Though the drawer is still liable even if he waited longer than 30 days, he has no liability if the drawee becomes insolvent.

The other condition is if the check was dishonored, which means that the drawee refuses to pay the instrument upon presentment.

Now, the drawer’s liability is discharged when the check is accepted by bank.

The drawer can limit his liability by writing on a check stating that the check is void after a certain number of days.

Question 33

Liability of Endorser

Answer 33

Endorser

Generally, an endorser is anyone, other than the maker or
drawer, who puts their signature on an instrument.

A qualified endorsement can avoid endorser liability by writing “without recourse” by the endorser’s name.

However, if the endorser has liability, he is liable to the
holder of the check and any subsequent endorser who paid the check.

An endorser is liable under all of the following situations.

1) The presentment for payment to the maker or drawee,
2) Dishonor by the maker or drawee,
3) The endorser is given notice of the dishonor within
30 days.

Nevertheless, an endorser’s liability is automatically
discharged if the presentment is not made within 30 days or the check is accepted by a bank.

Question 34

Liability of Drawee Bank

Answer 34

Drawee Bank

Generally, a drawee bank has no liability to a payee until the drawee signs the check.

If the drawee signs the check and has accepted it, then the primary liability incurs. This is the primary liability as the acceptor.

However, he does not have to accept the check and cannot be sued for failing to accept.

And if the bank accepts or certifies the check, the drawer and endorser’s liability is discharged.

Now, final payment occurs either when the drawee bank pays the instrument in cash or does not revoke a provisional settlement by the midnight deadline. The midnight deadline refers to the midnight on the next banking day after the banking day of receipt.

Once the drawee bank pays a check, drawee bank cannot recover on the check from the persons it paid.

Regardless, the bank can still have a claim for breach of
presentment warranty or go after its customer, such as the drawer.

If the payee’s name is forged and the drawee bank pays it, the payee can sue a drawee for conversion.

Here, the payee must have received the delivery of the
instrument to sue in conversion. If the instrument is lost or
stolen from mail, the payee cannot sue.

At the death or incompetence of a customer, the bank can continue to pay until 10 days after they get notice of the death or incompetence.

But if someone with an interest in the account demands that the bank stop paying immediately, the bank must stop immediately.

Question 35

Liability of the Accommodation Party

Answer 35

Accommodation Party

An accommodation party is a surety who signs an instrument to lend his credit to another party but does not receive any direct benefit, such as money.

Parties are on notice that a person is acting as an
accommodation party if:

There is the use of words such as guarantor or surety
Or it is an anomalous endorsement.

For Example, if he is a person who is not in the chain of title.

This accommodation party may sign an instrument in any capacity and incur liability in that capacity.

If a party signs as an accommodation maker, then he has primary liability and the right to reimbursement from the accommodated party.

In contrast, if a party signs as an anomalous endorser, then he has secondary liability and the right of contribution from other anomalous endorsers or right of reimbursement from the accommodated party.

If the guarantor specifically guaranteed collection only, then he has to go after the accommodated party first unless such action would be useless because the accommodated party is either insolvent or cannot be found.

Question 36

Warranty Liability

Transfer (6) v. Presentment (4)

Answer 36

Warranty Liability

1) Disclaiming Warranties

The transferor CANNOT DISCLAIM warranties in CHECKS, but he can disclaim warranties in everything else.

2) 2 Types of Warranties

TRANSFER and PRESENTMENT warranties.

Any transferor who receives consideration can make transfer warranties.

However, the drawee bank or maker of note cannot sue on a transfer warranty. They can only sue on presentment warranties.

Transfer warranties are made to the immediate transferee and also to subsequent transferees if the transferor endorsed the instrument.

Transfer warranties warrant that:

1) The transferor is entitled to enforce the instrument.
2) All signatures are authentic and authorized.
3) There is no alteration.
4) There are no good defenses against the transferor.
5) There is no knowledge of any insolvency proceeding.
6) And that if a person demands draft, that person identified as drawer has authorized the instrument.

On the other hand, the presenter and previous transferors make presentment warranties, and the holder of the presentment warranties can sue anyone in the chain of title.

Also, presentment warranties are made to those who paid in good faith. They include:
The maker who pays in good faith.
The drawee who pays or accepts in good faith.
And the acceptor who accepts in good faith.

As for PRESENTMENT warranties on checks, it warrants that:
1) The transferor is entitled to enforce the instrument,
assuming that the transferor is the holder and there is no
forged or missing endorsements.
2) There is no alteration.
3) Transferor has no knowledge that drawer’s signature is
forged or unauthorized.
4) Transferor is entitled to enforce the instrument.

Question 37

How does a holder discharge an obligation?

Answer 37

1) Discharge by Holder

A holder can discharge an obligation by surrendering the
instrument to the obligor, destroying it, or canceling it.

Question 38

Effect of Underlying Obligation

What’s the holder do when the promise behind the paper is broken?

Answer 38

Effect on Underlying Obligation

If a negotiable instrument, such as a check or note, is accepted for an underlying obligation, the obligation is SUSPENDED.

After the SUSPENSION, if the negotiation instrument is then paid or accepted, then the obligation is DISCHARGED up to the amount of the payment.

On the other hand, if negotiation instrument is then DISHONORED, HOLDER can sue on the instrument or on the underlying obligation.

For Example, if the tenant delivers a rent check to landlord, then the tenant’s rent obligation is suspended until the check is presented for payment to Tenant’s bank.

If the bank pays the check, obligation is discharged, but if the bank refuses to pay, the landlord can sue on the check or on the underlying lease agreement.

Now, if the check is paid by the certified, cashiers or teller’s check, then the underlying obligation is discharged as if paid in cash.

Question 39

Failure to produce original instrument. What are the requirements and what are the options for the person that was in possession?

Answer 39

3) Failure to Produce Original Instrument
When there is a failure to produce an original instrument, there can be enforcement by a person not in possession.

This means that if the original instrument has been lost,
destroyed or stolen, a person can still enforce the instrument if:

a) That person was in possession when the loss occurred,
b) Loss was not due to transfer or lawful seizure,
c) And that person cannot reasonably obtain the original instrument.

Here, the person enforcing the instrument is required to put up a SECURITY or BOND.

Question 40

1) Overdraft;
2) Postdated Check;
3) Stop Payment Orders.

Answer 40

1) Overdraft

A bank can charge a check against an account even though the charge creates an overdraft.

A customer is not liable for the amount of the overdraft if the customer neither signs it nor benefit from the proceeds of the check.

2) Postdated Check

A bank can pay a postdated check before the post date unless the customer gives notice to the bank of the postdating which describes the check with reasonable certainty.

3) Stop Payment Orders

The drawer can make the stop payment.

A stop payment must be in writing, dated and signed, and the writing must describe the item with certainty.

Also, a stop payment order is effective for 6 months and can be renewed

However, a drawer has no right to stop payment on cashiers, tellers, and certified checks. Here, a bank can stop payment, but it risks the liability for expenses, lost interest and consequential damages.

Question 41

Defenses of Bank on failure to comply with Stop payment order

Answer 41

Defenses of the bank include:

1) The stop payment order did not comply with the
requirements, although, in this case, the bank can stop the payment order if it wants to.

2) The customer suffered no loss because he would have had to pay the check even if the payment were stopped.

For Example, the check has already reached the hands of the holder in due course.

If the bank pays a check that had a proper stop payment, it is liable for any losses incurred, including damages for dishonor of subsequent items and bank must re-credit account.

Question 42

Wrongful Dishonor: when bank dishonors properly payable check, what are the options?

What are Banks valid defenses?

Answer 42

7) Wrongful Dishonor

It occurs when a bank dishonors a properly payable check.

Only the drawer can complain about wrongful dishonor, and the drawer can get any damages that resulted from the dishonor of the check.

There are two defense for the drawee bank:

1) The payment would overdraw the drawer’s account.
2) The check is more than 6 months old.

Question 43

“Payment in Full” check. what is it? what’s it act as?

Answer 43

Payment in Full Check

It is a check on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation.

Payment in full acts as an accord and satisfaction if the payee cashes the check.

Unless, the payee returns the money within 90 days,
Or the payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks.

In those cases, payment in full is not an accord and
satisfaction, and the drawer is not discharged simply by the act of cashing the check.

Question 44

Forgery and Alteration

Forging MAKER’S SIGNATURE

Answer 44

Forgery and Alteration

Different rules apply based on the identity of the person whose name is forged.

Forgery of Maker’s Signature

When there is a Forgery of the Maker’s Signature, the alleged maker is not liable because a maker’s signature does not appear on a note.

However, the FORGER IS LIABLE because his signature is the one that appear on a note.

Question 45

Forgery and Alteration

Forging DRAWER’S NAME. Who’s Liable?

What Possible Defenses (2)?

Answer 45

Forgery of Drawer’s Name

When there is a Forgery of the Drawer’s Name, the alleged DRAWER IS NOT LIABLE.

In contrast, the DRAWEE BANK IS LIABLE.

In detail, a drawee bank must re-credit the drawer’s account because the check was not properly paid unless the bank has a valid defense.

Here, the drawee cannot go after the presenter for breach of presentment unless the presenter knows of the forgery.

The forger is liable to the drawee bank because he is treated as the real drawer.

The DRAWEE BANK has 2 DEFENSES:

1) THE NEGLIGENCE RULE, if the drawer’s own negligence substantially contributed to the forgery, forgery is validated.
2) THE BANK STATEMENT RULE, a drawer has duty to inspect bank statements in a timely manner and report forgeries to the bank.

If the drawer does report, the bank will have to re-credit his account unless the bank can show that delay in reporting resulted in the bank suffering a loss.

For Example, if the forger has escaped.

The forged drawer’s signature must be reported within 1 year or any claim is barred.

Also, under the repeat offender rule, if the same person is forging checks, the drawer must report the forgeries within 30 days of when statement was available.

If the drawer does not do that, the bank only has to re-credit those forged checks that were included in the statement.

Question 46

Forgery and Alteration

Forgery of PAYEE’S NAME. Who’s Liable?

Answer 46

Forgery of Payee’s Name

Sometimes there is Forgery of the Payee’s Name, which usually is a forgery of endorsements.

In a bearer paper, this forgery is irrelevant because
endorsement is not necessary, whereas in order paper, forgery breaks the chain of title and the order paper is then not properly payable.

The DRAWER can DEMAND that the DRAWEE bank re-credit his account because it was not properly payable.

Also, the PAYEE can bring a CONVERSION action against the drawee or anyone who took the check if the payee had possession.

There can ONLY BE ONE (1) recovery against the DRAWEE bank. If the payee wins a conversion action, the drawer is not able to sue the drawee bank.

Nevertheless, the DRAWEE BANK has DEFENSES.

1) Under the IMPOSTER RULE, if a check is made out to an impostor, forgery is validated.

If the check is made out to a fictitious person, forgery is
validated, and if a person makes out a check to a payee and then forges the payee’s name and does not intend that the payee receive the check, the forgery is validated.

2) Under the EMPLOYEE ENDORSEMENT rule, if an employer entrusts an employee or an independent contractor with responsibility for an instrument and the employee forges it and the bank pays it in good faith, the forgery is validated.
3) The DRAWER was NEGLIGENT.
4) The DRAWER FAILED TO TIMELY SUE. He must sue within 3 years.

Now, if a drawee bank is forced to pay, it will then want to pass on liability, which can pass to the presenter or transferor. On passing liability to the presenter, a drawee bank can sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce.

However, if it was the drawer’s signature that was forged, the drawee bank could not go after presenter.

And on passing liability to the transferor, the presenter who loses to the drawee for breach of presentment can sue up the chain for breach of transfer warranty.

Question 47

What is the imposter rule?

Answer 47

1) Under the IMPOSTER RULE, if a check is made out to an impostor, forgery is validated.

If the check is made out to a fictitious person, forgery is
validated, and if a person makes out a check to a payee and then forges the payee’s name and does not intend that the payee receive the check, the forgery is validated.

Question 48

What is the Employee Endorsement Rule?

Answer 48

2) Under the EMPLOYEE ENDORSEMENT rule, if an employer entrusts an employee or an independent contractor with responsibility for an instrument and the employee forges it and the bank pays it in good faith, the forgery is validated.

Question 49

What are the two types of Alteration? And what are their effects, respectively, in a HDC v. NON-HDC?

And Drawee Bank’s Defenses?

Answer 49

Alteration

There are two types of alterations:

1) CHANGE IN OBLIGATION, which is any unauthorized change in an instrument that changes the obligation of a party such as amount due, date, names of payees, or interest rate.
2) UNAUTHORIZED COMPLETION, where an instrument is completed in an unauthorized manner.

These types of alterations have different effects on the holder in due course.

In a change in obligation, the holder in due course can enforce the original amount, while in an unauthorized completion, he can enforce the instrument as completed.

On the other hand, the effects are different for on a nonholder in due course.

If the alteration is fraudulently made by the holder, the
obligor can be totally discharged.

However, if it is not fraudulently made by the holder, the
obligor is still liable under the original terms.

Now, when an ALTERED CHECK is NOT properly payable, the drawer can sue the drawee bank.

The DRAWEE BANK’s defenses are:

The DRAWER’S NEGLIGENCE, where if the drawer’s negligence substantially contributed to the alteration, then he cannot
complain

And the BANK STATEMENT RULE, which state that the drawer must report the alteration within 1 year.
Lastly, a drawee can sue for breach of presentment. A presenter can then sue up the chain for breach of transfer warranties.

Question 50

When an ALTERED CHECK is NOT properly payable, who can sue whom?

And what are the available defenses?

Answer 50

Now, when an ALTERED CHECK is NOT properly payable, the drawer can sue the drawee bank.

The DRAWEE BANK’s defenses are:

The DRAWER’S NEGLIGENCE, where if the drawer’s negligence substantially contributed to the alteration, then he cannot
complain

And the BANK STATEMENT RULE, which state that the drawer must report the alteration within 1 year.
Lastly, a drawee can sue for breach of presentment. A presenter can then sue up the chain for breach of transfer warranties.