UCC 3 Flashcards
The basic question in Commercial Paper asks
The basic question in Commercial Paper asks whether a holder can force a maker or drawer to pay on an instrument involves an analysis of (1) whether the instrument is negotiable, (2) has been properly negotiated, (3) the holder is an HDC, and whether the defenses that the maker or drawer is asserting are real or personal?
- IS THE INSTRUMENT NEGOTIABLE?
To be negotiable, an instrument must be:
To be negotiable, an instrument must be: She Won Unlimited Free Dunkin Donuts Or Bagels
(1) in writing, (2) signed by the maker or drawer, (3) be an unconditional promise (note) or order to pay (draft/check) judged on the face of the instrument, (4) state a fixed amount of money (not services or goods), (5) to be payable on demand (demand instrument or at a definite time (may be an option), (6) to order or to bearer, unless it is a check (7) without any other unauthorized promise
Explain prima facie element # 3 regarding whether an instrument is/is not negotiable
(3) Whether a note/draft is conditioned is judged on the ____ of the ____ . The note/draft here (does or does not) state any conditions to payment
(3) Whether a note/draft is conditioned is judged on the face of the instrument. The note/draft here (does or does not) state any conditions to payment
What is a draft?
A draft is a three-party commercial paper. It is a WRITTEN and SIGNED order to pay. The party ordering the payment is the drawer. The party receiving the payment is the payee. The party that actually makes the payment is the drawee.
• Drafts = 3 parties
• The drawer draws the draft
• WE have to pay (the draWEE has to pay)
• The payee says “pay me”
A check is a specific type of draft, namely one drawn on a bank and payable on demand. aka money order or cashier’s check
What is a promissory note?
A promissory note is a WRITTEN and SIGNED promise by the maker to pay money to another, the payee or bearer (bears the note while waiting for repayment)
• Notes = 2 parties
• The maker makes the note
• The payee says “pay me”
Explain prima facie element # 3 (unconditional promise or order to pay) regarding whether an instrument is/is not negotiable
• Unconditional: Whether a note is conditional is judged on the face of the instrument signature. An instrument is conditional and thus not negotiable if:
(1) it expressly states a condition for payment, or
(2) it states that if the promise or order is subject to or governed by another writing.
A promise or order is not conditional merely because it:
(a) refers to another writing regarding collateral, prepayment, or acceleration (watch for parole evidence issues) (remember cannot be “subject to” another writing;
(b) Includes a statement of consideration,
(c) limits payment to a particular source or fund;
(3) requires a countersignature (traveler’s check); or
(4) contains a statement required by law that the Holder is subject to claims and defenses of the original payee.
Explain prima facie element # 5 (payable on demand) regarding whether an instrument is/is not negotiable
(5) Payable on demand means that it is payable whenever the holder wants payments, the holder decides when he gets paid; a note that does not say when it is payable is considered payable on demand; (can be by acceleration); OR Payable at a definite time is payable on or before a stated date or within a fixed period after signed
Explain prima facie element # 7 (Unauthorized promise regarding negotiable instrument) regarding whether an instrument is/is not negotiable
(7) Unauthorized promise regarding negotiable instrument: undertaking or power to give, maintain, or protect collateral, authorization or power given to Holder to confess judgment or to realize on or disposal of collateral and A waiver of the benefit of law that protects the obligor
Order or Bearer?
If an instrument is order paper it may be payable “to the order of an identified person” or to “an identified person or order” (the person must be identified with certainty)
If an instrument is bearer paper it does not designate a specific payee: “payable to the order of bearer” “pay to the order of cash”, “pay cash”
Transfer of Instruments
transfer by assignment
versus
transferred by negotiation
- A transfer by assignment gives the assignee only those rights the assignor possessed. The assignee also inherits the obligations and duties of the assignor. Defenses that can be raised against the assignor can normally be raised against the assignee.
- When a paper is transferred by negotiation, the party receiving the document is called a holder; negotiation offers many protections to the holder; only negotiable instruments can be negotiated.
• The holder is offered protections under this transfer because he is not taking assignment of the contract; he is taking control of the payment obligation, which exists separately from the contractual deal.
Transfer of Instruments
Proper negotiation makes one a Holder. If there is an attempt to transfer by negotiation and it fails, it will be considered a transfer by ______
Proper negotiation makes one a Holder. If there is an attempt to transfer by negotiation and it fails, it will be considered a transfer by assignment
Transfer of Instruments
Only negotiable instruments can be negotiated. All other commercial paper must be _______.
Only negotiable instruments can be negotiated. All other commercial paper must be assigned.
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN. So ask…
- Was the instrument properly negotiated?
order
bearer
indorsements
To negotiate bearer paper, you need (1) delivery.
To negotiate order paper, you need (1) delivery and (2) a proper indorsement (real signature).
Indorsements are required to negotiate an order instrument. The person who indorses an instrument is the indorser; the person to whom the instrument is transferred is an indorsee
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
NAME 5 Indorsements
There are (5) different types of indorsements: Queen Sarah Bakes And Roasts
A blank indorsement specifies no particular indorsee If you put a blank indorsement on order paper it becomes bearer paper = anyone in possession can redeem the instrument and can negotiate by mere delivery.
A special indorsement names the indorsee, converts a bearer instrument into an order instrument.
Here the indorser signs, but does not redeem the instrument himself, he specifies another person to receive it
A qualified indorsement disclaims or limits contract liability; makes order paper
The indorser is not guaranteeing payment, the only thing happening is a transfer of ownership
Typically the words “without recourse”
A restrictive indorsement attempts to impose a condition or restriction on how the instrument will be further negotiated
A anomalous indorsement is indorsed for the purpose of negotiating it to another party (if someone other than the holder or payee indorses the instrument) [surety, and is now liable for payment]
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
A blank indorsement…
A blank indorsement specifies no particular indorsee If you put a blank indorsement on order paper it becomes bearer paper = anyone in possession can redeem the instrument and can negotiate by mere delivery.
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
A special indorsement …
A special indorsement names the indorsee, converts a bearer instrument into an order instrument.
Here the indorser signs, but does not redeem the instrument himself, he specifies another person to receive it
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
A qualified indorsement
A qualified indorsement disclaims or limits contract liability; makes order paper
The indorser is not guaranteeing payment, the only thing happening is a transfer of ownership
Typically the words “without recourse”
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
A restrictive indorsement
A restrictive indorsement attempts to impose a condition or restriction on how the instrument will be further negotiated
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
A anomalous indorsement
A anomalous indorsement is indorsed for the purpose of negotiating it to another party (if someone other than the holder or payee indorses the instrument) [surety, and is now liable for payment]
WHAT IS REQUIRED FOR NEGOTIATION DEPENDS ON HOW THE INSTRUMENT WAS DRAWN …
So ask… Was the instrument properly negotiated?
Last indorsement rule:
Last indorsement rule: the last indorsement on an instrument determines whether is it order paper or bearer paper.
If the last indorsement is blank, the instrument is bearer
If the last indorsement is special or qualified, it is order
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
A ______ is a person in possession of an instrument. A holder who meets certain qualifications becomes a ___ ___ ___ and takes an instrument _____ of all claims to it and most ____ against payment that could be successfully asserted against the transferor.
Remember: No Perfect Friend – Very Good News = negotiable, possession/rights, no forgery, value, good faith, and no notice
A holder is a person in possession of an instrument. A holder who meets certain qualifications becomes a holder in due course and takes an instrument free of all claims to it and most defenses against payment that could be successfully asserted against the transferor. Remember: No Perfect Friend – Very Good News = negotiable, possession/rights, no forgery, value, good faith, and no notice
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
HDC Elements (Big Picture)
Remember: No Perfect Friend – Very Good News = HDC
negotiable, possession/rights, no forgery, value, good faith, and no notice
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
HDC Elements
To be a HDC, the transfer must have taken place by negotiation, if not properly negotiated then not a holder, and the new owner takes ownership
(1) for value,
(2) in good faith,
(3) without notice
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
HDC explain Value
- Value: HIGHLY TESTED Any one of the following constitutes value:
Performance of the agreed consideration
o Under UCC, past consideration is considered value
Trading a negotiable instrument for another instrument
Giving the instrument in exchange for incurring an irrevocable obligation to a third person by the person taking the instrument
o An executory promise not value, unless it is an irrevocable obligation to a third party.
Acquisition by the Holder of a lien or a security interest in the instrument of event agent initial clean
A note taken as security is taken for value, and the secured party can be a Holder in due course on default of the secured obligation to the extent of any deficiency in the obligation that the note secures.
It is important to understand the difference between a purchase at a discount and partial failure of consideration which makes the Holder a proportional HDC.
o In the discount case, the Holder pays less than the face value of the instrument (pays $5000 for a $6000 note) but pays the full agreed consideration ($5000). The Holder is an HDC for full value ($6000).
Value may be less than the face value of the instrument, but if the value difference is excessive, the Holder is unlikely to be in good faith.
• Example – check cashing store charging a fee for cashing a check is still in good faith (COMMERCIAL FEB 2016 & ST JULY 2017)
An instrument purchased at a discount is sold for full value as long as a full price agreed upon has been given (i.e. a $1000 promissory note purchased for $900).
o However, if the Holder pays only part of what he agreed to pay ($2500 of the agreed $5000 for a $6000 note) the Holder is an HDC only in proportion to the consideration paid (half paid $2,500 of $5,000 then, receive $3000 -half value of note).
If one pays less than the agreed upon value, one becomes a partial HDC in proportion to the percentage of the value paid.
Not for Value
o Not an HDC if instrument is given as a gift.
Exam Tip: Don’t confuse value with consideration from the underlying contract. For example, an antecedent debt is value, but is not consideration.
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
HDC explain Good Faith
Good faith means honesty in fact (a subjective test) and observance of a reasonable commercial standard (an objective test)
- IS THE TRANSFEREE A HOLDER IN DUE COURSE?
HDC explain Notice
The holder must obtain instrument without notice of certain serious defect (actual, or reason to know) at the time the Holder gave value and took possession; notice of the following destroys HDC:
Remember – Our 3rd Defense Unauthorized Dishonor
o (1) instrument is OVERDUE for payment
o (2) there is an UNAUTHORIZED signature or alteration
o (3) there are 3RD parties with claims to the instrument
o (4) DISHONORED
o (5) DEFENSES or recoupment (counterclaim from O to Payee)
No proof of HDC status is necessary unless the defendant raises defenses available against HDC.
If the person seeking payment is an HDC, only REAL defenses can be successfully raised against the HDC
What are PERSONAL Defenses?
Personal Defenses
HDC is protected from personal defenses those similar to the defenses for breach of simple contract: lack of/failure of consideration; duress, undue influence, mistake, unconscionability, fraud in the inducement and misrepresentation that does not render the transaction void; breach of warranty; prior payment. Incapacity that does not render the transaction void (except infancy) is also a personal defense. Failure of a subsequent condition.
• Real fraud cannot be asserted by a party who failed to take reasonable steps to ascertain the nature of the transaction.
• Theft - nondelivery is a personal defense
• Personal defenses must be one zone defenses EXCEPT (1) accommodation party can raise most defenses available to party accommodated and (2) payor must raise the defense of theft if known
Shelter rule a person who does not qualify as an HDC but who acquires an instrument from an HDC receives the ____ and ____ of HDC UNLESS did so through ____ or _____.
Shelter rule a person who does not qualify as an HDC but who acquires an instrument from an HDC receives the rights and privileges of HDC UNLESS did so through fraud or illegality.
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
Fraud in the factum: fraud that causes a party to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms (relates to the instrument itself); Reasonable opportunity determined by factors: (1) signers confidence in party making representation (2) Availability of 3rd party who might explain this instrument (3) the necessity of acting without delay
Forgery of a necessary party: if the signature of the payee or a special indorsee was forged, no subsequent taker can be an HDC
Alteration: someone altered the instrument after it was issued
Adjudicated incompetent: the court has adjudicated incompetent the party we are trying to enforce against
Infancy: void or voidable because under 18 at the time of contract
Illegality: underlying transaction was illegal
Duress: party acts involuntary due to extreme duress
Discharge through bankruptcy: asserting that any debt that has been discharged by a bankruptcy court is a real defense
Discharges known by HDC
Suretyship defenses: party who we are trying to enforce against was just a surety (not primarily liable
Statute of limitations: holder must assert claim within SOL or barred: In Florida the SOL on all negotiable instruments is 5 years
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
FRAUD IN THE FACTUM…
Fraud in the factum: fraud that causes a party to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms (relates to the instrument itself); Reasonable opportunity determined by factors: (1) signers confidence in party making representation (2) Availability of 3rd party who might explain this instrument (3) the necessity of acting without delay
Fraud in the factum CANNOT be asserted as a defense if:
In order for a defendant to assert the defense of fraud in the factum, she must first take reasonable steps to ascertain the nature of the transaction. Fraud in the factum is a defense where the defendant signed an instrument without the opportunity to learn of its fraudulent character. Whether a defendant seeks counsel is irrelevant to the defense of fraud in the factum.
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
FORGERY
Forgery of a necessary party: if the signature of the payee or a special indorsee was forged, no subsequent taker can be an HDC
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is alteration…
Alteration: someone altered the instrument after it was issued
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is Adjudicated incompetent…
Adjudicated incompetent: the court has adjudicated incompetent the party we are trying to enforce against
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is infancy…
Infancy: void or voidable because under 18 at the time of contract
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is illegality…
Illegality: underlying transaction was illegal
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is duress…
Duress: party acts involuntary due to extreme duress
Duress is an example of a “real” defense, while estoppel, unconscionability, and fraud in the inducement are examples of “personal” defenses. Real defenses may be asserted against a holder in due course and non-holder in due course transferees of the instrument in question. Under the UCC, other defenses, commonly referred to as “personal defenses,” cannot be asserted against a holder in due course.
A claim that a contract was signed under duress, and a contract signed without an opportunity to learn of its fraudulent character are examples of assertable “real defenses.” The opportunity to obtain legal advice in advance of signing an agreement is irrelevant.
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is discharge…
Discharge through bankruptcy: asserting that any debt that has been discharged by a bankruptcy court is a real defense
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is suretyship…
Suretyship defenses: party who we are trying to enforce against was just a surety (not primarily liable
4.WHAT DEFENSES CAN BE ASSERTED AGAINST THE HOLDER? DEFENSE FFAAIIDDSS (REAL DEFENSES)
If the person seeking payment is an HDC, only real defenses can be successfully raised against the HDC:
What is the statute of limitations…
Statute of limitations: holder must assert claim within SOL or barred: In Florida the SOL on all negotiable instruments is 5 years
Who May bring a case?
The following persons are entitled to enforce an instrument for payment: (1) a Holder of the instrument, (2) a non-Holder in possession of the instrument who has the rights of a Holder (as through subrogation) and (3) a person not in possession of the instrument (due to loss, stolen, or destroyed instrument), but who is entitled to enforce it.
Who May bring a case?
To make out a prima facie case for payment, the person presenting the instrument for payment need only prove that:
To make out a prima facie case for payment, the person presenting the instrument for payment need only prove that: (1) signatures on the instrument are genuine (This is presumed unless defendant specifically denies validity); and (2) she is the person entitled to enforce the instrument as discussed above.
Every party who signs a negotiable instrument is liable for payment, except a qualified indorser.
Who may be held liable?
A maker’s or drawer’s liability arises from a contract when…
A maker’s or drawer’s liability arises from a contract when a maker or drawer signs a negotiable instrument,
he or she enters into a contract promising to pay on the negotiable instrument according to its terms when signed if certain prerequisites are met
Who may be held liable?
Primary liability of makers and acceptors
Primary liability only makers (notes) and acceptors (maker of certified check - a drawee who promises to pay an instrument when it is presented later for payment) are primarily liable
Under UCC, the drawee only has liability to pay when it “accepts” the draft by signing it; typically, the drawee accepts the draft when the payee presents it for payment
Primary liability to Holder - Maker and acceptor (maker of a certified check)
A cashier’s check is a draft drawn by a bank on itself. A bank is directly liable on the check. A bank need not and may not honor a stop payment on a cashier’s check. If the issuer are the cashier’s check wrongfully refuses to pay, the person asserting the right to enforce the check generally is entitled to expenses and interest resulting from the failure to pay. If the bank receives notice of a particular circumstance, it will also be liable for consequential damages arising from those circumstances. (JULY 2017)
• If a bank dishonours a valid check which causes other checks by the customer to bounce, and the bank knew about the other checks that were covered with the funds that the bank dishonored, the bank may be liable for any consequences of those bounced checks (even defaults on loans payments that bounced. (JULY 2017)
Who may be held liable?
Secondary liability …
Explain liability of drawers and unqualified indorsers
Secondary liability drawers and unqualified indorsers are secondarily liable, they pay only if a party who is primarily liable does not pay
A drawer pays if a drawee does not
o Need PDN also
o If the drawee accepts the draft, drawers liability is completely discharged
Remember: PDN = Please Don’t Negate:
o Presentment: the instrument was presented to a primary party within 30 days of indorsement
o Dishonor: the primary party refused to pay
o Notice of dishonor: the holder notifies the indorser that the primary party refused to pay within 30 days
Who may be held liable?
Secondary liability …
Explain liability of indorser
An indorser pays if a maker defaults (indorser rules – indorser’s liable under contract liability or warranty; liable to each other in order of signature; liable to prior and later indorsers; may disclaim because signature merely to pass title only);
There are three prerequisites to obtain secondarily liability from an indorses: PDN
Remember: Please Don’t Negate:
o Presentment: the instrument was presented to a primary party within 30 days of indorsement
o Dishonor: the primary party refused to pay
o Notice of dishonor: the holder notifies the indorser that the primary party refused to pay within 30 days
Indorses liability: As a general rule, if an instrument is dishonored, an indorser is liable on the instrument according to its terms at the time of the indorsement.
However, the indorser’s liability extends only two one entitled to enforce the instrument.
Who may be held liable?
Rule regarding Drawee And Conversion
Drawee A drawee makes no negotiable instruments contract. The drawee did not sign the check and thus, is not liable.
HOWEVER…
Conversion (Tort) liability if Drawee Pays on Forged Indorsement – A drawee who pays on a forged indorsement is liable to the payee in conversion. The person suing in conversion must have received DELIVERY of the instrument. No conversion action is allowed if the check never reaches payee because it was lost in the mail.
The UCC specifically allows an action for conversion when (JULY 2017)
1. an instrument is transferred in a manner other than by negotiation from one who is not entitled to enforce the instrument or (ie. missing indorsement of co-indorser on a check; cannot present without)
2. a bank takes an instrument either for payment or collection from one not entitled to enforce the instrument such as in the case of a forged endorsement. Note however that neither the issuer nor a payee or endorsee who never received delivery of the instrument may maintain an action for conversion.
Who may be held liable?
Accepting a check that is not properly transferred is conversion.
A check is in negotiable instrument. When a negotiable instrument is made payable to one or more individuals, it is order paper and may be transferred only when it is endorsed by those individuals. Accepting a check that is not properly transferred is conversion. (JULY 2017)
Co-makers (i.e. indorsers signing as co-makers)
Co-makers (i.e. indorsers signing as co-makers) are joint and severally liable: the payee can seek the full amount of the debt from either maker or both, as makers they are both liable
Who may be held liable?
Signatures by agents bind principle when…
Signatures by agents bind principle when the agent is authorized under agency theory. When the agent signs his name and the principle is bound, the agent escapes personal liability if:
a. the principle is identified in the instrument and
b. the signature unambiguously shows it was made on behalf of the principle.
o language that shows agent is signing on behalf of principle are words like “by,” “agent for”, “on behalf of”, or “treasurer”
HDC - If the two elements (a and b) above are not satisfied, the agent is liable to an HDC UNLESS the agent can prove that the Holder had notice of the representative nature of agent’s signature.
NON-HDC - If the two elements (a and b) above are not satisfied, agent is liable to a non-HDC UNLESS agent can prove that the original parties did not intend the agent to be liable.
Checks - For checks, the agent for drawer bears no liability if the principal’s name is on the check (even if agent did not indicate agency capacity).
Forgery - If agent is NOT authorized, it is then a forgery; The alleged agent is bound not the purported principle.
Stop Payment Orders
Oral v. Written
Oral stop payment orders to the drawee are effective for 14 days
Written stop payment orders to the drawee are binding for 6 months
If the drawee makes the payment anyways, the drawer has the burden of proving that a loss has occurred (not a valid defense against an HDC only FAIDS)
Transfer warranties -
Transfer warranties
A transfer is any “sale” of commercial paper for consideration (no consideration, no transfer warranties); when you sell commercial paper to another party you make certain warranties about the quality of the paper
5 Warranties: Everyone Screams About Negotiable Instruments
o The transferor is entitled to enforce the instrument
o Signatures are authentic and authorized
o The instrument has not been altered
o No defenses or claims against transferor
o Transferor has no knowledge of insolvency proceedings (against maker, acceptor or drawer
Who can enforce:
o Order paper: any subsequent holder who takes the instrument in good faith can assert the transfer warranties against the transferor.
o Bearer paper: only the immediate transferee can enforce the transfer warranties
If there is consideration, the holder can seek payment from the indorser under the transfer warranties AND/OR under indorser contract liability (PDN)
If there is no consideration, the holder must rely on the indorser’s contract liability only
Transfer warranties and Theft
Theft may occur during negotiation by someone unable to enforce the instrument and thus, violated transfer warranties. Theft is a personal defense that may be raised against the Holder of a negotiable instrument UNLESS she’s a Holder in due course.
Presentment Warranties EAU Eggs Are Ugly = enforce, altered, unauthorized
A person who presents an instrument for payment makes three warranties:
o (1) that he is a person entitled to enforce the instrument
o (2) that the instrument is not altered
o (3) that he has no knowledge that the drawer’s signature is unauthorized
Warranty v. Indorsers Contract
i. If the plaintiff is a Holder: if the payor (payor) has NOT PAID the instrument (check bounces or promissory note is not paid by the maker), then the Holder (plaintiff) will sue the indorser (defendant) on the indorser’s contract. (collecting on 1st instance)
ii. If the plaintiff is a Payor: if the payor (bank) HAS PAID and later discovers the payer should not have paid (the check was forged or the note was altered), then the payor will attempt to sue the indorser for breach of warranty (transfer or presentment, as appropriate under the facts). (collecting after already paid)
Discharged
A person entitled to enforce an instrument, may even without consideration, discharged any party from the instrument by voluntary act, such as lining through the party’s name.
To discharge her obligation to paying, a maker must pay the person who ______ has the right to receive payment on the note.
In Florida, a maker’s obligation to pay a note is not discharged by payment to someone who used to be the Holder. To discharge her obligation to paying, a maker must pay the person who currently has the right to receive payment on the note.
In Florida, the discharge of an obligated party will not discharge the obligation of an _____ or _____ party on the instrument.
In Florida, the discharge of an obligated party will not discharge the obligation of an endorser or accommodation party on the instrument.
Explain Discharge
Discharge a payment made by a maker to a person entitled to enforce an instrument (generally the Holder or transferee with the rights of a Holder) discharges the makers liability on the instrument. However, payment to one not entitled to enforce the instrument does not discharge the maker.
Suing for the underlying obligation…
Suing for the underlying obligation generally taking an instrument for an underlying obligation suspends the duty on the obligation. The person who took the instrument may enforce only the instrument until it is discharged or dishonoured but he must have had delivery. Delivery can be received directly or through delivery to an agent or a co-payee. (ESSAY)
Suing for the underlying obligation and Accord
Suing for the underlying obligation: When an instrument is given to satisfy an obligation, the obligation is suspended to the same extent as it would be discharged if cash were given. An instrument that conspicuously states that it is given in full satisfaction of an unliquidated or disputed debt, therefore, can suspend the obligation for the full debt just as any other accord agreement would. If the is instrument is paid, it generally will discharge the entire debt. HOWEVER, if the instrument is dishonored, the underlying obligation is not discharged. The UCC provides that when an instrument is dishonored and in the hands of the obligee, he may enforce the underlying obligation. (ESSAY)
Accord and Satisfaction Under the UCC
An accord and satisfaction is the acceptance of a proposed settlement of a debt. under the UCC, when a claim is subject to dispute, the claim can be discharged in full if the person against whom the claim is asserted in good faith tenders an instrument that conspicuously states that it is tendered in full satisfaction of the claim (i.e. if the memo line says “payment in full”) and the claimant obtains a payment of the instrument. (ESSAY)
Avoiding Accord and Satisfaction Under the UCC
Under some circumstances, the UCC provides that an accord and satisfaction can be avoided if the satisfaction was obtained inadvertently (where a creditor did not realize that it was intended to fully satisfy the claim) by tendering repayment within 90 days after receiving payment. However, if payment was not obtained inadvertently, the accord and satisfaction cannot be avoided. a payment will not be considered to be inadvertent if it was obtained by the claimant, or an agent of the claimant with direct responsibility for the disputed claim, with knowledge that the instrument was tendered in full satisfaction. (ESSAY)
DETERMINE DEFENDANT’S DEFENSES: Unauthorized Indorsement
Once a drawee pays out an instrument, payment generally is final, the drawee generally cannot recover from the party paid UNLESS there was a forged indorsement
If there was a forged indorsement, a warranty of presentment was breached (all signatures are genuine)
The warranty is not breached when there is a forged drawer’s and maker’s signature because the UCC treats such signatures as genuine signature of the forger. The forger effectively becomes a customer of the drawee bank, and the drawee must seek to recover from the forger-drawer rather than the person who presented the check
DETERMINE DEFENDANT’S DEFENSES: Unauthorized Indorsement
Order Paper
Order Paper - Forgery breaks the chain of title and the check is NOT properly payable. The drawer may demand that the drawee bank recredit the drawer’s account as a check was not properly payable
DETERMINE DEFENDANT’S DEFENSES: Unauthorized Indorsement
Fictitious Payee Rule
Fictitious Payee Rule if the drawer negligently contributed to the forgery (1) issues the instrument to an imposter, (2) makes the instrument payable to someone who was not intended to have an interest in the instrument
DETERMINE DEFENDANT’S DEFENSES: Unauthorized Indorsement
Defendant Bank’s Defenses
Defendant Bank’s Defenses
Once bank is unable to pass on the loss, it tries to blame the drawer (you, the account holder) for the forgery; drawer’s negligence, duty to inspect statements; report within one year but if a repeat offender…
Repeat Offender Rule – (HT) If the same person (the repeat offender) is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available. If the drawer does not do so, the bank will not recredit the account for the subsequent forgeries by the same person.
DETERMINE DEFENDANT’S DEFENSES: Unauthorized Indorsement
Situations Where A Party Is Precluded from Asserting Forgery of a Payee’s Name
Impostor Rule
Situations Where A Party Is Precluded from Asserting Forgery of a Payee’s Name
Impostor Rule (HT) – Bank defense stops the drawer or maker from raising forgery as a defense. The issuer, maker or drawer, will be estopped from denying the validity of a forged indorsement because the law deemed him to have acted carelessly in issuing the check and contributed to the forgery.
o Examples of when maker or drawer have been deemed by law to have acted carelessly in issuing the check and contributed to the forgery: drawer should have determined the true identity of the payee, the agent’s authority, or a corporation that should have better supervised its treasurer or the treasurer’s secretary
Situations Where A Party Is Precluded from Asserting Forgery of a Payee’s Name
Agency and Checks (ESSAY)
if an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent endorsement on the instrument, the endorsement is effective. A person who takes the instrument and fails to exercise ordinary care may be held liable to the extent of the loss caused by the failure.
IF DEFENDANT IS HELD LIABLE, MAY DEFENDANT PASS LIABILITY ON TO ANOTHER PARTY?
Liability of Presenter
Liability of Transferor
The Situation - The drawee bank has paid the payee in a conversion action or paid the drawer in a not properly payable action, but either way the bank has paid twice (drawer deposited once and the drawee bank paid twice: once because of the fraud and second to repay drawer account). Bank is mad and wants to pass he loss onto someone else.
ALTERATION
The obligor does not want to pay because the instrument was altered.
ALTERATION
Type:
Change in Obligation
Change in Obligation - Any unauthorized changed in an instrument that reports to modify the obligation of the party such as the amount, date, names of payees, or interest rate.
ALTERATION
Type: Unauthorized Completion
Unauthorized Completion - Instrument is completed in an unauthorized manner which affects the parties’ obligation
a. Effect on Holder in Due Course
i. Change an Obligation - a Holder in Due Course may enforce for the original amount; alteration is a real defense for the excess amount (the amount above that which was altered from the original)
ii. Unauthorized Completion - This is a personal defense; the Holder in Due Course (a bank) may enforce an unauthorized completion (alteration) as completed.
b. Effect on Non-Holder in Due Course
i. If not fraudulently made, the obligor is liable under the original terms.
ii. If fraudulently made by Holder it is a total discharge of the obligor; no obligation to pay alteration AND original obligation
c. Not Properly Payable
i. General Rule - An altered check is not properly payable; so a drawer is not liable for the alteration but the payee bank is liable and will assert the following defenses:
ii. Banks Defenses – wants to blame drawer
• Negligence - If the drawer’s negligence substantially contributes to the alteration, the drawer will be precluded from asserting the alteration
• Bank Statement Rule - The drawer must report alterations to the drawing bank within one year
Breach of Transfer and Presentment Warranties of No Alteration - Essay answer sequence of events:
- I issue a check for $100 to Paula.
- Paula expertly alters the check, so it reads $1000 and cashes the check.
- I timely report the alteration after receiving my statement
- the drawee bank recredits my account because the check was not properly payable
- My bank may now Sue up the chain of banks for breaching the presentment warranty of no alteration
- the presentment bank may sue up the chain for breach of the transfer warranty of no alteration
Liability ends up at the altar or the first person who accepted the alteration
Default of Note
CHECK
FEB 2019
Instead of attempting to collect under you see Article 9, a creditor could simply sue on the debt. UCC Article 3, As adopted in Florida, provides that he promised every note is a written and science promise to pay money to another party. A promissory note may be enforced against its maker on default. A creditor can file an action in court when forced the note. If the creditor obtains a judgment against the debtor , and the debtor fails to pay the amount of the judgment, the creditor can enforce the judgment against all of the debtor’s assets, Not just collateral to which the security interest is attached. (FEB 2019)
An instrument that is payable upon satisfaction of a condition is not an instrument payable upon demand. An instrument is payable upon demand if it:
(i) is payable “on demand” or “at sight” or otherwise indicates that it is payable at will; or (ii) does not state a time for payment.
an instrument must be payable upon demand or at a definite time. Any clause that accelerates clause ____ destroy negotiability
To be negotiable, an instrument must be payable upon demand or at a definite time. Any clause that accelerates the time of payment upon the occurrence of an event or at the option of the maker or holder is permissible; an acceleration clause does not destroy negotiability. An instrument payable “100 years from date, but if my uncle Sam should die, payable upon his death” is permissible as an enforceable acceleration clause. Instruments containing conditions on payment are not enforceable, and they are not negotiable.
In defending a lawsuit, unless otherwise expressly set forth in the UCC, a party must generally:
Under the UCC, in defending a lawsuit, one must generally rely on her own defenses and cannot use the claims and defenses of third parties. When a third party in privity of contract has a claim against a holder in due course due to breach of contract, unconscionability, and fraud in the inducement, the defendant in a lawsuit may not raise such defenses of the third party.
An employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement. If a bank accepts the instrument and pays the amount stated therein to the employee, may the bank be held liable for the amount stated in the instrument?
If an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective. However, if the party who takes the instrument fails to exercise ordinary care, it may be held liable to the extent of loss caused by the failure. Whether or not a party who takes the instrument actually knew the employee or had cashed checks presented by the employee in the past are not specific requirements presenting the possibility of liability to the bank. However, they may be facts considered to determine whether ordinary care was exercised.
If any negotiable instrument, except a certified check, a cashier’s check or a teller’s check, is given to satisfy an obligation, the obligation is suspended (unless otherwise agreed to), for the following duration:
If any negotiable instrument, except a certified check, a cashier’s check or a teller’s check, is given to satisfy an obligation, the obligation is suspended and the suspension continues until the instrument is paid and discharged or dishonored, unless otherwise agreed to by the parties. The suspension of the obligation does not continue until the maker takes certain actions, nor by the obligor’s actions to deliver the instrument. Also, the obligation does not terminate immediately upon the obligor signing the negotiable instrument.
If an instrument is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, she may enforce:
If an instrument is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, she may enforce:
If an instrument is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, she may enforce either the instrument or the obligation. Her remedy is not exclusively limited to either enforcing the obligation or the instrument. Also, she does not have to pursue enforcement of the instrument or the underlying obligation in any particular order.
