UCC 3/4/6

Question 1

What are two types of negotiable instruments?

Answer 1

Notes and Drafts.

Question 2

Note

Answer 2

A written and signed promise to pay between two people, which is issued by the “Maker” to a “Payee,” who can eventually present the note for payment, or sell it to another holder, who can present it.

Question 3

Draft

Answer 3

A written and signed piece of paper that ORDERs someone, to pay another. The person who orders the payment is the drawee and the person who the payment is drawn from is the drawer. A check is a type of draft.

Question 4

Teller’s Check

Answer 4

The DRAWER is a bank & the DRAWEE is a different bank. Essentially, it is a bank that issuing a check, demanding payment from another bank.

Question 5

Cashier’s Check

Answer 5

The DRAWER & DRAWEE are same bank.

Question 6

NEGOTIABLE INSTRUMENT

Answer 6

A writing, signed by the maker or drawer, containing an unconditional promise or order to pay a fixed amount of money payable on demand or at a definite time, and containing with no other undertakings or instructions. However, a NI can refer to a security interest/agreement.

Question 7

WHAT HAS TO BE ON A NEGOTIABLE INSTRUMENT

Answer 7

In order to be a negotiable instrument a written piece of paper must state who is paying, who is getting paid, how the payment occurs, and when… AND NOTHING ELSE.

Question 8

Order Paper

Answer 8

NI that specifically identifies the person to be paid. MUST use the precise term “to the order of.”

Question 9

Bearer Paper

Answer 9

NI that does not identifying who payment is supposed to be made to, thus making it payble to whoever is in possession of the NI.

Question 10

Check Exception to Order/Bearer

Answer 10

A check does not need to contain an “order” or “bearer” term on it to be a valid NI.

Question 11

Demand Paper

Answer 11

An NI that is payable on demand and thus does not mature on a certain date.

Question 12

Time Paper

Answer 12

An NI that is payable at a definite time/date

Question 13

P.E.T.E.

Answer 13

(Definition and Three Types): A “Person Entitled To Enforce” the NI. You must be a PETE in order

Question 14

Holder, Non-Possessor & Possessor

Answer 14

NonPossessor Of a Lost or Stolen Instrument

Possessor Who is Not a Holder Under the Shelter Doctrine.

Question 15

HOLDER

Answer 15

“A holder is any person in possession of a bearer paper or an order paper, if the identified person is in possession, if the paper has genuine signatures.

Question 16

Special Endorsement

Answer 16

Original holder endorses the NI with his signature and specifically names the next person in line, thereby transforming or keeping the NI as an order paper.

Question 17

Blank Endorsement

Answer 17

Original holder endorses the NI with his signature and does NOT designate the next person in line, thus turning an order paper into a bearer paper.

Question 18

Transfer of Bearer Paper as Bearer Paper

Answer 18

Only requires giving possession to next holder, no new signatures.

Question 19

Lost/Stolen Instrument PETE

Answer 19

If instrument is lost or stolen, a person can enforce the NI if he proves via an affidavit that he was a prior holder of the NI that he is no longer in possession of possession of the NI, what the terms of NI were, and if he posts a bond. However, PETE of a lost or stolen cashier’s, teller’s, or certified check does not have to post a bond. If HDC appears after 90 days of bank paying PETE, PETE on hook for paying HDC.

Question 20

Shelter Doctrine PETE

Answer 20

The shelter doctrine allows a non-holder who is in possession, the have the rights of a holder if she can prove, as a matter of fact, that the transferee actually intended to make the non-holder a holder.

Question 21

Restrictive Endorsement

Answer 21

An endorsement that adds a condition to the NI is still effective, but the condition itself is not effective unless it relates to where the money goes.

Question 22

Anomalous Endorsement

Answer 22

A person signs an NI that has absolutely no reason to to sign it.

Question 23

FORGERY

Answer 23

An unauthorized signature. A person cannot be a holder of a NI if any necessary signature has been forged.

Question 24

Necessary Signatures

Answer 24

Issuers signature and, for Order Paper, Named Payee signature and Special Endorsement. No new signature needed for bearer paper.

Question 25

Depository Bank

Answer 25

A “depository bank” is a bank where an NI is deposited, which is not the drawee. Thus, it becomes a holder/transferee the same way as anyone else.

Question 26

Effect of Forged Endorsement:

Answer 26

No more holders allowed, Banks eat loss if accepts, NI is effective against the forger himself.

Question 27

Effect of Forged Issuance Signature

Answer 27

When a person forges an issuerance signature, the NI is still created and is effective. However, the forger is considered the issuer and all liability for the NI is on him. Because such a forging creates an NI, subsequent takers CAN be holders, or even HDCs

Question 28

Two Types of Forgery

Answer 28

Forgery of Issuing Signature and Forgery of Necessary Endorsement.

Question 29

Four F.I.N.E Forgeries: Mnemonic for exceptions to Forgery Rule

Answer 29

⁃ Fictitious Payee Rule
⁃ Impostor Rule
⁃ Negligence Substantially Contributing to Forgery (or alteration)
⁃ Entrusted Employee’s Fraudulent Indorsement Rule

Question 30

F = Fictitious Payee Rule

Answer 30

A person with authority to issue a check, forges an endorsement to a Payee that is a nonexistent person or Payee is a real person that the drawer never intended to actually get the money. If this happens, bank not liable for cashing the check.

Question 31

I= Impostor Rule:

Answer 31

A good faith taker is not liable when an impostor induces the issuer of a NI to issue a NI to the him in the name of the impersonated payee. The policy is that issuer should always check to see that person is who he says he his.

Question 32

N = Negligence Substantially Contributing to Forgery (or alteration):

Answer 32

Anyone whose negligence substantially contributed to the making of a forgery is estopped from deny the genuineness of the signature or the fraudulent alteration.

Question 33

E = Entrusted Employee’s Fraudulent Endorsement Rule:

Answer 33

If an Entrusted employee make fraudulent endorsement in the name of the employer, the taker is not liable for taking NI of non-holder. An “entrusted employee” is one who is authorized to deal with the business’ NIs, but not authorized to sign.

Question 34

Effect of a F.I.N.E Forgery:

Answer 34

Forgery treated as an effective signature. Thus, bank not liable for taking the instrument and the instrument can be transferred and enforced against the person who was culpable in allowing the forgery to occur.

Question 35

Forgery Comparative Negligence

Answer 35

If a NI is forged with an excuse, good faith taker is responsible. But, if NI is forged and one of the F.I.N.E exceptions apply, it acts as a defense for the good faith taker. That said, if the good faith taker is also negligent in handling the NI and that negligence substantially contributes to the loss, loss is apportioned according to relative fault between the negligent parties

Question 36

HDC

Answer 36

A holder who takes the instrument for value, in objective good faith, and without notice of certain defects gets specially protected status as a holder in due course.

Question 37

HDC Specific Types of Notice

Answer 37

Overdueness, Dishonor, Alteration/Forgery, Other Claims to NI, Contract Defenses Apply to NI.

Question 38

TYPES OF LIABILITY: “Only With Focus, Can People Understand… Liability”

Answer 38

O = 	Obligation on the instrument
	W = 	Warranty Liability
	F = 	Final Payment / Payment by Mistake Rule
	C =	Conversion 
	P =	Properly Payable
	U = 	Underlying Contract (NOT UCC 3/4)

Question 39

OBLIGATION ON THE INSTRUMENT

Answer 39

Anyone who signs an instrument can likely be held liable for the NI.

Question 40

WARRANTY LIABILITY

Answer 40

Implied promises that gill in gap where there is a missing link in the chain of liability via endorsement, such as when bearer paper is transferred. Two types are transfer warranty and presentment warranties.

Question 41

TRANSFER WARRANTY

Answer 41

Any person, whether they endorse or not, makes STEAK promises regarding the NI. If Transferor did not endorse, warranty only promised to the immediate transferee. If Transferor did endorse, warranty is to everyone in the chain.

Question 42

Transfer Warranty STEAK Promises:

Answer 42

S = Signatures are genuine

	T = 	No defenses are good against the Transferor

	E = 	Entitled to enforce (means transferor was a holder)

	A =	No Alterations 

	K =	No Knowledge of any insolvency of the drawer

Question 43

PRESENTMENT WARRANTIES:

Answer 43

A party that presents a NI to a drawee or maker for payment, makes A.K.E promises. Drawee or Maker that relies on those implied promises, can seek reimbursement of payment from the presenting party and ALL prior transferors, regardless of endorsement.

Question 44

Presentment Warranty AKE Promises:

Answer 44

A = No Alterations

	K = 	No Knowledge of a forged drawer’s signature

	E =  	Entitled to enforce (transferor is a holder).

Question 45

F = FINAL PAYMENT RULE / PAYMENT BY MISTAKE:

Answer 45

If a drawee makes final payment or acceptance by mistake, the drawee has option to recover money, revoke acceptance, dishonor the NI up until midnight of the next business day, unless the final payment or acceptance made to a HDC.

Question 46

C = CONVERSION LIABILITY

Answer 46

When a drawee/maker pays someone who is not a holder or other PETE they are considered to have committed the tort of conversion. The first bank that takes the NI and pays out is the bank that is liable, not further banks down the line, or former banks that are just holder’s themselves or didn’t pay out.

Question 47

P = PROPERLY PAYABLE LIABILITY:

Answer 47

A drawee is liable to its customer if it either debits a customer’s account for a note that was not properly payable or for damages if it refuses to honor a properly payable NI.

Question 48

Stops Payment Orders:

Answer 48

A bank is liable for paying an non-properly payble NI if it pays despite receipt of a valid stop payment order in sufficient time to give bank a reasonable opportunity to act on it. An Oral stop payment order is valid for 14 days and a written stop payment order valid for 6 months.

Question 49

UNDERLYING CONTRACT LIABILITY UCC3

Answer 49

Delivery of a negotiable instrument as payment of a contractual obligation satisfies that obligation and suspends the party’s duty to pay until the instrument is paid, accepted or dishonored. If check is dishonored, could result in breach of contract liability.

Question 50

Original Tenor Rule

Answer 50

Party who is liable must pay according to the terms at the time the instrument was issued. Thus if $100 check alter to read $1000, drawee may still debit customers account for $100.

Question 51

Incomplete Instrument Rule:

Answer 51

If a NI is left blank, and amount is filled in by someone with authority, drawer is liable for amount as completed by the one with authority. If a NI is left blank, and amount is filled in without authority, it is treated as an alteration.

Question 52

Defenses of a Holder That is Not HDC

Answer 52

A Holder that is not an HDC can enforce the his instrument but his claims are subject to all the defendant’s personal and real defenses.

Question 53

Defenses of a HDC

Answer 53

“HDC takes free of all claims and all personal defenses.” Thus, A HDC can enforce the his instrument and is subject only to the defendant’s real defenses.

Question 54

Real Defenses: Mnemonic - “4 I FAVOR DEFENSES” (Rare)

Answer 54

I = Infancy 
		I = Incapacity  
		I = Illegality 
		I = Insolvency 
		F = Fraud in Factum 
		D = Duress

Question 55

Fraud in Factum

Answer 55

Real defense where the defendant proves he did not know he issued an instrument in the first place, or that it even existed.

Question 56

Personal Defenses:

Answer 56

EVERY defense that is NOT a real defense is a personal defense. Personal defenses not effective against a HDC.

Question 57

Is HDC subject to ownership claims

Answer 57

No, even if proven that HDC has a stolen instrument in his possession.

Question 58

DEFENSE OF ALTERATION

Answer 58

An alteration is an unauthorized change to or completion of an instrument that changes the obligation of a party. A Non-fraudulent alteration does NOT discharge issuer from liability. However, a Fraudulent Alteration totally discharges an issuer from his obligation to pay. However, discharge is a personal defense, thus must still pay an HDC original amount NI was for.

Question 59

DEFENSE OF DISCHARGE

Answer 59

Once a person is discharged, they are no longer liable to pay, and if sued to pay on the instrument, their discharge is a defense to liability. Not effective against HDC.

Question 60

Methods of Discharge

Answer 60

Payment, Acceptance, Tender of Payment (even if refused), Cancellation of NI, Accord and Satisfaction.

Question 61

When is an Endorser discharged form liability

Answer 61

An endorser is discharged from liability if NI is accepted by a bank, or a Check is NOT presented to drawee bank within 30 days of Endorsement, or a Required notice of dishonor was not promptly given to endorser.

Question 62

STATUTE OF LIMITATIONS

Answer 62

Personal checks: 3 years after dishonor or 10 years after date of check.
Time note = 6 years after due date.
Demand note = 6 years after demand or 10 years if no payment at all.