UCC Flashcards
Lease
Art. 2A covers leases and subleases of goods (NOT REAL PROPERTY), defined as a transfer of the right to possession and use of goods for a term in return for consideration
Lease vs. Disguised Sale on Credit
A contract is a disguised sale on credit if the “lessee” has no right to terminate his obligation to pay during the lease term and:
- The lease term is equal to or greater than the entire economic life of the goods or gives the “lessee” an option ot renew for the rest of the economic life for nominal or no additional consideration
- The lease provides that the “lessee” will become the owner of the goods or has an option not purchase the goods for nominal or no consideration
Factors that do not indicate a sale
- The lessee pays consideration equal to or grteater than the fair market value of the leased goods (as long as the lease does not cover the total economic life of the goods)
- The lessee has an option to renew or become th eowner of the goods
- The lessee assumes major duties (e.g., paying taxes, assuming the risk of loss, etc.) as to the goods)
Statute of Frauds: Leases
A lease must be in writing if the total of payments under the lease will be $1,000 or more. The writing must be signed by the party against whom enforcement is sought, describe the leased goods and lease term, and indicate that a lease contract has been made between the parties. Lease must specify the quantity of leased goods.
Battle of the Forms
Art. 2A has no battle of the forms provision
Consumer Protection
If lessee is consumer, a consumer lease arises and the following special rules apply:
- Option to accelerate at will - If lease allows acceleration of the entire lease obligation at the lessor’s will, the option is enforceable only if exercised in good faith
- Unconscionability
a. Substantive Unconscionability Not Required - Art. 2A does not require both procedural and substantive unconscionability. It is a defense that a consumer lease was induced by unconscionable conduct even if the lease terms are fair.
b. Attorney’s Fees - In consumer lease litigation, successful consumer may recover attorney’s fees, but a consumer who knowingly brings a groundless suit can be held liable for the lessor’s attorney’s fees
Lease Warranties
Finance Lease (e.g., bank buys car and leases to consumer) Warranties - Any warranties made by supplier to lessor are passed on to lessee, so lessee may sue the supplier
Lessee can refuse to pay lessor on nonconsumer finance lease when goods are not accepted
Hell or High Water Clause - Imposes absolute obligation on lessee to make payments no matter how badly the leased goods perform or break down. DOES NOT APPLY TO CONSUMER LEASES.
Remedies
Default by Lessor - Same as Art. 2: Accept the goods and recover damages or reject goods and cover or seek market price-lease differential)
Default by Lessee - Lessor may cancel lease contract, withhold delivery, take possession of previously delivered goods, stop delivery of goods by a bailee, dispose of or retain the goods and recover damages, recover rent, or exercise any other rights or pursue any other remedies specifically provided for in the lease contract
Damages are limited to actual damages caused by the breach except for lost volume sellers
Ability to Sublease
Subleasing is allowed, even despite an agreement to the contrary. But if the transfer is a material violation of the prime lease, it is grounds for a default
Sublessee entitled to same rights
Assignment of Right of Payment Allowed
When lessor has no remaining significant affirmative duties (“non-operating lease”) the right to payment may be transferred despite agreement to the contrary, even if it would otherwise be grounds for default
Basic Approach for Commercial Paper Issues
- ID type of paper
- ID parties
- Determine if instrument is negotiable
- Determine if instrument was properly negotiated
- Determine if transferee is a holder in due course
- Determine P’s cause of action, such as contract, warranty, tort, or not properly payable
- Determine D’s defenses
- If D is held liable, may D pass liability onto another party?
Note
A promise to pay money made from a maker (promisor, obligor) to a payee (promisee)
A note issued by a bank is called a Certificate of Deposit
Draft
Order to pay (3-party instrument) involving the drawer (person ordering payment), drawee (person to make the payment; payor in check context), and payee (person who receives the payment)
Checks
Requirements: Bank is drawee and payable on demand
Types of Checks:
- Ordinary check
- Certified Check - Ordinary check which bank has accepted
- Cashier’s Check - Drawer and drawee are the same bank; person buying the check is the remitter
- Teller’s Check - Check drawn by one bank on another bank
- Travelers Check - Demand instrument requiring countersignature by a person whose signature already appears on the instrument
Remotely-Created Item
A draft not signed by the drawer but created with drawers authority so that a third party can get paid from the drawers account at a bank
Third party is usually a seller in an internet transaction or when you pay bills over the telphone by giving creditor your checking account number
Negotiability
Refers to the form of the instrument
If paper is negotiable, and reaches the hands of a Holder in Due Course (HDC), HDC obtains better rights than transferor and thus can get paid from obligor even though the obligor (maker or drawer) has defenses under contract law
Non-negotiable instruments are just regular contracts
Elements of Negotiability
A. In writing.
B. Signed by maker or drawer. Any symbol intended to authenticate will do.
C. Unconditional promise or order to pay (IOU not enough)
D. Fixed Amount. Must be able to look at instrument and determine principal amount do.
E. In Money. (Words v. Figures = Words prevail)
F. No other undertaking or instruction
G. Payable on demand or at a definite time
H. Contains words of negotiability
Items that DO NOT make a promise or order conditional
a. Statement of consideration
b. Reference to another record that is not conditioned on that record (e.g., “as per” or “in accordance with”
c. Incorporation by reference of items that would not hurt holder
1 Rights regarding collateral
2. Prepayment
3. Acceleration
d. Limitation of payment to a particular fund or source
e. Countersignature
f. Consumer protection language (but this will prevent holder from being a holder in due course
Negotiability Elements: Unconditional Promise or Order to Pay
- Presumption of Unconditional Promise or Order
- Items that make promise or order conditional (and thus non-negotiable) include:
a. Express condition to payment
b. Promise or order “subject to” or “governed by” another record
c. Incorporation by reference - Rights or obligations re. the promise are stated in another record
Negotiability Elements: No Other Undertaking or Instruction
Exceptions: Promises concerning collateral and waiver of law meant to benefit the obligor
Negotiability Elements: Payable on Demand or at a Definite Time
On Demand - A note is payable on demand if an express statement is used providing for payment “on demand” or “at sight” or if the instrument does not state the date it is due
At a Definite Time - Can be on a specified date, a fixed period after sight or acceptance, or at a time readily ascertainable at the time the promise or order is issued
These do not prevent instrument form being payable oat a definite time:
a. Prepayment of Instrument (right of obligor to pay early)
b. Acceleration of Due Date
c. Provisions Extending the Due Date
- -By holder = to any time
- -By obligor = to a later definite time stated in the instrument
- -Automatically upon condition stated in instrument = to a later definite time stated in the instrument
Negotiability Elements: Words of Negotiability
- Bearer Language (e.g., payable to bearer, payable to the order of bearer, indication that possessor entitled to payment, no payee stated, to cash or to order of cash, not payable to identified person)
- Order Language (e.g., to the order of)
- If both Order Language and Bearer Language, Bearer controls
- Exception for Checks - If this is the only element of negotiability missing from a check, the order or bearer language requirement is waived
Negotiation: Holder Status
Achieved when the payee transfers the instrument to a third party rather than just getting the money.
Requirements:
- Physical possession of negotiable instrument, and
- Good Title (For bearers good title only requires possession. For Order Language, good title requires possession plus necessary indorsements)
Blank Indorsements***
Created with payee’s signature on a negotiable instrument.
Effect: Creates bearer paper. Further negotiations achieved by possession only
Special Indorsements***
Created with payee’s signature plus designation of new person to whom instrument is payable
Effect: Creates order paper. Thus, further negotiations will require the indorsement of the person to whom it was made payable
Restrictive Indorsement
Limits what may be done with the instrument
E.g., “For deposit in my Bank of America account #395482302 only.”
Identification of Payee
- Intent of issuer determines initial payee
2. Multiple Payees (and/or)
Misc. Endorsement Issues
- Transferee’s Right to Transferor’s Endorsement: If instrument is transferred for value, transferee has specifically enforceable right to transferor’s endorsement
- Depositary Bank Becomes Holder Without Transferee’s Signature: Depositary bank becomes a holder even if payee deposits check in payee’s account without indorsing it
- Payee May Indorse with Incorrect or Real Name
- Payee Lacking Capacity May Effectively Indorse
Rights of Mere Holder
Most important: Right to enforce payment
When Is HDC Status Relevant
When obligor raises a defense to payment
Elements of HDC Status***
- Negotiable Instrument
- Holder
- Authenticity Not Apparetnly Questioned
- Holder Must Pay Value
- Good Faith (honesty in fact (subjective), observance of reasonable commercial standards of good faith and fair dealing (objective))
- Without Notice of Defense at Time of Instrument Acquisition
- Shelter Rule (transfer of instrument vests in the transferee the rights the transferor)
- Burden of Proof on Person Seeking HDC Status
Notice at Time of Instrument Acquisition Means:
- Actual knowledge (subjective test)
- Receipt of a notices coupled with a reasonable time to act on it
- From all the facts and circumstances known to the person at the time in question, the person has reason to know it exists
- Merely filing in the public records does NOT put a person on notice
Circumstances That Give Notice
- Instrument (principal) Overdue
- Instrument Dishonored (e.g. insufficient funds)
- Uncured default with respect to payment of another instrument issued as part of the same series
- Unauthorized signature
- Alteration
- Any defense or claim in recoupment (obligor’s claim against payee arising from the transaction giving rise to the paper)
Shelter Rule
Transferee has rights of a transferor.
- Even if a holder does not qualify as an HDC (e.g., because he did not pay value or had notice the note was overdue), he may still have rights of HDC by shelter
- Exception: Person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter
Real Defenses
- Infancy (to the extent it is a defense in contract law)
- Duress
- Lack of Legal Capacity Making Obligation Void
- Illegality Making Obligation Void
- Fraud in the Execution
- Discharge in Bankruptcy
- Omission of Required Consumer Protection Language
- Statute of Limitations
- Payment to Former Holder
- Alteration
- Unauthorized Signatures & Forgeries
Real Defenses: Fraud in the Execution
Also called Fraud in the Factum
a. Signer lacked knowledge of the instrument’s character or essential terms and
b. Signer lacked reasonable opportunity to learn of the instrument’s character or essential terms
Real Defenses: Statute of Limitations
a. Note: 6 years from due date
b. Unaccepted Draft: Earlier of 3 years after dishonor or 10 years after issue
c. Mortgage Note: 4 years
Real Defenses: Payment to Former Holder
Unless the obligated party received proper notice that the note was transferred and that payment is to be made to the new holder
Notification is adequate only if it is signed by the transferor or transferee, reasonably identifies the transferred note, and provides an address at which payments subsequently are to be made
HDC Protected from “Personal Defenses”
Including, without limitation:
- Failure of consideration
- Breach of warranty
- Fraud in the inducement
HDC and Claims of Others to the Instrument
NO claimant can take an instrument from HDC; HDC is a “perfect defendant”
Basis of Contract Liability
Primary basis is a person’s signature
Contract Liability: Binding by Agent***
Follow general law. Assume agent signs agent’s name and principal is bound.
Agent escapes personal liability if:
- Principal identified in instrument
- Signature unambiguously shows it was made on behalf of principal
If these two elements are not satisfied:
a. Agent liable to HDC unless agent can prove the HDC had notice of the representative nature of agent’s signature
b. Agent liable to non-HDC unless agent can prove the original parties did not intend the agent to be liable
c. Special rule for checks–no liability if principal’s name on check
If agent is not authorized, it is a forgery and agent is bound but not principal
Contract Liability for Maker of Note
- Maker must pay instrument when it is due according to its terms at the time it was issued
- Maker liable to holder or indorser who paid instrument
- Maker may raise defenses, but effectiveness depends on status of holder
Contract Liability: Drawer of Draft
- Drawer may not disclaim liability on a check, but may disclaim liability on other drafts
- Drawer only liable after two conditions are satisfied:
a. Presentment to drawee within 30 days
b. Dishonor (drawee refuses to pay upon proper presentment)
Contract Liability: Indorser of Note or Draft
- Liability of Disclaimer Allowed - (e.g., “without recourse, Paul Parsons” prevents incurring contract liability and merely passes title)
- Order of Liability*** - Indorsers liable to each other in order of signatures
- Secondary Liability - Indorser liable only after:
a. Presentment
b. Dishonor
c. Notice of dishonor within 30 days
Contract Liability: Drawee (Bank)
- General Rule: A drawee makes no negotiable instruments contract
- Acceptance or Certification - Drawee may agree to pay the draft by signing the draft
Drawee has no obligation to accept a draft and cannot be sued for failing to accept.
Certification discharges the drawer and all prior endorsers.
- Final Payment - Once a drawee bank finally pays a check, contract actions may no longer be pursued and drawee bank may not recover on the check from the persons it paid unless there is a breach of presentment warranty
- Conversion liability if drawee receives delivery and pays on a forged indorsement
Payment of Checks After Drawer’s Death
a. Bank may continue to pay checks until it knows the drawer has died and has a reasonable opportunity to act on that knowledge
b. Drawee bank may pay for no more than 10 days after drawer’s death. Must comply immediately with requests to stop payment by someone claiming an interest in the account.
Accommodation Parties
Definition - A person who signs an instrument to lend his or her credit to another party but does not receive any direct benefit (e.g., co-signers, sureties, and guarantors)
Contract Liability: Accommodation Parties
- Liable only in capacity in which accommodation party signs
- May limit liability to collection only with express language
- Entitled to reimbursement from accommodated party
- May demonstrate accommodation by express language or anomalous indorsement (i.e., an indorsement outside the chain of title)
Warranty Liability: Generally
Implied warranties arise automatically
Warranty liability arises from the instrument, since warranties are created by the transfer or presentment, not indorsement
Possession of the instrument is not needed to take advantage of the warranty
Warranty liability survives the final payment
Transfer Warranties: To Whom
Transferor must receive consideration
Warranties made to immediate transferee and subsequent transferees if transferor indorsed
Drawee and maker cannot sue for breach of transfer warranty
Transfer Warranties
a. Warrantor is entitled to enforce the instrument (warranty of good title)
b. All signatures authentic and authorized
c. No alteration
d. No good defenses against transferor (perfect plaintiff warranty)
e. No knowledge of insolvency proceedings against relevant parties (only warranty where warrantor’s lack of knowledge is relevant)
f. If remotely-created item, the person identified as the drawer authorized the item
Disclaiming Warranties
Checks: Cannot disclaim
Non-Checks: Can disclaim (“without warranties”)
Presentment Warranties
Mutually exclusive with transfer warranties. A P can only have one of theses warranty causes of action although a person might make both warranties
Made by presenter and previous transferors
Made to parties who pay in good faith (e.g., maker, drawee acceptor (plaintiff))
Warranties When Unaccepted Draft Presented to Drawee
a. Warrantor entitled to enforce draft or obtain payment
b. No alteration
c. No knowledge of unauthorized signature
d. If remotely created item, that person identified as the drawer authorized the item
Warranty Liability vs. Indorser’s Contract Liability
If P Is Holder: If payor has not paid the instrument (e.g., check bounces) then holder will sue indorser on the indorser’s contract
If P is Payor: If payor has paid and alter discovers the payor should not have paid (e.g., check was forged or note was altered), then payor will attempt to sue the indorser for breach of warranty
Discharge by Holder
Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it, etc.
Effect of Instrument on Underlying Obligation
- Payment by Cert. Check, Cashier’s Check, or Teller’s Check - Underlying obligation discharged as if person was paid in cash
- Uncertified Checks and Notes - Underlying obligation suspended. If check or note is dishonored, holder may sue on either instrument or underlying obligation
Failure to Produce Original Instrument
- Enforcement by Person Not in Possession:
a. Person entitled to enforce when loss occurred,
b. Loss not due to transfer or lawful seizure, and
c. Person cannot reasonably obtain original - Protection for payor (e.g., security or bond) required
