UCC Articles 3&4

Question 1

What are the four basic questions you should ask on a UCC Article 3&4 essay?

Answer 1

(1) Is there a negotiable instrument here (NUTSS)? (2) is one party a holder in due course (FINSS)? (3) what defenses, if any, are being asserted? and (4) who is liable?

Question 2

What are the requirements for something to be a negotiable instrument?

Answer 2

NUTSS: Negotiable words, Unconditional promise to pay, Time certain for payment, Sum certain in money, Signed by the maker/drawer

Question 3

What are the necessary negotiable words to trigger the first requirement for a negotiable instrument?

Answer 3

If the payee is identified, the magic word is “order” (pay to the order of ___). If it is a “bearer” paper then it should just say “pay to bearer” - no name or signature is necessary but just transfer and delivery are enough.

Question 4

If there are conflicting terms in a negotiable instrument, which govern?

Answer 4

Handwriting trumps typing. Words spelled out trump words in numerals.

Question 5

What makes a negotiable instrument have an “unconditional promise to pay?”

Answer 5

Look for any terms that qualify payment, including saying payment will be from too specific a source (e.g. “I’ll pay you when I sell my car” or “I’ll pay you from the proceeds of the sale of my car.”)

Question 6

What meets the “sum certain” requirement for an NI?

Answer 6

Has to designate the currency of which country you are paying. Also cannot be subject to open… has to be a fixed amount (although inclusion of interest is okay)

Question 7

What are acceptable signatures for an NI?

Answer 7

Almost anything as long as it’s physical and by someone with the authority to sign: includes an “X” a rubber stamp, a machine signature, etc.

Question 8

What’s a magic sentence explaining what a negotiable instrument is?

Answer 8

“A negotiable instrument is a signed writing containing an unconditional promise to pay to order or bearer on demand or a date certain in the future a sum certain in money (no other undertaking)”

Question 9

What has to happen to “issue” a negotiable instrument?

Answer 9

Requires delivery and intent by the maker/drawer to give/transfer existing rights to the payee or bearer.

Question 10

What has to be met to make an assignee a holder in due course (HDC)?

Answer 10

FINNS: For value, In good faith, No notice, Negotiation, Shelter rule

Question 11

What does the “no notice” requirement to be an HDC mean?

Answer 11

To be an HDC you can’t have constructive notice of a claim/defense against the enforceability of the instrument (e.g. obvious changes on the note, different color pen altering the note would satisfy)

Question 12

WTF does “negotiation” mean in the course of becoming an HDC?

Answer 12

“Negotiation” is a way of saying the NI is issued to another person (and endorsed via a signature)

Question 13

How do personal defenses to an NI work? And how do you determine whether it is a personal defense?

Answer 13

They are not valid against an HDC (HDC still wins!). Personal defenses are typically found at the time of issue of the NI (e.g. fraud in the inducement at the time of formation).

Question 14

How do real defenses to an NI work? And how do you determine it was a real defense?

Answer 14

Real defenses ARE valid against an HDC! And usually spring out of conduct after the formation.

Question 15

What are the key personal defenses to an NI?

Answer 15

MUUFFO: Mutual mistake, Unauthorized completion, Uncompletion of a condition precedent, Fraud in the inducement, Failure of consideration, Other’s claims

Question 16

What are the key real defenses to an NI?

Answer 16

FIDDLS FUM: Fraud in Execution, Illegality, Discharge in Bankruptcy, Duress, Lack of Capacity, Statute of Limitations, Forgery, Unauthorized Signature, Material Alteration

Question 17

What limitations are the “FUM” (forgery, unauthorized signature, material alteration) real defenses subject to?

Answer 17

The FUM real defenses are subject to the exceptions where the maker/drawer/indorser was negligent and that substantially contributed to the defense. (HDC may still be able to collect despite a real defense - so in practice, converts them to a personal defense)

Question 18

What effects do warranties have in a negotiable instruments dispute?

Answer 18

Where typically an assignee who isn’t an HDC could not go against a party they weren’t in contract with (For liability/failure under the instrument), a warranty enables them to go “up the ladder” and sue

Question 19

What makes an NI “order paper”?

Answer 19

It contains the magic words “pay to the ORDER of” and the payee is identified.

Question 20

What makes an NI “bearer paper”?

Answer 20

It does not need to identify a payee - could simply be “pay to bearer” or “pay to cash.”

Question 21

Can a gift donee be a holder in due course?

Answer 21

NO. They would not have met the “for value” prong of FINNS.

Question 22

How is order paper negotiated?

Answer 22

Negotiating order paper requires delivery (transfer of possession + endorsement by the payee)

Question 23

How is order paper with TWO payees negotiated?

Answer 23

If their names are separated by “or” (A or B) then endorsement by either is adequate. If separated by an “and” (A and B) then both need to endorse.

Question 24

How is bearer paper negotiated?

Answer 24

Negotiation of bearer paper requires only delivery - an HDC can collect on bearer paper even if the instrument was stolen previously down the chain.

Question 25

When can an assignee of an improperly negotiated instrument still be considered an HDC?

Answer 25

Public policy says the innocent HDC should prevail in two key circumstances (1) “Fictitious payee” where the maker of the NI didn’t mean for the payee to be real - e.g. a dummy vendor or a phantom employee - and the maker uses the funds for his/herself and (2) “Imposter” where someone impersonates another and gets the maker to issue an NI to them (the impersonated personality). Someone who buys this instrument is still an HDC

Question 26

What is the basic statute of limitations for suing for NI against the primarily liable party?

Answer 26

An action must be commenced within 6 years of payment demand by the liable party (typically the drawer of a check, the drawee bank, etc)

Question 27

How does liability operate in a NI case after some sort of wrongful payment/fraud?

Answer 27

Liability proceeds chronologically up the chain (you can sue your transferor but your transferees can sue you). Breach of transferor/presenter warranties should also be factored in.

Question 28

what are the transfer warranties?

Answer 28

• Good title
• Alterations not present
• No knowledge of insolvency
• Defenses not present
• Signatures are genuine and authorized

Question 29

What are the presentment warranties?

Answer 29

o Presentment party warranties (presentor warrants to the maker): GAD
• Good title
• Alterations not present
• Drawer’s signature is authorized