UCC - Negotiable Instruments Flashcards
Negotiable Instrument
Generally, a signed writing that orders or promises payment of money.
List the requirements for an instrument to be negotiable.
- be a signed writing
- contain an unconditional promise or order
- to pay a fixed amount of money
- payable to order or to bearer at the time it either is issued or first comes into possession of a holder
- payable on demand or at a definite time
- contain no undertaking or instruction except as authorized by the UCC
Note
A two-party instrument in which one party (the maker) promises to pay a second party (the payee) a sum of money.
Draft
A three-party instrument in which one party (the drawer) orders a second party (the drawee or payor) to pay a sum of money to a third party (the payee).
Check
A draft drawn upon a bank and payable on demand.
includes money orders, cashier’s checks, teller’s checks
Negotiation
A voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder.
Order Instrument
An instrument payable to an identified person.
What is required for Order Instrument Negotiation?
Negotiation requires transfer of possession of the instrument and endorsement by the holder.
Bearer Instrument
An instrument payable to bearer (possessor).
What is required for Bearer Instrument Negotiation?
It may be negotiated by transfer of possession alone.
Transfer
Occurs when the instrument is delivered by a person other than its issuer for the purpose (with intent) of giving the right to enforce the instrument to the recipient.
Endorsement
A signature made on an instrument to negotiate the instrument, restrict payment of the instrument, or incur the endorser’s liability on the instrument.
Presentment
A demand made by the holder of the instrument to pay or accept it.
Who are persons entitled to enforce a negotiable instrument?
- the holder or a holder in due course
- a non-holder in possession of the instrument who has the rights of a holder
- a person not in possession who is nonetheless entitled to enforce the instrument
Holder
Someone who has both possession and rights to the instrument.
Holder in Due Course
A holder of a negotiable instrument that does not bear apparent evidence of forgery, alteration, or other irregularity, and who:
* takes the instrument for value
* in good faith
* without notice that the instrument is overdue or has been dishonored
Distinguish between a Holder and a Holder in Due Course.
A holder’s rights are subject to all defenses that the maker or drawer might raise, whereas a holder in due course is only subject to ‘Real’ defenses.
What constitutes Value in relation to a negotiable instrument?
Value is given for the instrument when it is issued or transferred for various reasons, including:
* for a promise of performance
* as payment or security for an existing claim
* in exchange for a negotiable instrument
* in exchange for the incurring of an irrevocable obligation
Forged Endorsement
A forged necessary endorsement prevents the possessor of an instrument from being a holder.
Fictitious Payee Rule
If the person identified as the payee is not intended to have any interest in the instrument, or is a fictitious person, an endorsement of the instrument by any person in the name of the payee is effective as the endorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
Imposter Rule
When a person impersonates the payee and induces the drawer or maker to issue an instrument to the imposter payable to the name of the impersonated person, an endorsement by anyone in the name of the payee is effective in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
Example of Personal Defense that would not be valid against a Holder in Due Course
breach of contract
Examples of “Real” Defenses
Forgery, Fraud, Alteration, Incapacity, Illegality, Duress
Principal Liability for Instruments Signed by an Agent (VA Code § 8.3A-401)
A principal is liable on an instrument signed by an authorized agent. Liability exists whether the agent signs:
- The principal’s name,
- The agent’s name, or
- A combination of both.
Surety
a person or company that guarantees another party’s obligations.
Accommodation Party (VA Code § 8.3A-419)
An accommodation party acts as a surety (guaranteeing another’s debt). A person is an accommodation party if:
- They co-sign an instrument without receiving direct benefit from it.
- They do not limit their liability with express language.
Co-Signer Presumption
A co-signer is presumed to be an accommodation party unless stated otherwise.
Surety’s Rights After Payment (VA Code § 49-27)
A surety who pays a loan on behalf of a principal gains all rights and remedies of the creditor.
The principal debtor remains ultimately liable to the surety.
Alteration of Instruments (VA Code § 8.3A-407)
Alteration refers to an unauthorized change that modifies the obligation of a party on an instrument, whether it is a completed or incomplete instrument.
If an alteration is fraudulent…
it discharges the liability of the obligor.
If an alteration is not fraudulent…
the obligor remains liable on the original terms of the obligation.
Hierarchy of Terms in Case of Contradictions (VA Code § 8.3A-114)
The hierarchy for interpreting conflicting terms in a written instrument is as follows:
- Handwritten terms prevail over
- Typewritten terms, which prevail over
- Printed terms.
Words take precedence over numbers when there is a discrepancy.
Forgery and Liability (VA Code § 8.3A-403)
If the maker’s signature is forged or omitted from a note, the maker is not generally liable for the obligation unless the forgery is ratified by their actions.
Ratification by Conduct
Ratification by conduct occurs when a party acts in a way that accepts or adopts the forged signature.
Negligence contributing to a forgery or fraudulent indorsement…
precludes the party from denying the validity of the instrument (VA Code § 8.3A-406).
Duty to Report Forgery (VA Code § 8.3A-406)
A party must report a forged signature within one year from the date of the creation of the instrument or from the date a statement containing the forged signature is issued.
Failure to report the forgery within this period precludes the defense of forgery.
Liability of Accommodation Party (VA Code § 8.3A-605)
An accommodation party is liable for an instrument under the following conditions:
- The person entitled to enforce the instrument has reduced the claim to a judgment, and execution is returned unsatisfied,
- The other party has become insolvent,
- The other party cannot be served with process, or
- It is useless to proceed against the other party.
Liability on Negotiable Instruments
A party is generally not liable on a negotiable instrument unless it bears their signature or the signature of an authorized representative. Va. Code §8.3A-401.
Does stopping payment on a check void the underlying contractual obligation?
No, it merely delays payment. A party who stops payment must establish a real or personal defense to avoid liability.
Shelter Doctrine
A transferee of an instrument may inherit the HDC status of a prior holder, as long as the transferee has not personally engaged in wrongdoing related to the instrument.
A holder who endorses and transfers an instrument makes certain warranties, including:
- The transferor is entitled to enforce the instrument.
- All signatures are authentic and authorized.
- The instrument has not been altered.
- The instrument is not subject to any defenses or claims against the transferor.
- The maker is not insolvent.
A transferee can recover under both contract and tort theories based on these warranties.
Liability for Dishonored Instruments
- The drawer (person writing the check) remains liable for payment.
- The payee or subsequent holder may seek enforcement under contract law or negotiable instrument law (UCC Article 3).
- If the check is dishonored for insufficient funds, the drawer may face civil penalties or even criminal liability, depending on the jurisdiction.
- A holder who transfers a dishonored instrument remains liable unless expressly discharged.
Dishonored Check
a check that a bank refuses to pay or process when presented for payment. This can happen for several reasons, generally categorized into non-sufficient funds (NSF) dishonor and formal dishonor by the bank:
