VA _ Commercial Paper Flashcards
When is a principal liable on an instrument signed by an agent?
Authorized Agent
Whether a principal is liable on an instrument signed by an agent turns, in part, on whether the agent had authority, either actual or apparent. If the agent is authorized, the principal is liable whether the agent signed the principal’s name, the agent’s own name, or both.
Unauthorized Agent
If the agent is not authorized, the principal generally will not be liable.
However, the principal may ratify the agent’s unauthorized signature if the principal adopts the signature or fails to deny the signature’s validity. Ratification occurs when a principal affirms a prior act that was done or purported to be done on the principal’s behalf. The principal’s affirmation may be either express or implied (such as through conduct), and consideration is not required.
Also, the principal may be estopped from denying liability against a HDC if the principal negligently contributed to the agent’s unauthorized signature.
Accommodation Party
An accommodation party is a type of surety, or one who guarantees the debt of another. In order to be an accommodation party, a person cannot have received a direct benefit from the instrument. An accommodation party is liable on the instrument in whatever capacity he has signed.
2 Requirements to be an Accommodation Party:
1) The party signs the instrument for the purpose of incurring liability on the instrument.
2) The party must not be a direct beneficiary of the value given for the instrument.
Discharge of Indorsers & Accommodation Parties - Impairment of Collateral
Under the UCC, if a party’s obligation to pay an instrument is secured by an interest in collateral and the person entitled to enforce the instrument impairs the value of the interest in collateral, the obligations of an accommodation party (or indorser) are discharged to the extent of the impairment.
The burden of proving the collateral’s impairment is on the party asserting discharge.
Impairing the value of an interest in collateral includes:
(i) failure to obtain or maintain perfection or recordation of the interest in collateral; (failure to perfect or record its interest)
(ii) release of collateral without substitution of collateral of equal value;
(iii) failure to perform a duty to preserve the value of collateral owed to a debtor or surety or other person secondarily liable; or
(iv) failure to comply with applicable law in disposing collateral.
“Collection Guaranteed” - Accomodation Parties
When “collection guaranteed” or similar words added to a signature unambiguously indicate an intention to guarantee collection only, the signer** guarantees only collection rather than payment**.
The accommodation party is liable on the instrument only if:
(i) the person entitled to enforce the instrument has reduced his claim to judgment against the other party and execution is returned unsatisfied,
(ii) the other party has become insolvent,
(iii) the other party cannot be served with process, or
(iv) it appears useless to proceed against the other party.
Transfer Warranties (6)
The transferor warrants that, at time of transfer:
i) The transferor is entitled to enforce the instrument;
ii) All signatures are authentic;
iii) All signatures are authorized;
iv) The instrument has not been altered;
v) There are no defenses or claims that can be asserted against the transferor; and
vi) The maker, acceptor, or drawer is not, to the transferor’s knowledge, subject to insolvency proceedings.
*Unlike the presentment warranty, the transfer warranty is breached by a forged drawer’s signature, as well as the forgery of a nececessary indorsement (e.g., payee’s signature)
Within how many years of the note’s due date may an action be brought for notes payable at a definite time?
6 years
stolen instrument
When an instrument is stolen from a holder, the former holder may be able to enforce the instrument.
Bar Exam Approach to Answering Commercial Paper Questions (6 steps)
- Determine if the instrument is a negotiable instrument.
- Determine whether the instrument was properly negotiated.
- Determine whether the instrument’s holder is a holder in due course (HDC).
- Determine whether the individual who is obligated to pay has any defenses against payment.
- Determine whether those defenses are real or personal defenses.
- Can the one who paid the instrument hold anyone else responsible?
Formal Requirements of Negotiability
Determines whether an instrument was properly negotiated.
To be negotiable under the Uniform Commercial Code (“UCC”) as adopted by Virginia, an instrument must be a writing, signed by the maker, containing an unconditional promise or order, to pay a fixed amount of money, to an order or bearer, payable on demand or at a definite time, and without stating any additional undertaking or instruction.
i) A writing, signed by the maker/drawer;
ii) Containing an unconditional promise or order at the time that it is issued or first comes into possession of a holder;
iii) To pay a fixed amount of money;
iv) To order or bearer;
v) Payable on demand or at a definite time; and
vi) Without stating any additional undertaking or instruction.
What is required to negotiate an order instrument?
To negotiate an order instrument, the holder must the transfer of possession of the instrument and indorse it.
“special indorsement”
“special indorsement” names an identified person as indorsee in addition to the indorsement (e.g., “Pay to Nancy Next” /s/ Peter Payee).
The indorsee must sign in order for the instrument to be further negotiated.
Restrictive Indorsements
Restrictive words such as “only” (e.g., pay John only) or conditions (e.g., pay John if he finishes painting my house) are generally ineffective as a limitation on the subsequent transfer of the instrument.
However, words that require bank collection such as “for deposit” or “for collection” are valid.
Interest on a Negotiable Instrument
Unless explicitly stated, an instrument does not automatically convey an interest payment.
Interest may be at a fixed or variable rate, and may be determined by reference to other documents or information.
If the instrument specifies only that interest will be paid, the rate is the established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues. Unless stated otherwise, interest begins to accrue as of the date of the instrument.
Contradictory Terms in a NI
When conflicting or contradictory terms exist within an instrument, handwritten terms take precedence over typewritten terms, typewritten terms over printed terms, and words over numbers.
hierarchy:
* handwritten –> typewritten –> printed
* words –> numbers
Attorney’s fees (actions to obtain payment of a NI)
Generally, the winning party is not entitled to attorney’s fees unless the agreement specifically provides for it.
Additionally, while a statute may grant the winning party the ability to collect attorney’s fees, no such statute is applicable under Virginia law.
