Law 3

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  1. Demand Instruments
    Payable on demand

    • Payee can demand payment at any reasonable time
    • notes and drafts
    • checks are always demand instruments - banks do not have to refuse to cash a post dated check
  2. Time instruments
    Payment will be made only at a designated time

    • notes, and drafts that are not checks
    • checks cannot be time instruments
  3. Order Instruments
    Payable to a particular party
  4. Bearer Instruments
    payable to bearer
  5. What constitutes a negotiable instrument?
    • 1. Written document
    • 2. Signed by the creator of the instrument
    • 3. Unconditional promise (note) or Order (draft) to pay
    • 4. Sum in certian money
    • 5. Time certain
    • 6. Words of Negotiability
  6. Written Document
    • relative permanence
    • movability
  7. Signed by the creator of the instrument
    • affirmative mark
    • duly authorized agent
    • handwritten, even without a signature
    • automated signature
  8. Unconditional promise to pay
    cannot be contigent on something else happening

    • I will pay because ----- Good
    • I will pay if ------ Not good
  9. Sum in certain money
    • a national currency
    • stated exchange rate not necessary
    • goods are not currency
  10. Time certain
    Payment to be made either on demand or at a fixed future time
  11. Words of negotiability
    • "to the order of" OR
    • alternative words indicating that it is a "bearer" instrument
    • bearer instruments are treated like cash

    Endorsing an order instrument converts it to a bearer instrument

    words of negotiability are an indication that the creator intended the instrument to circulate in commerce

    • pay to the order of
    • pay to john doe or bearer
    • pay to cash
    • pay to the order of cash
    • pay to the order of bearer
  12. How does one properly transfer an instrument
    • Bearer instrument - by delivery
    • Order instrument - by endorsement and delivery
  13. Types of endorsement
    Unconditional promise to pay, no limitations

    Blank - just a signature, no special instructions

    • Special - Payable to a particular person
    • "to the order of" is not needed
    • instrument remains negotiable instrument continues to be an order instrument

    or changes bearer instrument to an order instrument
  14. types of endorsement
    • use words "without recourse"
    • Party is not gaurenteeing to susequent holders that it will pay if the party that created the instrument does not honor it
    • transfer without signature liability

    can be blank or special
  15. Types of endorsement
    • attempt to control the manner of the payment
    • instrument remains negotiable, but options for further transfer are restricted
    • "for deposit only"
    • instrument is still negotiable, but cannot be cashed
    • but can be deposited into any account

    can be blank or special
  16. Status of recipient
    Owner of a NON-negotiable instrument - an instrument that doesn't meet all 6 of the requirements for negotiability

    owner of an instrument that was not properly negotiated to him or her

    • assignrr merely stands in the shoes of the assignor - no greater right to enforce the underlying promise than the assignor had
    • contract law
  17. status of recipient
    owner of a negotiable instrumen that was properly negotiated
  18. Status in recipient
    holder in due course
    • special class of holder
    • has superior rights to holder
    • HDC is one who has taken the instrument

    • 1. for Value
    • 2. in good faith
    • 3. without notice (of defenses or adverse claims)
  19. for value
    • payment for services rendered
    • payment of a claim
    • in exchange for a security interest
    • in exchange for another negotiable instrument

    does NOT include promise to preform

    holder must havesuffered an out of pocket loss

    goft recipient is not a HDC
  20. in good faith
    • Honesty in fact
    • AND
    • practicing reasonable commercial standards
    • perpetrator of fraud is not HDC
  21. without notice
    • the instrument has been altered
    • unauthorized signature
    • the instrument is over due
    • - checks 90 days
    • - notes after payment date; unreasonable time if "on demand"
    • the instrument has been dishonnored
    • there is a claim of ownership by another person
    • there is a defense to payment
  22. HDC - Shelter Principle
    a holder who obtains a negotiable instrument from a HDC will have the same elevated status as if the holder had qualified as a HDC

    Once HDC exists, all following holders have sale elevated status - UNLESS fraud or other illegal activity

    this is to encourage marketability of instruments
  23. Rights of the holder
    all the parties associated with a negotiable instrument potentially face tw types of liability

    • 1. Signature Liability
    • 2. Warranty Liability

    every endorser is potentially liable for the value of the negotiable instrument to every subsequent endorser and holder
  24. Signature Liability
    • Primary Liability - the party who must be presented with the instument for payment
    • note- maker
    • check - drawee(bank)

    • Secondary Liability
    • - if the primary party dishonors the instrument, the holder may then demand payment from
    • note - any endorser
    • check - drawer or endorser

    anyone who has put their signature on the intrument maybe liable for the amount due

    • before any secondary party can become liable, three things must happen
    • 1. the holder must present the instrument to the primary party for payment
    • 2. the primary party must "dishonor" the instrument
    • 3. the primary party must give "notice" of the dishonor to the holder

    Then, the holder can seek payment from a secondary party
  25. Warranty Liability
    • One who transfers an instrument creates an implied warranty (enforceable promise) of certian facts relating to the instrument
    • 1. Transferor's warranties
    • 2. Presenter's warranties

    seperate and in addition to the signature liability of primary and secondary parties

    Protects the party accepting the instrument

    This guarantees the validity of the instrument

    if warranty is breached, the transferor or presenter is liable for the loss accruing as a result of the defect of the instrument - DAMAGES
  26. Transferor's Warranties
    • If the transfer id made in good faith for consideration, the transferor warrants the following to the transferee
    • - he has good title
    • - all signatures are genuine and authorized
    • - the instrument has not been materially altered
    • - the instrument is not subject to defense
    • - he has no knowledge of any insolvency proceedings

    in addition the transfer is made through endorsement, these warranties apply to subsequent holders as well

    Note: if a transferee becomes aware of a breach of warranty, seh does NOT have to present the instrument to the original party. She can go directly to the transferor for any losses she has incurred

    "without recourse" does NOT protect a transferor from warranty liability
  27. Presenter's Warranties
    • Protects those paying on the instrument
    • HDC who presents the instrument for payment warrants that she has good title to the instrument

    Any Person other than HDC who presents the instrument for payment warrants that she has good title to the instrument, the instrument has not been materially altered and she has no knowledge that the signature of the maker or drawer is unauthorized
  28. Real defenses
    Target the validity of the negotiable instrument or VOID the underlying contract

    VAlid against both holders and HDC's

    • DIFF MID
    • - discharge in bankruptcy known to holder a the time of the transfer
    • - Incapacity (minority, or other incapacity that would void the underlying contract)
    • - forgery
    • - fraud in the execution
    • - material alteration of a completed instrument
    • - illegality that would render the contract void
    • - duress to the extent it would render the contract void
  29. Notes on Forgery
    No person is liable, even against an HDC, unless the person's authorized signature appears on the instrument OR her negligence substantially contributed to an unauthorized signature

    a forged signature creates no liability against the person whose signature it purports to be, but instead operates as the signature of the un authorized signer
  30. Notes on unauthorized signatures
    • a valid signature may be made by an authorized representative of the person whose name is to be signed
    • an unauthorized signature may later be ratified, thereby the defense of forgery is lost
    • an unauthorized signature that occurs due to negligence on the part of the signatory will cause the defense of forgery to be lost
    • an endorsement to an imposter by an agent is effective
    • if the endorser intended to endorse then it's not forgery
  31. Personal Defenses
    Reasons to excuse performance of the contract underlying the transfer of the negotiable instrument

    • Examples
    • - breach of contract
    • - lack of consideration
    • - fraud in the inducement
    • - theft
    • - payment inconsistent with restrictive endorsement (for deposit only)

    • Valid only against holders and assignees
    • NOT valid against HDC's
  32. Notes on fraud
    • fraud in the execution is a real defense
    • a misrepresentation occurs concerning the terms and character of the instrument itself
    • Person is tricked into believing the note is actually somethign else, but the note itself does not contain misrepresentation
    • or tricked into thinking the note is for 1,000 but actually states 100,000

    • Fraud in the inducement is a personal defense
    • the fraud and decpetion concern something other than the instrument itself
    • selling a fake picasso painting in exchange for the note
  33. Liability of accommodation party
    an accommodation party is one who signs the instrument for the purpose of lending his or her name to the instrument - co-signing for the loan

    • If the accommodation party signs as the maker of a note he is a primary party
    • a holder can present the instrument to the co-signer without first going to the accomodated party

    joint and several liability with the accommodated party.
Card Set
Law 3
law 3
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