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COMMERCIAL PAPER - ART. 3 OF UCC
When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses
- 1. Distinguising negotiable instruments from contracts
- 2. Theories of liability - 1) contract or signature liability and 2) warranty or transfer liability
- 3. Determining whether a negotiable instrument is duly negotiated (proper transfer)
- 4. Determining whether a transferee qualifies as a holder in due course (HDC)
- 5. The claims and personal defenses (which the HDC takes free of) and real defenses (which the HDC is subject to)
TYPES OF NEGOTIABLE INSTRUMENTS
an affirmative, unconditional promise to pay from the maker to the payee
checks in which the drawer unconditionally orders the drawee to pay the payee
Distinguishing from Contracts
- Ordering payment,
- Signed by the maker/drawer,
- for a Sum certain,
- Unconditionally with no additional promises,
- Payable on demand or at a definite time, and
- Payable in currency (cannot include goods)
- notes must be signed by maker (promisor)
- drafts must be signed by drawer (gives order)
- If there are any conditions, it is not a negotiable instrument
- Negotiable instruments must be payable to order/assigns or to bearer, unless it’s a check.
- Checks are the only negotiable instrument that don’t need to words order, assigns, or bearer in the payable to section.
THEORIES OF LIABILITY
- Contract or Signature Liability
- Warranty or Transfer Liability
Contract or Signature Liability
- Defendant (maker/promisor) has signed the negotiable instrument (a promise to pay)
- Indorser signs back of instrument - promises that if the check bounces and he is notified, he will pay
- Drawer signs the check - promise that if the check bounces and he is notified, he will pay
- Drawee (usu. bank) pays the draft and does not sign (no liability)
- "without recourse" accompanying signature passes title but notifies transferee that signature liability does not pass
Warranty or Transfer Liability
- Seller's liability for selling a defective instrument
- Any transferor who sells the negotiable instrument can be liable (not donors)
- Any P in possession of an indorsed instrument may sue the D who indorsed (warranties run with the instrument when indorsed)
- If D id not indorse the instrument, the only the D's immediate transferee may sue (warranties do not run with the instrument)
- D warranties: P has good title, all signatures are genuine/authorized, no material alterations (tampering = defective), no defense or claims against (enforceable), and no knowledge of bankruptcy or insolvency action against maker/drawer
DUE NEGOTIATION/PROPER TRANSFER
- duly negotiated = proper transfer
- making the transferee a holder in due course
- improper transfer means not an HDC
- Instruments payable to the order of a specific payee are negotiated by delivering the instrument to that payee. Further negotiation requires the payee to indorse the instrument and deliver it to the transferee.
- Instruments payable to bearer don’t require indorsement for further negotiation. Anyone in possession of that instrument is a holder.
- If an indorsement names a particular person as indorsee it’s a special indorsement, and the indorsee must sign in order for the instrument to be further negotiated.
- Blank indorsements may be further negotiated by delivery alone. So someone can find a blankly indorsed check and be a holder.
- Restrictive indorsements contain conditions (“for deposit only”) and cannot be further indorsed.
HOW A TRANSFEREE BECOMES A HOLDER IN DUE COURSE
- A holder who takes the instrument
- for VALUE (not mere promise and old value is good value),
- in GOOD FAITH (honesty in fact and observance of reasonable commercial standards of fair dealing), and
- without NOTICE that it is overdue or has been dishonored or is subject ot any defense or claim (did holder know or have reason to know of the problem)
- Shelter Rule: a transferee acquires whatever rights the transferor had (eg, a donee transferee)
BENEFITS OF HDC STATUS
- HDC takes the instrument free from claims (defeats superior owner), free from personal defenses (such as lack of consid, unconscionability, waiver, estoppel, fraud in inducement) and subject only to real defenses
- Real Defenses: MAD FIFI4
- 1) Material Alteration (changing terms of the instrument; if maker is negl., then he is estopped from raising defense -left too much room)
- 2) Duress
- 3) Fraud In the Factum (lie about the instrument)
- 4) Incapacity
- 6) Infancy
- 7) Insolvency
VA essay focus
- writing checks without authority, where the employee signs his employer’s name or a thief steals another’s checkbook.
- The drawee honoring a forced check must recredit the drawer’s account as long as the drawer wasn’t negligent - left blanks spaces, failed to follow internal protocol for avoiding forgeries (not locking a signature stamp), wrote a check to an imposter, or entrusting an employee with handling checks who later forges them.
- A negligent drawer and a thief are liable to drawee.