Neg Inst

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Neg Inst
2009-11-23 18:05:26
Law Negotiable Instruments Payment law

Payment law
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  1. Drawer Liability
    • -by signature
    • a. unauthorized signature is good against HDC
    • i. Theft of signature device is cut off byHDC
    • b. Defense - must specifically deny signature
    • c. CANNOT be a general denial
    • d. Must specifically rebut the presumption - present evidence
  2. Indorser Liability
    • - by signature
    • a. signature required
    • b. forger's signature ok
    • i. then offer defense
    • ii. unauthorized signature is good against HDC
    • iii. theft of signature device - cut off by HDC (negligence)
  3. Indorsement
    • 1. Qualified ("without recourse") or unqualified
    • 2. Blank or special
    • * Blank- other than special
    • a. becomes payable to bearer (bearer paper/inst)
    • b. negotiated by transfer of possession alone until specially indorsed
    • 3. Restrictive or unrestrictive
  4. Indorser Liability
    • *liable by signing instrument if instrument is dishonored,
    • *indorser is obliged to pay
    • *liable to PEEI or subsequent indorser who paid the instrument
    • *may escape indorser liability by qualifying (adding "without recourse") signature
    • *indorser's liability is discharged unless check is presented for payment or given to
    • DB within 30 days.
  5. Negotiation
    • - transfer of possession other than to payee
    • 1. Instrument payable to a person
    • a. transfer possession and
    • b. indorse
    • 2. Payable to bearer (bearer paper/instrument)
    • a. transfer possession alone - becomes PEEI by possession alone
    • *Transferring instrument with or without indorsement transfers right to enforce
  6. Agency
    • 1. Actual
    • 2. Apparent
    • 3. Implied
    • *Undisclosed principal
    • - 3rd party doesn't know there's a principal
    • - Principal liable even if not identified if he authorized rep's signature
    • *Agent liable unless form of signature shows it was made on behalf of represented person and represented person is identified on instrument:
    • *Agent signature: "Peter Principal" - agent not liable
    • "Peter Principal by Adam Agent, Agent" - agent not liable
    • "Peter Principal, Adam Agent" - both are liable
    • "Adam Agent, Agent" - liable to holder in due course
    • "Adam Agent" - agent liable
    • * Agent can put on evidence that she was not intended to be liable
    • * Liable to holder-in-due-course (HDC) only
  7. PEEI
    • 1. Holder
    • a. By issuance
    • i. bearer
    • ii. order
    • iii. cash
    • b. By negotiation - transfer to another (indorse if necessary) other than issuer
    • c. EXCEPTION - DB becomes a holder as soon as the bank receives the item for collection;
    • seller does not have to indorse.
    • i. To be HDC, DB must "have a stake in it" by allowing the customer to withdraw against credit on the instrument
    • 2. Non-holder - transferor gains rights through holder
  8. Holder in Due Course (HDC)
    • 1. Holder of a negotiable instrument
    • 2. For value
    • 3. Without notice
    • 4. Without reason to question the authenticity of instrument
    • 5. In good faith
    • 6. Apart from certain unusual circumstances
  9. Value v. Consideration
    • a. Distinguish between value and consideration
    • i. Consideration - doing or promising to do what one is not already
    • legally bound to do, or refraining or promising to do what one has a
    • legal right to do, in return for a promise
    • ii. Value - an instrument is issued/transferred for value if:
    • 1. for a promise to the extent the promise is performed
    • 2. transferee acquires a security interest (DB; inst as collateral) or other lien other than a lien through a judicial proceeding
    • 3. antecedent claim - old debt, won't work in K
    • 4. in exchange for a negotiable instrument
    • 5. in exchange for the incurring of an irrevocable obligation to a 3rd party - i.e. letter of credit
  10. HDC Notice
    • a. Actual knowledge of it; or
    • b. received a notice or notification of it; or
    • c. from all facts/circumstances known at the time - reason to know it exists
    • i. Overdue - 90 days
    • ii. Dishonor
    • iii. Uncured default
    • iv. Unauthorized signature
    • v. Alteration
    • vi. Claim to instrument
    • 1. claim of property or possessory rights to inst or its proceeds including:
    • a. ownership
    • b. consensual/nonconsensual lien; or
    • c. any other legal or equitable interest
    • vii. Defense or claim in recoupment
    • *claim in recoupment - issuer wants money back because thing bought is defective
  11. Good Faith
    • Two-prong test:
    • i. "honest in fact and
    • ii. the observance of reasonable commercial standards of fair dealing"
    • *follow rules and good business procedures
    • * concerned with fairness of conduct rather than the care which an act is performed
  12. Shelter Rule
    • Requirements:
    • 1. Took from a holder
    • 2. Took by legitimate transfer
    • i) Transferee may have rights of HDC without necessarily having HDC status
    • ii) Enforce other person's status
    • iii) Can't use fraud to shelter under someone else's status
  13. Article 3 Defenses
    a) Personal/ordinary defenses - cut off by HDC

    b) Real defenses - good against HDC
  14. Defense
    • - same as K (state law)
    • (1) Only defense to allow defendant to avoid liability although merely voidable
    • (2) Necessaries - must pay reasonable value
  15. Defense
    • - wrongful threat that overcomes the will
    • (1) Cannot threaten prosecution to induce someone to enter K
    • (2) Must be extreme (gun to head) to be a real defense; otherwise personal/ordinary
  16. Defense
    Lack of Legal Capacity
    • - nullifies depending on state law
    • (1) insane
    • (2) intoxicated
    • (3) corporation acting outside the powers of its charter
    • (4) ONLY defense against HDC IF state law makes it a VOID K; VOIDABLE K not a defense against an HDC
  17. Defense
    • (1) Real defense only if transaction is rendered VOID
    • (2) Public policy outweighs rights of HDC
    • (3) In AR - gambling makes void
  18. Defense
    Usury Laws
    VOID to the extent of state law

    HDC cannot collect for consumer loan if usurious (violation)
  19. Defense
    Fraud in the Inducement/Procurement
    • NOT good against HDC
    • (a) defrauded person is fully aware of the character and essential terms of the instrument but is induced to sign by deception with respect to some other matter.
    • (b) i.e. person signs a check for $1,000 for a worthless rock the seller/payee has fraudulently represented to be a diamond.
  20. Defense
    Fraud in the Factum/Essense
    • Good against HDC
    • (a) occurs when the defrauded person is induced to sign an instrument by deception with respect to the character or terms of the instrument itself.
    • (b) i.e. payor is induced to sign a check for $10,000 relying on a false representation that it is only a receipt or the amount is only $1,000.
    • (c) To be a good real defense depends on whether or not the defrauded party can prove that she lacked a reasonable opportunity to learn the true character of the terms.
  21. Defense
    Bankruptcy (Discharge in Insolvency Proceedings)
    Overrides HDC
  22. Real defense - good against HDC
  23. Deposit Agreement
    • Governs rights and duties of customer and PB
    • *many rules can be varied by deposit agreement
  24. EXCEPT for duties to:
    • 1. act in Good Faith and
    • 2. exercise ordinary care
  25. Properly Payable
    • IMPORTANT QUESTION - when must or may the bank pay checks drawn against the account and charge the customer's account?
    • o Item is Properly Payable when:
    • 1. "authorized by the customer" -
    • 2. "in accordance with any agreement between customer and PB
    • - If PB pays unauthorized check it CANNOT charge customer's account because it was wrongfullyhonored
    • 1. payment comes out of PB's funds
    • 2. PB must cover loss (w/ exceptions) and cannot look to Customer account or property
    • - An authorized check can be dishonored if inconsistent with deposit agreement
    • * usually insufficient funds and no overdraft agreement
  26. "authorized by customer"
    • AUTHORIZED - when drawn by customer and issued to a named payee (identified person)
    • or the person's order and presented for payment by payee or PEEI
    • - NOT AUTHORIZED - if signature is unauthorized/forged or, in some cases,a necessary indorsement is missing
    • - Altered check UNAUTHORIZED beyond original terms
    • - NOT AUTHORIZED on:
    • a) a valid STOP payment or
    • b) closed account
  27. Reasons for wrongful dishonor
    • - Dishonor Properly Payable item
    • - Liable to customer - breach of K; tort; etc.
    • - PEEIs have same COA as rightful dishonor - sue on check or underlying ob.
    • *Miscalculating Balance
    • - Funds availability
    • 1. PB can check balance anytime between when item received and return/notice
    • 2. Only required to check once
    • 3. May check again but is not required
    • 4. Available funds - provisional credit is NOT available
    • * Damages
    • - Breach of K
    • 1. Actual damages proved - court will not presume
    • 2. Look at consequences of wrongful dishonor
    • Economic - lost business; and
    • Physical - mental anguish
    • 3. Liable for damages proximately caused by wrongful dishonor
    • 4. limited to actual damages proved
    • 5. Punitive damages must be justified by other state law
    • 6. Speculative damages unlikely
  28. Trader rule - rejected
    • #Definitions:
    • *Local check - payable by, through, or at a local paying bank
    • *Local paying bank - located in the same check processing region as the physical location as the DB.
    • #Next-day availability
    • *Cash deposits - funds available not later than next business day if made in person to an employee of DB.
    • -otherwise (not in person to DB employee), second business day after banking day of deposit
    • *Local checks - not later than second business day following
    • *Nonlocal checks - not later than the fifth business day following
    • #Exceptions - "Reasonable period of time" - does not apply to:
    • *Large deposits - over $5,000 on any one banking day
    • *Redeposited checks - missing indorsement; post dated
    • Repeated overdrafts
  30. STOP Order
    • *Order may be oral or written and must describe the item with reasonable certainty
    • -Reasonable certainty - check number, amount, date, and name of payeeOral
    • - good for 14 days, then must be in writingWriting
    • - good for six months
    • *Customer or anyone authorized to draw on account can request
    • *Must be made in a manner that give the bank a reasonable opportunity to act
    • *Bank is subrogated under §4-407
    • -subrogated to rights of any HDC on the item against the drawer
    • -subrogated to rights of the payee or any other holder of the item against the
    • drawer
    • -PB can subrogate the rights of drawer against payee or any other holder
    • Damages - re-credit account
  31. Death
    • *PB (agent of drawer) - authority to pay is not revoked "until the bank knows of the fact of death" and has reasonable opportunity to act on it.
    • *PB has limited power to pay for 10 days after date of death unless person
    • claiming an interest orders a STOP Order.
  32. Breach of Fiduciary Duty
    • *Fiduciary means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument
    • *Represented person - person to whom duty is owed
    • *PB must know the fiduciary is in violation
    • *Presumption of authorized action
    • *Knowledge the person is a fiduciary
  33. Postdated Check
    • *Date on check later than the date issued
    • *Inst payable on demand is not payable until that date w/exceptions
    • - Customer must have given notice to bank of postdating and describing the check with reasonable certainty
    • - Not microencoded (date) - unlikely bank will catch the date
    • - If post-dating notice is effective, bank is liable for resulting damages
    • - Treated like a STOP Order
  34. Stale Checks
    • *More than 6 months past due
    • *Can bounce for staleness but can pay and charge customer's account if paid in GF
    • *Computers cannot read date - microencoding in MICR line
    • *SOL on underlying obligation is 3 years
  35. Alteration
    • *Properly payable as to original terms
    • *Only payable on terms authorized by drawer
    • *Not properly payable as to wrongfully changed terms
    • *PB can charge the customer's account to the original terms
    • *Not unauthorized if drawer OK's someone else's changes on check
  36. Unauthorized Completion
    • *Properly payable as completed
    • *properly payable as to the amount - drawer is contributorily negligent for giving a
    • blank check
  37. Check Fraud
    • DISCHARGE - gets rid of underlying obligation
    • - Payment must be made to PEEI to discharge obligations
  38. Check Fraud
    Ineffective Drawer's Signature
    INEFFECTIVE DRAWER'S SIGNATURE - any unauthorized signature is ineffective
  39. Check Fraud
    Ineffective Indorsement
    • - Forged/unauthorized indorsement is NOT Properly Payable
    • - Transferee w/ unauthorized indorsement cannot be a holder
    • - If thief indorses an instrument given to S, C is not discharged b/c check
    • not cashed by PEEI
  40. PB's Defenses
    • Signature was authorized
    • - Agency law

    • Signature was ratified
    • - Unauthorized signature may be authorized by conduct and express statements
  41. PB's Defenses
    Imposters and fictitious payees
    • "Per se type" → imposters and fictitious payees
    • - Indorsement by imposter is effective
    • -- Drawer negligence - get ID, pay at store, etc.
    • -- Drawer loses the money
    • -- Drawer is in best position to prevent this
    • - Fictitious person
    • -- LIABLE - shouldn't write checks to fictitious people
    • -- Indorsement by ANYONE is good
    • - Nominal person - Intent → never intends names payee to have an interest
    • -- Anyone in possession is holder
  42. PB's Defenses
    Fraudulent Ind by employees
    • Fraudulent indorsement by employees - Narrow
    • - Easier for bank to prove
    • - Employer is in better position to prevent this
    • - Fraudulent indorsement by entrusted employee → indorsement is effective as the indorsement of the person to whom instrument is payable if it is made out in the name of that person
  43. PB's Defenses
    General Negligence
    • - Failure to exercise ordinary care substantially contributes to alteration or forged
    • signature.
    • - Theft of signature device
    • - Substantially contributes - must actually contribute to the alteration/forgery and be
    • substantial
    • - Contributory negligence - each party responsible for degree of culpability
  44. PB's Defenses
    Negligence after the fact - statement
    • Statement not required but if provided, the bank must:
    • - make items paid available or provide sufficient info to allow customer to identify them
    • -- item #s, amount, and dates of paymentBank
    • - must retain info to reproduce item for 7 years
    • Customer has an obligation to examine statement.
    • Must look for: alterations, forgery/unauthorized signature
    • - 30 days to discover and notify bank → after, customer is precluded from asserting against bank
    • - Repeater Rule - if a series of checks are forged/unauthorized liability
    • time-frame depends on statement being issued
    • -- Before statement is issued → bank must prove loss
    • -- For 30 days after statement is issued → Customer may be liable
    • -- Beyond the 30 days → Customer is liable
    • - One-year Outside Limit (§4-406(f)) - preclusion rule → customer must make claim
    • within 1 year after statement is available.
  45. PB's Defenses
    • CL provision → any words or conduct that an innocent person relies upon that
    • the signature is authorized precludes customer/drawer action.

    CL claims, as they apply to the duties of a DB are displaced only to the extent that the UCC contains particular provisions regarding those duties.
  46. PB Remedies
    • 1. Subrogation
    • 2. Warranty
    • 3. Restitution
  47. Wrongful Honor
    Absent real fraud or forgery
    • * PB paid a check that is not properly payable under deposit agreement
    • * PB is not entitled to charge customer's account for amount of item
    • 1. Subrogation - PB is subrogated to the rights on the check and the underlying obligation the payee could have asserted against the drawer IF the check had been dishonored.
    • a. For example, Payor pays $10,000 to S who deposits in DB; DB allows S to draw all $10,000 (makes DB an HDC). Payor wrongfully honors payment over STOP Order. PB subrogated to HDC (DB) - payor would have had to pay anyway so PB doesn't have to pay; unless payor had real defenses against S.
    • b. PB is subrogated pro tanto to payee's rights - to the extent Customer lacks a defense
    • c. Must look at situation as if PB had dishonored check
    • d. PB can also assert the rights of a 3rd party
    • e. To the extent that Customer has defenses, PB can assert as well
    • 2. Warranties
    • a. Encoding warranties - can sue the encoder
    • b. Presentment
    • 3. Restitution - for mistaken payment
    • a. Elements
    • i. Benefit conferred
    • ii. Unjust to keep
    • b. Rare - PB may claim against a person who took for value but NOT GF or person who took in GF but has not changed position in reliance on the payment
  48. The Great Race
    4 Legals
    • 1. Knowledge/notice
    • - Bankruptcy, Death, Mental incompetence
    • 2. STOP Order
    • 3. Legal process
    • - Garnishment
    • 4. Setoff
    • - Right of setoff against drawer's account
  49. The Great Race
    5 Milestones
    • (when one of these 5 pass, the check wins)
    • 1. Accept or certify
    • 2. Pay in cash
    • 3. Settle w/o right to revoke
    • 4. Midnight Deadline passes
    • 5. Cutoff hour
    • - "priority cutoff"
    • - ALWAYS a day two hour (EXAM)
  50. Shifting Check Fraud Losses
    Presentment Warranty
    • *person, who is last in chain, makes warranties when he presents checks for payment. Previous transferors make the same kinds of warranties at the time they transferred it.
    • - generally the only remedy for a bank that has already paid an instrument, which has gone thru several transferors
    • Who - everyone in the chain, as of the date they present the instrument, makes a presentment warranty
    • How - implied as a matter of law (statutory)
    • Consideration irrelevant - not required → only transfer
    • - Bank must know there is a claim and who the warrantor is
    • -- 30 days
    • -- Warrantor discharged to the extent of any loss caused by delay in giving notice
    • - if an unaccepted draft (check) is presented to the drawee for pmt and the drawee pays, the person obtaining pmt, at the time of presentment, and previous transferors, at the time of the transfer, warrant to the drawee the following things:
    • -- That the warrantor is a PEEI
    • -- That check hasn’t been altered
    • -- The warrantor has no knowledge that the signature of the purported
    • drawer is unauthorized.
    • -- For a remotely-created consumer item, that the person on whose acct the item is drawn authorized the issuance of the item (auto bill pay).
  51. Presentment Warranty Defenses
    • Same as PB's Defenses
    • i.e. - signature authorized, ratified, per se type, etc.
  52. Shifting Check Fraud Losses
    • Shift loss back upstream on this basis? §3-418 builds Restitution into the code. Should
    • work for forged drawer and wrongfully pays over stop order, etc.
    • Pay by mistake → recover in restitution
    • However, that right to recover isn’t good in good faith takers for value or good faith reliers. They prevail b/c that’s fair and just.