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Define: Holder
Define: HDC
- Holder:
- One in possession with right to enforce instrument.
- HDC:
- Holder who takes for value, without notice of defenses and in good faith.
- Value: performance of agreed-on consideration, acquisition of a SI in instrument, taking as payment of antecedent debt, trading negotiable instruments, giving instrument in exchange for incurring an irrevocable obligation to a 3P.
- Good Faith: Honesty in fact (subjective) and observance of reasonable commercial standards (objective).
- Notice: Both actual and constructive notice. Facts constituting notice: instrument overdue, unatuhorized signature, claims/defenses to instrument.
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Shelter Rule
- A transferee acquires whatever rights her transferor had UNLESS parties to fraud.
- Once someone becomes an HDC, all subsequent transferees are also HDCs.
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V. CLAIMS & DEFENSES
A. Real Defenses
- prevents HDC from enforcing
- may be asserted against an HDC
- FAIDS
B. Personal Defenses
- HDC may still enforce
- may NOT be asserted against an HDC.
- Real Defenses:
- (1) Forgery, Fraud in Factum, Alteration of Instrument, Incapacity to K, Infancy, Illegality, Duress, D/C in bankruptcy, SOL, Suretyship Defenses, D/C known to HDC.
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Real Defenses:
(1) Forgery,
(2) Fraud in Factum,
(3) Alteration of Instrument,
(4) Incapacity to K,
(5) Infancy,
(6) Illegality,
(7) Duress,
(8) D/C in bankruptcy,
(9)SOL,
(10) Suretyship Defenses,
(11) D/C known to HDC
- Forgery: If payee's indorsement forged, no one can become HDC b/c no one has rt to enforce.
- If drawer's indoresement forged, transferees may be holders b/c forgerer adopts that signature as his own.
- Fraud Factum: Obligor didn't know what he was signing or it's essential terms.
- Fruad Inducement: Personal defense.
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Real Defenses:
(1) Forgery,
(2) Fraud in Factum,
(3) Alteration of Instrument,
(4) Incapacity to K,
(5) Infancy,
(6) Illegality,
(7) Duress,
(8) D/C in bankruptcy,
(9)SOL,
(10) Suretyship Defenses,
(11) D/C known to HDC
- Alteration: HDC may collect original amount of altered terms (changing terms already on instrument).
- HDC may collect fradulently completed terms (left blank and wrongfully filled in).
- Maker liable for completed terms BUT NOT altered terms (b/c negligent in leaving blanks to be fraudulently filled in).
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Real Defenses:
(1) Forgery,
(2) Fraud in Factum,
(3) Alteration of Instrument,
(4) Incapacity to K,
(5) Infancy,
(6) Illegality,
(7) Duress,
(8) D/C in bankruptcy,
(9)SOL,
(10) Suretyship Defenses,
(11) D/C known to HDC
- Infancy: If defense to k law, real defense to comm paper.
- Illegality: Even if HDC not involved, if underlying transaction renders obligation void, it's a real defense.
- Duress: If one party acts involuntarily in a k situation under extreme duress, i.e. gun pointed at head.
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Real Defenses:
(1) Forgery,
(2) Fraud in Factum,
(3) Alteration of Instrument,
(4) Incapacity to K,
(5) Infancy,
(6) Illegality,
(7) Duress,
(8) D/C in bankruptcy,
(9)SOL,
(10) Suretyship Defenses,
(11) D/C known to HDC
- D/C B'ruptcy: D/C of debt in insolvency is real defense.
- D/C Known To HDC: Any type of D/C, not just from bankruptcy, is a real defense IF the HDC did not know about it (obligor already paid but transferor transferred anyway).
- If notice of D/C, real defense.
- If no notice of D/C, personal defense.
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Real Defenses:
(1) Forgery,
(2) Fraud in Factum,
(3) Alteration of Instrument,
(4) Incapacity to K,
(5) Infancy,
(6) Illegality,
(7) Duress,
(8) D/C in bankruptcy,
(9)SOL,
(10) Suretyship Defenses,
(11) D/C known to HDC
- SOL: 3 years for: (i) unaccepted checks, (ii) against issuers of cashier's/certified checks, (iii) conversion, (iv) breach of warranty, (v) to enforce other Art 3 rights.
- 6 years for: (i) notes payable at definite time or on demand, (ii) C.D.s
Suretyship (accomodation): If HDC knows of the accomodation, takes subject to the suretyship defenses. If no knowledge, does not take subject to.
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Personal Defenses:
(1) Consideration
(2) Defenses of Others
[Thief --> X and X tries to enforce against Maker]
(3) Simple K Defenses
Consideration: Comm Paper must be supported by consideration. If it is not, it is a personal defense.
- Claims/Defenses of another: If payor pays with (i) knowldge payment is prohibited by injunction, (ii) knowledge instrument stolen or paying to someone in wrongful possession, or (iii) payor rcvd indemnity from a person with a claim to the instrument for refusal to pay person entitled to enforce instrument.
- *NOTE: Theft defense MUST BE RAISED by payor or waived (and payment is enforceable). If payor knows holder obtained possession by theft or as a result of theft (thief transfers to holder), must raise defense to get out of paying.
K Defenses: lack or failure of consideration, breach of warranty, fraud in inducement, HDC no notice of D/C, etc.)
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VI. TRIAL PROCEDURE
A. Who may Enforce?
B. Burden of Proof?
C. Conversion
D. Vouching in
- Who may Enforce?
- (i) a holder, (ii) a nonholder in poss w/rts of a holder, (iii) person not in poss but w/rts to enforce (lost, stolen).
- BOP: Prima Facie case: (i) signatures are genuine, and (ii) person presenting instrument is entited to enforce it.
- Signatures: Presumption of validity. If not specifically denied, deemed admitted.
- Defenses: Plaintiff who proves prima facie case entitled to payment unless defendant raises defense. If defense raised, plaintiff can cut off defense by raising HDC status.
- Lost, Stolen, Destroyed: Person entitled to enforcement may maintain action if can prove ownership, terms and facts preventing prodcution of instrument. May have to indemnify defendant (post bond) against other claims.
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VI. TRIAL PROCEDURE
A. Who may Enforce?
B. Burden of Proof?
C. Conversion
D. Vouching in
- Conversion: One entitled to conversion may bring action for conversion unless never received delivery.
- Vouching In: May "vouch in" parties who may be liable to defendant. Notice must be given to 3P.
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VII. LIABILITY OF PARTIES
A. Parties Potentially Liable
B. Effect of Persons Signing Jointly
C. Effect of Rep/Agent Signing
D. Effect of Unauthoirzed Signatures
E. Effect of Alteration and Incomplete Instruments
- A. Parties Potentially Liable:
- (1) Maker of Note, Issuer of Cashier's Check
- (2) Indorser
- (3) Transferor
- (4) Drawer
- (5) Drawee
- (6) Acceptor
- (7) Accomodation Parties
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
1 - presentment, 2 - dishonor, 3 - notice of dishonor
(3) Transferor
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
Maker/Issuer: By signing name, k to pay terms as are at time issued.
- Indorser: Secondarily liable (after Maker/Drawee) on k or waranty.
- (1) k obligations: Presentment, Dishonor, Notice of Dishonor. ( Needed only for k liability, irrelevant for warranty liability).
- Presentment: Indorser liable if presented for payment.
- Presentment: Excused if: (i) cannot w/resonably diligence present (ii) maker repudiated ogligation to pay/dead/insolvent, (iii) unnecessary by terms, (iv) obligor waived, (v) drawer told drawee not to pay or drawee not obligated to pay.
- Dishonor: Maker/Drawee doesn't pay on date due.
- Notice of Dishonor: Indorser not liable UNLESS given timely notice of dishonor (w/in 30 days). Maker/Drawer need NOT be given notice.
- Notice not needed if: (i) not required by terms, (ii) obligor waives.
- (2) warranty obligations: (See transferor warranties)
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
(3) Transferor
1 - transfer warranties (IDEA)
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
- Transferor Liability:
- Transferor: (i) one who transfers FOR CONSIDERATION.
- *If no consideration, no trasnfer warranties but can still be liable under k as indorser if she indorsed.
- Transferred by Indorsement: warranties run to ALL subsequent transferees.
- Transferred Other Than By Indorsement: Warranties run to IMMEDIATE transferee.
Warranty Liability: CANNOT be restricted on checks. CAN be restricted by words on notes.
- Transferor Warrants That:
- (1) She is entitled to enforce instrument
- (2) All signatures are authentic and authoirzed,
- (3) Instrument has not been altered
- (4) No defense or claim is good against her, and
- (5) She has no knowledge of any insolvency proceedings against maker/drawer.
IDEA: Insolvency (none), Defenses (none), Entitled Enforcement, Authentic Authoirzed Alterations (none).
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
(3) Transferor
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
- Drawer: Secondary Liability
- If check dishonored, drawer obligated to pay according to terms when signed (or, if incomplete check and is completed, as to completed terms) UNLESS check accepted by a bank.
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
(3) Transferor
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
- Drawee Liability: D'er-->D'ee-->P'ee (check)
- Drawee cannot have liability UNLESS it signs instrument (and therefore accepts check and becomes acceptor).
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- (1) Duties of Drawee Bank to Customer:
- Liable for failure to accept from cusomter if sufficient funds.
- Bank must honor check AS DRAWN. Cannot charge account if: (i) no order to pay (Drawer's signature forged) (ii) for more money than original order, (iii) bank pays wrong person (forger), (iv) if postdated and customer notifies bank.
- (2) Duties Customer to Bank: Discover and notify bank of unauthoirzed payments due to alteration or forgery.
- (3) Death of Customer: Bank may pay until (i) knows of death and (ii) has reasonable time to act on knowledge.
(4) Subrogation: When bank pays, it is subrogated (substited for) to the rights of the person it paid against a customer. Bank assumes payees rights. If payee was HDC, bank has HDC rights.
- (5) Stop Pays: Oral = 14 days, Written = 6 months.
- Not effective against Casher's checks.
- If bank pays in violation of stop pay to HDC, customer no recourse b/c would've had to pay HDC anyway.
- (6) Bank's Rights vs. 3P: If bank erroneously pays forged instrument to HDC, may not recover from HDC UNLESS breach of transfer or presentment warranty.
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
(3) Transferor
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
- Acceptor:
- One who signs a draft (usually drawee bank) and becomes primarily liable. According to terms upon acceptance. Called Presentment for Acceptance.
- Ex: Certifying a check. Acceptance by a bank on which it was drawn. D/C drawer & all prior indoresees from liability.
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A. Parties Potentially Liable:
(1) Maker of Note, Issuer of Cashier's Check
(2) Indorser
(3) Transferor
(4) Drawer
(5) Drawee
(6) Acceptor
(7) Accommodation Parties
- Accommodation Party: Surety
- Lends credit to another but receives no benefit. May sign in any incapacity (co-maker, indorser)
- Liability: NEVER to the party accommodated. To other parties in capacity signed for. To HDC, if HDC knows of accommodation, can raise suretyship defenses but liable in capacity signed.
- Payment: If accommodation party pays, has action against accommodated party. AND becomes subrogated to rights of payee.
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VII. LIABILITY OF PARTIES
A. Parties Potentially Liable
B. Effect of Persons Signing Jointly
C. Effect of Rep/Agent Signing
D. Effect of Unauthorized Signatures
E. Effect of Alteration and Incomplete Instruments
- B. Jointly & Severally Liable
- Either or both can be sued for entire amount. If 1 pays more than his share, entitled to contribution from other party.
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VII. LIABILITY OF PARTIES
A. Parties Potentially Liable
B. Effect of Persons Signing Jointly
C. Effect of Rep/Agent Signing
(1) Liability of P
(2) Liability of A
D. Effect of Unauthorized Signatures
E. Effect of Alteration and Incomplete Instruments
- Liability of Represented Person (Principal)
- If A auth, P liable whether A signed own name or P name.
- If A no auth, P liable if (i) ratification or (ii) estoppel (P negligent).
- Liability of Representative (Agent)
- Depends on whether P's ID disclosed
- (1) A signs only P's name: P liable if A auth but A not liable cuz A name not on instrument.
- (2) A signs A name but P disclosed: If A auth, P liable and A not liable IF signature shows it was on behalf of P.
- (3) A signs A name and P not disclosed: If signature does not show agency r-ship, A liable to HDC w/o notice but NOT liable to non-HDC if A&P did not intend for A to be liable.
- (4) Checks: A w/auth to sign on P's check not liable.
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VII. LIABILITY OF PARTIES
A. Parties Potentially Liable
B. Effect of Persons Signing Jointly
C. Effect of Rep/Agent Signing
D. Effect of Unauthorized Signatures
E. Effect of Alteration and Incomplete Instruments
- Effect Unauth Sign:
- Unauth signature ineffective as signature of person whose name is signed but effective as the signature of the signer. Therefore, signer assumes all obligations to any party who gave value.
- Unauth Sign Validated:
- (1) Fictitious Payee
- (2) Fraudulent Indoresements by Employees
- (3) Failure to Exercise Ordinary Care
- (4) Bank Statement Rule
- (5) Estoppel by Certification
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Unauth/Forged Signature Validated When:
(1) Fictitious Payee
(2) Fraudulent Indorsements by Employees
(3) Failure to Exercise Ordinary Care
(4) Bank Statement Rule
(5) Estoppel by Certification
- (1) FP: Carelessness of maker/drawer making forgery of payee's name likely. PASSES right to enforce!
- (2) FIE: If employer entrusts employee and emp'ee fraudulently indoreses, it is effective.
- (3) FEOC: If failure contributes to alteration or forged signature, person is estopped from raising alteration or forgery defense.
- (4) BSR: Failing to examine is negligent and can preclude defenses .
- (5) EC: A bank that certifies a check is estopped from claiming named payee was not original payee.
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VII. LIABILITY OF PARTIES
A. Parties Potentially Liable
B. Effect of Persons Signing Jointly
C. Effect of Rep/Agent Signing
D. Effect of Unauthorized Signatures
E. Effect of Alteration and Incomplete Instruments
- Effect Alteration and Incomplete Instruments:
- (1) Nonfraudulent Alterations: DO NOT d/c parties and instrument enforceable as to ORIGINAL terms.
- (2) Fraudulent Alterations: D/C all parties EXCEPT payor bank, or drawee. HDC may enforce (i) alteration as to original terms, or (ii) unauthoirzed completion as to completed terms.
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VIII. PAYMENT
A. When Can Maker Safely Pay?
1 - Is person a holder?
2 - 3P Protecting Claim
3 - Do Not Pay if Theft
B. Finality of Payment
1 - Presentment Warranties
- (1) If party seeking payment is a holder, maker may safely pay. If pay non-holder, must also pay true holder if they so demand.
- (2) 3P can protect claim by (i) indemnifying maker, (ii) seeking injunction in action in which maker/holder/3P are parties.
- (3) Maker may not pay if k nows holder acquired by theft or was transferred instrument by theft. If HDC, may pay.
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VIII. PAYMENT
A. When Can Maker Safely Pay?
1 - Is person a holder?
2 - Actions of 3P
3 - Do Not Pay if Theft
B. Finality of Payment
1 -Presentment Warranties
Finality: Payment of neg instrument is final EXCEPT that: (i) payor can pursue those who breached transfer warranties; and (ii) holder did not take for value or in GF.
- (1) Presentment Warranties: 1- made to drawees, or 2-those made to payors (those obligated to pay):
- (i) warrantor is entitled to enforce check (no unauth sign)
- (ii) check not altered
- (iii) warrantor has no knowledge that drawer's sign unauth.
- *Note: Forged indorser's signature destorys good title BUT forged drawer's signature does NOT.
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IX. DISCHARGE:
A. In General
1-Accord & Satisfaction
B. D/C By Payment
C. D/C By Tender of Payment
D. D/C By Cancellation or Renunciation
E. D/C By Impairment of Recourse or Collateral - Suretyship Defenses
F. D/C By Reacquistion
G. D/C By Any Act D/C'ing a Simple K
H. D/C By Delay in Presentment of Check
I. D/C By Failure to Give Notice of Dishonor
J. D/C By Acceptance of Check By Bank
K. D/C By Alteration
- In General: D/C of a party is a personal defense. Not effective against HDC unless HDC knows of it.
- Accord & Satisfaction:
Payment: Liaiblity of party D/C to extent of payment (satisfaction) UNLESS payor knows stolen or knows in wrongful possession.
Tender: Tender governed by k law. (Tender=to offer or present something formally). Tender of amount due d/c duty to pay interest.
Cancellation: One entitled to enforce may D/C party by (i) intentional voluntary acts (surrending instrument, striking out name), or (ii) renouncing rights in signed writing.
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IX. DISCHARGE:
A. In General
B. D/C By Payment
C. D/C By Tender of Payment
D. D/C By Cancellation or Renunciation
E. D/C By Impairment of Recourse or Collateral -
Suretyship Defenses
F. D/C By Reacquisition
G. D/C By Any Act D/C'ing a Simple K
H. D/C By Delay in Presentment of Check
I. D/C By Failure to Give Notice of Dishonor
J. D/C By Acceptance of Check By Bank
K. D/C By Alteration
Suretyship Defenses: D/C'ed to extent of loss caused by modification of obligation. Impairment: (i) a SI not perfected, (ii) collateral released w/o obtaining substitute collateral, (iii) failure to perform acts required to preserve collateral's value, (iv) failure to dispose of collateral as law requires.
Accommodation Party not D/C UNLESS holder knows of accommodation.
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IX. DISCHARGE:
A. In General
B. D/C By Payment
C. D/C By Tender of Payment
D. D/C By Cancellation or Renunciation
E. D/C By Impairment of Recourse or Collateral -
Suretyship Defenses
F. D/C By Reacquisition
G. D/C By Any Act D/C'ing a Simple K
H. D/C By Delay in Presentment of Check
I. D/C By Failure to Give Notice of Dishonor
J. D/C By Acceptance of Check By Bank
K. D/C By Alteration
Reacquisition: Transfer to former holder, reacquier may cancel indoresements made after her transfer and cancels liability.
K: D/C by acts/agreement that would D/C obligation to pay $ under k.
Delay in Presentment: In not presented w/in 30 days, indorser is D/C.
Failure to Give Notice: Indorser is D/C from indorsement obligation.
Acceptance by Bank: Drawer and indorser are D/C.
Alteration: Fraudulent alterations D/C every party but HDCs may enforce as to original terms (or if fraudulently completed, as to completed terms).
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