Commercial Paper

• 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.

• A transferee acquires whatever rights her transferor had UNLESS parties to fraud.
• Once someone becomes an HDC, all subsequent transferees are also HDCs.  

• 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.

• 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.

• 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).

• 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.

• 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.

• 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.

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.)

• 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.

• 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.

• 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

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)

• 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).

• 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.

• Drawee Liability:     D'er-->D'ee-->P'ee (check)
• Drawee cannot have liability UNLESS it signs instrument (and therefore accepts check and becomes acceptor).
•  
• (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.

• 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. 

• 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.

• 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.

• 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.

• 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

• (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.

• 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.

• (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.

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.

• 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. 

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. 

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).