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Commercial Paper - Main Issues (3)
- 1. Person With an Instrument Wants to get paid
- 2. Person obligated to the instrument does not want to pay
- 3. Person who paid the instrument now wants to get the money back
Identify the Instrument - Note vs. Draft
- 1. Note: Two party instrument - Promise to pay - like a car loan
- 2. Draft: Three Party Instrument - "A" orders "B" to pay "C". Check drawn on a checking account
Note - Who are the two parties to a note
- 1. Maker - Person who promises to pay (debtor)
- 2. Payee - Person entitled to payment (creditor)
Draft - Who are the 3 parties
- Checking Account:
- 1. Drawer - Person ordering payment
- 2. Drawee - Person to make the payment (bank)
- 3. Payee - The person getting paid
Draft - Check - Requirements for a check (2)
- 1. A Financial Institution
- 2. A document payable on demand (check)
Draft - Checks - Types of Checks (certified, etc)(5)
- 1. Ordinary Check: Personal or Biz
- 2. Certified Check: Ordinary check that bank pre-agreed to pay
- 3. Cashiers Check: The Bank is both the Drawer and Drawee, person caching is the remitter
- 4. Tellers Check: A check drawn by one bank on another bank
- 5. Travelers check: Requires a counter signature to match the one on the check
Negotiable Instrument - What is the importance
Like K law if a instrument is non-negotiable, the transferee gets no better rights than a transferer (i.e. obligor can raise all defenses against both.
But, if it is Negotiable, and you become a Holder in Due Course you have better rights and obligor has to pay you even if he has a defense.
Negotiable Instrument - Elements required to have a negotiable instrument (8 - Memorize)
- 1. Writing
- 2. Signed by Maker or Drawee (an X is ok)
- 3. Unconditional Promise to pay
- 4. Fixed Amount
- 5. Of Money (not goods)
- 6. No other instruction (not a K just a check)
- 7. Payable on Demand or Definite Time
Negotiable Instrument - Elements of a negotiable instrument - Must have Unconditional Language (examples 2)
- 1. Cannot say words like - I will pay "if" - or "Subject to"
- 2. Ok to reference what it is for, like I promise to pay $500 to Z for a telvision. Can even say "as per our agreement" just cant say "subject to our agreement"
Negotiable Instrument - Elements of a negotiable instrument - Fixed Amount (examples 2)
- 1. The amount must be easily determinable, like for $700 or can even say for 7 payments of $100
- 2. It can call for interest but rate must be clear - can referrence an outside source
Negotiable Instrument - Elements required to have a negotiable instrument - No other undertaking (General rule + 3 exceptions)
- 1. Cannot have other contractual obligations
- 2. But 1)can have the note secured or 2) a clause that says you agree to a judgment if you do not pay or 3) Waive a law that benefits obligor
Negotiable Instrument - Elements required to have a negotiable instrument - Payable on Demand or a Fixed Time (3 rules)
- 1. Need to be able to cash now; or
- 2. At a determinable specific date, like you can say "on the 1st day of spring (its determinable)" but cannot say "when Jim dies (nobody knows when)"
- 3. You can have the right to pay early, or an acceleration clause, or a right to extend a date
Negotiable Instrument - Elements required to have a negotiable instrument - Words of negotiability (bearer language), checks rules
Bearer means to whoever has it can cash it, like a blank, signed check
- 1. Must have the word "Bearer" or words that indicate whoever the possessor is entitled to payment
- 2. Checks Exception - Checks do not need bearer language, they can have "Pay to the Order of". But other notes must have bearer language to be negotiable
Negotiation - How does a Bearer get Holder Status
Just Need Physical possession
Negotiation - To have Holder Status, you need (2 things)
- To be a holder with Good Title you need:
- 1. Physical possession; and
- 2. All proper endorsements
Negotiation - Blank endorsement, what is the effect
If you sign the back of the check, then you essentially create bearer paper, meaning anyone in possession can now cash it.
Negotiation - Special endorsement, what is it and what does it protect
This happens when you endorse a check on back and write "Pay to Suzan". That stops the negotiation, to make it bearer paper again, Suzan will need to endorse it.
Negotiation - Restrictive Endorsement, what does it do
You can restrict what might be done with the instrument like "for deposit only"
Negotiation - Determining who the instrument is payable to (if wrong name on check)
Intent of the issuer determines who the initial payee is
Negotiation - Other endorsement issues, multiple payees, Transferee for value entitled to, what is bank if payee dsnt endorse, mispelled payee
- 1. Multiple payees, all must sign
- 2. Transferee, for value has a right to transforers endorsement
- 3. Bank becomes holder even if payee does not endorse
- 4. Mispelled payee can sign with correct name
Holder in Due Course - When is an HDC relevant, example
Only when a person does not want to pay the holder
An HDC has even more rights if an obligor raises any defenses to payment the HDC can still get paid.
Example, if maker decides not to pay because a product was defective, then a HDC could still cash the check
Holder in Due Course - Elements to be HDC (6 requirements)
- 1. Negotiable Instrument (8 elements)
- 2. Holder
- 3. Authenticity not questioned
- 4. Must pay value
- 5. Good Faith
- 6. Without Notice of a Defense
- (like a BFP)
Rights of Holder in Due Course - Defenses that are NO good against an HDC (7)
- Must not have knowledge of:
- 1. Due date has passed (90 Days for check)
- 2. Instrument has been dishonered
- 3. Uncured default on other instrument as part of the same series
- 4. Unauthorized signature
- 5. Alteration
- 6. Any other defense
Holder in Due Course - Shelter Rule
Even if current holder is not an HDC he still gets the benefit if the transforer was an HDC
Rights of Holder in Due Course - Defenses that are good against an HDC - Normal K defenses (10)
- HDC not protected from the normal K defenses, like:
- 1. Infancy
- 2. Duress
- 3. Capacity
- 4. Illegality
- 5. Fraud in the execution
- 6. Discharge in bankruptcy
- 7. Statute of Limitations
- 8. Payment made to a former holder
- 9. Alterations
- 10. Unathorized signatures and forgeries
Holder in Due Course protected from Personal Defenses - Example: Note for Computer
If D signs a note to P for $1k in exchange for her computer and the D never delivers the computer. If D sold the note to an HDC, he could collect from P even though she never got the computer.
Holder in Due Course protected from Personal Defenses - Example: Check blows out window
If P endorses a check and it blows out his window and D finds the check and sells it to a HDC, then P cannot get the check back from HDC and HDC can cash it
Contract Liability - Can HDC make Agent liable
- An Agent can be personally liable on the check if she does not name the principal on the check.
- HDC: To get out of liability Agent must show HDC had notice she was only the agent
- Non-HDC: To get out of liability need to show parties did not intend her to be bound
Contract Liability - Is Maker of note liable to HDC
- 1. Maker must pay when due or in breach
- 2. Maker is liable to HDC's who paid value
Contract Liability - Is Drawer of a Check liable to Drawee (3)
- Drawer is liable only after:
- 1. Check Presented to Drawee
- 2. Check dishonored by Drawee
- 3. Drawer cannot disclaim liability
Contract Liability - Are Endorsers of Checks liable, can they disclaim
- 1. Endorsers are liable to each other in order of their endorsements.
- 2. Endorsers can disclaim liability when they sign over a note or check by writing "without recourse"
Contract Liability - Endorsers of Checks - Presentment on check in 60-days, what is the liability
P endorses a check to J. J attempts to cash the check in 60-days and it bounces, P is not liable. J needed to cash the check in 30 days to hold P liable. The check is still good after 30 days but cant hold endorser liable after 30 days. Can still sue drawer, just not endorser
Contract Liability - Is Drawee (bank) liable to casher if bank does not cash
Bank does not make a negotiable instrument K. If bank does not cash a check the B gave to P because B did not have money in account, then P cannot sue the bank.
Contract Liability - is Drawee (bank) liable after Final Payment
Once bank pays it cannot go after the person it paid to get the money back unless there was a breach of presentment warrantee
Contract Liability - Can Drawee (bank) make Payments after drawers death
Bankcan continue to cash drawers checks until they learn of his death. Once they know, cannot pay anything after 10 days.
Warranty Liability - If A Transfers to B, what are A's Transfer Warranties (5)
If D transfers a note or check to E then D makes the following warranties:
- 1. That D is entitled to enforce the instrument
- 2. All signatures are authentic/authorized
- 3. No Alterations
- 4. There are no defenses against D
- 5. No knowledge of insolvency against Maker
- 6. You cannot disclaim warranties on checks but can on notes
Warranty Liability - When B presents to the bank, what Presentment Warranties(3)
- These are warrantees the presenter and previous transforers make to the bank when they cash the check:
- 1. You are entiteled to cash the check
- 2. No alterations
- 3. No knowledge of unauthorized drawer's signature
Whether to sue for Breach of K or Breach of Presentment Warrantee
- 1. If check has not been paid then sue the endorser for breach of K
- 2. If check has been paid then Bank will sue for breach of endorser warrantee
Wrongful Dishoner of Check, who can sue bank
If bank should have paid but didnt only the drawer can sue the bank, payee cannot sue the bank
Payment in full endorsement - Does it work
Only works if amount of debt is in dispute, acts as an accord and satisfaction
Forgery - Maker's signature forged - Who is liable
- Maker is not liable for the check
- The forger is liable for the check
Forgery - Makers Signature - Banks liability
If bank pays on a forged check, they must re-credit P's account
Forgery - Makers Signature- Banks liability Defenses
- 1. Drawers negligence
- 2. Duty to inspect bank records
- 3. Repeat offender rule - Must report forgery w/in 30-days of statement available or bank will not re-credit for subsequent forgery by same person
Forgery - Forged Endorsements - Banks liability
Forged endorsements break the chain of title and Drawer is not obligated to pay the forger so the bank must credit Drawers account
Forgery - Forged Endorsements - Banks liability - Defenses
- Estoppel. Bank is not liable:
- 1. Imposture rule: Where P writes a check to B who is pretending to be C and endorses as C.
- 2. Fraudulent Endorsements of Employees
Example of Suing for breach of K and warantee: D to P drawn on ABC Bank
- 1. Dan gives check to P drawn on ABC bank
- 2. T steals check from P and Forges P's sig
- 3. T deposits in XYZ bank
- 4. XYZ presents to ABC for payment
- 5. ABC pays XYZ.
- 6. D and P find out and sue ABC
- 7. ABC is liable under K to D for cashing the check or to P for conversion.
- 8. ABC then sues XYZ for breach of presentment warrantee
- 9. XYZ then sues Tom for breach of transfer warrantee
Exam Rule Statement: For paper to be negotiable it must
Be in writing, signed by the maker, unconditional promise to pay to order/bearer on demand.
Exam Rule Statement: To be a holder
To be a holder, Transferee must have possession of instrument payable to him. Must be free of forgeries in the chain of title.
Exam Rule Statement: To be a Holder in Due Course you must:
Must be a Holder, Negegotiated (value paid, endorsed), took the instrument, without notice of claims or that the instrument is PAST DUE or has been dishonored.
Exam Rule Statement: If the Maker of a Note pays an innocent person who purchased the Note from a forger, is the Maker still liable to pay the person whose signature was forged
Once a Makor pays a Holder he is discharged of any further obligations. However, a person in possession of a note that has a forged signature is NOT a Holder, because to be a Holder it must have been given to you after being endorsed by the prior owner (not a forgerer).
Exam Rule Statement: Is the person who was the victim of forgery liable for the money paid to the forgerer
A forgered signature is considered the signaturer of the forgerer, not the victim's signature
Exam Rule Statement: If the Maker of a Note pays an innocent person who purchased the Note from a forger, can the Maker later go back and recover the money he paid from the innocent
Yes, A presentor makes a Warrantee that he has the right to enforce the instrument that he is presenting.
Exam Rule Statement: What is the opening sentence for any commercial paper question
Because this question deals with a negotiable instrument Article 3 of the UCC applies
Exam Rule Statement: Exception to forgeries on a corporate Check
If a corp trusts an employee with handling checks, and employee forges, the forgery is not a defense and does not defeat a holder or HDC.
Exam Rule Statement: Can a person be a Holder or HDC if there is any forgery in the chain of title
Any forgery breaks the chain of title and no subsequent purchasers can be Holders or HDC