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What is a proper Commercial Paper analysis under UCC Art. 3?
- (1) Identify type of paper
- (2) Identify parties
- (3) Negotiable?
- (4) Properly negotiated?
- (5) Is transferee a HDC?
- (6) What are Plaintiff’s Causes of Action?
- (7) What are Defendant’s defenses?
- (8) If found liable, can Def pass liability to another party?
What is a note, who is a maker, and who is a payee?
A note is a promise to pay money (2-party instrument).
Maker – obligor/promisor, person who promises to pay
Payee – promisee, person entitled to payment.
What is a certificate of deposit?
Note issued by a financial institution (bank, loan company)
Financial institution acknowledges receipt of money; and
Financial institution promises the payee/depositor to repay the money
What is a draft, drawer, drawee, payee?
Draft – Order to pay (3-party instrument)
Drawer – person ordering payment
Drawee – person to make the payment (payor bank in context of check)
Payee – person to receive the payment (money)
What is a check and what are the different types of checks?
A check is where the financial institution is the drawee and the instrument is payable on demand.
- There are four different types of checks:
- (1) Certified check – ordinary check which bank has accepted (agreed to pay/be liable)
- (2) Cashier’s check – drawer and drawee are same bank; person buying is remitter
- (3) Teller’s check – check drawn by one bank on another bank; person is remitter
- (4) Traveler’s check – demand instrument requiring counter signature by a person whose signature already appears on the instrument (sign it when you buy it and cash it).
What is a remotely created item?
Draft not signed by the drawer but created w/ drawer’s authority so that a 3rd party can get paid from drawer’s bank account (i.e. internet transaction using Pay Pal).
What are the elements of negotiability?
- (1) In writing
- (2) Signed by the maker or drawer
- (3) Unconditional promise or order to pay
- (4) Fixed amount
- (5) In money (not goods or services)
- (6) No other undertaking or instruction
- (7) Payable on demand
- (8) Containing words or negotiability
What can ruin the “unconditional promise or order to pay” element of negotiability?
- (1) Can’t be subject to express condition to payment
- (2) Promise/order can’t be “subject to” or “governed by” another record
- (3) Rights/obligations with respect to promise/record can’t be incorporated by reference
- What is allowed:
- (1) “As per” or “in accordance with”
- (2) Incorporation by reference of items that would not hurt holder
- a. Rights regarding collateral
- b. Prepayment – right of obligor to pay early
- c. Acceleration – right of holder to get paid early upon some event
- (3) Limiting payment to 1 fund or source is ok
- (4) Counter signature
- (5) Consumer protection language – has “subject to” but doesn’t prevent from being negotiable BUT will prevent holder from being a HDC
What promise will not violate the “no other undertaking or instruction” requirement?
A promise to provide additional collateral, confession of judgment clauses, and waiver of law meant to benefit obligor (maker/drawer) are all OK.
How do you determine if an instrument is payable on demand or at a definite time (i.e. ascertainable date?
On demand = express statement, and if instrument is silent as to due date, the it’s a demand instrument.
At a definite time = stated on instrument, fixed period after sight or acceptance, time readily ascertainable at time the promise or order is issued (first day of fall = OK; but when “X” dies = NOT OK)
- Permitted date change matters that don’t prevent instrument from being payable at a definite time include:
- (1) Prepayment of Instrument
- (2) Acceleration of Due Date
- (3) Provision in Instrument Extending Due Date: (i) By holder – to any time; (ii) By obligor – to a later definite time states; (iii) Automatically upon condition stated = to a later definite stated
What prevails between numerals and words?
Words – ex: check in numeral says $550, but written words say $500, check is payable for $500.
What is bearer language, what is order language, and what happens if both appear?
Bearer language – “payable to bearer”; “payable to order of bearer”; indication that possessor entitled to payment; no payee stated/not payable to identified person “to cash”; “to order of cash”
Order language – “pay to order of Kati Smith”; or preprinted on checks.
If both appear, bearer language controls
When is neither bearer nor order language required?
Checks – if bearer or order language element is the only element of negotiability missing on a check, this element is waived.
What is “negotiation”?
Negotiation is where payee transfers instrument to some 3rd party rather than just getting money for it.
What is “holder” status?
- To have holder status, have physical possession of negotiable instrument and good title:
- --Bearer – just need possession
- --Order – need possession + necessary indorsements (signature on back that is other than the maker/drawer/acceptor)
What are the different types of indorsements?
- (1) Blank indorsement – when payee signs check and no one else is named, this creates bearer paper
- (2) Special indorsement – payee’s signature + designation of new person to whom instrument payable, which creates order paper (requires indorsement of person made payable to)
- (3) For deposit or collection – limiting what may be done with the instrument “for deposit in my BOA account only”
Who must indorse?
- If “and” separate names – all payees must indorse
- If “and/or” separates the names – any payee can indorse
Can a payee lacking capacity effectively indorse?
Yes – a payee lacking capacity MAY effectively indorse.
What elements are required to become a Holder in Due Course?
- (1) negotiable instrument
- (2) holder
- (3) authenticity not apparently questioned (no forgery/alternation or incomplete)
- (4) holder must pay value (not gift)
- (5) good faith (honesty in fact + fair dealing)
- (6) without notice at time of instrument acquisition
What does “notice” mean with regards to determining whether someone is a Holder in Due Course?
- Notice – no reason to know any of the following:
- (1) instrument PRINCIPAL overdue (90 days after issue for check; overdue interest is not notice)
- (2) instrument dishonored (insufficient funds)
- (3) uncured default w/ respect to payment of another instrument issued as part of same series
- (4) unauthorized signature
- (5) alteration
- (6) any claim
- (7) any defenses or claim in recoupment
- Note: Mere filing in public record is not notice
What is the Shelter Rule?
Even if a holder does not qualify as a Holder in Due Course, person may still have rights of HDC by shelter > assuming no fraud or illegality, transferee has rights of transferor, but doesn’t make transferee a HDC.
What are the rights of a Holder in Due Course?
HDC are subject to subject to Real Defenses (but they are protected from Personal Defenses).
What are Real Defenses that a HDC are subject to?
- (1) Infancy
- (2) Duress (which voids obligation)
- (3) Lack of legal capacity making obligation void
- (4) Illegality making obligation void
- (5) Fraud in execution (singer lacked knowledge of and reasonable opportunity to learn of instrument’s character or essential terms – excusable ignorance)
- (6) Discharge in insolvency/bankruptcy
- (7) Omission of required consumer protection language
- (8) SOL – (i) 6 years from DUE date, (ii) unaccepted draft: earlier of 3 years after dishonor or 10 years after issuance
- (9) Payment to former HDC (unless proper signed notice of new holder’s addy)
- (10) Alteration
- (11) Unauthorized signatures and forgeries
What does it mean that HDCs are protected from Personal Defenses?
- --HDC prevails against all other defense either under UCC or CL.
- --Ex: failure of consideration, breach of warranty, fraud in the inducement.
- --No claimant can take an instrument from HDC = “perfect defendant”
What is Contract Liability?
- Trying to get money owed – payer hasn’t paid
- Primary basis of liability on an instrument is a person’s signature (agency law applies)
- Key issue: is someone personally liable?
- (1) Agenct escapes personal liability if (i) principal is identified in instrument; (ii) signature unambiguously shows it is made on behalf of the principal
- (2) Liability of agent if above not satisfied = (1) to HDC and (2) to non-HDC, unless can prove original parties did not intend for agent to be liable (easier to escape)
- (3) Special rule for checks – agent for drawer NOT liable if principal’s name on check
- (4) Agent not Authorized = forgery and agent is bound, but not purported prcipal
Under Contract Liability, who is the “Maker”?
The maker of the instrument has primary liability – must pay instrument expressly based on terms at time of issuance or when incomplete completed (i.e. paying for my car loan); liable to holder or indorser who paid instrument; may raise defenses but effectiveness depends on status of the holder.
Under Contract Liability, who is the “Drawer of the draft”?
The drawer of the draft has secondary liability – drawer is liable only after (i) presentment to drawee within 30 days and (ii) dishonor (i.e. drawee refuses to pay after proper presentment). Drawer may not disclaim liability on check, but may on other drafts with “without recourse” placed next to signature.
Under Contract Liability, who is the “Indorser of the note or draft”?
Indorsers are liability in order of their signatures (sue for prior payment; liable to later); liability after (i) presentment – 30 days; (ii) dishonor; (iii) notice of dishonor – within 30 days; “without recourse” liability disclaimer allowed here
Under Contract Liability, who is the “Drawee”?
Drawee generally makes no negotiable instrument contract BUT may agree to pay the draft by (i) signing the draft (no obligation to accept draft and can’t be sued for failing to accept; certification discharges drawer and all prior indorsers); (ii) final payment – drawee cuts off contract actions and may not recover from person it paid unless breach of presentment warranty; (iii) conversion (tort) liability if drawee pays in forged indorsement (person suing must have received delivery of instrument); (iv) payment of check after the drawer’s death (10 days after notice of, unless interested party give specific request then must immediately stop)
What is Final Payment?
Final Payment occurs when drawee bank (1) pays the item in cash or (2) doesn’t revoke a provisional settlement by the midnight deadline (midnight of the next banking day after banking day or receipt)
Who are Accommodation Parties?
- --Co-signers, surities, guarantors
- --Accommodated party – principal, debtor, obligor
- --Accommodation party – surety, co-signer
- --Holder – creditor, oblige (party who wants payment assured)
What is the liability of accommodation parties?
Depends on capacity in which accommodation party signs; no special contract and entitled to reimbursement from accommodated party.
Presumed to be a guaranty of payment (holder can go directly after surety) UNLESS liability has been limited to collection only (in which case must get judgment and fail to collect from accommodated party before going after surety).
What is an Anomalous Indorsement in the accommodation context?
An extra signature on the instrument, but we don’t know why signature is there – in this case, the extra signature will be presumed to be an accommodation surety.
What is Warranty Liability?
Trying to get money back on something paid for because discovered its defective and breached a warranty. Possession of the instrument is not needed to assert a warranty breach and survives the final payment of an instrument. Warranties are implied and arise automatically. Warranties do NOT apply when instrument was gifted (need consideration).
What are the different types of Warranty Liability?
Transfer Warranty and Presentment Warranty
What is a Transfer Warranty?
Trasnferor who receives consideration for transfer makes a transfer warranty to immediate transferee and subsequent transferees if he indorsed (drawer and maker never can sue). May disclaim transfer warranties on all NON-CHECK instruments.
- Transfer warranties include:
- (1) warrantor entitled to enforce instrument
- (2) all signatures are authentic and authorized
- (3) no alteration
- (4) no good defenses against him
- (5) no knowledge of insolvency proceeding
- (6) if remotely created item, person identified as the drawer authorized the item
What is a Presentment Warranty?
Made on presentment (P can’t claim both transfer and presentment – only gets one). Presenter and previous transferors make this warranty and it’s made to parties who pay in good faith (maker, drawer, acceptor, plaintiff).
- Warranties made when unaccepted draft presented to drawee:
- (1) warrantor entitled to enforce draft or obtain payment
- (2) no alteration
- (3) no knowledge of unauthorized drawer’s signature
- (4) if remotely created item, person identified as the drawer authorized the item
- Warranty when other instrument presented:
- (1) warrantor entitled to enforce draft or obtain payment
Warranty v. Indorser’s Contract
- --If P is the Holder and payor hasn’t paid the instrument, then sue on indorser’s contract
- --If P is Payor: & payor has and later discovers payor should not have paid (forgery, alteration, or defective) > sue indorser for breach of warranty.
How can a Holder discharge the obligation and what is the effect?
Holder can discharge (cancel, destroy) obligation by writing “void.”
Effect if Payment by Certified Check, Cashier’s Check, or Teller’s Check – underlying obligation discharged as if person paid in cash
Effect if Uncertified Checks & Notes – underlying obligation is discharged. If check or note later paid, underlying obligation is discharged. If check or note dishonored, holder may sue on either instrument or underlying obligation.
What happens if a person is unable to produce the original instrument?
Enforcement by person not in possession – person entitled to enforce when loss occurred, loss not due to transfer or lawful seizure, and person can’t reasonably obtain the original.
Protection for Payor required (security or bond)
Can a bank pay a postdated check early?
Yes, UNLESS customer gives bank notice of the postdating which describes the check with reasonable certainty.
Can banks charge a customer’s account even if it creates an overdraft?
How can you create an enforceable Stop Payment order?
Must be in writing, dated, signed, and item described with certainty.
How long are stop payment orders enforceable?
6 months, but can be renewed
What are a bank’s defenses if it violates a stop payment order?
- (1) didn’t comply with requirements
- (2) no loss to customer – would have had to pay anyway
Can a remitter stop payment on a cashier’s check or teller’s check?
No, remitters can’t stop payment. But, the bank may stop payment, but then risks liability of expenses, lost interest, and consequential damages.
What is wrongful dishonor?
Occurs when a drawee dishonors a properly payable check. Drawer has standing to bring action against drawee for bouncing check it should have paid and recover all damages (but payee may not sue drawee bank).
What are the drawee bank’s defenses in the case of a wrongful dishonor?
- (1) payment would overdraw the drawer’s account
- (2) check is more than 6 months old (i.e. stale)
What is a Payment in Full check?
A check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is un-liquidated or subject to a bona fide dispute.
In this case, payment operates as an accord and satisfaction if payee cashes the check.
Exceptions: (i) payee returns the money within 90 days; (ii) payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks to a certain location.
What happens if the maker’s signature is forged?
- --Alleged maker not liable because signature doesn’t appear on note.
- --Forger is liable because his signature appears thereon
What happens if a drafter’s signature is forged?
Alleged drawer isn’t liable and drawee bank must recredit alleged drawer’s account as check wasn’t properly payable, UNLESS drawee bank has a defense.
Bank unable to pass on loss UNLESS breach of presentment warranty > drawee takes the risk that drawer’s signature unauthorized UNLESS presenter knew it was unauthorized.
Forger is liable on the note because forger’s signature appears thereon.
What are a Bank’s Defenses to re-crediting in the case of a forged drafter’s signature?
- (1) drawer’s negligence
- (2) Bank Statement Rule – customer/drawer has a duty to Inspect Statements, cancel checks in a timely manner and report forgeries to Bank. If not, customer precluded > forged signature must be reported to bank within 1 year, regardless of drawer’s negligence.
- (3) Repeat Offender Rule – if same person forging series of checks, drawer must report within 30 days. If not, bank will not re-credit account for subsequent forgeries by same person.
What is the effect of a forged indorsement?
- --On bearer paper, forgery irrelevant because indorsement not necessary.
- --On order paper, forgery breaks the chain of title in order paper and check isn’t properly payable.
What are the situations where a party is precluded from asserting forgery of payee’s name?
- (1) Impostor Rule: the issue, maker, or drawer, will be estopped form denying the validity of a forged indorsement in situations where the maker or drawer acted carelessly in issuing the check and is deemed to have contributed to the forgery; burden on the drawer for allowing it to happen and won’t be reimbursed.
- (2) Fraudulent Indorsement by Employee: if employer entrusts employee with responsibility to an instrument and employee makes a fraudulent indorsement, the indorsement is effective AND payee is estopped to assert forgery (book-keeper vs. janitor).
What is the liability of a drawee of a forged instrument and what are bank defenses?
- (1) Conversion of Liability to Payee – payee can sue payor bank for conversion
- (2) Not properly payable liability to drawer – drawer of a check can sue payor/drawee bank since check with a forged payee’s name isn’t properly payable
- (3) Drawee protected from double liability – a successful conversion action against drawee will eliminate drawer’s not properly payable action
- Bank Defenses:
- (1) Imposter Rule; (2) Fraudulent indorsement by employee entrusted with check (conversion; (3) drawer’s negligence; (4) failure to timely sue (must sue within 3 years) > Result = bank can then sue.
Liability of Presenter – drawee bank can sue the presenter and those prior for breaching the presentment warranty of entitled to enforce (foregery broke chain so no holder).
Liability of Transferor – presenter who looses to payor for breach of presentment may sue entities further up chain of title for breach of the various transfer warranties: (1) entitled to enforce; (2) all signatures authentic or authorized; and (3) no good defenses.
What are the consequences of alteration?
Generally, an altered check isn’t properly payable.
- If Holder in Due Course,
- (1) change in obligation – HDC may enforce for original amount; (2) unauthorized completion – HDC may enforce as completed
- If non-HDC,
- (1) fraudulently made by holder = total discharge of obligor; (2) not fraudulently made = obligor liable under original terms
What are bank’s defenses to alteration?
Negligence or bank statement rule.
Breach of present and breach of transfer warranties also apply.