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Governing Law (Commercial Paper)
UCC Article 3 applies to negotiable instruments, including notes, drafts, and checks.
UCC Article 4 governs the bank/customer relationship and primarily applies to checks.
Must be a writing, signed by maker/drawer, containing an unconditional promise to order or pay a fixed amount of money payable to order or bearer on demand or at definite time containing no unauthorized promises or undertakings.
Holder in Due Course
Must be a holder (possession and good title), and taken in good faith (honesty in fact and observance of reasonable standards of commercial dealing) for value and with no knowlege of underlying defenses or problems with the instrument.
Takes free from personal defenses, subject only to real ones.
Forgery, fraud in factum, alteration, incapacity, illegality, duress, discharge in insolvency, suretyship, SOL.
Although not a HDC, a party may have rights of HDC if transferor was HDC, taking shelter in status of transferor.
FTC HDC rule
Applies to financed sales of consumer goods, whereby subsequent holder of note will taken note subject to all personal defenses.
When a party signs an instrument, he becomes liable on it by viture of signature. Makers are primarily liable on notes; indorsers are secondarily liable if maker dishonors the instrument and indorser is given notice of maker's dishonor and check presented within 30 days of indorsement.
Transfer Warranty Liability
Each person who transfers an instrument for consideration makes 5 transfer warranties: good title, no alterations, all signatures genuine/authorized, no defenses, no knowledge of insolvency proceeding involving maker. These run to immediate transferee and every subsequent (or just immediate if w/o indorsement)
These warranties arise with or without negotiations, with or wthout indorsement, and regardless of whether or not indorsement is qualified or unqualified.
Presentment Warranty Liability
When a note is presented for payment, person presenting for payment warrants to person paying note that he is person entitle to enforce, draft has not been altered, and has no knowledge that signature of drawer is unauthorized.
When breached, drawee/payor bank may sue presenter or prior transferor for actual damages from breach.
Properly Payable Rule
Banks required to pay checks that are properly payable and to refrain from paying checks that are not. A bank will be liable for all losses proximately caused by violation of this rule.
Checks are not payable if stale, stop payment has be been ordered, or an exception applies.
Exceptions to Asserting Forgery or Alteration Against Bank
- Neligence on part of customer that substantially contributes to forgery
- Issuing instrument to an imposter or fictitious payee
- Forgery by employee responsible for check writing
- Failure to examine bank statement promptly
Customer precluded from asserting alteration/forgery if failing to notify bank within certain time. Biz customers 60 days, others 1 year.
Stop Payment Order
- 14 days oral
- 6 months in writing (can be renewed)
Liability of Forgers/Impostors
Forgery or alteration, conversion
"For Deposit Only"
A bank must pay instrument consisntely with indorsement or it will be deemed to have converted it.
Merely suspended on issuance of check; discharged only when check is dishonored or paid.
Qualified indorsement, disclaiming indorser liability
One who substantially interferes with another's personal property has committed tort of converstion. Checks are personal property.
One who alters or forges a check is potentially subject to criminal action as well as civil liability to those who suffer losses as a result of the forgery or alteration.