Commercial Paper

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Commercial Paper
2011-06-29 22:08:32
commercial paper texas

Texas Bar: Commercial Paper
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  1. What are the three fundamental issues that can be raised by a commercial paper question?
    1. The person with the instrument wants to get paid

    2. The person obligated on the instrument does not want to pay.

    3. The person who has already paid the instrument now wants to recover the money from the person paid or someone else.
  2. What is the 8 step approach for any commercial paper problem?
    1. Identify the type of paper

    2. Identify parties

    • 3. Determine if the instrument is negotiable
    • 4. Determine if the instrument was properly negotiated

    • 5. Determine if the transferee is a holder in due course
    • 6. Determine the plaintiff's cause of action such as contract, warranty, or tort

    • 7. Determine defendants defenses
    • 8. If defendant is held liable, may defendant pass liability to another?
  3. Define a "note" and give an example of a note.
    1. A promise to pay money

    • 2. Between two parties:
    • (a) the maker, i.e. the promisor (obligor) who promises to pay, and
    • (b) the payee, i.e. the promisee who is entitled to payment

    • 3. an example of a note is a certificate of deposite (CD), which is a note issued by a financial institution.
    • (a) The financial institution acknowledges receipt of the payee, and
    • (b) The financial institution promises to repay the payee after a certain amount of time
  4. Define a "draft" and give an example of a draft
    1. An order to pay money

    • 2. Between 3 parties:
    • (a) the drawer, i.e. the person ordering payment
    • (b) the drawee, i.e. the person to make the payment (in a check context, called the "payor" bank), and
    • (c) the payee, i.e. the person to receive the payment

    • 3. An example of a draft is a check.
    • (a) a check requires a financial institution as the drawee, and is payable on demand
    • (b) a check can be either an ordinary check, a certified check (an ordinary check that a bank has accepted, i.e. agreed to pay), a cashier's check (where the drawer and drawee are the same bank and the person buying the check is the remittur), a teller's check (drawn by one bank on another bank and the person buying the check is the remittur), or a traveler's check (a demand instrument requiring a counter-signature by the person whose signature already appears on the instrument)

    4. Another example of a draft is a remotely-created item (formerly a "demand draft"): this is a draft not signed by the drawer but created with the drawer's authority so a third party can get
  5. List and define the elements of negotiability.
    The negotiability of an instrument refers to the form of the instrument and is determined at the time of issuance. An instrument is negotiable if it is:

    1. in writing (although there is no requirement what it is to be written with or on),

    2. signed by maker or drawer (which can be any symbol executed or adopted by a party with present intent to authenticate)

    3. an unconditional promise or order to pay (i.e. must be more than a mere ackowledgement of debt such as an IOU)

    4. for a fixed amount (i.e. one must be able to look at the instrument and determine the principal amount due)

    5. in money (i.e. a medium of exchange adopted by a domestic or foreign government as part of its currency. This requirement is NOT satisfied if the instrument is payable in goods or services. Also note that if the words and figures differ on an instrument, the WORDS control)

    6. not burdened by other undertakings or instructions (i.e. the instrument is ONLY a promise or order to pay money)

    • 7. payable on demand or at a definite time:
    • (a) On demand: an instrument is payable on demand if it is expressly stated or if the instrument is silent as to the due date it is due on demand by default
    • (b) At a definite time: an instrument is due at a definite time if it expressly states a date in the instrument ("August 1, 2011"), a fixed period after sight or acceptance ("90 days after sight"), or a time readily ascertainable at the time the instrument is issued ("the first day of Fall 2011"). A note providing "when Uncle Bobby dies" is NOT readily ascertainable

    • 8. contains words of negotiability such as:
    • (a) Bearer language ("payable to bearer")
    • (b) Order language ("to the order of Frank Smith")
    • (c) NOTE: if both bearer and order language exists, bearer language controls.
    • (d) NOTE: if words of negotiability are the only element of negotiability missing from a check, the words of negotiability requirement is waived and the check is still negotiable.
  6. How does one determine whether an instrument is an unconditional promise or order to pay for purposes of negotiability?
    1. First, there is a presumption of unconditional promise or order.

    • 2. Items that will make a promise or order conditional (and thus not negotiable):
    • (a) Express conditions of payment ("pay to the order of Frank Smith if he gets the highest score on the bar exam")
    • (b) Promise of order "subject to" or "governed by" another record ("this note is subject to the contract signed by the parties on January 2, 2011")
    • (c) Incorporation by reference, i.e. rights or obligations with respect to the promise or order are stated in another record.

    • 3. Terms that do not make the promise or order conditional:
    • (a) Statements of consideration ("pay to the order of Best Buy for a 70" TV")
    • (b) Mere reference to another record ("this note is in accordance with the contract signed on January 2, 2011")
    • (c) Incorporation by reference of items that would not hurt the holder, i.e. rights regarding collateral, prepayment rights, or acceleration rights
    • (d) Limitations of payment to a particular fund or source ("payment must come from the proceeds of my Summer 2011 wheat crop")
    • (e) Countersignatures, i.e. traveler's checks
    • (f) Consumer protection language (although this language does not destroy negotiability, it will prevent the holder from becoming a holder in due course)
  7. How may an instrument provide for interest without destroying negotiability?
    An instrument may provide for interest without violating the "fixed amount" requirement of negotiability.

    1. There is a presumption of no interest, i.e. if the instrument is silent, it bears no interest

    • 2. Ways interest may be stated without violating the "fixed amount" requirement:
    • (a) a fixed amount of money ("$50 interest")
    • (b) fixed or variable rate ("5% interest")
    • (c) reference to an outside source ("2% above the prime rate")

    3. Failure to state an interest rate: a note that provides for interest without stating an amount or rate of interest is still negotiable and interest will be at the judgment rate.
  8. Generally, to be negotiable, an instrument must contain no other undertakings or instructions beyond the promise or order to pay money. What are the exceptions to this rule?
    1. Promises concerning collateral, i.e. a note providing "the maker will provide additional collateral" under certain circumstances stated in the note is still a negotiable instrument.

    2. Confession of Judgment clauses: Note that confession of judgment clauses are void in Texas.

    3. Waiver of law meant to benefit the obligor:
  9. When can an instrument provide for a change in due date without destroying the negotiability requirement that an instrument be payable at a definite time?
    1. Prepayment of an instrument, giving the obligor the right to pay early.

    2. Acceleration of the due date, giving the holder the right to demand payment earlier than the stated due date upon the happening of certain named events.

    • 3. Provisions extending due date:
    • (a) by the holder to any time
    • (b) by the obligor to a later definite time expressly stated in the instrument, or
    • (c) automatically upon condition stated in the instrument to a later definite time expressly stated in the instrument
  10. Define "negotiation"
    Negotiation in the transfer of a negotiable instrument, making the transferee a holder. Negotiation occurs when the payee transfers the instrument to a third party rather than just getting the money.
  11. When is a person a "holder"?
    A person becomes a holder when they are

    1. In possession of a negotiable instrument and

    • 2. The person has good title to the instrument. The method of obtaining good title depends on the words of negotiability used:
    • (a) if the words are bearer, possession of the instrument gives good title
    • (b) if the words are order, the person needs possession plus all necessary indorsements
  12. Define "indorsement", generally.
    An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument.
  13. Define "blank indorsement".
    A blank indorsement is accomplished by the signature of the payee only. This is the simplest kind of indorsement. The effect of a blank indorsement is that the instrument becomes bearer paper, thus further negotiations may be by transfer of possession alone. The most common example of blank indorsement is the signing of a regular check.
  14. Define "special indorsement".
    Special indorsements are accomplished by the signature of the payee plus designation of a new person to whom the instrument is payable. A special indorsement creates order paper, thus further negotiations will require the indorsement of the person to whom the instrument was made payable.
  15. What is an "indorsement for deposit or collection"?
    An indorsement for deposit or collection is a restrictive indorsement limiting what may be done with the instrument.

    Example: if a check is made payable "to the order of Frank Smith" and Frank writes "for deposit in my Bank of Texas account #4568239 only" on the back and then signs below, he has created a restrictive indorsement. If the depository bank does not comply with the indorsement, the depository bank will be liable to Frank for conversion.
  16. How is the person to whom the instrument is payable (the payee) determined?
    1. The general rule is that the intent of the issuer determines the initial payee. This is most commonly applied when an instrument is issued to a person who shares a name with another (George Bush could mean George W. or George H.W.)

    • 2. Multiple payees:
    • (a) if the names are separated with "and", the instrument must be indorsed by all payees.
    • (b) if the names are separated by "or" or "and/or", the instrument requires any one of the payees to indorse.
  17. 1. Transferee's right to transferor's indorsement, and

    2. Depository bank becoming a holder without transferee's signature.
    1. If the instrument is transferred for value, the transferee has a specifically enforceable right to the transferor's indorsement.

    2. Depository bank becomes a holder even if payee deposits check in payee's account without indorsing it.
  18. What result if payee's name is misspelled on the instrument?
    If the name of the payee is misspelled on the instrument, the payee may indorse the instrument in either her real name or the name written on the instrument. However, a person giving value for the instrument may require the payee to indorse in both her real name and the name on the instrument.
  19. What result if a payee who lacks capacity indorses the instrument?
    If a payee lacks capacity (because they are a minor, incompetent, intoxicated, under duress, etc.) the negotiation is still effective.
  20. Holder in due course vs. Holder
    While a holder has many rights, such as the right to get paid, whether or not the holder is a holder in due course becomes important only when the obligor raises defenses.

    For example, if a maker of a note does not want to pay because a product was defective, a holder would lose, but a holder in due course would obtain better rights than the transferor and take free of this and most other defensess.
  21. List the elements required for Holder in Due Course status.
    1. A negotiable instrument

    2. The person is a holder.

    3. Authenticity of the instrument is not apparently questioned (as in the instrument had no obvious forgeries or alterations when the holder took possession of the instrument)

    • 4. Holder must pay value for the instrument (although it is not required the holder pay the full value of the instrument)
    • 5. Good faith, both:
    • (a) Honesty in fact (subjective), and
    • (b) Observance of reasonable commercial standards of fair dealing (objective)

    • 6. Without notice at the time of instrument acquisition. Notice means:
    • (a) Actual knowledge (subjective)
    • (b) Receipt of notice coupled with a reasonable time to act on the notice,
    • (c) From all the facts and circumstances known to the person at the time in question, the person has reason to know that it exists (objective)
    • (d) NOTE: merely filing in the public record does not put a person on notice.

    • 7. Shelter Rule: the transferee of an instrument inherits the rights of the transferor. This means that if the transferee does not qualify as an HDC, she may still have the rights of an HDC under the Shelter Rule.
    • --EXCEPTION: a person who was a party to fraud or illegality affecting the instrument cannot get HDC rights via shelter.

    NOTE: the burden of proof is on the person claiming HDC status
  22. What qualifies as notice that will destroy HDC status?
    1. The instrument principal is overdue (for a check, 90 days after issue) although overdue interest is not notice.

    2. The instrument is dishonored (such as when the instrument was not paid upon proper demand).

    3. Uncured default with respect to payment of another instrument issued as part of the same series.

    4. Unauthorized signature

    5. Alteration

    • 6. Any claim
    • 7. Any defenses or claim in recoupment
  23. A holder in due course is subject to what defenses?
    An HDC is subject to "real defenses", such as:

    1. Infancy (if the obligor is an infant, this is a real defense to the extent that it is a defense to a simple contract under state law)

    2. Duress which voids obligation

    3. Lack of legal capacity which makes the obligation void

    4. Illegality making the obligation void

    • 5. Fraud in the execution (also called "fraud in the factum"), meaning:
    • (a) the signer lacked knowledge of the instrument's characte ror essential terms, and
    • (b) the signer lacked reasonable opportunity to learn of the instrument's character or essential terms, thus
    • (c) the person lacked the intent to sign a promise or order to pay.
    • (d) NOTE: this is an excusable ignorance test; merely stating that you signed without knowing what it was is not enough. Courts look at factors such as the signer's intelligence, education, business experience, and signer's ability to understand English.

    6. Discharge in insovency (bankruptcy)

    • 7. Omission of required consumer protection language
    • 8. Statute of limitations (6 years from the due date for a note. 3 years after dishonor or 10 years after issue for a check)

    9. Payment to former holder (although this is not a defense if the obligor was on notice that the instrument was transferred and that payment should have been made to the new holder)

    • 10. Alteration
    • 11. Unauthorized signature and forgeries
  24. A holder in due course is protected from what claims and defenses?
    A holder in due course prevails against all defenses of the obligor, either under common law or the UCC, that are not "real defenses." For example:

    • 1. A holder in due course is protected from personal defenses:
    • (a) Failure of consideration (e.g non-delivery of goods, non-performance of services)
    • (b) Breach of warranty
    • (c) Fraud in the inducement: e.g. a maker knows she is signing a promissory note but is misled regarding the quality of goods, or maker signs a note without reading it because she was in a hurry

    2. A holder in due course is free from claims of others to the instrument. No claimant can take an instrument from an HDC; HDC is the "perfect defendant"
  25. To what extent are agents liable under contract law when binding their principal to an instrument?
    An agent is generally not personally liable when signing her own name to bind the principal.

    An agent escapes liability if:

    1. the principal is identified in the instrument, and

    2. the signature unambiguously shows it is made on behalf of the principal.

    If the above two elements are not satisfied, the agent is personally liable to:

    1. the HDC, unless the agent can prove the HDC had notice of the representative nature of agent's signature.

    2. a non-HDC, unless the agent can prove that the original parties did not intend for the agent to be liable.

    If hte agent is not authorized, then it is a forgery, binding the agent but not the purported principal.

    NOTE: there is a special rule for checks stating the agent is not liable if the principal's name is on the check.
  26. What is the contract liability of the maker of a note?
    1. Primary liability: the maker must pay the instrument when due according to its terms at the time it was issued (or when incomplete instrument was completed)

    2. Liable to holder or indorser who paid the instrument

    3. Defenses: a maker may raise defenses that are subject to the status of the holder (e.g. is the holder an HDC or not?)
  27. What is the contract liability of a drawer of a draft?
    1. A drawer may not disclaim liability on a check but may disclaim liability on other drafts.

    • 2. Secondary liability: the drawer is liable only after two conditions are met:
    • (a) Presentment to the drawee within 30 days, and
    • (b) Dishonor (the drawee refuses to pay the instrument upon a proper presentment).
  28. What is the contract liability of an indorser of a note or draft?
    1. Generally, indorsers are liable based on the order of the signatures on the instrument. An indorser wishing to sue must sue the prior indorser. A person who indorses may be liable to later indorsers.

    • 2. Secondary liability: an indorser is liable if
    • (a) Presentment to maker or drawee within 30 days of indorsement,
    • (b) Dishonor occurs, and
    • (c) There is notice of dishonor within 30 days

    NOTE: An indorser may disclaim liability, e.g. Jack Smith indorses a check by signing "without recourse, Jack Smith."
  29. What is the contract liability of a drawee?
    1. Generally, the drawee makes no negotiable instruments contract (For example, if Dan writes a check to Paula for $300 and the check bounces, Paula may not sue Dan's bank for the $300 because the bank did not sign the instrument)

    2. Acceptance or certification: The drawee bank may agree to pay the draft by signing the draft. If the drawee certifies the instrument by signing, the drawer and all prior indorsers are discharged from liability. In the above example, if Dan's bank had certified the check, Paula could sue the bank for the $300.

    • 3.Final payment: once the drawee pays a check, contract actions may no longer be pursued and the drawee bank may not recover on the check. Final payment occurs when:
    • (a) the drawee pays the item in cash or
    • (b) does not revoke a provisional settlement by the midnight deadline (midnight of the next banking day after the banking day of receipt)

    4. Conversion (tort) liability occurs if the drawee pays on a forged indorsement. The drawee is liable to the payee for conversion so long as the payee actually received the instrument.

    • 5. Payment of checks after the drawer's death:
    • (a) Generally, a drawee bank may continue to pay checks until is knows that the drawer has died and has a reasonable opportunity to act on that knowledge.
    • (b) Drawee bank may pay no more than 10 days after the drawer's death if it knows of the drawer's death, but if someone claiming interest in the drawer's account requests the drawee stop paying drawer's checks, then the bank must comply.
  30. What is the contract liability of an accomodating party to an instrument?
    An accomodating party (a person who signs an instrument to lend his or her credit to another party, but who receives no direct benefit from the transaction such as a co-signer, surety, or guarantor)

    1. Generally is liable in capacity in which accomodating party signs; no special contract. The signature is presumed to be a guarantee of payment

    2. The accomodating party may limit liability to collection only.

    3. If the accomodating party pays the instrument, the accomodating party is entitled to reimbursement from the accomodated party (the person with bad credit who receives the benefit of the instrument)

    • 4. To demonstrate accomodation status, there must be either:
    • (a) express language, or
    • (b) an anomalous indorsement (one that is outside the chain of title serves as notice of accomodation)
  31. Warranty liability, generally
    Warranties in the commercial paper context are implied warranties.

    Warranty liability is off the instrument, since the warranties are created by transfer or presentment, not the indorsement of the instrument.

    To use a warranty, possession of the instrument is not required as it is in the contract liability context, and warranty liability survives final payment of the instrument.
  32. Transfer warranties, generally
    1. Transfer warranties are made by a transferor who receives consideration.

    2. Transfer warranties are made to the immediate transferee and subsequent transferees if the transferor indorsed. Drawees and makers can never sue for breach of transfer warranty because they get instruments presented to them, not transferred.

    3. Warranties can be disclaimed in any non-check instrument (with language such as "without warranties"). Warranties may not be disclaimed on a check.
  33. List the different kinds of transfer warranties.
    All of these are transfer warranties:

    1. Warrantor is entitled to enforce the instrument (basically, this is a warranty of holder status)

    2. All signatures are authentic and authorized.

    3. There has been no alteration of the instrument

    • 4. There are no good defenses that could be asserted
    • against the transferor. That is, the transferor warrants that if he were a plaintiff, no one has a defense that could defeat his claim to the instrument.

    5. The warrantor has no knowledge of insovency proceedings against the maker, acceptor, or drawer of an unaccepted draft. NOTE: this is the only warranty where warrantor's lack of knowledge is relevant.

    6. If a remotely created item, there is a warranty that the person identified as the drawer authorized the item.
  34. Presentment warranties, generally
    Presentment warranties are made upon presentment by a presentor and previous transferors.

    Presentment warranties are made to parties who pay the instrument in good faith.
  35. List the different kinds of presentment warranties
    • 1. Warranties when an unaccepted draft is presented to the drawee:
    • (a) Warrantor is entitled to obtain the draft or obtain payment
    • (b) There has been no alteration
    • (c) The presenter has no knowledge of an unauthorized drawer's signature
    • (d) If remotely-created item, there is a warranty that the person identified as the drawer authorized the item

    2. Warranty when another type of instrument is presented (such as a dishonored draft presented to the indorser, or a note presented to the maker): There is a warranty that the warrantor is entitled to enforce the draft or to obtain payment.
  36. Warranty vs. Indorser's contract
    If plaintiff is the holder and the payor has not paid the instrument (e.g. a check bounce), then the holder will sue the indorser for breach of contract.

    If the plaintiff is the payor and the payor has already paid (e.g. a check was forged and cashed), then the payor will sue the indorser for breach of warranty.
  37. Discharge by the holder of an instrument (cancellation, destruction, etc.)
    A holder may discharge obligation created by the instrument by surrendering the instrument to the obligor, destroying it, canceling it (e.g. writing "void" on it), etc.
  38. Effects of the instrument on the underlying obligation
    1. Payment by certified check, cashier's check, or teller's check means that the underlying obligation has been discharged as if a person has paid in cash.

    • 2. Payment by checks and notes means the obligation is suspended.
    • (a) if the check or note is later paid, the underlying obligation is discharged, but
    • (b) if the check is dishonored, the holder may sue on either the instrument or the underlying obligation.
  39. Failure to produce the original instrument (because it was lost, inadvertantly destroyed, or stolen)
    • A person not in possession is entitled to enforce the instrument if:
    • (a) the person was entitled to enforce when the loss occurred,
    • (b) the loss was not due to transfer or lawful seizure, and
    • (c) the person cannot reasonably obtain the original.

    NOTE: it is required that the payor receive some sort of protection such as a sucurity or bond
  40. Overdrafts
    A drawee bank may charge a customer's account even if the charge creates an overdraft.
  41. Postdated checks
    A bank may pay a postdated check unless the customer gives the bank notice of the postdating which describes the check with reasonable certainty
  42. Stop Payment orders
    The drawer (the bank's customer) may stop payment on a check, and other parties have no authority to do so. A proper stop payment order:

    1. Must be in writing

    • 2. The writing must be signed, dated, and described with certainty
    • 3. Is valid for 6 months

    • 4. Is subject to certain defenses of the drawee bank, such as:
    • (a) the stop payment order did not comply with all requirements
    • (b) there was no loss, meaning the customer would have to pay the check even if the payment had been stopped.

    • 5. For cashier's checks and teller's checks:
    • (a) Remittur cannot stop payment
    • (b)The bank may stop payment (but then bank risks liability for expenses, lost interest, and consequential damages.
  43. Wrongful dishonor
    1. Wrongful dishonor is when a drawee dishonors a properly payable check.

    2. Standing: the drawer has standing to sue the drawee for bouncing a check it should have paid. The payee may not sue the drawee bank.

    3. Damages: the drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing hot checks

    • 4. Defenses:
    • (a) Payment would have overdrawn the account
    • (b) The check is more than 6 months old. The bank may dishonor "stale" checks as long as it does so in good faith.
  44. "Payment in full" check
    1. A check on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated operates as an accord and satisfaction if the payee cashes the check.

    • 2. Exceptions:
    • (a) the obligation is not satisfied if the payee returns the money within 30 days
    • (b) when the payee is an organization and had previously indicated to the drawer a particular person or address to send payment in full checks
  45. When the maker's signature is forged
    1. The alleged maker is not liable because maker's signature does not appear on the note. At times, however, the alleged maker's conduct may ratify the forgery or cause the alleged maker to be precluded from denying the forgery.

    2. The forger is liable on the note because the forger's signature appears thereon.
  46. When the drawer's signature is forged
    1. the alleged drawer is not liable.

    2. The drawee bank must recredit the alleged drawer's account as the check was not properly payable (unless drawee bank has a defense)

    3. The drawee bank will be unable to pass on the loss unless there was a breach of presentment warranty. Normally, no presentment warranties will have been breached because the parties had a right to enforce the forger's obligation. The forger is the real drawer because he put his signature on the instrument. Drawee takes the risk that the drawer's signature was unauthorized unless presenter knew it was unauthorized.

    • 4. Bank's Defenses:
    • (a) Drawer's negligence: if the drawer's negligence substantially contributed to the forgery, the drawer may not allege forgery.
    • (b) Bank Statement Rule: drawer has a duty to inspect bank statements and canceled checks in a timely manner and report forgeries to the bank. If the drawer fails to report and the bank proves loss beyond the original mistaken payment, the customer is precluded from collecting. If the same person is forging a series of checks, the drawer must report within 30 days of receiving the bank statement. If not, the bank will not recredit the subsequent forgeries.
  47. Effects of a forged indorsement
    • 1. If the payee's indorsement is forged:
    • (a) on bearer paper, since indorsement is not necessary to negotiate the instrument, forgery is no defense.
    • (b) on order paper, forgery breaks the chain of title and the check is not properly payable. Accordingly, the drawer may demand that the drawee recredit his account.

    • 2. A person is precluded from asserting forgery of a payee's name when:
    • (a) the Imposter Rule applies. When a maker or drawer is deemed to have acted carelessly in issuing the check and thus contributed to the forgery, he is estopped from claiming forgery.
    • (b) there have been fraudulent indorsements by employees. If an employer entrusts an employee (or independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective. Payee is estopped from asserting the forgery.
  48. Liability of drawee, presenter, and transferor when payee's indorsement has been forged
    • 1. Liability of drawee:
    • (a) Conversion liability to payee. The payee can sue the drawee bank for conversion
    • (b) Not properly payable liability to drawer. The drawer of a check can sue the payor/drawee bank since a check with a forged payee's name is not properly payable.
    • (c) Drawee is protected from double liability. A successful conversion action against the drawee will eliminate the drawer's not properly payable action.
    • (d) Defenses:
    • --Imposter Rule
    • --Fraudulent indorsement by an employee entrusted with the check
    • --Drawer's negligence
    • --Failure to timely sue

    2. Liability of the presenter: the drawee bank can sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce.

    • 3. Liability of the transferor: the presenter who loses to the payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties (entitled to enforce, all signatures authenticated/authorized, and no good defenses)
  49. Types of alteration (obligor does not want to pay because the instrument was altered)
    1. Change in obligation: any unauthorized change in an instrument that purports to modify the obligation of a party such as amounts, due date, names of payees, or interest rates

    2. Unauthorized completion: here, the instrument was completed in an unauthorized manner which affects the party's obligation.
  50. What are the effects of an alteration on a HDC? a non-HDC?
    • 1. Effect on a HDC:
    • (a) Change in obligation: HDC may enforce for original amount/obligation.
    • (b) Unauthorized completion: HDC may enforce the instrument as completed.

    • 2. Effects on a non-HDC:
    • (a) If the alteration was fraudulently made by the holder, there is a total discharge of the obligation.
    • (b) If the alteration was not fraudulently made, the obligor is liable under the original terms.

    • 3. Banks defenses:
    • (a) Negligence: if the drawer's negligence substantially contributes to the alteration, the drawer will be precluded from asserting the alteration.
    • (b) Bank Statement Rule: the drawer must report the alterations within 1 year.