Commercial Paper

While most indorsements are unqualified, a party can indorse an instrument "without recourse." This is called a

"qualified indorsement." This is irrelevant to negotiation, though it does negate "liability on the instrument" a/ka/ "contractual liability" which will be discussed later.

B issued a check to S, leaving the amount blank. S was authorized to complete the check in an amount not to exceed $100. S filled in the amount of $300 and presented the check to Drawee Bank, which paid $300 to S. To what extent, if any, can Drawee Bank charge B's account?

$300 bc Bs own neg in issuing a blank check contributed to the forgery: this is the neg rule

Bob issued a $50 check to Sam, who skillfully raised the amount to $500. Sam presented the check to Drawee Bank, which paid Sam $500. To what extent, if any, can Drawee Bank properly charge Bob's account?

$50, since that is the amount as to which it was properly payable

Assume that Publix simply signs the check "Publix" beneath the previous indorsement.

(1) What type of indorsement is this? blank endorsement (2) RULE: A blank indorsement of order paper by the instrument's holder converts it to bearer paper. After this indorsement, is the check order paper or bearer paper? Now it is bearer paper since the endorsement was blank If Heinz wishes to further negotiate this check to Ken Ketchup, what must Heinz do? Technically all that is needed is delivery and no endorsement is required since it is bearer paper

The transfer warranties: Under Article 3, any person who "transfers" an instrument warrants to the transferee (and to any subsequent transferee):

(i) that he is a "person entitled to enforce the instrument" (sometimes called a "PETE"), \that hes a holder (ii) that all signatures are authentic and authorized, (iii) that the instrument has not been altered, (iv) that no defense or claim of any party is good against the transferee, and (v) that he has no knowledge of any insolvency proceeding against the maker or drawer.

Draft

** an order to pay money TO: DRAWEE NATIONAL BANK PAY TO THE ORDER OF Patricia Payee One-Hundred Dollars ($100) Donna Drawer A draft is a three party instrument: 1) Drawer: the person that signs the order to pay money (Donna) 2) Drawee: the person ordered by the drawer to pay money to the payee 3) Payee: the person to whom the drawee is ordered to make payment

Note:

**promise to pay money I, Max Maker, promise to pay to the order of Peter Payee the sum of One Hundred Dollars ($100) Max Maker 2 Parties involved: 1) Maker: person that makes the note 2) Payee: the person to whom the promise to pay is made

The treasurer of D Corporation, who is authorized to write checks on the company's account, embezzles funds by drawing a check, for $50,000 payable to ABC Corporation, a company that does not really exist. The treasurer himself indorsed the check so that it appears to be indorsed by an officer of the non-existent ABC Corporation. The check is paid and charged to the account of D Corporation. Does D Corrporation have recourse against the against the drrawee bank on the ground that the indorsedment on the check was forged (obviously there is no problem with the drawer signature)"

- here there is a true fictitious payee and the treasurer never intended that the named payee to have an interest in the check since the named payee didnt exist - under the fictitious payee rule the endorsement is treated as valid

- Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs "Pay to Publix, Peter Payee" on the back of the check.

1) What type of indorsement is this? Special endorsement 2) After this indorsement, is the check order paper or bearer paper? Still order paper bc after a special endorsement it is order paper 3) RULE: A holder is a person in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to her. Assuming Peter delivers the check to Publix, is Publix a holder of the check? YES (4) If Publix wishes to further negotiate the check to Heinz, what must Publix do? SInce it is order paper, endorse and deliver it

THE REQUIREMENTS FOR A NEGOTIABLE INSTRUMENT:

1. Writing 2. Signed by Maker or Drawer 3. Promise to Pay or Order to Pay 4. Unconditional 5. A Fixed Amount 6. In Money 7. No Other Unauthorized Promise or Order 8. Payable On Demand or at a Definite Time 9. Payable To Order or To Bearer

FORGED INDORSEMENT HYPOs: Reynold received his weekly paycheck of $200 from the grocery store where he worked. Shortly thereafter, Suzy broke into Reynold's home and stole the check. Suzy forged Reynold's indorsement and cashed the check at Brown's a local liquor store. Brown's indorsed the check and deposited it in its account at First Bank. First Bank then indorsed the check and presented it to the drawee bank, Second Bank, which made payment. Reynold asks for and receives another check from his employer. The grocery store now demands that Second Bank recredit its account. What result and why?

2nd bank must be recredit the grocery stores account bc the check was not properly payable bc it included a forged endorsement: properly payable rule

Writing:

A "writing": There is no such thing as an oral negotiable instrument. It must be something tangible. Almost always a piece of paper, but need not be (a t-shirt, a cow, a tamale, etc. -- all technically O.K.)

Holder in due course:

A holder in due course is (1) a holder (2) who gives value, (3) in good faith, (4) without notice of defenses or irregularities.

Holder:

A holder is in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to him so that he is the identified person to whom it is payable.

On Demand or at a Definite Time:

A holder of an instrument must be able to tell when it comes due or the instrument is non-negotiable. This doesn't mean that the instrument must be dated. An undated instrument which specifies no time for payment is treated as an instrument payable on demand by the holder. (See sample note and check page 1 of these Teaching Hypos: in each of those examples, the instrument is undated, and so is payable on demand). HYPOs: What about the negotiability of the following? a. A post-dated check? its ok its still due at a definite time-- the post dated date b. A note containing an acceleration clause? its ok bc there is still a definite date, July 15, 2012, when the note will be payable 1) Example of acceleration clause: A note is payable on July 15, 2012, but provides that "the holder may demand payment any time prior thereto if she deems herself insecure." c. A note providing for payment "upon the death of my rich Uncle Gotbucks?" (a post-obituary note) its NOT ok bc its definite that he will die but the date is not known and so its not payable at a def time and that destroys neg d. A note providing for payment "on July 15, 2095, but if my Uncle Gotbucks dies before this note is due, it shall become payable 10 days after distribution of his estate is made to his heirs." this is ok bc there is a def time for payment, July 15, 2095, with an acceleration clause that makes it payable when Uncle Gotbucks dies

To Order or To Bearer:

A negotiable instrument must contain the magic words -- either order language or bearer language. [The language chosen also actually serves to classify the instrument as "order paper" or "bearer paper" which is very important as we will see below.] HYPOs: a. I promise to pay Paul.-- not neg bc there is no order or bearer language b. I promise to pay to the order of Paul (or "to Paul or his order") - the phrase "to the order" satisfies the magic language req (More specifically, it is "order paper" because it is payable to an identified person ("Paul") or as he orders.) c. I promise to pay bearer (or "to the order of bearer" or "to Paul or bearer"). - the language req is satisfied by the bearer lang here and its neg (More specifically, it's "bearer paper" since (even as to the example using the word "order") it indicates that the person in possession can demand payment—there is no "identified person" to whom or to whose order it is payable.) d. I promise to pay to the order of a bowl of soup (or to the order of a keg of nails, or to the order of a Happy Birthday). - the use of the word order satisfies the magic lang and its neg (More specifically, it is "bearer paper" (even though it uses the word "order") since there is no "identified person" to whom or to whose order it is payable. "Bowl of soup," "keg of nails," and "Happy Birthday" are none of them an "identified person." e. Exception to the order or bearer language requirement. A check need not contain the "to the order of" words of negotiability. It is still a check covered by Article 3 and a transferee may become a holder in due course.

With respect to the liability of an indorser, presentment is due within a reasonable time after such party becomes liable thereon.

A reasonable time is determined by the nature of the instrument, any usage of banking or trade and the facts of the particular case. NOTE: In the case of a typical check drawn and payable within the United States, a reasonable time is presumed to be seven (7) days after the indorsement is made.

The Shelter Rule:

A transferee of an instrument takes whatever rights the transferor had. Thus a transferee from a HIDC takes the rights of the transferor HIDC, even if the transferee himself is not a HIDC. This is known as the "shelter rule" since the transferee is "sheltered" by the HIDC status of the transferor. HYPO: Maker is fraudulently induced to issue a note to Payee. Payee negotiates the note to Harold, a HDC. Harold then indorses the note and gives it to his son Carl as a graduation present. When Carl demands payment from Maker, Maker raises fraud as a defense. A HDC takes free of the defense of fraud in the inducement (we will discuss this later). Does Carl take free of the fraud defense? YES, under the Shelter Rule - Carl is not a HIDC bc he didnt give value - but he took from a HIDC, Harold - Harold's HIDC status shelters his transferee Carl

Two Different Warranty Rules: Transfer and Presentment:

Also in this cluster of rules allocating risks of forgery and alteration are two warranty rules, the warranty of transfer and the warranty of presentment. The combined effect of these two warranty rules is that the risk of a forged endorser signature generally is pushed back up the chain of collection to the first honest party to deal with the dishonest party, since that person is usually the person who could taken greater care (ask for identification) to prevent the loss. On the other hand, under these warranty rules, the loss from a forged drawer signature is usually left on the drawee/payor bank once it pays it the check. Combine that last result with the above discussed "properly payable " rule under which the drawee/payor bank can't charge its customer's account for a forged drawer signature item since it is not properly payable and the net result of forged drawer signatures scenarios is that the poor, pitiful payor bank winds up holding the bag.

No Notice That Instrument Overdue or of Defense or Claim to It:

An HIDC must take the instrument without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. Did the party know or have reason to know of overdue status or of defense or claim to it? a. HYPO: Shmuck wrote a check on January 2, 2012, but mistakenly wrote "2011" as the year. He noticed the error, crossed out the last digit and wrote "2" above it. Does this constitute notice that the instrument is overdue so that no one be a HIDC of the check? NO this is the kind of common error that would not excite suspicion - More generally though, always read an instrument carefully to see when it was due, and if on its face it was overdue when it was negotiated to the holder. That would be a giveaway that the holder had notice it was overdue. Caveat: The question is whether it was overdue at the time the holder took the instrument. The fact that it later becomes overdue doesn't matter.

ACCOMMODATION PARTIES

An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it.

Note that an indorser is "secondarily" liable.

An indorser is liable only after the instrument has been presented to the maker (if a note) or the drawee (if a check), that party has dishonored the instrument, and a notice of dishonor has been given to the indorser.

Forms of Commercial Paper

Article 3 of the Uniform Commercial Code (UCC) governs the rights and liabilities of parties to what the code calls "commercial paper." This "paper" calls for a party to pay money rather than deliver goods or perform a service. (While negotiable instruments calls for the payment of money, money itself is not a negotiable instrument.)

Most promissory notes contain a clause providing that all parties to the instrument waive presentment and notice of dishonor. Such waiver is permissible.

As a result, questions of presentment or notice of dishonor or more likely to arise in the case of checks. In addition, presentment and notice of dishonor may be delayed or even entirely excused under certain circumstances.

Qualified Indorsement:

Dan Drawer issues a check to the order of Peter Payee, who indorses the check "Peter Payee, without recourse" and negotiates the check to Harry Holder. If the check is dishonored and appropriate notice is given, is Payee liable as an endorser? NO, this type of endorsement is known as a qualified endorsement and it negates endorsement liability

Do the Transfer Warranties Also Include a Warranty that the Drawer's or Maker's Signature Has Not Been Forged?

Definitely. The warranty that all signatures are authentic and authorized includes a warranty that the drawer's or maker's signature has not been forged.

The Underlying Obligation.

Distinguish between two types of liabilities: liability on the instrument (discussed below) and liability on the underlying obligation. Unless a negotiable instrument is received as a gift, it is usually taken in connection with an underlying obligation. The following HYPOs illustrate underlying obligations and the related rules.

Hypos:

Don Drawer issues a check to "to the order of Peter Payee." RULE: A holder is a person in possession of bearer paper or in possession of order paper that has been issued or properly indorsed to him. Is Peter a holder of the check? YES, it is order paper and he is the identified person to whom it is payable - Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs "Pay to Publix, Peter Payee" on the back of the check.

Hypo on issue:

Donna Drawer sits down with her checkbook and prepares a check to Patricia Payee in the amount of $100, in the form set forth above, and actually signs the check However, Donna does not at that time tear the check out of her checkbook, much less deliver it to Patricia. She plans to give it to Patricia later when Patricia comes to Donna's house for dinner, and she just wants to have the check all filled out and signed and ready for that occasion. The check has not been "issued." Suppose Thief steals the check from Donna's checkbook. It still has not been issued since it has not been delivered by Donna for the purpose of giving rights on the instrument, and non-issuance would be a defense to any demand that Donna pay it.

If presentment and notice of dishonor or either not made or are delayed beyond the time when due, an indorser is excused from contractual liability on the instrument.

HYPO: Drawer issues a check to Payee on March 1. On March 3, payee indorses the check to Holder. Holder presents the check to Drawee Bank for payment on April 17, and the check is dishonored for insufficient funds. May Holder successfully sue payee on his indorsement liability? NO, unreasonable delay in presentment discharges endorsement liability

Lost, Stolen or Destroyed Instruments.

HYPO: In the face of a threatened hurricane, Drew Drawer evacuates the condo where he is staying in Gulf Shores, first issuing a check to the landlord, Beach Rentals, Ltd. The area is in fact struck by a hurricane and much Beach Rentals papers, including Drew's check, is lost or destroyed. RULE: Generally a person not in possession of a negotiable instrument can collect on it only if (i) it was lost, stolen, or destroyed, and (ii) he was entitled to enforce the instrument (i.e., he was a holder of it) at the time it was lost, stolen, or destroyed. Can Beach Rentals enforce the lost or destroyed check? YES. It must prove the check's terms and explain what prevents its production. The court may not enter judgment against the person required to pay unless the claimant sufficiently indemnifies that person against a claim by some other person who might come into possession of it and seek to enforce it.

A holder also gives value for an instrument when he takes it in payment of or as security for an antecedent claim, or when he makes an irrevocable commitment to a third person.

HYPO: On January 1, 2012, Mary borrowed $1,000 from Lois, orally promising to pay the money back by June 1, 2012. On June 1, Mary was unable to pay the $1,000, but signed and delivered to Lois a promissory note. Has Lois given value for the note? YES, an antecedent debt constituted value for purposes of the HIDC rule

THe Negotiability Concept:

If a particular piece of commercial paper is negotiable, if it is a negotiable instrument, then it has a very special attribute. - a holder in due course takes free of many claims and defenses

The Negligence Rule:

If a person, by his negligence, substantially contributes to a material alteration or to the making of an unauthorized signature, he is precluded from asserting the alteration or lack of authority against a HDC or the drawee or other payor who pays in good faith and in accor dance with the reasonable commercial standards of the drawee's or payor's business. **Note: Not just any negligence effects preclusion. The negligence must actually "contribute" to the forgery or alteration. That is, it must afford an opportunity of which advantage is taken. Examples of negligence might be signing blank checks, or failure to look after one's signature stamp or automatic signing device. Any form of slovenly business practice may be negligent.

Employee Entrustment Rule:

If an employer entrusts employee with the responsibility for handling checks, and the employee makes a fraudulent endorsement on the check, the indorsement is effective as against the employer.

What Does It Mean to Warrant that One is a Person Entitled to enforce the Instrument, i.e., that One is a PETE?

In Code-Speak, this is essentially just a warranty that there are no forged endorsement signatures.

Liability on the Instrument.

Liability "on the instrument" is the other type of liability associated with negotiable instruments. Distinguish between "liability on the instrument" and "liability on the underlying obligation", discussed above. ("Liability on the instrument" is also sometimes referred to as "contractual liability" since a party to an instrument in signing it is sometimes thought of as having become obligated under an implied contract of negotiable instruments law. The exact terms of a party's liability on the instrument depends on the capacity in which he or she signed. The first party we will talk about is the MAKER. *Maker's Liability on the Instrument. RULE: A "maker" (remember the nomenclature from page 1) is liable to pay the instrument according to its terms when it comes due

Value:

Look for executed consideration. A mere promise to give value is not enough. A party that hasn't actually given value yet does not need HIDC protection. If a promise is executory, a holder who learns of a defense or claim can normally avoid her loss by refusing to carry out her promise. Here are some HYPOs: a) Maker issues a $20,000 note to Payee, payable in one year. Payee doesn't want to wait for one year, and discounts the note to Holder for $18,000. Assuming good faith and no notice, is Holder a HDC as to $18,000 or $20,000? **$20,000 bc holder is a HIDC to the extent that the full price agreed upon has been paid and she agreed to pay $18,000 and she did pay so she is a HIDC for the face amount of the note b) What if Holder pays Payee $9,000 now and promises to pay $9,000 later? Holder is a HIDC as to $10,000, 1/2 the face amount of the note bc she has paid 1/2 the agreed upon consideration c) What if Holder pays $9,000 now, learns of a defense, then pays the other $9,000? the payment of the second $9,000 comes too late bc Holder cannot be a HIDC to the extent of payment after he learns of a defense d) What if Holder pays $9,000 cash, and also gives Payee a note for $9,000? Holder is an HIDC as to 20,000 bc giving of a note automatically counts as value so the holder has paid the full amount of the agreed upon consideration

HYPO: Assume the facts in "d" above, but assume that the note was discounted for $2,700. But also assume that the Corleone Finance Company supplied Baker with all forms, established financing charges, investigated each customer, and reserved the right to reject any note. Can Corleone Finance Company be a HDC?

Maybe not, the more involved a holder is with the original transaction the more likely it is that it will be deemed to have notice of claims or defenses

HYPO: Able purchased some equipment for his business from Baker Equipment, and executed a note payable to Baker for $3,000. Baker discounted the note to Corleone Finance Company for $100. Is Corleone Finance Company a HDC?

Maybe not, when the value given for any instrument is trivial in comparison to its face value that fact alone may be notice that there are defenses or claims to it

HYPO: Bank was unwilling to lend Able money without a co-signer who owned property in the county. Able approached Baker, whom Able supervised at work. Baker was "a little slow," had little education, and virtually no ability to read. Able told Baker that he needed someone to attest to his good character, and displayed a paper which he said contained a statement that he, Able, was of good character and could be depended upon to repay a loan. In fact, this paper was a promissory note. Baker signed the paper without even attempting to read it. If Baker is sued on the note by a HDC, can Baker raise the defense that he was tricked and did not realize what he was signing?

Maybe yes maybe no - fraud in the inducement: fraud as to the underlying facts of the transaction such as the number of miles on a car, whether land is in a flood plain,-- this is a personal defense that cannot be asserted against a HIDC - fraud in the factum: fraud in which the giver of an instrument is led to sign without learning of its character and with no opportunity to learn of its true nature ** Here Baker will raise the defense of fraud in the factum which is a real defense since Able misled him as to the nature of the instrument but the defense may not be successful since Baker did not make any attempt to read it or have someone else read it to him

Drawer issued a $900 check to A, who then indorsed it to B, who then indorsed it to C, who then indorsed it to Store. Store presented the check to Drawee Bank, which dishonored it. Store gave appropriate notice of dishonor to all parties to the instrument (we will discuss presentment and notice of dishonor later). Store demands payment of the $900 from C alone. C claims that he is liable, at most, for only one-third of the amount ($900). Is C correct?

NO, C is liable for the full amount bc he is an endorser and the drawer has dishonored the check (a) Could Store "skip over" C and recover the $900 from B? YES From A? YES, store can recover in full from any of the endorsers since the check has been dishonored (b) Assume that Store recovers the $900 from C. May C recover the $900 from B? YES From A? YES, this is the prior endorser rule: C can recover in full from any prior endorser and B and A were both prior endorsers (c) Assume that Store recovers the $900 from C, and C recovers the $900 from A. Can A recover from B? NO From Drawer? YES, A cannot recover form B bc B was a subsequent not a prior endorser - any endorser that is forced to pay can recover from the drawer

Thief steals Sheldon's checkbook. A month later, Sheldon's bank returned his canceled checks, including one payable to Toys-R-Us for $200, to which Sheldon's name was forged as drawer. Sheldon promptly notified his bank. Is the check properly payable?

NO, Sheldon never ordered the bank to pay $200 to Toys R Us and so the bank must recredit his account bc the check was not properly payable

HYPO: Drawer issues a check to Payee. When Payee presents the check to Drawee Bank, due to a computer foul-up, it is wrongfully dishonored (assume there was, in fact, enough in the account to cover the check). By the time that Payee can locate Drawer to give notice of dishonor, Drawer has skipped town, having closed his bank account. Can Payee recover from Drawee Bank?

NO, a drawee is generally not liable on the instrument Would your answer be the same if it had been a certified check? NO, by certifying the check the bank makes itself liable to pay the check and makes itself an acceptor

Suppose that Sam Slick, dressed in business clothes, had represented that he was the Easter Bunny's helper. Amy then gave Sam a check made payable to "E. Bunny." Sam then indorsed the check using the name of "E. Bunny," and presented the check to Drawee Bank, which paid it. Amy now demands that her bank recredit her account. Must the bank recredit?

NO, bc the impostor rule also applies if the impostor pretends to be the agent of the named payee

HYPO: Mary borrowed some money from her friend, Betty, and issued a promissory note to Betty for $1000. The note was dated July 1, 2011, and was due on January 1, 2012. On December 20, 2011, Mary mailed a check to Betty for the full amount of the loan plus interest. On an enclosed card, Mary asked that the note be returned "whenever Betty could get to it." Betty spent the proceeds of the check, and on Christmas Day, negotiated Mary's note to Edgar, in payment for obligations owed to him. On January 1, 2012, Edgar demanded payment from Mary. Did Mary's payment to Betty discharge her on the note, even if Edgar is a HDC?

NO, discharge will be good against a HIDC only if he knows of the discharge and here he did not know

A, B, and C all sign as makers of a $5,000 note payable to Bank. When the note matured, Bank sued only A, demanding the entire amount. 1 May A defend on the basis that Bank should have sued all three of them?

NO, each of the makers is jointly and severably liable to pay the instrument when it comes due If Bank wins, can A recover from B and/or C? YES. If so, how much from each? 1/3 ofthe $5,000 from each-- this is a matter of contribution

HYPO: Myrna Minor looked much older than her actual age (15). She wants to start a little business of her own as a courier in the Greater Birmingham area, and purchased a motorcycle at City Cycle to use in that business, signing a note payable to City Cycle for $2000. City Cycle was unaware of Minor's age. City Cycle then discounted the note with Big Bank for $1800. When the first payment came due, Minor refused to pay, saying that she was disaffirming the contract and wished to return the motorcycle. Must Minor pay the bank?

NO, her defense of infancy is good against a HIDC - FTC Rule doesnt apply here bc she bought the motorcycle for business purposes but if the facts had stated that she bought it for personal use or the facts were unclear as to why she cought it then you would have to analyze the facts under FTC Rule before you analyzed the infancy defense

Upon answering a knock at her door, Amy, found a man at her door dressed in a bunny costume who said he was the the Easter Bunny and that he was seeking contributions to buy toys for children's Easter baskets. Amy gave the man a check for $100 payable to the order of "E. Bunny". In fact, the man's name was Sam Slick, a con artist. Sam took the check, indorsed it "E. Bunny", then signed his own name underneath the forged signature. Sam then presented the check to Drawee Bank, which paid it. Upon discovering that she had been swindled, Amy demanded that her bank recredit her account. Amy argues that the check was not properly payable because of the forged indorsement. Is Amy correct?

NO, here Sam was an impostor and the UCC art 3 validates a forged endorsement where the issuer has been duped by an imposture to issue an instrument in the impostors name

HYPO: On January 2, 2012, Merry Maker made out a note to Bank, promising to pay $1,000 to the order of Lender on January 2, 2013. On January 7, 2012, Lender duly negotiates the note to Bank, which otherwise meets the requirements for HIDC status. Does Bank take the instrument with notice that it was overdue?

NO, since it was not overdue on Jan 7, 2012, the date the bank became a holder there is no notice that it was overdue

Harry Homeowner issued a check for $100 to Gary Gardener for some yardwork that Gary had done. Gary's friend, Tony Thief, stole the check from Gary. Thief then forged Gary's indorsement on the back of the check and presented the check to Drawee Bank for payment. Drawee Bank paid the check, and Homeowner is demanding that his account be recredited. Was the check properly payable?

NO, since there was a forged endorsement the check was no properly payable and the bank must recredit homeowners account

HYPO: When Barry Builder filed for bankruptcy, he listed among his debts a loan he had taken from First Bank which was evidenced by a promissory note that he had signed. As a result of the bankruptcy proceeding, the judge ordered that Builder be discharged from all his scheduled debts. A year later, the note surfaced in the possession of Second Bank, which claimed to be a HDC. Must Builder pay Second Bank?

NO, the discharge in bankruptcy is good even against a HIDC

A Special Rule As to Discharge of the Underlying Obligation When the Instrument is a Special Kind of Check.

Note that the underlying obligation is discharged if the instrument given is a cashier's check, which is a check where the same bank is both the drawer and the drawee. Since a bank is liable on the cashier's check, receipt of a cashier's check discharges the underlying obligation. The same is true of the receipt of a bank draft, where one bank is drawer but a different bank is drawee. The underlying obligation is also discharged if payment is made by certified check, which is just an ordinary check but one as to which certification (known technically as "acceptance") by the payee bank has been procured. Look back at the example at the beginning of the materials. (p. 2). If Donna or Patricia took the check to Drawee National Bank and had Drawee National Bank "accept" the check by signing it (usually done across the face of the check) it would now be a certified check and would discharge any underlying obligation of Donna to Patricia.

Understanding the Importance of the Difference Between the Transfer Warranties and the Presentment Warranties.

Notice that the transfer warranties, which run from each transferee to each subsequent transferee, up to but not including the drawee, include warranties that there are no forged endorsements (I am a PETE) and that there is no forged drawer signature. The presentment warranty, which runs to the drawee from the immediate presenter of the draft and from each previous transferor, also includes a warranty that there are no forged indorsements (I am a PETE). But as to the drawer's signature, there is not a warranty that the drawer's signature is authorized and authentic but only the much weaker warranty that the person "has no knowledge" that the drawer's signature is forged. As a result, a drawee bank that has paid a check with a forged indorsement can look back up the chain of collection, and ultimately the loss should come to rest on the first honest person who dealt with the thief. But a drawee bank that has paid a check with a forged drawer signature will usually be stuck with the loss.

What is a "Transfer"?

Notice that the transfer warranty is deemed to be made whenever there is a "transfer" of an instrument. "Transfer" includes a transfer by negotiation, but it does not include "presentment" of a note to the maker or of a draft to the drawee.

The "Properly Payable" Rule:

One rule is the properly payable rule, which shifts the risk in check transactions away from the customer to the payor/drawee bank by providing that the bank can charge the customer's account only if it follows the customer's orders in paying the money out of the customer's account. Under the properly payable rule, the bank may pay out the customer's money only if it follows the customer's orders exactly. If it does not do so, it must recredit the account.

Order Paper:

Order paper can be negotiated only by delivery plus proper indorsement. To be proper, an indorsement must be written by or on behalf of the holder. To be a holder of order paper, it must be issued to him, or properly indorsed to him. 1) Assume Thief steals a paycheck that had been issued to Paul Payee by his employer. The check had not been indorsed when it was stolen. (a) Was the check order paper or bearer paper when it was stolen? Order paper since it was payable to Paul Payee, an identified person (b) Is Thief a holder of this check? NO, bc it has not be endorsed to him (c) Can Thief negotiate this check? NO, he is not a holder and so cannot neg the check 2) Assume that Thief forges Payee's name and delivers the check to Publix. Has the check been "negotiated" to Publix so as to make Publix a "holder" and possibly a HiDC? NO, theifs forged endorsement is not an endorsement by a holder and so does not validly neg the check to publix

Drawee's Liability on the Instrument.

RULE: A drawee is generally not liable on an instrument since she has not signed it. (Exception: If a drawee "accepts" an instrument, i.e., in the case of a bank "certifies" a check, then the Drawee becomes liable as an "acceptor", discussed below.

While the drawer's liability, like that of an indorser, is secondary, the rule as to excuse of liability because of delay is different.

RULE: A drawer is excused from contractual liability on the instrument due to delay in presentment or notice of dishonor only in the unlikely event that the drawee bank has become insolvent during the delay and there is no insurance to cover the loss.

SIGNATURE BY AN AGENT.

RULE: A party is not liable on an instrument unless he or she has signed it, but a signature by an agent is effective. Two questions arise: (1) the liability of the party itself and (2) any possible liability of the agent.

But assume Heinz signs the check "Pay to Ken Ketchup, Heinz" beneath the previous indorsements.

RULE: A special indorsement of bearer paper made by the instruments holder (i.e., anyone in possession of the paper) converts the instrument to order paper. After this indorsement, is the check order paper or bearer paper? Now it is order paper again and only can be neg by delivery plus endorsement

"Acceptor's" Liability on the Instrument.

RULE: An acceptor is a drawee who, by signing a draft, has obligated itself to pay the draft on presentment. A bank's certification of a check is a form of "acceptance."

Indorser's Liability on the Instrument.

RULE: An indorser is liable only if the maker or drawer has dishonored the instrument - indorser's liability is secondary

Drawer's Liability on the Instrument:

RULE: The drawer is liable after presentment, dishonor, and notice of dishonor. So, like the indorser, a drawer is "secondarily" liable. The drawer is liable after presentment, dishonor, and notice of dishonor. With respect to the liability of a drawer, a reasonable time for presentment of a typical check drawn and payable within the United States is presumed to be 30 days after the check is issued.

Unconditional:

RULE: The promise to pay (if a note) or order to pay (if a draft) must be unconditional. Conditional promises are O.K. under contract law, but they destroy negotiability. a. HYPO: Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series. Can this be negotiable? NO, there is an express condition to the promise and that destroys negotiability b. What if the instrument refers to another agreement? HYPO: I promise to pay $100 to the order of Payee "in accordance with" (or "as per") the contract we signed today. Can this be negotiable? YES, its just a cross reference to the other document c. Assume however that the promise to pay is "subject to" a contract. Upon examining the contract, it is clear that it puts no conditions on the promise to pay. Can this be negotiable? NO, the concept is that one should be able to determine from the face of the instrument itself whether it is conditional without looking at any other writing--- here the language "subject to" means we must look at the other writing and that destroys neg

Hype of nonnegotiable instrument:

Seller and Buyer sign a contract that Seller will deliver goods to Buyer, with Buyer agreeing to pay an agreed amount within 60 days. a.. Can Seller assign this right to receive payment to X, a third party? YES, it is freely assignable b.. Suppose though the goods turn out to be defective! Would Buyer still have to pay X the agreed amount under the contract? NO, the assignee simply steps into the shoes of the seller and since buyer would have a good defense on the K, buyer can assert that defense against X too **If commercial paper is non-negotiable, the general principles of contract law apply -- the assignee stands in the shoes of the assignor.

Signed:

Signed by Maker (if note) or Drawer (if check): Code defines "signed" as including "any symbol executed or adopted by a party with a present intention to authenticate a writing." a. Can be printed, stamped, written Can be initials or thumbprints Can be a trade name or assumed name b. Key: the intention of the maker or drawer: did she execute or adopt the symbol with the intention of authenticating the writing c. HYPO: Mark Jones writes out in longhand the following: "I, Mark Jones, promise to pay $500 to the order of First Bank on July 31, 2012." No signature appears at the bottom of the note. Is it "signed?" MAYBE YES, here the signature Mark Jones may be embedded in the instrument itself and the key will be what was the intention of Mark JOnes

Bearer Paper:

Since bearer paper can be negotiated by delivery alone, even a thief can negotiate it to a holder (and so to a HDC who may take the instrument free from the claim of the rightful owner). HYPO: Thief steals the paycheck that had been issued to Peter Payee by his employer. Peter had indorsed the check "Peter Payee" before it was stolen. 1) Was the check order paper or bearer paper when it was stolen? Bearer paper since Peters blank endorsement made it bearer paper 2) RULE: A holder is a person in possession of bearer paper or in possession of order paper that has been issued or indorsed to her. Is Thief a "holder" of this check? YES, since he is in possession of bearer paper 3) Can Thief negotiate this check? YES, but not a HIDC

Ernest is the bookkeeper for Employer. As such, Ernest has cash management responsibilities for receiving checks received from customers of Employer, posting them to the account of the particular customer. Ernest doesn't have authority to indorse received checks, however. Ernest steals a customer check, makes a fraudulent indorsement by forging Employer's name and fraudulently endorses it in the name of Employer and deposits it in his own account. The indorsement is treated as effective even though it is forged.

THis is bc Earnest was entrusted with resp of handling incoming checks and that validates his fraudulent endorsement

VALIDATION OF THE FORGERY.

The basic rules for the allocation of losses from forgeries are discussed and illustrated above. But there is a separate set of rules by which forgeries are validated and treated as authentic, authorized signatures.

The Basic Risk Allocation Rules: Forgeries and ALterations:

The primary risks involving negotiable instruments are the risks of forgeries (forged drawer signatures and forged indorser signatures) and of alterations. The UCC sets up a cluster of rules to allocate those risks among the various parties.

To Whom Does the Transfer Warranty Run?

The transfer warranty runs not only to the immediate transferee, but to any subsequent transferee of the instrument. BUT since "presentment" is not a transfer, IT DOES NOT RUN TO THE maker or drawee/payor bank. The maker or drawee/payor bank only get the benefit of the weaker presentment warranties described below.

Now assume that when Seller delivers goods to Buyer, Buyer issues to Seller a negotiable instrument (check or promissory note). Seller then negotiates the negotiable instrument to X, a holder in due course (HDC) who gives value, in good faith, with no notice that it is overdue or has been dishonored or of any defenses or claims.

Then X as a HIDC takes free of most claims and defenses that buyer would have had against seller - X can collect the full amount of the neg instrument from buyer not withstanding the buyers complaint that the goods are defenses

The Fictitious Payee Rule #1:

This rule validates a forged endorsement where the issuer of the instrument intends the named payee to have no interest in the instrument

The Impostor Rule:

This rule validates the forged endorsement the payees name where the maker or drawer has been duped by an impostor to issue the instrument.

The Presentment Warranties.

Under Article 3, any person who presents a draft, such as a check, to the drawee for payment, and any previous transferor of the draft, warrants to the drawee (i) that he is a "PETE," i.e., in Code-speak, that there are no forged indorsements, (ii) that the draft has not been altered, and (iii) that he has no knowledge that the signature of the drawer is unauthorized.

The FTC Rule:

Under a rule adopted by the Federal Trade Commission, a transferee of a consumer note cannot be a HIDC. As a federal law, this rule preempts state law, such as UCC Article 3. As a result, in practice, the HIDC doctrine applies primarily to commercial transactions.

Fixed Amount:

When the instrument is payable, the holder must be able to determine from the instrument itself the sum due. Holder must be able to tell from the instrument the amount What about a note providing for variable interest rates? variable interest rates are ok HYPO: Assume a note provides for interest computed at "3% over prime, adjusted each six months based on then prevailing bank rates in New York City." Can this be negotiable? YES, article 3 expressly permits interest to be at a variable rate

Assume that Second Bank recovers from First Bank. May First Bank recover from Brown's?

YES, 1st Banks claim against Browns would be based on the transfer warranties since Browns transfered the check to 1st Bank and the transfer warranties also include that the warranty that the transferee is a Pete and since there were forged endorsements they can recover May Brown's recover from Suzy? YES, bc Suzy also gave the transfer warranties to Browns including the warranty of no forged endorsements and she breached that warranty Who winds up bearing the loss? Probably Browns and he can theoretically recover from SUzy but she is probably judgment proof

Assume that, instead of asking for another check from his employer, Reynold demands the $200 from Second Bank. Must Second Bank pay Reynold? Why?

YES, 2nd Bank when it payed the check over a forged endorsement actually converted Reynold's property - could sue on conversion too

HYPO: Donna Drawer wrote a check on March 31 to Peter Painter, a housepainter, for $500 for services rendered. Peter indorsed the check over to Herb's Paint Shop on May 5, and it was dishonored on May 8, when the drawee bank informed Herb that Drawer had stopped payment on the check because she was unhappy with Painter's work. Is Herb's Paint Shop a HDC?

YES, a check is deemed overdue 90 days after its date, so when Herbs Paint shop took the check on May 5 it was not overdue and there was no notice of it being overdue

HYPO: Friendly Finance was the payee of a promissory note signed by Mary Maker. The note called for Mary to make 24 monthly interest payments before the note matures. Friendly discounted the note with Big Bank. When it was discounted to Big Bank, the note had written on it in large letters the notation "Missed Paying First Installment." Can Big Bank be a HDC?

YES, all that is important is whether there is notice of a missed principle payment - notice that interest payments have been missed is not notice that deprives one of HIDC status

Assume that Reynold or the grocery store recovers the $200 from Second Bank. Can Second Bank recover from First Bank and/or Brown's?

YES, as the drawee bank 2nd Bank is the beneficiary of the presentment warranties and that includes a warranty that there are no forged endorsements (PETE), 1st Bank and Browns gave that warranty to 2nd bank and they are liable for its breach

Corporation wishes to borrow $20,000 from Bank. Bank says that it will make the loan, but only if Adam, Bob and Carl (three corporate officers) sign the note along with Corporation. (They would be signing to "accommodate" Corporation -- we will discuss "accommodation parties" more fully in a few minutes). Corporation is the maker of the note, and then Adam, Bob, and Carl (in that order) sign as indorsers. When the note comes due and it is presented to Corporation for payment, Corporation dishonors it. Notice of dishonor is given to each of the indorsers. Bank demands the $20,000 from Carl. Is Carl liable for the entire $20,000?

YES, he is an endorser and is liable for the full amount since there was dishonor (a) Assume that Bank recovers the $20,000 from Carl. Can Carl recover from Bob and/or Adam? YES If so, how much from each? 1/3 of $20,000 from each-- this is different bc there is a diff rule for accommodation parties that sign at virtually the same time: this is the accommodation endorser rule (b) Assume that Bank "skips" Carl and Bob, and instead recovers the $20,000 from Adam. Can Adam recover from Carl and/or Bob? YES If so, how much? 1/3 of $20,000 even though Carl and Bob seem to be subsequent endorsers, since they are all accommodation endorsers they are required to contribute 1/3 each

HYPO: On January 2, 2012, Merry Maker made out a note to Bank, promising to pay $1,000 to the order of Lender on January 2, 2013. On January 7, 2013, Lender duly negotiates the note to Bank, which otherwise meets the requirements for HIDC status. Does Bank take the instrument with notice that it was overdue?

YES, if the lender neg the note to the bank of Jan 7, 2013, a week after the note had become due, then the bank would have notice that the note it overdue

Forged Drawer's Signature HYPOs: Joe Crooks steals one of Daisy Drawer's blank checks and fills it in, making it payable to the order of "Joe Crooks" for $500, and forges Daisy's name on the drawer's line. Joe writes his own name on the back of the check and takes it to his own bank, State Bank, asking it to cash the check for him. State Bank pays Joe $500, and, after stamping its own indorsement under Joe's, presents the check to Drawee Bank. Drawee Bank pays the check. Daisy demands that Drawee Bank recredit her account. Must Drawee Bank do so?

YES, properly payable rule says the check was not properly payable since Daisy's drawer signature was forged

B issued a check to H and W jointly. H indorsed the check and also forged W's indorsement. Drawee Bank paid the check and charged B's account for the amount of the item. W never got a dime of the payment. Must Drawee Bank recredit B's account?

YES, since the check was payable to H&W jointly both signatures were required to properly endorse - What if the check was payable to H or W. Was the check properly payable? YES, since the check was payable to H or W the endorsement of either was all that was needed - What if it was to them jointly and H did not forge W's indorsement. The check carried only H's indorsement. Drawee Bank paid the check even though W's indorsement was missing. Was the check properly payable? NO, both signatures were required so its not properly payable

Drawer issued a check to Payee on March 1. Payee places the check in his desk and forgets about it for several months. On June 1, Payee comes upon the check, and the next day presents it to Drawee Bank. The check is dishonored for insufficient funds. May Payee successfully sue Drawer on his drawer's contract?

YES, the drawer is not excused form liability by unreasonable delay of presentment

Same facts as "b" above, except that Gary had indorsed the check in blank before it was stolen by Thief. Thief then presented the check to Drawee Bank, which paid it. Was the check properly payable?

YES, there was no forged endorsement and so Gary's own endorsement converted the check to bearer paper after which anyone in possession of the check is a holder that can enforce the check

Mike had borrowed $10,000 from his rich uncle Al to help finance his daughter's wedding party. Mike had orally agreed to repay the money to Al (with interest) on June 1, 2011. On June 1, 2011, Mike, unable to come up with the money, gave Al a promissory note for the amount owing, payable on December 1, 2011. Here the original loan is the underlying obligation for which the note was taken. Al took the note and deposited it in his safe deposit box. The next week, though, Al brought suit against Mike for non-payment of the loan (the underlying obligation for the note). Did the note suspend Al's right to sue on the underlying obligation?

YES, when a party takes a note for an underlying obligation the underlying obligation is suspended until the note comes due - Assume that when the note comes due, Mike fails to make payment. May Al now sue on the underlying obligation? it is discharged, discharged of the note by payment discharges the underlying obligation as well - Assume that the note comes due on December 1, and Mike makes payment on it. What happens to the underlying obligation? YES, he can now sue both on the note and on the underlying obligation

No Other Promise or Order (Unless Authorized by Article 3)

a. A negotiable instrument must be a "courier without luggage" -- it must not be burdened with anything other than a simple, clean, unconditional promise or order. If a note contains additional promises, the holder is given notice that the note is or may be conditioned on the performance of those additional promises. b. The UCC does permit a number of extra promises. Several of these relate to collateral. For example: O.K. to authorize holder to sell collateral on default O.K. to promise to maintain or protect collateral O.K. to promise to put up additional collateral if some condition (or, sometimes, on demand by holder) Also O.K. to promise to pay costs of collection and attorneys fees.

In money:

a. A promise to pay 100 bales of cotton is a non-negotiable promise. b. Foreign money is O.K. (as long as the U.S. recognizes the currency). - Euros are ok

Assignment Distinguished from Negotiation

a. Assignment: A payee who has been issued a negotiable instrument can simply assign it to a third party. The third party is then an assignee, and has no greater rights on the instrument than the assignor/payee does. Any defenses that could be raised against the assignor/payee also could be raised against the assignee. b. Negotiation: But if the payee negotiates the instrument to a third party, however, then that third party is not a mere assignee, but is a holder. (We will define "holder" more specifically below in terms of the concepts of " order paper" and "bearer paper.") If the holder gives value, in good faith, with no notice, then the holder is a holder in due course, who takes free of most defenses that could have been raised against the payee.

Steve needs some new equipment for his business, but, unfortunately, Steve has a rather "spotty" credit record. Steve finds the equipment that he needs, but the seller, Reliable Equipment, refuses to extend credit to Steve alone. Therefore, Steve calls his rich friend Norman, who signs a promissory note "to help Steve out." Both Steve and Norman sign as makers of the note. The note is payable in 60 equal installments.

a. Assume that, after the 15th installment, Steve can no longer pay. May Reliable recover from Norman? YES, Norman is liable as a maker-- the capacity in which he signed b. Assume that Steve does not pay (assume he has no defense -- he simply doesn't have the money) and Norman therefore pays. What are Norman's rights against Steve? - Norman can recover the entire amount from Steve-- this is different than the usual contribution rule among co-makers: as between Norman and Steve themselves, Norman is known as the accommodation party and Steve as the accommodated party and as the accommodation party Norman can recover the full amount from the accommodated party c. Suppose that Reliable sues Steve and Steve does pay the note. May Steve sue Norman for contribution? NO, the accommodated party, Steve, cannot recover anything from the accommodation party, Norman, this is again different than usual contribution rule d. Assume that Steve is having difficulty making payments to Reliable and is able to persuade Reliable to grant him a six-month extension. Assume that this is done without the knowledge or consent of Norman. Does this effect Norman's liability? Maybe yes, if the delay jeopardizes Norman's ability to recover form Steve, Norman will be discharged

While a HDC takes free of personal defenses and claims, she takes subject to "real defenses." These real defenses are listed in the UCC as follows:

a. Infancy, to the extent that it is a defense to a simple contract. b. Such other incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity. c. Such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms. - this is fraud in the factum - HIDC takes free of other types of misrepresentation called in the inducement d. Discharge in insolvency proceedings. e. Any other discharge of which the holder has notice when he takes the instrument.

Assume that Jane signs the note "Software Corporation, by Jane Doe, President."

a. Is Software Corporation liable on the instrument? YES, bc Jane was authorized b. Is Jane Doe personally liable? NO, since the manner of her signing shows unambiguously that she signed as an agent and her principle software was identified then Jane is not liable - if either of these 2 elements are missing the outcome is different

Assume that Jane simply signs the note "Jane Doe."

a. Is Software Corporation liable on the instrument? YES, bc she was authorized b. Is Jane Doe personally liable? Is parol evidence admissible to clear up the liability of Doe? Same as b above

Assume that Jane signs the note "Jane Doe, President."

a. Is Software Corporation liable on the instrument? YES, she was authorized b. Is Jane Doe personally liable? Is parol evidence admissible to clear up the liability of Doe? here the form of the signature showed that she signed as agent but it did not identify her principle so Jane is liable to any holder in due course but as to a non holder in due course parole evidence can be admitted to show that the original parties never intended for her to be personally liable

Jane Doe is the president of Software Corporation. Jane signed a promissory note "Software Corporation." Assume that Jane had authority (express or implied) to sign the note on behalf of Software Corporation.

a. Is Software Corporation liable on the instrument? YES< since Jane was authorized SWC is liable based on her signature b. Is Jane Doe personally liable? NO, her name doesnt even appear

Promise to Pay (if note) or Order to Pay (if check)

a. Is an I.O.U. negotiable? NO, only an acknowledgement of a debt not a promise to pay b. "I wish you would pay" is not an order to pay. Not negotiable.

HYPO: A strange looking man wearing a trenchcoat, and with a hat pulled down over his head, stopped Ned Naive on the street one night. Glancing around nervously, the man explained to Ned that he needed money to buy a bus ticket to go visit his ailing daughter in Nashville. He said that he had a check for $100 that he had received from his employer, but that his bank was closed. The man asked Ned if he would cash the check for him. Moved by the man's story, Ned gave him $100 in cash in return for the check, and the man hurried off down the street. The next day, when Ned presented the check to the drawee bank, he was informed that the check had been stolen from its true owner after the true owner had indorsed it in blank. The true owner is now claiming the check from Ned. Can Ned successfully defend under the theory that he is an HDC?

a. Is he a holder? YES, since the true owner had endorsed the check in blank it is neg by delivery only b. Did he give value? YES, he gave $100 in cash c. Did he take in "good faith"? (We will discuss the "without notice" element next but for now take it he was "without notice.") Prob not under the general rule bc he may fail the test of reasonable standards of fair dealing and here he prob was not reasonable d. Alabama's non-uniform "white heart/empty head" entirely subjective test (for what it's worth). he may meet this standard here ** apply the general rule on the MEE

Material Alteration: Altered Note:

a. Maker borrows money from Corleone Loan Company, and signs a $2000 note payable in 6 months. After Maker leaves the office, Corleone skillfully altered the amount of the note to read $20,000. When the note came due, Corleone demanded the $20,000 from Maker. What amount, if any, must Maker pay Corleone? $0, the effect of an alteration if to discharge the maker entirely against holders other than a holder in due course and Corleone is not a HIDC b. Assume that, after altering the note, Corleone had negotiated the note to Finance Company, a HDC. When the note comes due, Finance Company presents the note to Maker for Payment. What amount, if any, must Maker pay Finance Company? $2,000 even in the case of a HIDC the holder in due course can enforce it against the make only as to the original amount c. If Finance Company cannot recover the full $20,000 from Maker, can Finance Company recover anything from Corleone? YES, finance comp can recover the rest of the $20,000 from Corleone bc the transfer warranties that Corleone gave finance comp included a warranty of no material alteration and since he breached that warranty he is liable to finance comp for the rest of the money

How Does One Negotiate an Instrument?

a. ORDER PAPER IS NEGOTIATED BY DELIVERY PLUS PROPER INDORSEMENT. (1) Delivery: a voluntary or involuntary transfer of possession - snatching of a thief is delivery (2) Endorsement: by the person previously entitled to enforce the instrument (a) Special Endorsement: endorsement to a specific person - after a special endorsement the instrument is order paper (b) Blank Endorsement: signature by the person previously entitled that orders the enforcement of the instrument - after a blank endorsement the instrument is bearer paper BEARER PAPER IS NEGOTIATED BY DELIVERY ALONE!

Material Alteration: Altered Check:

a. S takes a personal check from B for $100 in payment for the price of goods sold by S to B. S alters the instrument to read $1000 and cashes the check at his own bank, Local Bank. Local Bank then presented it to Drawee Bank, which paid the $1000. When B received his bank statement, he immediately complained to Drawee Bank, demanding that is account be recredited. Must Drawee Bank recredit B's account? YES. If so, how much? $900 assuming drawee bank is a HIDC it can treat the check as properly payable but only to the original amount b. If B's bank must recredit B's account, could it recover anything from Local Bank (the bank presenting the check)? YES, the presentment warranty that local bank gave to drawee bank included a warranty that the check had not been altered and it breached the warranty and local bank is liable for the breach

There are four major issues in applying the negotiability concept:

a. Whether the instrument is negotiable. b. If it is negotiable, has it been negotiated, a special kind of transfer that makes the transferee a holder. c.. If it has been negotiated to a holder, is the holder a holder in due course (HIDC)? d. If the holder is a HIDC, are the claims and defenses at issue those kinds that are cut off against a HIDC?

When the drawee is a bank, and it is payable on demand, then the draft is a

check. Bank Checks. A "cashier's check" is a check with respect to which the drawer and the drawee are the same bank. A "teller's check" is a check as to which the drawer is a bank and the drawee is a different bank. A "certified check" is an ordinary check which the drawee bank has then certified by stamping/signing it as "certified." - another word for certified is accepted

Now assume that the treasurer of D Corporation, who is authorized to write checks on the company's account, embezzles funds by drawing a check payable to XYZ Corporation, a corporation that actually exists and with which D often does business. The treasurer himself then indorsed the check so that it appears to be indorsed by an officer of XYZ Corporation. The check is paid and charged to the account of D Corporation. Does D Corporation have recourse against the drawee e bank on the ground that the indorsement on the check was forged (again, there is obviously no problem with the drawer signature)?

even though XYZ actually exists the treasurer didnt intent for XYZ to have an interest in the check and the fictitious payee rule applies and validates the endorsement

If Drawee Bank must recredit Daisy's account, can Drawee Bank recover the $500 from anyone?

i. From State Bank? NO, the drawee bank cant use the transfer warranties since the check came to it by presentment and not transfer; drawee can proceed against prior parties only only presentment warranties; the presentment warranties dont include a warranty that the drawer's signature was valid; they only include a warranty that the party has no knowledge that there was a forged drawer's signature; State Bank didnt know and so they are not liable ii. From Joe Crooks? YES, has a good claim against Joe for breach of the presentment warranties since Joe knew the drawees signature was forged Who winds up bearing the loss in the forged drawer signature hypo? Prob the drawee bank since even though Joe is technically liable he is prob judgment proof

Bottom Line: Once parties start indorsing, you need to look at the

last indorsement to determine whether the instrument is order paper or bearer paper.

Notice of dishonor

must be given by a bank before its "midnight deadline" (midnight following the banking day of receipt) and, by any other person, before midnight of the third business day after dishonor or receipt of notice of dishonor.

Another Bottom Line: When order paper contains a forged endorsement

none of the parties from the forger on are holders -- none have good title -- none are entitled to the money. In fact, they all have converted the check. The drawee cannot properly pay any one of them. The drawee can only pay a holder -- someone with good title to the check.

The types of commercial paper governed by Article 3 of the UCC can be divided into two basic categories:

notes and drafts.

Good Faith:

subjective -- "white heart test PLUS "reasonable standards of fair dealing"-- objective test

"ISSUE" means

the initial delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person.