Ch. 25-26-27

The law governing negotiable instruments =

Lex Mercatoria first - then codified in England and is the forerunner of Article 3 of the Uniform Commercial Code (UCC)

Potential Indorsement Problems

Misspelled Names Instruments Payable to Entities Alternative or Joint Payees Instrument is ambiguous

In re Bass Does an instrument that requires an indorsement for negotiation need to contain the written signature of an individual's name?

No - UCC is very lenient as to what passes for authenticating intent - signature, symbols, initials, thump print, etc

imposter

One who, by use of the mail, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of an impersonated payee. Indorsements by imposters are not treated as unauthorized under Article 3 of the Uniform Commercial Code

The UCC specifies four types of negotiable instruments:

Orders-to-pay -drafts -checks Promises-to-pay -notes -certificates of deposit (CDs)

Exceptions to the general rule

Ratification. When the person whose name is signed ratifies (affirms) the signature, he or she will be bound Negligence

To protect consumers who purchase defective products, the Federal Trade Commission (FTC) adopted ________________, which effectively abolished the HDC doctrine in consumer transactions.

Rule 433

Discharge by Impairment of Collateral

Sometimes, a party to an instrument gives collateral as security that her or his performance will occur. When a holder "impairs the value" of that collateral without the consent of the parties who would benefit from it in the event of nonpayment, those parties are discharged to the extent of the impairment

discharge by tender of payment

Sometimes, a tender (offer) of payment is made to a person entitled to enforce the instrument, and the tender is refused. In that situation, the rights of indorsers and accommodation parties to seek reimbursement are impaired (impairment of the right of recourse is discussed shortly). Therefore, the indorsers and accommodation parties are discharged to the extent of the amount of the tender

A bill or not is not a debt, it is primarily evidence of a debt

TRUE

A person is not liable on an instrument unless he or she has signed it personally or through an authorized representative (agent)

TRUE

A person who signs a negotiable instrument is potentially liable for payment of the amount stated on the instrument.

TRUE

An indorsement can be written on a separate piece of paper - must be affixed to the instrument (stapled)

TRUE

With an unqualified indorsement, The indorser is guaranteeing payment of the instrument in addition to transferring title to it

TRUE

With presentment warranties, the person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce the instrument. (This is, in effect, a warranty that there are no missing or unauthorized indorsements.)

TRUE

The second and third warranties do not apply to makers, acceptors, and drawers

TRUE It is assumed that a drawer or a maker will recognize his or her own signature and that a maker or an acceptor will recognize whether an instrument has been materially altered.

Usually by indorsing, it impliedly promises to pay the holder, or any subsequent indorser, the amount of the instrument in the event the drawer or maker defaults on the payment

TRUE: this is an unqualified indorsement

An instrument is payable at a definite time if it states any of the following:

That it is payable on a specified date. That it is payable within a definite period of time (such as thirty days) after being presented for payment. That it is payable on a date or time readily ascertainable at the time the promise or order is issued

Presentment

The act of presenting an instrument to the party liable on the instrument to collect payment; the act of presenting an instrument to a drawee for acceptance

AS PELEUS, LLC V. SUCCESS INC. (2016)

The holder of a note seeking to enforce the note through foreclosure must produce the note. The note must be endorsed so as to demonstrate that the foreclosing party is a holder, either by a specific endorsement to that party or by means of a blank endorsement to bearer * * * If the foreclosing party produces a note demonstrating that it is a valid holder of the note, the court is to presume that the foreclosing party is the rightful owner of the debt

Parties are secondarily liable on a negotiable instrument only if the following events occur:

The instrument is properly and timely presented. The instrument is dishonored. Timely notice of dishonor is given to the secondarily liable party

Makers

The maker of a promissory note unconditionally promises to pay the note according to its terms. It is the maker's promise to pay that renders the instrument negotiable. Even if the promissory note was incomplete at the time the maker signed it, the maker is still obligated to pay. The maker must pay it according to either its stated terms or terms that were agreed on and later filled in to complete the instrument

Mills v. Chauvin

The note itself—which was drafted by Chauvin, signed by him, notarized and transmitted to Mills clearly states that it was executed in return for a loan received by Chauvin and contained an unconditional promise or order to pay a sum certain in money. In addition, Mills took the note as a holder in due course.

Presentment warranties:

The person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce the instrument. (This is, in effect, a warranty that there are no missing or unauthorized indorsements.) The instrument has not been altered. The person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is unauthorized

shelter principle:

The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course (HDC), but who derives his or her title through an HDC, acquires the rights of an HDC.

Discharge by Reacquisition

The reacquisition of an instrument by a person who held it previously discharges all intervening indorsers against subsequent holders who do not qualify as HDCs

Rule 433

The rule applies to consumers who purchase goods or services for personal, family, or household use using a consumer credit contract. The regulation prevents a consumer from being required to make payment for a defective product to a third party HDC who has acquired a promissory note that formed part of the consumer's contract with the dealer who sold the defective good.

The 5 transfer warranties

The transferor is entitled to enforce the instrument. All signatures are authentic and authorized. The instrument has not been altered. The instrument is not subject to a defense or claim of any party that can be asserted against the transferor. The transferor has no knowledge of any bankruptcy proceedings against the maker, the acceptor, or the drawer of the instrument.

What are the factors that affect negotiability?

Undated Antedating or postdating Handwritten terms outweigh typewritten and printed terms, typewritten outweighs printed Words outweigh figures No interest rate specified Even if it says "nonnegotiable."

Fictitious payees most often arise in two situations:

When a dishonest employee deceives the employer into signing an instrument payable to a party with no right to receive payment on the instrument. When a dishonest employee or agent has the authority to issue an instrument on behalf of the employer and issues a check to a party who has no interest in the instrument.

Unauthorized signatures arise in two situations:

When a person forges another person's name on a negotiable instrument. When an agent who lacks the authority signs an instrument on behalf of a principal

Conditional Indorsements

When payment depends on the occurrence of some event specified in the indorsement, the instrument has a conditional indorsement

It is not a material alteration to...

-correct the maker's address -draw a red line across the instrument to indicate that an auditor has checked it -change the figures on a check so that they agree with the written amount.

CHARLES R. TIPS FAMILY TRUST V. PB COMMERCIAL LLC (2015)

1,700,000 vs 1,007,000 The court entered a judgment in PBC's favor. The trust appealed, arguing one issue—that the amount of the loan must be determined from the printed words in the note and not the numerals.

Authorized agent may be held personally liable if:

1. When the agent signs his own name on the instrument with no indication of agency status 2. When the agent signs in both the agent's and principal's name but nothing on the instrument indicated the agency relationship 3. When the agent indicated his agency status in signing a negotiable instrument but fails to name the principal

SILICON VALLEY BANK V. MIRACLE FAITH WORLD OUTREACH, INC. (2013)

A bill or note is not a debt; it is only primary evidence of a debt; and where this is lost, impaired or destroyed bona fide, it may be supplied by secondary evidence The loss of a bill or note alters not the rights of the owner, but merely renders secondary evidence necessary and proper

Personal defenses:

A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC. Personal defenses are also called limited defenses.

Universal defenses

A defense that is valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs. Universal defenses are also called real defenses.

fictitious payee

A payee on a negotiable instrument whom the maker or drawer does not intend to have an interest in the instrument. Indorsements by fictitious payees are not treated as unauthorized under Article 3 of the Uniform Commercial Code.

bearer

A person in the possession of an instrument payable to bearer or indorsed in blank

indorsee:

A person to whom a negotiable instrument is transferred by indorsement.

Fraud in the inducement

A person who issues a negotiable instrument based on false statements by the other party will be able to avoid payment on that instrument, unless the holder is an HDC

accommodation party:

A person who signs an instrument for the purpose of lending his or her name as credit to another party on the instrument

indorser:

A person who transfers an instrument by signing (indorsing) it and delivering it to another person.

indorsement:

A signature placed on an instrument for the purpose of transferring ownership rights in the instrument

negotiable instrument

A signed writing that contains an unconditional promise or order to pay an exact sum of money, on demand or at an exact future time, to a specific person or order, or to bearer. sometimes referred to as commercial paper

promissory note:

A written promise made by one person (the maker) to pay a fixed sum of money to another person (the payee or a subsequent holder) on demand or on a specified date. -sometimes referred to as a "note"

Discharge by payment

All parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due The liability of all parties is also discharged when the drawee of an unaccepted draft or check makes payment in good faith to the holder.

Acceptors

An acceptor is a drawee that promises to pay an instrument when it is presented later for payment The drawee's acceptance is a promise to pay that places the drawee in almost the same position as the maker of a promissory note [UCC 3-413]. Failure to pay an accepted draft when presented leads to primary signature liability for the drawee-acceptor.

blank indorsement:

An indorsement that specifies no particular indorsee and can consist of a mere signature

What are the Requirements for Negotiability?

Be in writing. Be signed by the maker or the drawer. Be an unconditional promise or order to pay. State a fixed amount of money. Be payable on demand or at a definite time. Be payable to order or to bearer

Personal defenses include the following:

Breach of contract or breach of warranty. Lack or failure of consideration. Fraud in the inducement (ordinary fraud). Illegality. Mental incapacity. Ordinary duress or undue influence rendering the contract voidable Previous payment or cancellation Unauthorized completion of an incomplete instrument Nondelivery of the instrument

Discharge by Impairment of Recourse

Discharge can also occur when a party's right of recourse is impaired [UCC 3-605]. A right of recourse is a right to seek reimbursement.

In the following situations, a delay in payment or a refusal to pay an instrument will not dishonor the instrument:

When presentment is made after an established cutoff hour (not earlier than 2:00 p.m.), a bank can postpone payment until the following business day without dishonoring the instrument When the holder refuses to exhibit the instrument, to give reasonable identification, or to sign a receipt for the payment on the instrument, a bank's refusal to pay does not dishonor the instrument When an instrument is returned because it lacks a proper indorsement, the instrument is not dishonored

Any of the following acts—if done by the holder with the intent to cancel the obligation—will discharge liability: (cancellation)

Writing "Paid" across the face of an instrument. Intentionally tearing up an instrument. Crossing out a party's signature. Doing this will discharge that party's liability and the liability of subsequent indorsers who have already signed the instrument. Surrendering the instrument (such as a promissory note) to the party to be discharged

Loophole of Rule 433:

FTC Rule 433 does not prohibit third parties from purchasing notes or credit contracts that do not contain the required notice. If a third party purchases an instrument arising from a consumer credit transaction that lacks the notice, that third party normally is not subject to the buyer's defenses against the seller. Thus, some consumers remain unprotected by the FTC rule

Universal defenses includes

Forgery of a signature on the instrument. Fraud in the execution. Material alteration. Discharge in bankruptcy. Minority. Illegality, mental incapacity, or extreme duress.

Trade Acceptance:

Frequently used in the sale of goods The draft orders the buyer to pay a specified amount to the seller, usually at a stated time in the future

Holder v. HDC

Holder has SAME status as an assignee - subject to the same defenses that could be asserted against the transferor HDC takes an instrument free of most of the defenses and claims that could be asserted against the transferor

Fraud in the execution:

If a person is deceived into signing a negotiable instrument by being told that it is something else, fraud in the execution (or inception) is committed against the signer

transfer warranties:

Implied warranty made by any person who transfers an instrument for consideration to subsequent transferees and holders who take the instrument in good faith

Issue:

In negotiable instruments law, the first transfer, or delivery, of an instrument to a holder

Forms of restrictive indorsements:

Indorsements to Pay Only a Named Payee Conditional Indorsements Indorsements for Deposit or Collection Trust (Agency) Indorsements

Trust (Agency) Indorsements

Indorsements to persons who are to hold or use the funds for the benefit of the indorser or a third party

Discharge by cancellation

Intentional cancellation of an instrument discharges the liability of all parties

HDC doctrine:

a consumer who purchased a defective product (such as a defective automobile) would continue to be liable to HDCs even if the consumer returned the defective product to the retailer.

Postdating occurs when:

a party puts a date on an instrument that is after the actual date

Antedating occurs when:

a party puts a date on an instrument that precedes the actual calendar date

Discharge can also occur if

a party reacquires an instrument if a holder impairs another party's right of recourse if a holder surrenders collateral without consent.

presentment occurs when:

a person presents an instrument either to the party liable on the instrument for payment or to a drawee for acceptance. The holder must present the instrument to the appropriate party, in a timely fashion, and give reasonable identification if requested

Instruments that are payable on demand include those that contain the word...

"Payable at sight" or "Payable upon presentment."

Any instrument containing terms such as the following is a bearer instrument:

"Payable to the order of bearer." "Payable to Simon Reed or bearer." "Payable to bearer." "Pay cash." "Pay to the order of cash."

To ensure a proper transfer, the instrument must be ______________________________ at the time it is issued or first comes into the possession of the holder

"payable to order or to bearer" An instrument is not negotiable unless it meets this requirement

An order instrument is an instrument that is payable

"to the order of an identified person" "to an identified person or order"

negotiation:

the transfer of an instrument in such form that the transferee becomes a holder

Envision Printing LLC v. Evans (2016)

the trial court found that Evans had signed the promissory note solely in his representative capacity and was not personally liable. The court further found that Envision Printing knew that Evans had not signed in his personal capacity. [Envision Printing appealed.] Envision Printing contends that the trial court erred by granting summary judgment to Evans when he was personally liable under the note. We disagree. Generally, a corporation's officers and the corporation are entirely separate and distinct entities. Contracts may be signed by one acting in a representative capacity, or a representative may make himself liable for the debt of the corporation

The transferee or holder must notify the warrantor of the breach of warranty claim within ___________ days of discovering the breach.

thirty Failure to give notice relieves the warrantor from liability for any loss caused by a delay.

A draft is an unconditional written order that involves....

three parties -party creating the draft (drawer) -party being ordered to pay (drawee) -party being paid (payee) The party creating the draft (the drawer) orders another party (the drawee) to pay money, usually to a third party (the payee).

CDs are _____________ deposits

time

Because one of the functions of a negotiable instrument is to serve as a substitute for cash, freedom to ________________ is essential.

transfer

For a negotiable instrument to operate practically as either a cash substitute or a credit device, it is essential that the instrument be easily...

transferable without danger of being uncollectible. -fundamental function

A breach of warranty can occur when the instrument is...

transferred or presented for payment

Primary liability is ___________________

unconditional Liability is immediate when the instrument is signed or issued

There are two general categories of defenses—

universal defenses and personal defenses

Usually, an instrument is accepted by

writing the word accepted across its face, followed by the date of acceptance and the signature of the drawee

To avoid the risk of loss from theft, a holder may convert a blank indorsement to a special indorsement by...

writing, above the signature of the indorser, words identifying the indorsee

Acceptance is the drawee's

written promise to pay the draft when it comes due

Warranties fall into two categories:

▫Transfer ▫Presentment

Discharge in bankruptcy is an ________________ defense on any instrument regardless of the status of the holder

absolute This defense exists because the purpose of bankruptcy is to settle finally all of the insolvent party's debts.

An ___________________ clause allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a specified event occurs.

acceleration

A sight draft may be payable on _____________________.

acceptance

Banks may require an accommodation party—a cosigner—to secure against nonpayment of a negotiable instrument...A parent who cosigns a promissory note with her or his son or daughter, for instance, is an ______________________, and the child, the _______________ is the accommodated party

accommodation party / maker

general rule also applies to

agents' signatures. If an agent lacks the authority to sign the principal's name or has exceeded the authority given by the principal, the signature does not bind the principal but will bind the "unauthorized signer"

There are two methods of negotiating an instrument so that the receiver becomes a holder.... The method used depends on whether the instrument is:

an order instrument or a bearer instrument.

The general rule

an unauthorized signature is wholly inoperative and will not bind the person whose name is signed or forged.

A certificate of deposit (CD):

another type of note issued when a party deposits funds with a bank and the bank promises to repay the funds, with interest, on a certain date

Once issued, a negotiable instrument can be transferred by:

assignment or by negotiation

Only a ____________ can become a holder of instruments indorsed for deposit or collection

bank

An order instrument that is indorsed in blank becomes a _______________ instrument

bearer

The use of _________________ instruments involves a greater risk of loss or theft

bearer

four main categories of indorsements:

blank, special, qualified, and restrictive Note that a single indorsement may have characteristics of more than one category -- not mutually exclusive

the most common type of draft is a

check

A cashier's check functions the same as cash because the bank has...

committed itself to paying the stated amount on demand

Rule 433 makes the buyer's duty to pay _____________________ on the seller's full performance of the contract. It also clearly reduces the degree of transferability of negotiable instruments resulting from consumer credit contracts.

conditional

For transfer warranties to arise, an instrument must be transferred for...

consideration

On a negotiable instrument, secondary liability is ____________________ liability

contingent a drawer or an indorser will be liable only if the party that is primarily responsible for paying the instrument refuses to do so—that is, dishonors the instrument.

An alteration is material if it changes the...

contract terms between two parties in any way Examples include any unauthorized addition of words or numbers or other changes to complete an incomplete instrument that affect the obligation of a party to the instrument

Because CDs are time deposits, the purchaser-payee typically is not allowed to withdraw the funds before the ______________________ (except in limited circumstances, such as disability or death)

date of maturity

A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument—unless, he or she has a valid _________________ to payment.

defense

A special qualified indorsement includes the name of the indorsee as well as the words "without recourse" The special indorsement makes the instrument an order instrument and it requires an indorsement plus ____________ for negotiation

delivery

A blank qualified indorsement makes the instrument a bearer instrument and ONLY _____________ is required for negotiation

delivery no indorsement needed

Negotiating order instruments requires both:

delivery and indorsement.

If an instrument is an order instrument, it is negotiated by

delivery with any necessary indorsements

Negotiable instruments may also be classified as either ______________ instruments or _______________ instruments

demand / time

On certain types of checks, such as cashier's checks, the bank is both the...

drawer and the drawee.

The transferee or holder can recover damages for the breach in an amount _________ to the loss suffered (but not more than the amount of the instrument)

equal Damages can also include expenses and any loss of interest caused by the breach

The reverse of an acceleration clause is an _________________ clause, which allows the date of maturity to be extended into the future

extension

An HDC must be a holder of a negotiable instrument and must have taken the instrument...

for value, in good faith, without notice that it is defective

The federal government limits the rights of HDCs in certain circumstances because of the

harsh effects that the HDC rules can sometimes have on consumers.

Negotiable instruments must be in writing and...

have a degree of permanence and portability

A holder who takes an instrument in good faith can sue for breach of a warranty as soon as...

he or she has reason to know of the breach

when transferred by negotiation, the UCC provides that the transferee becomes a _______________, and the _____________ gets at least the rights an assignee would plus sometimes more

holder

A person who forges a check or signs an instrument without authorization can be held personally liable for payment by a

holder in due course. This is true even if the name of the person signing the instrument without authorization does not appear on the instrument.

If an instrument is payable to bearer, it is negotiated by delivery—that is, by transfer into another person's possession but _______________________ is not necessary

indorsement

If the accommodation party signs on behalf of a payee or other holder (usually to make the instrument more marketable), she or he is an accommodation ____________________. she or he is secondarily liable.

indorser

Extension must be specified if the right to extend the time is given to the _______________ of the instrument

maker

If the accommodation party signs on behalf of the maker, he or she is an accomodation ______________ and is primarily liable on the instrument.

maker

With a CD, the bank is the ____________________________, and the depositor is the _________________.

maker of the note / payee

Indorsements for Deposit or Collection

makes the indorsee (almost always a bank) a collecting agent of the indorser

An order instrument contains the ___________ of a payee capable of indorsing, as in "Pay to the order of Jamie Fowler."

name

Generally, an authorized agent binds a principal on an instrument if the agent clearly ______________ the principal in the signature

names

"Payable to the order of my nicest cousin," for instance, is not ___________________, because it does not clearly specify the payee.

negotiable

Instruments that include acceleration clauses are __________________ because the exact value of the instrument can be ascertained

negotiable In addition, the instrument will be payable on a specified date if the event allowing acceleration does not occur

A bearer instrument can be payable to:

nonexistent person nonexistent organization

A special indorsement changes bearer instrument back to an ___________ instrument

order

An indorsement is required whenever an ______________ instrument is negotiated

order

With __________________ instruments, the person specified must be identified with certainty because the transfer of an order instrument requires an endorsement, or signature of the payee

order

A check is a draft drawn by a drawer ordering the drawee bank or financial institution to

pay a certain amount of money to the holder on demand

Checks are demand instruments because they are

payable on demand.

A bearer instrument is an instrument that does not designate a specific ______________

payee

Any person who presents an instrument for _____________ or ___________________ makes the following presentment warranties to any other person who in good faith pays or accepts the instrument...

payment / acceptance

Discharge from liability on an instrument can come from...

payment, cancellation, or material alteration

A time draft is payable at a definite future time and a sight draft (or demand draft) is payable on sight—that is, when it is

presented to the drawee (usually a bank or financial institution) for payment.

presentment warranties protect the person to whom the instrument is presented (the transferee) and they often have the effect of shifting liability back to the party that was in the best position to...

prevent the wrongdoing

HDC meets certain acquisition requirements and therefore receives a higher level of

protection from defenses and claims used by other parties

The general rule is that every party, except a _______________ indorser, who signs a negotiable instrument is either primarily or secondarily liable for payment of that instrument when it comes due

qualified

An indorser who does not wish to be liable on an instrument can use a ______________ indorsement to disclaim this liablity

qualified Often used by persons acting in a representative capacity (agents)

"without recourse"

qualified indorsement

"For Deposit (or Collection) Only."

restrictive

A _______________ indorsement requires the indorsee to comply with certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument

restrictive

CDs in small denominations (for amounts up to $100,000) are often sold by...

savings and loan associations, savings banks, commercial banks, and credit unions

Drawers and indorsers are _______________ liable

secondarily

If a payee wants to access the funds before the maturity date, he or she can...

sell (negotiate) the CD to a third party

Liability on a negotiable instrument can arise from a person's ____________ on the instrument or from the warranties implied

signature

Unlike signature liability, warranty liability does not require a _____________ and extends to both signers and nonsigners.

signature

A qualified indorsement ("without recourse") can be accompanied by either a _____________ indorsement or a ______________ indorsement

special / blank In either situation, the instrument still transfers title and can be further negotiated

A time instrument is payable at a __________________

specified future date

A negotiable instrument can function as a _______________ for cash or as an extension of credit.

substitute -checks -promissory notes

For an instrument to be negotiable, it must be signed by:

the maker if it is a note or a certificate of deposit or the drawer if it is a draft or a check The location of the signature on the document is unimportant, although the usual place is the lower right-hand corner

A special indorsement contains...

the signature of the indorser and identifies the person to whom the indorser intends to make the instrument payable—that is, it names the indorsee