Module 5- Negotiable Instruments - Transferability & Holders In Due Corse

HDC: DEFECTS

Overdue Instruments The instrument is part of a series of which at least one part has an uncured default. The instrument bears an unauthorized signature or has been altered. The instrument is so facially incomplete as to lack one or more elements required for negotiability. A facial irregularity calls into doubt the instrument's validity or ownership or creates ambiguity about who to pay.

Timeliness

(1) A time instrument must be presented for acceptance on or before its due date and for payment on its due date; (2) A demand instrument must be presented for acceptance or payment within a reasonable time after its issue; and (3) A check must be presented for payment within 30 days of its date or the date it was indorsed

negotiable instrument

(1) written instrument, (2) signed by the maker or drawer of the instrument, (3) setting forth the signer's unconditional promise or order to pay (4) a fixed amount of money (with or without interest in a specified amount or at a specified rate) (5) on demand or at an exact future time (6) to a specific person, or to order, or to the instrument's bearer

Who must sign?

(a) The maker (b) The drawer

Trust Endorsement

(a.k.a. "agency indorsement"): An indorsement to a person who is to hold or use the funds for the benefit of the indorser or a third party.

Presentment Warranties

3 implied warranties that a person who presents a draft or check for payment

Secondary Liability

A contingent requirement to pay a negotiable instrument upon dishonor or the failure to pay or accept by the party primarily liable for the instrument.

Trade Acceptance

A draft drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a specified future time. The buyer accepts the draft by signing and returning it to the seller.

Sight Draft

A draft payable on sight when the holder presents it for payment.

Acceptance

A drawee's written promise to pay the draft when due or on presentment. A drawee that has so bound itself is an acceptor.

Holder in Due Course HDC

A holder who (1) acquires a negotiable instrument for value, (2) in good faith, and (3) without notice that the instrument

Written Form

A negotiable instrument must be written on material that (1) lends itself to permanence and (2) is portable.

Promise or Order

A negotiable instrument must contain an express order or promise to pay.

Bearer Instrument

A negotiable instrument payable "to bearer" or to "cash," rather than to an identified payee.

Certificate of Deposit

A note by which a bank or similar financial institution acknowledges receiving money from a party and promises to repay the money, plus interest, to the party or the party's designee, on a certain date.

Dishonor:

A party to whom the instrument was properly presented refused to pay it.

Fictitious Payee

A payee whom the maker or drawer does not intend to have an interest in the instrument.

Holder

A person possessing an instrument drawn, issued, or indorsed to her, to her order, to bearer, or in blank.

Shelter Principle

A person who does not qualify as an HDC can, nonetheless, acquire the rights and privileges of an HDC if he derives his title to the instrument through an HDC.

Fraud in the Execution

A person whose signature is obtained through fraud or deception is generally not liable unless reasonable inquiry (in light of, among other things, the signer's age, experience, and intelligence) would have revealed to the signer the nature and terms of the instrument

Unconditionality of Promise or Order

A promise or order is conditional (and, therefore, not negotiable) if it states (1) an express condition to payment, (2) that the promise or order is subject to or governed by another writing, or (3) that the rights or obligations with respect to the promise or order are stated in another writing.

Time Draft

A promise to pay by the accepting party at some future date

Indorsement

A signature, with or without additional words (e.g., "for deposit only," "payable to Jane White," "payable from acct. # 000001," etc.), made by the indorser in order to transfer her rights to the indorsee.

Promissory Note

A written promise made by one person (the maker) to pay a fixed sum of money to another person (the payee) on demand or at a specified future time.

Acceleration Clause

Allows the lender to demand immediate payment of the entire loan if the borrower defaults

Good Faith

An HDC must acquire an instrument honestly and in a manner consistent with "reasonable commercial standards for fair dealing."

Primary Liability

An absolute requirement, subject to one or more valid defenses, to pay a negotiable instrument upon presentment.

Material Alteration

An alteration that changes the terms of the instrument between any two parties in any way (e.g., adding words or numbers).

Fixed Amount

An amount (including interest, if any) ascertainable from the face of the instrument - with or without reference to some outside source of information identified on the face of the instrument

Restrictive Endorsement

An endorsement that limits the use of a check

Special indorsement

An indorsement that indicates the specific indorsee to whom the indorser intends to make the instrument payable (e.g., "pay to the order of X").

Conditional Endorsement

An indorsement that makes payment of the instrument dependent on the occurrence of some event specified in the indorsement. *Payment is conditional upon the happening of an event

Endorsement for Deposit or Collection

An indorsement that makes the indorsee a collecting agent of the indorser, prohibiting further negotiation except by a bank or financial institution engaged in collection activities.

Blank Indorsement

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

Qualified Indorsement

An indorsement which disclaims any contract liability on the instrument (e.g., "without recourse").

Dishonor

An instrument is dishonored when the required acceptance or payment is refused by or cannot be obtained from the primarily liable party within the prescribed time.

Payment at a Definite Time

An instrument is payable at a definite time if it states that it is payable (1) on a specified date, (2) within a definite period of time, or (3) on a date or at a time readily ascertainable at the time the promise or order is made.

Payment on Demand

An instrument is payable on demand, "at sight," or "upon presentment" if it is subject to payment immediately upon being presented to the payor or drawee.

Method

An instrument may be properly presented (1) by any commercially reasonable means, (2) through a clearinghouse used by banks, or (3) at the place specified in the instrument.

Payable in the Alternative

An instrument payable to two or more persons in the alternative (e.g., "Pay to Bob OR Jill") requires the indorsement of only one of the payees.

Draft

An unconditional order by which the party creating the draft (the drawer) orders another party (the drawee), typically a bank, to pay money to a third party (the payee).

Illegality

Any illegal act which would render a contract void under state law is an absolute defense against the claims of any holder, including HDCs

Mental Incapacity

Any instrument made or issued by a person previously adjudged to be mentally incompetent is void ab initio and, therefore, unenforceable by any holder, including an HDC.

Extreme Duress

Any instrument signed and issued under immediate threat of force or violence is void and unenforceable by any holder, including an HDC.

Transfer Warranties

Any person who transfers an instrument for consideration impliedly warrants to subsequent transferees and holders who take the instrument in good faith that

Signature

Any symbol (1) made manually or by means of a device or machine, (2) using any name, including a trade or assumed name, word, mark, or symbol (3) the signer executes or adopts with a present intention to authenticate a writing.

Misspelled Name

As a general rule, an indorsement should be identical to the name appearing on the instrument. However, when the indorser's name is misspelled on the instrument, she may indorse it (1) as it (incorrectly) appears, (2) as it should (correctly) appear, or (3) both.

Unauthorized Signature

As a general rule, unauthorized signatures are wholly inoperative and will not bind the person whose name is forged. However, an unauthorized signature will bind the person whose name is forged if (1) that person ratifies, or affirms, the obligation, or (2) that person's own negligence substantially contributed to the forgery.

Discharge in Bankruptcy

Discharge is an absolute defense against the claims of any holder, including an HDC.

Forgery

Forgery of a maker's or drawer's signature cannot bind the person whose name is used unless that person ratifies the signature or is precluded from denying it (e.g., because the forgery was made possible by the maker's negligence). *the act of making a fake document or altering a real one with the intent to commit fraud

Claims or Defenses

Knowledge of claims or defenses may be imputed to the holder if they are apparent on the face of the instrument or if the holder otherwise had reason to know them from the facts surrounding her purchase of it.

Minority

Minority is a defense to liability on an instrument to the same extent that it is a defense to contract liability.

Jointly Payable

On the other hand, an instrument payable to two or more persons jointly (e.g., "Pay to Bob AND Jill") requires the indorsement of both of the payees.

Proper Notice

Once an instrument has been dishonored, secondary parties must be notified

Imposter

One who, by use of the mails, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of the imposter. Indorsements by imposters are not treated as being unauthorized.

Order Instrument

Payable to: the order of an identified person, and an identified person or order.

Requirements for HDC Status

Taking for Value Performed the promise Acquired a security interest or other lien Taken the instrument in payment of a preexisting claim Given a negotiable instrument as payment Given an irrevocable commitment as payment

Payable in Money

The amount due must be payable in "a medium of exchange authorized or adopted by a domestic or foreign government as part of its currency."

Unauthorized Endorsement

The first party to accept an instrument bearing an unauthorized indorsement will bear the burden of loss, unless the unauthorized indorsement is that of the payee, in which case the loss falls on the drawer/maker.

HDC: NOTICE

The holder has notice of a defect whenever she (1) has actual knowledge of the defect, (2) received notice of the defect (3) has reason to know that a defect exists, given all of the facts and circumstances known to her at the time.

Proper Party

The party to whom presentment must be made depends on the type of instrument involved: (1) a note or CD must be presented to the maker; whereas (2) a draft or check must be presented to the drawee.

Negotiating Order Instruments

The payee may negotiate an order instrument to a third party by an indorsement by the payee in favor of the third party.

Converting Instruments

The proper method of negotiation depends on the nature of the instrument at the time of negotiation. Thus, an order instrument can be converted into a bearer instrument by, e.g., indorsing the instrument in blank. Likewise, a bearer instrument can be converted into an order instrument by, e.g., indorsing it in such a way as to identify a particular payee.

Negotiation

Transfer of an instrument in such a form that the transferee becomes a holder, who has at least the same rights in the instrument as the transferor, and may have more rights than the transferor

FACTORS NOT AFFECTING NEGOTIABILITY

Undated Antedating or postdating Handwritten, typewritten, printed terms Words outweigh figures "with interest" Notation of "nonnegotiable"

Assignment

Under general contract principles, a negotiable instrument may be transferred to an assignee, which then holds the instrument with all the rights of the assignor.

Negotiating Bearer Instruments

Unlike an order instrument, a bearer instrument need not be indorsed to transfer the payee's rights to the transferee. All that is required is delivery to the new bearer.

time instruments

Wait for it to mature, promissory notes Payable at a future date

Bearer

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

Extension Clause

allows the date of maturity of the instrument to be extended to sometime in the future

Universal Defenses

are valid against all holders, including HDCs and holders through HDCs

A time instrument

is overdue after the due date shown

A demand instrument

is overdue if an unreasonable length of time has passed after its issue.

A series of notes

with successive maturity dates is overdue when any note in the series is overdue.