Commercial Paper
Special or Blank Indorsement
Must be one or the other. Special: - Names a particular person as indorsee (who then must sign in order for the instrument to be further negotiated). - Does NOT require words of negotiability (i.e. to order or bearer); can simply say "Pay to John Smith." - e.g. D writes a check to P, who signs the back "Pay to M, /s/ P". Special indorsement, so the instrument remains order paper. If it then flies out the window and is recovered by F, F cannot qualify as holder. Blank: - Signature of an indorser that is not accompanied by the naming of a specific indorsee. - *Creates bearer paper, which may then be negotiated by delivery alone.* - e.g. you indorse the back of your own paycheck when you deposit it in your bank account. - e.g. D writes a check to P, who signs the back "/s/ P". Blank indorsement by P, so the instrument is bearer paper. If the check blows out the window and is recovered by F, F is a holder simply by possession. Forgery - Forging a name not necessary to the chain of title will not keep later takers from becoming holders - Forgery of the drawer's name does not break the chain of title, because it operates as the genuine signature of the forger. Multiple Endorsements - if the instrument has been indorsed multiple times, some blank, some special - the last indorsement controls in determining whether it is bearer paper or order paper.
Definition of "Without Notice of Claims/Defenses"
Notice includes both actual notice and reason to know. To be effective, notice must be received in such time and manner as to give a reasonable opportunity to act on it. Facts constituting Notice: - instrument is overdue (i.e. any part of the principal is overdue, an acceleration has been made, or more than a reasonable time has elapsed after issue, e.g. 90 days). - Alterations or unauthorized signatures - Claims to the instrument - Defenses or claims in recoupment by obligor Facts NOT constituting Notice: - instrument is antedated, postdated, or undated - instrument was issued in return for executory promise - any party signed for accommodation - an incomplete instrument has been completed - there has been default in payment of interest - instrument was sold at discount
Liability of Maker of Note/Issuer of Cashier's Check
By signing her name, maker of note (or issuer of cashier's check) makes a contract to pay the instrument according to its terms at the time it is issued.
Depositary Bank - definition
a bank in which an instrument is first deposited; not necessarily the bank where the money is to ultimately come from.
Definition of "No Other Undertaking or Instruction"
- cannot be burdened with anything other than simple, clean, unconditional, promise or order. No additional promises, undertakings, or instructions. ALLOWABLE UNDERTAKINGS/INSTRUCTIONS Per the UCC, the following will not destroy negotiability: - an undertaking or power to give, maintain or protect collateral to secure payment. - an authorization or power to the holder to confess judgment or realize on or dispose of collateral - a waiver of the benefit of any law intended for the advantage or protection of the obligor - promise to pay costs of collection and attorney's fees
Trial - Who may enforce an instrument?
1. Holder 2. Nonholder in possession with rights of a holder 3. person not in possession but entitled to enforce (e.g. stolen instrument)
Negotiation of Bearer Paper
A negotiable instrument that is issued as bearer paper or subsequently converted into bearer paper is negotiated simply by *transferring possession* of the instrument. Once the transferee has possession, she technically qualifies as a holder.
Holder - definition
A person in possession of an instrument with a right to enforce it. Holder status depends on whether the instrument is bearer paper or order paper.
Shelter Rule
A transferee acquires whatever rights her transferor had and thus is said to take shelter in the status of her transferor. Thus, once a person qualifies as an HDC, all subsequent transferees will acquire those rights. Protects the free negotiability of commercial paper. Exception: parties to fraud or illegality affecting the instrument cannot take shelter in transferor's HDC status
Liability of Accommodation Party
Accommodation party signs an instrument to lend his credit to another party to the instrument and receives no direct benefit. He is a surety. Can sign in any capacity (e.g. as a co-maker or an indorser) NEVER liable to the party accommodated; but the party accommodated is liable to the accommodator if the accommodator paid the instrument. IS liable to other parties in the capacity in which he signed. - If signed as Guarantor of Collection ("collection guaranteed" written when he signed), will be liable only if the person entitled to enforce has reduced his claim to judgment and execution is returned unsatisfied, or seeking judgment would be futile. Can raise any defense available to the party accommodated other than incapacity/discharge in bankruptcy
Defenses on Negotiable Instruments
An HDC can enforce an instrument subject only to real defenses; he takes free of personal defenses and claims. Whether an obligated party such as a maker, drawer, or indorser will be forced to pay depends on whether the holder is an HDC and on what defenses the obligated party has. If the holder is not an HDC, obligated party can assert both Real Defenses and Personal Defenses. If the holder is an HDC, obligated party can assert only Real Defenses.
Alteration
An alteration is an unauthorized change that purports to modify the obligation of any party. If it is made nonfraudulently, parties are not discharged and the instrument may be enforced according to its original terms. If it is made fraudulently, it discharges all parties except a payor bank, a drawee paying fraudulently altered instrument, or an HDC may enforce it according to its original terms or in the case of unauthorized completion, according to the completed terms.
Negotiation of Order Paper
An instrument that is payable to an identified person is negotiated by *transferring possession* of the instrument, along with the *endorsement of the identified person*. Endorsement: - The right to enforce an order instrument will not pass unless the payee's endorsement is authorized and valid. - Must have all necessary signatures of all payees and special endorsees. - Generally, forging payee's name breaks the chain of title and no subsequent possessors of the instrument can qualify as holders. - But, a signature is effective even if made by incapacitated payee or obtained through duress, fraud, illegality. - If instrument is made payable to more than one payee connected by "and" ("Payable to the order of A and B"), it must be endorsed by all payees to make subsequent negotiation effective. But if they are separate by "or", either one can effectively negotiate. - If an order instrument is transferred without endorsement or with an endorsement missing, it may be effective to transfer possession but it does not constitute negotiation until endorsement is made. Transferee of Order Instrument Without Endorsement - does not have the status of holder - cannot become an HDC - cannot negotiate the instrument - Remedies: can sue to compel endorsement if he paid value for the instrument; can sue to enforce instrument if it is due even though it lack endorsement (would have to prove his ownership though).
Definition of "Value"
Any one of the following constitutes value sufficient to meet the HDC requirement that the holder take for value: - Performance of agreed consideration - Acquisition by the holder of a lien/security interest in the instrument - Taking the instrument as payment of/security for a debt - Trading a negotiable instrument for the other instrument - giving the instrument in exchange for incurring an irrevocable obligation to a third person by the person taking the instrument. Partial: If you pay partial (less than agreed upon) value, you become a partial HDC in proportion to the percentage paid. Discount: if you pay the agreed upon value, it does not matter that it is less than the face value of the instrument. If you agree with the holder to pay $5k for an instrument worth $6k, you are the HDC as to that full amount of $6k. NOT: - an executory promise - does not have to be equal to the face amount of the instrument
Personal Defenses
Cannot be asserted against HDC; only a transferee of a negotiable instrument without HDC rights. Includes every defense available in simple contract actions; This INCLUDES improper formation of contract, breach of warranty, fraud in the inducement, etc. Remember to defer to contract principles if stuck on exam. Must assert one's own defenses, except for under the Payment Rule: - the liability to pay is discharged by payment to a person entitled to enforce the instrument, unless another person has an enforceable claim and: (a) payment is made with knowledge that it is prohibited by an injunction (b) the paying party has received indemnity from a person with a claim to the instrument for refusal to pay the person entitled to enforce, or (c) the paying party knows the instrument is stolen and that the person paid is in wrongful possession
Who cannot be HDC?
Cannot become an HDC of an instrument taken by legal process or purchase at a judicial sale, acquiring it as a successor in interest to an estate, or purchasing as part of a bulk transaction not in regular course of business. on the bar, assume that the payee is not an HDC. They are involved in the underlying transaction so they're subject to the other party's defenses.
Certificate of Deposit
Def: Acknowledgment by a bank that a sum of money has been received, and a promise by the bank that they will repay that sum of money. Can be viewed as the bank's promissory "notes" to its account holders, in that it is a two-party instrument.
Drafts
Def: a three-party instrument written and signed by one person ("Drawer") to another person ("Drawee") demanding that the drawee pay money to a third person ("Payee" or "Bearer") = an ORDER TO PAY. AKA "Bill of Exchange" Examples: - Checks: an instrument where (1) drawee is your bank and (2) it is payable on demand. It's an order to your bank to pay the payee out of your bank account. Even if an instrument is described on its face as something else, it will be deemed a check if it meets these two elements. - Money Orders - Traveler's Checks
Note
Def: a two-party instrument, containing a written and signed promise by one party ("Maker") to pay money to another party ("Payee" or "Bearer")= a PROMISE TO PAY.
Negotiation - definition
Def: the process for transferring a negotiable instrument from one party to another. What is needed to transfer depends on whether the instrument is bearer paper or order paper.
Presentment Warranties on Unaccepted Draft
Drawee (e.g. bank) can recover for breach of presentment warranty even from HDC. On unaccepted drafts, persons obtaining payment and previous transferors warrant that: 1. he is entitled to enforce the draft, or is authorized by one who is 2. the draft has not been altered 3. the warrantor has no knowledge that the drawer's signature is unauthorized.
Liability of Drawee
Drawee of a draft cannot have any liability unless and until she signs the instrument and thus becomes an acceptor. Thus, holder generally can NOT force a drawee to pay out on a draft. If drawee is a bank, may have contractual liability to customer for failure to accept draft (e.g. wrongful dishonor of check). Bank must honor the check as it is drawn, so it cannot charge the account/must recredit: - where drawer's signature is forged - where third party altered the amount - if bank pays the wrong person (e.g. forger of signature) - if the item is postdated and the customer notifies the bank of the postdating. Customer is liable to bank for negligently failing to discover and notify the bank of any unauthorized payments on his bank statement resulting from alterations or forgeries. Death of customer - bank still has authority to pay checks of his until they know of the death and have a reasonable time to act on it. Even then, may pay them up to 10 days after the date of death. Stop Payment Orders: 1. Types - Oral Stop Payment Order: effective for 14 days then lapses unless confirmed in writing in that period. - Written Stop Payment Order: effective for 6 months. 2. Must give bank reasonable time to act 3. if bank pays an item in spite of order, customer has burden of proving that a loss has occurred and the amount
Liabilities of Parties
EXAM ANALYSIS ON LIABILITY: 1. Identify the status of each party 2. Discuss each party's liability RULE: Generally, no one may be held liable unless her signature or the signature of an authorized representative is on the instrument. Parties who May be Liable: 1. Maker of Note/Issuer of Cashier's Check 2. Indorser - Secondarily Liable 3. Transferor 4. Drawer - Secondarily Liable 5. Drawee 6. Acceptor 7. Accommodation Parties
Types of Indorsements
Every indorsement must be either (1) special or blank, (2) qualified or unqualified, and (3) restrictive or unrestrictive.
Definition of "Fixed Amount of Money"
Fixed Amount - The principal amount due under the instrument must be fixed. - Interest does not need to be fixed; won't be due unless the instrument provides for the payment of interest (can provide for set amount or generally by stating "with interest", and court will set judgment rate). Of Money: - Must be any medium of exchange authorized or adopted by a government. Thus, foreign money is okay, as long as the US recognizes the currency (i.e. will exchange it) - Cannot be items, goods, etc.
Effect of Unauthorized Signatures
Generally, unauthorized signature is ineffective as the signature of the person whose name is signed but is effective as the signature of the signer. That signer thus assumes all obligations to any party who gave value for the instrument. But, five circumstances where the person whose name is used has done something to preclude her from raising the issue (i.e. the signature is validated as hers). The overarching theme is that they should have exercised ORDINARY CARE: 1. Fictitious Payee: carelessness of maker/drawer, i.e. gives it to an imposter, makes it out to someone who doesn't exist/who she doesn't intend to actually pay (e.g. you got duped into doing it). 2. Fraudulent Indorsements by Employees: employer entrusts employee with responsibility for instrument and the employee fraudulently indorses. 3. Failure to Exercise Ordinary Care - Negligence Rule: i.e. leaving blank spaces on instrument, mailing it to someone with the same name as payee, failing to follow procedures to avoid forgery. 4. Bank Statement Rule: Customer has duty to examine his bank statement to find forgeries/alterations, then promptly report any discrepancies (one year limit) 5. Estoppel by Certification: bank has opportunity for checking ID and bona fides when it certifies a check, so it is estopped from claiming the named payee was not the original payee as against subsequent parties.
Holder in Due Course
If a negotiable instrument is negotiated to an HDC, the HDC takes free of most defenses. HDC status is determined at the moment the instrument is negotiated to the holder or when she gives value, whichever occurs later. Two Step Analysis: 1. Must be a holder - def: a person in possession of an instrument with the right to enforce it. Instrument must be payable to bearer (bearer paper) or to the person in possession (order paper) and free of forgery. 2. Must hold in due course - The holder took possession (1) for value, (2) in good faith, and (3) without notice of any claims against or defenses to the instrument.
Trial - Burden of Proof
If plaintiff proves prima facie case, she is entitled to payment unless defendant raises defense or claim. If the defendant raises defense or claim, plaintiff can cut off their rights by establishing her HDC status. Prima Facie Case: 1. Signatures are genuine - Presumption of Validity of signature; must be rebutted 2. Person presenting the instrument is entitled to enforce it.
Liability of Indorser
Indorser's Contract: the basic obligation to pay according to the terms of the instrument at the time of the indorsement. Arises merely from indorser's signing of her name on the instrument (although, can negate if she also writes "without recourse"). Secondary Liability: a person entitled to enforce the instrument must look first to the drawee or maker. Requirements to go after Indorser: 1. Presentment: - demand for payment made by person entitled to enforce; usually upon the drawee or maker. - Excused if the personal entitled to present cannot with reasonable diligence do so; maker has repudiated the obligation or is dead/insolvent; instrument's terms make presentment unnecessary; OR drawer instructed drawee not to pay/drawee was not obligated to pay. 2. Dishonor: - Occurs when the maker or drawee does not pay within the allowed time after presentment. - Demand instruments are dishonored if not paid on date presented. - Time instruments are dishonored if not paid on the date they become payable or on the date of presentment, whichever is later. - Checks are dishonored if presented for other than immediate payment and bank returns the check OR send written notice that it is dishonoring before final payment or the bank's midnight deadline (usually next business day) 3. Notice of Dishonor: - Must give indorser timely notice that the instrument has been dishonored; generally 30 days. - If multiple indorsers, any one of them is liable for the amount that existed when they indorsed. - Do NOT need to give notice of dishonor to maker or drawer.
Payment - When can maker pay?
Maker must first determine that party is a holder; if she is, maker can pay her, even if he knows of a third party claim on the instrument. If maker pays a non-holder, he also has to pay the true holder whenever he shows up. Maker may not pay the holder if he knows the holder acquired the instrument by theft or got it from another holder who acquired it by theft. But if the holder is an HDC, maker may pay him.
Real Defenses
May be asserted against any transferee of a questioned instrument, regardless of HDC status. "FFAAIIDDSS" 1. [F]orgery of the signature of the payee or any special indorsee (unless that person ratifies it or is estopped from denying it). 2. [F]raud in the Factum (Real Fraud) - fraud that causes obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms 3. [A]lteration of Instrument's existing terms (amt. due) - compare to Unauthorized Completion (filling in blanks left by maker or drawer), where maker will be liable. 4. [A]djudicated Incompetent/Incapacity to Contract - party lacks capacity to contract and the contract is thus rendered void. If contract is only voidable at the option of the incompetent, incompetency is a personal defense. 5. [I]nfancy, if state makes it defense in simple contract 6. [I]llegality in the underlying transaction, if it renders the obligation void (not voidable; thats a personal defense) 7. [D]uress 8. [D]ischarges, either in Insolvency Proceedings or any others known to HDC - if person's estate is liquidated or rehabilitated through bankruptcy, all their debts are dissolved and that instrument is included. 9. [S]tatute of Limitations - Three Years (unaccepted drafts, against issuers/acceptors of cashier's checks, certified checks, conversion, breach of warranty) - Six Years (note payable at a definite time or on demand, certificates of deposit) 10. [S]uretyship (Accommodation) - by signing instrument, accommodation party incurs liability without being a direct beneficiary. If HDC knows of it, he takes subject to that party's defenses
Presentment Warranties on Other Instruments or Items
Only that he is entitled to enforce
Finality of Payment - Recovery for Instruments Mistakenly Paid or Accepted
Payment of a negotiable instrument is final, except: - payor can pursue those who breach transfer/presentment warranties - the rule of finality operates only in favor of persons who took for value and in good faith, or who changed their position in good faith reliance on the instrument. If the person is not one of those, then action to recover payment can be maintained
Liability of Principal for Agent's Signature
Principal liable if agent signs his own name or the principal's name with principal's authority, OR (if no authority) principal ratifies the signature or is estopped from denying it. the agent is only liable if he signs his own name and does not show it was in a representative capacity/does not identify the principal. Only applies to HDCs who take without notice of such principal.
Definition of "Promise to Pay" or "Order to Pay"
Promise to Pay = Note - IOU does not count; that's just an acknowledgement of a debt, not a promise to actually pay it. Order to Pay = Draft - e.g. on checks it says "Pay to the order of" - NOT "I wish you would pay"
Qualified or Unqualified Indorsement
Qualified = an indorsement that adds the words "without recourse". It limits the legal liability otherwise imposed on indorsers under the UCC.
Restrictive or Unrestrictive Indorsement
Restrictive = Any other language added to an indorsement - whether special/blank or qualified/unqualified. An indorsement that does any of the following is ineffective to actually do those things: 1. Limit transfer, negotiation, or payment to a particular person, 2. States a condition to payment If the endorsement includes words that indicate the purpose of having the instrument collected by a bank for the indorser (e.g. "for deposit" or "for collection"), a person or depositary bank (i.e. a bank in which an instrument is first deposited) must pay the instrument consistently with that instruction or they will be deemed to have converted the instrument illegally.
Negotiability by Declaration
Rule: A writing CANNOT be made a negotiable instrument by agreement, declaration, contract, or conduct of the parties. MUST meet the negotiability requirements. Exception: a negotiable instrument can be made non-negotiable by declaring on the instrument that it is "not negotiable".
Definition of "Made Payable to Order or to Bearer"
Rule: Instrument must be payable to either (1) order or (2) bearer. Exception: a check does not have to contain either (though it usually contains such language). Order Paper: payable only to 'the order of an identified person', or 'to an identified person or his order'. - e.g. "Pay to the order of John Smith."; "Pay John Smith or his Order." Bearer Paper: payable to anyone legitimately possessing the instrument. Payable to bearer if it: - States that it is payable 'to bearer', 'to order of bearer', 'to order or bearer', 'to order and bearer' or otherwise indicates that the person in possession of the promise or order is entitled to payment. - Does not state a payee (e.g. "Pay to the order of ____.") - State that it is payable 'to cash' or otherwise indicates that it is not payable to an identified person (e.g. "I promise to pay to the order of Merry Christmas.") Identification of Payee: - The person to whom the instrument is payable is governed by the intent of the person signing as or on behalf of the issuer (maker or drawer). - If more than one person issues the instrument, any person intended by any signer may properly be paid.
Definition of "Payable on Demand or at a Definite Time"
Rule: a holder of an instrument must be able to tell when it comes due. Must be payable either: 1. On Demand (a) state that it is payable 'on demand' or 'at sight' or otherwise indicates it is payable at the will of the holder, OR (b) does not state a time for payment. 2. Definite Time (a) on a fixed date (b) on elapse of a specified period or time after sight or acceptance, OR (c) at some time readily ascertainable at the time it is issued. YES: - an undated instrument that specifies no time for payment is treated as an instrument payable on demand by the holder. E.g., a post-dated check. - acceleration clauses NO: - "Payable upon dissolution of the corporation."
Definition of "Unconditional"
Rule: purchaser must be able to tell what he is getting merely be examining the document. An instrument is "conditional" and is therefore non-negotiable if it: (a) Expressly states a condition to payment (b) States that the promise or order is subject to or governed by another writing. NOT Conditional: - Mere reference to the fact that the promise or order arises out of a separate writing or agreement. (e.g. "I promise to pay $100 to X as down payment for the car I agreed to purchase today.") - Reference to another writing for a statement of rights regarding collateral, prepayment, or acceleration. - Limitation of payment to a particular source or fund - Requirement as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (e.g. on traveler's checks) - Contains a statement required by law that the holder is subject to claims or defenses of the original payee.
Liability of Drawer
Secondarily liable generally, if draft is dishonored, the drawer is obliged to pay according to the draft's terms when the drawer signed it. But, if a draft is accepted by a bank, the drawer is discharged and cannot be held liable if the bank fails to pay.
Liability of Acceptor
Signs a draft and thereby becomes primarily bound to pay the instrument. Presentment for Acceptance: Draft is usually presented to the acceptor, which signs the draft (and usually charges customer's account at that time) and returns it to the presenting party. May be sought at any time by any party entitled to enforce the instrument Certification of a check: the acceptance of a check by the bank on which it was drawn, discharging the drawer and all prior indorsers. Bank does not have to certify a check absent some special agreement with customer. But if it chooses to do so, it puts its own credit on the line.
Applicable law
UCC Article 3 Purpose: to provide a safe alternative for cash. Rule: if an instrument is in a special form ("negotiable") and is transferred in a special way ("negotiated") to a person who takes it for value, in good faith, and without notice of any defenses to or claims on the instrument ("holder in due course") the person will be able to enforce the instrument subject to very few defenses. "Commercial Paper" = "Instruments" Two Kinds of Instruments Covered: 1. Notes - e.g. Certificates of Deposit 2. Drafts - e.g. Checks UCC Article 4 Covers rules for banks and customers in check collection process
Transferor Liability
Warranties are made by any person who transfers an instrument, or by any customer or collecting bank that transfers an item for consideration. Transfer by indorsement = warranty runs to all subsequent holders Transfer not by indorsement = warranty runs only to immediate transferee A transferor can place words on the instrument to negate warranty liability. A transferor who transfers gratuitously warranties NOTHING; only transfers for consideration create transferor warranties. The General Transferor Warrants that: 1. She is entitled to enforce the instrument or item 2. all signatures are authentic and authorized 3. the instrument or item has not been altered 4. no defense or claim of any party is good against her 5. she has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer ["THE TRANSFER WARRANTIES"] **NOTE: can be a transferor AND indorser at the same time, so discuss both if necessary. (1- presentment, dishonor, notice of dishonor. 2- warranties)
Presentment Warranties
When person presents an instrument for payment, he makes certain warranties: 1. Presentment Warranties on Unaccepted Draft 2. Presentment Warranties on Other Instruments/Items
Transfer Warranties
When person presents instrument for payment, she warranties that: 1. She is entitled to enforce the instrument or item 2. all signatures are authentic and authorized 3. the instrument or item has not been altered 4. no defense or claim of any party is good against her 5. she has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer
Negotiability
Whether an instrument is negotiable depends on its form. Requirements: 1. Writing 2. Signed by Maker or Drawer 3. Unconditional 4. Promise to Pay or Order to Pay 5. Fixed Amount of Money, that: (a) is Payable to Order or to Bearer (b) is Payable on Demand or at a Definite Time (c) does not state any Unauthorized Undertaking or Instruction by the person promising or ordering payment.
Definition of "Signed"
any symbol executed or adopted by a party with a present intention to authenticate a writing. The key is whether the party INTENDED for that symbol to operate as a signature. Can be printed, stamped, written; initials, thumbprint; trade name or assumed name; appear anywhere on doc, not just at bottom.
Definition of "Writing"
can be on any surface: paper, tshirt, napkin, ceramic plate. CANNOT be an electronic form.
Liability of Joint Signers
if parties to an instrument sign jointly, they have joint and several liability (either one or both can be sued for entire amount due). Can get contribution from one another.
Anomalous Indorsement
indorsement made by a person who is not a holder of the instrument. that person is called the anomalous indorser and he becomes liable on the instrument.
Definition of "Good Faith"
to be an HDC, holder must take with honesty in fact (subjective) and observance of reasonable commercial standards (objective).
