Negotiable Instruments Michigan Bar 2016

Restrictive Endorsements

A limit on payment to a particular person or otherwise prohibiting further transfer or negotiation, will not prevent further transfer or negotiation of the instrument. Code says illegal transfer restraint on alienation.

Draft

A three party instrument, in which the drawer orders the drawee (or payor) to pay the payee a sum of money. i.e. a check.

Umbrella or Shelter Doctrine: Non-holders in possession

A transferee of an instrument obtains any right of the transferor to enforce it, including a right as an HDC, except that a transferee who engaged in fraud or illegality.

Signed requirement for negotiable instruments.

Can be manually, mechanically, any use of a symbol. Writing the name of another person without authority, is a forgery. but constitutes signature of the forger.

Anomalous Endorsement

Extraneous to the chain of title and has no effect on the manner in which the instrument may be negotiated. However, may create liability on the instrument for the endorser. i.e. rich uncle signs and endorses check as well.

This converts a blank endorsement into a special endorsement

Holder has a blank endorsement that consists only of a signature. Can write above signature of the endorser, words identifying the person to whom the instrument is payable.

Taking instrument in Good Faith

Honesty in fact and the observance of reasonable commercial standards of fair dealing. Holder must have taken it without actual knowledge, or reason to know of some defect.

HDC status in actions to enforce an instrument

If a defense or claim in recoupment to the obligation sued upon is proved, the burden shifts to P to establish HDC status.

Rescission for Illegality or Incapacity

If a minor other incapacitated person negotiates an instrument, it is effective to transfer the instrument notwithstanding the incapacity. The minor may still rescind if appropriate, but can't rescind as to a subsequent holder in due course.

Signing an incomplete instrument

If the issuer signed an incomplete instrument, he is obliged to pay the instrument according to its terms. i.e. I promise to pay __ dollars to P.

Ambiguous for multiple payees on an instrument

Instrument is then interpreted to be payable to the persons alternatively. i.e. Jim and/or Bob.

What overdue means

Instrument on its face has a due date in the past, or it is installment- payment schedule in the installment is overdue.

Notice of dishonor

Must be given to all the relevant parties, once the instrument is dishonored.

Presentment Warranties

Person who presents and obtains payment on a draft warrants to the drawee that 1. the warrantor is a person entitled to enforce the draft; 2. the draft has not been altered; 3. he has no knowledge the signature of the drawer is unauthorized.

Forged Necessary Endorsement of an instrument

Prevents the possessor of an instrument from being a holder. Breaks the chain of title, and cuts it off. Exceptions: fictitious payee, imposter rules.

Interest on a negotiable instrument

i.e. promise to pay $10k plus 3% interest. This is fine, as long as interest is fixed.

Not unconditional example for negotiable instruments

i.e. promises to pay Jim subject to terms of K dated in 2010, or subject to terms of a will. **However, mere reference to another writing and reason for payment is fine. Question is whether it requires us to read the other writing. i.e. "I promise to pay $100 as required by our K for service" is fine.

Contains no undertaking or instruction: EXCEPTIONS

1. An undertaking or power to maintain or protect collateral to secure payment; 2. Authorization or power to confess judgment; 3. Promise or provision waiving benefit of any law intended for the obligor's protection.

Instrument payable to bearer (bearer paper)

1. Can state payable to bearer; 2. Doesn't state a payee. 3. States it is payable to cash. 4. Indicates it's not payable to an identifiable person. 5. Instrument is payable to order.

Signatures of negotiable instruments

A person is not liable on an instrument, unless they signed it or represented by an agent who signed it in such a manner to bind the person.

Lost or stolen instrument rule

Another type of non-holder who may enforce an instrument is a person, who is not in possession of an instrument enforcing a lost or stolen instrument.

Validity of Signatures

Burden is initially on P. Authenticity and authority to make each signature on an instrument is admitted unless specifically denied in the pleadings.

Careless representative liability

If a rep signs her name to an instrument, and it is an authorized signature, then the rep will be held liable on the instrument to a third party holding it in due course UNLESS the form of the signature unambiguously shows it is made in a representative capacity and clearly identifies the represented person.

Defenses or Claims in Recoupment

If the validity of signatures is admitted or proved and the plaintiff proves that he is entitled to seek enforcement of the instrument, then burden shifts to D to prove a defense or claim in recoupment.

Liability of the Drawee of a draft

Initially has no liability to the payee or subsequent holder. Only if the bank chooses to accept or certify the check, will they become primarily liable. i.e. certified check, bank stamps it.

If instrument is payable to bearer

It's a bearer instrument and may be negotiated by transfer of possession alone.

Negotiation (MI)

Means a voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to person who thereby becomes its holder.

Holder

Primary type of person who can enforce a negotiable instrument. In possession of an instrument drawn, issued or endorsed to him, his order or bearer or in blank. Has both possession and rights to the instrument.

Reserving write to prepay etc doesn't make writing conditional

Reference to another writing which states rights with respect to collateral, prepayment or acceleration. Doesn't make a writing conditional.

When works or numbers are added to an incomplete instrument without authority of the signor

Then an alteration has occurred.

Imposter Rule

When a person impersonates and induces the drawer or maker to issue an instrument to them payable to the name of an impersonated person, an endorsement by anyone in the name of the payee is effective in favor of a person who, in GF, pays the instrument or takes it for value or for collection.

Unauthorized signatures on an instrument

When a person signs someone else's name without authority, the signature does not operate as the signature of the person whose name was signed- but does operate as the signature of the unauthorized signer, AS LONG AS the person who pays the instrument or takes it for value acts in GF.

Presentment for payment

a particular type of demand on the party who ought to pay the instrument- the maker of a note or the drawee of a draft.

Liability of the maker of a note

i.e. Maker writes on instrument, "I promise to pay to the order of P $10k." Maker signs at the bottom of the note. Liability of the maker is primary liable.

Transferor of a negotiable instrument who receives consideration

warrants to his immediate transferee and all subsequent transferees that: 1. transferor is entitled to enforce the instrument; 2. all signatures are authentic & authorized; 3. the instrument has not been altered; 4. not subject to defense or a claim of recoupment of any party against the transferor; 5. has no knowledge of any insolvency proceeding with maker, acceptor or drawer.

Negotiability

Determines the rights and obligations of the various parties involved with commercial paper.

Article 3 doesn't apply

Doesn't apply to money, payment orders or securities. Has to be negotiable. If note says "non-negotiable," Article 3 does not apply.

Value given for an instrument

Given when the instrument is issued or transferred, 1. for a promise of performance to the extent that the promise has been performed. 2. as payment of, or as security for, any existing claim against any person- whether or not claim is due. 3. In exchange for a negotiable instrument; or 4. in exchange for the incurring of an irrevocable obligation to a 3P by the person taking the instrument.

Article 3 of UCC

Governs negotiable instruments, which is a signed writing that orders or promises payment of money.

If an instrument is payable to an identified person

It's an order instrument, and requires transfer of possession of the instrument AND endorsement by the holder.

Note that is payable "when my oldest son marries"

Not sure if he will ever get married. Not a definite date, so clearly not payable at a definite date.

Teller's check

One bank is the drawer, and another bank is a drawee.

Payable at a definite time

Payable at the end of a definite period of time (i.e. in 90 days) or at a fixed date (i.e. Dec 2016); or at a time readily ascertainable at the time of issue- even if is subject to rights of prepayment, acceleration, or extension to a further definite time at maker's option or automatically upon or after an act or event.

Liability of a drawer

Secondary liability & only liable when the bank refuses to pay. After bank and refused to pay, can go after them. i.e. dishonored check.

People who sign on behalf of others

When a rep or purported rep signs either her name or the represented person's name on an instrument, the represented person is bound to the extent she would be bound if her name were on a simple K.

Situations where a person will not acquire rights of HDC

When instrument is taken by legal process or by purchase in an execution, bankruptcy or creditor's sale; by purchase as part of a bulk transaction not in the transferor's ordinary course of biz; or as the successor in interest to an estate or other organization.

Presentment

When the bearer / holder requests payment from the drawee of a check or maker of a note. This is not negotiation, but this instead.

Accommodation Parties

aka Surety. One who signs commercial paper that is issued for value and is liable in whatever capacity signed.

Liability on commercial paper

is primarily promissory. Promisors are liable on the promises they make. Promises can be made either as a maker of a note, a drawer or an endorser.

When instrument is presented, the party to whom the presentment is made has these rights

1. That the instrument be exhibited; 2. ID of the party presenting, and if being made on behalf of another person, authorization to do so; and 3. A signed receipt on the instrument or surrender of the instrument upon full payment.

General meaning of value

Generally means the giving of something other than a promise for the instrument or the acquiring of a security interest int he instrument. Can't be executory or a gift.

Demand Instruments

Have notice it is overdue, if taking 1 day or more after demand has been made, or more than a reasonable amount of time after its date if it is not a check. More than 90 days after a check's date is overdue.

Multiple payees on an instrument

Have to see what conjunction is used. If *"or,"* payable alternatively it's payable to any of them and may be negotiated, discharged or enforced by either or all of them who are in possession. If *"and,"* payable to all of them and may be negotiated, discharged or enforced by all of them, and neither acting alone.

If name stated in instrument is different from name of holder

He may endorse the instrument either as his name is stated on the instrument or as it really is. Both names may be required by a person taking instrument for value or collection. i.e. Smith and Smythe.

Fictitious Payee Rule

If a person identified as the payee is *not intended to have any interest* in the instrument, or is a fictitious person, an endorsement of the instrument by any person in the name of the payee is effective as the endorsement of the payee in favor of a person who, in GF, pays the instrument or takes it for value or for collection.

Dishonor

Occurs when a proper presentment for payment is made and payment is refused. Does not occur when payment is refused because the instrument lacks a necessary endorsement.

Liability of Endorsers

Secondarily liable, if maker or bank doesn't pay. But can disclaim by giving a qualified endorsement. i.e. pay without recourse.

Bearer

Whomever bears it possesses it, it is payable to them. Even a thief can become one.

Persons entitled to enforce a negotiable instrument

1. Holder in due course; 2. Non-holder in possession of the instrument who has the rights of a holder; and 3. a person not in possession who is nonetheless entitled to enforce the instrument.

REQUIREMENTS of negotiable instruments

1. Must be a signed writing. 2. Contains unconditional promise or order. 3. Will pay a fixed amount with or without interest or other charges, in money. 4. Payable to order or bearer at time it is issued or first comes into possession of a holder. 5. Payable on demand or at a definite time; and 6. Contains no instruction or undertaking by maker or drawer except as authorized by UCC.

Person of lost or stolen instrument, when they can enforce it

1. Person once had it and was entitled to enforce it, 2. not the result of a voluntary transfer by the person or lawful seizure. 3. Not sure where it is because whereabouts can't be determined, was destroyed, or is in wrongful possession of an unknown person or person who can't be found.

Analysis of a negotiable instrument

1. What is the nature of the instrument, is it negotiable has it been negotiated? 2. Who is P and what is P's rights. Holder in due course? 3. Who is D and what is the nature of D's liability. What is D's defense, is the defense raised one that is cut off?

Holder in Due Course

A GF purchaser of the instrument, which has no apparent evid of forgery, alteration or other irregularity that calls its authenticity into question. And, no notice the instrument is overdue, has been dishonored, bears an unauthorized signature or alteration, or any defense or claim against the instrument.

Note (MI)

A two party instrument, in which the maker promises to pay the payee a sum of money.

Payable upon the happening of an event

An instrument that is payable only upon the happening of an event is non- negotiable, even if that event is certain to happen- so long as the time is uncertain. i.e. a note payable at, or at a fixed time after death.

Cashier's check

Drawer and drawee are the same bank. Bank draws it on themselves and it's as good as cash.

If writing contains statement, required by law (MI)

If a promise or order contains a statement, required by law, that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, doesn't make such payment conditional. i.e. subject to buyer's claims. Can't be HDC but just subject to consumer protection claims.

Time for presentment

Must be made on or after the date stated on the instrument, if a date is stated. Or within a reasonable time after the person to be charged becomes liable on the instrument.

Special endorsements

Names the transferee and directs payment to him. Instrument becomes order paper and the transferee's endorsement is necessary for further negotiation.

Payable on demand

Needs to be clear to the buyer when they can count on enforceability, or when we can count on it. On demand if states so, or doesn't state any time for payment. i.e. I promise to pay Jim $10k on demand.

Contains no undertaking or instruction by maker or drawer except as authorized by the Code

Negotiable instrument may not state any other undertaking or instruction to do anything besides pay money.

If transferor purports to transfer less than the entire instrument

Negotiation of the instrument does not occur. The transferee obtains only the rights of a partial assignee.

Without notice to be an HDC

No notice that the instrument is overdue, has been dishonored or that there is uncured default of payment on another instrument in the same series.

Unconditional requirement for negotiable instruments.

Not unconditional if contains express condition to payment, governed by another writing, & states that rights or obligations with respect to it are stated in another writing.

Blank endorsements

Signature of transferor written on the back of the instrument.

When order instrument is transferred by delivery without an endorsement

The transferee has a specifically enforceable right to the endorsement of the transferor. But, there is not a negotiation until then.

Transfer of an instrument

when it is delivered by a person other than its issuer for the purpose of giving the right to enforce the instrument to the person receiving delivery.