Bus Law Test II

3 parties in a check / draft

drawer (employer) drawee ( bank) payee (you)

Things that do not affect negotiability

-A check is negotiable even if it states "non-negotiable" on it. This is not true of other commercial paper. -Words trump numbers promises to pay One Thousand Dollars ($100 -Handwriting trumps printing -Antedating and postdating

Discharge from Contract

-All discharged when party with primary liability pays holder in full - Payment by any other person (an indorser) discharges only that party and subsequent parties (the party paying can recover from the original maker as a prior party) -Discharge by intentional cancellation or surrender by holder discharges all parties Writing paid across instrument Tearing it up Crossing out a party's signature Surrender (27.23) Impairment of collateral

Types of Universal Defenses

-Forgery - fraud in the excution -Material alternation -Discharge in bankruptcy - Extreme duress - Mentally incompetent

Promissory Notes

-Written contracts that promise to pay a supplier a specific sum of money at a certain time. -A written promise to pay made by....a maker -A note is a promise to pay but not a debt itself. Debt can come under a mortgage, purchase agreement, credit/loan agreement -Notes often collateralized

6 requirments to be a negotiable instrument

1. in wiritng, 2. signed by drawer 3. uncondtional promise to pay 4. state specfic amount of money 5. payable on demand or specfic time 6. payable to bearer. (think of whats on a check)

Warranty liability

A liability account that reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period. The liability amount is recorded at the time of the sale

Extension clause

A rule in a contract that lets the parties to continue it after the expiration date.

Assignment vs. Negotiation

Assignment vs. Negotiation Assignee receives only those rights in the instrument that assignor had prior to assignment Transfer by negotiation = status as a holder and maybe an HDC Negotiation in simpler term = a transfer

Payable to entities (ABC Co.)

Authorized rep must sign

Types of Personal Defenses

Breach of contract/warranty (27.19) Lack or failure of consideration (27.20) (Case 27.2) Fraud in inducement (ordinary fraud) (27.21) Illegality where not specifically void Mental incapacity (not already recognized by court) Ordinary duress Discharge by payment or cancellation Unauthorized completion of an incomplete instrument Nondelivery of instrument

4 types of comerical paper under UCC

Checkes , notes, drafts and CD's

Unauthroized signatures

Could be a foragery or unathorized agent, unauthorized signature is inoperative (27.9) and does not bind the person whose signature is forged

Personal Defenses

Defenses against regular holder but not HDC

what is required to negotiate order paper

Delivery and endorsement = order paper, bearer paper just have to be possesed.

Who has secondary liabality Instrument

Drawers and indorsers

Benefits to being an HDC ( holder in due course)

Free most of the defenses of claims that could be asserted against the transfer

If the indorser indorses in blank.

Guess what....turns order paper into bearer paper which can then be subsequently negotiated by delivery alone

HDC Test - Good Faith

Holder must have acted honestly in the process of acquiring the instrument (note applies only to the holder - not the transferor - thus even a holder who takes from a thief can become an HDC (provided they meet all the other prongs of the test) Note - holder must honestly believe that the instrument is not defective... when you buy a $10,000 note on a street corner from a stranger for $300.... ?????

Test for HDC

Holder of neg. instrument, must have taken in payment of, or as a security of, a pre exisitng obligation, givn a negotiable instrumetn as payment. and given an irrevocable commitment as payment, also must be in good faith , must have consideration.

Who has a primary liability on a negotiable instrument

Makers and acceptors of instruments have primary liablitiy, maker of a note (bank) acceptor is a drawee

HDC Test

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

Rules Regarding Checks

Must be dated in the last 90 days, also can be cashed before date.

Is an IOU a negotiable instrument

No, because there is no expclicit promise to pay

Condtions for secondary Liability

Proper Presentment, timely Presentment , Dishonor, Proper notice

Alternate or joint payees

Ying or Yang = either can indorse; pay to the order of Bert and Ernie means they both need to sign

Acceleration clause

in the law of contracts, is a term that fully matures the performance due from a party upon a breach of the contract. Such clauses are most prevalent in mortgages and similar contracts to purchase real estate in installments.

What Happens if a name is mispelled on an indorsement

indorsement should be identical to the name that appears on the instrument. If the instrument says pay to the order of Fran Wardega then per the rule you can indorse it with the misspelling, the corrected name or both.

The Shelter Principle

is a doctrine in the common law of property under which a grantee who has received an interest in property from a bona fide purchaser will also be protected as a bona fide purchaser, even if the grantee would not legally qualify for this status.

Universal defenses

iversal defenses are the strongest possible defenses that a given party to a negotiable instrument might be able to mount in order to avoid payment on that negotiable instrument. These defenses are so strong that they actually supersede the protective rights of a holder in due course (HDC), and in turn, the protective rights of any holders through an HDC. The reason is that most of these universal defenses are based on blatant, inarguably illegitimate actions, each of which would serve as grounds for not paying the negotiable instrument in question.

Conditional indorsement

pay to xx upon completion of my kitchen reno Note - don't confuse the conditional indorsement on the back of commercial paper with conditional language that appears on the front which would render the instrument non-negotiable (review chapter 25!)

Qualified indorsement

typically "without recourse" If qualified and the instrument is dishonored (not paid) then the holder cannot recover from the indorser who made a unqualified (without recourse) indorsement