Commercial Paper

Restrictive endorsement

"For Deposit Only" Payee can sue anyone for conversion of the check for acting inconsistently with restrictive endorsement (depositary bank, thief, etc.) However, can't sue drawee bank or any intermediary bank for conversion b/c they can disregard the restrictive endorsement

Not Properly Payable

(1) Forged drawer's signature (2) Forged or missing endorsement --Unless a blank endorsement b/c a thief in possession of bearer paper is a holder, and paying a holder is properly payable --If a check is issued jointly to H & W, and H forges W's endorsement or the check only carries H's endorsement, not properly payable because we need both endorsements ---If it was issued payable to H or W, we wouldn't have this problem: only need one name

Can a drawee bank receive transfer warranties?

No, because the instrument is presented to the Drawee bank for payment, not transferred to it. The drawee bank may only recover for breach of presentment warranties

Is a drawer generally entitled to notice of dishonor?

No--> a drawer will or should know of the dishonor on her own because of her relationship with the drawee

Can the party accommodated sue the accommodation party for contribution?

No: the accommodation party is not liable to the party accommodated

What happens when order paper contains a forged endorsement?

None of the parties from the forger on are holders; none have good title and none are entitled to the money In fact, they have all converted the check The drawee cannot properly pay any one of them--> drawer can only pay a holder (someone with good title to the check)

Notice of dishonor

Notice of dishonor with respect to a check must be given by a bank before its midnight deadline (midnight of the next banking day following the banking day on which the bank received notice) By Any other person: within 30 days following the day on which she herself received the notice With respect to any other instrument, notice of dishonor must be given within 30 days following the day on which dishonor occurs

How does one negotiate an instrument?

Order Paper: -Negotiated by TRANSFER OF POSSESSION plus ENDORSEMENT BY THE HOLDER (the identified person to whom the instrument is payable) Bearer Paper: -Negotiated by TRANSFER OF POSSESSION ALONE

Order Paper

Order paper can be negotiated only by a transfer of possession PLUS an endorsement by the holder To be a holder of order paper, it must be issued to him or properly endorsed to him If a thief steals a paycheck that was order paper when stolen, the thief is NOT a holder of the check because it wasn't issued to him or properly endorsed to him --The thief cannot negotiate this check; he can transfer possession, but would need endorsement of holder to negotiate

Holders: Different Rule for Banks

Ordinarily, order paper must be transferred and endorsed in order to make the transferee a holder. BUT a depository bank ( a bank in which an item is first deposited) that takes an unendorsed instrument for collection becomes a holder of the instrument, if the customer was a holder at the time of delivery, EVEN IF the customer has not endorsed the instrument

What happens if the party accommodated gets an extension without the knowledge and consent of the accommodation party?

The extension without the accommodation party's consent discharges the accommodation party(AP) to the extent that the AP can prove that the extension caused him some loss

Forgery and bank recovery: forged instrument

The forgery of the payee's name (or of a special endorsee's name) means that no valid negotiation takes place, and no one taking the instrument thereafter can qualify as a holder The payee has several different possible courses of action whenever a check that has been delivered to him is stolen, his name is forged thereon, and the instrument is paid by the drawee bank

Close-connectedness doctrine

The more that the holder knows about the underlying transaction, and particularly when it controls or becomes involved in it, the less likely it is a good faith purchaser without notice

Presentment Warranties

The party obtaining payment and previous transferors warrant that: (1) they are entitled to enforce the instrument (warranty of good title) (2) the instrument is not altered, and (3) they have no knowledge that the drawer's signature is unauthorized

The FTC Rule

The rule provides that every consumer credit contract contain a notice that any holder or assignee is subject to all claims and defenses that the debtor could assert against the seller of the goods or services covered by the K. The rule also applies to direct lender loans made to a consumer where the creditor is affiliated with the seller or where the creditor has had consumers referred to it by the seller on a regular basis. Any consumer K covered by such purchase money loans MUST contain the FTC notice provision NOTE: Such a clause does not make the note "conditional"--Still a negotiable instrument and Article 3 applies, but there can be no HDC of the instrument

Certificate of Deposit

an acknowledgement by a bank that a sum of money has been received, and a promise by the bank to repay the sumo money

HDC: Good faith

(1) Honesty in fact: this component of good faith is SUBJECTIVE (2) Observance of reasonable commercial standards of fair dealing: this component of good faith is OBJECTIVE --concerned with the fairness of conduct (not with the care with which an act is performed) --To be a HDC, a business person must show that his actions meet the generally accepted standards current in his business trade or profession

Endorsement: two types

(1) Special endorsement: specifies the person to whom the instrument is payable (Ex. You write "Pay to Macys" on the back of employment check) (2) Blank endorsement: does not specify the person to whom the instrument is payable; generally consists of a mere signature Bottom line: once parties start endorsing, you need to look at the LAST endorsement to determine whether the instrument is order paper or bearer paper

Requirements for a negotiable instrument

(1) Writing (2) Signed by maker (note) or drawer (check) (3) Unconditional (4) Promise to pay (note) or order to pay (check) (5) Fixed amount (6) In money (7) No other undertaking or instruction (8) On demand or at a definite time (9) To order or To Bearer

Holder in Due Course

(1) a holder (2) who gives value (3) in good faith, and (4) without notice Most claims and defenses are NOT good as against a holder in due course

Examples for what is and isn't "Definite time"

-A post-dated check: okay, because there is a definite time -A note containing an acceleration clause: okay, because we know a definite time beyond which the instrument cannot run (note payable on set date, but when certain things happen, the whole amount is due early) -A note containing an extension clause: ---A clause that permits the instrument to be extended at the OPTION OF THE MAKER is still negotiable so long as the extension is to a further definite time stated in the instrument ---A clause that permits the instrument to be extended at the OPTION OF THE HOLDER is negotiable, since the holder always has the option of giving extra time for payment, even if no definite time -Events certain to happen, but uncertain as to time: not negotiable because there is no definite time for payment

Promise to pay (if note) or Order to pay (if check)

-An IOU is not negotiable--> it is not a promise to pay -"I wish you would pay" is not negotiable--> not an order to pay

Payee options when his check is stolen

-Payee can recover from drawer, who will then demand that drawee bank recredit its account because the check was not properly payable (b/c of forged instrument) -Payee can sue Drawee bank, or anyone taking the check after the forgery in conversion NOTE: the payee would not have a conversion action if the check had been stolen from the mails before it had been received by payee

Validation of the forgery

-Ratification -The imposter rule -Fictitious payee rule -Fraudulent endorsements by employees -The negligence rule -Comparative negligence -The bank statement rule

When does a check become overdue?

90 days after its date

HDC: No Notice

A HDC must take the instrument without notice (which includes ACTUAL KNOWLEDGE and REASON TO KNOW) that: (1) the instrument is so irregular or incomplete as to call into question its authenticity; (2) the instrument is overdue or has been dishonored; (3) the instrument contains an unauthorized signature or has been altered; (4) there is a claim to the instrument; (5) any party has a defense or a claim in recoupment (a claim that reduces the amount payable) on the instrument

Draft

A THREE party instrument (1) Drawer: the person who signs or is identified in a draft as the person ordering payment (2) Drawee: the person ordered in a draft to make payment (3) Payee: the person to whom the draft is payable When the drawee is a BANK, and it is payable on demand, then the draft is a CHECK

Note

A TWO party instrument (1) maker: the person who signed or is identified in a note as the person undertaking to pay (2) payee: the person to whom the note is payable

Bank Deposits

A bank does not become a holder for value merely by crediting a depositor's account The bank does not need HDC protection because the bank can take back the credit from the customer's account if the check is dishonored If however the customer is permitted to draw against a deposited item, the bank immediately becomes a holder for value to the extent of the withdrawal To trace deposits to withdrawals, the first in, first out (FIFO) rule is used

Wrongful dishonor

A bank is liable to its customers for damages caused by the wrongful dishonor of an item Liability is limited to actual damages proved and may include damages for arrest or prosecution or other consequential damages.

Stale checks

A check is stale after 6 months --The bank is not obligated to pay, but it may (so long as payment is made "in good faith") --the bank is not obligated to pay if it creates an overdraft (unless the customer has overdraft protection), but it may pay if it chooses to pay

The Bank Statement Rule

A customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized Prompt notice must then be given to bank by its customer of any unauthorized payment that the customer reasonably should have discovered. I the customer fails to do this, and the bank can show that it suffered a loss by reason of this failure, the bank need not reaccredit its customers account Moreover, where the statement has been available to the customer for a reasonable period (not more than 30 calendar days) and she does not complain about an unauthorized signature or alteration, the customer is estopped from demanding recredit on any items forged or altered by the same wrongdoer and subsequently paid by the bank NOTE: without regard to which party was negligent, a customer is precluded from asserting an unauthorized signature or any alteration on the face of the instrument if he does not notify the bank within 1 year after the statement or items are made available to the customer. The customer is precluded from asserting a forged endorsement more than 3 years after the cause of action accrues.

Drawee's contract liability

A drawee bank is only liable on an instrument if they sign it If they sign it, they are liable as an acceptor for the amount stated

Transactions precluding HDC status

A holder does not become a HDC of an instrument taken by: (1) legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding; (2) purchase as part of a bulk transaction not in the ordinary course of business of the transferor; or (3) as the successor in interest to an estate or other organization

HDC: holder element

A holder is in possession of bearer paper or in possession of order paper that has been issued or properly endorsed to him

On Demand or at a Definite Time

A holder of an instrument must be able to tell when it comes due or the instrument is non-negotiable Doesn't mean that the instrument must be dated An undated instrument which specifies no time for payment is treated as an instrument payable on demand by the holder

Material alteration: altered note

A holder who fraudulently alters an instrument discharges the party as to the whole

Statute of Limitations

A legal or equitable action on a contract, obligation, or liability founded on a written instrument must be commenced within 5 years (after the date or demand if a demand instrument)

To Order or To Bearer

A negotiable instrument must contain certain magic words: either order language or bearer language A writing lacking these magic words is not negotiable and is not governed by Article 3 "I promise to Pay Paul": not negotiable "I promise to pay to the order of Paul": negotiable, order paper "I promise to pay bearer" (or "to the order of bearer" or "to paul or bearer"): negotiable, bearer paper "Pay to the order of cash": bearer paper "Pay to the order of a bowl of soup": negotiable; bearer paper when it otherwise indicates not payable to identified person NOTE THIS IMPORTANT EXCEPTION: A check need not contain words of negotiability

No other undertaking or instruction

A negotiable instrument must not be burdened with anything other than a simple, clean unconditional promise or order If a note contains additional undertakings or instructions, the holder is given notice that the note is or may be conditioned on the performance of those additional undertakings or instructions

Qualified endorsement: "without recourse"

A party can endorse an instrument "without recourse" to limit contractual liability If the check is dishonored and appropriate notice is given, payee is NOT liable as an endorser

Discharge by payment

A personal defense Not effective if promissory note gets into the hands of a HDC

What extra undertakings or instructions does the UCC permit?

A promise or order may contain: -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 (e.g. waiver of homestead exemption, or trial by jury, or right to notice of dishonor) Note: Also ok to promise to pay costs of collection and attorney's fees What do these all have in common? -they strengthen the promise to pay, but have no independent value of its own

In money

A promise to pay 100 bales of cotton is a non-negotiable promise Foreign money is OK (as long as the U.S. recognizes the currency)

Accommodation parties

An accommodation party is one who signs an instrument in any capacity for the purpose of lending his name to another party to it. Accommodation party is liable in the capacity in which he signed. If an accommodation party pays, they can get complete reimbursement from the other maker (not simply contribution like an ordinary co-maker)

Bottom line rule for signature by an agent

An agent with authority who signs her name to a principal's check cannot be held liable on the check if it is drawn on the principal's account and indicates the identity of the principal. It does not matter whether the agent indicates her representative capacity.

Endorser "secondarily" liable

An endorser is liable only after the instrument has been PRESENTED to the maker (if a note) or the drawee (if a check), that party has dishonored the instrument, and a notice of dishonor has been given to the endorser

What defenses does an accommodation party have?

Any defenses that the party accommodated could raise, EXCEPT insolvency, infancy, and lack of legal capacity

Holder

Any holder is entitled to enforce the instrument They take subject to most claims to and most defenses on that instrument If no other party is claiming the instrument, and the parties contractually liable on the instrument raise no defenses, it generally is not important to be a holder in due course

What Article of the UCC governs commercial paper?

Article 3

Signature by an agent

As long as the agent had authority (express or implied) to sign the note on behalf of X, X will be held liable on the instrument and the agent will not be personally liable. Ex. "Software Corporation, by Jane Doe, President" is the preferred way Even if she doesn't put company name or title, X will still be liable as long as the was authorized

Assignment Distinguished from negotiation

Assignment: -A payee who has been issued a negotiable instrument can simply assign it to a third party -The third party is then an assignee and has no greater rights than the assignor does on the instrument -Any defenses that could be raised against the payee also could be raised against the asignee Negotiation: -If a payee NEGOTIATES the instrument to a third party, then the third party is not a mere assignee, but is a HOLDER -If the holder gives value, in good faith, without notice, then the holder is a HOLDER IN DUE COURSE (HDC) -An HDC takes free of most defenses that could have been raised against the payee

Knowledge of a default

Knowledge of a default in a INTEREST PAYMENT is harmless Knowledge of any part of the PRINCIPAL amount being overdue deprives one of HDC status

Bearer Paper

Bearer paper can be negotiated by a transfer of possession alone, and this transfer can be voluntary or involuntary If a thief steals a paycheck that was bearer paper when stolen, the chief is a holder of the check (but not a HDC)--> all you need is a transfer of possession --The thief would be able to negotiate this check

Signed by Maker (if note) or Drawer (if check)

Code defines "signed" as including "any symbol executed or adopted by a party with a present intention to authenticate a writing" Can be: -printed, stamped, written -initials or thumbprint -a trade name or assumed name -in the body of the instrument Key: whether the party intended for that symbol to operate as her signature

Collection guaranteed

Collection guaranteed or equivalent language means that the signer agrees that she will be liable on the instrument ONLY IF (1) execution of judgment against the other party has been returned unsatisfied; (2) the other party is insolvent or in insolvency proceedings; (3) the other party cannot be served with process, or (4) it is otherwise apparent that payment cannot be obtained from the other party You don't avoid liability, but you may be able to delay their ability to come after you until one of those is met

Unconditional

Conditional promises are OK under K law, but they destroy negotiability Ex. Maker promises to pay $100 to the order of payee if the Atlanta Braves win the world series--> this is NOT negotiable It is okay to mention the underlying contract without destroying negotiability so long as the payment of the instrument is not made "subject to" or "conditioned upon" performance of the underlying contract. Terms of the incorporated document are irrelevant--> the fact of incorporation destroys negotiability

Drawer's contract liability

Drawer is obligated to pay the draft according to its terms when the drawer signed the instrument A drawer is "secondarily" liable--> liable after presentment and dishonor With respect to the liability of a drawer, a check must be presented to the drawee for payment, or be given to a depository bank for collection within 30 days after the date of the instrument BUT NOTE: unlike the endorser, a drawer is excused from contractual liability on the instrument due to delay in presentment ONLY in the unlikely event that the drawee bank has become insolvent during the delay and there is no insurance to cover the loss

Transfer warranties

Each party that transfers an instrument and receives consideration warrants that: (1) they are entitled to enforce the instrument (2) that all signatures on the instrument are authentic and authorized (3) the instrument has not been altered (4) no defense of claim of any party is good against the warrantor (5) the warrantor has no knowledge of any insolvency proceeding that has been instituted against the maker, acceptor, or in the case of an unaccepted draft, the drawer.

What if commercial paper is non-negotiable?

General principles of contract law apply--assignee stands in the shoes of the assignor

The underlying obligation

Generally, once an instrument is offered and accepted in satisfaction of an underlying obligation, the obligation merges with the instrument and the underlying obligation is suspended Payment of the instrument discharges the instrument and the underlying obligation If the instrument is dishonored, the party issuing the instrument is liable on the instrument or the underlying obligation (only 1 recovery) Note: The underlying obligation is discharged if the instrument given is a cashier's check (bank is drawer and different bank is drawee) or a certified check ( a check accepted by the bank on which it was drawn)

Material alteration: altered check

Have to recredit what was not properly payable

The Negligence Rule

If a person, by his negligence, substantially contributes to a material alteration or to the making of an unauthorized signature, he is precluded from asserting the alteration or lack of authority against a HDC or the drawee or other payor who pays in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business NOTE: not just any negligence effects preclusion. The negligence must actually contribute to the forgery or alteration. That is, it must afford an opportunity of which advantage is taken. Examples of negligence might be signing blank checks, or failure to look after one's stamp or automatic signing device. Any form of slovenly business practice may be negligent

A "Writing"

No such thing as an oral negotiable instrument Must be something tangible (not written if typed on a computer and saved to a disk) It is almost always a piece of paper, but need not be (a t-shirt, cow, tamale, etc.)

Fraudulent endorsements by employees

If an employer entrusts an employee (including an independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent endorsement on the instrument, the endorsement is effective Responsibility with respect to an instrument includes authority: (1) to sign or endorse instruments on behalf of the employer; (2) to process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition; (3) to prepare or process instruments for issue in the name of the employer; (4) to supply information determining the names or addresses of payees of instruments to be issued by the employer; and (5) to control the disposition of instruments issued in the name of the employer

Delay of presentment and notice of dishonor

If presentment and notice of dishonor are either not made or are delayed beyond the time when due, an endorser is discharged from contractual liability on the instrument BUT NOTE: the discharge of the endorser's obligation because of this failure to make a timely presentment or to give a timely notice of dishonor is NOT EFFECTIVE against a HDC or a person having the right of a HDC (under the shelter rule) Because endorsers rarely date their endorsements, this is a real possibility

Comparative negligence

If the drawee bank or other person paying the instrument or taking it for value or for collection fails to exercise ordinary care, the person bearing the loss (under the imposter rule, the fictitious payee rule, the fraudulent endorsement by employee rule, or the negligence rule) may recover from the drawee bank or other person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss

Fictitious Payee Rule

If the drawer, maker, or other person whose intent determines to whom an instrument is payable does not intend (at the time that the instrument was issued) for the person identified to have any interest in the instrument, or if the person identified in the instrument as the payee is fictitious, then an endorsement in the name of the payee is effective NOTE: if the signature of the issuer of an instrument is made by automated means, such as a check-writing machine, the relevant intent is that of the person who supplied the name of the payee

Notice of a claim: fiduciary benefit

If the holder has knowledge that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary's own debt or in any transaction for the fiduciary's own benefit or has otherwise breached his duty, the holder has notice of a claim

Is parol evidence admissible to clear up the liability of an agent signing "Jane Doe"?

In this case, you may have a HDC without notice, so parol evidence inadmissible

Is early payment of a post datable check properly payable?

It is not properly payable IF customer gave notices to bank of postdating, describing the check with reasonable certainty

HDC: Value

Look for EXECUTED CONSIDERATION A party is a HDC to the extent that the agreed consideration has been performed A mere promise to give value is not enough Giving a negotiable instrument is giving value A holder also gives value for an instrument when he takes it in payment of or as security for an antecedent claim, or when he makes an irrevocable commitment to a third person

The Shelter Rule

Maker is fraudulently induced to issue a note to a payee, and payee negotiates the note to X, a HDC. X later endorses the note and gives it to Y. Y is not a HDC, BUT since he took from someone who was a HDC, he took shelter in Payee's rights, and therefore takes free of defenses.

Contract liability: signature on an instrument creates liability

Maker's K liability: obligated to pay the instrument according to its terms at the time it was issued. If more than one maker, the makers are JOINTLY AND SEVERALLY LIABLE on the instrument. Endorser's contract liability: obligated to pay according to the terms of the instrument at the time of the endorsement --those signing later in time can get COMPLETE reimbursement from those signing prior in time (BEFORE YOU, NOT AFTER YOU) *NOTE: a party signing an instrument as an endorser incurs this contractual liability even if that party took the instrument as a HDC --HDC doesn't affect ability to BE SUED--> just helps them TO SUE

Transfer of possession

May be voluntary or involuntary

Waiver of presentment and notice of dishonor

Most promissory notes contain a clause providing that all parties to the instrument waive presentment and notice of dishonor Such waiver is permissible

Can a writing be made a negotiable instrument within Article 3 by contract or conduct of the parties?

NO If a writing contains a conditional promise, a statement that "this note is negotiable" would not be effective to make this writing a negotiable instrument

Payee as HDC

Payee of an instrument can be a HDC so long as she meets the usual requirements BUT where the issuer and the payee are the only parties, the HDC doctrine is irrelevant in determining the rights between the obligor and the obligee with respect to the instrument **HDC doctrine applies only to cases where more than two parties are involved HDC doctrine may be relevant where the payee does not deal directly with the issuer of the instrument but instead obtains the instrument from a remitter who obtained it from the issuer --If payee is HDC, she takes free of any defense based on the remitter's wrongdoing

Can a drawee recover from a prior party simply by claiming that the payment was made by mistake?

Payment to a HDC or to one who in good faith changed her position in reliance on the payment is final, so the payor cannot recover payment back from the party paid TWO EXCEPTIONS--> payor can recover from the party paid if: (1) that party neither took for value nor in good faith, nor detrimentally relied on the payment (unlikely); or (2) the party breached a transfer or presentment warranty

Presentment of dishonor may be delayed or even entirely excused under certain circumstances

Presentment will be excused where the maker has repudiated the obligation or is dead or insolvent, or cannot be found with reasonable diligence, or the drawer has instructed the drawee not to pay Delay in giving notice of dishonor is excused if the delay was caused by circumstances beyond the control of the person giving notice, and the party exercised reasonable diligence after the cause of the delay ceased to exist

Ratification

Ratification occurs when a party, with full knowledge of the forgery (or alteration) accepts the benefits thereof or actively assents to the wrongful activity

The "Properly Payable Rule"

The bank may pay out the customer's money ONLY if it follows the customers orders exactly. If it does not do so, it must reaccredit the account.

Who has the burden of establishing the fact and amount of loss resulting from the payment over a valid stop payment order?

The customer

Death or incompetence of Customer

The death or incompetence of a customer does not revoke the bank's authority to pay a check until the bank knows of the death Even with such knowledge, the bank may for 10 days after the date of death keep paying checks, unless a person claiming an interest in the account orders that payment be stopped

Customer's right to stop payment

The stop payment order must describe the item with reasonable certainty; a reasonably prudent banker with that information should be able to find the check (check #, date, amount) The stop payment order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it Stop payment order is effective for 6 months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period Bank may not contract out of liability for negligently failing to honor a valid stop payment order

What is commercial paper?

This paper calls for a party to pay money rather than deliver goods or perform a service Two basic categories: (1) notes (2) drafts

The Imposter rule

This rule validates the forged endorsement of the payee's name where the maker or drawer has been duped by an imposter to issue the instrument

When will a promise or order not be deemed conditional under Article 3?

Under Article 3, a promise or order will not be deemed conditional merely because it: (1) refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration; (2) limits payment to a particular source or fund (e.g. "I promise to pay out of the funds received from the sale of my next wheat crop") (3) Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (such conditions are common on traveler's checks)

Forged DRAWER'S signature

When a forger forges the drawers name (as opposed to that of the payee), the law reaches a very different result Drawee bank usually takes the hit: drawee bank takes the risk that the drawer's signature is unauthorized unless a prior party in the chain of collection had knowledge that the drawer's signature was unauthorized. It is likely that the forger would be the only one with this knowledge

Instrument payable to Joint Payees

When an instrument is made payable to joint payees (e.g. H & W) and both payees endorse, they are jointly and severally liable

The Negotiability Concept

When buyer issues to seller a negotiable instrument (check or promissory note), and seller then negotiates the negotiable instrument to X, a holder in due course (gives value in good faith with no notice that it is overdue or has been dishonored or of any defenses or claims), X will take free of most defenses (personal defenses) that the buyer could raise against seller (including the defense that goods are defective) *But Note: certain defenses (real defenses) can be raised even as against a HDC

A Fixed Amount

When the instrument is payable, the holder must be able to determine FROM THE INSTRUMENT ITSELF THE PRINCIPAL AMOUNT DUE. The requirement of a fixed amount applies ONLY to principal It does not apply to interest (or other charges that are often included in an instrument, such as collection costs and attorneys fees) A note providing for variable interest rates is negotiable If the instrument states that it is payable "with interest" but does not state how much interest, the judgment rate (the rate on a court judgment) will be implied

Exception: anomalous endorsement

Where the parties have made an anomalous endorsement (one made by a non-holder, i.e. surety), the endorsers are jointly and severally liable

Real Defenses

While a HDC takes free of personal defenses and claims, she takes subject to REAL DEFENSES. (1) infancy, to the extent that it is a defense to a simple K (2) such other incapacity, or duress, or illegality of the transaction,as renders the obligation of the party a nullity (3) such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms. (4) discharge in insolvency proceedings (5) any other discharge of which the holder has notice when he takes the instrument *Note: difference b/w fraud in the inducement (personal defense) vs. fraud in the execution (real defense)

Presentment

With respect to the liability of an endorser, presentment is due within a reasonable time after such party becomes liable thereon. A reasonable time is determined by the nature of the instrument, any usage of banking or trade and the facts of the particular case NOTE: in the case of a check, an endorser is discharged unless the check is presented for payment or given to a depository bank for collection within 30 days after the day the endorsement was made

Can parties avoid negotiability by declaring that it is not negotiable?

YES Parties can use a form that is a negotiable instrument and avoid negotiability by declaring on the instrument that it is NOT NEGOTIABLE EXCEPTION: CHECKS --A declaration on a check that it is not negotiable is INEFFECTIVE

Can a drawee recover for breach of presentment warranties?

Yes, even from a HDC or one who detrimentally relied on payment

Is parol evidence admissible to clear up the liability of an agent signing "Jane Doe, president"?

You can bring in parol evidence, except as against a HDC who takes without notice--> will probably be on notice since she signed it "president"