LREB Exam 4

Holders in Due Course

A holder who takes a negotiable instrument for value, in good faith, and without notice that is defective or overdue.

Accommodation Parties

A person who acts as a surety, also called a cosigner. Involved in strict surety arrangements when a third person, a surety, promises to be liable for the payment of another person's debt.

Floating Items

A security interest in property that was not in the possession of the debtor when the security was executed. Essentially the debtor (person taking out loan) is subject to having any asset used to cover his or her loan as collateral if loan is not paid.

Certificates of Deposit

A two-party negotiable instrument that is a special form of note created when a depositor deposits money at a financial institution in exchange for the institution's promise to pay back the amount of the deposit plus an agreed-on rate of interest on the expiration of a set time period agreed on by the parties. Financial Institution is the borrower and maker of a certificate of deposit. The party whom the CD is made payable; usually the depositor (lendor) is the payee of a CD.

How Indorsement Works

An Indorsement is the signature of a signer that is placed on an instrument to negotiate to another person. Signature may appear (1) appear alone, (2) name an individual to whom the instrument is to be paid, or (3) be accompanied by other words. If a payee is named this person is the indorsee. Are REQUIRED to negotiate order paper but they are NOT required to negotiate bearer paper. Usually placed on backside of instrument, like a check. If there is no room then an "Allonge," which is a separate piece of paper to indorse, must be affixed to the original instrument.

Bearer and Order Negotiable Instruments

Bearer Instrument (Paper)- An instrument that is payable to anyone in physical possession of the instrument who presents it for payment when it is due. It occurs when the drawer or maker does not make the instrument payable to a specific payee. Order Instrument (Paper)- An instrument that is payable to (1) to the order of an identified person or (2) to an identified person or order. UCC requires it to be payable to order or bearer. If not meeting that standard it is not negotiable.

Effect of Various Indorsements on Negotiable Paper

Blank Indorsement- Does not specify a particular indorsee. It creates a bearer paper. Special Indorsement- An indorsement that contains the signature of the indorser and specifies the person (indorsee) to whom the indorser intends the instrument to be payable. It creates order paper. Qualified Indorsement- Includes notation "without recourse" or similar language that disclaims the liability of the indorser. Unqualified Indorsement- Indorser promises to pay the holder or any subsequent indorser the amount of the instrument if the maker, drawer, or acceptor defaults on it. Restrictive Indorsement- Contains some sort of instruction from indorser. Nonrestrictive Indorsement- Has no instructions or conditions attached to the payment of the funds.

Certified and Cashier's Checks

Certified- A type of check for which a bank agrees in advance (certifies) to accept the check when it is presented for payment. Check is certified when bank stamps or signs certified.(i.e. giving money to university?) Cashier's- A check issued by a bank for which the customer has paid the bank the amount of the check and a fee. The bank guarantees payment of the check. (i.e. when you close your bank account, payee is you but bank is drawer and drawee)

Imposter and Fictitious Payee Rules

Imposter Rule: A rule that states that if an imposter forges the endorsement of the named payee, the drawer or maker is liable on the instrument to any person who, in good faith, pays the instrument or takes it for value or for collection. (ie. If I pretend to be Sally and sell her car to Fred, and then forage Sally's signature, The person liable is the person who wrote the check or the drawer). Fictitious Payee Rule- A rule that a drawer or maker is liable on a forged or unauthorized endorsement, if the person singing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fictitious person. (i.e. check is filled out to Ashley by John, It is stolen by leslie and given to liquor store, liquor store is held liable and can only recover damages from leslie if she can be found)

Statutory Period of Redemption

Most states allow the mortgagor to redeem real property for a specified period (6mo-1yr) after foreclosure.

Primary and Secondary Liability on Negotiable Instruments

Primary-Absolute liability to pay a negotiable instrument, subject to certain universal (real) defenses. (ie makers of promissory notes, and certificates of deposit promise to pay the amount stipulated in note or certificate when its due). Secondary- Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when its due. (ie. Jackson writes a check to Joe. Joe goes to cash the check but bank refuses even though Jackson has the funds, Jackson is secondarily liable).

Universal and Personal Defense

Universal (real) defenses- Can be raised against both ordinary holders and holders in due course (HDC's) to deny the payment of negotiable instruments (NI's). If it is proven, holders and HDC's cannot recover on the NI's. Minority-a minor misrepresenting their age can disaffirm), Extreme Duress-Force or Violence was used to issue a negotiable instrument (NI)) Mental Incapacity-A person adjudicated mentally incompetent cannot issue a NI) Illegality-Instrument arrises out of illegal transaction) Discharge of Bankruptcy- Bankruptcy laws allow for obligations to pay NI's to be discharged Fraud in the inception- Person is deceived into signing an NI, thinking it is something else Forgery- The unauthorized signature of a maker, drier, or an endorser is wholly inoperative as that of the person whose name is signed Material alteration- An instrument that has been fraudulently and materially altered cannot be enforced by an ordinary holder, HDC's can enforce such an instrument if the alteration is not apparent Personal Defenses- Can be raised against ordinary holders to deny the payment of negotiable instruments by an ordinary holder but NOT against a holder in due course (HDC). If it is proven, the HDC can still recover on the negotiable instrument. Breach of Contract- there is a breach of contract, the NI may be deemed unenforceable Fraud in the inducement- occurs when a wrongdoer makes a false statement to another person to lead that person to enter into a contract with the wrongdoer. Mental Illness that makes contract voidable instead of void- If mental illness is found that makes a contract voidable rather than void, then a NI is unenforceable by a holder but is enforceable by an HDC. Illegality of contract that makes contract voidable instead of void- IF a contract is found to be illegal but the illegality only makes the contract voidable instead of void. Ordinary duress or undue influence- If a person is wrongfully influenced or threatened to enter into a NI Discharge of an instrument by payment or cancellation- If an instrument is discharged by payment or cancellation.