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Note A promise to pay money (two-party instrument).
Parties in a Note. Maker (Promisor/Obligor – person who promises to pay) and Payee (Promisee – person entitled to payment)
Certificate of Deposit Note issued by a Financial Institution.
Draft An order to pay money (three-party instrument).
Parties in a Draft. Drawer (person ordering payment), Drawee (person to make the payment), and Payee (person to receive the payment).
What is a check? A Draft.
Requirements for a Check. 1) A financial Institution is the Drawee AND 2) Payable on Demand.
Types of checks Ordinary Check, Certified Check (check a bank has "accepted"), Cashier's Check (Drawer and Drawee same bank; person buying check is Remitter), Teller's Check (check drawn by one bank on another bank; person buying check is Remitter), and Traveler's Check
Remotely-Created Item A draft NOT signed by the Drawer, but created w/ the drawer's authority so that a third-party can get paid from Drawer's account at a bank.
Opting Out If instr says non-negotiable, it is so UNLESS it is a check. Cannot expressly opt in.
What if an instrument is NOT negotiable? It is not invalid or unenforceable; it is just a regular contract.
Elements of Negotiability 1) In writing, 2) Signed by Maker/Drawer, 3) Unconditional, 4) Fixed Amount, 5) In Money, 6) No other undertaking or Instruction, 7) Payable on Demand/At a Definite Time, AND 8) Contains words of Negotiability
Signature Any symbol executed or adopted by a party w/ present intent to authenticate a writing.
What makes a Promise/Order Conditional? Express condition to payment, Promise/Order subject to/governed by another record, incorporation of rights/obligations by reference.
What does NOT make a Promise/Order Conditional? Statement of Consideration, Reference to another record (e.g. "as per", "in accordance with"), Incorporation by reference of items that would not hurt holder, limitations of pymt to a particular fund/source, countersignature, consumer protection language.
Interest in re Fixed Amount element. Presumption of No Interest; but interest can be stated as an amount of money, fixer or variable rate, or by referencing an outside source. Failure to state the Interest Rate = Judgment Rate.
On a negotiable instrument, will the words or figures prevail? Words prevail.
General Rule in re Undertakings. Negotiable instruments provide no other undertakings, other than payment of money.
Exceptions to Undertakings General Rule. Promises concerning collateral, Confessions of Judgment Clauses, Waiver of Law Meant to Benefit the Obligor (maker/drawer).
How is the instrument on demand? Expressly stated, or Instrument is silent.
What counts as a Definite Time? Express date, Fixed period a/f Acceptance given, or Time readily ascertainable at the time the promise/order is issued.
Words of Negotiability Bearer Language ("payable to bearer," "to cash," no identified person), Order Language (identifiable person). If both order and bearer language, bearer controls.
Exception to Words of Negotiability element. Checks. If it is the ONLY element missing, order/bearer language is waived.
What if an instrument is missing one or more of the eight elements required for negotiability? It can still be enforceable under K law.
Holder Status 1) Possession of Negotiable Instrument AND 2) Good Title
Methods of obtaining good title. Bearer: possession alone; Order: possession and necessary endorsements.
Indorsement A signature on a negotiable instrument by someone other than the maker, drawer, or acceptor.
Blank Indorsements Simplest type of indorsement consisting merely of payee's signature. Creates Bearer Paper (further negotiations may be by transfer of possession alone).
Special Indorsements Payee's signature plus Designation of New Person to whom Instrument is Payable. Creates Order Paper (further negotiations will require the indorsement of the person to whom it was made payable).
Restrictive Indorsement Limits what may be done with the instrument (e.g. "for deposit", "for collection").
Multiple Payees "And" between names require ALL payees to indorse; "or" between names requires any one of the payees to indorse.
What happens when an instrument is transferred for value? Transferee has specifically enforceable right to the transferor's indorsement.
May a Payee indorse even though she lacks capacity? Yes, negotiation is effective even if the payee was a minor, incompetent, or subject to duress.
Benefit of being a Holder in Due Course (HDC)? HDC can obtain better rts than the transferor and take free of most defenses.
Elements of HDC status. 1) Negotiable Instrument (8 elements), 2) Holder (2 elements), 3) Authenticity NOT apparently questioned, 4) Holder must pay Value, 5) Good Faith, 6) W/o Notice AT TIME of instrument acquisition
What Value may a Holder pay? Amount can be less than face value of instrument, If less than consideration than HDC only for amount paid on consideration, Security Interest.
Good Faith Honesty in Fact (subjective) AND Observance of Reasonable Commercial Standards of Fair Dealing (objective).
Notice (in re HDC) Later notice does not matter. Notice can be Actual or Reason to Know. Receipt of Notice must be w/in a reasonable time to act on it.
Does filing in the public records put a Holder on notice? No.
Of what things can a HDC not have Notice? 1) Instr (principal) Overdue, 2) Instr Dishonored, 3) Uncured Default w/ Respect to Pymt of Another Instr Issued as Part of the Same Series, 4) Unauthorized Signature, 5) Alteration, 6) Any claim by Third-Party to Instr, 7) Any defense/claim in recoupment
Shelter Rule The transfer of an instrument vests in the transferee the rights that the transferor had. (Having HDC rights via shelter does NOT make one a HDC)
Exception to Shelter Rule A person who was a party to Fraud or Illegality affecting the Instrument cannot get HDC rts by Shelter.
Real Defenses Fraud in the Factum, Forgery (Unauthorized signatures), Alteration, Adjudicated Incompetency, Infancy, Illegality, Duress, Discharge (bankruptcy, known by HDC), Suretyship defenses, SoL OTHERS: Omission of req'd consumer protection lang, pymt to Former Ho
Fraud in the Execution Signer lacked knowledge of instr's character/essential terms AND Signer lacked reasonable opportunity to learn of instr's character/essential terms.
Statute of Limitations Note = 6 years from due date (NOT issue date). Unaccepted Draft = Earlier of a) 3 years after dishonor or b) ten years after issue.
When does Agent escape Personal Liability? Principal is identified in Instrument AND Signature Unambiguously shows it was made on behalf of Principal. (Exception: Principal's name is on check)
Liability of an Agent. If two elements NOT satisfied. Agent is liable to HDC, unless proves HDC had notice. Agent is liable to Holder, unless proves original parties did NOT intend agent to be liable.
Liability of Maker/Obligor of Note. Primary Liability. Must pay instr when it is due. Liable to Holder or Indorser who paid Instr.
Liability of Drawer of Draft. Cannot disclaim liability on a check, but can on other Drafts. Secondary Liability. Drawer liable ONLY a/f two conditions: 1) presentment, 2) dishonor.
Liability of Indorser. Liability Disclaimer Allowed (e.g. "without recourse"). Indorsers are liable to each other in order of signatures. Secondary Liability. Indorser liable only a/f 3 conditions: 1) presentment, 2) dishonor, AND 3) notice of dishonor.
When is an Indorser's liability discharged? When presentment is not made w/in 30 days of Indorsement.
General Rule in re Drawee. Drawee makes NO negotiable instr contract. EXCEPTION: Acceptance or Certification.
Drawer's Death General Rule: Drawee can pay checks until knows of death and had reasonable opportunity to act on knowledge. If knows of death, Drawee may pay for no more than 10 days a/f death; unless someone claiming an interest requests Drawee to stop immediately.
Who makes Transfer Warranties? Transferor who receives consideration.
Transfer Warranties. Warrantor is entitled to enforce instr, All signatures authentic and authorized, No alteration, No good defenses against transferor, No knowledge of insolvency proceedings, If remotely-created item person id'd as Drawer actually authorized the item.
Disclaiming Warranties (in re checks) Checks cannot disclaim; Non-checks may disclaim.
To whom are Presentment Warranties made? Maker, Drawee, and Accepter. (who pay in good faith)
Presentment Warranties when unaccepted draft presented to Drawee. Warrantor Entitled to Enforce Draft or Obtain Payment, No Alteration, No knowledge of Unauthorized Drawer's Signature, If remotely-created item, that person id'd as Drawer authorized the item.
Warranty when other instruments presented Warrantor entitled to enforce draft or obtain payment (good title).
Warranty v. Indorser's K If payor has not paid instr, Holder will sue Indorser on Indorser's K (trying to get paid). If payor has paid and later discovers payor should not have paid, payor will attempt to sue Indorser for Breach of Warranty (trying to get money back).
Discharge by Holder Holder may discharge obligation by surrendering instr to obligor, destroying it, canceling it (e.g. writing "void"), etc.
Enforcement for failure to produce original instr by person NOT in possession. a) person was entitled when loss occurred, b) loss not due to transfer or lawful seizure, and c) person cannot reasonably obtain the original.
Post-dated Check Bank may pay post-dated check UNLESS customer gives bank a notice of post-dating that describes the check w/ reasonable certainty.
Who has authority to stop payment on a check. Only the Drawer.
Oral Stop Payment Order lapses a/f 14 days
Written stop payment order effective for 6 months, and should be signed and dated
Describing a check "w/ reasonable certainty" Check #, Account #, Amount
Bank's defenses if it pays over a stop payment order a) Stop payment order did not comply w/ requirements, b) no loss
Who has standing to complain about wrongful dishonor? Drawer against Drawee (Bank). Payee may NOT sue Drawee.
Drawee Bank's Defenses in re Wrongful Dishonor. a) payment would overdraw Drawer's account, b) check is more than 6 months old.
Payment in Full Check A check on which Drawer CONSPICUOUSLY indicates that cashing it acts as paymt in full. Said check operates as an ACCORD AND SATISFACTION if payee cashes check.
Exceptions to Payment in Full Check a) Payee returns money w/in 90 days, b) Payee is an organization AND had previously notified Drawer of a particular person/address to send payment in full checks.
Forged Maker's Signature Alleged Maker NOT liable, UNLESS a) alleged maker's conduct ratifies the forgery, OR b) alleged maker's conduct precludes him from denying the forgery.
Bank's defenses to Re-crediting Alleged Drawer's Not Properly Payable Action. a) Drawer's Negligence, b) Bank Statement Rule
Bank Statement Rule Generally: Drawer has duty to inspect bank statement and cancel checks in timely manner and report forgeries to bank. If he does not AND bank can prove loss beyond original mistaken payment, Drawer is precluded from bringing not properly payable action.
Repeat Offender Rule If same person is forging a series of checks, Drawer MUST report forgeries w/in 30 days of when statement was available. If Drawer does not, the Bank will not re-credit the account for the subsequent forgeries by same person.
Effect of Forgery of Payee's Name Bearer Paper: irrelevant. Order Paper: Breaks chain of Title and check is not properly payable.
Situations where a party is precluded from asserting forgery of payee's name. Imposter Rule and Fraudulent Indorsements by EEs
Imposter Rule The issuer, maker, or drawer, will be estopped from denying the validity of a forged indorsement. These are situations where Maker/Drawer is deemed to have acted carelessly in issuing the check and to have contributed to the forgery.
Liability of Drawee a) Conversion Liability to Payee, b) Not Properly Payable Liability to Drawer (Drawee protected from double liability)
Defenses of Drawee (Bank) if paid 1) Imposter Rule, 2) Fraudulent Indorsement by EE Entrusted w/ Check, 3) Drawer's Negligence, 4) Failure to Timely Sue (e.g. Drawer must sue w/in 3 years)
Types of Alterations Change in Obligation (amt, date, names of Payees, interest rate). Unauthorized Completion.
Effect of different types of Alterations on HDC. Change in obligation: HDC may enforce original amt (real defense fo rest). Unauthorized Completion: HDC may enforce as completed.
General Rule in re Alterations of checks (properly payable). General Rule: An altered check is NOT properly payable. UNLESS drawer's negligence substantially contributes to alteration or drawer did not report alterations to Drawee w/in 1 year.
Created by: Sarah_Shore