Term
| Types of commercial paper |
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Definition
Note: two-party instrument in which the maker promises to pay a sum of money to the payee
Draft: three-party commercial paper in which drawer order the secured party (drawee or payor) to pay a sum of money to third-party payee
-check: type of draft that is drawn upon a bank and payable on demand
-traveler's check: draft that must be countersigned by a person whose specimen signature appears on it
-cashier's check: a draft on which the drawer and drawee are the same bank
-teller's check: draft drawn by a bank on another bank or payable at or through a bank
contradictory terms: handwritten terms take precedence over typewritten terms, typewritten terms over printed terms, and words over numbers |
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Term
| Formal requirements of negotiability |
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Definition
1) writing signed by maker/drawer
2) contains unconditional promise or order
3) to pay a fixed amount of money
4) payable to order or to bearer
-order instrument: identifies a person or order to be paid
-bearer instrument: payable to person in possession; payable to bearer or order of bearer; no payee is identified; payable to cash; names a specific person, but also includes bearer
5) payable on demand or at a definite time
6) no additional undertaking or instructions |
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Term
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Definition
HDC: purchaser of debt who is assigned the right to receive payments; gives them superior status then mere holder
One must take the instrument:
1) as a holder: can become a holder in two ways:
-issuance: instrument is delivered by maker or drawer to either a holder or non-holder, for purpose of giving rights in instrument to any other person (first delivery)
-negotiation: delivery, regardless of voluntariness, by a person other than the maker or drawer to any other person who, as a consequence, becomes holder of the instrument (second delivery)
---bearer instrument: negotiation requires only transfer of possession of instrument; transfer does not have to be voluntary
---order instrument: negotiation requires transfer of possession of instrument and indorsement by holder
-----special indorsement: names an identified person as indorsee; indorsee must sign in order for the instrument to be further negotiated; special indorsement of a bearer instrument creates order instrument
-----blank indorsement: indorsement that is not accompanied by the naming of a specific indorsee; creates a bearer instrument
------qualified indorsement: indorser includes words that disclaim liability (without recourse)
------restrictive indorsement: indorser adds words seeking to impose a restriction (pay X only) or condition (pay X if he finishes y) on payment of instrument; restrictive words are generally ineffective as a limitation on transfer
-----anomalous indorsement: indorsement by a person who is not a holder of the instrument: person signing becomes liable on the instrument; it may be further negotiated
2) for value
-includes completed performance and payment for antecedent debt
-equivalent value not required
3) in good faith
4) without notice of infirmities
-notice includes actual knowledge, receipt of notification, or existence of a reason to know
-type of infirmities: claim or defense, apparent forged/altered/otherwise irregular instrument, overdue or dishonest instrument |
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Term
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Definition
-delivery of an instrument by a person, other than the maker or drawer, for the purpose of giving the person receiving it the right to enforce the instrument
-rights obtained by transferee: with the transfer or delivery of an instrument, all of the transferor's rights vest in the transferee
-shelter rule: person to whom an HDC transfer an instrument acquires rights of HDC, expect that transferee who engaged in fraud or illegality affecting instrument cannot acquire rights of HDC |
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Term
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Definition
six:
-transferor is entitled to enforce instrument
-all signatures are authentic
-all signatures are authorized
-instrument has not been authorized
-there are no defenses or claims that can be asserted against transferor
-maker, acceptor, or drawer is not, to transferor's knowledge, subject to insolvency proceedings
transferor must transfer the instrument for consideration
beneficiaries of transfer warranties
-transferee who indorses instrument makes warranties to all subsequent transferees
-transferee who does not indorse instrument makes warranties only to immediate transferee
damages for breach: limited to amount of instrument, plus expenses and loss of interest
disclaimer: transfer warranties may be disclaimed unless instrument is a check |
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Term
| Enforcement of instrument |
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Definition
legal action
-prima facie case: P must prove: 1) entitled to enforce instrument, and 2) signatures are valid
-D's response: D may avoid paying by providing a defense or claim in recoupment
-HDC reply: P may re-establish the right by proving HDC status, not subject to defense or claim
lost, destroyed, or stolen instrument: person seeking enforcement must prove terms and right to enforce
conversion: instrument taken by transfer, other than negotiation, from person not entitled to enforce it, or depository or payor bank makes or obtains payment for person not entitled to enforce it or obtain payment |
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Term
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Definition
effective against all holders, including HDC
-infancy
-incapacity
-duress
-illegality
-fraud in the factum (signer is not aware that he is signing a negotiable instrument and he must not have had a reasonable opportunity to become aware); NOTE fraud in the inducement not available against HDC, but available against holder (signer aware he is signing a negotiable instrument but induced into signing based on misrepresentation)
-discharge in insolvency proceedings
-alteration and forgery
-statute of limitations (usually 3 years)
-accomodation party |
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Term
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Definition
effective against non-HDC (holder); not effective against HDC
-issuance
-any K defense
-claim in recoupment (offset against amount owed on instrument): claim must arise from transaction that gave rise to instrument and limited to amount owed at time action is brought
-defenses and claims in recoupment of other persons: obligor may generally raise only his own defenses
-claims to the instrument |
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Term
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Definition
-generally ineffective as signature of person whose name is signed
-effective as signature of unauthorized signer in favor of person who, in good faith, pays instrument or takes it for value or collection |
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Term
| Fraudulent payees and employees: imposters |
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Definition
-if imposter induces person to issue instrument to imposter by impersonating payee of instrument, indorsement of instrument by any person in name of payee may be effective as indorsement of payee
-rule also applies to persons who, without authorization, misrepresent themselves as agents of payee |
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Term
| Fraudulent payees and employees: fictitious or unintended payees |
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Definition
if a person whose intent determines to whom instrument is payable (drawer or maker) does not intend person identified as payee to have any interest in instrument, or person identified as payee of instrument is fictitious person:
-any person in possession of instrument is its holder; and
-indorsement by any person in the name of stated payee may be effective as indorsement of payee |
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Term
| Fraudulent payees and employees: employer's liability for employee's fraudulent indorsement |
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Definition
| if employer entrusts employee with responsibility for instrument, and employee makes a fraudulent indorsement of instrument, indorsement may be effective as indorsement of person to whom instrument is payable if it is made in the name of that person |
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Term
| Negligence contributing to forged signatures or alteration |
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Definition
| person whose failure to exercise ordinary care substantially contributes to alteration of instrument, or to making of forged signature, is precluded from asserting alteration or forgery against person who, in good faith, pays instrument or takes it for value or collection |
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Term
| Alterations and incomplete instruments |
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Definition
fraudulent alterations
-alteration: unauthorized modification of instrument that, if given effect, alters party's obligation
-effect of fraudulent alteration: generally discharges party whose obligation is affected by alteration, unless party assents or is precluded from assert alteration
incomplete instrument: instrument signer intends instrument to be completed after signing by addition of words or number
-if completion is authorized, instrument may be enforced as completed
-if completion is unauthorized, obligor is generally discharged, but payor bank or HDC can enforce instrument as complated |
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Term
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Definition
demand for payment made to maker of note or drawee of draft by person entitled to enforce instrument
presentment excused when
-presentment cannot be made by exercise of reasonable diligence
-maker or acceptor has repudiated obligation to pay, is dead, or is in insolvency proceedings
-terms of instrument make it unnecessary
-drawer or indorser has waived it or is estopped from requiring it; and
-drawer has instructed draweee not to pay instrument (stop payment order on a check)
presentment warranties; three warranties:
-warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft
-draft has not been altered; and
-warrantor has no knowledge that the signature of the drawer of the draft is unauthorized
made by a person obtaining payment or acceptance of draft and by any previous transferor of draft
made to person who in good faith pays or accepts
damages: amount paid, plus expenses and loss of interest, resulting from breach, less any amount drawee received or is entitled to receive from drawer because of the payment |
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Term
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Definition
failure by drawee of draft or maker of note to pay within required time after presentment
time of dishonor
-time instrument: generally, on day it becomes payable or day of presentment, whichever is later
-demand instrument: generally on day of presentment
notice of dishonor
-indorser's liability: indorser not liable on instrument unless given timely notice of dishonor
-time of notice: notice of dishonor must ordinarily be given within 30 days after dishonor occurs
-excused notice: notice excused if waived, either by terms of instrument or person entitled to notice |
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Term
| Liability of parties: parties to instrument |
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Definition
issuer of note or cashier's check: primarily liable
drawer of an unaccepted draft: secondary liability; liable upon dishonor, no need for notice
drawee: no liability on instrument unless acceptance of draft
-drawee bank:
---liability to customer/drawer:
-----properly payable rule: bank can charge customer's account only for checks that are properly payable
-----banks must honor customer's check if there are sufficient funds to cover; if insufficient funds, bank may pay check and hold customer liable for overdraft
-----to be properly payable, check must have been authorized by customer
-------forged drawer's signature or indorsement: not liable
-------altered amount: liable for original amount
-------check completed by someone other than customer: customer liable unless bank has notice
-------postdated check: customer liable unless customer gives bank notice
-------stale check (more than six months after date): bank may, but not required to cash)
-----if bank dishonors a check that is properly payable, customer entitled to damages
---customer's duties to bank
-----bank statement rule: customer, upon receipt of bank statement, must exercise reasonable care and promptness to discover any unauthorized payments and promptly notify bank
-------forged drawer's signature or alteration: not more than 30 days to report; effect of failure: precluded from asserting subsequent forgery or alteration by same wrongdoer that has been paid by bank prior to receiving notice
-------forged indorsement: not more than one year to report; effect of failure: precluded from asserting subsequent forged indorsement by same wrongdoer that has been paid by bank prior to receiving notice
-----customer's defenses
-------bank's lack of good faith
-------bank's negligence substantially contributed to loss: comparative negligence allocation of loss
-----death of customer: bank can pay checks until knowledge of death and reasonable time to act; for 10 days after death, bank can pay regardless of knowledge unless ordered to stop by person claiming interest in account
-----stop payment order by customer
-------bank must honor but has a reasonable time to act
-------period of effectiveness; oral: 14 days unless confirmed in writing; written: 6 months
-------violation of order: customer has burden of proving loss; bank subrogated to rights of HDC
acceptor (drawee who agrees to pay a draft as presented): primary liability on instrument
indorser: secondary liability; requires both dishonor and notice of dishonor; if check, requires presentment within 30 days after indorsement; disclaimer: without recourse along with signature
joint signers: joint and several liability; generally not applicable to indorser, instead earlier indorser liable to later indorser |
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Term
| Liability of parties: accommodation parties |
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Definition
general rule: liability on instrument in capacity signed (indorser, maker, acceptor, or drawer)
requirements
-debtor must also sign instrument
-accommodation party cannot receive direct benefit from instrument
limitation of liability: collection guaranteed
defenses:
-his own defenses except lack of consideration
-accommodated party's defenses, except discharge in insolvency proceedings, infancy or lack of capacity |
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Term
| Liability of parties: signature by agent |
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Definition
principal's liability
-agent authorized: principal liable regardless of how agent signed instrument
-agent not authorized: principal not liable, unless ratification or estoppel
agent's liability
-agent not authorized or exceeds authority: agent liable in capacity signed to person who pays instrument in good faith or takes it for value
-agent authorized:
---agent signs principal's name only: agent not liable
---agent signs agent's name and capacity: agent not liable
---agent signs agent's name only or fails to indicate capacity: agent liable to HDC who takes without notice that original parties never intended for agent to be personally liable
---agent signs agent's name on principal's check: agent not liable |
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Term
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Definition
no recovery from:
-persons who took instrument in good faith and for value
-persons who in good faith changed position in reliance on payment or acceptance
recovery
-person who breached presentment warranty |
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Term
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Definition
elimination of person's personal liability on instrument
-instrument itself: not discharged
-underlying obligation: generally suspended until paid or dishonored, unless certified check, cashier's check or teller's check
-payment: discharge or obligation if made to person entitled to enforce instrument
-tender of payment: effect generally governed by K law
-cancellation or renunciation
---voluntary act or agreement not to sue by person entitled to enforce instrument
---no need for compensation
---no effect on HDC without notice of discharge
-indorser and accommodation party
---extension of due date: discharge to extent of loss
---other material modification: discharge to extent of loss equal to amount of right of recourse
---impairment of collateral: discharge to extent of impairment
-reacquisition by former holder: may cancel indorsements occurring after prior possession, discharging those indorsers
-accord and satisfaction
---claim is unliquidated or otherwise subject to dispute
---person against whom claim is asserted in good faith tenders instrument
---instrument contains conspicuous statement that instrument is tendered as full satisfaction of claim
---claimant obtains payment of instrument |
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