Term
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Definition
| Promise to pay money - a two-party instrument between the maker (obligor) and the payee (promisee) |
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Term
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Definition
| Note issued by financial institution - financial institution acknowledges receipt of money and promises payee/depositor to repay the money |
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Term
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Definition
AKA a check
Order to pay money - 3-party instrument
Drawer - person ordering payment
Drawee - person to make payment
Payee - person to receive payment |
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Term
| Requirements for Check (Draft) |
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Definition
Financial institution is the drawee
Payable on demand (whenever payee wants it) |
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Term
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Definition
-Ordinary
-Certified: bank has accepted it and agreed to pay
-Cashiers: drawer and drawee are same bank, person buying the check is the remitter (amt debited from bank customer's acct)
-Tellers: check drawn by one bank on another bank - person buying the check is the remitter
-Travellers: demand instrument requiring countersignature by a person whose specimen signature already appears on the instrument |
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Term
| Remotely-Created Item (Demand Draft) |
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Definition
| A draft not signed by the drawer but created with the drawer's authority so that a third party can get paid from the drawer's account at the bank (3rd party is usually a seller in an Internet transaction or when you pay bills over the phone by giving creditor your checking acct #) |
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Term
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Definition
Refers to the form of the instrument - it's determined at the time of issuance
*If it says it's NON-NEGOTIABLE, then it is - can't opt in |
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Term
| Importance of Negotiability |
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Definition
| If paper is negotiable and transferred (properly negotiated), it can reach the hands of a special good faith purchaser called a holder in due course (HDC) who gets better rights than the transferor and can get paid from the obligor even if the obligor has defenses like good reasons not to pay under normal contract law |
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Term
| What makes an instrument negotiable? |
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Definition
-In writing
-Signed by maker or drawer (mark X, signature, thumbprint, computer-generated)
-Unconditional Promise or Order to Pay
-Fixed Amount
-In Money
-No Other Undertaking or Instruction
-Payable on Demand OR at a Definite Time
-Has Words of Negotiability |
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Term
| What makes a promise or order to pay UNCONDITIONAL? |
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Definition
-Presumption of such
-Items that make CONDITIONAL:
-Express condition to payment
-Promise subject to another record
-Incorporation by reference (rights or obligations with respect to the promise or order are stated in another record
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-Items that DO NOT make it CONDITIONAL:
-Statement of consideration ("I promise to pay $50 to ABC for a TV")
-Reference to another record ("as per", "accordance with")
-Incorporation by Reference of Items that Wouldn't Hurt Holder: rights regarding collateral, prepayment (right to pay early), acceleration (right to get paid early upon some event)
-Limitation of Payment to a Particular Fund or Source
-Countersignature
-Consumer Protection Language |
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Term
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Definition
There's a presumption of no interest (like an ordinary check)
Interest may be stated but not violate the fixed amount requirement if it still states an amt of money
Can also include reference to outside sources |
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Term
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Definition
-Authorized medium of exchange: foreign or domestic, no Monopoly money
CANNOT be payable in goods or services
WORDS PREVAIL OVER FIGURES - if it says "$500" but it's written "five thousand", then it's $5000 |
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Term
| No Other Undertaking or Instruction |
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Definition
JUST promises to pay money - not a full contract
EXCEPTIONS: permitted undertakings or instructions, promises concerning collateral ("the maker will provide additional collateral"), confession of judgment clauses, waiver of law meant to benefit the obligor |
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Term
| Payable on Demand at a Definite Time |
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Definition
Look for express language: "on demand"
If instrument doesn't state the date it's due, it's a silent instrument
Express language stating it's due at a definite time must be paid by then (look for dates, fixed periods of time, etc.)
-CAN prepay, OR accelerate the due date ("payable on January 1, 2015 but if Uncle Fred dies earlier, may accelerate note to 30 days after Fred's death") |
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Term
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Definition
BEARER PAPER: "good luck on the bar exam", "payable to bearer" - doesn't identify a person as payee
ORDER LANGUAGE: "to the order of Frank Smith"
IF BOTH ORDER AND BEARER LANGUAGE - BEARER CONTROLS!!
Exception for checks: order or bearer language requirement is waived (ONLY for checks!!) |
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Term
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Definition
| Transfer of a negotiable instrument so transferee is a HOLDER - payee transfers the instrument to a 3rd party rather than just getting the money, e.g., as payment for a sale, to a donee as a gift, etc. |
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Term
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Definition
-Possession of negotiable instrument
-Good tite (for bearer, that means possession; for order, that means possession plus necessary endorsements) |
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Term
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Definition
Signature on the back of the instrument
Blank - payee signature only - no particular person to whom it should be paid - this creates BEARER PAPER
Special indorsements - payee's signature PLUS designation of new person to whom instrument payable - creates ORDER PAPER
Restrictive indorsement - makes it only for deposit or collection ("for deposit into my BOA acct #123 only")
ID of person to whom instrument is payable - intent determines initial payee, if it's unclear on its face
Multiple payees - "and" separates the names of the payees (requires ALL payees to indorse), "or" also separates (requires ANY ONE of the payees) |
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Term
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Definition
Transferee's right to transferor's indorsement - if instrument is transferred for value, transferee has specifically enforceable right if it's missing
Depositary Bank Becomes Holder Even W/o Transferee's Signature
Misspelled - payee can indorse with correct name
Payee lacking capacity can effectively indorse |
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Term
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Definition
Important when obligor raises a defense to payment - regular holders would lose to a defense to payment (like maker not wanting to pay because product is defective)
HDC can obtain better rights and take FREE of this and most other defenses |
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Term
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Definition
Negotiable instrument
Holder
Authenticity not apparently questioned (doesn't bear evidence of forgery or alteration or isn't otherwise so irregular or incomplete as to call it into question)
Holder must pay value (could even pay less than the face value - also, past consideration IS considered value)
Good faith - honesty in fact and observance of reasonable commercial standards of fair dealing
Without notice at time of acquisition (NOTICE is actual knowledge - subjective; receipt of a notice coupled with a reasonable time to act on it; person has reason to know based on facts and circumstances - just filing doesn't put someone on notice) |
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Term
| HDC Doesn't Have Notice of |
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Definition
Instrument principal overdue (more than 90 days)
Instrument dishonored (check marked insufficient funds)
Uncured default with respect to payment of another instrument issued as part of the same series
Unauthorized signature
Alteration
Any claims
Any defense or claim in recoupment (any reason obligor doesn't want to pay - minority, incapacity, etc.) |
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Term
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Definition
Person can get HDC rights without qualifying as a HDC if:
-transfer of an instrument vests the rights that the transferror had (HDC rights pass with the note) BUT person can't get HDC rights by shelter if they were a party to fraud re: the instrument
BURDEN OF PROOF is on person claiming HDC status or rights by shelter |
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Term
| HDC Subject to "Real Defenses" |
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Definition
| Subject to "real defenses": infancy, duress which voids obligation, lack of legal capacity making obligation void, illegality making obligation void, fraud in the execution (signer lacked knowledge of instrument's character or reasonable opportunity to learn of it), discharge in insolvency, omission of required consumer protection language, SOL (6 yrs from due date - if unaccepted draft, 3 yrs after dishonor/10 yrs after issue), payment to former holder, alteration, unauthorized signatures and forgeries |
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Term
| HDC Protected from "Personal Defenses" |
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Definition
| Failure of consideration, breach of warranty, fraud in the inducement |
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Term
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Definition
| HDC is free from claims of others to the instrument |
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Term
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Definition
Basis is a person's signature on an instrument
Signatures by agents: binding principal (follow general law), binding agent (but escapes personal liability if P is identified in instrument and sig shows it was made on P's behalf) |
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Term
| Liability of Agent on an Instrument |
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Definition
If P isn't identified on instrument through signature, agent is liable to the HDC unless they can prove the holder had notice of the representative nature of agent's signature, OR to non-holder in due course unless agent can prove that the original parties didn't intend the agent to be liable
NO liability if principal's name is on the check! |
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Term
| Liability of Maker of Note |
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Definition
Primary liability - must pay instrument when it's due according to its terms at the time it was issued
Liable to holder or indorser who paid instrument
Defenses - depends on status of holder |
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Term
| Liability of Drawer of Draft |
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Definition
Can't disclaim liability on a check but can on other drafts
Only liable if there is i) presentment to drawee within 30 days and ii) dishonor |
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Term
| Indorser of Note or Draft |
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Definition
If payee indorses check and writes "without recourse", prevents him from incurring contract liability - just effective to pass title
Indorsers are liable in the order of their signatures - sue prior indorsers for payment; liable to later indorsers
Secondary liability - only if i) presentment, ii) dishonor and iii) notice of dishonor |
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Term
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Definition
Makes no negotiable instruments contract - if A draws a check for $300 to B, and the check bounces, B can't sue the bank from which the check was drawn
Acceptance or Certification - may agree to pay by signing, but no obligation to accept, and if drawee doesn't sign, can't be sued for it
Final payment: when drawee bank pays the item in cash or doesn't revoke a provisional settlement by the midnight deadline of the next banking day after the day of receipt (if bank provisionally issues a check but then waits to see if customer puts enough $ in the acct, then doesn't withdraw the check, it's issued!)
Conversion liability - drawee who pays on forged indorsement is liable - MUST have received delivery of the instrument |
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Term
| Payment of Checks after the Drawer's Death |
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Definition
Generally, drawee bank may continue to pay checks until it knows drawer has died and has a reasonable opportunity to act on that knowledge
Drawee bank may pay for NO MORE THAN 10 DAYS after drawyer's death, but if someone claiming interest requests the drawee bank stop paying immediately, they must do so |
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Term
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Definition
Person who signs an instrument to lend his credit to another party but who doesn't get any direct benefit
ACCOMMODATED: principal/debtor/obligor (person with bad credit)
ACCOMMODATION: surety/cosignor (person with good credit)
HOLDER: creditor/obligee (person who wants payment assured)
Liability is capacity in which accommodation party signs - presumed as a guaranty of payment
CAN limit language - "collection guaranteed only" - creditor has to try to recover from obligor first
If surety pays the instrument, they are entitled to recover from the obligor/debtor |
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Term
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Definition
| Indorsement by a person who wasn't the holder of the instrument - outside the chain of title - is notice of its accommodation character |
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Term
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Definition
Made by transferor who receives consideration - not in a gift context
Made to immediate transferee, subsequent transferees if transferor indorsed - drawer and maker can NEVER sue for breach of transfer warranty (they get instruments presented to them, not transferred)
Warrantor entitled to enforce the instrument (basically holder status)
All signatures authentic and authorized
No alteration
No good defenses against transferor
No knowledge of insolvency proceedings
*ONLY WARRANTY WHERE WARRANTOR'S LACK OF KNOWLEDGE IS RELEVANT
Can't disclaim checks
Can disclaim non-checks |
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Term
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Definition
Made by presenter and previous transferors
Made to parties who pay in good faith - maker, drawee, acceptor
(Law firm pays clerk with a check for $500 drawn on Texas state Bank - clerk deposits into his acct at ONB - ONB presents to TSB for payment and TSB pays - clerk and ONB made presentment warranties to TSB)
Warranties when unaccepted draft presented to drawee (like cashing a paycheck) - warrantor entitled to enforce draft or obtain payment, no alteration, no knowledge of unauthorized drawer's signature |
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Term
| Warranty vs. Indorser's Contract |
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Definition
If P is holder: if payor hasn't paid the instrument, then the holder will sue the indorser on the contract breach
If P is payor: if P paid then later discovers they shouldn't have (check was forged or note was altered), payor will attempt to sue the indorser for breach of warranty |
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Term
| Failure to Produce Original Instrument |
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Definition
(if lost, inadvertently destroyed, or stolen)
Enforcement by person not in possession - if they were a holder when the loss occurred and the loss wasn't due to transfer or lawful seizure, and they can't reasonably get the original - protection is required by security or bond |
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Term
| Forged Drawer's Signature |
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Definition
Alleged drawer is NOT liable
Drawee bank must recredit alleged drawer's account as check wasn't properly payable unless drawee bank has a defense
Bank can't pass on the loss UNLESS breach of presentment warranty |
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Term
| How can bank defend having to re-credit an account that was drawn on from a forged check? |
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Definition
Drawer's negligence - leaving checkbook out in the open
Bank statement rule - drawer has a duty to inspect their bank statement and cancel checks in a timely manner and report forgeries to bank
Forger drawer's signatures must be reported within 1 yr regardless of bank or customer's negligence
Repeat offender rule - if the same person is forging a series of checks, drawer must report within 30 days of when the statement was available |
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Term
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Definition
Irrelevant for bearer paper b/c indorsement isn't needed
Forgery breaks chain of title for order paper and check isn't properly payable - drawer may demand bank (drawee) recredit his account |
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Term
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Definition
| drawer or maker may be estopped to deny the validity of forged indorsement if they acted carelessly (responsible for determining true identity of payee) |
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Term
| Bank's defenses to liability for forged indorsements |
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Definition
Impostor rule
Fraudulent indorsement by employee entrusted with check
Drawer's negligence
Failure to timely sue (drawer must sue within 3 yrs) |
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Term
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Definition
Obligor doesn't want to pay because the instrument was altered
-any unauthorized change in an instrument that purports to modify the obligation of a party - amt, date, names of payees, or interest rate |
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Term
| Alteration - Effect on HDC |
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Definition
HDC can enforce for the original amount (if A issues a promissory note to B for $100, and B alters it to read $1000 and sells it to C, C can enforce against A for $100, and then A has a defense of alteration for the other $900)
Unauthorized completion - HDC may enforce as completed (A signs a check but leaves the amount blank, hands it to B saying he can spend up to $100, but B writes the check out for $1000 - A is liable for $1000) |
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Term
| Alteration - Effect on non-HDC |
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Definition
If fraudulently made by holder, obligor is totally discharged
If not fraudulently made, obligor is liable under the original terms |
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Term
| Alteration - Not Properly Payable |
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Definition
| If A issues a check to B for $100 but B alters it and cashes it for $1000, A may recover against his bank because the check was NPP |
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Term
| Bank's Defenses to Alteration |
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Definition
Drawer's negligence
Bank statement rule - drawer has to report alterations to the drawee bank within 1 yr
Breach of transfer and presentment warranties of no alteration |
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