Term
|
Definition
| Article 3 applies to Negotiable Instruments; if an instrument is not negotiable, then the common law of K applies. Note this on an essay answer, but always go on to apply Art. 3, noting that you are assuming negotiability. |
|
|
Term
|
Definition
| Note: a promise to pay (e.g., “promissory note”, “certificate of deposit”). Two parties involved: 1. Party promising to pay (the “maker”—only obligated to pay the “holder” of the negotiable instrument) 2. Party to whom payment is promised (the “payee” or “bearer”) |
|
|
Term
|
Definition
| Draft (bill of exchange, e.g., a check): an order to pay. Three parties involved: 1. Party ordering payment (“drawer”) 2. Party being ordered to pay (“drawee,” often a bank) 3. Party to whom payment is ordered (“payee” or “bearer”) |
|
|
Term
|
Definition
| Negotiability: “An unconditional promise or order to pay a fixed amount of money that is payable to order or bearer when issued or first in possession of a holder; is payable on demand at a definite time; and states no unauthorized undertaking or instruction by the person promising or ordering payment.” |
|
|
Term
|
Definition
| Holder in Due Course (HDC): “A holder in due course is a holder who takes an instrument for value, in good faith, and without notice that: (i) the instrument is overdue or has been dishonored; (ii) the instrument contains an unauthorized signature or has been altered; (iii) there is a claim to the instrument; or (iv) any party has a defense or claim in recoupment on the instrument. (To determine this status, ask first if the person is a holder (a person in possession of an instrument with a right to enforce it) then determine whether they are a HDC.) |
|
|
Term
|
Definition
| Benefit of HDC status: “Where a negotiable instrument is negotiated to a HDC, the HDC takes the instrument free of personal defenses and claims and subject only to real defenses. |
|
|
Term
| Creation of Negotiability |
|
Definition
| Negotiability: for an instrument to be “negotiated,” it must be transferred to a subsequent party who becomes a “holder.” A holder means both possession and good title. Order paper is negotiated by proper indorsement and delivery; bearer paper is negotiated by delivery alone. Blank indorsements create bearer paper; special indorsements create order paper. |
|
|
Term
| Elements of Negotiable Instrument |
|
Definition
Negotiable Instrument: has nine formal elements; all must be satisfied for notes; first eight must be satisfied for checks:
1. Writing: means tangible form, but is pretty loosely interpreted (e.g., printing, typing, graffiti, etc.)
2. Signed by Maker (or Drawer): any name or mark will suffice if it is intended to be adopted as a signature (even an “x”)
3. Unconditional: cannot expressly state a condition for payment or state that the promise or order is subject to or governed by another writing.
4. Promise or order: a commitment to pay is a promise; a direction to pay is an order
5. To pay a fixed amount: the principal due must be fixed, but the interest can be a variable amount
6. Of Money: meaning currency (U.S. or foreign); cannot use a commodity for payment (e.g. gold, silver, barley, etc.)
7. No other unauthorized promise: the note cannot be bogged down by a bunch of other promises, except the following:
a. promises about collateral
b. confession of judgment clause
c. promise to waive the benefit of any law
8. On demand or at a definite time: an instrument is payable on demand if it fails to state a time for payment or states that it is payable “on demand,” “at sight,” etc. An instrument is payable at a definite time if it is payable (i) on a fixed date; (ii) after elapse of a specified period after sight; or (iii) at a time readily ascertainable when the instrument is issued.
9. To “order” or To “bearer”
a. examples of “order” paper: (note: negotiation of order paper requires indorsement of named payee and delivery)
i. “pay to the order of Bob Gibson”; “pay to the order of ABC, Inc.”; “pay to Bob Gibson or his order”
b. examples of “bearer” paper:
i. “pay to bearer”;“pay to the order of bearer”;“pay to cash”;“pay to ______”;“pay to the order of Bob Gibson or to bearer”;“pay to the order of Bob Gibson and to bearer”
|
|
|
Term
|
Definition
| To become a “holder” of “order” paper requires (i) a proper indorsement; and (ii) delivery |
|
|
Term
|
Definition
| To become a “holder” of “bearer” paper requires only delivery |
|
|
Term
|
Definition
| Last indorsement rule: if an instrument has been indorsed several times, the last indorsement controls what is necessary for further negotiation |
|
|
Term
|
Definition
| Special indorsement: names a particular person as indorsee, (e.g., “pay Joe Blow, [s] Payee.”) The indorsee (Joe Blow) must sign in order for the instrument to be further negotiated. Words of negotiation (such as “pay to the order of”) are not required in indorsements, and extra words generally do not impair negotiability. |
|
|
Term
|
Definition
| Blank indorsement: a signature that is not accompanied by the naming of a specific indorsee (e.g., the indorser merely signs his own name, probably the way most people indorse a paycheck). Blank indorsements create bearer paper, which may then be negotiated by delivery alone (such as if someone finds it lying on the ground—it’s been negotiated). |
|
|
Term
|
Definition
| Qualified indorsements: an indorsement with the words “without recourse” is a qualified indorsement and limits the contract liability imposed on indorsers |
|
|
Term
|
Definition
| Restrictive indorsements: any other language added to an indorsement creates a restrictive indorsement. Restrictive indorsements generally are ineffective to limit transfer or negotiation (e.g., “pay Joe Blow only”) or that try to condition payment (e.g., “pay Joe if he fixes my car”—may be negotiated even if Joe doesn’t fix the car). However, an instrument with words requiring bank collection (e.g., “deposit only,” “for collection”) must be paid consistent with the indorsement by any person or the first bank into which the instrument is deposited, or it will be deemed to have been converted. |
|
|
Term
| Becoming A Holder in Due Course |
|
Definition
| Holder in Due Course: a holder becomes a holder in due course by giving value, and acting in good faith and without notice of problems with or defenses to the instrument. A HDC can sue the other parties to the instrument for payment, and those parties are able to defend against that suit only with narrow grounds called “real” defenses and not on broader grounds (“personal” defenses). |
|
|
Term
|
Definition
Due Course requires the holder to take for value, in good faith, and without notice:
1. value: an executory promise (unperformed promise) is not value for Article 3 purposes
2. good faith: means honesty in fact (only one necessaty in Idaho) and observance of reasonable commercial standards
3. without notice: to be effective, notice must be received in such time and manner as to give a reasonable opportunity to act
a. facts constituting notice include:
i. instrument overdue: this is if any of the principal is overdue, an acceleration has been made, or it’s been more than a reasonable time after issuance of the demand instrument (90 days in the case of checks)
ii. unauthorized signature or alteration: will not be HDC if notice of alterations or unauthorized signatures
iii. claims to the instrument: notice of the claims will prevent HDC status
iv. defenses or claims in recoupment: notices of “real” defenses or claims in recoupment will prevent HDC status
b. facts not constituting notice: knowledge of the following facts does not of itself give the purchaser notice
i. the instrument is antedated, postdated, or undated
ii. instrument was issued in return for an executory (unperformed) promise
iii. any party signed for accommodation
iv. an incomplete instrument has been completed, unless the purchaser has notice of any improper completion
v. that there has been a default in the payment of interest
vi. that there is a public filing or recording of a document concerning the instrument
vii. any person negotiating the instrument was a fiduciary
ix. notice of discharge of a party, other than a discharge in an insolvency proceeding
|
|
|
Term
|
Definition
Real Defenses (FAIDS might be a helpful mnemonic):
a. Forgery: if the signature of the payee or any special indorsee was forged, generally no subsequent taker can be a HDC because no one can obtain the right to enforce necessary to qualify as a “holder.” However, if the person whose name was forged ratifies the unauthorized signature or is estopped from denying it, subsequent takers can qualify as HDC. The forgery of a name other than the payee or a special indorsee does not affect the right to enforce; subsequent takers can qualify as HDC.
b. Fraud in the Factum: causes the obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms
c. Alteration of the instrument: must be a “material” alteration
d. Incapacity: e.g. infancy, adjudicated insanity, etc.
e. Illegality: so long as it renders the transaction void; if the K is merely voidable, it becomes a personal defense
f. Duress: gun pointed to the head
g. Discharge in Insolvency Proceedings: fancy name for “bankruptcy”
h. Suretyship Defenses: when HDC knows a prior party signed the instrument as a surety
i. Statute of Limitations: for checks it’s 6 years after dishonor or 10 years from date of check, whichever is first
|
|
|
Term
|
Definition
| Personal claims or defenses: basically everything else, including defenses and claims available in ordinary K actions. (e.g., ownership claims, misrepresentation, simple fraud, breach of K, breach of warranty, payment, etc.) |
|
|
Term
|
Definition
| Shelter Rule—basically says a transferee acquires whatever rights her transferor enjoyed, taking “shelter” in the status of her transferor. (there is a limitation, however—the rule doesn’t apply if the transferee is a party to fraud or illegality affecting the instrument). |
|
|
Term
|
Definition
| Holder v. Indorser: basically the framework for a lawsuit. An instrument may be enforced (or sued on) by either a holder or a non-holder in possession with rights of a holder (we didn’t cover this). Parties liable on an instrument will be the maker or drawer, and the indorser(s). |
|
|
Term
|
Definition
| Theories of Liability: the prerequisites for liability require three elements: 1. presentment of the instrument: a demand for payment made by person entitle to enforce (30 day limit for checks) 2. dishonor: occurs when the maker or drawee does not pay within the allowed time after presentment 3. notice of dishonor: indorser must be given timely notice that the instrument has been dishonored (usually within 30 days) |
|
|
Term
|
Definition
| Contract Liability: this stems from the signature on the instrument. Maker/Drawer has primary liability; indorsers secondary |
|
|
Term
|
Definition
| Warranty Liability: 1. transfer warranty liability arises upon any transfer for consideration (good title; genuine signatures; no material alteration; no defenses; no knowledge of insolvency proceedings) 2. presentment warranty liability arises upon presentment (no material alteration; no knowledge of unauthorized signature) |
|
|
Term
| Coversion (Tort) Liability |
|
Definition
| Conversion (Tort) Liability: arises upon mistreatment of personal property (notes, checks) |
|
|
Term
| The Underlying Obligation |
|
Definition
| The Underlying Obligation (usually a contractual obligation for which the note or check was issued). This is “suspended” when an instrument is issued, but springs back once the instrument is dishonored. |
|
|
