Term
| Who are the parties to a promissory note? |
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Definition
| Promisor (maker) and promisee (payee) |
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Term
| Who are the parties to a draft? |
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Definition
1. Drawer - gives the order
2. Drawee - pays the order (typically the bank)
3. Payee - beneficiary of the order |
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Term
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Definition
| An order to pay - typically a check |
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Term
| What is required for an instrument to be negotiable? |
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Definition
WOSSUP
1. A writing
2. Payable to order or to bearer
3. Signed by maker or drawer
4. Reciting a certain sum
5. Containing an unconditional promise or order, and no additional promises or orders
6. Payable on demand or at a specified time
7. Payable in currency |
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Term
| What is contract or signature liability? |
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Definition
| Liability for any ∆ who signs a negotiable instrument - by signing, ∆ promises to pay, and if ∆ does not make good on the promise, then ∆ is liable. |
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Term
| Who is liable under contract or signature liability? |
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Definition
The maker, the indorser, and the drawer
NOT the drawee, since this party does not sign the instrument - merely pays it. |
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Term
| What does it mean when a person signs a negotiable instrument "without recourse"? |
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Definition
| Signer passes title to the negotiable instrument but disclaims contract/signature liability. |
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Term
| What is warranty or transfer liability? |
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Definition
| Seller's liability for having sold a flawed or defective instrument. |
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Term
| Who is liable under warranty or transfer liability? |
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Definition
Any transferor who sells a negotiable instrument.
Donors are NOT liable under warranty/transfer liability. |
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Term
| Who can bring suit for warranty/transfer liability? |
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Definition
If seller ∆ signed the instrument, then any π in possession can sue - indorsement means that warranties run w/ the instrument.
If seller ∆ did not indorse the instrument, then only the immediate transferee can sue. |
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Term
| What are the 5 warranties made by a seller of a negotiable instrument? |
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Definition
1. That π has good title to the instrument
2. That all signatures are genuine and authorized
3. Instrument has not been materially altered
4. No defense or claim against ∆
5. No knowledge of bankruptcy or insolvency of the maker or drawer |
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Term
| What does it mean for an instrument to be duly negotiated? |
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Definition
| It means that the instrument has been properly transfered, thus allowing the transferee to become a holder and eligible to become a holder in due course. |
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Term
| How is an instrument "payable to bearer" duly negotiated? |
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Definition
| Indorsement isn't needed for due negotiation - anyone who holds the instrument can cash it and is a holder. |
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Term
| How is an instrument "payable to order" duly negotiated? |
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Definition
By delivery of the instrument to the named payee.
Any subsequent transfer must be indorsed by the payee and delivered to the transferee. |
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Term
| What is a special indorsement? |
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Definition
An indorsement that names a particular person as indorsee.
The named indorsee must sign the instrument for that instrument to be further negotiated (i.e., further transferred) |
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Term
| What is a blank indorsement? |
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Definition
Simply a signature w/o naming a specific indorsee - can be negotiated by delivery alone.
I.e., anyone who subsequently holds the blank indorsement can cash it or be a holder. |
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Term
| What is a restrictive indorsement? |
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Definition
An indorsement w/ a condition, e.g. "for deposit only"
Any transferee who does not pay attention to the indorsement is liable to the indorser for conversion. |
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Term
| What is a holder in due course? |
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Definition
A holder who takes the instrument:
1. For value (not a mere promise)
2. In good faith
3. W/o notice that the instrument is overdue, dishonored, or subject to any valid defense or claim |
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Term
| What does it mean when a holder has notice that an instrument is overdue? |
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Definition
1. If holder takes an instrument w/ a date and the date has already passed, holder is on notice that it is overdue.
2. If holder knows that a payment on the instrument is in arrears, she is on notice and can't become a HDC.
3. Conversely, if holder knows that interest on the instrument is in arrears, she can still become a HDC. |
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Term
| How can a holder have notice of a defense of claim against the instrument's validity? |
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Definition
| If th instrument is stamped with PAID or VOID, the holder is on notice - can't become HDC. |
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Term
| Is actual notice of the instrument being overdue, dishonored, or subject to a claim or defense required? |
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Definition
No - in all cases, the holder is deemed to have notice if there was reason for her to believe that any of the above was true, even if she did not have actual notice.
Exception: holder who takes instrument from a fiduciary that is breaching her fiduciary duty - holder here is not on notice unless she has actual notice. |
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Term
| What is the shelter rule for holders in due course? |
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Definition
| Any subsequent transferee of a holder in due course steps into the HDC's shoes - has all the benefits of HDC status even if she herself would not qualify (e.g., if she had notice or was a donee instead of a transferee for value) |
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Term
| What are the benefits of being a holder in due course? |
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Definition
Takes the instrument free of claims of superior ownership and personal defenses.
Still subject to real defenses, however. |
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Term
| What are the real defenses that a HDC is still subject to? |
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Definition
MAD FIFI4
1. Material Alteration
2. Duress
3. Fraud in the Factum
4. Incapacity
5. Illegality
6. Insolvency
7. Infancy |
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Term
| What happens if a bank wrongfully dishonors a check? |
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Definition
| Customer can recover damages for whatever harm is caused by the wrongful dishonor |
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Term
| When does the death of a customer revoke a bank's authority to pay a check? |
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Definition
| When the bank receives notice of the customer's death and has reasonable time to act on the knowledge. |
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Term
| How long are stop payment orders binding on a bank for? |
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Definition
Oral stop payment order: 14 days unless renewed within that period
Written stop payment order: 6 months and renewable for another 6 months if in writing
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Term
| What happens if bank makes payment in spite of stop payment order? |
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Definition
| Bank is liable, but burden is on customer to prove that loss has occurred. |
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Term
| When is a bank liable for a forged or materially altered instrument? |
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Definition
Whenever the drawer was not negligent.
Drawer's negligence includes: leaving blanks or spaces on the instrument, failing to follow internal procedures to avoid loss, failing to examine own bank statement (bank statement rule) |
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Term
| What is the fictitious imposter rule? |
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Definition
| If an imposter induces a drawer to write a check through fraud or false pretenses, the drawer is considered negligent and the drawee bank will not be liable for the loss. |
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Term
| What is the employee inducement rule? |
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Definition
| Employers are liable for forgeries by employees who were entrusted with responsibility for handling checks (bank not liable) |
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