Bright Line RULE

Article 3 UCC

Promissory Note

(writing calling for payment of money )

-contains affirmative primise to pay

promisor = maker

promisee = payee

The Draft

(typically a check)

-contains an order/command

drawer = gives order

drawee = ordered to do the paying

payee = beneficiary of the order

Requirements to qualify as a negotiable instrument

WOSSUPP

1. a writing

2. payable to order or to bearer

3. signed by maker or drawer

4. reciting a sum certain

5. containing an unconditional promise or order, and no additional promises or orders

6. payable on demand or at a definite time, and

7. payable in currency

intitials, some definiing mark, nickname, found on margins, etc.

informal standard

unconditional promise = note

unconditional order = draft

what does conditional make?

NON NEGOTIABLE

*note: merely referring to another writing does not of itself make the promise or order conditional simply because it referes to another writing for a statement of rights with respect to collateral, prepayment, or acceleration

-what the writing says, or

-reference to an outside source

*interest rate need not be calculated by looking only to the instrument itself

MONEY! including foreign currency

NOT goods!

NON NEGOTIABLE!

must not contain any additional promises or orders

still negotiable! and payable on demand

on demand = on demand, at site, or on presentation

NOT NEGOTIABLE!

no magic words: order or assigns

-D signed negotiable instrument (usually maker/promisor) and can be sued if he fails to pay

-indorser on back of instrument promises that if check bounces and he is notified he will pay, so he can be sued too

-drawer who signs check promises that if it bounces he will pay, so he can be sued too

-drawee pays the draft (typcally BANK!) and DO NOT SIGN

When the words "without recourse" accompany signature:

*USED BY ENDORSERS and DRAWERS

disclaimer of liability

(passes title but assumes no signature liability)

Defendant: any transferor who sells the negotiable instrument (if transferor is not a donor, he can be sued)

-if D indorsed, any P in possession may sue

When D indorses, warranties run with the instrument

If not indorsed, only immediate transferee may sue (warranties do not run w/ the instrument)

5 warranties made by D who transfers or indorses

(IF INDORESED - WARRANTY RUNS w/ INSTRUMENT!)

D promises

1. all signatures are genuine and authorized

2.  plaintiff has good title to the instrument (forgery is breach of warranty)

3.  instrument ahs not been materially altered (instrument has been tampered with --> defective)

4. there is no defense or claim good against the defendant, instrument is enforceable

5. she has no knowledge of any bankruptcy or insolvency action against maker/drawer

proper transfer of instrument

transferee is a holder and may be eligible to be a holder in due course

"Payable to order of"

negotiated by:

delivery of the instrument to that payee

*any further negotiation requires that payee indorse the instrument and then deliver it to transferee

-indorsement must be authorized and valid

"Payable to bearer"

must be either SPECIAL or BLANK

+

RESTRICTIVE or UNRESTRICTIVE

one that names a particular person as "indorsee"

-indorsee must sign in order for the instrument to be further negotiated

one that does not name a specific endorsee

negotiated by DELIVERY ALONE

contains a CONDITION

"for deposit only"

cashed at Stupid Bank --> bank is NOT a holder (didn't pay attention to restriction)

HOW DOES TRANSFEREE QUALIFY AS A HOLDER IN DUE COURSE:

HDC takes an instrument:

1. for value, and

2. in good faith, and

3. without notice that it is overdue or has been dishonored or is subject to any defense or claim

holder must give value for the instrument

DOES NOT MEAN GIVING CONSIDERATION

promise is not a value

old value is good value

honesty in fact (subjective test)

"rule of a pure heart and an empty head"

holder must acquire the instrument without ntice that it is overdue, has been dishonored or is subject to any defense or claim.

OBJECTIVE TEST

did the holder know or have reason to know?

1. payable at definite time

2. principal in arrears

(holder had notice that a payment or more of principal is in arrears --> no HDC)

contrast with**interest in arrears

(holder takes with notice that one or more payments of interest are in arrears he can STILL QUALIFY AS HDC!!)

instrument is stamped VOID or PAID and holder still buys it

notice that obligation of any party is voidable

A transferee acquires whatever rights her transferor had

(transferee takes shelter in the status of her transferor)

-transferee has all the rights of a HDC even though transferee is a donee or otherwise fails to qualify

claim is a right to a negotiable instrument because of superior ownership

*if a negotiable instrument is duly negotiated to a holder in due course, the holder in due course defeats the superior owner

HDC takes free from personal defenses

INCLUDING:

(any defense available in ordinary contract action)

HDC DOES TAKE SUBJECT TO REAL DEFENSES:

MAD FIFI^4

Material

Alteration

Duress

Fraud

In

Factum

Incapacity

Illegality

Infancy

Insolvency

a change in the term of instrument

(i.e. maker writes a check for $100, payee changes to $2100 then sells to HDC --> maker only liable for 100)

BUT, if maker is negligent, estopped from raising material alteration as a defense

REAL fraud (FIF) --> assertable against an HDC

-there has been a lie about the instrument

(like saying it is a application for credit but it's really a promissory note)

PERSONAL fraud (fraud in the inducement)

-ineffective against HDC

1. To Honor Customer's Check (so long as there are sufficient funds)

2. Insufficient Funds (CAN honor check even if funds are sufficient, customer is liable to bank for the overdraft)

3. Wrongful Dishonor (if bank wrongfully dishonors a check, customer can recover damages for whatever harm is proximately caused)

4. Death of Customer (does not revoke bank's authority to pay a check until the bank knows of death and has reaosnable time to act on such knowledge)

5. Must honor a check as drawn (cannot charge account if signature forged, for more money than original order, if the bank pays wrong person, or if the check is postdated)

6. Stop Payment orders (oral stop payment order is binding on bank for 14 days unless renewed in writing. Written binding for 6 mo)

*if bank pays in spite of a stop payment order, customer has the burden of proving loss has occured and amount

The drawee bank that honors a forged or materially altered check must recredit the drawer's account, as long as the drawer was not negligent

theif is always liable

drawer liable if negligent

-leaving banks or spaces on the instrument

-includes failing to follow internal procedures desigend to avoid forgeries