Commercial Papers

Question 1

Lost check

Answer 1

to enforce a lost check, must show:
(1)he is a person entitled to enforce;
(2) reason no longer in possession is not because of a purposeful transfer or lawful seizure;
(3) cannot obtain possession of the instrument because its whereabouts are unknown; and
(4)

Question 2

properly payable

Answer 2

a check is properly payable when it is authorized by the customer and not in violation of the bank’s agreement.

A bank may dishonor a check that is not properly payable, such as: (1) when check is payable to two people and only one person endorses the check; (2) check contains a forged payee’s endorsement; and (3) forged drawer’s signature

Question 3

presentment warranty

Answer 3

(1) warrantor is a person entitled to enforce;
(2) draft has not been altered; and
(3) warrantor has no actual knowledge that the signature is unauthorized

Question 4

Forged drawer signature

Answer 4

(1) not properly payable; and

(2) drawee bank is generally liable for paying check

Question 5

Impostor

Answer 5

forgery is effective and drawee is precluded from raising the forgery in a “not properly payable action” against the drawer. it is the drawer’s fault for not recognizing the impostor.

no warranties are breached because he is a person entitled to enforce

impostor is liable to drawer in common law fraud and conversion for misrepresenting his identity and lying about any additional money

Question 6

bank statement rule

Answer 6

customer must exercise reasonable promptness in examining the statements to determine any unauthorized alteration or signature, and, if customer should have reasonably discovered an issue, he must promptly notify the bank. Otherwise, he is precluded from asserting against the bank the alteration or signature if the bank suffered a loss

without regard to negligence, customer must report forgery within 1 year of when bank statement was made available. Must show at least the check number, payment date, and amount of the check

Question 7

drawer negligence

Answer 7

if drawer failed to exercise ordinary care and this failure substantially contributed to the forgery, he is precluded from asserting the alteration or signature against a person who, in good faith, pays the instrument

Question 8

Holder in Due Course

Answer 8

(1) negotiable instrument;
(2) took for value;
(3) in good faith; AND
(4) without notice of:
(a) the instrument being overdue or dishonored;
(b) an unauthorized signature; or
(c) any defenses or claims

past consideration is considered for value, but an unexecuted promise does not constitute value

can only be a holder in due course for the amount of value actually rendered (if note is for $1000, but gave value of $500 plus promised $500 in future performance, only HIDC in extent of $500)

Question 9

Blank indorsements

Answer 9

signature not accompanied by the naming of a specific indorsee

operates to turn a check into a bearer payer so that anyone in possession of the check would have good title and the ability to enforce payment. if that check is stolen from the holder, holder’s only remedy is to seek recovery based on common law fraud and conversion

The drawee is not liable to that person because check suspends the underlying contract obligation and, once the check is paid, the obligation is discharged altogether

Question 10

overdraft

Answer 10

absent an agreement otherwise, payor bank has no obligation to pay a check which would cause the customer’s account to become overdrawn

Question 11

stale check

Answer 11

bank has no obligation to honor a check that is older than 6 months

Question 12

negotiable instrument

Answer 12

(1) in writing;
(2) signed by maker;
(3) unconditional promise to pay/order;
(4) fixed amount of money;
(5) no other undertaking or instruction;
(6) payable on demand or at a definite time; AND
(7) is payable to “order” or to “bearer”

Question 13

implied warranty of merchantability

Answer 13

a warranty that goods are fit for ordinary use is implied in a contract if the seller is a merchant who deals in goods of that kind

Question 14

“as is”

Answer 14

negates implied (not express) warranties. Between merchants an additional term in a confirmation is included unless the term materially alters the contract

Question 15

perfect tender

Answer 15

buyer can accept all goods, reject all goods, or accept some and reject the rest. If the buyer does not reject the goods in a reasonable time, he has impliedly accepted them

Question 16

transfer warranties

Answer 16

when commercial paper is transferred for consideration, and runs to the immediate transferees and to subsequent transferees if the transferor indorsed the check. Does not apply to gifts (no consideration)

Warrants that:

(1) transferor is a person entitled to enforce the paper;
(2) all signatures are authentic and authorized;
(3) check has not been altered;
(4) no one has a defense that could defeat the transferor; AND
(5) transferor has no knowledge of insolvency proceedings against the drawer

Question 17

loss suffered from breach

Answer 17

a person who takes the check in good faith may recover the loss suffered from the breach, but not more than the amount of the check plus expenses and lost interest

Question 18

agency powers

Answer 18

an agent has the power to bound the principal on a check and/or note.

For an agent to escape liability on an instrument, instrument must both (1) state the name of the principal and (2) unambiguously show that it was made on behalf of the principal. On checks, all that is necessary is for the principal’s name to appear on the check.

IF the party is not a holder in due cause, the agent can introduce evidence that the party did not intend for the agent to be personally liable

Question 19

statute of limitations to enforce a promissory note

Answer 19

6 years from due date

Question 20

indorsor liability

Answer 20

indorsor is secondarily liable (on the check to the holder) only if the holder presents the check to draw within 30 days of the indrosement

Question 21

final payment

Answer 21

if (1) paid in cash;

(2) check is settled and there is no right to revoke settlement; OR
(3) provisional settlement was made and the settlement was not revoked in the time permitted (by midnight of the next banking day)

Question 22

holder

Answer 22

requires proper negotiation. a holder is a person with possession of an instrument with a right to enforce it.

Bearer paper = possession ONLY

order paper = possession + necessary indorsements

Question 23

special indorsement

Answer 23

has the payee’s signature + designates a new person to whom instrument is payable

Question 24

Transferee’s right to transferor’s indorsement

Answer 24

if the instrument is transferred for value, transferee has specifically enforceable right to the transferor’s indorsement

Question 25

HIDC notice

Answer 25

(1) actual knowledge; OR
(2) from all the facts and circumstances known to the person at the time of the question (subjective), the person has reason to know it exists (objective)

Question 26

HIDC notice of claims and defenses

Answer 26

(1) instrument overdue (due date has passed, 90 days for check);
(2) instrument dishonored;
(3) uncured default;
(4) unauthorized signature;
(5) alteration;
(6) any claim; AND
(7) any defense or claim in recoupment

Question 27

recoupment

Answer 27

obligor’s claim against payee arising out of the transaction giving rise to the paper

Question 28

shelter rule

Answer 28

transferee has rights of the transferor - the transfer of the instrument vests in the transferee the rights the transferor had

having HDIC rights through shelter does not make you an HIDC, but does provide the rights

Question 29

Real defenses

Answer 29

an HDIC is still subject to the following “real” defenses:

(1) infancy
(2) duress/illegality
(3) lack of legal capacity making the obligation VOID
(4) illegality making the obligation VOID
(5) fraud in the execution/factum
(6) discharge and insolvency proceedings
(7) alteration (HIDC can enforce to original tender)
(8) unauthorized signatures and forgeries

Question 30

fraud in the execution

Answer 30

signer lacked:

(1) knowledge of the instrument’s character or essential terms; AND
(2) reasonable opportunity to learn of the instrument’s character

Question 31

drawee liability

Answer 31

general rule = no liability

exception = acceptance or certification: when the bank signs the check

Question 32

Accommodation party liability

Answer 32

accommodation - a person who signs an instrument to lend his or her credit to another party but does not receive any direct benefit

general rule = liable in the capacity in which they sign

can limit liability to collection only through express language

reimbursement - accommodation party is entitled to reimbursement from the accommodated party

Question 33

stop payment orders

Answer 33

(1) in writing;
(2) dated;
(3) signed;
(4) describes the item with certainty (account #, check #, amount)

valid for 6 months

Question 34

wrongful dishonor

Answer 34

standing: only the drawer (not the payee)

Drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing a hot check

Bank defenses: (1) payment would overdraw account; (2) payee is an organization and has previously notified drawer of a particular person/address to send payments

Question 35

note

Answer 35

two-party instrument where one party (the maker) promises to pay the second party (the payee) a sum of money

Question 36

draft

Answer 36

three-party instrument in which one party (the drawer) orders a second party (the drawee) to pay a sum of money to a third party (the payee)

Question 37

fictitious payee

Answer 37

one who is not intended to have an interest in the draft or is a fake payee

where payee is fictitious, indorsement by any person in name of payee is effective if bank pays in good faith

Question 38

accord and satisfaction

Answer 38

requires: (1) instrument tendered in good faith; (2) as full satisfaction of claim; (3) amount of claim is unliquidated or disputed; (4) claimant obtain payment of instrument

must contain conspicuous statement that instrument is tendered as full satisfaction of the claim

claim is not discharged by accord and satisfaction if claimant tenders payment in 90 days UNLESS the claimant or agent knew it was tendered in full satisfaction