Business Law III: UCC Article 3

Question 1

UCC Article 3

Answer 1

Negotiable Instruments

Question 2

Orders to pay

Answer 2

Drafts/Checks - 3 party instruments consisting of drawer, who orders drawee, to pay a payee

Question 3

Promises to pay

Answer 3

Notes/CDs - 2 party instruments consisting of maker, who promises to pay a payee

Question 4

Drafts

Answer 4

1. Sight draft - payable on demand immediately
2. Time draft - payable at specific time
3. Trade/Banker’s acceptance

Question 5

Checks

Answer 5

1. Cashier’s check - drawer/drawee are same bank
2. Teller’s check - draft drawn by one bank on another
3. Traveler’s check - draft payable on demand that requires countersignature
4. Certified check - check drawn by drawer on which drawee bank accepts primary/absolute obligation to pay

Question 6

Notes

Answer 6

Promissory - note payable on demand/within definite time to a specific payee or bearer

Question 7

CDs

Answer 7

A note made by a bank acknowledging it has a deposit of funds payable to holder (most are time-interest instruments)

Question 8

Negotiation of Bearer Instruments

Answer 8

negotiated by mere delivery to a holder

Question 9

Negotiation of Order Instruments

Answer 9

negotiated by delivery plus an indorsement

Question 10

Blank Indorsement

Answer 10

Specify no particular holder to receive payment

1. Converts order instrument to bearer instrument
2. Transfer warranties extended to subsequent holders
3. Blank indorser has secondary liability to pay all subsequent holders

Question 11

Special Indorsement

Answer 11

Specify person to whom payment or to whose order payment is to be made

1. Converts bearer into order or continues order instrument
2. Transfer w/ consideration extends warranties to subsequent holders
3. Indorser has secondary liability to pay all subsequent holders

Question 12

Qualified Indorsement

Answer 12

“without recourse”

1. disclaims contract signature (secondary party) liability
2. Transfer warranties extended to all subsequent holders

Question 13

Restrictive Indorsement

Answer 13

1. Conditional (conditioned upon happening of event)
2. Prohibitive (prohibits further transfer of instrument)
3. For deposit/collection (makes indorsee bank collection agent of indorser)

Question 14

Holder in Due Course (HDC)

Answer 14

1. must be a holder
2 must take the instrument for value
3. in good faith
4. without notice that instrument is 
   - overdue
   - been previously dishonored
   - of any claim or defense on the part of any person

Question 15

Holder

Answer 15

anyone who takes possession of a negotiable instrument that is made payable to him/her, the bearer or is negotiated to him/her

Question 16

Holder as HDC

Answer 16

only to extend agreed-upon consideration has actually been paid, or in the case of actions required, actually been performed

Question 17

Shelter Rule

Answer 17

Holder who cannot qualify as HDC, but took instrument through a HDC has same rights as if HDC

Question 18

Overdue Time Instrument

Answer 18

If one minute after due date

Question 19

Overdue Demand instrument

Answer 19

If taken after instrument has been outstanding for unreasonable period of time or one day after day demand for payment has been duly made

Question 20

Overdue Check

Answer 20

> 90 days

Question 21

Overdue if payable in installments

Answer 21

when an installment has been missed

Question 22

Proper Presentment

Answer 22

holder must present instrument to right person for correct reason in right timely manner

Question 23

Primary Parties to Negotiable Instruments

Answer 23

1. Notes - Payor/Debtor
2. CDs - bank that agreed to accept CD deposit
3. Check - Person with checking account
4. Drafts - drawee of draft

Question 24

Dishonor

Answer 24

any refusal to pay or accept, except where holder refuses to show evidence of authority to receive payment

Question 25

Notice of Dishonor

Answer 25

1. must be given w/in 30 days of dishonor | 2. for banks dishonor notice must be given by midnight of next banking day

Question 26

Contract Liability of Primary Party

Answer 26

1. Makers of CDs and Notes | 2. Drawees of Drafts/Checks

Question 27

Contract Liability of Secondary Party

Answer 27

1. Drawers of ordinary check/draft | 2. Indorsers (unqualified)

Question 28

Contract Liability of Accommodation Party

Answer 28

1. Accommodation party - signs instrument to lend his/her name to guaranty liability of accommodated party 2. same level of liability as party for whom he/she is accommodating 3. treated as surety or guarantor

Question 29

Transferor warranty liability

Answer 29

Results from role party plays in transferring the instrument: 1. General/qualified indorsers make following transfer warranties to all subsequent holders - transferor has good title - signatures are authorized/genuine - instrument has not been altered - instrument not subject to claim/defense by any party that can be asserted against transferor - transferor has no knowledge of any insolvency proceeding 2. Nonindorsers make same transfer warranties but only to immediate transferee

Question 30

Presentment Warranties

Answer 30

1. anyone who obtains payment/acceptance of draft/check warrants to party who pays/accepts: - person obtaining payment/acceptance is authorized to do so - instrument has not been altered - person obtaining payment/acceptance has no knowledge that signature of drawer is unauthorized 2. Cannot be disclaimed by presenters of checks

Question 31

Personal Defenses of Secondary Parties to Obligation to pay

Answer 31

Only ordinary holders (not HDC) - mistake - misrepresentation - fraud in inducement - lack of consideration - breach of contract - product warranty issues

Question 32

Real/Universal Defenses

Answer 32

Can be asserted against all holders (even HDC) - forgery - fraud in execution/factum (person deceived into signing) - minority (being a minor) - inability to pay (lack of solvency) and/or discharge decree in bankruptcy - void events (i.e. illegality, mental incapacity, duress)

Question 33

Effect of Material Alteration on Contractual/Warranty Duties to Pay

Answer 33

Can be: 1. complete defense - against both ordinary holder/HDC (i.e. cross-out changes obligations of indorser) 2. partial defense - altered amount (i.e. changing $7-$700) 3. no defense - original instrument incomplete, but later completed in unauthorized manner

Question 34

Unauthorized Signature Liability

Answer 34

How agent signs instrument controls whether principal/agent will be liable or whether additional evidence can be used to establish liability

Question 35

Forged Signature Liability

Answer 35

liability depends on role forger played in forgery 1. Forged drawer's signature - liability rests on drawee who is presumed to know signature of drawer 2. Forged payee/indorser signature - liability rests on first party to accept instrument after forged indorsement (should have checked id) 3. Imposters (exception) - although fraudulent, indorsement is effective 4. Fictitious Payee - Indorsements to payees not entitled to payment (fraudulent) are effective in favor of whoever pays the instrument or taxes it for value in good faith.