Business Law III: UCC Article 3 Flashcards Preview

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Flashcards in Business Law III: UCC Article 3 Deck (35):
1

UCC Article 3

Negotiable Instruments

2

Orders to pay

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

3

Promises to pay

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

4

Drafts

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

5

Checks

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

6

Notes

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

7

CDs

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

8

Negotiation of Bearer Instruments

negotiated by mere delivery to a holder

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Negotiation of Order Instruments

negotiated by delivery plus an indorsement

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Blank Indorsement

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

11

Special Indorsement

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

12

Qualified Indorsement

"without recourse"

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

13

Restrictive Indorsement

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)

14

Holder in Due Course (HDC)

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

15

Holder

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

16

Holder as HDC

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

17

Shelter Rule

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

18

Overdue Time Instrument

If one minute after due date

19

Overdue Demand instrument

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

20

Overdue Check

> 90 days

21

Overdue if payable in installments

when an installment has been missed

22

Proper Presentment

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

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Primary Parties to Negotiable Instruments

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

24

Dishonor

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

25

Notice of Dishonor

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

26

Contract Liability of Primary Party

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

27

Contract Liability of Secondary Party

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

28

Contract Liability of Accommodation Party

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

29

Transferor warranty liability

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

30

Presentment Warranties

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

31

Personal Defenses of Secondary Parties to Obligation to pay

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

32

Real/Universal Defenses

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)

33

Effect of Material Alteration on Contractual/Warranty Duties to Pay

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

34

Unauthorized Signature Liability

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

35

Forged Signature Liability

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.