Chapter 19 Notes Flashcards
1
Q
A signed writing (record) that contains an unconditional promise or order to pay an exact sum on demand or at a specified future time to a specific person or order, or to bearer.
- Can be a substitute for cash or act as a substitute for cash or a credit device, or both.
A
Negotiable Instrument (Commercial Paper)
2
Q
In order for a negotiable instrument to operate practically as either a substitute for cash or a credit device, or both, it is essential that the instrument be:
A
Easily Tranferrable Without Danger of Being Uncontrollable
3
Q
- Drafts
- Checks
- Promissory Notes
- Certificates of Deposit (CD)
A
UCC Specified 4 Types of Negotiable Instruments
4
Q
- Orders to pay
- Promises to pay
A
2 Classifications of Negotiable Instruments
5
Q
- Demand Instruments
- Time Instruments
A
Other Classifications of Negotiable Instruments
6
Q
Payable on demand. Payable immediately after it is issued andfor a reasonable period fo time thereafter.
A
Demand Instrument
7
Q
Payable at a future date.
A
Time Instruments
8
Q
Any instrument drawn on a drawee that orders the drawee to pay a certain amount of funds, usually to a third party (the payee), on demand or at a definite future date.
A
Draft
9
Q
- Time draft
- Sight draft (Demand draft)
- Check
A
Types of Drafts
10
Q
Payable at a definite future time.
A
Time Draft
11
Q
Payable on sight, when it is presented to the drawee (usually a bank or financial institution) for payment.
A
Sight Draft (Demand Draft)
12
Q
Payable at a stated time after sight (a draft that states it is payable 90 days after sight, for instance).
A
Drafts can be Both Time and Sight Drafts
13
Q
The drawee must be obligated to the drawer either by agreement or through a debtor-creditor relationship.
A
For Drawee to be Obligated to Honor the Order
14
Q
In negotiable instrument law, a drawee’s signed agreement to pay a draft when it is presented.
- Write’s the word “accepted” with the signature and a date.
A
Acceptance
15
Q
A drawee that accepts, or promises to pay, an instrument when it is presented later for payment.
A
Acceptor
16
Q
A type of draft commonly used in the sale of goods. The seller is both the drawer and the payee. The buyer to whom credit is extended is the drawee.
A
Trade Acceptance
17
Q
A similar instrument that orders the buyer’s bank to pay. Often these are used in international trade.
A
Banker’s Acceptance
18
Q
A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of funds to the payee on demand.
- Demand instruments
A
Check
19
Q
The writer of the check.
A
Drawer
20
Q
The bank on which the check is drawn.
A
Drawee
21
Q
The peron to whom the check is payable.
A
Payee
22
Q
In this kind of check, the bank is both the drawer and the drawee.
A
Cashier’s Check
23
Q
A written promise made by one person to pay a fixed amount of funds to another person on demand or on a specified date.
- Both a time and demand instrument
- Can be made to a specific payee or be payable to bearer.
A
Promissory Note (Note)
24
Q
Often carries the name of the transaction involved.
- Collateral note
- Installment note
A
Promissory Notes- Names
25
A note secured by personal property.
Collateral Note
26
Property pledged as security for the satisfaction of a debt.
Collateral
27
A note payable in installments.
Installment Note
28
A note issued by a bank in which the bank acknowledges the receipt of funds from a party and promises to repay that amount, with interest, to the party on a certain date.
* Bank is the maker
* Depositor is the payee
* Time deposits
Certificate of Deposit (CD)
29
Because CDs are time deposits, the _______ typically is not allowed to withdraw the funds before the date of maturity (except in limited circumstances, such as disability or death).
Purchaser-Payee
30
He or she can sell (negotiate) the CD to a third party.
Accessing Funds Prior to Maturity Date
31
(For amounts up to 100,000 dollars).
Often sold by:
* Savings and loan associations
* Savings banks
* Commercial banks
* Credit unions
Certificates of Deposits in Small Denominations
32
1. Be in writing
2. Be signed by the maker or the drawer
3. Be an unconditional promise or order to pay
4. State a fixed amount of money
5. Be payable on demand or at a definite time
6. Be payable to order or to bearer, unless the instrument is a check.
Requirements for Negotiability- Instuments Must Meet These Requirements to be Negotiable
33
Negotiable instruments must be in ____ \_\_\_\_ (but may be evidenced by an electronic record).
* Must possess the quality of certainty that only formal, written expression can give.
Written Form
34
1. The writing must be on a material that lends itself to permanance.
2. The writing must have portability. (UCC does not explicitly state this requirement, but if an instrument is not moveable, it obviously cannot easily be transferred in the ordinary course of business).
The Writing Must Have These Qualities
| (UCC gives considerable leeway)
35
For an instrument to be negotiable, it must contain the signatures of:
1. The maker, if it is a note or a certificate of deposit, or
2. The drawer, if it is a draft or check.
* Makers and drawers can have an agent sign for them.
Signatures
36
* Nearly an symbol executed or adopted by a person with the intent to authenticate a written or electronic document.
* Can be made by any device (rubber stamp, thumb print).
* Can consist of any name (trade name, word, mark, or symbol)
What UCC Constitutes a Signature
37
Admissible to identify the signer.
Parole Evidence
38
This is the usual place of a signature, but the location of a signature on a document is unimportant.
Lower Right Hand Corner
39
Written on the body of the instrument is sufficient to act as a signature.
Handwritten Statement
40
* Terms of the Promise or order must be included in the writing on the face of the instrument
* These terms must be unconditional
Express Order or Promise to Pay
41
* UCC requires this to be affirmative (express)
* An acknowledgement of the debt (I.O.U.) might logically imply a promise, but it is not sufficient under the UCC.
Promise
42
Associated with three-party instruments, such as checks, drafts, and trade acceptances.
* Directs a third party to may the instrument as drawn.
* May be addressed to one party or to more than one party, either jointly.
Order
43
Signifies an order if it is accompanied by curteous words (please, kindly). Words like "I wish" would not constitute an order.
"Pay"
44
1. An express condition to payment
2. That the promise or order is subject to or governed by another writing or record.
3. That the rights or obligations with respect to the promise or order are stated in another writing or record.
A Promise or Order is Conditional (not negotiable) if it States These Things.
45
Only these orders or promises dan be negotiable.
Unconditional
46
* Reference to another writing
* Statements in the instruments that payment can be made only out of a particular fund or source
Things that do not Make a Promise or Order Conditional
47
This requirement ensures that the value of an instrument can be determined with clarity and certainty.
Fixed Amount of Money
48
An amount that is acertainable from the face of an instrument
* Payable in money
Fixed Amount
49
May be determined from information that is not contained in the instrument itself but described by it, such as a formula or a source.
* Legal rate of interest
* Variable rate of interest
Rate of Interest
50
A rate of interest fixed by statute. This is negotiable ineterest.
Legal Rate of Interest
51
Mortgage notes tied to this are negotiable. It is a rate that fluctuates as a result of market conditions.
Variable Rate of Interest
52
A medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.
* Gold is not a medium of exchange (nonnegotiable)
* Foreign currency is negotiable- paid in the foreign curency of the equavalent amount of US dollars.
Money
53
* Necessary to know when the maker, drawee, or acceptor is required to pay
* Necessary to know when obligations of secondary parties (indorsers) will arise.
* Necessary to know when an instrument is due in order to calculate when the statute or limitations may apply.
* With an interest bearing instrument, it is necessary to know the exact interval during which interest will accrue to determine the instrument's present value.
Payable on Demand or at a Definite Time
54
* Include the words "payable on sight" or "payable upon presentment"
* Very nature of the instrument may indicate this (i.e. checks)
* If no time for payment is specified and the person responsible for payment must pay on the instrument's presentment, the instrument is this.
Payable on Demand
55
The act of presenting an instrument to the party liable on the instrument in order to collect payment. Also occurs when a person presents an instrument to a drawee for a required acceptance.
* Can be made by any commercially reasonable means: oral, written, electronic communication
Presentment
56
1. That it is payable on a specified date
2. That it is payable within a definite period of time after being presented for payment.
3. That is payable on a date or time readily ascertainable at the time the promise or order is issued.
Payable at a Definite Time: An Instrument is Payable at a Definite Time if it States any of These Things:
57
* Payable by the maker or drawer on or before a stated date, it i clearly payable at a definite time
* The maker or drawer has the option of paying before the stated maturity date, but the payee can still rely on payment being made by the maturity date.
* If undated and made payable "one month after date" is clearly nonnegotiable. There is no way to determine the maturity date.
* If uncertain, not payable at a definite time.
Payable at a Definite Time
58
A clause that allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such a default in the payment of an installment when due.
* Negotiable because exact value of the instrument can be ascertained.
* Payable on a specified date if the event allowing acceleration does not occur
* Specified date is the outside limit used to determine the value and negotiability of the instrument.
Acceleration Clause
59
Any person in possession of an instrument drawn, issued, or indorsed to him or her, to his or her order, to bearer, or in blank.
Holder
60
A clause in a time instrument that allows the instrument's date of maturity to be extended into the future.
Extension Clause
61
If the right to extend the time of payment is given to these parties, the interval of the extension must be specified to keep the instrument negotiable.
Maker or Drawer- Extension Clause
62
If this person can extend the time of payment, the extended maturity date need not be specified for the instrument to be negotiable.
Holder- Extension Clause
63
Because one of the functions of a negotiable instrument is to serve as a subsititute for cash, freedom of transfer is essential.
* It must be this at the time it is issued or first comes into the possession of the holder.
* An instrument is not negotiable until it meets this requirement.
Payable to Order or to Bearer
64
A negotiable instrument that is payable "to the order of an identified person" or "to an identified person or order."
* Identified person may in turn transfer the paper to whomever he or she wishes.
* Must be identified with certainty because the transfer of the instrument requires the indorsement (signature) of the payee.
Order Instrument
65
To whom the instrument is initially payable as determined by the intent of the maker or drawer.
Identified Person
66
Any instrument that is not payable to a specific person, including instruments payable to the bearer or to "cash."
* Maker or drawer agrees to pay anyone who presents the instrument for payment.
Bearer Instrument
67
A person in possession of an instrument payable to bearer or indorsed in blank.
Bearer
68
1. Payable to the order or bearer
2. Payable to Simon Reed or bearer
3. Payable to bearer
4. Pay cash
5. Pay to the order of cash
Any Instruments Containing These Terms is a Bearer Instrument
69
* Undated
* Antedating or postdating an instrument
* Handwritten terms
* Words Outweigh figures
* Instrument does not specify a particular interest rate
* Notation on sales
Factors That do not Affect Negotiability
70
Unless the date of an instrument is necessary to determine definite time for payment, the fact that an instrument is _______ does not affect its negotiability.
* For a check, the date is the date it is issued
Undated
71
Using a date before or after the actual current date does not affect the instrument's negotiability.
Antedating or Postdating an Instrument
72
Outweigh typewritten and printed terms (preprinted terms on forms, for example), and typewritten terms outweight printed terms.
Handwritten Terms
73
Unless the words are ambiguous. This rule is important when the numerical amount and the written amount on a check differ.
Words Outweigh Figures
74
But simply states "with interest", the interest rate is the judgement rate of interest (a rate of interest fixed by a statute that is applied to court judgements).
Instrument Does not Specify a Particular Interest Rate
75
A check is negotiable even if a notation on it states that it is "nonnegotiable" or "not governed by Article 3." Any other instrument, in contrast, can be made nonnegotiable if the maker or drawer conspiciously notes on it that it is "nonnegotiable" or "not goverened by Article 3."
Notation on Sales
76
Assignment is the transfer of rights under a contract. Gives the assignee only those rights that the assignor possessed.
* Any defenses can be raised against an assignor can normally be raised against the assignee.
* The transferee is an asignee rather than a holder.
Transfer by Assignment
77
Creates a holder who, at the very least, receives the rights of the pervious possessor.
* Can make it possible for a holder to receive more rights in the instrument than the prior possessor had.
* Two methods so that the receiver becomes a holder, the method used depends on whether the instrument is an order instrument or a bearer instrument.
Transfer by Negotiation
78
The transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder.
Negotiation
79
A holder who receives greater rights.
Holder in Due Course
80
Contains the name of the payee capable of indorsing it. It is negotiated by delivery with any necessary indorsements.
* If not indorsed, it would not be a negotiation and the transfer would be treated as an assignment.
Negotiating Order Instruments
81
If an instrument is payable to bearer, it is negotiated by delivery- that is, by transfer into another person's possession. Indorsement is not necessary.
* Involves more risk through loss in theft than the use of order instruments.
Negotiating Bearer Instruments
82
A signature placed on an instrument for the purpose of transferring ownership rights in the instrument.
* Required whenever an order instrument is negotiated.
Indorsement
83
* Back of the instrument itself
* Can be on a separate piece of paper that is firmly affixed to the instrument
Where the Indorement is Located
84
A person who transfers an instrument by signing (indorsing) it and delivering it to another person.
Indorser
85
The person to whom the check is indorsed and delivered.
Indorsee
86
1. Blank
2. Special
3. Qualified
4. Restrictive
* Sometimes indorsements can have characteristics of more than on category.
4 Types of Indorsements
87
An indorsement on an instrument that specifies no indorsee. An order instrument that is indorsed this way becomes a bearer instrument.
* Can be negotiated by delivery alone.
Blank Indorsement
88
An indorsement on an instrument that identifies the specific person to whom the indorser intends to make the instrument payable.
* Order indorsement, requires a signature
* To avoid risk of loss on blank indorsement- convert into this by writing, above the signature of the indorser, words identifying the indorsee. This changes the bearer instrument back into an order indorsement.
Special Indorsement
89
An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument. The notation "without recourse" is commonly used to create this type of indorsement.
* If later dishonored, the holder cannot recover from the qualified indorser unless the indorser has breached one of the transfer warranties.
* Often used by persons (agents) acting in a representative capacity.
* Can be accompanied by a special or blank indorsement.
Qualified Indorsement
90
Merely by indorsing the instrument, the indorser impledly promises to pay the holder or any subsequent indorser the amount of the instrument in the event that the drawer or maker defaults the payment. The indorser is guaranteeing payment of the instrument in addition to transferring title to it.
Unqualified Indorsement
91
Includes the name of the indorsee as well as the words "without recourse". The special indorsement makes the instrument and order instrument.
Special Qualified Indorsement
92
Makes the instrument a bearer instrument, and only delivery is required for negotiation.
Blank Qualified Indorsement
93
An indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. It does not generally prohibit negotiation of the instrument.
* Conditional indorsements
* Indorsements for deposit or collection
* Trust (Agency) indorsements
Restrictive Indorsement
94
When payment depends on the occurrence of some event specified in the indorsement.
Conditional Indorsements
95
One that makes the indorsee (almost always a bank) a collecting agent of the indorser.
Indorsements for Deposit or Collection
96
An indorsement to a person who is to hold or use funds for the benefit of the indorser or a thrid person.
Trust (Agency) Indorsements
97
Can indorse with the misspelled name, the correct name, or both. The usual practice is to indorse with the name as it appears on the instrument, followed by the correct name.
Mispelled Names
98
A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is defective.
* Takes an instrument free of most of the defenses and claims that could be asserted against the transferor (unlike an ordinary holder)
Holder in Due Course
99
If he or she takes the instrument for:
1. Value
2. In good faith
3. Withotu notice that it is defective.
Requirements for HDC Status
100
A person who receives an instrument as a gift or inherits it has not meet the requirement of value. The person becomes an ordinary holder and does not possess the rights of an HDC.
* If a person promises to perform or give this in the future, the person is not an HDC.
* Holder takes the instrument for value only to the extent that the promise has been performed.
HDC Status- Value
101
1. Performed the promise for which the instrument was issued or transferred.
2. Acquired a security interest or other lien in the instrument, excluding a lien obtained by a judicial proceeding.
3. Taken the instrument in payment of, or as security for, a preexisting claim.
4. Given a negotiable instrument as payment for the instrument.
5. Given an irrevocable committment (such as a letter of credit) as payment for the instrument.
A Holder Takes an Instrument for Value if the Holder has done any of These Things:
102
This means that the holder must have acted honestly and observed reasonable commercial standards of fair dealing in the process of acquiring the instrument.
* Applies only to the holder
Taking in Good Faith
103
1. It is overdue
2. It has been dishonored
3. It is part of a series of which at least one instrument has an uncured (uncorrected) default.
4. It contains an unauthorized signature or has been altered.
5. There is a defense against the instrument or claim to it.
6. The instrument is so irregular or incomplete as to call its authenicity into question.
Taking Without Notice
A person will not qualify for HCD protection if he or she is on notice (knows or has reason to know) that the instrument being acquired is defective in one of these ways:
104
1. The person has actual knowledge of the defect.
2. The person has received a notice or notification concerning the defect (such as a letter from a bank identifying the serial numbers of stolen bearer instruments).
3. The person has reason to know that a defect exists, given all the facts and circumstances known at the time in question.
A Person is Considered to have Notice in These Circumstances:
105
The holder must recieve this at a time and manner that gives a reasonable opportunity to act on it.
Notice- Timing
106
(Such as insolvency proceedings against the maker or drawer of an instrument), does not constitute notice that the instrument is defective.
Notice- A purchaser's knowledge of certain facts
107
Depends on whether it is a time instrument or a demand instrument.
Overdue Instruments
108
If the purchaser either takes the instrument knowing that demand has been made or takes the instrument an unreasonable length of time after its issue.
* Reasonable time for checks: 90 days
* Other instruments: depends on circumstances
Overdue Demand Instrument
109
The day after it's due date. Anyone who takes a time instrument after it's due date is on notice that it is overdue (meaning they will be ordinary holder, not an HDC).
* The counting begins the day after the instrument is dated.
* If payment date falls on a Sunday or holiday, the instrument is payable next business day.
Overdue Time Instrument
110
To refuse to pay or to accept a negotiable instrument that has been presented in a timely and proper manner.
Dishonor
111
* If a holder knows or has reason to know that an instrument has been dishonored, the holder is on notice and cannot claim HDC status.
* If a holder does not know and has no reason to know that it has been dishonored, the person is not put on notice and therefore can become an HDC.
Dishonored Instruments
112
A holder cannot become an HDC if she or he has notice of any claim to the instrument or any defense against it. Instruments with irregularities and incomplete instruments fall under this rule.
Notice of Claims or Defenses
113
Any irregularity on the face of the instrument (obvious forgery or alteration) that calls into question its validity or ownership will bar HDC status.
* A good forgery or the careful alteration can go undetected by reasonable examination- in this case the purchaser will qualify for HDC status.
Instruments With Irregularities
114
A purchaser of an instrument cannot become an HDC of an instrument so incomplete on its face that an element of negotiability is lacking.
* Minor omissions are permissible (such as date) because these do not call into question the validity of the instrument.
Incomplete Instruments
115
The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course (HDC), but who derives his or her title through an HDC, acquires the rights of an HDC.
* No matter how far removed, anyone who can track down the HDC may aquire the rights of the HDC.
* Promotes the marketability and free transferability of negotiable instruments.
Holder Through an HDC (Shelter Principle)
116
* Certain person who formally held instruments cannot improve their positions by later reacquiring the instruments from HDCs
* Fraud or illegally affecting the instrument or had notice of a claim or defense against in instrument, that holder is not allowed to gain the benefits of HDC status by repurchasing the instrument from a later HDC.
Limitations of the Shelter Principle
117
Every party, except a qualified indorser, who signs a negotiable instrument is either primarily or secondarily liable for payment of that instrument when it comes due.
* This is contractual liability- no person will be held contractually liable for an instrument that he or she did not sign.
Signature Liability- General Rule
118
This person is absolutely required to pay the instrument- unles he or she has a valid defense to payment.
* Only makers and acceptors are this
Primary Liability
119
On a negotiable instrument, this is contingent liability (similar to that of a guarantor in a contract). Will be liable only if the party that is responsible for paying the instrument dishonors it by refusing to pay.
* Drawers and indorsers
Secondary Liability
120
1. The instrument is properly and timely presented
2. The instrument is dishonored
3. Timely notice of dishonor is given to the secondarily liable party.
Parties are Secondarily Liable on a Negotiable Instrument only if:
121
The holder must present the instrument to the appropriate party in a proper and timely fashion and must give reasonable identification if requested.
* The party to whom the instrument must be presented depends on the type of instrument.
* Note or CD- presented to the maker for payment.
* Draft- presented to the drawee for acceptance, payment or both.
Proper and Timely Presentment
122
Can be made by any commercially reasonable means, including oral, written, or electronic communication.
* Ordinarily effective when received
* If it takes place after an established cut off hour, it may be treated as occurring the next business day.
Making Presentment
123
Failing to present an instrument on time is the most common reason for improper presentment.
* Payable on demand- holder should present it for payment or acceptance within a reasonable time.
* Domestic check- holder must present within 30 days of its date to hold the drawer secondarily liable and 30 days after its indorsement to hold the indorser secondarily liable.
Timely Presentment
124
* An instrument can be dishonored when acceptance or payment cannot be obtained within the prescribed time or when the required presentment is excused and the payment is not properly accepted or paid.
Dishonor
125
A bank can postpone payment until the following business day without dishonoring the instrument.
Presentment is Made After Established Cutoff Hour
126
A bank's refusal to pay does not dishonor the instrument.
Holder Refuses to Exhibit the Instrument, Give Reasonable Identification, or Sign Receipt for the Payment on the Instrument
127
The instrument is not dishonored.
When Instrument is Returned Because it Lacks Proper Indorsement
128
Proper notice must be given to secondary parties (drawers and indorsers) for them to be held liable.
* Can be given in any reasonable manner (oral, written or electronic communication, as well as notice written or stamped on the instrument itself.
* Bank must give necessary notice before midnight deadline.
* Notice by any other person other htan the bank must give 30 days following the day of dishonor or the day on which the person who is secondarily liable receives notice of dishonor.
Proper Notice of Dishonor
129
Arise in two situations:
1. When a person forges another person's name on a negotiable instrument.
2. When an agent who lacks the authority signs an instrument on behalf of a principal.
Unauthorized Signatures
130
An unauthorized signature is wholly inoperative and will not bind the person whose name is signed or forged.
* Also applies to agent's signatures- if an agent lacks the authority to sign the principal's name or has exceeded the authority given by the principal, the signature does not bind the principal but will bind the "unauthorized signer."
General Rule of Unauthorized Signatures
131
1. Ratification
2. Negligence
Exceptions to the General Rule of Unauthorized Signatures
132
When the perosn whose name is signed affirms the signature, he or she will be bound.
* Expessly- affirming the signature
* Impliedly- Other conduct, such as keeping any benefits received in the transaction or failing to repudiate the signature.
Ratification
133
When the negligence of the person whose name was forged substantially contributed to the forgery, a court may not allowo the person to deny the effectiveness of an unauthorized signature.
Negligence
134
When an instrument has a forged or unauthorized indorsement, the burden of loss falls on the first party to take the instrument.
* The first party to accept the instrument is in the best position to prevent the loss.
Special Rules for Unauthorized Indorsements
135
1. Imposter Rule
2. fictitous Payee Rule
Exceptions to Special Rules for Unauthorized Indorsements
136
One who induces a maker or drawer to issue a negotiable instrument in the name of an impersonated payee. These indorsements are treated as authorized indorsements under UCC Article 3.
Imposter
137
If the maker or drawer believes this person to be the named payee at the time of issue, the indorsement is not treated as unauthorized when the instrument is transferred to an innocent party. This is because the drawer intended the imposter to receive the payment.
* Provides that an imposter's indorsement will be effective, that is, not forgery- insofar as the drawer or maker is concerned.
Imposter Rule
138
A payee on a negotiable instrument whom the maker or drawer did not intend to have an interest in the instrument. These indorsements are treated as authorized indorsements under UCC Article 3.
Fictitious Payee
139
The payee's indorsement is not treated as forgery, and an innocent holder can hold the maker or drawer liable on the instrument. The loss falls on the maker or drawer of the instrument rather than on the third party that accepts it or on the bank that cashes it.
Fictitious Payee Rule
140
1. When a dishonest employee decieves the employer into signing an instrument payable to a party with no right to receive payment on the instrument.
2. When a dishonest employee or agent has the authority to issue an instrument on behalf of the employer and issues a check to a party who has no interest in the instrument.
Fictitious Payees Most Often Arise in Two Situations:
141
* Signature liability arises from a transferor's signature. Transferors also make certain implied warranties regarding the instruments that they are negotiating. Warranty liability arises even when a transferor does not sign the instrument.
* Particularly important when a holder cannot hold a party liable on his or her signature. Not subject to the conditions of proper presentment, dishonor, or notice of dishonor.
Warranty Liability
142
1. Those that arise on the transfer of a negotiabe instrument
2. Those that arise on presentment
* Both of these categories attempt to shift liability back to a wrongdoer o rthe prson who dealt face to face with the wrongdoer and thus was in the best position to prevent the wrongdoing.
Two Categories of Warranties
143
A person who transfers an instrument for consideration impliedly makes five warranties- relating to good title, authentic signatures, no alterations, defenses, or insolvencies- to all subsequent transferees or holders who take the instrument in good faith.
Transfer Warranties
144
1. The transferor is entitled to enforce the instrument
2. All signatures are authentic and authorized
3. The instrument has not been altered
4. The instrument is not subject to defense or claim of any party that can be asserted against the transferor.
5. The transferor has no knowledge of any bankruptcy proceedings of the maker, the acceptor, or the drawer of the instrument.
The Five Transfer Warranty
145
A person who presents an instrument for payment or acceptance impliedly makes three warranties relating to good title, no alterations, and no unauthorized signatures.
* The second and third warranties do not apply to makers, acceptors, and drawers when the presenter is an HDC - makers and drawers recognize their own singatures and a maker or acceptor will recognize whether an instrument has been materially altered.
Presentment Warranties
146
1. The person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce the instrument. (A warranty that there are no missing or unauthorized indorsements).
2. The instrument has not been altered.
3. The person obtaining payment or acceptance has no knowledge that the signature of the issuer of the instrument is unauthorized.
The Three Presentment Warranties
147
Can bar collection from persons who would otherwise be primarily or secondarily liable on a negotiable instrument. Two general categories:
1. Universal defenses
2. Personal defenses
Defenses
148
A defense that can be used to avoid payment to all holders of a negotiable instrument, including a holder in due course (HDC) or a holder with the rights of an HDC.
Universal Defense (Real Defense)
149
1. Forgery of a signature on the instrument.
2. Fraud in the execution
3. Material alteration
4. Discharge in bankruptcy
5. Minority
6. Illegality, material incapacity, or extreme duress
Universal Defenses Include:
150
A forged signature will not bind the person whose name is used.
* No liability to pay any holder the value of the instrument
* If singature is ratified, he or she may be liable
Forgery of a Signature on the Instrument
151
If a person is deceived into singing a negotiable instrument, believing that she or he is signing something other than a negotiable instrument, this is committed against the signer.
* This defense cannot be raised if reasonable inquiry would have revealed the nature and terms of the instrument.
Fraud in Execution
152
An alteration is material if it changes the obligations of the parties in the instrument in any way.
* Includes: completing an incomplete instrment, adding words or numbers, or making any unauthorized changes that effect the obligation of a party.
* Complete defense against an ordinary holder
* Partial defense against an HDC
Material Alteration
153
* Correct the maker's address
* Change the figures on a check so that they agree with the written amount.
Not Material Alteration
154
Can recover nothing on an instrument that has been materially altered.
Ordinary Holder- Material Alteration
155
Can enforce the instrument against the maker or the drawer according to its original terms but not for the altered amount.
HDC- Material Alteration
156
An absolute defense on any instrument, regardless of the status of the holder, because the purpose of bankruptcy is to settle all of the insolvent party's debts.
Discharge in Bankruptcy
157
A universal defense only to the extent that state law recognizes it as a defense to a simple contract.
Minority (Infancy)
158
* When the law declares an instrument to be void because it was issued in connection with illegal conduct, illegality is a universal defense.
* If a person who signed the instrument has been declared by a court to be mentally incompetent, or was under an immediate threat or force or violence, the defense is universal.
Illegality, Mental Incapacity, or Extreme Duress
159
A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC.
Personal Defense (Limited Defenses)
160
1. Breach of contract or breach of warranty
2. Lack or failure of consideration
3. Fraud in the inducement (ordinary fraud)
4. Illegality, mental incapacity, or ordinary duress
Personal Defenses Include:
161
When there is a breach of the underlying contract for which the negotiable instrument was issued, the maker of a note can refuse to pay it, or the drawer of a check can stop payment.
Breach of Contract or Breach of Warranty
162
The absence of consideration may be a successful personal consideration in some instances.
Lack or Failure of Consideration
163
A person who issues a negotiable instrument based on false statements by the other party will be able to avoid payment on the instrument, unless the holder is an HDC.
Fraud in the Inducement (Ordinary Fraud)
164
If the law declares that an instrument is voidable because of illegality, mental incapacity, or ordinary duress, the defense is personal.
Illegality, Mental Incapactiy, or Ordinary Duress
165
The federal government limits the rights of HDCs in certain circumstances because of the harsh effects that the HDC rules can sometimes have on consumers.
* A consumer who purchased a defective product would continue to be liable to HDCs even if the consumer returned the defective product to the retailer. To protect consumers- Rule 433-Abolished HDC doctrine in consumer transactions.
Federal Limitations on the Rights of HDCs
166
Can come from payment, cancellation, or ,material alteration.
Dicharge from Liability
167
The liability of all parties is discharged when the party primarily liable on the instrument pays to the holder the full amount due.
* Payment by any other party (such as indorser) discharges only the liability of that party and subsequent parties.
Payment- Discharge
168
If done by the holder of an instrument it discharges the liability of all parties.
* Intentionally writing "paid" across the face of the instrument cancels it, as does intentionally tearing it up.
* If a holder intentionally crosses out a party's signature, that party's liability and the liability of subsequent indorsers who have already indorsed the instrument are discharged.
Intentional Cancellation
169
May discharge the liability of any party affected by the alteration. An HDC may be able to enforce a materially altered instrument against the maker or drawer according to the instrument's original terms.
Material Alteration
170
Can also occur when a holder impairs another party's right of recourse (right to seek reimbursement) on the instrument. This occurs when, for instance, the holder releases, or agrees not to sue, a party against whom the indorser has a right of recourse.
Discharge of Liability
