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Flashcards in Chapter 26 Deck (74)
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1
Q

Negotiation

A

The transfer of an instrument in such form that the transferee becomes a “holder”

2
Q

Negotiating Order Paper - 2 Requirements

A
  1. Sign it (endorsement)
  2. Deliver it to the person you are selling it to
3
Q

Negotiating Bearer paper - 1 requirement

A
  1. Deliver it…signature not required
4
Q

A Common Law assignment occurs when:

A
  1. a non-negotiable instrument is transferred to a third party; or
  2. a negotiable instrument is transferred improperly
5
Q

Indorsement

A

A signature placed on an instrument for the purpose of transferring ownership rights in the instrument.

6
Q

Indorser

A

The one who writes the indorsement

7
Q

Indorsee

A

A person to whom a negotiable instrument is transferred by indorsement

8
Q

Indorsement is usually on the back of the instrument but…

A

can be on a separate piece of paper attached to the instrument called an allonge.

9
Q

Blank Indorsements

A

An indorsement that specifies no particular indorsee and can consist of a mere signature. An order instrument that is indorsed in blank becomes a bearer instrument.

10
Q

A blank indorsement converts…

A

order paper to bearer paper

11
Q

What is an example of a blank indorsement?

A

“Signed Jefferson Jones”

12
Q

Special Indorsements

A

An indorsement on an instrument that indicates the specific person to whom the indorser intends to make the instrument payable—that is, it names the indorsee.

13
Q

What is the result of special indorsements?

A

They maintain the order paper nature and the identified payee gets to identify what happens with the check next.

14
Q

What is an example of a special indorsement?

A

“Pay to William Hunter, signed Jefferson Jones”

15
Q

Most indorsements are…

A

unqualified.

16
Q

What is an unqualified indorsement?

A

Implies the indorser will pay the holder or any subsequent indorser, the amount of the instrument in the event the drawer or maker defaults

17
Q

How is a qualified indorsement created?

A

When the words “without recourse” are added to any of the other indorsements.

18
Q

What are qualified indorsements used for?

A

To limit liability of the indorser

19
Q

“Pay to William Hunter without recourse, signed Jefferson Jones.”

A

qualified, special indorsement

20
Q

“Without recourse, signed Jefferson Jones”

A

blank, qualified indorsement

21
Q

What is the result of a qualified indorsement?

A

Maintain the order paper nature

22
Q

Restrictive Indorsements

A

Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. A restrictive indorsement does not prohibit the further negotiation of the instrument.

23
Q

Restrictive Indorsements require the indorsee to comply with certain instructions regarding…

A

the funds involved

24
Q

What is an example of a restrictive indorsement?

A

“For deposit only…signed Jefferson Jones” Deposit into his account. If you want to be even more clear, include the account number.

25
Q

How do you convert order paper to bearer paper?

A

Blank indorsement

26
Q

How do you convert bearer paper to order paper?

A

Special indorsement

27
Q

What happens if the name on instrument is misspelled or incorrect?

A

The indorsement can be the incorrect name as in the instrument, or the correct name, or both

28
Q

Marley Ellison receives a check payable to the order of Mary Ellison.

A

She can indorse the check either “Marley Ellison” or “Mary Ellison.”

29
Q

A negotiable instrument can be drawn payable to an entity such as an estate, a partnership, or an organization. In this situation, who can negotiate the instrument?

A

An authorized representative of the entity can negotiate the instrument.

30
Q

A check states “Pay to the order of the Red Cross.” Who can negotiate the check?

A

An authorized representative of the Red Cross

31
Q

Alternate payees

A

OR (either have to sign)

32
Q

Joint payees

A

AND (both have to sign)

33
Q

Rear-ended by 3 college kids. Insurance company will only send a check addressed to Hailey and Body Shop, or Hailey and Bank. The check was to Hailey AND Body Shop (both parties had to sign).

A

Hailey and Body Shop are joint payees

34
Q

When a drawer gives one alternative or joint payee a check, the drawer’s obligation on the check to other payees is suspended. The payee who has possession of the check holds it for the benefit of all of the payees.

A

The drawer has no obligation to make sure that the funds are allocated or distributed among the joint payees.

35
Q

A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: “For rent paid, [signed] Jordan.” Jordan’s landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm trees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: “Pay to Better-Garden Nursery, without recourse, [signed] Deborah.” Better-Garden Nursery sends the check to its bank indorsed “For deposit only, [signed] Better-Garden Nursery.”

Classify each of these indorsements.

A

“For deposit only”: restrictive
“Pay to BGN without recourse”: qualified special
“For rent paid”: memo, really all you have is a signature… blank

36
Q

A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: “For rent paid, [signed] Jordan.” Jordan’s landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm trees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: “Pay to Better-Garden Nursery, without recourse, [signed] Deborah.” Better-Garden Nursery sends the check to its bank indorsed “For deposit only, [signed] Better-Garden Nursery.”

Was the transfer from Jordan’s landlord to Deborah, without indorsement, an assignment or a negotiation? Explain.

A

Landlord to Deborah. The check in the landlord’s possession is bearer. To properly negotiate a bearer instrument you have to deliver, and that is what happened. The check was delivered to Deborah. It is a negotiable instrument.

37
Q

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Is the check a bearer instrument or an order instrument?

A

Bearer when it was issued “payable to cash”

38
Q

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Did Jerrod’s delivery of the check to Amber constitute a valid negotiation? Why or why not?

A

Yes because it was a bearer instrument, delivery is all we have to do (doesn’t matter that it is dishonest/illegal)

39
Q

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

What type of indorsement did Amber make?

A

Restrictive

40
Q

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Does Bertram have a right to recover the $200 from Amber? Explain.

A

No Bertram does not have the right to get the money back from Amber. Negotiable Instruments law would make it hard to recover from Jerod too.

41
Q

Holder

A

A Holder has the status of an assignee – he obtains only those rights that the transferor had and is subject to the same defenses as the transferor.

42
Q

Holder in Due Course (HDC)

A

A holder (possession of negotiable instrument) who also meets 3 additional requirements:
1. Take an instrument
2. Take in good faith
3. Take without notice of a defect

43
Q

An HDC takes the instrument free of…

A

most defenses and claims asserted by the party with the obligation to pay

44
Q

Shanna Morrison buys a BMW X3 SUV for her business from Heritage Motors in Irvine, California, signing a promissory note for $50,000 as part of the deal. Heritage negotiates the note to Apollo Financial Services, which promises to pay Heritage for it in six months. During the next two months, Morrison has significant problems with the SUV and sues Heritage for breach of contract. She also refuses to make further payments on the note.

A

Whether Apollo can hold Morrison liable on the note depends on whether it has met the requirements for HDC status. If Apollo has met these requirements and thus has HDC status, it is entitled to payment on the note. If Apollo has not met the requirements, it has the status of an ordinary holder, and Morrison’s defense against payment to Heritage will also be effective against Apollo.

45
Q

What is the prerequisite for HDC Status?

A

Must first be a Holder of a negotiable instrument.

46
Q

Requirements for HDC Status

A
  1. Must take the instrument for value
  2. Taking in good faith
  3. Taking without notice of a defect
47
Q

Zon owes Dwyer $2,000 on a past-due account. Zon negotiates a $2,000 note signed by Gordon to Dwyer. If Dwyer accepts it to discharge the overdue account balance…

A

Dwyer has given value for the instrument.

48
Q

Justin issued a $5,000 negotiable promissory note to Paige. The note is due six months from the date issued. Paige needs cash and does not want to wait until the maturity date to collect. She negotiates the note to her friend Lexi, who pays $2,000 in cash and writes Paige a check—a negotiable instrument—for the balance of $3,000.

A

Lexi has given full value for the note by paying $2,000 in cash and issuing Paige a check for $3,000.

49
Q

In a few situations, the holder may pay for the instrument but not acquire HDC status.

A
  1. when the instrument is purchased at a judicial sale, such as a bankruptcy or creditor’s sale, the holder will not be an HDC
  2. if the instrument is acquired as a result of taking over a trust or estate (as administrator), or as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder
50
Q

Value does not equal…

A

consideration

51
Q

A promise of payment or performance in the future (executory promise) is value only to the extent that…

A

payment or performance has been made

52
Q

I make a promise to do something now or in the future, consideration. If I make a promise to do something in the future, there is no value…

A

I have to actually perform

53
Q

Do discounts affect the HDC status?

A

Discounts happen, they don’t affect HDC status

54
Q

A holder has “taken the instrument for value” if it has done any of the following things:

A
  1. By performing the promise for which the instrument was issued or transferred.
  2. By acquiring a security interest or other lien in the instrument (other than a lien obtained by a judicial proceeding). Notes can be collateral.
  3. By taking an instrument in payment of, or as security for, an antecedent (preexisting) claim. Past debt. Not consideration – but it is value. Cancelling debt owed in exchange for note.
  4. By giving a negotiable instrument as payment. Mary writes a check and pays cash. Another instrument and cash.
55
Q

Are gifts and inheritance value?

A

No, they are gifts

56
Q

If you are not a HDC when issues arise, you cannot defend. Mary owes $6,000. She pays $3,000 today and will pay $3,000 in 60 days. At that time, Mary is not a Holder in Due Course. There is not value. When will she be a HDC?

A

She will be a HDC when she pays the second $3,000.

57
Q

Good faith

A

This means that the holder must have acted honestly in the process of acquiring the instrument.

58
Q

Who does “taking in good faith” apply to?

A

ONLY the holder

59
Q

What are the guidelines on the determination of good faith?

A

There are no clear guidelines exist on determination of good faith

60
Q

Cassandra Demery worked as a bookkeeper at Freestyle until the owner, Clinton Georg, discovered that she had embezzled more than $200,000. Georg fired Demery and demanded repayment. Demery went to work for her parents’ firm, Metro Fixtures, where she had some authority to write checks. Without specific authorization, she wrote a check for $189,000 to Freestyle on Metro’s account and deposited it in Freestyle’s account. She told Georg that the check was a loan to her from her family.

When Metro discovered Demery’s theft, it filed a suit against Georg and Freestyle. Freestyle argued that it had taken the check in good faith and was an HDC.

A

The Colorado Supreme Court agreed. Demery was the wrongdoer. She had the authority to issue checks for Metro, and Georg had no reason to know that Demery had lied about this check. Therefore, Freestyle was an HDC, and Metro would bear the loss.

61
Q

Notice

A

A person knows or has reason to know of a defect.

62
Q

Defects

A
  1. It is overdue.
  2. It has been dishonored.
  3. It is part of a series in 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 a claim to the instrument.
  6. The instrument is so incomplete or irregular as to call into question its authenticity.
63
Q

Dishonored instruments

A

The party who is required to pay has refused to pay (the drawee…for check/draft) (the maker…for note).

64
Q

Lucinda Gonzalez holds a demand note dated September 1 on Apex, Inc., a local business firm. On September 17, she demands payment, and Apex refuses (that is, dishonors the instrument). On September 22, Gonzalez negotiates the note to Brenner, a purchaser who lives in another state.

A

Brenner does not know, and has no reason to know, that the note has been dishonored. Because Brenner is not put on notice, Brenner can become an HDC.

65
Q

Unauthorized signature or instrument has been altered

A

Forged signature or altered instrument. It has to be a forgery that a reasonable person would be able to recognize as a forgery. Same with an alteration.

66
Q

Instrument is so irregular or incomplete to make authenticity suspect.

A

Missing something really important (missing a dollar amount or makers signature).

67
Q

James Wu, knowing that the note he has taken has a forged indorsement, presents it to the maker for payment. The maker refuses to pay on the ground of breach of the underlying contract. The maker can assert this defense against Wu even though Wu had no knowledge of the breach.

A

Wu’s knowledge of the forgery prevents him from being an HDC in any circumstances.

68
Q

Peyton asks Brittany to buy a textbook for him when she goes to the campus bookstore. Peyton writes a check payable to the campus store, leaves the amount blank, and tells Brittany to fill in the price of the textbook. The cost of the textbook is $85. If Brittany fills in the check for $150 before she gets to the bookstore, the bookstore cashier sees only a properly completed instrument.

A

Therefore, because the bookstore had no notice that the check was incomplete when it was issued, the bookstore can take the check for $150 and become an HDC.

69
Q

Losses that result from well-crafted forgeries usually fall on the party to whom the forger transferred the instrument (assuming, of course, that the forger cannot be found).

A

Typically, this means the bank that accepts a check despite evidence on the check’s face that it is irregular will bear the loss if the check later turns out to be forged.

70
Q

Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000.

The first group will determine whether the bank qualifies as a holder in due course and, if so, for what amount?

A
  1. The bank gives value – the $4,850 (discount is irrelevant)
  2. The bank acts in good faith
  3. The bank acted without notice of a defect
    So… the bank is a holder in due course.
71
Q

Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000.

The second group will decide what would have happened if Hayden had sold the note to a stranger in a bar for $500. Would the stranger qualify as a holder in due course? Explain.

A
  1. Value
  2. Looks like bad faith
  3. The stranger in the bar should have questioned why Hayden is selling a $5,000 for $500..
    The stranger would not qualify in due course.
    Unauthorized completion of an incomplete instrument. The bank is a HDC. The bank is trying to collect $5,000 from Celine. Celine will probably argue that she doesn’t have to pay anything. Personal defense – have no affect on HDC and the bank collect the full $5,000 anyway. “unauthorized completion of incomplete instrument”
72
Q

Shelter Principle - Holders through HDC

A

Holders can get HDC privilege if instrument is acquired from an HDC. “if I’m a HDC I shelter the next owner’s status by me being a HDC.”

73
Q

What are limitations to the shelter principle?

A

If a Holder disqualifies as an HDC and then reacquires the instrument after an HDC, still not HDC.

74
Q

Matthew and Carla collaborate to defraud Dina. Dina is induced to give Carla a negotiable note payable to Carla’s order. Carla then specially indorses the note for value to Ling, an HDC. Matthew and Carla split the proceeds. Ling negotiates the note to Stuart, another HDC. Stuart then negotiates the note for value to Matthew.

A

Matthew, even though he obtained the note through an HDC, is not a holder through an HDC because he participated in the original fraud and can never acquire HDC rights in this note.