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Flashcards in Chapter 27 Deck (55)
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1
Q

Universal (Real) Defenses

A

A defense that is valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs. Used to avoid payment to all holders.

2
Q

What are the universal defenses?

A
  1. Forgery of a signature on the instrument.
  2. Fraud in the execution.
  3. Material alteration.
  4. Discharge in bankruptcy.
  5. Minority.
  6. Illegality, mental incapacity, or duress (when the instrument is void).
3
Q

Forgery of Maker or Drawer Signature.

A

i.) a person’s name is signed by another without permission
ii) an agent signs an instrument without authority

4
Q

Forgery is a universal defense unless…

A

The Drawer or Maker was negligent when issuing the instrument or if the Drawer or Maker ratifies the signature, Drawer or Maker will be liable

5
Q

Under what circumstance would forgery be used against you?

A

Negligence…leaving yourself open to forgery

6
Q

Fraud in execution

A

Not ordinary fraud. You are signing an instrument believing it to be something else.

7
Q

Russian immigrant went to dealership. Buying car on credit. The Russian does not read any English, but can speak enough. Signs an agreement that was not was discussed – he was taken advantage of.

A

Fraud in execution

8
Q

Material alteration is a…

A
  1. Complete defense against holders
  2. Partial defense against HDCs (good to original terms)
9
Q

Alteration is analyzed twice

A

under HDC and again when HDC is trying to collect on it.

10
Q

Personal (Limited) Defenses

A

Used to avoid payment to holders, but HDC will collect on the instrument

11
Q

What are personal defenses?

A
  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 duress (when the instrument is voidable)
  5. Previous payment or cancellation (discharge)
  6. Unauthorized completion of an incomplete instrument
  7. Nondelivery of the instrument
12
Q

Lack of failure of consideration

A
  1. No consideration, no enforceable promise
  2. Delivery of goods is truly impossible
13
Q

Should you write a check in pencil?

A

NO!

14
Q

Elias purchases two dozen pairs of athletic shoes from De Soto. The shoes are to be delivered in six weeks. Elias gives De Soto a promissory note for $1,000, which is the price of the shoes. The shoes arrive, but many of them are discolored, and the soles of several pairs are coming apart. Elias has a defense to liability on the note on the basis of breach of contract and breach of warranty. (A seller impliedly promises that the goods being sold are at least merchantable.)

If, however, the note is no longer in the hands of the payee-seller (De Soto) but is presented for payment by an HDC, the result is different.

A

The maker-buyer (Elias) in that situation will not be able to plead breach of contract or breach of warranty as a defense against liability on the note.

15
Q

Tony gives Cleo, as a gift, a note that states, “I promise to pay you $100,000,” and Cleo accepts the note.

A

No consideration is given in return for Tony’s promise, and a court will not enforce the promise.

16
Q

New Houston Gold Exchange, Inc. (HGE), issued a $3,500 postdated check to Shelly McKee as payment for a purportedly genuine Rolex watch. McKee indorsed the check and presented it to RR Maloan Investments, Inc., a check-cashing service. RR Maloan cashed the check. Meanwhile, HGE issued a stop-payment order on the check based on information that the watch was counterfeit.

When RR Maloan presented the check to HGE’s bank for payment, the bank refused to honor it. HGE claimed that RR Maloan was not a holder in due course because of McKee’s fraud in selling an allegedly fake Rolex. RR Maloan filed a suit in a Texas state court against HGE to recover the funds, asserting that it was an HDC entitled to collect on the check.

A

Ultimately, a state appellate court found that McKee’s alleged fraud toward HGE did not prevent RR Maloan from obtaining the status of an HDC. The check-cashing service took the check in good faith and for fair value, unaware of McKee’s alleged fraud in inducing HGE to issue the check. Therefore, RR Maloan was entitled to payment on the check.

17
Q

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

Under the HDC doctrine, a consumer who purchased a defective product (such as a defective automobile) would continue to be liable to HDCs even if the consumer returned the defective product to the retailer.

18
Q

To buy a used truck with a one-year warranty, Brian pays $5,000 down and signs a promissory note to the dealer for the remaining $15,000. The truck turns out to be defective, and Brian returns it to the dealer, but the dealer has already sold the note to an HDC.

A

Under the HDC doctrine, Brian would remain liable to the HDC for $15,000 in this situation because his claim of breach of warranty is a personal defense, not a universal defense.

19
Q

To protect consumers who purchase defective products, the Federal Trade Commission (FTC) adopted Rule 433, which effectively abolished the HDC doctrine in consumer transactions.

A

FTC Rule 433 severely limits the rights of HDCs that purchase instruments arising out of consumer credit transactions. The rule applies to consumers who purchase goods or services for personal, family, or household use using a consumer credit contract. The regulation prevents a consumer from being required to make payment for a defective product to a third party HDC who has acquired a promissory note that formed part of the consumer’s contract with the dealer who sold the defective good.

20
Q

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

A

FTC Rule 433 Required Provision

21
Q

Analyzing HDC scenarios:

A
  1. Determine if the holder is just an ordinary holder or a HDC.
  2. When the HDC/holder attempts to collect on the instrument, the next question is what defense is raised by the party required to pay?
  3. What classification of defenses does that defense fit in?
  4. If the defense is personal: HDC collects full amount of the instrument.
    Holder does NOT collect anything.
    If the defense is real/universal: even an HDC will NOT collect (unless material alteration is the defense).
22
Q

Two Types of Liability with Negotiable Instruments:

A
  1. Signature Liability.
  2. Warranty Liability.
23
Q

Signature Liability

A

Liability associated with signatures.

24
Q

Warranty Liability

A

Promises and guarantees on the instrument itself. Extends to people who sign and do not sign an instrument. Every time an instrument is transferred there are warranties that are a part of the transfer.

25
Q

Lien’s

A

rights of buyers

26
Q

Every party EXCEPT a ________ endorser who signs a negotiable instrument incurs some sort of signature liability (primary or secondary).

A

qualified

27
Q

Lamar and Case are roommates. Deere is their landlord. Universal Bank is Drawee on Lamar’s checks and depository bank for Deere.
Case: Payee
Lamar: Drawee
Deere: Endorser and secondarily liable
Deere deposits…UB alerts Deere that there are NSF (from Lamar)

Who are primarily and secondarily liable?

A

Primary: UB
Secondary: Lamar (drawer), Case (indorser)

28
Q

Primary Liability (Signature Liability)

A

A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument, subject to certain defenses.

29
Q

Who is primarily liable under signature liability?

A

Makers (notes and CDs) and Acceptors (drafts and checks)

30
Q

A Maker of a promissory note promises to pay the note…

A

when it is due

31
Q

An Acceptor is a Drawee that promises to pay an instrument when…

A

it is presented later for payment.

32
Q

The bank has primary liability…

A

the bank account…(looking to drawee for payment first). Treat the drawee and drawer separately. If there is no money you can look outside of the account to hold the drawer personally responsible.

33
Q

Parker finds Dolby’s checkbook lying in the street, writes out a check to himself, and forges Dolby’s signature. Banks normally have a duty to determine whether a person’s signature on a check is forged.

A

If a bank fails to determine that Dolby’s signature is not genuine and cashes the check for Parker, the bank will generally be liable to Dolby for the amount.

34
Q

Maya Campbell is the principal, and Lena Shem is her agent. Shem, without authority, signs a promissory note as follows: “Maya Campbell, by Lena Shem, agent.”

A

Because Maya Campbell’s “signature” is unauthorized, Campbell cannot be held liable, but Shem is liable to a holder of the note. This would be true even if Shem had signed the note “Maya Campbell” without indicating any agency relationship. In either situation, the unauthorized signer, Shem, is liable on the instrument.

35
Q

Roger writes and signs a check, leaves blank the amount and the payee’s name, and then leaves the check in the front lobby at his hotel. Joan finds the check, fills it in, and cashes it.

A

Roger, on the basis of his negligence, can be estopped (prevented) from denying liability for payment of the check. Alternatively, whatever loss occurs may be allocated between the parties on the basis of comparative negligence [UCC 3–406(b)]. If Roger can demonstrate that the bank was negligent in paying the check, a court may require the bank to bear a portion of the loss.

36
Q

If Michel Vuillard signs “Paul Richman” without Richman’s authorization, Vuillard is personally liable just as if he had signed his own name.

A

Vuillard’s liability is limited, however, to persons who in good faith pay the instrument or take it for value. A holder who knew the signature was unauthorized would not qualify as an HDC (because of the good faith requirement) and thus could not recover from Vuillard on the instrument.

37
Q

Secondary signature liability

A

Drawers and Unqualified Indorsers

38
Q

What makes an indorsement unqualified?

A

The lack of the words “without recourse.”

39
Q

Parties who are secondarily liable are required to pay on an instrument only if the following events occur:

A
  1. The instrument is properly and timely presented to the primarily liable party;
  2. The instrument is dishonored “I will not pay” or defense; and
  3. Notice of dishonor is timely given to those secondarily liable.
40
Q

Drawer - secondary liability

A

A Drawer is not liable until the Drawee of a draft or check fails to pay or accept the instrument.

41
Q

Indorser - secondary liability

A

An Indorser is not liable until the Maker (primary party) of a note refuses to pay.

42
Q

If there is more than one indorsement…

A

Each indorser is liable for the full amount to any subsequent (after) indorser or to any holder.

43
Q

Accommodation Party

A

lend their signatures to bolster credit

44
Q

Accommodation Maker

A

If the accommodation party signs on behalf of the maker, he or she is an accommodation maker. Primarily liable.

45
Q

Accommodation Indorser

A

If the accommodation party signs on behalf of a payee or other holder (usually to make the instrument more marketable), she or he is an accommodation indorser. Secondarily liable.

46
Q

If the Accommodation Party has to pay, he can sue…

A

the party accommodated to be reimbursed.

47
Q

Warranties are made by…

A

any person who transfers an instrument for consideration.

48
Q

When is warranty liability particularly important?

A

when a holder cannot hold a party liable on her or his signature, such as when a person delivers a bearer instrument.

49
Q

Unlike secondary signature liability, warranty liability is…

A

not subject to the conditions of proper presentment, dishonor, or notice of dishonor.

50
Q

What are the two categories of warranties?

A
  1. Those that arise from the transfer of a negotiable instrument
  2. Those that arise on presentment
51
Q

Warranties are made to the transferee and, if the transfer is by indorsement, to all subsequent Holders who take in good faith.

In other words…

A

If you don’t have to endorse…don’t endorse. If you sign it your warranty flows all the way down the line, if you don’t sign it…your warranty only flows to the person YOU transfer it to.

52
Q

Transferor warrants the following 5 things:

A
  1. Transferor has good title or the authority to obtain payment or acceptance on behalf of one who does have good title (agent).
  2. All signatures are genuine or authorized.
  3. The instrument has not been altered.
  4. No defense of any party is good against the transferor.
  5. Transferor has no knowledge that Maker, Drawer, or Acceptor of an unaccepted instrument is insolvent
53
Q

Presentment Warranties

A

A person who obtains payment or acceptance of an instrument warrants to any other person who in good faith pays or accepts the instrument that:
1. The party presenting the instrument has good title or is authorized to obtain payment for a person with good title.
2. The party presenting the instrument has no knowledge of unauthorized signature of a Maker or Drawer (limited).
3. The instrument has not been materially altered (limited).

54
Q

Wylie forges Kim’s name as a maker of a promissory note. The note is made payable to Wylie. Wylie indorses the note in blank, negotiates it for consideration to Bret, and then leaves the country. Bret, without indorsement, delivers the note for consideration to Fern. Fern, also without indorsement, delivers the note for consideration to Rick. On Rick’s presentment of the note to Kim, the forgery is discovered.

A

(forgery of a maker’s signature is a real defense – Kim doesn’t have to pay Rick) Rick can hold Fern (the immediate transferor) liable for breach of the warranty that all signatures are genuine. Rick cannot hold Bret liable, because Bret is not Rick’s immediate transferor. Rather, Bret is a prior nonindorsing transferor.

55
Q

Any of the following acts—if done by the holder with the intent to cancel the obligation—will discharge liability:

A
  1. Writing “Paid” across the face of an instrument.
  2. Intentionally tearing up an instrument.
  3. Crossing out a party’s signature. Doing this will discharge that party’s liability and the liability of subsequent indorsers who have already signed the instrument.
  4. Surrendering the instrument (such as a promissory note) to the party to be discharged.