Chapter 27: Negotiable Instruments Flashcards

Question

Representative capacity

Answer 1

Action taken by one on behalf of another, as the act of a personal representative on behalf of a decedent's estate, or as a shareholders bringing a representative action

Answer 2

If instrument fails to show the representative capacity of the person authenticating then the person authenticating may be personally liable for the instrument Instrument is a final agreement so parole evidence rule applies and cannot introduce external evidence to clarify representative capacity (Check preprinted with employer's name is sufficient identification of the principle)

Answer 3

Instrument must contain words that permit is transfer Promissory note: includes promise to pay money (not just acknowledgement of debt) ``` Certain phrases are required Pay to the order of x Pay to x or order Pay to bearer Shows no intention of restricting payment to single individual ``` Checks may be made simply "pay to x" but it is not negotiable on other instruments

Answer 4

- Whitaker and Fletcher loaned Limeco director Kidd $750,000 for the purchase of a hockey team that never happened - July 1, 2002 parties entered into "what they referred to as promissory notes" with language stating "on demand, for value received, I promise to pay to R.W. Whitaker... The sum of Three Hundred, Seventy-five Thousand Dollars." - Dec, 11 2003 Whitaker and Fletcher filed suit to recover money - trial court dismissed suit for being outside contract's statute of limitations - Whitaker and Fletcher appealed stating notes were negotiable instruments subject to the six year statute of limitations on negotiable instruments - court dismissed sui - words of negotiability an absolute requirement for a negotiable instruments, without them it is just a contract (suit required to be filed within three years) - if document had contained words of negotiability suit could have proceeded

Answer 5

If duty to pay is dependent upon an event the promise is conditional and the instrument is non-negotiable (enforceable as a contract but not under article 3) Order for payment from a particular find is negotiable. But the fund must be currently in existence (or the payment is conditional on the creation of the fund)

Answer 6

Does not affect negotiability

Answer 7

Amount due under an instrument that can be computed from its face with only reference to interest rate

Answer 8

Any medium of exchange adopted or authorized by the United States, a foreign government, or an intergovernmental organization

Answer 9

Negotiable instrument must be for an exact amount of money. Some exceptions: - market rate (non fixed) mortgage - note providing for costs and attorney fees in event of litigation If not payable in money (ex stock or goods) instrument is non-negotiable

Answer 10

Time if payment computable from the face of the instrument

Answer 11

Negotiable instruments must be payable on demand or at a definite time if time is "when convenient" not negotiable. May never be paid. If payment is contingent on an event instrument is not negotiable Time of payment still considered definite if there are provisions for prepayment/acceleration/extensions

Answer 12

Instrument expressly states it is payable "on demand" at sight, or on presentation If no date listed then instrument is payable on demand

Answer 13

- Vaughn signed document stating that the smiths were lending him $9,900 to be repaid "when you can" - 18 months later Smith's sure for entire amount - Vaughn moved for summary judgment saying he did not have to pay if he did not have the ability to do so - trial court granted summary judgement. Smiths appealed - appeals court: payable "when you can" is not payable on demand and isn't a negotiable instrument. Parties had an open ended agreement which might form the basis for a contractual obligation - potential issue of unjust enrichment and borrower obligation to pay debt - case sent back to trial court for resolution of these contract issues

Answer 14

Rules 1. Words control figures where conflict exists 2. Handwriting supercedes conflicting typewritten or printed terms 3. Typewritten terms supercede preprinted terms 4. If there is a failure to provide for the payment of interest or if there is a provision for the payment of interest but no rate is mentioned, the judgement rate at the place of payment applies from the date of the instrument

Answer 15

The transfer of commercial paper by indorsement and delivery by the person to whom it is then payable in the case of order paper and by physical transfer in the case of bearer paper The process of transferring a negotiable instrument in a manner that permits.thr transferee to become a holder

Answer 16

Someone in possession of an instrument that runs into that person (is made payable to that person, is indorsed to that person, or is bearer paper)

Answer 17

Instrument payable to order: payable to the order or any person described in it Specific words of negotiability determine if order paper or bearer paper

Answer 18

Instrument where no specific person is expressly identified or is only identified by "bearer" (or instruments that include "x person or bearer"

Answer 19

- Herrera found a purse in a dumpster and the purse was returned to the owner. - Herrera returned to the dumpster and found more items including a check made out to cash - he added "to Joshua Herrera" next to cash on the payee line and indorsed the check (on instruction of the credit union teller) - pled guilty to forgery but moved to have indictment dismissed on the grounds that adding his name to a bearer instrument was not forgery - court denied motion to dismiss, Herrera appealed - court ruled since instrument found was bearer paper adding his name after cash did not change the character of the instrument and since he did not alter the nature of the instrument he could not be charged with forgery

Answer 20

May be accomplished by constructive or actual transfer of possession of the instrument such that the transferree has exclusive access

Answer 21

Bearer instruments negotiation by delivery (actual or constructive transfer of possession) Negotiated without regard to whether possession of instrument is lawful. (Some consideration for liability issues)

Answer 22

Negotiation of order instruments require indorsement and transfer of possession of the paper by the payee or indorsee or their authorized agent

Answer 23

Signature of the payee on an instrument Not necessary that indorsement require words order or bearer to continue to be negotiable as long as words of negotiability are on the front of the instrument. Only need "pay to"

Answer 24

An indorsement that does not name the person to whom the paper, document of title, or investment security is negotiated Turns an order instrument into a bearer instrument so person who possesses the instrument on which the last indorsement is a blank endorsement is the holder

Answer 25

An indorsement that specifies the person to whom the instrument is indorsed (to whom the indorser makes the instrument payable) Continues the order instrument as an order instrument now negotiable by the indorser

Answer 26

Party to whom special indorsement is made

Answer 27

- Ring behind on property taxes - he received a check made out to him for $11k - on the back of the check he wrote "payable to town of Freeport property taxes" and he sent it with a letter to the town offices - his property then leined by the tax clerk - ring asserted he paid his taxes - clerk said not paid as check was not indorsed - there was no indorsement as ring had not signed his name, which was required for further negotiation "Indorsements vary according to the method of signing and the words used along with the signature. The nature of an indorsement also affects the future of the instrument in terms of its requirements for further negotiation."

Answer 28

An indorsement that includes words such as "without recourse" that disclaims certain liability of the indorser to a maker or a drawee without affecting the transfer or title or negotiable character of the instrument. Any words that indicate intent to limit liability will work. (Limits liability to the indorser in the even the maker/drawee does not pay on the instrument)

Answer 29

An indorsement that restricts further transfer, such as in trust for or to the use of some other person, is conditional, or for collection or deposit Ex. "For deposit only" Specifies the purpose of the instrument or its use but does not prevent transfer or negotiation once the initial restriction is honored

Answer 30

Possible to name two or more payees on an instrument. Instrument may specify if payable to any one or more or that it is payable to all jointly If jointly requires indorsement of all payees to negotiate

Answer 31

Those persons to whom a negotiable instrument is made payable, any one of whom may indorse and take delivery of it

Answer 32

- L&T issued checks to one of their subcontractors and one of that subcontracts suppliers (presumably payable jointly?) - check city cashed the check with only the indorsement or the subcontractor not the supplier - it was clear that the check was missing the second required signature - check city filed suit against L&T for negligence - trial court ruled L&T breached duty by failing to exercise ordinary care and substantially contributing to an alteration of an instrument or forged signature - L&T appealed - judgment reversed. Check city had failed to obtain necessary signatures for the payees and had liability for the losses as duty to ensure signatures were there and genuine is on the first party to receive the check

Answer 33

A holder who has given value, taken in good faith without notice of dishonor, defenses, or that instrument is overdue, and who is afforded special rights and status Receives the rights of a negotiable instrument without the obligations of the seller who formed the contract (some consumer credit contracts allow for defenses against holders in due course: FTC protections

Answer 34

Rights of a holder like the rights of a contract assignee - ordinary holder is subject to legitimate defenses against payment Holders in due course mostly free of contract assignment defenses, unless a consumer credit contract under FTC rule

Answer 35

Four requirements for obtaining holder in due course (HDC) status - value (consideration in exchange) - good faith - no knowledge of the instrument's being overdue or dishonored - ignorance of defenses and adverse claims

Answer 36

Consideration or antecedent debt or security given in exchange for the transfer or a negotiable instrument or creation of a security interest Not a promise to be performed Can be value given previously Courts do not consider if value is sufficient. Just if it has been given

Answer 37

Honest in fact and observance of reasonable commercial standards of fair dealing Requires a holder of a negotiable instrument act with honest in fact in acquiring the instrument

Answer 38

Honest in fact and observance of reasonable commercial standards of fair dealing Requires a holder of a negotiable instrument act with honest in fact in acquiring the instrument

Answer 39

Circumstantial evidence, such as an ongoing or close relationship, that can serve as notice of a problem with an instrument If a holder has taken so many instruments from its transferor or is so closely connected with transferor that any knowledge the transferor had is deemed transfered to the holder

Answer 40

Still can be negotiated. Transferee is still a holder. But cannot be a holder in due course as the fact that the instrument is circulating overdue/after it has been dishonored is suspicious. There may be adverse claim or defense Recorded documents do not give notice Discharge of a party does not prevent the taker from being a holder in due course

Answer 41

Prior parties in an instrument may have defenses that entitle them to without payment from the holder (ex:defective merchandise) If a transferee is aware of any potential defenses they cannot be a holder in due course. Simply a holder

Answer 42

- Trevinos had a mortgage on their home - when they went into bankruptcy it was arranged that the trustee would make payments on the mortgage. Plan did not provide for payment of real estate taxes - payments of taxes were made both by trustee and mortgage company which resulted in litigation - mortgage transfers from HSBC to US bank and trust, who claims they were holders in due course (free and clear of any previous issues and claims) - not holders in due course because the note was overdue when transferred and us bank and trust knew that "A mortgage company or lender that takes over a note following bankruptcy cannot be an HDC."

Answer 43

A transferable, written, signed promise or order to pay a specified sum of money

Answer 44

Draft drawn by a bank on itself

Answer 45

Draft drawn by a bank on another bank

Answer 46

Check payable on demand provided it is countersigned

Answer 47

Drawee who has accepted the liability of paying the amount specified in the draft

Answer 48

Aka accommodation party Person who allows their name to be added to add strength to the collectability of an instrument

Answer 49

- natural person - artificial person - unincorporated enterprise

Answer 50

Generally 3 years CDs and accepted drafts have a 6 year statute

Answer 51

- Green valley growers (owned by Massey) contracted for services and materials from KC Crushed (owned by Smith) - GVG took out a loan and paid proceeds to KC Crushed - Massey and Smith "executed" (wrote) a promissory note saying that Massey (named) would pay Smith (named) the money with interest - GVG went into bankruptcy (trustee Randy Williams) - Smith and Massey contend that the note was between the companies KC Crushed and GVG, not themselves as individuals, ergo they are not liable for the debts as individuals - Smith claims signed without reading the note believing signing for KC crushed Holding: Smith and Massey liable. GVG wrote payment checks to Smith, not KC Crushed. + Parties presumed to know contents of documents they signed (subjective beliefs cannot contradict what is written in the contract) and obligations determined Wiley from written agreement p

Answer 52

"real defenses" - infancy - duress - legal incapacity - illegality of the transaction - fraud in the factum (inducing the obligor to sign the instrument without knowledge of it's essential character and terms)

Answer 53

"personal defenses" Including: - fraud in the inducement (obligor could still know content of instrument) - misrepresentation - lack of consideration - undue influence - breach of warranty - discharge by payment to someone other than the holder of the instrument - statutory violations

Answer 54

If parties intend to negotiate an order instrument but fail to indorse, there is no negotiation and the transfer has the effect of a contract assignment

Answer 55

May be used only when the instrument was intended to be payable to the person making the correction

Answer 56

Between banks, any agreed method which identifies the transferor bank is sufficient

Answer 57

An instrument payable to the order of an office holder may be negotiated by the person who holds the office at that time An instrument payable to a corporation maybe indorsed by any corporate officer

Answer 58

Not a valid indorsement

Answer 59

Negotiation is effective even though: - made by a minor - an act beyond corporate powers - obtained by fraud, duress, or mistake - a part of an illegal transaction or breach of duty

Answer 60

Finder does not become holder because instrument not indorsed and delivered

Answer 61

Finder as possessor is the holder and entitled to enforce payment

Answer 62

BDGS contracted with Balio to manage a warehouse including collecting and depositing rent - discovered that many checks had been made out to slightly wrong name (DBGS) and endorsed over to another company (owned by Balio) - brought suit against Balio, the other company and the ban - bank determined to be liable - it is the bank's responsibility to verify that the party with the checks is actually the payee and authorized to deposit the checks

Answer 63

Any person may indorse payee's name. Indorsement is treated as genuine and cannot be attacked. Doesn't applies when a valid check to an actual creditor is forged Negligence of drawee not required

Answer 64

- Won Charlie Yi solicited and was given money by investors under the claim he would invest it in equities - he created his own account at wells fargo, deposited the money there, and later absconded with it - investors filed against wells fargo to recover losses (claim lack of ordinary care) - original and appeal court ruling for Wells Fargo - the checks were made out to and deposited by intended payee, even if not always precise. Since investors intended money to go to Charlie's company bank is not liable for losses simply because the investors later realized he was untrustworthy. Checks were essentially legitimate

Answer 65

to obtain payment on the negotiable instrument free of any underlying problems between the original parties

Answer 66

- ordinary contract defenses - fraud in the inducement - miscellaneous defenses (non-delivery, duress via threat, prior payment or cancellation, breach of warranty, unauthorized completion) May be called "personal defenses" not valid against a holder in due course

Answer 67

Defenses that involve breach of contract issues - lack, failure, or illegality of consideration - misrepresentation of goods - failure to perform defects to underlying transactions HDC not subject to these defenses with exception for certain consumer contracts

Answer 68

Fraud that occurs when a person is persuaded or induced to execute an instrument because of fraudulent statements cannot be defense against HDC

Answer 69

Limited defenses- HDCs are not subject to these defenses Universal defenses (real defenses)- HDCs are subject to these defenses Holders subject to all defenses

Answer 70

- payee Shelly Mckee got check from HGE for purported rolex (check postdated three days) - she indorsed the check and presented it to RR Maloan, which cashed it for her - HGE discovered watch was counterfeit and issued stop payment, so their bank refused to honor the check - RR Maloan stated they were a holder in due course and sued HGE for payment - Since HGE not present on trial date, default judgement to RR Maloan. Maloan appealed - Question before the court: o do you lose HDC status because it was a post-dated check? BUT the bank is not actually required to honor the post-dated date, as long as legit can pay it then o Is fraud on the underlying transaction a defense against an HDC - RR Maloan found to be holder in due course and fraud by payee is not a defense against an HDCs right to payment o Postdating of check does not change HDC status (does not impose duty on RR Maloan to investigate circumstances surrounding check)

Answer 71

Regarded as so basic that the social interest in preserving them outweighs the social interest of giving negotiable instruments the freely transferable quality of money. May be raised against all holders. Includes: - fraud in the instrument (in factum) - Forgery/ lack of authority - Duress depriving control - incapacity - illegality - alteration

Answer 72

Fraud committed by deceiving the signing party about the nature of the document being signed (false representation) a universal defense

Answer 73

Defense that a signature was forged or signed without authority universal defense that negligence of drawer helped wrongdoer does not prevent drawee from raising defense of forgery

Answer 74

If a negotiable instrument is executed or indorsed in response to a force of such a nature that, under general principles of law, duress makes the transaction void (not just voidable) Universal defense Physical duress = universal defense economic duress = personal/ limited defense

Answer 75

Incapacity is a universal defense if: - raised by a minor - if effect of incapacity is to make the instrument void (formal declaration of insanity)

Answer 76

Instrument is void by law if illegal universal defense

Answer 77

The unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument recovery is still possible under original terms if proof of original terms available universal defense

Answer 78

If alteration is fraudulent then the person whose obligations affect by the alteration is discharged of the liability under the instrument instrument may still be enforced on original terms by holders in due course who had no notice of the alteration

Answer 79

Party to whom the holder in due course must turn first to obtain payment For a note or CD: the maker For a draft: the drawee (it the drawee has accepted the draft. Though the bank is not primarily liable for the instrument in the case of a check they are still the party turned to first)

Answer 80

Called secondary obligors under revised article 3, parties to an instrument to whom holders turn when the primary party, for whatever reason, fails to pay the instrument Notes: indorsers Checks and drafts: drawers and indorsers Leaves the secondary party to collect from the primary party

Answer 81

A party who signs and transfers a negotiable instrument; secondary party (or obligor) on a note

Answer 82

1) presentment | 2) dishonor and notice of dishonor

Answer 83

Formal request for payment on an instrument according to it's terms Primary party then required to pay unless there are valid defenses

Answer 84

can require presentment be made in a "commercially reasonable manner" can make specific requirements for receipt of funds (authorization, ID, etc...) Can require a valid indorsement prior to payment

Answer 85

Status when the primary party refuses to pay the instrument according to it's terms Holder left to turn to secondary parties

Answer 86

Notice that an instrument has been dishonored required from primary party refusing to pay. Can be oral, written or electronic but subject to time limitations Non-bank primary parties must give notice of dishonor within 30 days, at which time the holder can turn to secondary parties for payment

Answer 87

A primary party must have a valid reason for refusing to pay or they will be liable for wrongful dishonor Valid reasons include any valid defenses or failure of the presenting party to provide sufficient identification

Answer 88

Promises that parties to an instrument give to other parties to that instrument that provide assurances of payment and grounds for liability At both creation and at transfer

Answer 89

Warrants that presenter: - is authorized to present and enforce the draft - that the draft has not been altered - that the presenter had no knowledge that the signature of the drawer is forged

Answer 90

Those who present the instrument to the primary party for payment

Answer 91

- that they are entitled to enforce the instrument - that the signatures are genuine and authorized - that there has been no alterations - that there are no defenses to an instrument that are good against the transferor (may be disclaimed with a qualified indorsement) - that the transferor has no knowledge of any insolvency proceeding Warranties always return responsibility to the first person who could have prevented the problem

Answer 92

- Artisan breads receives promissory note for $2,500 from Diego's - Will (A/R employee) stamps ab endorsement on the back of the note and then fails to put it away correctly and it is lost - Diego's rebilled for same services (told past due). - Diego's manager tells Will that the note had been presented to them by factoring firm Financial Advisors and they had paid it since artisan had endorsed it so they assumed it was a legit firm - Financial Advisors said they had received the note in the mail with a preprinted return envelope and had issued payment to that address (not the artisan breads addresss - because there was an authorized blank endorsement on the note financial advisors properly presented it for payment. Diego's may be able to recover from artisan breads /not pay twice as Artisan is reasonable for lax internal controls that allowed theft - it there had been no blank indorsement Diego's would be entitled to demand returned funds from Financial Advisers who would then have to go after forger (FAmay try to use negligence defense against Artisan)

Chapter 27: Negotiable Instruments Flashcards

(116 cards)