Commercial Law - UCC Article 3 & 4 Flashcards
Bar Review - Article 3 & 4 of the UCC - TX (36 cards)
Negotiability
Determined at the time the item is issued (SWUP OF PAN) • Signed - by maker or drawer • Written • Unconditional Promise or Order – (1) statements of consideration, (2) reference to another record (as, per or in accordance with), (3) incorporation of collateral, prepayment, acceleration, (4) limitation of payment to a particular source, (5) countersignature, and (6) consumer protection language are NOT conditions • Fixed Amount of money • Payable to bearer or order • At a specified time (or on demand) • No other pressure or undertaking
Accommodation Party
Surety
• Incurs liability without being direct benefit
• Entitled to reimbursement if pay on instrument from accommodation party
Anomalous Indorsement
An indorsement by person who’s is not holder of the instrument. Make liable as an indorser.
Holder Status or Party entitled to enforce
Possession and good title.
• Bearer Paper: Possession
• Oder paper: Possession plus necessary indorsments
Allonge
Typically, the indorsement is placed on the reverse side of the instrument, but it may also properly be placed on the front or on a paper affixed to the instrument
How initial payee determined:
The intent of the issuer
Types of Indorsements
- Blank: Becomes bearer paper
- Special: Payee’s signature plus designation of new person who instrument is payable – creates order paper
- Restrictive: Limits what is done on the check
- Qualified: without recourse – limit the legal liability otherwise imposed on the indorser
What happens when the check is not indorsed and deposited into an account with the bank?
• Depository bank becomes a holder even if payee deposited check into payee’s account without indorsing it.
Holder In Due Course
- Holder – in possession & good title
- Took for value
- In good faith – looked at when value given or instrument negotiated, whatever is later
- Without notice that:
- Overdrawn or dishonored – check 90 days after issue
- Instrument contains and unauthorized signature or been altered
- There is a claim to the instrument or
- Any party has any defense or claim in recoupment
Burden of proof on person claiming HDC status
Shelter Rule
Transferee has the rights of the transferor – vesting of rights
• Not make you a HDC, just shelter you
• Exception: A person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter
Rights of a Holder in Due Course and Real Defenses
HDC NOT resistant against - 11 real defenses (FAIDS)
- Fraud in the execution (fraud in factum)
- Alteration
- Infancy, Insanity
- Illegality making obligation void
- Duress which voids obligation
- Statutes of limitations (note: 6 years from due date; unaccepted draft: earlier of (1) 3 years after dishonor or (2)10 years after issue)
- Lack of legal capacity
- Insolvency
- Omission of required consumer protection language
- Payment to former holder (item transferred without notice to issuer)
- Unauthorized signatures & Forgeries
Signatures by Agents on Negotiable Instruments – when not liable
Agent escapes personal liability if:
- Principal is identified in the instrument and
- Signature unambiguously shows it made on behalf of the principal.
Liability if above two elements are not satisfied:
- To Holder in Due Course – agent is liable to HDC unless the gent can prove that the holder had NOTICE of the representative nature of agent’s signature.
- To Non-Holder in Due Course – agent is liable to a non-HDC unless agent can prove that original parties did not INTEND the agent to be liable.
Checks – no liability if principal’s name is on the check.
General Statutes of Limitations on Notes and Drafts
Note: 6 years from due date;
Unaccepted Draft: earlier of :
(1) 3 years after dishonor or
(2) 10 years after issue
Claims of Recoupment
A claim of recoupment is a claim by the obligor against the original payee of the instrument arising form the transaction that gave rise to the instrument.
• The claim can be asserted against the transferee only to reduce the amount owed on the instrument at the time the action is brought.
• A HDC takes free of claims of recoupment.
When an instrument is lost or destroyed or stolen:
A person entitled to enforce an instrument keeps that right if an item is lost, destroyed, or stolen. MUST PROVE:
- Person entitled to enforce – (1) in possession, (2) payable to him/her or bearer
- Directly or indirectly acquired ownership
- Loss not result of transfer or lawful seizure
- Can’t reasonably obtain
Still must give indemnity for any additional claims that may result due to the loss of the instrument, and protection for payor required – security or bond.
Conversion:
A person entitled to possession of an instrument may bring an action for conversion of the instrument.
• Occurs when an instrument is taken by transfer (other than negotiation) from a person NOT entitled to enforce.
• May NOT be brought by: (1) issuer or acceptor; OR (2) payee or indorsee who did NOT receive DELIVERY
• Who can enforce: Payee/Special Indorsee if have DELIVERY
NOTE: Drawee who pays on forged indorsement is liable to payee in conversion.
Bank’s defenses:
- Imposter rule
- Fraudulent indorsement by EE entrusted with check
- Drawer negligence
- Failure to timely sue – Drawer must sue within 3 years.
Primary Liability on an Instrument:
- Maker
- Maker must pay instrument when it is due
- Acceptors: Drawee/payor bank when accepts item
• Need presentment – how present:
• Exhibit instrument within 30 days
• Give reasonable identification - Sign/surrender instrument
Both have an absolute obligation to pay the negotiable instrument.
Secondary Liability on an Instrument
- Indorser
• To create liability need:
• Presentment within 30 days of indorsement
• Dishonor AND
• Notice of dishonor to indorser within 30 days of dishonor - Drawer
• Presentment to drawee within 30 days and dishonor by drawee with notice to indorser within 30 days
Drawee’s acceptance or certification
- Drawee may agree to pay the draft by signing the draft
* Certification discharges the drawer and all prior indorsers
Final Payment by Drawee
Once a drawee bank finally pays a check, contract actions (e.g., drawer’s and indorser’s contracts) may no longer be pursed and the drawee bank may not recover on the check form the person it paid UNLESS there is a breach of presentment warrant.
Final Payment: Occurs when the drawee bank:
(1) pays the time in cash or
(2) does not revoke a provisional settlement by the midnight deadline, that is, midnight of the next banking day after the banking day of receipt.
Payment of checks after Drawer’s Death
Drawee bank may continue to pay checks until KNOWS of death
Effect of Notice of Death: Drawee may pay no more than 10 days after drawer’s death if bank KNOWS of death
• BUT – if someone claiming an interest in the account requested and the drawee bank stop payment the drawer’s checks immediately, the drawee must comply.
Transfer Warranties:
Who makes them: Transferor who receives consideration
Who made to: Immediate transferee and subsequent transferees if transferor indorsed – with bank liability runs to any subsequent collecting bank even without endorsement
NOTE: Drawee and Maker not sue under
Warrantees make:
- Person entitled to enforce
- Signatures are authentic
- No alterations
- No defenses
- No knowledge of insolvency
- Authority of creator of demand
Transferor Warrants to Transferee:
- Person entitled to enforce
- Draft NOT altered
- Warrantor has NO knowledge of forged drawer signature
Presentment Warrantees
Who makes them: Presenter and pervious transferors
Made to: Maker of a note, drawee of a draft, acceptor
Warrantees to Drawee:
1. Warrantor entitled to enforce draft or obtain payment
2. No alteration
3. No knowledge of unauthorized drawer signature
4. Remotely created check – person identified as drawer authorized the item
5.
Warrantee to maker: Warrantor entitled to enforce
