Commercial Paper Flashcards

Question

K Liability: Drawer of Draft

Answer 1

May NOT disclaim liability on a check (putting "without recourse" on the check won't cut it!)... but MAY disclaim on other drafts Secondary liability--only liable after 2 conditions are met: (1) Presentment to drawee within 30 days (2) Dishonor (drawee refuses to pay instrument upon proper presentment)

Answer 2

Liability disclaimer is allowed! Order of liability: indorsers are liable to each other in order of their signatures - sue prior indorsers for payment - liable to later indorsers Secondary liability = indorser only liable after 3 conditions are met: (1) presentment to maker/drawee of check within 30 days of indorsement (2) dishonor (3) notice of dishonor to indorser within 30 days of dishonor

Answer 3

General rule = drawee makes no negotiable instruments K (e.g., Dan draws check on BoA for $300 payable to Paula; check bounces when Paula attempts to cash it... Paula MAY NOT sue BoA to collect $300 because BoA, the drawee, did not sign the check and has no K liability) Acceptance or Certification - Drawee may agree to pay the draft by signing the draft - Certification (e.g., bank writes on check "Certified by BoA") discharges the drawer AND all prior indorsers Final Payment occurs when drawee bank (1) pays item in cash, or (2) does not revoke a provisional settlement by midnight of the next banking day after receipt - Once drawee bank finally pays a check, K actions may no longer be pursued and bank may not recover on check from person it paid unless there is breach of presentment warranty Conversion (tort) liability if drawee pays on forged instrument - Person suing in conversion must have received delivery of the instrument (no go if check gets lost in the mail) Payment of Checks After Drawer's Death - May continue to pay checks until it knows drawer has died or has reasonable opportunity to act - Drawee bank may pay for no more than 10 days after death - But if someone claiming interest in account requests bank stop paying checks immediately, drawee must comply

Answer 4

A person who signs an instrument to lend her credit to another party but does not receive any direct benefit (e.g., Co-signers, sureties, and guarantors) Accommodated party = principle/debtor/obligor (person with bad credit) Accommodation party = surety/co-signer (good credit) Holder = creditor/obligee (wants payment assured) Status can be demonstrated by - express language - anomalous indorsement (indorsement by person who was not the holder of instrument--e.g., outside the chain of title)

Answer 5

Accommodated party is liable in capacity in which he signs Presumption = guarantee of payment (meaning payee can collect from accommodation party before even trying to collect from person with bad credit) Accommodation party can limit liability by including express language indicating "collection only" (so that payee has to attempt to collect from bad credit party first) If accommodation party pays the instrument, he's entitled to reimbursement from accommodated party (maker/indorser)

Answer 6

these are IMPLIED warranties that arise automatically off the instrument Unlike K liability, possession of instrument is not needed to use warranty; and it survives the final payment of an instrument

Answer 7

TRANSFEROR who receives consideration makes transfer warranties (does NOT apply to gift!) Warranties are made to (1) Immediate transferee (2) Subsequent transferees if transferor indorsed Drawee and maker NEVER sue for breach of transfer warranties because instruments are PRESENTED to them, not transferred to them

Answer 8

(1) Warrantor is entitled to enforce the instrument (i.e., warranty of being a holder) (2) All signatures authentic and authorized (3) No alteration (4) No good defenses against transferor (i.e., perfect P warranty) (5) No knowledge of insolvency proceedings (6) If remotely-created item, the person identified as the drawer actually authorized the item

Answer 9

Checks = CANNOT disclaim (ineffective) Non-checks = CAN disclaim ("without warranties")

Answer 10

Made on presentment by PRESENTER AND PREVIOUS TRANSFERORS Made to the parties who pay in good faith (i.e., maker of note drawee or acceptor of draft) Warranties when unaccepted draft presented to drawee (e.g., a normal check): (1) Warrantor entitled to enforce draft or obtain payment (2) No alteration (3) No knowledge of unauthorized drawer's signature (4) If remotely-created item, that person identified as the drawer authorized the item Warranty when other instruments presented (i.e., a note, a dishonored draft to indorser) (1) Warrantor entitled to enforce draft or obtain payment

Answer 11

if P is HOLDER - if payor has not paid the instrument, then the holder will sue the indorser on the indorser's K if P is PAYOR - if payor has paid and later discovers the payor should not have paid, the payor will attempt to sue the indorser for breach of warranty (to get the $ back)

Answer 12

Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it (e.g., writing "void") etc.

Answer 13

Payment by certified check, cashier's check or teller's check = underlying obligation is discharged as if person paid in cash Uncertified checks and notes = underlying obligation is merely suspended - If check or note is later paid, underlying obligation is THEN discharged - If check or note is dishonored, holder may sue on either instrument or underlying obligation

Answer 14

E.g., original instrument is lost, inadvertently destroyed, or stolen - Enforcement by person not in possession (1) person was entitled to enforce when loss occurred, (2) loss was not due to transfer or lawful seizure, AND (3) person cannot reasonably obtain the original - Protection for payor required (e.g., security or bond)

Answer 15

Bank MAY charge customer's account even if the charge creates an overdraft

Answer 16

Bank MAY pay postdated check UNLESS customer gives bank a notice of the postdating which describes the check with reasonable certainty

Answer 17

Drawer (bank's customer), but no one else, may stop payment on a check... must: (1) be in writing (2) be dated (3) signed (4) described item with certainty (check #, account #, amount, etc.) Valid for 6 mo.; can be renewed by drawer Bank's defenses if it pays over a stop payment order: - didn't comply with above requirements - no loss = customer would have to pay the check even if payment had been stopped (i.e., check reached hands of HDC) Cashier's and Teller's checks = remitter cannot stop payment; bank may stop it to be nice (but risks liabilities)

Answer 18

Drawee dishonoring (bounces) a properly payable check DRAWER may bring action against drawee for bouncing a check it should have paid - may recover all damages caused by wrongful dishonor (bounced check fee, expenses incurred defending prosecution for writing hot checks) PAYEE may NOT sue the drawee bank, even if banks should've paid the check and drawer had sufficient funds Drawee Bank's Defenses (1) Payment would overdraw the drawer's account (2) Check is more than 6 mo. old (bank MAY honor a "stale check" in good faith, but doesn't have to)

Answer 19

A check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bona fide dispute Effect = operates as accord and satisfaction if payee cashes the check Exceptions - Payee returns the money within 90 days (undoing the accord and satisfaction) - Payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks

Answer 20

Alleged maker is NOT liable because maker's signature isn't on the note! - Maker's conduct could ratify or cause alleged maker to be precluded from denying the forgery Forger is liable because his signature appears on the note

Answer 21

Alleged drawer is NOT liable Drawee bank must re-credit alleged drawer's account as check was not properly payable unless drawee bank has a defense Bank unable to pass on loss unless breach of presentment warranty - normally NO presentment warranties will be breached - forger is the real drawer because he signed - drawee takes risk that drawer's signature unauthorized unless presenter knew it was unauthorized

Answer 22

Drawer's negligence substantially contributes to the forgery of the drawer's name Bank Statement Rule: Duty to Inspect Statement - General rule = customer (drawer) has duty to inspect statement and canceled checks in timely manner and report forgeries to bank - Forged drawer's signature MUST be reported to bank within 1 year regardless of banks or customer's negligence - Repeat Offender Rule = if same person is forging series of checks, drawer must report forgeries within 30 days of when the statement was available (if not, bank will not re-credit the account for subsequent forgeries by the same person)

Answer 23

Forging Payee's Name - Bearer paper = irrelevant! - Order paper = forgery breaks chain of title and check is not properly payable; drawer may demand that drawee bank re-credit the drawer's account as the check was not properly payable Imposter rule = drawer/maker estopped to deny validity of forged indorsement - i.e., where maker/drawer is deemed to have acted carelessly/negligently in issuing the check and thus to have contributed to the forgery If employer entrusts an employee (or independent contractor)nwith responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective

Commercial Paper Flashcards

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