Commercial Paper (j) Flashcards
(19 cards)
Benefits of HDC Status
When a negotiable instrument is duly negotiated to a holder in due course, that holder takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
Note
A promise to pay. Only two parties.
- the person promising to pay (maker), and
- the person to whom payment is promised (payee or bearer)
Draft
A draft is an order to pay. Three parties:
- one person (drawer) orders another party (drawee-bank) to pay money to a third person (payee or bearer)
Negotiability
Whether an instrument is negotiable depends on its form. To be a negotiable instrument, an instrument must:
(1) Be in writing
(2) Be signed by the maker or drawer
(3) Contain an unconditional promise to pay a sum certain in money and no other promise
(4) Be payable on demand or at a definite time, and
(5) Be payable to order or bearer
- must use “order” or “assigns”
Holder In Due Course (HDC)
A holder in due course is a holder who takes the instrument:
(1) For value, and
(2) In good faith, and
(3) Without notice that is is overdue/dishonored/subject to any defense of claim
Without Notice Requirement for HDC
Objective Test: Did the holder know or have reason to know of the problem?
- notice that a payment of principal in arrears (cannot qualify as HDC)
- notice that a payment of interest in arrears (CAN lead to HDC)
- notice that the obligation of any party is voidable (no hdc)
- notice that fiduciary breach his duty (HDC as long as no ACTUAL notice)
Central Theme of Article 3
A central theme of Article 3 is to provide a safe alternative to cash. That safety provided by Article 3 is available only to an HDC. A person becomes a holder through a transfer that qualifies as a negotiation.
HDC and the Shelter Rule
A transferee acquires whatever rights her transferor has and as such, the transferee takes shelter in the status of the transferor
Claim
A right to a negotiable instrument because of superior ownership
Personal Defenses
Ordinary contract defenses:
- lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement
Real Defenses
MaD FifI4:
Material Alteration
Duress
Fraud in the Factum (lie about the instrument)
Incapacity, Insolvency, Infancy, Illegality
Duties of Drawee Bank
- A bank must honor its customer’s check if there are sufficient funds to cover it.
- Bank must honor a check as drawn (cannot charge cust. account if signature was forged, more money than original order, bank pays wrong person or paid before post-dated)
- If the bank wrongfully dishonors a check, the customer can recover damages for whatever harm is proximately caused by the wrongful dihonor
- the death of a customer does not revoke the bank’s authority to pay a check until the bank knows of the death and has reasonable time to act on it
Stop Payment Orders
- oral stop payment is binding on bank for 14 days unless renewed in writing within that period
- a written stop payment order is binding for 6 months, renewable every 6 months in writing
- if the bank pays despite the order, the customer has the burden of proving that a loss has occurred (and the amount)
Properly Payable Rule
The drawee bank that honors a forged or materially altered check must re-credit the drawers account, as long as the drawer was not negligent
When is the drawer negligent?
- leaving blanks or open spaces
- failing to follow internal procedures designed to avoid forgeries (employer leaves checks and stamp in same unlocked drawer)
- failing to examine one’s bank statement
- if an impostor induces the drawer to write a check, the drawer is negligent
- an employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks
Special Indorsement
An indorsement that names a particular person as indorsee
- “pay jon smith, signed peter payee”
Blank Indorsement
A signature that is not accompanied by the naming of a specific indorsee
- blank indorsements create bearer paper, which may then be negotiated by delivery alone.
Holder
A person becomes a holder through a transfer that qualifies as a negotiation.
- bearer instruments are negotiated by delivery of the instrument to the transferee
- Order instruments are negotiated by delivery of the instrument to the payee named on the instrument. Any further negotiation requires that the payee indorse and delivery the instrument to the transferee.
- chain of title will be broken unless the payee’s indorsement is authorized and valid.
Value Requirement for HDC
- performance of the agreed consideration
- acquisition by the holder of a lien or a security interest in the instrument
- taking the instrument as payment of or security for an antecedent debt
- making an irrevocable commitment to a third person
