Hot Topics Flashcards
(320 cards)
1
Q
What is the first step in analyzing a commercial paper exam question?
A
Identify the parties
This involves determining the roles of each party involved in the instrument.
2
Q
How many parties are involved in a note?
A
2 parties
A note involves a maker who promises to pay and a payee.
3
Q
How many parties are involved in a draft?
A
3 parties
A draft includes a drawer who orders a drawee to pay a payee.
4
Q
What is unique about a cashier’s check in terms of parties?
A
The drawer and drawee are the same bank
This means that the bank is both the entity that issues the check and the one that pays it.
5
Q
What should you do if an exam question is complex regarding party liability?
A
Chart the transfer chain
This helps in visualizing the flow of liability among the different parties.
6
Q
What two types of liability should be discussed for an indorser?
A
Contract liability and warranty liability
Discussing both helps to show a thorough understanding of the indorser’s obligations.
7
Q
What is the presentment-dishonor-notice of dishonor trilogy?
A
A series of steps related to the enforcement of negotiable instruments
Understanding this trilogy is essential for liability discussions.
8
Q
What are the 8 required elements for an instrument to be negotiable?
A
- Written
- Signed
- Unconditional
- Promise or order to pay
- Fixed amount of money
- Payable to order or bearer
- Payable on demand or at a definite time
- States no unauthorized undertaking or instruction
All 8 elements must be present for an instrument to be considered negotiable.
9
Q
What is the importance of consideration in the context of commercial paper?
A
Consideration is important for the validity of the transfer
A transferor who gratuitously transfers the instrument may impact the liability of an indorser.
10
Q
What is the difference between value and consideration?
A
Value refers to something given in exchange, while consideration is the legal term for it
Understanding this distinction is important in the context of negotiable instruments.
11
Q
True or False: A negotiable instrument can be conditional.
A
False
A negotiable instrument must be unconditional to be valid.
12
Q
What is the importance of consideration in a contract?
A
Consideration is important in determining the validity of a contract.
Consideration refers to something of value exchanged between parties in a contract.
13
Q
Define the difference between value and consideration.
A
Value refers to the worth of the contract, while consideration is the actual payment or exchange made.
Consideration must be present for a contract to be enforceable.
14
Q
What happens when a holder pays a discounted amount for a note?
A
The holder is an HDC for full value if they pay the full agreed consideration.
For example, paying $5,000 for a $6,000 note qualifies as full value.
15
Q
What is the implication of paying only part of the agreed consideration?
A
The holder is an HDC only in proportion to the consideration paid.
For instance, paying $2,500 of the agreed $5,000 for a $6,000 note makes the holder an HDC for $3,000.
16
Q
Does having the rights of an HDC make someone an HDC if they take under the shelter rule?
A
No, they merely succeed to the HDC’s rights without being an HDC themselves.
The shelter rule allows a non-HDC to take the rights of an HDC.
17
Q
What is alteration in the context of financial instruments?
A
Alteration refers to changing the terms that the maker or drawer inserted in the instrument.
Generally, the maker will not be liable for the altered amount.
18
Q
What is unauthorized completion?
A
Unauthorized completion is filling in blanks left by the maker or drawer.
The maker is generally liable for the full amount of the unauthorized completion.
19
Q
What is the difference in result between a forged drawer’s signature and a forged indorser’s signature?
A
A forged drawer’s signature results in final payment with no recovery, while a forged indorser’s signature breaks a presentment warranty.
The bank cannot recover money paid on a forged drawer’s signature, but it can on a forged indorser’s signature.
20
Q
True or False: Payment on a forged drawer’s signature can be recovered by the bank.
A
False.
The bank cannot recover the money because the forgery is treated as valid.
21
Q
Fill in the blank: If a bank pays out on a forged indorser’s signature, a _______ warranty is broken.
A
presentment
This means the presenter didn’t have the right to enforce against the drawer due to the forgery.
22
Q
What is a personal defense in contract law?
A
Contract was not properly or fully performed
Personal defenses can be used against non-HDCs but not against holders in due course.
23
Q
List some examples of personal defenses.
A
- Forgery
- Fraud
- Alteration
- Adjudicated incompetency
- Infancy
- Illegality
- Duress
- Discharge
- Statute of limitations
- Suretyship
24
Q
True or False: The defense of non-performance can be used against a holder in due course (HDC).
A
False
This defense can only be used against non-HDCs.
25
What are the essential elements of negotiability for an instrument?
* Unconditional
* Promise (note) or order (draft) to pay
* A fixed amount of money
* Payable to order or bearer
* On demand or at a definite time
* Contains no unauthorized promise or undertaking
26
Fill in the blank: An instrument must be _______ to be considered negotiable.
[unconditional]
27
What is required for an instrument to be a promise or order?
It must be written and signed
## Footnote
This distinguishes it from informal agreements.
28
What does it mean for an instrument to be payable on demand or at a definite time?
It specifies when the payment is due
## Footnote
This adds clarity and enforceability to the contract.
29
True or False: A negotiable instrument can contain unauthorized promises.
False
## Footnote
Any unauthorized promises or undertakings invalidate the negotiability.
30
What are the characteristics that determine whether an instrument is negotiable?
The instrument must be:
* Unconditional
* A promise or order to pay
* A fixed amount of money
* Payable to order or bearer
* On demand or at a definite time
* Contains no unauthorized promise or undertaking
## Footnote
These characteristics ensure the instrument can be transferred and honored in financial transactions.
31
What does it mean for an instrument to be 'unconditional'?
It does not state a condition for payment and is not subject to or governed by another writing.
## Footnote
This ensures that the payment is straightforward and not contingent upon other agreements.
32
What is meant by a 'promise (note)' or 'order (draft)' to pay?
A written and signed commitment to pay a specified amount.
## Footnote
This is essential for the enforceability of the instrument.
33
What types of payment amounts are acceptable for a negotiable instrument?
A fixed amount of money, which may include interest.
## Footnote
The amount must be clear and specified to ensure validity.
34
What does 'payable to order or bearer' mean?
The instrument can be paid to a specified person (order) or to whoever possesses it (bearer).
## Footnote
This flexibility allows for easier transfer and negotiation of the instrument.
35
What does 'on demand or at a definite time' refer to in negotiable instruments?
The instrument must specify when payment is due, either immediately (on demand) or at a set future date.
## Footnote
This defines the terms of repayment, which is crucial for both parties.
36
What are the roles of the parties involved in a negotiable instrument?
The roles include:
* Maker
* Drawer
* Drawee
* Acceptor
* Indorser
* Transferor
* Accommodation Party
## Footnote
Each party has specific responsibilities and liabilities in the transaction.
37
What type of liability does a holder have against a maker?
Primary liability.
## Footnote
The maker is directly responsible for paying the instrument.
38
What type of liability does a holder have against a drawer?
Secondary liability.
## Footnote
The drawer is only liable if the maker fails to pay.
39
Is notice of dishonor required for a drawee?
No.
## Footnote
The drawee is not required to be notified if the instrument is dishonored.
40
In what situation is notice of dishonor required for an acceptor?
Yes, if the acceptor is a bank.
## Footnote
This ensures that the bank is aware of the dishonor to take appropriate action.
41
What determines the liability of an indorser?
Depends on the capacity in which the party signed.
## Footnote
The role and authority of the indorser affect their liability.
42
What is the general rule regarding forged signatures?
Forged signatures are valid only as the signature of the forger and are invalid as the signature of the named payee.
43
When is forgery considered valid?
Forgery will be valid as the name forged when:
1. Fictitious payee's signature forged - issuance to impostor or to a payee not intended to have an interest in the instrument.
2. Entrusted employee forges signature - includes agents, not just employees.
3. Negligence contributes to forgery - for example, leaving blank spaces or mailing to a person with the same name as the intended payee.
4. Bank statement rule violated - failure to discover forgeries and alterations within a reasonable time after receiving bank statement.
5. Bank certifies - estoppel by certification.
44
What happens if the taker fails to exercise ordinary care?
If the taker fails to exercise ordinary care, the loss generally will be shared according to the negligence of each party.
45
What is commercial paper?
Commercial paper = written instrument for the payment of money
## Footnote
Governed by Articles 3 and 4 of the UCC.
46
What are the three fundamental issues regarding commercial paper?
* The person with the instrument wants to get paid
* The person obligated on the instrument doesn't want to pay
* The person who pays on the instrument wants to recover the money from the person who was paid or someone else
47
What is the first step in answering a commercial paper question?
Identify the type of paper
48
What is the second step in answering a commercial paper question?
Identify the parties
49
What is the third step in answering a commercial paper question?
Determine whether the instrument is negotiable
50
What is the fourth step in answering a commercial paper question?
Determine whether the instrument was properly negotiated
51
What is the fifth step in answering a commercial paper question?
Determine whether the transferee is a holder in due course
52
What is the sixth step in answering a commercial paper question?
Determine who may be held liable
53
What is the seventh step in answering a commercial paper question?
Determine defenses
54
What is the eighth step in answering a commercial paper question?
If a party is held liable, determine if they can pass liability on to another
55
What are the two basic instruments of commercial paper?
Notes and drafts
56
What is a note in commercial paper?
A promise to pay money
## Footnote
A note is a 2-party instrument involving the maker and the payee.
57
What is a certificate of deposit?
A note issued by a bank containing acknowledgment of money received and a promise to repay
58
What is a draft in commercial paper?
An order to pay
## Footnote
A draft is a 3-party instrument involving the drawer, drawee, and payee.
59
What qualifies a draft as a check?
If the bank is the drawee and the instrument is payable on demand
60
Who is the maker in a note?
The person who promises to pay
## Footnote
The maker is also called the 'promisor' or 'obligor'.
61
Who is the payee in a note?
The person entitled to payment
## Footnote
The payee is also called the 'promisee'.
62
Who is the maker in a note?
Person who promises to pay
## Footnote
Also called 'promisor' or 'obligor'.
63
Who is the payee in a note?
Person entitled to payment
## Footnote
Also called 'promisee'.
64
What is a drawer in a draft?
Person ordering payment
65
What is a drawee in a draft?
Person to make the payment
## Footnote
For checks, drawee = payor bank.
66
What is a payee in a draft?
Person to receive the payment
67
What is the first step to determine if an instrument is negotiable?
Look at the form of the instrument at the time of issuance.
68
What are the elements of negotiability?
Instruments are negotiable if they satisfy 8 elements:
* Written
* Signed by the maker or drawer
69
True or False: A promise remains unconditional if it states that consideration is required for payment.
True
70
Fill in the blank: The maker of a note is also known as the _______.
promisor
71
Fill in the blank: The person entitled to payment in a note is known as the _______.
promisee
72
Who is the maker in a note?
Person who promises to pay
## Footnote
Also called 'promisor' or 'obligor'.
73
Who is the payee in a note?
Person entitled to payment
## Footnote
Also called 'promisee'.
74
What is a drawer in a draft?
Person ordering payment
75
What is a drawee in a draft?
Person to make the payment
## Footnote
For checks, drawee = payor bank.
76
What is a payee in a draft?
Person to receive the payment
77
What is the first step to determine if an instrument is negotiable?
Look at the form of the instrument at the time of issuance.
78
What are the elements of negotiability?
Instruments are negotiable if they satisfy 8 elements:
* Written
* Signed by the maker or drawer
79
True or False: A promise remains unconditional if it states that consideration is required for payment.
True
80
Fill in the blank: The maker of a note is also known as the _______.
promisor
81
Fill in the blank: The person entitled to payment in a note is known as the _______.
promisee
82
Who is the maker in a note?
The maker is the person who promises to pay
## Footnote
The maker is also referred to as the 'promisor' or 'obligor'.
83
Who is the payee in a note?
The payee is the person entitled to payment
## Footnote
The payee is also known as the 'promisee'.
84
Who is the drawer in a draft?
The drawer is the person ordering payment
85
Who is the drawee in a draft?
The drawee is the person to make the payment
## Footnote
For checks, the drawee is the payor bank.
86
Who is the payee in a draft?
The payee is the person to receive the payment
87
What is the first element of negotiability?
The instrument must be written
88
What is the second element of negotiability?
The instrument must be signed by the maker or drawer
89
What is the third element of negotiability?
The promise must be unconditional
90
Fill in the blank: An instrument is negotiable if it satisfies _______ elements.
8
91
True or False: An unconditional promise can state that consideration is required for payment.
True
92
What should you look for to determine if an instrument is negotiable?
Look at the form of the instrument at the time of issuance
93
What are the 8 elements that determine if an instrument is negotiable?
1. Written
2. Signed by the maker or drawer
3. Unconditional
4. Promise or order to pay
5. Fixed amount of money
6. Payable on demand or at a definite time
7. Payable to order or bearer
8. No unauthorized promises
94
True or False: An instrument is negotiable if it states that consideration is required for payment.
False
## Footnote
A promise remains unconditional even if it states that consideration is required for payment.
95
What makes a promise conditional and thus not negotiable?
1. Contains an express condition to payment
2. States the promise/order is 'subject to' another record
3. Rights/obligations are stated in another record
96
Fill in the blank: An instrument must be ______ to be considered negotiable.
[written]
97
What does it mean for a promise to be unconditional?
A promise is unconditional if it does not state any conditions for payment.
98
What is an example of a conditional promise?
'I promise to pay to the order of John Smith $10,000 if I make the highest score on the bar exam.'
99
What phrase should you look for to identify a conditional promise?
'subject to' or 'governed by' another record
100
True or False: An instrument can be negotiable if it limits payment to a particular fund or source.
False
## Footnote
Limiting payment to a particular fund or source makes the promise conditional.
101
What is required for an instrument to be signed?
It must be signed by the maker or drawer.
102
Fill in the blank: A promise to pay must state a ______ amount of money.
[fixed]
103
What are the two ways an instrument can be payable in terms of timing?
1. On demand
2. At a definite time
104
What does it mean for an instrument to be payable to order or bearer?
It can be transferred to another party either by endorsement (order) or simply by possession (bearer).
105
What are the elements of negotiability?
Written, signed by the maker or drawer, unconditional promise
## Footnote
Elements required for a financial instrument to be considered negotiable.
106
What is required for a promise to be considered unconditional?
It cannot state that consideration is required, refer to another record, or limit payment to a particular fund or source
## Footnote
Examples include promises that reference conditions for payment.
107
What makes a promise conditional and therefore not negotiable?
Contains an express condition to payment, states 'subject to' another record, or rights/obligations are in another record
## Footnote
Example: 'I promise to pay $10,000 if I make the highest score on the bar exam.'
108
What type of document cannot just acknowledge debt?
An I.O.U.
## Footnote
An I.O.U. does not contain an express promise to pay.
109
What must a note contain to express a promise to pay?
An express promise to pay
## Footnote
This is essential for the note to be valid.
110
What must a draft contain to be valid?
An order to pay
## Footnote
This distinguishes drafts from other forms of acknowledgment.
111
What is the requirement for the amount in a negotiable instrument?
A fixed amount of money (with or without interest)
## Footnote
This ensures clarity in the amount owed.
112
What is a promise or order to pay?
It is a document that must contain an express promise to pay or an order to pay a fixed amount of money.
113
What must a note contain to be valid?
An express promise to pay.
114
What is required of the principal amount in a promissory note?
The principal amount must be fixed.
115
How can interest rates be structured in a promissory note?
Interest rates can be:
* A specific amount of money
* A fixed rate
* A variable rate
* A reference to an outside source
116
What does 'plus interest' imply in a promissory note?
It implies a judgment rate unless a specific rate is stated.
117
What is the presumption regarding interest if it is not specified in the instrument?
No interest is presumed.
118
What is considered money in the context of a promissory note?
Any medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.
119
Can a promissory note be payable in goods or services?
No, it cannot be payable in goods or services.
120
In the case of discrepancies between words and figures in a check, which prevails?
Words prevail over figures.
121
What happens if a check states '$550.00' in numerals but 'five hundred dollars' in words?
The check is payable for $500.
122
What are the characteristics of an instrument that is payable to bearer?
An instrument is payable to bearer if it:
* states that it's "payable to bearer" or "payable to the order of bearer"
* does not name a payee
* is payable to "cash" or indicates it isn't payable to an identified person
## Footnote
Bearer instruments allow anyone in possession to claim payment.
123
What defines an instrument that is payable to order?
An instrument is payable to order if it:
* is payable to the order of an identified person (e.g., "pay to the order of John Smith")
* is payable to an identified person or order (e.g., "pay to John or his order")
## Footnote
Order instruments require a specific person to claim payment.
124
What is the typical language used for order on checks?
Order language is usually pre-printed on checks.
## Footnote
This language indicates that the check is payable to a specific person or their order.
125
What happens if an instrument contains both order and bearer language?
If an instrument contains both order and bearer language, the bearer language controls.
## Footnote
For example, a check payable "to the order of John Smith or bearer" is considered bearer paper.
126
What is the definition of a demand instrument?
A demand instrument is one that states it is payable "on demand," "at sight," or fails to state a date or time for payment.
## Footnote
Ordinary checks are considered demand instruments since they do not specify a due date.
127
What is an example of a fixed date for a definite time instrument?
An example of a fixed date is "July 5, 2028."
## Footnote
This indicates that the instrument is payable at that specific time.
128
True or False: If the order/bearer language is the only missing element of negotiability for a check, the requirement is waived.
True.
## Footnote
This waiver applies only to checks.
129
What does 'payable on demand' mean?
An instrument is payable on demand if it states that it's payable 'on demand,' 'at sight,' or fails to state a date or time for payment.
## Footnote
An ordinary check is considered a demand instrument.
130
What is an example of a definite time for payment?
Examples of definite time include:
* Fixed date (e.g., 'July 5, 2028')
* Fixed period after sight or acceptance (e.g., '90 days after sight')
* At a time readily ascertainable when the instrument is issued (e.g., 'first day of summer 2028')
## Footnote
Events that occur on uncertain dates, such as 'after my death,' are not acceptable.
131
What are the only authorized undertakings or instructions by the UCC?
The UCC authorizes only three undertakings/instructions:
* Promises to give, maintain, or protect collateral
* Authorization given to holder to confess judgment or to realize on/dispose of collateral
* Waiver of law meant to benefit obligor (maker/drawer)
## Footnote
Any other undertaking/instruction destroys negotiability.
132
True or False: An instrument can have multiple unauthorized instructions and still remain negotiable.
False
## Footnote
Any unauthorized undertaking/instruction destroys the instrument's negotiability.
133
Fill in the blank: An ordinary check is a _______ instrument.
demand
## Footnote
It does not state a due date.
134
What is an example of an unacceptable time for payment?
Events that occur on uncertain dates, such as 'after my death'
## Footnote
Such terms do not meet the requirements for a definite time.
135
What happens when a payee transfers the instrument to a third party?
The third party becomes a holder
## Footnote
A holder is a person in possession of an instrument with a right to enforce it.
136
What are the two types of instruments based on payee designation?
* Bearer instruments
* Order instruments
137
How are bearer instruments negotiated?
By transferring possession of the instrument
138
What is required to negotiate an order instrument?
Transferring possession + the identified person's authorized and valid indorsement
139
What is an indorsement?
Signature on a negotiable instrument by someone other than the maker, drawer, or acceptor
140
Where is an indorsement usually found?
On the back of the instrument
141
What is a blank indorsement?
A signature that isn't accompanied by the naming of a specific indorsee
142
How do most people indorse physical checks they receive?
By using a blank indorsement
143
What does a blank indorsement create?
Bearer paper
144
What is a special indorsement?
Payee's signature + a designation of a new person payable
145
What is required for subsequent negotiations if the instrument is payable to multiple payees jointly?
All payees must indorse the instrument
146
What are bearer instruments?
Negotiated by transferring possession of the instrument
## Footnote
Bearer instruments allow anyone in possession to claim the value.
147
How are order instruments negotiated?
By transferring possession + the identified person's authorized and valid indorsement
## Footnote
Order instruments are payable to a specific person.
148
What is an indorsement?
Signature on a negotiable instrument by someone other than the maker, drawer, or acceptor
## Footnote
Typically found on the back of the instrument.
149
What is a blank indorsement?
Signature that isn't accompanied by the naming of a specific indorsee
## Footnote
Commonly how people indorse physical checks they receive.
150
What does a blank indorsement create?
Bearer paper
## Footnote
Anyone in possession of a check with a blank indorsement has the right to cash it.
151
What is a special indorsement?
Payee's signature + a designation of a new person payable
## Footnote
It specifies to whom the payment is directed.
152
What is required for subsequent negotiations of an instrument payable to multiple payees jointly?
All payees must indorse the instrument
## Footnote
Example: If payable to 'Thelma and Louise', both must sign.
153
What is a qualified indorsement?
Indorsement + the words 'without recourse'
## Footnote
It limits the contract liability imposed on indorsers.
154
What is the significance of determining holder in due course (HDC) status?
An HDC takes free of most defenses.
155
What are the criteria to determine HDC status?
1. Is the person a holder? 2. Does the person hold in due course?
156
Define 'holder' in the context of HDC.
Person in possession of instrument with the right to enforce it.
157
What must an instrument be to qualify as a holder's instrument?
It must be payable to bearer or to the person in possession and free of forgery.
158
What are the requirements for a holder to hold in due course?
The holder must take for value, in good faith, and without notice.
159
Does the value given in exchange for an instrument need to equal its face amount?
No, it does not need to equal the face amount.
160
What is an example of purchasing an instrument at a discount?
A $1,000 promissory note purchased for $900 is sold for full value.
161
What happens if a person pays less than the agreed-upon value for an instrument?
They become a partial HDC in proportion to the percentage of the value paid.
162
Fill in the blank: If a person pays $2,500 of the agreed $5,000 for a $6,000 note, the holder is an HDC only in proportion to the _______.
$3,000 (half value)
163
What is the term for a holder who pays less than the agreed-upon value?
Partial holder in due course.
164
What is the value given in exchange for an instrument?
Doesn't need to equal the face amount of the instrument.
165
What happens when an instrument is purchased at a discount?
It is sold for full value as long as the full price agreed upon has been given.
166
What is a partial failure of consideration?
Occurs when a person pays less than the agreed-upon value, becoming a partial HDC in proportion to the percentage of the value paid.
167
If a person pays $2,500 of the agreed $5,000 for a $6,000 note, what is their status?
The holder is an HDC only in proportion to the consideration paid, or $3,000 (half value).
168
What constitutes good faith?
Honesty in fact + observance of reasonable commercial standards.
169
What does 'without notice' imply in this context?
It refers to conditions that indicate the absence of notice regarding the instrument.
170
What are the facts constituting notice?
* Instrument overdue
* Instrument dishonored
* Unauthorized signature or alteration
* Claims to the instrument
* Defenses/claims in recoupment
171
What is the shelter rule?
Transferee acquires whatever rights their transferor had without taking 'shelter' in that.
172
What is the Shelter Rule?
Transferee acquires whatever rights their transferor had and takes 'shelter' in the status of the transferor.
173
What happens when an HDC transfers an instrument?
Their transferee and subsequent transferees get the HDC's rights.
174
Under what condition do transferees not have HDC rights?
If they are parties to fraud/illegality affecting the instrument.
175
What defenses can an HDC enforce an instrument against?
Subject only to real defenses.
176
Who may be held liable on an instrument?
Generally, no one may be held liable unless their signature (or the signature of an authorized representative) is on the instrument.
177
What determines liability between an agent and principal?
It depends on whether the agency and the principal's identity were disclosed.
178
What is the general rule for principal liability regarding an agent's authorization?
Principal is liable if agent is authorized.
179
In what cases may a principal be liable despite the lack of agent's authority?
* Ratification
* Estoppel
180
When is an agent not personally liable?
If the agency and the principal's identity were disclosed.
181
Who may be held liable on an instrument?
Generally, no one may be held liable unless their signature (or the signature of an authorized representative) is on the instrument.
182
What is the general rule regarding principal liability for an agent's actions?
Principal liable if agent authorized.
183
Under what circumstances may a principal be liable despite the lack of agent's authority?
* Ratification
* Estoppel
184
When is an agent not personally liable on an instrument?
If principal identified in instrument and signature unambiguously shows it was made on behalf of the principal.
185
When is an agent personally liable on an instrument?
If agent signs own name but doesn't disclose principal's name and/or agency relationship.
186
True or False: An agent for a drawer is personally liable on a check if the principal's name is on it.
False
187
Fill in the blank: An agent is not personally liable if the principal's name is on the _______.
check
188
What determines the liability of an agent in an agency relationship?
Liability depends on whether the agency and the principal's identity were disclosed.
## Footnote
An agent is not personally liable if the principal is identified in the instrument and the signature unambiguously shows it was made on behalf of the principal.
189
When is an agent personally liable?
An agent is personally liable if they sign their own name but do not disclose the principal's name and/or agency relationship.
## Footnote
This means the agent can be held responsible for the obligations of the contract.
190
Under what condition is an agent not personally liable on a check?
An agent is not personally liable if the principal's name is on the check, even if the agent does not indicate their capacity.
## Footnote
This protects the agent from personal liability in transactions where the principal's identity is clear.
191
Who may be liable on an instrument?
Liability may fall on the following parties:
* Maker
* Drawer
* Drawee
## Footnote
Each party has different conditions for liability based on their role and actions.
192
What does signing their name as a maker signify?
Signing their name constitutes a contract to pay the instrument.
## Footnote
The maker is directly responsible for the obligation outlined in the instrument.
193
What conditions must be satisfied for a drawer to be liable?
A drawer is liable only if:
* Presentment within 30 days (if draft is a check)
* Dishonor (drawee bank refuses to pay upon proper presentment)
## Footnote
These conditions ensure that the drawer is only held accountable under specific circumstances.
194
When is a drawer discharged from liability?
A drawer is discharged and cannot be held liable if the draft was previously accepted by a bank and the bank fails to pay.
## Footnote
This protects the drawer from liability once the draft is accepted.
195
What role does the drawee play in a negotiable instrument?
The drawee makes no negotiable instrument contract and cannot have any liability unless/until they sign the instrument.
## Footnote
This means that the drawee's responsibility is contingent upon their endorsement.
196
True or False: Holders can force a drawee to pay.
False.
## Footnote
Holders cannot force a drawee to pay unless the drawee has signed the instrument.
197
What is the liability of a drawer in a negotiable instrument?
May disclaim liability on any instrument, except for checks.
## Footnote
The drawer is only liable if two conditions are satisfied: presentment within 30 days (if draft is a check) and dishonor.
198
What discharges the drawer from liability?
If the draft was previously accepted by a bank.
## Footnote
In this case, the drawer cannot be held liable if the bank fails to pay.
199
What is the role of the drawee in a negotiable instrument?
Makes no negotiable instrument contract; can't have any liability unless/until they sign the instrument.
## Footnote
Holders generally can't force a drawee to pay out on a draft.
200
What is the final payment rule?
Once drawee bank pays a check, contract actions may no longer be pursued and drawee bank can't recover from the person paid unless presentment warranty breached.
## Footnote
This rule applies to payments made by the drawee bank.
201
What happens if a drawee bank pays out on a forged instrument to a holder in due course (HDC)?
Bank can't recover from person paid unless breach of transfer warranty or presentment warranty.
## Footnote
This highlights the protection offered to HDCs.
202
What is the obligation of an indorser?
Contract/obligation to pay according to the terms of the instrument at the time of indorsement.
## Footnote
Signing their name signifies this obligation.
203
What are the prerequisites for a holder to look to the indorser for payment?
1. Presentment: demand for payment made by a person entitled to enforce the instrument.
2. Must occur within 30 days after indorsement for checks.
## Footnote
Fulfillment of these prerequisites is essential before pursuing payment from the indorser.
204
What is an Indorser?
An Indorser is a person who signs their name on a financial instrument, creating a contract/obligation to pay according to the terms at the time of indorsement.
## Footnote
An Indorser is liable to the holder for payment under specified conditions.
205
What are the three prerequisites a holder must fulfill before looking to the indorser for payment?
The three prerequisites are:
* Presentment
* Dishonor
* Notice of dishonor
## Footnote
These steps ensure that the indorser is properly notified and that the holder has made a demand for payment.
206
Define 'Presentment' in the context of indorsement.
Presentment is the demand for payment made by a person entitled to enforce the instrument, which must occur within 30 days after indorsement for checks.
## Footnote
It establishes the holder's right to claim payment.
207
What does 'Dishonor' mean?
Dishonor occurs when the maker or drawee does not pay within the allotted time after presentment.
## Footnote
This indicates that the instrument cannot be enforced for payment.
208
When must notice of dishonor be given to the indorser?
Notice of dishonor must generally be given within 30 days after dishonor.
## Footnote
This is crucial for the indorser's liability to be activated.
209
True or False: Any one indorser is liable to any holder for the full amount stated on the instrument at the time of indorsement.
True.
## Footnote
This means that multiple indorsers share collective liability.
210
What is an Accommodation Party?
An Accommodation Party is a person who signs an instrument to lend credit to another party and receives no direct benefit, acting as a surety.
## Footnote
They are liable in whatever capacity they sign.
211
What is presumed when someone acts as an Accommodation Party?
Accommodation is presumed to be a guaranty of payment.
## Footnote
This implies a commitment to ensure payment is made, although they are not liable to the party accommodated.
212
What happens if an Accommodation Party pays the instrument?
If an Accommodation Party pays the instrument, they will have an action on the instrument against the party accommodated.
## Footnote
This allows them to recover the amount paid.
213
What are transfer warranties?
Transfer warranties are automatically made to the transferee when an instrument is transferred.
## Footnote
These warranties protect the transferee's rights regarding the instrument.
214
What are transfer warranties in the context of negotiable instruments?
Transfer warranties are automatically made to the transferee when an instrument is transferred for consideration.
215
List the key components of transfer warranties.
* Entitled to enforce
* Signatures are authentic and authorized
* No alteration
* No defenses
* No knowledge of insolvency proceedings
216
To whom are transfer warranties made?
Transfer warranties are made to the immediate transferee and subsequent transferees if indorsed.
217
Can transfer warranties be disclaimed for checks?
No, transfer warranties cannot be disclaimed for checks.
218
True or False: Transfer warranties and presentment warranties are mutually exclusive.
True
219
What are the two sets of presentment warranties?
* Those made to drawees (banks) on unaccepted drafts (normal checks)
* Those made to payors of other instruments
220
What is the liability of parties signing an instrument jointly?
Each party has joint and several liability on the instrument.
221
What recourse does a party have if they pay more than their share in a joint liability?
They have a right of contribution against the other jointly liable party.
222
What is the first step to take if there is a forgery issue?
Determine whose signature was forged
## Footnote
Different rules apply based on the identity/status of the person whose name is forged.
223
What is the liability of a maker if their signature is forged?
Maker isn't liable; their signature isn't on the note
## Footnote
The forger is liable even if they sign the maker's signature.
224
What happens if a drawer's signature is forged?
Purported drawer is not liable; the drawee bank must recredit the 'drawer's' account
## Footnote
This is because the check was not properly payable.
225
What is one defense a bank might have against a drawer's not-properly-payable action?
Drawer's negligence substantially contributed to alteration or forged signature
## Footnote
This defense can protect the bank from liability.
226
What is the outcome of forged indorsements on bearer paper?
Forgery of indorsement is irrelevant
## Footnote
Bearer paper does not break the chain of title.
227
What is the effect of forged indorsements on order paper?
Forgery breaks chain of title and check not properly payable
## Footnote
This means the check cannot be enforced.
228
What is the imposter rule in relation to forgery?
Precludes a party from asserting forgery if issuer, maker, or drawer acted carelessly
## Footnote
Issuance to an imposter or navee not intended.
229
What is fraud in the factum?
Fraud that causes the obligor to sign an instrument without knowledge of its character or essential terms and without reasonable opportunity to learn of them.
## Footnote
This type of fraud involves the signer's lack of awareness regarding the nature of the document being signed.
230
What test do courts use to evaluate 'excusable ignorance'?
Courts look at a variety of factors such as signer's intelligence, education, business experience, and ability to read/understand English.
## Footnote
These factors help determine whether the signer had a reasonable opportunity to understand the instrument.
231
What are some defenses to a contract?
* Alteration of instrument
* Adjudicated incompetency (incapacity to contract)
* Infancy
* Illegality
* Duress
* Discharge in insolvency proceedings
* Statute of limitations
## Footnote
These defenses can invalidate a contract if proven.
232
What is the statute of limitations for unaccepted drafts?
3 years after the date of dishonor or 10 years after the date of the draft, whichever is earlier.
## Footnote
This statute governs the time frame in which legal action can be taken.
233
What is the statute of limitations for notes payable at a definite time or on demand?
6 years after the due date or demand for payment.
## Footnote
This time frame is critical for enforcing payment on such notes.
234
What is an accommodation party in suretyship?
A surety who signs to accommodate another party.
## Footnote
The accommodation party assumes liability to support the primary party's obligation.
235
What is 'Alteration of instrument'?
A modification of the terms of a negotiable instrument that may affect its enforceability.
## Footnote
Alteration can lead to the discharge of the instrument or liability of parties involved.
236
What does 'Adjudicated incompetency' refer to?
The legal determination that an individual is incapable of entering into contracts due to mental incapacity.
## Footnote
This can invalidate contracts made by the incompetent individual.
237
What is 'Infancy' in the context of contracts?
The legal status of being under the age of majority, which typically allows minors to void contracts.
## Footnote
Minors usually have the right to disaffirm contracts they enter into.
238
What does 'Illegality' mean in contract law?
A contract that is void because its subject matter is illegal or against public policy.
## Footnote
Contracts involving illegal activities cannot be enforced.
239
Define 'Duress'.
The use of threats or coercion to compel someone to enter into a contract.
## Footnote
Contracts signed under duress may be voidable.
240
What is 'Discharge in insolvency proceedings'?
The release of a debtor from the obligation to pay certain debts through legal bankruptcy proceedings.
## Footnote
This can affect the enforceability of contracts against the debtor.
241
What is the statute of limitations for 'unaccepted drafts'?
3 years after the date of dishonor or 10 years after the date of the draft, whichever is earlier.
## Footnote
This limits the time period in which legal action can be taken.
242
What is the statute of limitations for 'notes payable at a definite time or on demand'?
6 years after the due date or demand for payment.
## Footnote
This statute applies to promissory notes and similar instruments.
243
What is an 'Accommodation party'?
A surety who signs an instrument to lend their credit to another party without being a direct beneficiary.
## Footnote
This party incurs liability for the instrument.
244
What does 'Discharges known to HDC' mean?
Discharges that a holder in due course is aware of when taking the instrument.
## Footnote
HDC takes the instrument subject to any discharge of which they had notice.
245
True or False: Personal defenses can be asserted against a holder in due course (HDC).
False.
## Footnote
Personal defenses cannot be claimed against HDC, but may be used against other transferees.
246
What happens to a transferee of a negotiable instrument without HDC rights?
They take the instrument subject to all personal defenses.
## Footnote
This means they cannot assert the same protections as an HDC.
247
Fill in the blank: Personal defenses can't be asserted against one having rights of _______.
[HDC]
## Footnote
HDC stands for Holder in Due Course, who has special protections under the law.
248
What must be determined regarding personal defenses?
Whether any personal defenses apply.
## Footnote
This assessment is crucial for determining the enforceability of an instrument.
249
What are personal defenses in the context of negotiable instruments?
Personal defenses include every defense available in simple contract actions such as:
* Lack of consideration
* Failure of consideration
* Breach of warranty
* Fraud in the inducement
## Footnote
Personal defenses cannot be asserted against a holder in due course (HDC), but transferees without HDC rights take the instrument subject to all personal defenses.
250
Can personal defenses be asserted against a holder in due course (HDC)?
No, personal defenses can't be asserted against one having rights of HDC.
## Footnote
HDC is referred to as the 'perfect defendant' in the context of negotiable instruments.
251
What happens if a negotiable instrument has a forgery issue?
Determine whose signature was forged, as different rules apply based on the identity/status of the person whose name is forged.
## Footnote
The rules differ for forged maker's signatures versus forged drawer's signatures.
252
What is the liability of a maker if their signature is forged?
The maker isn't liable because their signature isn't on the note; the forger is liable.
## Footnote
This applies even if the forger signs the maker's signature.
253
What is the liability of a purported drawer if their signature is forged?
The purported drawer is not liable unless they have a defense.
## Footnote
The rules may vary based on the circumstances surrounding the forgery.
254
Fill in the blank: Personal defenses cannot be asserted against a holder in due course (HDC), but any transferee of a negotiable instrument without HDC rights takes the instrument subject to all _______.
personal defenses
## Footnote
This highlights the protective nature of HDC status in transactions involving negotiable instruments.
255
What is the first step to take if there is a forgery issue?
Determine whose signature was forged
## Footnote
Different rules apply based on the identity/status of the person whose name is forged.
256
What is the liability of a maker if their signature is forged?
Maker isn't liable; their signature isn't on the note
## Footnote
The forger is liable even if they sign the maker's signature.
257
What happens if a drawer's signature is forged?
Purported drawer is not liable; the drawee bank must recredit the 'drawer's' account
## Footnote
This is because the check was not properly payable.
258
What is one defense a bank might have against a drawer's not-properly-payable action?
Drawer's negligence substantially contributed to alteration or forged signature
## Footnote
This defense can protect the bank from liability.
259
What is the outcome of forged indorsements on bearer paper?
Forgery of indorsement is irrelevant
## Footnote
Bearer paper does not break the chain of title.
260
What is the effect of forged indorsements on order paper?
Forgery breaks chain of title and check not properly payable
## Footnote
This means the check cannot be enforced.
261
What is the imposter rule in relation to forgery?
Precludes a party from asserting forgery if issuer, maker, or drawer acted carelessly
## Footnote
Issuance to an imposter or navee not intended.
262
What must the drawee bank do if a check is not properly payable?
Recredit the drawer's account
## Footnote
This applies unless the bank has a valid defense.
263
What are the bank's defenses to a drawer's not-properly-payable action?
* Drawer's negligence substantially contributed to alteration or forged signature
* Forged indorsements
* Order paper-forgery breaks chain of title
## Footnote
These defenses can prevent the bank from recrediting the drawer's account.
264
What rule indicates a party may be precluded from asserting forgery?
Imposter rule
## Footnote
This applies when the issuer, maker, or drawer acted carelessly.
265
What are two situations where negligence might contribute to forgery?
* Leaving blank spaces
* Mailing to a person with the same name as the intended payee
## Footnote
These actions may lead to a payee being estopped from asserting forgery.
266
Define 'alteration' in the context of instruments.
Unauthorized change that purports to modify the obligation of any party
## Footnote
Alteration can affect the enforceability of the instrument.
267
What are the two types of unauthorized changes that constitute an alteration?
* Alteration of complete, existing instrument
* Unauthorized completion of an incomplete instrument
## Footnote
Both types can lead to legal disputes regarding the instrument.
268
What is an alteration in the context of instruments?
Unauthorized change that purports to modify the obligation of any party
269
What are the two types of unauthorized changes?
* Alteration of complete, existing instrument
* Unauthorized completion of an incomplete instrument
270
What is the effect of an alteration on a holder in due course (HDC)?
If alteration changes obligation on instrument, HDC may enforce instrument according to original terms
271
What happens if an instrument is completed in an unauthorized manner for HDC?
HDC may enforce instrument according to its terms as completed
272
What is the effect of a fraudulent alteration on a non-HDC?
Obligor is totally discharged
273
What is the effect of a non-fraudulent alteration on a non-HDC?
Obligor remains liable on original terms
274
What does an altered check indicate?
Not properly payable
275
What defenses do banks have regarding altered instruments?
* Drawer's negligence
* Bank statement rule
276
What warranties are breached by altered instruments?
Transfer and presentment warranties promising there have been no alterations
277
What issue arises from the failure to produce the original document?
Failure to produce original document
278
What is an alteration in the context of instruments?
Unauthorized change that purports to modify the obligation of any party
279
What are the two types of unauthorized changes?
* Alteration of complete, existing instrument
* Unauthorized completion of an incomplete instrument
280
What is the effect of an alteration on a holder in due course (HDC)?
If alteration changes obligation on instrument, HDC may enforce instrument according to original terms
281
What happens if an instrument is completed in an unauthorized manner for HDC?
HDC may enforce instrument according to its terms as completed
282
What is the effect of a fraudulent alteration on a non-HDC?
Obligor is totally discharged
283
What is the effect of a non-fraudulent alteration on a non-HDC?
Obligor remains liable on original terms
284
What does an altered check indicate?
Not properly payable
285
What defenses do banks have regarding altered instruments?
* Drawer's negligence
* Bank statement rule
286
What warranties are breached by altered instruments?
Transfer and presentment warranties promising there have been no alterations
287
What issue arises from the failure to produce the original document?
Failure to produce original document
288
What does an altered check signify?
Not properly payable
## Footnote
An altered check is one that has been changed in a way that makes it invalid for payment.
289
What defenses does a bank have regarding altered checks?
Drawer's negligence and bank statement rule
## Footnote
The drawer's negligence refers to the responsibility of the account holder in monitoring their account.
290
What warranties are breached by altered instruments?
Transfer and presentment warranties
## Footnote
These warranties promise that there have been no alterations to the instrument.
291
What must a person prove to enforce a lost, destroyed, or stolen instrument?
1. Possession of the instrument when the loss occurred
2. The terms of the instrument
3. Facts preventing production of the original instrument
## Footnote
These are the requirements to enforce an instrument if the original cannot be produced.
292
What is discharge by cancellation or renunciation?
Discharging a party through intentional voluntary acts or renouncing rights in a signed writing
## Footnote
This refers to actions that can release a party from their obligations under the instrument.
293
Is discharge effective against a subsequent HDC without notice?
No
## Footnote
A subsequent holder in due course (HDC) is not affected by a discharge unless they have notice of it.
294
What is a payment in full check?
A check on which the drawer indicates it is payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute
## Footnote
This type of check serves to settle a debt that may not have a clear amount due.
295
What does a payment in full check operate as if cashed by the payee?
Accord and satisfaction
## Footnote
This means that cashing the check is accepted as a settlement of the disputed obligation.
296
What must a person prove to enforce an instrument if they can't produce the original document?
They must prove:
* They were in possession of the instrument and entitled to enforce it when the loss occurred
* The terms of the instrument
* The facts that prevent production of the original instrument
## Footnote
This applies when the instrument is lost, destroyed, or stolen.
297
How can a person entitled to enforce a party be discharged?
Through:
* Intentional voluntary acts (destroying instrument or striking out signature)
* Renouncing rights in a signed writing
## Footnote
Such discharge is not effective against a subsequent HDC without notice.
298
What is a 'payment in full check'?
A check on which the drawer conspicuously indicates cashing the check acts as payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute
## Footnote
This operates as an accord and satisfaction if the payee cashes the check.
299
What exceptions exist for a payment in full check?
Exceptions include:
* Payee returns the money within 90 days
* Payee is an organization and sends notice before the instrument is tendered requiring payment in full checks to be tendered to a designated person, office, or place to be effective
## Footnote
These exceptions affect the enforceability of the payment in full check.
300
What must a person prove to enforce an instrument that is lost, destroyed, or stolen?
They must prove:
* They were in possession of the instrument and entitled to enforce it when the loss occurred
* The terms of the instrument
* The facts that prevent production of the original instrument
## Footnote
These criteria are necessary to validate the enforcement of a lost or stolen instrument.
301
What are the two ways a person entitled to enforce an instrument may discharge a party?
Through:
* Intentional voluntary acts (destroying the instrument or striking out a signature)
* Renouncing rights in a signed writing
## Footnote
Such actions may not be effective against a subsequent holder in due course (HDC) without notice.
302
What does a check indicating 'payment in full' signify?
It acts as payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute
## Footnote
This operates as an accord and satisfaction if the payee cashes the check.
303
What are the exceptions to a 'payment in full' check?
Exceptions include:
* Payee returns the money within 90 days
* Payee is an organization and sends notice before the instrument is tendered requiring payment in full checks to be tendered to a designated person, office, or place
## Footnote
These exceptions protect the payee's rights regarding the check.
304
What must a person prove to enforce an instrument that is lost, destroyed, or stolen?
They must prove:
* They were in possession of the instrument and entitled to enforce it when the loss occurred
* The terms of the instrument
* The facts that prevent production of the original instrument
## Footnote
These criteria are necessary to validate the enforcement of a lost or stolen instrument.
305
What are the two ways a person entitled to enforce an instrument may discharge a party?
Through:
* Intentional voluntary acts (destroying the instrument or striking out a signature)
* Renouncing rights in a signed writing
## Footnote
Such actions may not be effective against a subsequent holder in due course (HDC) without notice.
306
What does a check indicating 'payment in full' signify?
It acts as payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute
## Footnote
This operates as an accord and satisfaction if the payee cashes the check.
307
What are the exceptions to a 'payment in full' check?
Exceptions include:
* Payee returns the money within 90 days
* Payee is an organization and sends notice before the instrument is tendered requiring payment in full checks to be tendered to a designated person, office, or place
## Footnote
These exceptions protect the payee's rights regarding the check.
308
What must a person prove to enforce an instrument if the original document is lost, destroyed, or stolen?
They must prove:
* They were in possession of the instrument and entitled to enforce it when the loss occurred
* The terms of the instrument
* The facts that prevent production of the original instrument
## Footnote
This is important for maintaining the enforceability of financial instruments in legal situations.
309
What are the two ways a person entitled to enforce may discharge a party?
Discharge may occur through:
* Intentional voluntary acts (destroying instrument or striking out signature)
* Renouncing rights in a signed writing
## Footnote
This discharge is not effective against a subsequent holder in due course (HDC) without notice.
310
What is a 'payment in full check'?
A check on which the drawer conspicuously indicates cashing the check acts as payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute
## Footnote
It operates as an accord and satisfaction if the payee cashes the check.
311
What are the exceptions to the operation of a payment in full check?
Exceptions include:
* Payee returns the money within 90 days
* Payee is an organization and sends notice before the instrument is tendered requiring payment in full checks to be tendered to a designated person, office, or place to be effective
## Footnote
These exceptions are crucial for protecting the rights of the payee.
312
What is an alteration in the context of instruments?
Unauthorized change that purports to modify the obligation of any party
## Footnote
Alterations can affect the enforceability of the instrument.
313
What are the two types of unauthorized changes?
* Alteration of complete, existing instrument
* Unauthorized completion of an incomplete instrument
## Footnote
These types define how alterations can occur in financial instruments.
314
What is the effect of an alteration on a holder in due course (HDC)?
If alteration changes obligation on instrument, HDC may enforce instrument according to original terms
## Footnote
HDCs have protections that allow them to enforce the original terms despite alterations.
315
What happens if an instrument is completed in an unauthorized manner regarding HDC?
HDC may enforce instrument according to its terms as completed
## Footnote
This allows HDCs to enforce the instrument despite unauthorized completions.
316
What is the effect of a fraudulent alteration on a non-HDC?
Obligor is totally discharged
## Footnote
This highlights the severe consequences of fraudulent alterations for non-HDC holders.
317
What is the effect of a non-fraudulent alteration on a non-HDC?
Obligor remains liable on original terms
## Footnote
Non-fraudulent alterations do not discharge the obligor from their obligations.
318
What is the status of an altered check?
Not properly payable
## Footnote
Altered checks can lead to disputes regarding payment responsibility.
319
What defenses do banks have regarding altered instruments?
* Drawer's negligence
* Bank statement rule
## Footnote
These defenses can protect banks from liability in cases of altered instruments.
320
What warranties are breached by altered instruments?
Transfer and presentment warranties promising there have been no alterations
## Footnote
Breaching these warranties can lead to legal issues for the holder of the instrument.
