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Flashcards in Negotiable Instruments Deck (58):


A note is a two-party commercial paper.
It's a written and signed promise by one party (called the maker) to pay money to another party (called the payee or bearer).


Certificates of Deposit

A CD is an instrument made by a bank containing (i) an acknowledgement that a sum of money has been received by the bank, and (ii) a promise by the bank to repay the sum of money.



Someone who makes a note (e.g., a check)



A draft is a three party commercial paper.
It's a written and signed instruction by one person (called the drawer) to another person (called the drawee) demanding that the drawee pay money to a third person (called the payee or bearer).



A check is a type of draft drawn on a bank and payable on demand.
As long as it meets these two requirements, it's a check--regardless of what it purports to be.


Cashier's Check

A draft drawn by a bank on itself.



The first delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person.
The maker or drawer is the issuer.


What are the formal requirements for a negotiable instrument?

A negotiable instrument must be: 

(1) a written and signed 
(2) unconditional 
(3) promise or order to pay
(4) a fixed amount of money, with or without interest, that:
(4.a) is payable to order or to bearer at the time it is issued or first comes into possession of a holder
(4.b) is payable on demand or at a definite time
(4.c) does not state any unauthorized undertaking or instruction by the person promising or ordering payment


Things that make an instrument non-negotiable

(a) If it expressly states a condition to payment
(b) If it states that the promise or order (or rights and obligations subject thereto) is subject to or governed by another writing
(c) If it calls for payment with something other than money or allows such payment in the alternative
(d) if the instrument is payable on or after a stated time or event certain to happen but uncertain as to time


Things that do not make an instrument conditional

(a) reference to another writing for a statement of rights re: collateral, prepayment, or acceleration
(b) limitation on payment to a particular source or fund
(c) requirement of a countersignature as a condition of payment
(d) containing a statement required by law that the holder is subject to claims and defenses of the original payee


Promise or Order to Pay

A promise is a written undertaking to pay money signed by the person undertaking to pay. A note must contain a promise to pay.

An order is a written instruction to pay money signed by the person giving the order. A draft must contain an order to pay.


Things that need/don't need to be fixed

The principal must be fixed.

The interest rate does not need to be fixed. 
It can be variable or just say "with interest," but if there's nothing about interest written, then there can be no interest demanded.


Payable to Order

A promise or order is payable to order if it is payable to the order of an identified person or to an identified person or order.


Payable to Bearer

A promise or order is payable to bearer if:
(a) it states that it's payable to bearer, to order of bearer, to order or bearer, to order and bearer, etc., indicating that the person in possession of the promise or order is entitled to payment
(b) does not state a payee 
(c) states that it is payable to cash or otherwise indicates that it is not payable to an identified person


Payable on Demand

An instrument is payable on demand if it states that it:
(a) is payable "on demand" or "at sight" or otherwise indicates that it is payable at the will of the holder, or
(b) does not state a time for payment


Payable at a Definite Time

An instrument is payable at a definite time if it is payable:
(a) on a fixed date
(b) on elapse of a specified period of time after sight or acceptance, OR
(c) at some time readily ascertainable at the time the instrument is issued


Acceleration Clauses

These are permissible and do not destroy negotiability.


Extension at Option of Maker or 
on Happening of an Event

These may be included on a negotiable instrument without destroying negotiability if the extension is to a further definite time stated in the instrument.


Extension at Option of Holder

This type of clause is always permitted because the holder always has the option of giving extra time for payment.


Undertakings or Instructions that May be Included

(1) an undertaking or power to give, maintain, or protect collateral
(2) an authorization or power to the holder to confess judgment or realize on or dispose of collateral
(3) a waiver of the benefit of any law intended for the advantage or protection of the obligor

Any other promise or undertaking will destroy negotiability.


Enforcement of Incomplete Instruments

These may be enforced according to its incomplete terms or as augmented by an authorized completion. 



A holder is a person in possession of an instrument with a right to enforce it.


How to Negotiate a Bearer Instrument

Bearer instruments are negotiated simply by transferring possession of the instrument.
Once the transferee has possession, she technically qualifies as a holder.


How to Negotiate an Order Instrument that's Payable to a Single Person

An instrument that's payable to an identified person is negotiated by transferring possession of the instrument along with the indorsement of the identified person. 
* The right to enforce an order instrument will not pass unless the payee's indorsement is authorized and valid. 


How to Negotiate an Order Instrument that's Payable to Multiple People

If the names on the payee line are connected by an "and," the instrument is payable to the payees jointly, and any subsequent negotiation is effective only if all payees endorse the instrument. 

If the names on the payee line are connected by an "or" or an "and/or," the instrument is payable to the payees severally, and the valid endorsement of any one payee is sufficient to pass the right to enforce to a subsequent transferee.


Special Endorsement

One that names a particular person as "endorsee." That named person must sign in order for the instrument to be further negotiated.


Blank Endorsement

A signature that is not accompanied by the naming of a specific endorsee.
Blank endorsements create bearer paper, which may then be negotiated by delivery alone.


Effect of Forgery of Names NOT Necessary to the Chain of Title

This will not keep later takers from becoming holders.


Forgery of Drawer's Name

This does not break the chain of title, and thus subsequent transferees may qualify as holders. 
The forgery operates as the genuine signature of the forger.


Without Recourse

An endorsement that adds the words "without recourse" is a qualified endorsement.
The effect is to limit the legal liability otherwise imposed on endorsers.


Anomalous Endorsement

An endorsement made by a person who is not a holder of the instrument.
This is usually done for the purpose of accommodation.
It doesn't affect the manner in which the instrument may be negotiated, but it does make the signer liable on the instrument.


Requirements for Becoming a Holder in Due Course

1. Be a holder 
2. Take the instrument for value 
3. Take the instrument in good faith
4. Take the instrument without notice 
(a) that it's overdue or has been dishonored; 
(b) it contains an unauthorized signature; 
(c) there's a claim to it; or 
(d) any party has a defense or claim in recoupment


Sufficiency of Value

Value given in exchange for commercial paper doesn't need to be equivalent to the face amount of the instrument.
As long as the full price agreed upon is given, full value has been paid.


Good Faith
Def. for HDC

"Honesty in fact and the observance of reasonable commercial standards of fair dealing."


Time at which HDC Status is Determined

Whether a holder qualifies as an HDC is an ssue determiend at the moment the instrument is negotiated to the holder and she gives value therefor, whichever occurs later. 


Shelter Rule

The transferee acquires whatever rights her transferor had. The transferee is said to take shelter in the status of her transferor. 
This rule allows any transferee to step into the shoes of the HDC who formerly held the instrument and to obtain the rights of an HDC, even though she otherwise clearly fails to meet the requirements of due course holding. 



A claim is an affirmative right to a negotiable instrument because of superior ownership. 


Real Defenses

These can be asserted against both HDC and non-HDC transferees:
(i) forgery
(ii) fraud in the factum
(iii) alteration of instrument
(iv) infancy
(v) incapacity to contract, other than infancy 
(vi) illegality
(vii) duress
(viii) discharge in insolvency proceedings
(ix) prescription
(x) discharges known to HDC


Persons Entitled to Enforce an Instrument

(1) A holder of the instrument,
(2) A nonholder in possession of the instrument who has the rights of a holder, and
(3) A person not in possession of the instrument but who is entitled to enforce it


If instrument is lost, stolen, or destroyed

The holder is entitled to maintain an action on the instrument as though she could produce it, providing she can prove her ownership, the terms of the instrument, and the facts that prevent her from producing it. 

The court in such a case is entitled to require protection indemnifying the defendant against loss by reason of additional claims on the instrument. 



A demand for payment made by a person entitled to enforce an instrument.



A process whereby the acceptor (usually a drawee bank) signs a draft and thereby becomes primarily bound to pay the instrument.



Occurs when the maker of a note or the drawee of a draft does not pay or accept the instrument wihtin the allowed time after presentment.


Transfer Warranties

Whenever a person transfer an instrument or a customer or collecting bank transfer an item for consideration, the transferor makes five transfer warranties:
(1) That she is a person entitled to enforce the instrument or item
(2) That the signatures are authentic and authorized
(3) That the instrument or item has not been altered
(4) That no defense of any party is good against her
(5) That she has no knowledge of any insolvency proceedings that have been instituted against the maker, acceptor, or drawer of an unaccepted instrument


Who is obligated to pay when a draft is dishonored?

The drawer of the draft.
Like an endorser, a drawer has secondary liability.


Accommodation Party

One who signs an instrument for the purpose of lending her name and credit to another party to the instrument and who does not directly benefit from the value given.
She's essentially a surety.


When Bank Cannot Charge the Account

(1) If there's no order by the depositor (forged signature of drawer)
(2) For more money than the original order (alteration of amount by third party)
(3) If the bank pays the wrong person (forgery of payee or endorsee's signature)
(4) If the item is postdated, the customer gives the bank notice of the postdating, and the bank pays the item before the stated date.

If a bank pays a check in violation of these principles, the customer is entitled to a re-credit on her account.



One who pretends to be someone else


What constitutes negligence?

- Leaving blanks or spaces on the instrument
- Mailing an instrument to a person having the same name as the payee
- Failing to follow internal procedures designed to avoid forgeries


Bank Statement Rule

Failure to examine statements is a form of negligence that can preclude the defenses of forgery and alteration. 
(a) Customer must promptly use reasonable care in examining the statements for two things: an unauthorized signing of the customer's own name as drawer, and any alteration of an item.
(b) If the customer fails to promptly report a forgery or alteration, she is precluded from complaining to the bank that the item in question was not properly payable. 
(c) If bank was also negligent, the loss is allocated between the bank and the customer according to the extent that each contributed to the loss.


Effect of Nonfraudulent Alterations

Nonfraudulent alterations do not discharge any party, and the instrument may be enforced according to its original terms.


Effect of Fraudulent Alterations

A fraudulent alteration has the effect of discharging every party obligated on the instrument unless the party assents to or is precluded from asserting the alteration.


Recovery for Instruments Mistakenly Paid or Accepted

The general rule is that payment of a negotiable instrument to an HDC or one who in good faith changed her position in reliance on the payment is final.

Two exceptions:
(1) If the party paid neither took for value nor in good faith, nor detrimentally relied on the payment, or
(2) If the party paid breached a transfer warranty or a presentment warranty.


Presentment Warranties on Unaccepted Drafts

1. That the warrantor is a person entitled to enforce the draft or is authorized to act on behalf of one who is entitled to enforce.
2. That the instrument is not altered.
3. That the warrantor has no knowledge that the drawer's signature is unauthorized.


Who makes presentment warranties?

- Any person who obtains payment or acceptance, and
- Any prior transferor


To whom are presentment warranties made?

To any person who in GF pays or accepts


Discharge by Delay in Presentment of a Check

If a check is not presented for payment or given to a depositary bank within 30 after the date of endorsement, the endorser is discharged.

If a check is not presented for payment or given to a depositary bank for collection within 30 days after its date and b/c of the delay the drawer is deprived of funds with which to pay the obligation, the drawer is discharged to the extent of the loss caused by the delay if he assigns his drawer's rights agaisnt the drawee to the party entitled to enforce the check.


If notice of dishonor is required but not given...

the endorser is discharged from his endorsement obligation.