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Negotiable instruments Flashcards

(71 cards)

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1
Q

What is a negotiable instrument

A

An unconditional promise or order to apy a fixed amount of money if the following apply:

  1. Must be payable to bearer or to order at the time it is issued or comes into possession of a holder.
  2. Must be payable on demand at a definite time.
  3. Must not state any other undertaking by person promising to pay to do any other act in addition to paying money
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2
Q

How to establish status as Holder in Due Course

A

Must take the instrument in good faith, for value, and without notice that the instrument contains an unauthorized signature or that any party has a defense to payment of the instrument.

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3
Q

Which UCC article?

A

Article 3. UCC applies to two instruments: notes and drafts. Not to money

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4
Q

Holder in Due Course Rule

A

If an instrument is negotiable and is transferred by way of negotiation to a person who takes the instrument for value, in good faith, and without notice of any defense or claim to the instrument, the HDC will be able to force someone to pay on the instrument unless a real defense exists.

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5
Q

Note definition

A

Promise to pay. Promisor is the maker. Promissee is the payee or bearer.

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6
Q

Certificate of deposit

A

Like a note. instrument from bank acknlowedging money received and promise to repay

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7
Q

Draft definition

A

Draft is an order to pay. A drawer draws a draft that orders the drawee to pay money to a third party payee or bearer.

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8
Q

To be negotiable an instrument must be a….

A
  1. written and signed
  2. unconditional
  3. promise to pay
  4. a fixed amount of money that is
    i. payable to order or bearer when issued or first in possession of holder
    ii. payable on demand or at a definite time and
    iii. states no authorized undertaking or instruction by the promisor
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9
Q

Formal Reqs of Negotiabiity: unconditional

A

an instrument is conditional if
-it expressly states a condition for payment
-states the promise or order is subject to or governed by another writing.
not conditional merely because it limits funds to a aprticular source or refers to another writings acceleration terms.

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10
Q

Formal Reqs of Negotiabiity: promise or order to pay

A 
Note = promise to pay
draft = order to pay
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11
Q

Formal Reqs of Negotiabiity: Fixed amount of $

A

Must require payment in currency, not any other medium. Principal due must be fixed. Ok if it says it will be payable with interest.

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12
Q

Formal Reqs of Negotiabiity: Payable to order or bearer

A

Payable to order = payable to identified person or to an identified person “or order”
payable to bearer =
1. states payable to bearer or otherwise indicates that the possessor is entitled to payment
2. does not name a payee
3. is payable to cash
Person to whom instrument is addressed is governed by intent of maker.

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13
Q

Formal Reqs of Negotiabiity: on demand or at a definite time

A

Demand = fails to state a time or states on demand

definite time = payable on fixed date, after elapse of specified period or at a time readily ascertainable when issued.

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14
Q

Formal Reqs of Negotiabiity: are accelerations and extension clauses allowed?

A

Acceleration clauses = yes
extensions are the option of the maker = yes if extension is to further definite time.
Extensions by option of holder = yes

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15
Q

Formal Reqs of Negotiabiity: no unauthorized undertakings or instructions

A

3 undertakings or instructions allowed by the UCC:

  1. undertaking or power to give, maintain, or protect collateral
  2. authorization or power given to holder to confess judgment or to realize on or dispose of collateral
  3. A waiver of the benefit of the law the protects the obligor
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16
Q

Rules of construction–Which controls: handwriting or type/print

A

handwriting

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17
Q

Rules of construction–Which controls: type vs print

A

type

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18
Q

Rules of construction–Which controls: unambiguous words or figures

A

words

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19
Q

Opting Out rule

A

Negotiability is destroyed by conspicuous statement on the instrument that it is non-negotiable. Doesn’t apply to checks.

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20
Q

If two or more people sign the instrument who is liable?

A

They are jointly and separately liable.

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21
Q

How to treat an incomplete instrument

A
  • may be enforced according to its incomplete terms

- may be treated as augmented by an authorized completion.

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22
Q

How to treat an instrument that is completed without authority?

A

Treat as a fraudlently altered instrument

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23
Q

What is a holder?

A

A person in possession of the instrument with the right to enforce it.

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24
Q

How do you become a holder?

A

Through a transfer that qualifies as a negotiation

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25
How to negotiate: bearer instrument
negotiated by transferring possession of the instrument.
26
How to negotiate: order instruments
negotiated by transferring possession along with the identified person's indorsement
27
Negotiating order instruments: Payee's indorsement must be valid
Right to enforce will not pass unless the payee's indorsement is authorized and valid.
28
Negotiating order instruments: what is the effect of forging the payee's name in an indorsement?
breaks the chain of title and no subsequent possessor can qualify as a holder.
29
Negotiating order instruments: how to negotiate an order to multiple payees
If made out to the order of multiple payees jointly = each must indorse if made out to the order of multiple payees severally (A or M) = only one has to indorse
30
Negotiating order instruments: location of indorsement
written on instrument or an allonge affixed to instrument
31
Effect of taking an order instrument without indorsement: rights of transferee
Unless and until she obtains the indorsement, she does not have status as a holder. Only has possession.
32
Effect of taking an order instrument without indorsement: Rule for banks
a depository bank that takes an instrument for colelction becomes a holder if the customer was a holder at the time of delivery. True even if the customer has not indorsed the instrument.
33
Types of indorsements: special indorsement
names a particular person as payee. (pay J signed P) The indorsee must sign in order to further negotiate the instrument.
34
Types of indorsements: blank indorsement
signature not accompanied by a special indorsee. Creates bearer paper which can be negotiated by delivery alone
35
Types of indorsements: indorsement of names not necessary to chain of title
forgery of names not necessary to chain of title will not keep later takers from becoming holders.
36
Types of indorsements: forgery of drawer's name
Does not break chain of title. forgery operates as the genuine signature of the forger
37
Types of indorsements: Multiple indorsements
Where instrument has been indorsed several times, the last indorsement controls what is necessary for further negotiation.
38
Types of indorsements: qualified indorsements
indorsement with words "without recourse" limits the contract liability imposed on the indorser.
39
Types of indorsements: restrictive indorsement
any other language added to an indorsement creates a restrictive indorsement. usually ineffective to limit transfer or negotiation or to condition payment. Exception: if indorsement says for colelction or for deposit that must be followed or instrument has been converted.
40
Two step inquiry to determine if person is HDC
1. is the person a holder | 2. Does the person hold in due course
41
How to determine if person is holder
Instrument must be payable to bearer or to the person in possession and free of forgery
42
How to determine if person took in due course?
1. take for value 2. in good faith 3. and without notice
43
Due Course: what constitutes value
1. performance of agreed consideration 2. acquisition by the holder of a lien or security interest in the instrument (other than judicial lien) 3. taking the insturment as payment for antecedent debt 4. trading negotiable instrument for another 5. giving instrument in exchange for insurring an irrevocable obligation to a third person by the person taking the insttument.
44
Due Course: does the value need to be equivalent to the face value?
no. But if one pays less than the agreed upon value, the person becomes an HDC in proportion to the perceantage of the value paid.
45
Due course: time of payment
important because good faith and without notice determined at the time of negotiation or the time of payment whichever is later.
46
Due Course: does a bank deposit = value?
The bank becomes a holder for value to the extent that it permits withdrawls of the amount credited to the depositer's account. Use first in first out to determine whether the money has been reached.
47
Due Course: good faith
Good faith means honesty in fact and observance of reasonable commercial standards.
48
Due Course: does notice to purchaser mean just actual notice?
No. It means actual notice and reason to know from the facts surrounding the transaction.
49
Facts Constituting notice: instrument overdue
A purchaser is on notice that an instrument if overdue if: - any part of the principa is overdue - an accelartion has been made - more than a reasonable time has elapsed after issue of a demand instrument
50
Facts Constituting notice: unauthorized signature or alteration
a person will not be an HDC if she takes instrument with notice of alterations or unauthroized signatures
51
Facts Constituting notice: claims to instrument
notice of claims to instrument prevent HDC status. notice that fiduciary has negotiated instrument to own benefit also prevents HDC status
52
Facts Constituting notice: defenses or claims in recoupment
notice of defense or claims in recoupment by obligor prevent HDC status
53
facts NOT constituting notice:
- date is messed up - party signed for accommodation - incomplete instruemnt has been completed - public filing - instrument sold at discount - notice of discharge unless insolvency proceedings
54
Transactions that preclude HDC status
instrument taken by - legal process or purchase at judicial sale - acquiring it as successor in interest to an estate - pruchase as part of a bulk transaction not in the regular course of business of the trasnferor
55
Time at which HDC status is determined
moment instrument is negotiated or when she gives value which ever is later
56
Holder of a security instrument
if holder merely has a security interest in the instrument and the person obligated to apy has a defense or claim against person who created the interest, the holder is an HDC only to the extent of the unpaid portion of the secured obligation
57
Shelter Rule
A transferre from an HDC takes whatever the transferor had. EXCEPTION: no HDC rights are given to persons who were parties to fraud or illegality affecting the instrument
58
Defenses of the obligor generally
if holder is an HDC, the HDC takes frees of any personal defenses or claims. HDC is subject only to real defense. If person is not an HDC, they take subject to any defenses or claims.
59
Real Defenses Pneumonic
``` FAIDS Fraud in factum Forgery Alteration Adjudicated incompetency Infancy Illegality Duress Discharge through bankruptcy Discharge known by HDC Suretyship defenses Statute of Limitations ```
60
Real Defenses: Forgery
if signature of payee or any special indorsees were forged, no subsequent taker can be an HDC because they can't be a holder. If person whose name was forged ratifies = can be an HDC. Forgery of names not necessary to title do no affect the right to enforce. Party has a real defense of unauthorized signature regardless
61
Real Defenses: Fraud in Factum
Fraud that causes the obligor to sign an instrument without knowledge or reaosnable opporuntiy to learn of its cahracter or essential terms is a real defense. Most other fraud is a personal defense
62
Real Defenses: Alteration of instrument
HDC may only be able to collect the original amount. Some times able to collect the amount as altered. Difference between changing the amount and filling in blanks left by maker. Maker liable for the latter.
63
Real Defenses: Incapacity
if person lacks capacity to contract and the contract is void the incapacity is a real defense.
64
Real Defenses: infancy
real defense
65
Real Defenses: illegalit
if illegality of underlying transaction renders the obligation void it is a real defense if merely voidable = personal defense
66
Real Defenses: duress
Real defense where there is extreme duress
67
Real Defenses: Discharge in insolvency proceedings
real defense
68
Real Defenses: Statute of Limitations
either 3 years or 6 years
69
Real Defenses: Suretyship defenses
If HDC knows of the accomodation, takes subject to the surety's defenses
70
Real Defenses: Discharges known to HDC
Unless the HDC has notice of the discharge or the discharge was made by payment to a prior holder and the HDC failed to give notice to the maker of the note's trasnfer, discharge will be a personal defense.
71
Personal Defenses
ANyone but an HDC takes subejct to all personal defenses you could raise in contract.

Negotiable Instruments (1 decks)

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