outline 1.8 negotiability, negotiation, HDC Flashcards
(29 cards)
note
parties
Certificate of Deposit
promise to pay money - 2 parties instrument
a, maker - the promisor (obligor) – Person who promises to pay
b. payee — the promisee – Person entitled to payment
note issued by FI, FI acknowledges receipt and promise to repay
draft
parties
check
an order to pay
- Parties
a. drawer — person ordering payment
b. drawee — person to make the payment
In a check context, also called the payor bank.
c. payee — person to receive the payment - Check
a. Requirements
(1) FI is the Drawee
and
(2) Payable on demand
b. Types of Checks
(1) Ordinary Check
(2) Certified Check
Ordinary check which bank has accepted, i.e., agreed to pay.
(3) Cashier’s Check
Drawer and drawee are the same FI.
Person buying the check is the remitter.
(4) Teller’s Check
Check drawn by one bank on another bank.
Person buying the check is the remitter.
(5) Traveler’s Check
Demand instrument requiring a counter signature by a
person whose specimen signature already appears on the instrument.
- Remotely-Created Item
A draft not signed by the __drawer_ but created with the drawer’s authority so that a third party can get paid from the drawer’s account at a bank.
The third party is usually a seller in an __internet__ transaction or when you pay bills over the telephone by giving creditor your checking account number.
Meaning of Negotiability:
Meaning of Negotiability:
Refers to the __form__ of the instrument. Determined at ___time of insurance_.
Opting out — If instrument says it is non-negotiable, it is non-negotiable (unless it is a check). Cannot expressly opt in.
if not negotiable then just regular contract
if negotiable then
If the paper is negotiable (form) and properly negotiated (transferred), it may reach the hands of a special good faith purchaser called a holder in due course (HDC).
HDC obtains ___better__ rights than transferor and thus can get paid from obligor even though the obligor (maker or drawer) has defenses (good reasons not to pay under normal contract law).
ELEMENTS OF NEGOTIABILITY
8 ISUFINPC in wiritng signed by maker or drawer unconditional promise or order to pay fixed amount in money no other undertaking or instruction (promise/ order to pay only) payable on demand or at a definite time contains words of negotiability
ELEMENTS OF NEGOTIABILITY
signed by maker or drawer
mark “X”
X, writing Y’s name without authority, acts as X’s signature
Any symbol executed or adopted by a party with present intent to ___authenticate__ a writing.
ok
no, forgery
ELEMENTS OF NEGOTIABILITY
3, unconditional promise or order to pay
3, unconditional promise or order to pay
o presumption of unconditional promise
o conditional = non-negotiable if
• express condition to payment
• promise or order “subject to” or “governed by” another record
• incorporation by reference “rights stated elsewhere”
o non-conditional = negotiable if
• statement of consideration
• reference to another record (“as per”, “in accordance with”)
• incorporation by reference of items that wouldn’t hurt holder
•rights regarding collateral
• prepayment
• acceleration
• limitation of payment to a particular fund or source
• countersignature
• consumer protection language (or with law)
• prevent holder to be HDC
•
ELEMENTS OF NEGOTIABILITY
4, fixed amount
o determine principle amount due, amount of money
o interest
• presumption = no interest
• Ways in which interest may be stated which do not violate the “fixed amount” requirement
• Amount of money
• Fixed or variable rate
• Reference to outside source
• Failure to state interest rate (for “interest”) = judgment rate
ELEMENTS OF NEGOTIABILITY
• 5, in money
o domestic or foreign
o no good or service
o words vs. figures = words prevail
ELEMENTS OF NEGOTIABILITY
6, no other undertaking or instruction (just promise/ order to pay)
o is instrument not a full contract
o exceptions: permitted undertaking or instruction
• promise concerning collateral
• confession of judgment clauses (void under TX law)
• waiver of law meant to benefit the drawer
ELEMENTS OF NEGOTIABILITY
• 7, payable on demand or at a definite time
o on demand
• express statement
• silent instrument (no date)
o at a definite time
• express statements
• date stated in the instrument
• fixed period after sight or acceptance
• time readily determinable at the time the promise or order is issued
• permitted date change that don’t prevent instrument from being payable at a definite time
• prepayment
• acceleration
• includes provisions extending the due date
o by holder: anytime
o by obligor: later definite time stated
ELEMENTS OF NEGOTIABILITY
• 8, contains words of negotiability
o bearer language
• “payable to bearer”
• “payable to the order of bearer”
• indication that possessor entitled to payment
• no payee stated
• “to cash” or “to order of cash”
• not payable to identified person
o order language “to the order of”
o if both then bearer controls
o exceptions for checks
• if this is the only element missing for a check, this requirement is waived
NEGOTIATION
A. NEGOTIATION
TRANSFER OF NEGOTIABLE INSTRUMENT SO TRANSFEREE IS A _____holder_____
The payee transfers the instrument to a third party rather than just getting the money, e.g., as payment for a sale, to donee as a gift, to bank to deposit in payee’s account, etc.
NEGOTIATION
B. HOLDER STATUS
- ___possession___ of Negotiable Instrument
and - Good Title
The method of obtaining good title depends on the words of negotiability used.
a. Bearer = ___possession__
b. Order = ___possession__ plus necessary endorsement
NEGOTIATION
C. INDORSEMENTS — GENERALLY
- Signature
An indorsement is a __signature__ on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the __back_ of the instrument
NEGOTIATION
D. BLANK INDORSEMENTS
- How Done = __payee_ Signature Only
Simplest type of indorsement consisting merely of payee’s signature, i.e., no particular person is named to whom the instrument is now payable. - Effect = Creates __bearer__ Paper
Thus, further negotiations may be by transfer of possession alone.
NEGOTIATION
E. SPECIAL INDORSEMENTS
- How Done = Payee’s Signature Plus Designation of New Person to Whom Instrument Payable
- Effect = Creates order Paper
Thus, further negotiations will require the indorsement of the person to whom it was made payable.
NEGOTIATION
F. FOR DEPOSIT OR COLLECTION
A restrictive indorsement limiting what may be done with the instrument.
Example: A check is made payable “to the order of Frank Smith.” Frank writes on the back, “For deposit in my Bank of Texas account #4568239 only,” and then signs his name immediately below.
NEGOTIATION
G. IDENTIFICATION OF PERSON TO WHOM INSTRUMENT PAYABLE (the payee)
- Intent of Issuer Determines Initial Payee
- Multiple Payees
a. “And” separates the names of the payees
Requires __all__ payees to indorse.
b. “Or” or “and/or” separates the names of the payees
Requires ___anyone__ of the payees.
NEGOTIATION
H. OTHER INDORSEMENT ISSUES
- Transferee’s Right to Transferor’s Indorsement
2, check
3, Misspelled Payee’s Name
Example: Karla Jones receives a check payable “to the order of Carla Jones.” She may indorse with either her incorrect (“Carla”) or correct (“Karla”) name. A person giving value for the check may? - Payee Lacking Capacity
- Transferee’s Right to Transferor’s Indorsement
If instrument is transferred for value, transferee has ___specifically enforceable __ right to the transferor’s indorsement. - Depositary Bank Becomes Holder Even Without Transferee’s Signature
Depositary bank becomes a holder even if payee deposits check in payee’s account without indorsing it. - Misspelled Payee’s Name — Payee May Indorse With Incorrect or Real Name

Example: Karla Jones receives a check payable “to the order of Carla Jones.” She may indorse with either her incorrect (“Carla”) or correct (“Karla”) name. A person giving value for the check may require her to indorse in both names to make the chain of title clear.
 - Payee Lacking Capacity May Effectively Indorse
Negotiation is effective even if the payee was a ___minor, incompetent person, subject to duress (incompetent)
HOLDERS IN DUE COURSE
whether the drawer/ maker have to pay? or do they have defenses not to pay
NHAVGW • negotiable instrument • holder (delivered, indorsement) • authenticity not apparently questioned • value holder must pay o good faith o without notice (actual knowledge) at time of instrument acquisition
o shelter rule
o real defense like forgery and alteration will destroy HDC
HOLDERS IN DUE COURSE
C. AUTHENTICITY NOT APPARENTLY QUESTIONED
Instrument does not bear such evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call its authenticity into question.
Example: Henry obtains a promissory note which has obvious erasures and which has been taped back together after being ripped into a dozen pieces. Henry will not qualify as a holder in due course because it is obvious that there is something “wrong” with the note.
HOLDERS IN DUE COURSE
• holder must pay value
An executory promise, a promise to give value in the future?
paid in different amount than face value is ok, but can not be excessive difference because it will be without good faith
o gift doesn’t count
o can only qualify as the portion holder actually paid
o past consideration ok
An executory promise, a promise to give value in the future, does not constitute value unless it is an irrevocable obligation to a third party. In contrast, the actual performance of the agreed consideration, such as painting a home, constitutes value.
Example: Calvin pays $500 for a promissory note with a face value of $550. Calvin has paid value although the amount he paid is less than the face value of the instrument. Negotiable instruments are often traded (bought & sold) at amounts different from their face values. But, if the value difference is excessive, such as paying $100 for a $10,000 note, the holder is unlikely to be in good faith.
Example: Jessica is the payee of a note payable for $1,000. Jessica gives the note to Doris, her daughter, as a present for passing the bar exam. Doris is __not_ a holder in due course because Doris did not pay value.
Example: Teresa agrees to pay Harold $4,000 for a note payable for $5,000. However, she has only paid $2,000 at the time the maker refuses to pay. Teresa can qualify as a holder in due course for only $ __2500___ because Teresa has paid only one-half of the agreed upon consideration and thus is a holder in due course for only one-half of the face value of the note.
Example: Bruce and Sam entered into a contract under which Sam sold his computer to Bruce for $1,000. Bruce made a $500 cash down payment and agreed to make monthly payments of $100. After making two cash payments, Bruce indorses over to Sam a promissory note signed by Morris for the remaining $300. Sam paid value for this note because past consideration is considered value.
HOLDERS IN DUE COURSE
o good faith
o
honesty in fact
plus
reasonable commercial standards of fair dealing
HOLDERS IN DUE COURSE
o
notice is?
without notice of 7 things
Later notice does not matter — once you get HDC status, it cannot be taken away.
Notice means:
__actual_ knowledge — A subjective test.
Receipt of a notice coupled with a reasonable time__ to act on the notice
From all the facts and circumstances known to the person at the time in question (subjective element), the person has reason to know that it exists (objective element)
Merely filing in the public records does __not put a person on notice.
