UCC - Negotiable Instruments

Question 1

Negotiable Instrument

Answer 1

Generally, a signed writing that orders or promises payment of money.

Question 2

List the requirements for an instrument to be negotiable.

Answer 2

• be a signed writing
• contain an unconditional promise or order
• to pay a fixed amount of money
• payable to order or to bearer at the time it either is issued or first comes into possession of a holder
• payable on demand or at a definite time
• contain no undertaking or instruction except as authorized by the UCC

Question 3

Note

Answer 3

A two-party instrument in which one party (the maker) promises to pay a second party (the payee) a sum of money.

Question 4

Draft

Answer 4

A three-party instrument in which one party (the drawer) orders a second party (the drawee or payor) to pay a sum of money to a third party (the payee).

Question 5

Check

Answer 5

A draft drawn upon a bank and payable on demand.

includes money orders, cashier’s checks, teller’s checks

Question 6

Negotiation

Answer 6

A voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder.

Question 7

Order Instrument

Answer 7

An instrument payable to an identified person.

Question 8

What is required for Order Instrument Negotiation?

Answer 8

Negotiation requires transfer of possession of the instrument and endorsement by the holder.

Question 9

Bearer Instrument

Answer 9

An instrument payable to bearer (possessor).

Question 10

What is required for Bearer Instrument Negotiation?

Answer 10

It may be negotiated by transfer of possession alone.

Question 11

Transfer

Answer 11

Occurs when the instrument is delivered by a person other than its issuer for the purpose (with intent) of giving the right to enforce the instrument to the recipient.

Question 12

Endorsement

Answer 12

A signature made on an instrument to negotiate the instrument, restrict payment of the instrument, or incur the endorser’s liability on the instrument.

Question 13

Presentment

Answer 13

A demand made by the holder of the instrument to pay or accept it.

Question 14

Who are persons entitled to enforce a negotiable instrument?

Answer 14

• the holder or a holder in due course
• a non-holder in possession of the instrument who has the rights of a holder
• a person not in possession who is nonetheless entitled to enforce the instrument

Question 15

Holder

Answer 15

Someone who has both possession and rights to the instrument.

Question 16

Holder in Due Course

Answer 16

A holder of a negotiable instrument that does not bear apparent evidence of forgery, alteration, or other irregularity, and who:
* takes the instrument for value
* in good faith
* without notice that the instrument is overdue or has been dishonored

Question 17

Distinguish between a Holder and a Holder in Due Course.

Answer 17

A holder’s rights are subject to all defenses that the maker or drawer might raise, whereas a holder in due course is only subject to ‘Real’ defenses.

Question 18

What constitutes Value in relation to a negotiable instrument?

Answer 18

Value is given for the instrument when it is issued or transferred for various reasons, including:
* for a promise of performance
* as payment or security for an existing claim
* in exchange for a negotiable instrument
* in exchange for the incurring of an irrevocable obligation

Question 19

Forged Endorsement

Answer 19

A forged necessary endorsement prevents the possessor of an instrument from being a holder.

Question 20

Fictitious Payee Rule

Answer 20

If the person identified as the payee is not intended to have any interest in the instrument, or is a fictitious person, an endorsement of the instrument by any person in the name of the payee is effective as the endorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

Question 21

Imposter Rule

Answer 21

When a person impersonates the payee and induces the drawer or maker to issue an instrument to the imposter payable to the name of the impersonated person, an endorsement by anyone in the name of the payee is effective in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

Question 22

Example of Personal Defense that would not be valid against a Holder in Due Course

Answer 22

breach of contract

Question 23

Examples of “Real” Defenses

Answer 23

Forgery, Fraud, Alteration, Incapacity, Illegality, Duress

Question 24

Principal Liability for Instruments Signed by an Agent (VA Code § 8.3A-401)

Answer 24

A principal is liable on an instrument signed by an authorized agent. Liability exists whether the agent signs:
- The principal’s name,
- The agent’s name, or
- A combination of both.

Question 25

Surety

Answer 25

a person or company that guarantees another party's obligations.

Question 26

Accommodation Party (VA Code § 8.3A-419)

Answer 26

An accommodation party acts as a surety (guaranteeing another’s debt). A person is an accommodation party if: - They co-sign an instrument without receiving direct benefit from it. - They do not limit their liability with express language.

Question 27

Co-Signer Presumption

Answer 27

A co-signer is presumed to be an accommodation party unless stated otherwise.

Question 28

Surety’s Rights After Payment (VA Code § 49-27)

Answer 28

A surety who pays a loan on behalf of a principal gains all rights and remedies of the creditor. The principal debtor remains ultimately liable to the surety.

Question 29

Alteration of Instruments (VA Code § 8.3A-407)

Answer 29

Alteration refers to an unauthorized change that modifies the obligation of a party on an instrument, whether it is a completed or incomplete instrument.

Question 30

If an alteration is fraudulent...

Answer 30

it discharges the liability of the obligor.

Question 31

If an alteration is not fraudulent...

Answer 31

the obligor remains liable on the original terms of the obligation.

Question 32

Hierarchy of Terms in Case of Contradictions (VA Code § 8.3A-114)

Answer 32

The hierarchy for interpreting conflicting terms in a written instrument is as follows: - Handwritten terms prevail over - Typewritten terms, which prevail over - Printed terms. Words take precedence over numbers when there is a discrepancy.

Question 33

Forgery and Liability (VA Code § 8.3A-403)

Answer 33

If the maker’s signature is forged or omitted from a note, the maker is not generally liable for the obligation unless the forgery is ratified by their actions.

Question 34

Ratification by Conduct

Answer 34

Ratification by conduct occurs when a party acts in a way that accepts or adopts the forged signature.

Question 35

Negligence contributing to a forgery or fraudulent indorsement...

Answer 35

precludes the party from denying the validity of the instrument (VA Code § 8.3A-406).

Question 36

Duty to Report Forgery (VA Code § 8.3A-406)

Answer 36

A party must report a forged signature within one year from the date of the creation of the instrument or from the date a statement containing the forged signature is issued. Failure to report the forgery within this period precludes the defense of forgery.

Question 37

Liability of Accommodation Party (VA Code § 8.3A-605)

Answer 37

An accommodation party is liable for an instrument under the following conditions: - The person entitled to enforce the instrument has reduced the claim to a judgment, and execution is returned unsatisfied, - The other party has become insolvent, - The other party cannot be served with process, or - It is useless to proceed against the other party.

Question 38

Liability on Negotiable Instruments

Answer 38

A party is generally not liable on a negotiable instrument unless it bears their signature or the signature of an authorized representative. Va. Code §8.3A-401.

Question 39

Does stopping payment on a check void the underlying contractual obligation?

Answer 39

No, it merely delays payment. A party who stops payment must establish a real or personal defense to avoid liability.

Question 40

Shelter Doctrine

Answer 40

A transferee of an instrument may inherit the HDC status of a prior holder, as long as the transferee has not personally engaged in wrongdoing related to the instrument.

Question 41

A holder who endorses and transfers an instrument makes certain warranties, including:

Answer 41

- The transferor is entitled to enforce the instrument. - All signatures are authentic and authorized. - The instrument has not been altered. - The instrument is not subject to any defenses or claims against the transferor. - The maker is not insolvent. ## Footnote A transferee can recover under both contract and tort theories based on these warranties.

Question 42

Liability for Dishonored Instruments

Answer 42

- The drawer (person writing the check) remains liable for payment. - The payee or subsequent holder may seek enforcement under contract law or negotiable instrument law (UCC Article 3). - If the check is dishonored for insufficient funds, the drawer may face civil penalties or even criminal liability, depending on the jurisdiction. - A holder who transfers a dishonored instrument remains liable unless expressly discharged.

Question 43

Dishonored Check

Answer 43

a check that a bank refuses to pay or process when presented for payment. This can happen for several reasons, generally categorized into non-sufficient funds (NSF) dishonor and formal dishonor by the bank: