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70 Cards in this Set

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Commercial paper (definition)
written instrument for payment of money
Approach to Commercial Paper Problem
1. Identify type of paper
2. Identify parties
3. Determine if the instrument is negotiable
4. Determine if the instrument was properly negotiated
5. Determine if transferee is a holder in due course
6. Determine plaintiff's course(s) of action (contract, tort, warranty)
7. Determine defendant's defenses
8. If defendant is liable, may defendant pass liability on to another party?
Note
Promise to pay money: 2-party instrument (ex. student loan)
Maker
Person who promises to pay (note)
Payee
Person entitled to payment (of note)
Certificate of deposit
Note issued by a financial institution (FI)

1. FI acknowledges receipt of money, and
2. FI promises payee/depositor to repay the money
Draft
Order to pay money: 3-party instrument (ex. checks are drafts)
Drawer
person ordering payment (of draft)
Drawee
person making payment (in check context, also called the payor bank)
Payee
person to receive payment (of money)
Checks
Requirements:
1. Financial institution is the drawee to make payment (called payor bank)
2. Payable on demand
Types of Checks
1. Ordinary
2. Certified - ordinary check that bank has accepted
3. Cashier's - drawer and drawee are the same bank
4. Teller's - drawn by one bank on another bank
5. Traveler's - demand instrument requiring countersignature by person with signature already on instrument
Remotely-Created Item
Draft not signed by drawer but created with drawer's authority so that 3rd party can get paid from drawer's account at a bank

3rd party is usually a seller in an internet transaction or when you pay bills over the phone by giving creditor your checking account number
Elements of Negotiability
1. In writing
2. Signed by maker (note) or drawer (draft)
3. Unconditional promise (note) or order (draft) to pay
4. Fixed amount in money
5. No other undertaking or instruction (by person promising or ordering payment)
6. Payable on demand or at a definite time
7. Order or bearer language
Elements of Negotiability - Signature Requirement
Any symbol executed by a party with present intent to authenticate a writing; includes:
1. Traditional signature
2. Mark "X"
3. Initials
4. X, writing Y's name without authority, acts as X's signature
5. Trade/assumed name
6. Typewritten or computer generated
7. Signature stamp
8. Thumb print
Elements of Negotiability - Items that Make Promise/Order Conditional (and thus not negotiable)
Presumption = unconditional promise to pay, BUT these items make promise/order conditional:

1. Express condition to payment
2. Promise or order "subject to" or "governed by"
3. Incorporation by reference (rights/obligations to with respect to the promise/order are stated in another record)
Elements of Negotiability - Items that Do NOT Make Promise/Order Conditional
1. Statement of consideration
2. Reference to another record ("as per" or "in accordance with")
3. Incorporation by reference of items that would not hurt holder
a. Rights regarding collateral
b. Prepayment
c. Acceleration
4. Countersignature (ex. traveler's checks)
5. Limitation of payment to particular fund/source
6. Consumer protection language
Elements of Negotiability - Fixed Amount
1. Determine principal amount due (must be on face)
2. Interest: presumption = no interest, BUT interest may be stated 3 ways that don't violate the "fixed amount" requirement:
a. Amount of money (ex. $10 interest)
b. Fixed or variable rate (ex. 5% interest)
c. Reference to outside source (ex. 2% above prime rate)
3. Failure to state interest rate = judgment rate (ex. note providing for "interest" is negotiable and interest will be at judgment rate)
Elements of Negotiability - In Money
1. Authorized medium of exchange (domestic or foreign)
2. Cannot be payable in goods or services
3. Words versus figures - words prevail (check says payable for $550 but "five hundred dollars" in words - payable for $500)
Elements of Negotiability - No Other Undertaking or Instructions (and Exceptions)
Instrument is NOT a full contract (negotiable instrument = courier without luggage) - it is just a promise or order to pay

Exceptions - permitted undertakings or instructions:
1. Promises concerning collateral
2. Confession of judgment clauses
3. Waiver of law mean to benefit obligor (maker/drawer)
Elements of Negotiability - Words of Negotiability
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

Order language = "to the order of M. Whitehead" (order language typically pre-printed on checks)

If order and bearer language - bearer controls

This requirement is waived for checks if it is the only element of negotiability missing
Negotiation
Transfer of negotiable instrument so transferee is a holder

Payee transfers the instrument to a 3rd party rather than just getting the money (ex. as payment for a sale, to donee as a gift, to bank to deposit in payee's account, etc)
Holder Status
1. Possession of negotiable instrument AND
2. Good title (method of obtaining good title depends on words of negotiability):
a. Bearer = possession alone
b. Order = possession PLUS necessary indorsements
Indorsements (generally)
Signature on negotiable instrument by someone other than the maker, drawer, or acceptor; normally on the back of the instrument
Blank Indorsements
1, How done = payee's signature only (simplest type of indorsement merely consisting of payee's signature - not particular person is named to whom instrument is now payable)

2. Effect = creates bearer paper (thus, further negotiations may be by transfer of possession alone)

Example = check payable "to the order of M. Whitehead"; I sign back of check; I made blank indorsement and check is now bearer paper (so anyone in possession of check has the right to cash it)
Special Indorsements
1. How done = payee's signature and designation of new person to whom instrument payable

2. Effect = creates order paper (thus, further negotiations will require the indorsement of person to whom it was made payable)

Example = check payable "to the order of M. Whitehead"; I write on back, "Pay to J. LaMarca" and sign my name immediately below; I made a special indorsement and the check is order paper (so further negotiation of check will need Jim's indorsement)
For Deposit or Collection (Restrictive Indorsement)
Restrictive Indorsement = limiting what may be done with instrument

Example = check payable "to the order of M. Whitehead"; I write on the back "for deposit in my Wells Fargo account # 123456 only" and sign immediately below; I made a restrictive indorsement; if depository bank does not comply with my indorsement, it will be liable to me for conversion
Identification of Person to Whom Instrument Payable (Payee)
1. Intent of issuer determines initial payee (ex. I write check to "George Bush"; my intent determines whether George H.W. Bush, George W. Bush, or some other George Bush is entitled to the check)

2. Multiple payees
a. "And" separates the names of payees: requires ALL payees to indorse
b. "Or" or "And/Or" separates the names of payees: requires only one payee to indorse
Other Indorsement Issues
1. If instrument is transferred for value, transferee has specifically enforceable right to transferor's indorsement
2. Depository bank becomes a holder even if payee deposits check in payee's account without indorsing it
3. Misspelled payee's name - payee may indorse with incorrect or real name
4. Payee lacking capacity may effectively indorse (ex. negotiation is effective even if payee was a minor who effectively indorsed)
Holder in Due Course (definition)
HDC = holder (possession + good title) who takes:
- for value
- in good faith, and
- without notice that:
a. instrument is overdue/has been dishonored
b. instrument contains an unauthorized signature/has been altered
c. there's a claim to the instrument
d. any party has a defense on the instrument

Note: instrument must not bear apparent evidence of forgery or call into question its authenticity; selling at a reasonable discount doesn't constitute notice
Shelter Doctrine
Transferee has rights of transferor:

While a holder might not qualify as an HDC herself (because she got the instrument as a gift or had notice of defense when she took instrument), she may still take shelter in the HDC rights of a previous holder because a transferee generally acquires whatever rights her transferor had

Having HDC rights via shelter doesn't make you a HDC

Person who was party to fraud/illegality affecting instrument cannot get HDC rights by shelter

Burden of proof on person who wants HDC rights (outright or by shelter)
Defenses (Holder versus HDC)
If holder seeking payment isn't an HDC, person from whom payment is sought can raise any defense against payment that could be raised in a simple contract action (ex. failure of consideration; breach of warranty; fraud in inducement)

If person seeking payment is an HDC, only the REAL DEFENSES can be successfully raised against him

HDC is free from claim of others to the instrument; HDC = "perfect defendant"
Real Defenses
FAIDS (11)

F = Fraud in the factum; Forgery
A = Alteration; Adjudicated insanity
I = Infancy; Illegality
D = Duress; Discharge through insolvency; Discharges known to HDC
S = Suretyship; Statute of limitations (6 years from due date; unaccepted draft: earlier of 3 years after dishonor or 10 years after issue)
Fraud in the Factum/Execution
1. Signer lacked knowledge of instrument's character or essential terms AND
2. Signer lacked reasonable opportunity to learn of instrument's character/essential terms
(thus, person lacked intent to sign a promise or order to pay)

"Excusable ignorance" test = just saying you signed something without knowing what it was is not enough; court considers signer's intelligence, education, business experience, ability to read and understand English
Contract Liability
Merely by signing his name on back of an instrument, an indorser enters into a contract with subsequent holders (possession + good title) of the instrument, promising to pay on the instrument according it its terms when indorsed if the instrument is presented for payment, is dishonored, and the indorser is given notice of dishonor
Signatures by Agents (K Liability)
If agent signs agent's name and principal is bound, is agent personally liable?

No, if (1) principal identified in instrument and (2) signature unambiguously shows it was made on behalf of principal

Yes, if either element above isn't satisfied
Liability of Agent
1. Agent is liable to HDC unless agent can prove that holder had notice of the representative nature of agent's signature

2. Agent is liable to a non-holder in due course unless agent can prove that the original parties did not intend the agent to be liable

3. Check rule - no agent liability if principal's name is on the check
Maker of Note (K Liability)
1. Primary liability: no conditions precedent; maker must pay instrument when it is due according to its terms at the time it was issued (or when incomplete instrument completed)

2. Liable to holder or indorser who paid instrument

3. Defenses: maker my raise defenses; effectiveness depends on status of holder (HDC or not)
Drawer of Draft (K Liability)
1. Drawer may not disclaim liability on a check but may disclaim liability on other drafts

2. Drawer liable only after 2 conditions are first satisfied:
a. presentment to drawee within 30 days
b. dishonor - drawee refuses to pay the instrument upon a proper presentment
Indorser of Note or Draft (K Liability)
1, Liability disclaimer allowed - "without recourse" prevents indorser from incurring K liability
2. Indorsers are liable to each other in the order of their signatures - sue prior indorsers for payment; liable to later indorsers
3. Indorser liable only after 3 conditions met:
a. presentment to maker/drawee within 30 days of indorsement
b. dishonor
c. notice of dishonor to indorser within 30 days of the dishonor
Accommodation Parties
Co-Signers, Sureties, Guarantors

Person who signs instrument to lend his credit to another party but who does not receive any direct benefit (does not receive any borrowed money)
Accommodation - Liability
Liable in capacity in which accommodation party signs; no special K

Presumed to be guaranty of payment

Accommodation party may include express language limiting the K to a guarantee of collection only

If accommodation party (surety) pays the instrument, he is entitled to reimbursement from the accommodated party (maker, indorser)
Demonstrating Accommodation Status
1. Express language

2. Anomalous indorsement - an indorsement by a person who was not the holder of instrument (an indorsement outside the chain of title) is notice of its accommodation character
Warranty Liability
2 Types: transfer warranty liability and presentment warranty liability

Implied warranties - arise automatically

An indorsement "without recourse" doesn't negate either type of warranty

Warranty liability is off the instrument since warranties are created by transfer or presentment, not the indorsement of the instrument

To use a warranty, possession of the instrument is not needed as it is for K liability

Warranty liability survives the final payment of an instrument
Transfer Warranties
Person who transfers an instrument for consideration warrants:
1. that he is a person entitled to enforce the instrument
2. genuineness of signatures
3. that the instrument includes no material alterations
4. that no defenses are good against the transferor
5. that he has no knowledge of insolvency proceedings against the maker, drawer or acceptor

Note: transferor who indorses an instrument makes these warranties to all subsequent holders; transferor who doesn't indorse makes the warranties only to the immediate transferee; drawee/maker never sue for breach of transfer warrant because they get instruments presented to them, not transferred
Presentment Warranties
Person who presents an instrument (usually a check) for payment (usually to a bank) makes 3 warranties:
1. that he is a person entitled to enforce the instrument
2. that the instrument hasn't been altered
3. that he has no knowledge that the drawer's signature is unauthorized
Warranty versus Indorser's K (How do you know whether P should bring suit against the indorser for breach of warranty or for breach of the indorser's K?)
If P is the Holder: if the payor has not paid the instrument (ex. check bounces or promissory note is not paid by the maker), then the holder will sue the indorser on the indorsement K

If P is Payor: if the payor has paid and later discovers that payor should not have paid (ex. check was forged or note was altered), then payor will attempt to sue the indorser for breach of warranty (transfer or presentment, as appropriate under the facts)
Discharge by Holder
Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it (ex. writing "void"), etc
Failure to Produce Original Instrument (original lost, inadvertently destroyed, stolen)
1. Enforcement by person not in possession
a. person entitled to enforce when loss occurred,
b. loss not due to transfer or lawful seizure, and
c. person cannot reasonably obtain the original

2. Protection for payor required - ex. security/bond
Overdraft
bank may charge customer's account even if the charge creates an overdraft
Postdated "Check" (really a draft)
Bank may pay postdated check unless customer gives bank an otice of the postdating which describes the check with reasonable certainty
Stop Payment Orders
Drawer (bank's customer) may stop payment on check:
1. must be in writing
2. requirements of writing - dated, signed, describe item with certainty
3. valid for 6 months; can be renewed
4. bank's defenses if it pays over a stop order - no loss; stop payment order did not comply with requirements
Wrongful Dishonor
Drawee (payor bank) dishonoring a properly payable check

Drawer may bring action against the drawee for bouncing a check it should have paid

Payee may not sue drawee bank even if the drawee bank should have paid the check and the drawer had sufficient funds to cover the check

Drawer may recover all damages caused by wrongful dishonor (bounced check fee, expenses incurred defending prosecution for writing hot checks)

Drawee (Payor) Bank's Defenses:
1. payment would overdraw the drawer's account
2. check is more than 6 months old (bank may honor the "stale" check as long as it does so in good faith)
Payment in Full Check
check on which drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bonafied

Effect = payment in full check operates as an accord and satisfaction if the payee cashes the check

Exceptions - payee returns the money with 90 days; payee is an organization and had previously notified drawer of a particular person/address to send payment in full checks
Forged Maker's Signature
1. Alleged maker not liable because maker's signature does not appear on the note; alleged maker's conduct may ratify the forgery or cause alleged maker to be precluded from denying the forgery

2. Forger is liable on the note because forger's signature appears thereon
Forged Drawer's Signature
1. Alleged drawer is not liable
2. Drawee bank must recredit alleged drawer's account as check was not properly paid unless drawee bank has a defense
3. Bank unable to pass on loss unless breach of presentment warranty; normally, no presentment warranties (entitled to enforce, no alteration, no knowledge of forged drawer's signature) will be breached; parties had right to enforce the forger's obligation; forger is the real drawer because forger signed when forger forged the alleged drawer's signature; drawee takes risk that drawer's signature unauthorized unless presenter knew it was unauthorized
4. Bank's defenses to recrediting:
a. drawer's negligence - if drawer's negligence substantially contributes to forgery of drawer's name, drawer may not raise the forgery
b. Bank Statement Rule - Duty to Inspect Statement
Bank Statement Rule
Customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and report forgeries to bank; if customer does not and bank can prove a loss beyond original mistaken payment (ex. cannot catch forger), customer precluded

Forged drawer's signatures must be reported to bank within 1 year regardless of bank's or customer's negligence
Repeat Offender Rule
if same person is forging a series of checks, drawer must report the forgeries within 30 day sof when the statement was available; if drawer does not do so, bank will not recredit the account for the subsequent forgeries by the same person
Forged Indorsements - Effect of Forgery of Payee's Name (Order Paper)
Effect of forgery of payee's name (order paper):
Forgery breaks chain of title and check is not properly payable; accordingly, drawer may demand that drawee bank recredit drawer's account as the check was not properly payable
Forged Indorsements - Situations where Party Precluded from Asserting Forgery of Payee's Name
Party precluded from asserting forgery of payee's name where:

a. imposter rule applies (drawer/maker estopped to deny validity of forged indorsement where maker/drawer acted carelessly in issuing the check and thus contributed to the forgery)

b. Payee estopped from asserting forgery if payee employer entrusted employee with responsibility with respect to an instrument and employee makes a fraudulent indorsement
Forged Indorsements - Liability of Drawee
a. Conversion liability of payee - payee can sue payor bank (and depository bank and non-bank converters) for conversion, OR

b. Not properly payable liability to drawer - drawer of check can sue payor/drawee bank since check with a forged payee's name is not properly payable

c. Drawee protected from double liability - successful conversion action against drawee by payee will eliminate drawer's not properly payable action

d. Bank's defenses - 1) imposter rule; 2) fraudulent indorsement by employee entrusted with check; 3) drawer's negligence; 4) failure to timely sue (drawer must sue within 3 years)
Forged Indorsements - If drawee (payor bank) pays, bank will then want to pass on liability --
Liability of presenter - drawee bank can then sue presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce (forged indorsement broke chain of title so no one could become a holder)
Forged Indorsements - if presenter loses to payor bank, presenter will then want to pass on liability --
Liability of transferor - presenter who loses to payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties of:
1. entitled to enforce
2. all signatures authentic or authorized
3. no good defenses
Alteration - Types
Obligor does not want to pay because instrument was altered

1. Change in obligation - any unauthorized change in an instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rate

b. Unauthorized completion - instrument is completed in an unauthorized manner which affects the party's obligation
Alteration - Effect on HDC
a. change in obligation - HDC may enforce for original amount

b. unauthorized completion - HDC may enforce as completed
Alteration - Effect on Non-HDC
a. Fraudulently made alteration by holder - total discharge of obligor

b. Not fraudulently made alteration - obligor liable under original terms
Alteration - Not Properly Payable
An altered check is not properly payable

Bank's defenses:
1. Negligence - if drawer's negligence substantially contributes to the alteration, drawer will be precluded from asserting the alteration
2. Bank statement rule - drawer must report alterations to drawee/payor bank within 1 year
Breach of Transfer and Presentment Warranties of No Alteration
Example: Jim issues a check for $10 to Maeghan. Maeghan expertly alters check so it reads $100 and cashes the check. Jim timely reports the alteration after receiving his bank statement and drawee bank recredits Jim's account because this check was not properly payable. Jim's bank may now sue up the chain of banks for breach of the presentment warranty of no alteration and the presenting bank may sue up the chain for breach of the transfer warranty of no alteration
Fictitious Payee Rule
Prevents a drawer or maker who was careless in issuing an instrument from using the forger defense by making the resulting forgery effective where the drawer or maker issues an instrument to a payee not intended to have an interest in the instrument (ex. employee furnishes employer with phony payee names or names of payees to whom employer owes no money)
Fraudulent Indorsements by Employees
if an employer entrusts an employee (including independent contractors) with responsibility with respect to an instrument, and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective (although a person who takes the instrument and fails to exercise ordinary care may be held liable to the extent the failure contributes to the loss)