commercial paper

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  1. Governing Law
    Article 3 of UCC adopted by WA, applies to negotiable instruments including notes, drafts, and checks. 

    Article 4 of UCC, as adopted by WA, governs bank/customer relationship and primarily applies to checks
  2. Is there a negotiable instrument?
    • For check to be negotiable, it must be:
    • writing
    • signed by maker/drawer
    • containing an unconditional promise or order to pay
    • a fixed amount 
    • of money
    • on demand/at definite time
    • containing no unauthorized promises or undertakings

    Check not required to say to order or to bearer. 
  3. Was a check/note negotiated?
    To be negotiated, it must be transfered to a person who becomes a hodler. A holder is one with possession and good title. Bearer paper need only have possession, but order paper must have necessary endorsement. 
  4. Holder in due course?
    A HIDC takes free from personal defense (any defense other than a real one) and claims/subject only to real defenses- for forgery, fraud, material alteration, adjudicated insanity, illegal, durres, infancy, discharge in insolvency, discharge of surety with notice. 

    HIDC = holder, have taken instrument, in good faith, for value, with no knowledge of underlying defenses or problems with instrument. 

    Good faith requires honesty in fact and observance of reasonable standards of commercial dealing. 
  5. Properly Payable Rule
    Between bank/customer, bank generally bear loss from forgery or alterations from this rule. Rule requires banks to pay checks that are properly payable and refrain from paying ones that are not. Bank liable to customer for all prox caused violations of the properly payable rule. 

    Altered checks are not properly payable to the extent of the alteration. 
  6. Exceptions to properly payable rule
    may operate to preclude a customer from asserting alteration against the bank: neg on customer part that substantially contributes to the alteration or forgery, issuing an instrument to an imposter/fictitious payee, alterations made by an employee with responsibility for check writing, and failure to examine a bank statement in a timely fashion.

    No matter which party is neg, a customer precluded from asserting alternation or forgery of his signature IF he does not notify bank of problem within a certain time after bank has made statement available. In WA, time limit is 60 days for biz customers. For others, its a year. 

    Time limit for asserting forged indorcement is one year regardless of whether it is a biz or reg customer. 
  7. Presentment warranties
    liabilities that arise in regard to negotiable instruments. When it is presented for payment, a presentment warranty arises by operation of law. Person who obtains payment on acheck, and all prior transferors, warrants that the drawee/payor bank that he is person entitled to enforce draft and get payment, that the draft has not been altered, and that he has no knowledge that signature is unauthorized. 

    If any of these are breached, bank can sue presentor OR prior transferor for actual damages arising out of breach. 
  8. Transfer warranties
    each person who transfers an instrument for consideration makes FIVE tranfer warranties by operation of law. GOOD TITLE, that ALL SIGNATURES ARE AUTHENTIC/AUTHORIZED, NO DEFENSES, NO KNOWLEDGE OF INSOLVENCY PROCEEDING INVOLVING DRAWER. 

    These arise with/without negotitaion. With or without indorsement, and regardless of whether indorsement is wualified or unqualified. 

    A transfer indorsement makes the transfer warranties run to the immediate transferee and to every subsequent transferee -- a transfer without indorsement makes the warranty run only to the immediate transferee
  9. K liability
    when party signs an instrument, becomes liable on it by virtue of signing. Drawers are secondarily liable on checks - must pay if drawee doesnt. Indorsers are secondarily liable if the drawee dishonors the instrument and the indorser has been given notice of the drawees dishonor. 
  10. Conversion
    Checks and notes are personal property. One who intereferes has committed tort of conversion.
  11. Bank payment to party with overdrawn account
    the bank can pay even though it will overdraw the customers account, or they may dishonor the check. 
  12. Check made out to two parties
    requires endorsement of each payee in order to be properly payable. A check is not properly payable if it lacks the necessary indorsements.
  13. Who is liable for an altered check?
    drawer liable on a check up to original amount unless neg allowed alteration to occur.
  14. governing law
    article 3 fo rnotes, article 4 for checks. 
  15. Intro paragraph
    first issue is whether checks involved are negotiable instruments. A  negotiable instrument must be in writing, signed, must not be conditional, must not make any unauthorized promises, must be for a fixed amount of currency to be paid on demand or at a definite time, and NOTES must be made to order or to bearer. 
  16. have instruments been negotiated?
    Instruments are negotiated when they are transferred to the holder for order paper, or if it is to bearer when person takes possession alone. 
  17. What is a holder?
    A holder is one with possession of the note or draft. 
  18. HIDC
    A HDC is one who pays value, takes in good faith, with no underlying information about any possible defenses. A HDC takes the instrument free from personal defenses, which relate to the underlying contract, but are still subjected to real defenses, such as forgery, or real fraud. 
  19. Shelter Rule
    A subsequent holder takes "shelter" in the status of the transferor, even if alone they would not have that status. So someone who gets a note or draft as a gift from an HDC wouldn't be an HDC because no value, but if giver is HDC then take that status as well. 
  20. When must bank honor check?
    Drawees are primarily liable. The properly payable rule states that banks must pay all properly payable instruments, and must not pay ones that are not. If customer was negligent with there instruments, or if the customer failed to check the bank statemtn, bank won't be liable. If customer makes check out to ficticious payee, or if employee of customer responsible checks commits a fraud, then the bank is not liable. 
  21. Breach of Transfer Warranty
    when instrument negotiated for considertaion, the transferor warrants that it has good title, genuine signatures, that there are no material alterations, no unauthorized signatures, and no defense.
  22. Contract liability/indorser liability
    when a party signs an instrument, he becomes liable by virtue of his signature. Drawers are secondarily liable on checks and they must pay if the drawee does not. Must first present to drawer, within 30 days, if they don't pay, then indorser can be liable if drawee dishonors and given notice. 
  23. Breach of Presentment warranty
    When instrument presented for payment, these arise as a matter of law. Person who obtains payment on a check warrants to the drawee/payor bank that he is person entitled to enforce it, the instrument hasn't been altered, and no knowledge of unauthorized signature.
  24. Conversion
    assertion of control over another's property depriving the owner of the property. 
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commercial paper
commercial paper
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