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Two basic instruments of commercial paper
Note and a Draft
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Note
Maker promises to pay the bearer
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Draft
Drawer orders the drawee to pay the payee
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Negotiability
- 1. Unconditional
- 2. Promise or order to pay
- 3. Fixed amount of money
- 4. To order or bearer
- 5. On demand or definite time
- 6. States no unauthorized undertaking or instruction
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Conditional instrument
- 1. A statement is conditional and NON-negotiable if expressly states a condition, OR
- 2. That the promise or order is subject or governed by another writing
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Non-conditional instrument
- Not conditional because it refers to another writing:
- 1. Refers to another writing regarding collateral, prepayment, or acceleration
- 2. Limits payment to a particular source or fund
- 3. Requires counter signature
- 4. Contains the statement required by law that holder is subject to claims and defenses of the original payee
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Holder in due course
- 1. Value
- 2. Good faith
- 3. Without notice
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Value
- 1. Consideration
- 2. Security interest
- 3. Payment of antecedent debt
- 4. Negotiable instrument
- 5. Irrevocable obligation
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Notice (both actual and constructive)
- 1. Instrument is overdue
- 2. Unauthorized signature or alteration
- 3. Claims on the instrument
- 4. Defenses of claims in recoupment (infancy, duress)
- 5. When and how notice must be received
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Recoupment
Claim by obligor that reduce the amount payable
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Facts not constituting notice
- 1. Postdated, ante-dated, undated
- 2. Return for executory promise
- 3. Part of a signed accommodation
- 4. Default in payment of interest
- 5. Any party negotiation the instrument was a fiduciary
- 6. Public filing
- 7. Sold at a discount
- 8. Notice of discharge
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Shelter rule
The transferee takes the same rights the transferor had
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Exception to the shelter rule
No HDC can be given to persons who were parties to fraud or illegality
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Real Defenses to HDC - FAIDS
- 1. Fraud,
- 2. Forgery,
- 3. Alteration of instrument,
- 4. Accommodation
- 5. Infancy,
- 6. Incapacity,
- 7. Illegality,
- 8. Duress,
- 9. Discharge in insolvency proceedings,
- 10. Discharge known to HDC
- 11. Statute of limitations
- 12. surety
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Fraud in the factum
Getting someone to sign something that they honestly did not know was commercial paper
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Alteration of instrument collection
The HDC may still be able to collect the original amount.
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Unauthorized completion
The maker will generally only be liable for what they did, but will also be liable for portions they left incomplete and someone else filled it in.
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Personal defenses – May not be raised against the HDC
Contract defenses – payor must raise the defense of theft – accommodation party can raise most defenses available to the party accommodated
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Transfer warranties – made by the defendant
- 1. entitled to enforce
- 2. signatures are authentic and authorized
- 3. not been altered
- 4. no defense or claim is good
- 5. no knowledge of insolvency proceedings
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Forging breaks what
Breaks the chain of title and no subsequent possessors of the instrument can qualify as holders. The person whom the check was stolen from did not lose title
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Presentment warranty
Anyone who presents instruments for payment warrants that he is entitled to enforce it. Drawee (bank) can go after those who it paid.
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Forged signatures are valid as the signature of:
The forger
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Order paper requirements
Possession AND necessary signatures
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Minor endorsement validity
Minors or incompetents may endorse
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Buyer of stolen goods
Seller makes an implied warranty of good title unless disclaimed. This means rightful property owners can come and reclaim or replevin.
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An instrument is negotiable when it is:
- 1. Unconditional
- 2. Promise to order or to pay
- 3. Fixed amount of money
- 4. Payable to the order or the bearer
- 5. Payable on demand or at a definite time
- 6. States no unauthorized taking or instruction
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Fixed amount of money is defined as
A principle of the payment that is fixed, the interest can be variable
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Bearer
- The person identified on an order instrument or the person in possession of the bearer instrument
- Definite time
- On a specific date, after a specific event, or any time readily ascertainable
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No unauthorized undertaking
- 1. Any undertaking to give, maintain, or protect collateral (Payment for debt)
- 2. A confession of judgment
- 3. A waiver of benefit of the law
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Forging a payee name breaks…
The chain of title
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Multiple Payees “and” v. “or”
And means all have to sign. Or means only one must sign
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Unindorsed order instruments, possessor
The possessor is not a holder until the order instrument is signed
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Special indorsements - names not necessary to chain of title
Forgery of names not needed in the chain of title will not keep later takers from being holders
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Forgery of the drawer’s name
This does not break the chain of title as the forgery operates as a genuine signature of the forger
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Multiple endorsements – who controls
The last endorsement controls what is necessary for further negotiation
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Restrictive endorsement
Generally ineffective – except when something like “For Deposit” or “For Collection”
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For Deposit – what does it do to negotiability
It must be paid consistently with the indorsement to specific person, or the first bank which the instrument is deposited
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Anomalous endorsement
Any endorsement by someone who is not a holder creates a surety liability for the signer
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Does the person have possession? No
Not a holder
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Is it a bearer instrument? Yes/No
- Yes – The possessor is a holder and thus can negotiate the instrument
- No – is the person in possession the named payee?
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Is the person in possession the named payee? Yes/No
- Yes – The possessor is a holder and thus can negotiate the instrument
- No – are all the necessary signatures on the instrument genuine?
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Are all the necessary signatures on the instrument genuine? Yes/No
- Yes – The possessor is a holder and thus can negotiate the instrument
- No – the person is not a holder
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Holder
A person in possession of the document
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Due course
A holder must take for value, in good faith, and without notice
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Due Course – Value
- 1. Performance of agreed consideration
- 2. Security interest in the instrument other than judicial lien
- 3. Taking as payment or security for antecedent debt
- 4. Traded for another negotiable instrument
- 5. Giving in exchange for incurring irrevocable obligation to pay debt
- Value is NOT Consideration
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Value v. face amount
Value need not be for the face amount
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Consideration v. face amount
If one pays less than the agreed upon consideration, the possessor becomes a HDC in proportion to the percentage of value paid
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Good Faith – Negotiable instruments
Honesty in fact and observance of reasonable commercial standards
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Notice to purchaser – negotiable instruments
- Facts Constituting Notice
- 1. Instrument overdue – any part of principle overdue, acceleration, or over 90 days after issue of demand
- 2. Unauthorized signature or alteration
- 3. Claims to instrument – property or possessory right to instrument
- 4. Notice of defenses or claims of recoupment (obligor disputing amount)
- 5. When and how notice is to be received (reasonable allowed)
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Facts NOT Constituting Notice
- 1. Pre, Post, or Un – dated
- 2. Intended in return for executory promise – future promise
- 3. Any party signed for accommodation
- 4. Incomplete instrument has been completed
- 5. Default in payment of interest
- 6. Public filing or recording
- 7. Sold at discount
- 8. Notice of discharge
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Time at which HDC status is determined
Later of when negotiated or when value is given
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Shelter Rule
Transferee acquires the rights of the transferor had
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Exception to the Shelter Rule
No HDC rights to those who were parties to fraud or illegality affecting the instrument
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Real Defenses – The only defenses against HDC
- 1. Forgery
- 2. Fraud in the factum – signor doesn’t know what they are signing
- 3. Alteration to instrument
- 4. Incapacity to contract
- 5. Infancy
- 6. Illegality
- 7. Duress
- 8. Discharge in insolvency proceedings
- 9. Statute of limitations
- 10. Accommodation (suretyship)
- 11. Discharges known to HDC
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Accommodation (surety)
If HDC knows of the accommodation he takes subject to surety defenses, 1 Extension of due date, 2 Material modification of obligation, 3 Impairment of collateral
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Fraud in the factum
Signor doesn’t know what they are signing
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Commercial paper defenses
- Real defenses – against HDC
- Personal Defenses – may NOT be used against HDC
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Personal defenses
- Simple contract defenses – often not proper performance
- Must be own defenses except: accommodation party can raise most defenses available to an accommodated party AND payor must raise the defense if known
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Indorser – secondary liability
- Incurs secondary liability after the person entitled to enforce looks first to the drawee or maker
- Secondary liability limitations – only good for 30 days
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Prior to secondary liability these three things must occur
Presentment, dishonor, and notice of dishonor
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Transfer warranty of transferor
- 1. Entitled to enforce
- 2. Signatures authentic and authorized
- 3. Not been altered
- 4. No defense is good
- 5. No knowledge of insolvency proceedings
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Bank Liability after death
Bank must know of death and reasonable time to act. Bank may pay up to 10 days after death
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Stop payment order
Good for 14 days, 6 months if written
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Agent signs name without principle name or agency relationship
Agent is liable to HDC who take without notice. Not liable to non-HDC if can prove original parties did not intend liability.
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Negligence – Check
Leaving blank spaces, making to another with the same name as payee, failing to follow internal procedures to avoid forgeries
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Negligence – Check, later parties
Negligence on behalf of the drawer does not relieve later parties from same standard
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Estopple by certification
Bank certifies check it is estopped from claiming the paying is not the original payee as against subsequent parties.
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Forged Indorser signature v. drawers signature
A forged indorser signature destroys good title, a forged drawee signature does not.
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Forged Maker signature – liability
An alleged maker is not liable, BUT the forger IS Liable
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Drawee bank’s defense for no payment
Payment would overdraw the account, OR check is more than 6 months old
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Payment in full check
Conspicuous indication that the payment is to act as full payment when the existing obligation is unliquidated or subject to bona fide dispute ACTS AS FULL PAYMENT
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Payment in full check acts as:
And accord and satisfaction of original obligation to pay, unless payee returns money within 90 days OR the payment in full check was supposed to go to a specific address.
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