MBE Commercial Paper Barbri (1)

Note and a Draft

Maker promises to pay the bearer

Drawer orders the drawee to pay the payee

• 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

• 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

• 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

• 1. Value
• 2. Good faith
• 3. Without notice

• 1. Consideration
• 2. Security interest
• 3. Payment of antecedent debt
• 4. Negotiable instrument
• 5. Irrevocable obligation

• 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

Claim by obligor that reduce the amount payable

• 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

The transferee takes the same rights the transferor had

No HDC can be given to persons who were parties to fraud or illegality

• 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

Getting someone to sign something that they honestly did not know was commercial paper

The HDC may still be able to collect the original amount.

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.

Contract defenses – payor must raise the defense of theft – accommodation party can raise most defenses available to the party accommodated

• 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

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

Anyone who presents instruments for payment warrants that he is entitled to enforce it. Drawee (bank) can go after those who it paid.

The forger

Possession AND necessary signatures

Minors or incompetents may endorse

Seller makes an implied warranty of good title unless disclaimed. This means rightful property owners can come and reclaim or replevin.

• 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

A principle of the payment that is fixed, the interest can be variable

• 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

• 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

The chain of title

And means all have to sign. Or means only one must sign

The possessor is not a holder until the order instrument is signed

Forgery of names not needed in the chain of title will not keep later takers from being holders

This does not break the chain of title as the forgery operates as a genuine signature of the forger

The last endorsement controls what is necessary for further negotiation

Generally ineffective – except when something like “For Deposit” or “For Collection”

It must be paid consistently with the indorsement to specific person, or the first bank which the instrument is deposited

Any endorsement by someone who is not a holder creates a surety liability for the signer

Not a holder

• Yes – The possessor is a holder and thus can negotiate the instrument
• No – is the person in possession the named payee?

• Yes – The possessor is a holder and thus can negotiate the instrument
• No – are all the necessary signatures on the instrument genuine?

• Yes – The possessor is a holder and thus can negotiate the instrument
• No – the person is not a holder

A person in possession of the document

A holder must take for value, in good faith, and without notice

• 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

Value need not be for the face amount

If one pays less than the agreed upon consideration, the possessor becomes a HDC in proportion to the percentage of value paid

Honesty in fact and observance of reasonable commercial standards

• 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)

• 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

Later of when negotiated or when value is given

Transferee acquires the rights of the transferor had

No HDC rights to those who were parties to fraud or illegality affecting the instrument

• 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

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

Signor doesn’t know what they are signing

• Real defenses – against HDC
• Personal Defenses – may NOT be used against HDC

• 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

• Incurs secondary liability after the person entitled to enforce looks first to the drawee or maker
• Secondary liability limitations – only good for 30 days

Presentment, dishonor, and notice of dishonor

• 1. Entitled to enforce
• 2. Signatures authentic and authorized
• 3. Not been altered
• 4. No defense is good
• 5. No knowledge of insolvency proceedings

Bank must know of death and reasonable time to act. Bank may pay up to 10 days after death

Good for 14 days, 6 months if written

Agent is liable to HDC who take without notice. Not liable to non-HDC if can prove original parties did not intend liability.

Leaving blank spaces, making to another with the same name as payee, failing to follow internal procedures to avoid forgeries

Negligence on behalf of the drawer does not relieve later parties from same standard

Bank certifies check it is estopped from claiming the paying is not the original payee as against subsequent parties.

A forged indorser signature destroys good title, a forged drawee signature does not.

An alleged maker is not liable, BUT the forger IS Liable

Payment would overdraw the account, OR check is more than 6 months old

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

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.