96 terms

UCC Article 3 & 4

There are three major issues to be addressed with article 3 negotiable instruments:
1. Is the instrument negotiable? If no, article 3 does not apply;
2. Is the holder a holder in due course - HIDC;
3. If there is a holder in due course, are there real defenses
Requirements for negotiability:
To be negotiable an instrument must be:
1. A signed writing;
2. An unconditional promise to pay;
3. Fixed amount of money;
4. Payable to bearer or to order;
5. At a specified time or on demand;
6. Does not contain any other conditions, undertakings, or agreements
A note is a written promise to pay. There are two parties in a note:
1. The maker; and
2. 2. The payee
A written order by the drawer -i.e. the person writing the check, to the drawee - i.e. the bank cashing the check, directing the drawee to pay money to the payee. There are three parties to a draft:
1. Drawer;
2. Drawee;
3. Payee
The person undertaking to pay money - e.g. promissory note
The person who signs the draft and is ordering payment - i.e. the person writing the check
The person or entity who is ordered in a draft to make payment - e.g. usually the bank
The person identified in the draft to receive payment - e.g. the person who the check is made out to.
The person who signs the back of the check
Payee blank indorsement:
When the payee simply signs the back of the instrument
Payee restrictive indorsement:
When the payee signs the back of the instrument and includes a condition - e.g. for deposit only
Special indorsement:
When the payee names a new payee when indorsing - e.g. signing over the check. Any further negotiation requires a valid indorsement of the new payee.
The first delivery of an instrument by the maker or drawer to a holder
Means the person in current possession is either the original payee or has taken the instrument thereafter pursuant to a valid negotiation.
The process by which an instrument is transferred by a person other than the issuer to another who qualifies as a holder.
A delivery by a person other than the issuer for the purpose of giving one the right to enforce the instrument.
Words that destroy negotiability include:
1. Subject to; and
2. Governed by
Words that do not destroy negotiability include:
1. As per; and
2. In accordance with
Definite time requirement:
A negotiable instrument need not be dated to be negotiable. If not dated, the instrument is payable on demand
Signature requirement:
A person is not liable on an instrument unless the person or their agent signed the instrument
Holder of bearer paper:
The person in possession of bearer paper is the holder of the instrument
Holder of order paper:
The holder of order paper must be:
1. The named payee or special indorsee; and
2. In possession of the order paper
Holder in due course - HIDC
A person is a holder in due course if the person takes the instrument:
1. For value;
2. In good faith;
3. Without notice of dishonor, defenses, or claims against it
Value does not include executory promises i.e. later promises to pay. For HIDC status, a gift is not value.
Purchase for value: A holder takes for value when:
1. The agreed upon consideration has been performed; 2. Makes an irrevocable commitment to pay; 3. When holder gives a negotiable instrument for it; 4. When taken in payment of or as security for a claim against a person; 5. Holder acquires a security interest in or a lien on the instrument
Too closely connected doctrine:
When the transferee of an instrument is too closely connected to the transaction creating the instrument. When this happens:
1. The transferee does not acquire HIDC status; and
2. Takes the instrument subject to all defenses
Shelter rule:
When the transferee acquires whatever rights the transferor had. Including the rights of an HIDC, unless those rights are cut off due to a shelter rule exception. The transferee cannot sue the transferor because the transferor gave the transferee the HIDC rights.
Exception to the Shelter rule:
HIDC rights are not transferred under the shelter rule where the holder was a party to fraud or illegality affecting the instrument.
Real defenses:
There are 7 real defenses. These are the only defenses assertable against an HIDC.
1. Material alteration
2. Duress
3. Fraud in the factum - i.e. real fraud
4. Illegality
5. Infancy
6. Incapacity
7. Insolvency
Personal defenses:
A HIDC takes a negotiable instrument free from all personal defenses
A forgery of the payees name while the instrument is order paper breaks the chain of title and there can never be an HIDC. If the forgery occurs while the instrument is bearer paper it is irrelevant to the chain of title.
Merger doctrine:
Once an instrument is accepted in satisfaction of an underlying obligation, the obligation merges with the instrument and the underlying obligation is suspended until instrument is due. The obligation cannot support a cause of action until the instrument is presented for payment and dishonored.
Dishonor after merger:
If the instrument merged is dishonored upon presentment, the holder may sue on the instrument and or the underlying obligation, but may only recover once.
Maker liability:
The maker's liability is primary on the instrument
Indorser's liability:
The indorsers liability is secondary to presentment, dishonor, and notice of dishonor
Joint and several liability:
When two or more persons have the same liability on an instrument as makers, drawers, or indorsers
A party who has joint and several liability is entitled to receive contribution from another party with joint and several liability.
Agent liability:
An agent can escape personal liability on an instrument by:
1. Disclosing the principal; and
2. Disclosing agent capacity
Where the agent does not disclose, the agent can be personally liable to a HIDC. The principal would also still be liable.
Transfer warranty: A person who transfers an instrument for consideration warrants to the transferee that:
1. The warrantor is entitled to enforce the instrument; 2. All signatures are authentic and authorized; 3. No alterations; 4. Instrument not subject to defenses or claims of recoupment; and 5. No knowledge of insolvency proceedings
Presentment warranty:
1. Warrantor is entitled to enforce the draft or authorized to obtain payment;
2. The instrument has not been altered; and
3. The warrantor has no knowledge that the signature of the drawer is unauthorized
A promise is an undertaking to pay and thus must be more than a mere acknowledgement of a debt - e.g. and IOU is not a note.
Certificates of deposit:
A CD is a note, signed by a bank acknowledging receipt of money coupled with a duty to repay the debt.
Unauthorized or forged signatures:
Unauthorized signatures will not bind the purported maker, but will bind the actual signer.
Burden of proving fraudulent signatures:
A presumption exists that a signature is valid. A defendant must pled invalidity, whereupon the plaintiff must prove validity. The defendant must produce evidence of forgery or plaintiff will recover.
Reference to other agreement:
Mere reference to a separate agreement between the same parties does not impair negotiability.
Demand instruments:
An instrument is payable on demand if so expressed or if no time for payment is stated
Date left off the instrument:
If the date is left off of the instrument and maturity depends on the date being stated, the instrument is not enforceable until the date is filled in by someone with authority.
Acceleration clauses:
Either the maker or drawer may be given the unconditional right to accelerate the maturity date. However, the holder must have a good faith belief that the prospect of payment is impaired to accelerate at will.
Words of negotiability:
An instrument must be payable either to bearer or to order of a specified payee.
Rules of construction: words vs. figures
A sum denoted by words controls over a sum expressed in figures
Rules of construction: handwriting vs. typing or printing
Handwritten provisions prevail over typed or printed terms. Typed terms prevail over printed terms.
Omission of interest rate:
If an instrument is payable with interest but no rate is stated, the states statutory judgment rate is applied.
Bearer instrument negotiation:
Bearer paper is negotiated simply by delivery because possession qualifies a transferee as a holder
Order instrument negotiation:
Delivery of an order instrument to the named payee is sufficient for negotiation
Multiple payees:
An instrument made payable to multiple payees whose names are connected by an and is payable jointly and all payees must indorse. If connected by and or the word or only one payee indorsement is sufficient for negotiation.
Location of indorsement:
An indorsement must be written on the instrument or on an allonge - i.e. a separate piece of paper firmly attached to the instrument.
Effect of delivery without indorsement:
Transfer of an instrument without the necessary indorsement does not constitute a negotiation, and the transferee does not become a holder, except where the bank takes a check for collection.
Wrong or misspelled name:
If an instrument is payable to a holder but the holders name is not accurately reflected in the instrument, the payee may indorse in that name, in the payees own name, or in both names.
When is HIDC status determined?
When the instrument is negotiated to the holder and or when the holder gives value, whichever is later.
A claim to a negotiable instrument is an affirmative cause of action for recovery on the instrument based on superior ownership rights of the claimant.
Fraud in the factum - real fraud: the excusable ignorance doctrine:
Real fraud is not assertable if the defendant failed to take reasonable steps to ascertain the nature of the transaction.
Jus tertii - claims of defenses of another:
Usually, a party must rely on her own defenses and cannot use the claims and defenses of third parties unless the third party joins the suit
Exceptions to jus tertii:
1. Theft; and
2. Violation of restrictive indorsement.
Available as a defense in actions by a non HIDC. This is to prevent innocent parties from paying twice
Obligation of an indorser:
An indorser becomes a type of surety for all prior parties and promises to pay any later holder. The promise is conditioned on the indorser first being accorded the procedural rights of:
1. Presentment; and
2. Notice of dishonor
Indorsement without recourse:
An indorser may avoid obligation by adding the words without recourse to the signature. This is a qualified indorsement and transfers the instrument without incurring liability.
A surety is a person who is primarily liable for paying another debt or performing anothers obligation. A surety is an accommodation party; a principal is the accommodated party.
Surety rights:
A surety has the rights of:
1. Exoneration;
2. Subrogation;
3. Reimbursement;
4. Contribution
Surety liability to principal:
A surety is not liable to the accommodated party, regardless of the order of the signatures
Tender of payment rule:
If a surety tenders payment at maturity and is refused, the surety is still liable for the full amount but not liable for any subsequent amounts - e.g. interest. If tender is made by the principal, the surety is completely discharged.
Impairment of collateral:
If a holder impairs the collateral for an instrument by failing to take reasonable care, non-consenting sureties are discharged up to the amount of the impairment.
Agreements between creditor and principal without surety consent:
Where a holder and principal agree to extend or suspend the time of payment, a non-consenting surety is discharged to the extent of the harm caused by the extension. However, when a holder failes to collect payment at maturity, a surety is not discharged.
Agreements not to sure principal:
A holder's agreement not to sue the principal does not discharge non-consenting sureties
Agreements to modify terms:
These agreements discharge non-consenting sureties up to the amount of harm caused by the modification
Presentment is a demand for payment or acceptance made by the holder of an instrument to the maker or the drawee
Dishonor occurs when a maker or drawee returns an instrument after presentment without paying or accepting within the allowed time.
Time allowed for dishonor:
If a check or draft is presented across the counter, it must be paid or returned that day. If it is presented through bank collection channels, the drawee bank has until its midnight deadline.
Indorser liability subject to presentment and dishonor:
Indorsers are entitled to presentment and notice of dishonor in order to be bound; unless excused. An indorser incurs no liability if these requirements are not met.
No assignment rule:
The issuance of a check or draft does not create an immediate assignment of the drawers funds in the possession of the drawee.
Conversion is the unauthorized assumption of ownership rights over the personal property of another. Good faith is no defense to conversion. Any wrongful taking of a negotiable instrument would be conversion.
Wrongful dishonor:
When an item is properly payable from the drawer's account but the bank wrongfully refuses to honor it, the drawer, and only the drawer may sue
Death or incompetence of customer:
Collection or payment by a bank prior to knowledge of a customer's death or incompetency is valid. Upon actual knowledge of the event, a bank may elect to pay or certify checks for 10 days following a death, unless an interested party stops payment.
Requirement that an item be properly payable:
If an item is not properly payable, the bank usually must re-credit the customer's account if a timely complaint is made
Right of setoff for bank:
A bank can setoff a customer's debts to the bank against a general checking or savings account, without notice. However, no setoff is permitted for credit card debts or after final payment has been made. No setoff permitted if bank new of insolvency before granting the loan.
Customer's duty to examine bank statements:
A customer's failure to use reasonable and prompt care in examining bank statements can validate improper payment by his bank.
No damages defense:
If, despite a forgery or alteration, the proper person received the proceeds, there has been no damage and usually no lawsuit may ensue.
Negligence rule:
If a person fails to exercise ordinary care and that failure substantially contributes to an alteration or forgery, the person is precluded from asserting the alteration or forgery against a person who in good faith pays the instrument and takes it for value or for collection.
Repeated offender rule:
When a customer does not report a bank statement problem within 30 days, the customer is estopped from demanding re-credit on any other items forged by the same wrongdoer and paid by the bank. All claims must be made within one year.
Properly payable rule:
The bank may pay out a customer's money only if it follows the customers' orders exactly. If they don't, they must re-credit the customer's account.
Postdated checks:
A postdated check is properly payable unless the customer has given notice to the bank describing the check with reasonable certainty.
Stop payment:
Customers have a statutory right to stop payment of a check. To do so a customer must:
1. Identify the check with reasonable accuracy; and
2. Give the bank a reasonable opportunity to stop payment
Legal equivalency of cash:
Cashier's checks, tellers checks, and certified checks are the legal equivalent of cash and a customer cannot stop payment unless:
1. By agreement to indemnify bank; and
2. Post an insurance bond
Check return:
The payor bank must notify the depositing bank of returned checks if the amount exceeds $2,500.
Price v. Neal:
If the drawee pays or accepts an item where the drawer's signature has been forged, the drawee suffers the loss. The drawee bank must know its customer's signature like a mother knows her child.
Validation of forgery:
An unauthorized signature may be ratified by:
1. Assent; or
2. Acceptance;
Of the benefits.
Who has liability when there is forgery on the front of the instrument - i.e. drawers signature:
Liability is on the drawee bank. The bank must re-credit the account.
Who has liability when forgery is on the back of the instrument - i.e. payees name:
Payor bank must re-credit the account. They will look to push liability to the bank or person who made presentment. A breach of presentment warranty claim is only possible if plaintiff is the payor bank.