Law of Commercial Transactions Exam #3

Types of Negotiable Instruments
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Terms in this set (42)
Types of Negotiable Instruments
-Drafts
-Checks
-Promissory notes
-Certificates of deposit (CD's)
Drafts/Checks
Orders to Pay

*includes 3 parties
-Drawer: the person who makes or signs the order to pay.
-Drawee: the person to whom the order to pay is made (bank)
-Payee: the person to whom payment is ordered.
Promissory notes and CD's
Promises to pay

*includes 2 parties
-Maker: the person who promises to pay
-Payee: the person to whom the promise is made
Requirements for negotiability:
1. Be in writing
2. Be signed by the maker or the drawer
3. Be an unconditional promise or order to pay
4. State a fixed amount of money
5. Be payable on demand or at a definite time
6. Be payable to order or to bearer
1. Be in writing
-the writing must be on a material that lends itself to permanence.
-The writing must also have portability.
2. Be signed by the maker or the drawer
-Signed by maker: if promissory note or CD
-Signed by drawer: if draft or check.

Front
3. Be an unconditional promise or order to pay
A promise or order is conditional (and not negotiable) if it states:
1) an express condition to payment
2) that the promise or order is subject to or governed by another document.
3) that the rights or obligations with respect to the promise or order are stated in another writing.
4. states a fixed amount of money
Necessary to ensure that the value of the instrument can be determined with clarity and certainty.
-Interest rates can be stated on face of doc. or but don't have to be
5. Payable on Demand or at a Definite Time
-On demand: "payable at sight" OR "Payable on presentment"
*presentment occurs when a person brings the instrument to the appropriate party for payment or acceptance.

-At a definite time:
1) payable on a specific date.
2) Payable within a definite period of time after being presented for payment
3) payable on a date or time readily ascertainable at the time the promise or order is issued.
6. Payable to order or bearer
Order instrument: Payable to
1) "to the order of an identified person"
2) "to an identified person or order"

Bearer instrument: Does not designate a specified payee
1) "payable to the order of bearer"
2) "Payable to _____ or bearer"
3) "Payable to bearer"
4) "Pay to cash"
5) "Pay to the order of cash"
*can be a nonexistent person
*cannot be a nonexistent organization
Factors that do not affect negotiability-Undated -Antedated/Postdated -Handwritten Vs. Typewritten words: Handwritten outweigh -Words vs. Numbers: If inconsistent written words outweigh -interest -writing nonnegotiable on check does not make it nonnegotiable (but does for other instruments)negotiationThe transfer of an instrument in such form that the transferee becomes a holder. -Order instrument: negotiated by delivery WITH necessary indorsements. -Bearer instrument: negotiated by delivery only.Types of Indorsements- Blanks Vs. Special -Qualified vs. Unqualified -Restrictive non-restrictiveblank vs special-Blank indorsement: does not specify a particular indorsee and can consist of a mere signature (Converts order paper to bearer paper) */S/ Kyle Alpers* -Special indorsement: Contains the signature of the indorser and identifies the person to whom the indorser intends to make the instrument payable. (converts bearer paper into order paper) *Pay to ______ /S/ Kyle Alpers*Qualified vs unqualified-Qualified: used to disclaim liability by an indorser who does not wish to be liable for an instrument */S/ Kyle Alpers Without recourse* -Unqualified: anything other than "without recourse"Restrictive indorsements-conditional indorsement: *Pay to ____ provided that she paints my house /S/ Kyle Alpers* (person who is later paying/taking the instrument for value can ignore the condition) -For deposit only: Makes the indorsee (bank) a collecting agent *For deposit only /S/ Kyle Alpers -Trust/Agency: indorsement to person(s) who are to hold or use the funds for the benefit of the indorsee or 3rd party. *Pay to ______ for the benefit of Kyle Alpers /S/ Kyle AlpersHolder in Due Course (HDC)Must be a holder of the instrument and must have taken the instrument: 1) for value 2) in good faith- must have acted honestly in the process of acquiring the instrument 3) without notice: cannot be a HDC if they know or have reason to know the instrument: -is overdue -has been dishonored -Has any claim or defense against it.Shelter PrincipleA person who does not qualify as a HDC but derives his or her title through an HDC can acquire the rights and Privilege's of an HDC Limitations: 1) if a holder participated in fraud affecting the instrument, that holder is not allowed to improve their status by later repurchasing the instrument from a HDC. 2) a holder who had notice of a claim or defense cannot gain HDC status by later reacquiring the instrument from a HDC.Signature LiabilityKey to liability on a negotiable instrument is a signature. -Primary Liability: unconditional liability to pay unless have valid defense. ~Makers and acceptors are primarily liable. -Secondary Liability: Contingent; only liable if the party that is primarily liable refuses to pay. **arises when: 1) The instrument is properly and timely presented 2) the instrument is dishonored (by primarily liable party) 3) timely notice of dishonor is given to the secondarily liable partyAccommodation Parties (Cosigner)-Accommodation maker: When the accommodation party signs on behalf of the maker. **Become primarily liable** -Accommodation indorser: accommodation party signs on behalf of a payee or holder [usually to make the instrument more marketable] **Become secondarily liable**Principle liabilityan authorized agent binds a principle on an instrument if the agent clearly names the principle in the signature. -Agent can add their name, but if signature shows clearly that it is on behalf of the principle, the agent is not liable.Liability of Agentauthorized agent may be held personally liable on a negotiable instrument on 3 occasions. 1) when the agent signs their own name with no indication of agency status, an HDC can hold the agent personally liable when they have no notice of the agency status. 2) when the agent signs in both the principles name and their own name but doesn't indicate agency relationship. 3) when the agent indicates agency status but fails to name the principle.Unauthorized Signature (Front of the Check)Arise in 2 circumstances: 1) When a person forges another persons name on a negotiable instrument. 2) when an agent who lacks the authority signs an instrument on behalf of the principle.Unauthorized signature ruling and exceptionsGeneral Rule: an unauthorized signature is wholly inoperative and will NOT bind the person whose name is signed or forged. 2 Exceptions: 1- Ratification 2- negligence: of person whose named was forged contributed to it.HDC and unauthorized signaturea person who forges a check or signs an instrument without authorization can be held personally liable for payment by an HDC.Unauthorized indorsement (Back of the check)General rule: when an indorsement is forged or unauthorized, the burden of loss falls on the first party to take the instrument AFTER the faulty indorsement.Exceptions to unauthorized indorsements1- Imposter rule: one who through deception, induces a maker or drawer to issue an instrument in the name of an impersonated payee. (NOT a real person) **Person who was duped bears risk of loss 2- Fictitious payee: named payee has no interest in the check (But IS a real person) **Person duped bears risk of lossWarranty LiabilityTransferors make certain implied warranties regarding the instruments that they are negotiating. 1- Transfer warranties (Only those who provide value ($$)) 2- Presentment warrantiesTransfer WarrantiesA person who transfers an instrument for consideration makes 5 transfer warranties (to ALL subsequent transferees who take the instrument in good faith. 1- the transferor is entitled to enforce the instrument 2- all signatures are authentic and authorized 3- the instrument has not been altered 4- the instrument is not subject to a defense or claim of any party that can be asserted against the transferor. 5- the transferor has no knowledge of any bankruptcy proceedings against the maker, acceptor, or drawer.Presentment warrantiesany person who presents an instrument for payment or acceptance (NOT Gifts) makes these warranties: 1- the person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce. 2- the instrument has not been altered 3- the person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is unauthorized.Universal (Real) Defenses**Are Valid against all holders including HDC's 1) Forgery 2) Fraud in the execution (Real Fraud) 3) Material alterations 4) Discharge in bankruptcy 5) Minority 6) illegality, mental capacity, extreme duress1) ForgeryForged signature (Front of the check) Will NOT bind the person whose name is used. -2 exceptions (Ratification & Negligence)2) Fraud in the execution (Real Fraud)Real Fraud- party does not know what they are actually signing.3) Material AlterationsOrdinary Holder cannot recover anything HDC can recover the original amount4) Discharge in bankruptcyabsolute defense regardless of status of holder.5) MinorityIf state law makes it VOIDABLE then real defense6) Illegality, mental incapacity, extreme duressIllegality- state must render it VOID. (If just voidable then HDC can recover) Mental incapacity- court must have declared a person incompetent (If not but claim incapacity then HDC can recover) Extreme Duress- Must be extreme to be a real defense (If not just a personal defense)Personal Defenses**Good only against holders and not HDC's 1- simple K defenses (breaches, lack of consideration) 2- Fraud in the inducement (ordinary fraud) Do know what you signed but you are induced into doing it. 3- Minority 4- illegality, incapacity, normal duressdischarge-Payment or tender of payment -Cancellation or surrender -material alteration -reacquisition -impairment of recourse -impairment of collateralpaymentAll parties will be discharged when the party that is primarily liable pays the full amount due.cancellation or surrenderintentional cancellation of an instrument or acts done by holder with intent to cancel such as: -writing paid across face of instrument -intentionally tearing up the document -crossing out a parties indorsement cancels their liability -surrendering the instrumentReacquisitionby a person who held it previously discharges all indorses in-between the 2 acquisitions from subsequent holders but not HDC's.