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Course: Negotiable Instruments Nofar Fall 2002
School: University of Detroit
Year: 2002
Professor: unknown
Course Outline provided by Legalnut.com

There are two kinds of instruments to which article 3 applies: a note and a draft

  1. Terminology

  2. Notes – §3-104(e) two party commercial paper

  1. General definition - simply a written promise (undertaking) by one party (the maker) to pay money to another party (the payee or bearer)

  2. Certificate of deposit – §3-104(j) instrument made by a bank containing

  1. An acknowledgement that a sum of money has been received by the bank AND

  2. A promise by the bank to repay the sum of money

  1. Maker makes a note - a maker makes a note and a drawer draws a draft

  1. Drafts – §3-104(e) a three party commercial paper

  1. General definition - it is written and signed by one person (the drawer) to another person (the drawee) demanding that the drawee pay money to still a third person (the payee or the bearer)

  1. Checks: §3-104(f) a check is a specific type of draft, namely one drawn on a bank and payable on demand (can also be called a money order = still a check)

  2. Instruments Qualifying as Draft or Note - if an instrument falls within the definition of both a draft or note – the person entitled to enforce it as either

  1. Other Instruments

  1. Investment securities (stocks or bonds) are made negotiable by article 8

  2. Documents of title are made negotiable by article 7

  1. Money – the UCC does not apply to money

  2. Issue – the first delivery of the instrument by the maker or drawer for the purpose of giving rights on the instrument to any person (the maker or the drawer is the issuer)

  3. NEGOTIATION; §3-201; means a transfer of possession, voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. Thus by definition, negotiation means that there must be at least two transfers to have a negotiation. (comes after issue)

  4. TRANSFER; §3-203; an instrument is transferred when it is voluntarily AND WITH INTENT delivered by a person other than the issuer, to a person. Some rights vest, but are not the same rights as a holder. Thus negotiation is something more than a transfer.

  5. ISSUE; §3-105; it is the first delivery of an instrument by the maker or by the drawer for the purpose of giving rights in the instrument to someone else

  6. HOLDER; §1-201(20); means the person in possession of the instrument is payable to the bearer or if it is payable to an identifiable person, it is that identifiable person.

 

II. Formal Requisites of Negotiability

  1. Negotiability Defined - whether an instrument is negotiable depends on its form; it must meet the very technical formal requisites of negotiability listed in the UCC

  1. A negotiable instrument (Is a vehicle for carring around a number of specific obligations involving rights and duties) means a written and signed:

  1. Unconditional §3-104(a)

  2. Promise or Order §3-104(a)

  3. To pay a fixed amount of money, with or without interest or other charges described in the promise or order, that:

  1. Is payable to order or to bearer at the time it is issued or first comes into possession of a holder §3-104(a)(1)

  2. Is payable on demand or at a definite time; AND §3-104(a)(2)

  3. Does not state any unauthorized undertaking or instruction by the person promising or ordering payment §3-104(a)(3)

  1. If an instrument is not negotiable, it is treated as a simple contract

  1. The special negotiable instrument rights and duties do not apply

  2. There can be no HIDC

  3. Transferee is treated as a mere assignee of the K

  4. Transferee is subject to K claims and defenses

  1. Unconditional §3-106

  1. When Promise or Order Conditional

An instrument will be conditional and therefore will not be negotiable if it:

  1. Expressly §3-106(a); states a condition to payment OR

  2. States that the promise or order is subject to or governed by §3-106(a) another writing

  1. When Promise or Order not Conditional

A promise or order will not be deemed conditional merely because it:

  1. Refers to another writing for a statement of rights regarding collateral prepayment or acceleration §3-106(b)

  2. Limits payment to a particular source or fund (I promise to pay out of the funds from my next wheat crop)

  3. Requires as a condition to payment a countersignature §3-106©; by a person whose specimen signature appears on the promise or order (like a traveler’s check)

  1. Effect of Reference to Separate Writing

If the negotiable instrument merely refers to a separate writing, the contents of the separate writing are irrelevant to negotiability and the rights of HDCs are not limited by the terms of the separate writing

  1. Promise or Order to Pay

  1. A note must contain a promise to pay - a promise is a written undertaking to pay money signed by the person undertaking to pay

  2. A draft must contain an order to pay – an order is a written instruction to pay money signed by the person giving the order

  1. Writing Required – very liberal; can be printing, typing, or any other intentional reduction to tangible form

  2. Signature Required – very liberal; handwritten, typed, printed, or made any other manner

  1. Fixed amount of money

  1. What is money – any medium of exchange

  1. Foreign Currency Proper §3-107; – ok – it is payable in the specific foreign money or its equivalent in United States dollars

  2. Other Consideration Improper – not negotiable if it calls for payment with something other than money

  1. What is fixed?

  1. Principal must be fixed - principal due under the instrument must be fixed

  2. Interest need not be fixed – no interest will be due unless the instrument provides for the payment of interest

  1. Specified Interest Rate – it need not be fixed – a variable interest rate or indexed rate may be used – need not be determinable from the face of the instrument

  2. Unspecified Interest Rate – if an instrument says with interest but does not state how much interest, the judgment rate will be implied

  1. Payable to Order or to Bearer

  1. To Order – §3-109(b); a promise or order is payable to order if it is payable to the order of an identified person

  2. To Bearer – a Promise or order is payable to bearer if it:

  1. States that it is payable to bearer, to order of bearer, to order or bearer, to order and bearer §3-109(a)(1)

  2. Does not state a payee §3-109(a)(2)

  3. States that it is payable to cash or otherwise indicates that it is not payable to an identified person §3-109(a)(3)

  1. Identification of Payee – governed by the intent of the person signing as or on behalf of the issuer (maker or drawer)

  1. Signature by Machine – the instrument is payable to the person intended by the person who supplied the name of the payee

  2. Means of Identification – a payee may be identified by any means, including name, office, account number, etc.

  3. Multiple payees – an instrument may name more than one payee

  4. Checks missing “magic words” still negotiable – (pay to the order of; pay bearer) but there can be no HDC

  • A check that is missing the magic words is still negotiable §3-104

  • On Demand or at a Definite Time

  • To be negotiable, an instrument must be payable on demand or at a definite time

    1. Demand – an instrument is payable on demand of it states that it:

    1. Is payable “on demand” or “at sight” or otherwise indicates that it is payable at the will of the holder; or

    2. Does not state a time for payment

    1. Definite Time – an instrument is payable at a definite time if it is payable

    1. On a fixed date

    2. On elapse of a specified period of time after sight or acceptance

    3. At some time readily ascertainable at the time the instrument is issued

     

    1. Events Certain to Happen but Uncertain as to Time – is not negotiable because the time for payment is not readily ascertainable and therefore, there is not a definite time for payment

    2. Acceleration Clauses – any clause that accelerates the time of payment upon the occurrence of an event or at the option of the maker or holder is permissible

    3. Extension Clauses

    1. At option of maker or upon happening of event – must be extended to a further definite time (has to state when it will be extended to)

    2. At option of holder – holder always has the option of giving extra time for payment

    1. No Unauthorized Undertaking or Instructions

    These undertakings or instructions are permitted by the code:

    1. An undertaking or power to give, maintain, or protect collateral;

    2. An authorization or power to the holder to confess judgement or realize on or dispose of collateral; and

    3. A waiver of the benefit of any law intended for the advantage or protection of the obligor

    è any other promise or undertaking will destroy negotiability

    1. Miscellaneous Provisions

    1. Rules of Construction – if an instrument contains contradictory terms, typewritten terms control printed terms and handwritten terms control both

    2. Opting Out – a promise or order that otherwise meets the requirements of a negotiable instrument will not be negotiable if when issued it contains a conspicuous statement that is not a negotiable instrument or that Article 3 is not applicable (this rule does not apply to checks)

    3. Two or more signers in single capacity – they are jointly and severally liable in the capacity in which they sign – either one can be held liable for the full value

     

    III. Negotiation – Becoming a holder

    1. Introduction – to become a holder of a negotiable instrument requires proper negotiation

    2. The Negotiation Process – The Code’s definition of negotiation provides that:

    1. Negotiation is a transfer of possession, §3-201(a); whether voluntary or involuntary, by a person other than the issuer to a person who thereby becomes its holder

    2. A holder is a person in possession of the instrument if the instrument is payable to bearer; if the instrument is payable to an identified person, that person is the holder as soon as she gets possession

      • a holder is a person in possession of an instrument with the right to enforce it

     

    1. Bearer Instruments – negotiable simply by transferring possession of the instrument

    2. Order Instruments

    1. Negotiation to Specific Payee – an instrument that is payable to an identified person is negotiated by transferring possession of the instrument along with the indorsement of the identified person

    2. Payee’s Indorsement must be Valid – the right to enforce an order instrument will not pass unless the payee’s indorsement is authorized and valid

     

    1. Genuine signature obtained by fraud or from infant is effective

    2. All Necessary Signatures must be included – the right to enforce will pass only if all necessary signatures of all payees and special indorsees are on the instrument

    1. Multiple Payees – if the names are connected by “and” the instrument is payable to the payees “jointly” and any subsequent negotiation is effective only if all indorse the instrument

    2. Location of Indorsement – an endorsement must be written on the instrument - it can be on the reverse, the front, or on a paper affixed to the instrument (“allonge”)

    3. Effect of Transferring an Order Instrument without Indorsement – the delivery of an order without indorsement may be effective to transfer possession, but it does not constitute a negotiation until the indorsement is made

     

    1. Rights of Transferee without Indorsement – unless and until he obtains the indorsement, the transferee of the instrument does not have the status of a “holder” and certainly cannot qualify as a HDC – therefore he cannot negotiate the instrument – but he is not entirely without rights:

    1. Suit to compel Indorsement – if the transferee paid value for the instrument, he has “the specifically enforceable right to unqualified indorsement by the transferor.”

    2. Suit to Enforce Instrument – similarly, if the instrument is due, the transferee can bring suit to enforce it even though it lacks an indorsement – he would just have to prove that he has ownership rights in the instrument

    1. Different Rules for Banks – a depository bank that takes an unendorsed instrument for collection becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not indorsed the instrument.

    1. This rule applies only as to instruments taken for collection.

    2. This rule does not insulate the bank for mishandling the funds represented by the instrument

    1. When Indorsement Later Obtained

    1. Transferee becomes a holder – upon obtaining the transferor’s indorsement, the right to enforce is thereupon vested in the transferee, who now becomes a holder – having both the right to enforce and possession. And the transferee may qualify as an HDC if other requirements for due course holding are met

    2. Notice of Adverse Claim or Defense – knowledge of notice is measured as of the time she obtains the missing indorsement

     

    Indorsement of Partial Interests not a “negotiation” – attempts to convey less than the complete amount of the instrument is not a negotiation and the transferee does not qualify as a “holder”

    1. Partial Payment of Instrument – if an instrument has been partially paid, an indorsement of all that remains will be an effective negotiation

     

    1. Types of Indorsements – there are several types of indorsements, each having certain qualities and each affecting further negotiation

     

    1. Special or Blank §3-205

    1. Special Indorsement §3-205 - a special indorsement is one that names a particular person as “indorsee”. The indorsee must sign in order for the instrument to be further negotiated

    1. Words of Negotiability Not Required

    2. Extra Words in Indorsement Do Not Impair Validity

    1. Blank Indorsement - §3-205(b) one that does not name a specific indorsee – it then becomes payable to bearer – It may be negotiated by delivery alone

    2. Multiple Indorsements – last indorsement controls

     

    1. Qualified Indorsements – an indorsement that adds the words “without recourse” is a “qualified” indorsement. – effect is to limit the legal liability otherwise imposed on indorsers under the UCC

    2. Restrictive Indorsements – §3-206 any other language added to an indorsement created a “restrictive indorsement”. Examples would include conditions, trust indorsements, and indorsements restricting further negotiation to the check collection system

    1. Limiting Transfer or Negotiation – an indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation is not effective to prevent further transfer or negotiation of the instrument

    2. Conditional Indorsement – an indorsement stating a condition to payment is ineffective to condition payment

    3. “For Deposit” or “For Collection” – must pay the instrument consistently with the indorsement or will be deemed to have converted the instrument

    1. Anomalous Indorsements – §3-205(d) endorsement made by a person who is not a holder of the instrument – it makes the signer liable on the instrument

     

    IV. Holders in Due Course §3-302 “ENFORCEMENT”

    HIDC means §3-302: Instrument when issued or negotiated to the holder does not bear apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity §3-302(a)(1) AND the holder took the instrument (i) for value;(ii) in good faith; (iii) w/o notice that the instrument was overdue or has been dishonored, or that there is an uncured default w/ respect to payment of another instrument issued as part of the same series, (iv) w/o notice that the instrument contains an unauthorized signature or has been altered, (v) w/o notice that any party has a defense or claim in recoupment described in §3-305(a)

     

    1. Introduction – A holder in due course is a Holder who takes the instrument:

    1. For value

    2. In good faith; and

    3. Without notice that:

    1. The instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;

    2. The instrument contains an unauthorized signature or has been altered;

    3. There is a claim to the instrument; or

    4. Any Party has a defense or claim in recoupment (a claim that reduces the amount payable) on the instrument

    • Note also that the instrument must not bear apparent evidence of forgery or alteration or be so irregular as to call into question its authenticity §3-302

    • Two-Step Process – 1) determine whether the person is a holder & 2) determine whether the person holds in “due course”

    • Holder – the transferee must have possession and a right to enforce the instrument

    • Due Course – requires the holder to take for value, in good faith, and without notice

      1. Value §3-303

      1. Types of value – any one of five things constitutes value:

      1. Promise of Performance §3-303(a)(1) of the agreed consideration

      2. Acquisition by the holder of lien or a security interest §3-303(a)(1) in the instrument

      3. Taking the instrument as payment of or security for an antecedent debt §3-303(a)(1)

      4. EXECUTORY PROMISE: promise to give value in the future:

      1. Exchanging/giving a negotiable instrument §3-303(a)(1) for the instrument; or

      2. Giving the instrument in exchange for the incurring of an irrevocable obligation to a third person by the person taking the instrument §3-303(a)(1)

      • Executory Promise is not “value” – a promise to give value in the future is not itself value §3-303(a)(1)

      • Value not need be equivalent to face amount – so long as the full price that is agreed upon is given, full value has been paid

        1. Compare – Partial Failure of Consideration – if one pays less than the agreed upon value, one becomes a partial HDC in proportion to the percentage of the value paid

        1. Time of Payment Important the time that value is given is important because whether one takes an instrument in good faith and without notice is measured at the time the instrument is negotiated or at the time value is given, whichever is later. The time that value is paid governs the time when notice and good faith are measured. If one who gets notice after having paid only part of the value, then a person is a HIDC with respect to the portion of the value that was paid before notice was rec’d.

        • Partial HIDC §3-302(d); a person can be a partial HIDC to the portion of value paid and not for the executory amount that is suppose to be paid in the future. Therefore, defenses can be asserted against the unprotected amount of value that was not paid.

        • Bank Deposits – merely crediting the depositor’s account is not value since the bank certainly would have the right to set aside the credit if the instrument were returned unpaid

          1. Good Faith –§3-103(a)(4) good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing

          1. Honesty in Fact – SUBJECTIVE – not a reasonable person standard

          2. Reasonable Commercial Standards of Fair Dealing – OBJECTIVE – the actor must proceed fairly in light of the facts and commercial standards

          1. Without Notice of Defenses

          1. What constitutes Notice?

          1. Actual Knowledge and Reason to Know – a purchaser cannot shut his eyes to the obvious or purposefully avoid finding out the truth

          2. Facts Constituting Notice

          1. Instrument Overdue

          1. Any Part of Principal amount is overdue or there is an uncured default payment of another instrument of the same series. OR any installment of principal has been defaulted upon

          2. Acceleration Made

          3. Demand Made – demand has been made or a reasonable time has elapsed after issue è after 90 days a check is stale and no taker may become a holder in due course

          1. Notice of Unauthorized Signatures or Alteration – to be a HDC, a holder cannot have notice of any unauthorized signatures or that the instrument has been altered

          2. Claims to Instrument – to be a HDC, a holder cannot have notice of any claim to the instrument. A claim is a defense to the obligation of payment

          1. Knowledge of Breach of Fiduciary Duty – if the purchaser has knowledge that a fiduciary has negotiated the instrument in payment of or as security for the fiduciaries own debt, the purchaser has notice of a claim

          1. Defenses or Claims in Recoupment – To be a HDC, the holder must not have notice of any defense available to the obligor

          3. When and How Notice Must be Received – to be effective, the holder must not have notice of any defense available to the obligor or claim in recoupment by the obligor

          B. Facts Not Constituting Notice

          Knowledge of the following facts does not of itself give the purchaser notice of a defense or claim:

          1. Date or Lack Thereof – that the instrument is antedated, undated, or postdates does not constitute notice

           

          1. Executory Promise – that the instrument was issued or negotiated in return for an executory promise or accompanied by a separate agreement does not constitute notice unless the purchaser has notice that a defense or claim has arisen form the terms thereof

          2. Accommodation Party – the mere fact that a party has signed for accommodation does not itself constitute notice

          3. Incomplete Instrument – unless the purchaser has notice of any improper completion

          4. Fiduciary Negotiated – unless the purchaser also knows that the negotiation constituted a breach of trust

          5. Default on Interest or Other Instrument

          6. Public Filing or Recording

          7. Purchase at a Discount

          4.Transactions Precluding HDC Status

          A holder does not become a HDC of an instrument taken by:

          1. Legal Process or purchase at a creditor’s sale or similar proceeding

          2. Acquiring it in taking over an estate; or

          3. Purchasing it as part of a bulk transaction not in the regular course of business of the transferor

          5. Time at Which HDC Status Determined – Whether a holder qualifies as an HDC is an issue determined at the moment the instrument is negotiated to the holder and she gives value therefor, whichever occurs later.

          6. SHELTER DOCTRINE §3-203(b)&(c)

          1. Shelter Doctrine–§3-203; where party A transfers an instrument to party B but party A forgets to sign it. Although a negotiation has not occurred, under this § a transfer has occurred which vests a property interest in the instrument even without endorsement. It must be voluntary transfer to vest rights in the transferee without endorsement. This transfer rule provides minimum property interest to allow the person in possession of the instrument to receive payments, but without endorsement there is no negotiation and other rights do not vest.

          2. Burden of Proof; §3-308 presenting the instrument for payment: The person who is in the holder of the instrument is entitled to a presumption in favor of payment. If the holder presents payment to the maker or drawer, the burden then shifts to the maker to show a defense to rebut the automatic presumption in favor of the holder.

          3. Exceptions to the Shelter Rule – the shelter rule never grants HDC rights to persons who were parties to fraud or illegality affecting the instrument

          4. HDC Rights and Remote Transferees – Once a person has qualified as a HDC, all subsequent transferees will acquire the same HDC rights no matter how far down the chain of transferees they may be

          1. MERGER DOCTRINE; the debt owed by the maker merges into the instrument itself. If the make who is obligated by debt evidenced by an instrument pays the holder, then the maker should be safe from any further liability.

          2. Cases involving a Holder in Due Course:

                  1. Competing Claims of Ownership: The maker of the instrument admits that he owes a debt. The issue is to whom the maker owes the debt. Between the original payee and someone else.

                    1. These situations arise when there is a dispute between parties as to who rec’s pmt for the note or draft. These cases are not concerned with defenses, but rather disputes and claims of ownership and who is entitled to pmt

                      1. BEARER INSTRUMENT; if you have a bearer instrument and you are in possession, it is fully negotiable. Even if the bearer instrument was stolen, the person in possession can present the bearer instrument for payment to the maker b/c they are the HIDC w/ possession

                      2. ORDER PAPER ENDORSED; if a person is in possession of an order paper and it is fully endorsed (valid signatures), even if the person holding the paper is a thief, he is a holder and can present the order to the drawer for payment. Once it is signed it is just like bearer paper.

                      3. ORDER PAPER NOT ENDORSED; if a ck is not endorsed; any person who finds the ck or steals it is not a HIDC. There can be no holder of commercial paper with a forged signature. For there to be a HIDC, there must be possession and a valid signature.

                  2. Asserted Defense of the maker: It is not a question of who is entitled to pay, but whether anyone is entitled to be paid. This is b/c of a potential defense asserted by the obligor/maker.

                    1. In order to determine what defenses an obligated party may raise when one attempts to collect for payment, you must first determine if the person presenting pmt is a HIDC. After you determine that you apply:

                      1. Party is a HIDC: the only defenses are REAL DEFENSES §3-305(a)&(b): forgery, fraud in the inducement, alteration of instrument, incapacity to contract, infancy, illegality, duress, discharge of the obligor in insolvency proceedings, statute of limitations.

                      2. Party is NOT a HIDC; all REAL DEFENSES and CONTRACTUAL DEFENSES: lack of consideration, theft, breach of warranty, failure of condition precedent, Contractual fraud is not enough against a HIDC, but is good against a non-holder. REAL FRAUD or fraud in the inducement can be asserted against a HIDC and requires an actual fraudulent action in obtaining the signature of the document.

                      3. CLAIMS OF RECOUPMENT; §3-305(a)(3); The claim of recoupment can only be used for monies that arise out of the transaction. Unrelated amounts cannot be collected in recoupment.

           

          1. Claims and Defenses on Negotiable Instruments

            • HDC takes the instrument free of personal defenses and claim and is only subject to real defenses

          2. Claim Defined – a claim is an affirmative right to a negotiable instrument because if superior ownership

           

          REAL DEFENSES

          1. Forgery

          1. If the name of the payee or any special endorsee is unauthorized no subsequent taker can be a HDC – unless the person ratifies the forgery, then they are estopped

          2. The forgery of any other name (maker, drawer, acceptor) does not effect the right to enforce

          1. Fraud in the Factum (Real Fraud) – fraud that induced the obligor to sign the instrument without knowledge nor reasonable opportunity to learn of its character or its essential terms

          2. Alteration of the Instrument – can only collect the original amount – not the altered amount

          3. Incapacity to Contract – declared incompetent

          4. Infancy – under state law in a simple contract action

          5. Illegality – gambling debt paid by check

          6. Duress - where one party acts involuntarily – it’s a matter of degree whether it is void or voidable (personal or real defense)

          7. Discharge in insolvency proceedings – includes an assignment for the benefit of creditors

          8. Accommodation – an accommodation party is one who signs an instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the instrument

          9. Discharges known to HDC

          10. Statute of limitations

          11. Three Years - §3-118©; actions on unaccepted drafts must be brought within three years after the date of dishonor or within ten years after the date of the draft, whichever is earlier

          12. Six Years - §3-118(b); actions on notes payable at a definite time or on demand must generally be commenced within six years after the due date or demand, respectively

           

          PERSONAL DEFENSES

          1. Consideration and negotiable instruments – lack of consideration is a defense to an instrument in the hands of anyone other than a HDC

          2. Claims or Defenses of another

          1. Must Rely on One’s Own Defenses

          2. The “Payment” Rule - the liability of any party obligated to pay on an instrument is discharges by payment to a person entitled to enforce the instrument unless:

          1. Payment is made with knowledge that it is prohibited by an injunction

          2. In cases not involving a cashier’s, teller’s or certified check, the party making payment has accepted indemnity against loss for refusal to pay the person entitled to enforce the instrument

          3. The person making payment knows the instrument is stolen and that the person being paid is in wrongful possession

           

          1. Trial Procedure

          A. Who May Enforce? §3-309

          1. The holder of the instrument

          2. A nonholder in possession of the instrument who has the rights of a holder (a person who obtained the instrument through subrogation)

          3. A person not in possession of the instrument but who is entitled to enforce it (lost, stolen, or destroyed instrument situation)

          B. Burden of Proof

          To make our a prima facia case for payment, the person presenting the instrument for payment need only prove that:

          1. Signatures on the instrument are genuine; and

          2. She is a person entitled to enforce the instrument as discussed above

          1. Proof of Signatures – Presumption of Validity §3-308(a)

          2. Proof of Defenses – once there is a prima facie case, the person is entitled to payment unless the D raises a defense or claim in recoupment

          3. Where an Instrument is Lost, Destroyed, or Stolen – §3-309 (a) if the person entitled to enforce the instrument cannot produce it because it is lost, stolen, or destroyed, she is entitled to maintain an action on the instrument as though she could produce it, providing she can prove ownership, the terms of the instrument, and the facts that prevent her production of it

          1. Procedure for missing certified, cashier’s, or teller’s check – first, inform the bank and give the bank a reasonable time to prevent payment to another

          2. §3-309(a)(i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred

          3. §3-309(a)(ii) the loss of possession was not a result of a transfer by the person or a lawful seizure AND

          4. §3-309(a)(iii) the person cannot reasonably obtain possession of the instrument b/c the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person that cannot be found.

          5. Such a person must prove their rights to enforce, then the presumption under §3-308 (proof of signatures and status as HIDC, pg320) applies.

           

          1. Action for Conversion – a person entitled to possession of an instrument may bring an action for conversion of the instrument

           

          1. Liability of Parties page 334 code

          1. Who may be held liable on a negotiable instrument - §3-401 states that no one may be held liable on a negotiable instrument unless her signature or the signature of an authorized representative appears thereon

          1. Maker of Note, Issuer of Cashier’s Check – by signing her name, they are obligated to pay the instrument according to its terms at the time it was issued – this promise is unconditional

           

          1. Indorser – Secondary Liability - considered to be secondarily liable on an instrument – meaning that a person entitled to enforce an instrument looks to the maker or drawer first for payment, and will look to the indorser for payment only if the maker or drawer does not pay

          2. DRAFT primary liability: Drawee (bank); Secondary liability: Drawer (§3-414 drawer has a 30 day time limit) or the Endorser §3-415(e) (intermediary banks or depository banks)

          3. NOTE primary liability: Maker; Secondary liability: Endorsee (holder)

          1. Basic Obligation – Indorser’s contract = signing your name

          2. Generally – there are three prerequisites to the indorser’s obligation

          1. Presentment §3-501– means a demand by or on behalf of a person entitled t o enforce an instrument (i) to pay the instrument to the drawee or a party obligated to pay the instrument or in the case of a note or accepted draft payable at a bank, to the bank, or (ii) to accept a draft made to the drawee.

          1. Time requirement for checks = 30 days

          2. How Presentment made = commercially reasonable means

          3. When presentment is excused (dead, insolvency, obligator waived)

          1. Dishonor –§3-502 when the maker of a note or the drawee of a draft does not pay or accept the instrument within the allowed time

          1. Demand instruments other than checks – dishonored if they are not paid on the date that they are due

          2. Time Instruments – if they are due at a certain time, they are dishonored if not paid on that date

          3. Checks – when the bank returns it or sends written notice of dishonor

          4. Final Payment – provisional credit is given when a check is deposited – the final payment occurs when the check clears

          ii. Midnight Deadline – if final payment is not made, the depository bank has until its midnight deadline to dishonor §4-104

          1. Notice of Dishonor – §3-503 notification that instrument was dishonored

          1. Generally not required for maker or drawer liability – since he knows that he did not pay

          2. Timing – 30 days §3-503© – notice of dishonor must be given within 30 days after dishonor

          1. Multiple Indorsers – where more than one indorsement appears on an instrument, any indorsers is severally liable for the full amount to any holder or later indorser of the instrument

          2. Transferor – whenever a person transfers an instrument for value the transferor makes the following five transfer warranties

          1. Entitled to Enforce

          2. Signatures are Genuine

          3. No Material Alteration

          4. No Defenses

          5. No Knowledge of Insolvency Proceedings

          1. Drawer - secondary liability

          1. Drafts accepted by a bank – drawer discharged – if the draft has been accepted by a bank – the drawer is discharged

          2. Drafts accepted by Nonbank – Drawer treated as Indorser

          3. Drafts without recourse – drawer nor liable except on checks

          1. Drawee - cannot have liability unless and until the drawee signs the instrument – when it does, it becomes an acceptor

          1. Rights and duties of parties – when a bank is the drawee, the bank may well be liable to its customer for failure to accept the draft

          1. Duties of drawee bank to customer

          1. Must honor customer’s check

          2. When bank cannot charge the account

          1. Alteration of the amount by third party

          2. Forgery of signature of the drawer

          3. Forgery of the payee or indorsees signature

          4. If the item is postdated, and the customer gives the bank notice of the postdating and the bank pays the bank before the stated date

          1. Duties of Customer to Bank

          The customer must be careful, and has a duty to the bank to exercise “reasonable care and promptness” to discover any errors and to notify the bank promptly after any such discovery

          1. When customer’s account can be charged

          1. When the customer failed to comply with this duty AND

          2. That the bank suffered a loss by reason of the failure

          1. Defense of Customer – if the customer shows that the bank was negligent in paying the item, then the cost will be allocated according to fault

          1. Death of a customer – death of a customer does not revoke the bank’s right to continue to pay a check until the bank has notice of the death and has a reasonable time to act on such knowledge – unless a person claiming interest in the account orders the payment be stopped §4-405

           

          Stop Payment Orders

           

          1. Requirements of Reasonable Notice

          A stop payment order is binding on a bank

          Written = 6 months

          Oral = 14 days

          1. Customer has burden of proving loss - if the bank pays an item in spite of a stop payment order, the customer has the burden of proving the loss and the amount of the loss

           

          Acceptor -Acceptance is a process whereby the acceptor (usually a drawee bank) signs a draft and thereby becomes primarily bound to pay the instrument

          • Certification of Check – bank is putting its own credit on the line – certification of a check is the equivalent of an acceptance

           

          Accommodation Parties – one who signs an instrument for the purpose of lending her name and credit to another party to the instrument (she is in essence a surety)

          • Liability – liable on the instrument in the capacity in which she signs

           

          Effect of Representative or Agent Signing §3-402(a)

           

          1. Liability of Represented Person (Principal)

          1. If agent is authorized – the principal is bound to the same extent as if the signature were on a simple contract

          2. When principal is liable despite lack of agent’s authority

          1. Ratification

          2. Estoppel

          3. Liability of Representative (Agent)

          1. Agent signs principal’s name only – then the principal is liable, not the agent

          2. Agent signs own name but discloses the principal - agent is not bound, because it shows that it was made on behalf of the principal

          3. Agent signs own name but does not disclose the principal or the agency relationship – the agent will be liable to any HDC who takes the instrument without notice that the agent was not intended to be liable – but will not be liable to non-HDC

          4. Check Cases – agent cannot be held liable if the check is written on the principal’s account and indicates the identity of the principal

           

          Effect of Unauthorized Signatures §3-403

          Five situations in which forgery will be validated because the person whose name is used has done something to preclude her from raising the forgery issue

          1. Fictitious Payee §3-404– effective to pass the right to enforce the instrument to later transferees

          2. Fraudulent Indorsements by Employees §3-405– if the employee has the authority to sign the checks

          3. Failure to Exercise Ordinary Care – §3-406 Negligence Rule

          4. Bank Statement Rule – customer must examine their statements – and must notify the bank within 1 year of receipt of the forged statement

          5. Estoppel by Certification – a bank that certifies a check has the opportunity of checking id and the bona fides of the transaction with the person seeking certification

           

          Effect of Alteration and Incomplete Instruments - an alteration §3-407(a) is an unauthorized change in an instrument may be enforced according to its altered terms

           

          1. Nonfraudulent alteration – do not discharge any party and the instrument may be enforced according to its altered terms

          2. Fraudulent alteration – discharges every party obligated in the instrument

          1. Limitation – HDC – may enforce the instrument according to its original terms or in the case of an incomplete instrument altered by an unauthorized completion according to its terms as completed

           

          PAYMENT

           

          1. When can maker safely pay and avoid further liability?

          1. Determine if party seeking payment is a holder – if they are a holder, you can safely pay them

          2. Actions of third party to protect claim

          1. Offer to indemnify the maker or acceptor in an amount deemed sufficient by the maker or acceptor while the other two parties fight it out; or

          2. Seek an injunction in an action in which the maker or acceptor, the holder, and the third party are parties

          1. Do not pay holder where there has been a theft – the maker or acceptor may not safely pay the holder of an instrument where she knows that the holder acquired the instrument by theft or that he holds through on who acquired it by theft

          1. Finality of Payment – Recovery for instruments mistakenly paid or accepted

          1. General rule – payment is final – payment to a HDC or one who in good faith changed her position in reliance on the payment is final – the payor cannot recover payment back from the party paid

           

          WARRANTIES §3-416

           

          Letters of credit

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

           

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