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commercial paper

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written instruments for the payment of money

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maker/promisor/obligor

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person who promises to pay

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payee/promisee

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person entitled to payment

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certificate of deposit

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a note issued by a financial institution where: - financial institution acknowledges receipt and - promises the payee/depositor to repay the money

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draft

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a three party order to pay money; all checks are drafts but not all drafts are checks

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drawer

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person ordering payment

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drawee

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person making payment; also called payor bank

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payee

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person to receive payment

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check

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order to pay money where: - financial institution is drawee - payable on demand

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types of checks

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-ordinary - certified: bank has accepted/agreed to pay - cashier's: drawer and drawee same bank; person buying check is remitter - teller's check: drawn by one bank on another bank; person buying check is remitter - traveler's check: demand instrument requiring a counter signature by person whose specimen signature is already on instrument

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remotely created item

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draft not signed by drawer but created with drawer's authority so third party can get paid from drawer's account at a bank

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negotiability

answer

refers to form of instrument at time of issuance; required to establish holder in due course

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requirements for negotiability

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1. in writing 2. signed by maker or drawer 3. unconditional promise or order to pay 4. fixed amount 5. in money 6. no other undertaking or instruction 7. payable on demand or at definite time 8. words of negotiability

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unconditional promise or order to pay

answer

presumption of unconditional promise or order promise conditional: - express condition - promise \"subject to\" or \"governed by\" another record - incorporation of rights/obligations by reference

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fixed amount

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- on its face - interest stated as amount, rate or by reference to outside source okay or no rate determined by judgment - if interest not mentioned at all- no interest

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no other undertaking or instruction

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instrument is not a full contract; permitted undertakings: - promise about collateral - confession of judgment clause - waiver of a law meant to benefit obligor

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payable on demand or at definite time

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- expressly states on demand or \"at sight\" - if no date-> it is a demand instrument - permissible time statements: - date - fixed period after sight or acceptance - time readily ascertainable/predictable at time promise issued - changes permitted: prepayment or acceleration - permissible extensions of due date: - by holder: any time - by obligor: later definite time stated -automatic extension upon condition in instrument to later definite time stated

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words of negotiability

answer

- must contain bearer or order language - if both bearer and order language- bearer controls - checks do not need words of negotiability to be negotiable - bearer if: - payable to bearer - payable to the order of bearer - indicates possessor entitled to payment - no payee stated - to cash or to order of cash - not payable to identified person order: \"to the order of\"

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negotiation

answer

transfer of negotiable instrument so transfer is a holder

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holder

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1. physical possession of negotiable instrument and 2. good title depends on bearer/order - bearer: possession alone for good title - order: possession plus necessary indorsements for good title (special, restrictive)

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indorsement

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signature on negotiable instrument by someone other than maker, drawer or acceptor

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blank indorsement

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payee signature creates bearer paper - further negotiations require only possession

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special indorsement

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payee's signature plus designation of new person to whom instrument now payable - creates order paper - further negotiations require endorsement of new person

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restrictive indorsement

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limits what may be done with instrument

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identifying payee

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1. intent of issuer determines initial payee 2. multiple payees using \"and\" requires all payees to indorse 3. multiple payees using \"or\" or \"and/or\" requires one payee indorsement

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transferee's right to transferor's indorsement

answer

when transferee pays value, has specifically enforceable right to transferor's indorsement

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depositary bank

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becomes holder even without transferee's signature

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misspelled payee name

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payee can indorse with incorrect or correct name; person giving value may require both indorsements to clear chain of title

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payee lack of capacity

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indorsement still effective even if a minor, incompetent, unduly influenced

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rights of mere holder

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can enforce payment

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holder in due course HDC

answer

1. need negotiable instrument (satisfies 8 elements) 2. need to be holder: possession and good title 3. authenticity not apparently questioned 4. pays value 5. good faith: honesty in fact and observance of reasonable commercial standards of fair dealing 6. without notice at time of instrument acquisition

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notice

answer

- actual knowledge - also need reasonable time to act on notice - reason to know from facts and circumstances - filing of public record does NOT put person on notice

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without notice that:

answer

1. instrument principal overdue (not interest) 2. instrument dishonored 3. uncured default on another instrument part of same series 4. unauthorized signature 5. alteration 6. any claim 7. any defense or claim in recoupment

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shelter rule

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transfer of an instrument vest in the transferee the rights that transferor had; HDC can transfer HDC rights even to donee exception: person that was party to fraud or illegality affection instrument cannot take shelter

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real defenses

answer

1. infancy 2. duress 3. lack of legal capacity making obligation void 4. illegality making oblation void 5. fraud in factum: signer lacked knowledge of instrument's character or essential terms and lacked opportunity to learn of them 6. bankruptcy 7. omission of required consumer protection language (treated like it contains language) 8. statute of limitations - note: 6 years from due date - check: earlier of 3 years after dishonor or 10 years after issue 9. payment to former holder when obligated party had no notice of transfer 10. alteration 11. unauthorized signatures or forgeries

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personal defenses

answer

- failure of consideration - breach of warranty - fraud in inducement

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HDC rights

answer

takes free from personal defenses, subject to real defenses and free from claims of others to instrument

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contract liability

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- suit to collect the money - person cannot be sued unless they signed instrument

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signature by agent

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- agent personally liable unless: principal identified and signature unambiguously shows it is made on behalf of principal - to HDC: liable unless can prove HDC had notice of representative nature - to non HDC: liable unless agent can prove original parties did not intend agent to be liable - checks: no liability if principal's name on check - if agent not authorized it is forgery and agent bound

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signature by maker of note (liability)

answer

- liable to holder or indorser who paid instrument - must pay when due according to terms - defenses: depend on HDC status

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signature by drawer of draft/check (liability)

answer

- liable to payee - cannot disclaim liability on checks but can on other drafts - secondary liability if: 1. presented to drawee and 2. dishonored by drawee

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indorser of note or draft primary liability

answer

- liable to later indorsers - can disclaim liability - order of liability: liable in order of signatures 1. can sue prior indorsers for payment 2. can be sued by later indorsers for payment

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drawee

answer

- generally, no negotiable instruments contract - liable only for conversion (payee) or not properly payable check (drawer) - can agree to pay draft by signing (acceptance/certification) but not obligated to; if they do, discharges drawer and all indorsers

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conversion liability

answer

- drawee who pays forged indorsement liable to payee in conversion - payee must have received delivery of the instrument

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drawer's death

answer

- drawee bank can continue to pay checks until ti knows drawer has died and has reasonable opportunity to act - can pay for no more than 10 days after death if bank knows unless someone claiming interest in account requests bank stop paying immediately

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accommodation parties

answer

co signers, sureties and guarantors; sign instrument to lend credit to another party and does not receive any direct benefit from borrowed money

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accommodated party

answer

principal/obligor/debor; person with bad credit

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accommodation party

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suret/co signer; person with good credit

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holder

answer

creditor/obligee; person who wants payment assured

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liability of accommodation party

answer

presumed to be guaranty of payment and holder can collect from before attempting to collect from accommodated party unless they include express language limiting the contract to a guarantee of collection only- \"collection guaranteed only\"

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warranty liability

answer

- off instrument created by transfer or presentment - need not be in possession of instrument (unlike contract) - survives final payment (unlike contract)

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transfer warranties in general

answer

- made by transferor who receives consideration to immediate transferee and subsequent transferees if the transferor indorsed - in banking context- any subsequent collection bank even w/o indorsement - drawee and makers cannot sue for breach of transfer, they sue for presentment

question

specific transfer warranties

answer

1. warrantor is entitled to enforce the instrument 2. warranty of holder status (good title) 3. all signatures authentic and authorized 4. no alteration 5. no good defenses against transferor 6. no knowledge of insolvency proceedings 7. if remotely created- drawer actually authorized item note: strict liability for all but insolvency

question

disclaiming transfer warranties

answer

- checks cannot disclaim - non checks may disclaim: \"without warranties\"

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presentment warranties in general

answer

made on presentment for payment from presenter or previous transferor to parties who pay in good faith including makers, drawees and acceptors

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warranty when unaccepted draft presented (paycheck)

answer

1. warrantor entitled to enforce draft or obtain payment 2. no alteration 3. no knowledge of unauthorized drawer's signature 4. if remotely created, person identified as drawer authorized the item

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other instruments

answer

warrantor entitled to enforce draft or obtain payment

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warranty versus indorser's contract

answer

- if P is holder and payor has not paid: indorser's contract - If P is payor and payor has paid: breach of warranty

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discharge by holder

answer

holder can discharge obligation by surrendering instrument to obligor, destroying it, canceling it, etc

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effect of instrument on underlying obligation

answer

payment by certified check, cashier's or teller's discharges underlying obligation uncertified check/note: underlying obligation suspended - discharged if paid later - holder can sue on either instrument or obligation if later dishonored

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failure to produce original instrument

answer

1. person not in possession must show: - person entitled to enforce when loss occurred - loss not due to transfer or lawful seizure - person cannot reasonably obtain original 2. protection for payor required: bond or security

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overdrafts

answer

bank can charge account even if results in overdraft but does not have to

question

postdated check

answer

considered a draft; bank may pay postdated check unless customer gives notice of postdating and describes check with reasonable certainty

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stop payment orders

answer

- in writing- effective for 6 months - oral- effective for 14 days - must describe item with reasonable certainty so reasonably prudent banker could find - must be received in time and manner that gives bank opportunity to act - banks defenses: did not comply with requirements or customer suffered no loss because would have to pay check any way for example because payee was HDC

question

cashier's and teller's check

answer

- remitter cannot stop payment - bank can but risks liability

question

wrongful dishonor

answer

- drawee dishonors properly payable check - DRAWER can bring action, payee may not - all damages caused by dishonor - banks defenses: result in overdraft or check is more than 6 months old

question

payment in full check

answer

check or accompanying communication on which drawer conspicuously indicates that cashing check acts as payment in full of existing obligation which is unliquidated or subject to dispute - operates as an accord and satisfaction if payee cashes unless: - payee returns within 90 days or - organization had notified drawer of particular place to send payment in full check

question

forged maker's signature

answer

- alleged maker not liable (unless ratifies) - forger is liable

question

forged drawer's signature (bank customer)

answer

- alleged drawer not liable - forger is real drawer so that presenter can enforce unless they KNEW unauthorized - drawee bank must reaccredit alleged drawer's account as check was not properly payable - bank can pass on loss if breach of presentment warranty or it has defense: 1. drawer's negligence substantially contributed to forgery 2. bank statement rule: if customer does not inspect statement and bank can prove loss beyond original mistaken payment, customer precluded; must report within one year 3. repeat offender rule: if same person forging, drawer must report within 30 days of statement availability or will not reaccredit for later forgeries by same person

question

forged payee's name

answer

- bearer: irrelevant - order: breaks chain of title and check not properly payable - drawer can demand bank recredit account - bank's defenses: 1. impostor rule: issuer/maker estopped from denying validity of indorsement because carelessness in issuing check contributed to forgery 2. fraudulent indorsement by employees: employer entrusts employee with respect to instrument and employee fraudulently indorses, it is effective and payee estopped

question

liability of drawee (bank)

answer

- conversion liability to payee - defenses: impostor, fraudulent indorsement by employee - not properly payable liability to drawer - defenses: drawer's negligence, failure to timely sue - drawee protected from double liability

question

liability of presenter

answer

liable to drawee bank for breaching presentment warranty of entitled to enforce

question

liability of transferor

answer

presenter who loses to payor for breach of presentment may sue for breach of transfer warranties of - entitled to enforce - all signatures authentic or authorized and - no good defenses

question

alteration

answer

- change in obligation: HDC can enforce original amount - unauthorized completion: HDC can enforce as completed - Non HDC: alteration fraudulently made by holder is total discharge of obligor - Non HDC: not fraudulently made can enforce original terms

question

not properly payable

answer

- altered check not properly payable generally - bank's defenses: 1. drawer's negligence substantially contributes to alteration (leaves space on amount line) 2. bank statement rule:

question

common bar hypo

answer

Facts: - D issues check payable to P from Bank - T steals P's check, forges and deposits in Credit Union - Credit Union presents check to Bank for payment and Bank pays - D and P discover forgery and notify Bank Liabilities: - Bank is liable to: D for cashing check not properly payable OR to P for conversion - Credit Union liable to Bank for breaching presentment warranty of entitled to enforce because Credit Union was not a holder - T is liable to Credit Union for breaching the transfer warranties of entitled to enforce, all signatures authentic and authorized and no good defenses because he forged check

question

drawer vs. holder

answer

drawer of a check is liable to pay a holder of the check according to its terms at time it was issued after holder presents it for payment and it is dishonored

question

promise of performance or to give value

answer

value given for purposes of qualifying as HDC only to extent of performance or value; if no delivery, no value given, no HDC

question

promise not conditional

answer

- statement of consideration - reference to another record \"as per\" or \"in accordance with\" - incorporation by reference of items that would not hurt HOLDER: collateral, prepayment, acceleration - limit of payment to particular fund or source - countersignature (traveler's check) - consumer protection language

question

indorser secondary liability to

answer

secondary liability if: 1. presentment within 30 days of indorsement (not liable after 30 days) 2. dishonor and 3. notice of dishonor within 30 days of dishonor

question

final payment by drawee

answer

- ends contract actions - occurs when: 1. pays item or 2. does not revoke provisional settlement by deadline (midnight of next day)

Bar Exam: Commercial Paper

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