Commercial Paper (UCC Art. 3)

a statutory scheme that is applied to pieces of paper, meaning negotiable instruments (drafts and promissory notes, writings that call for the payment of money)

When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses. Example: Tony steals a negotiable instrument from Carrie and sells it to Arlis. Carrie discovers the theft and confronts Arlis. Who is entitled to the negotiable instrument? The answer: Arlis, if the instrument was duly negotiated and Arlis can qualify as a holder in due course.

1) When is the given writing a negotiable instrument as opposed to a mere contract? 2) In a commercial paper fact pattern, on what theories might the defendant get sued? -Contract or Signature Liability -Warranty or Transfer Liability 3) How is a negotiable instrument duly negotiated, meaning, what makes the transfer proper? 4) How does a transferee qualify as a holder in due course (HDC)? 5) What are claims and personal defenses (which the HDC takes free of) and what are real defenses (which the HDC is subject to)? and 6) what result when a negotiable instrument is forced or altered (duties and liabilities of the parties)?

1) the promissory note 2) the draft 3) the indorser: appears in the context of promissory notes and checks; indorser signs the back

Contains an affirmative promise to pay between two parties ("I Promise to pay to the order of..."). Not just a mere IOU. Parties: -Promisor is the Maker -Promisee is the Payee.

Contains an order or a command to pay ("Pay to the order of..."). Ex. a check. Parties: -Drawer gives the order; -Drawee is ordered to pay (usually a Bank); -Payee is the beneficiary of the order.

(WOSSUPP): (1) a Writing; (2) payable to Order or to bearer; (3) Signed by the maker or drawer; (4) reciting a Sum certain; (5) containing an Unconditional promise or order, and no additional promises or orders; (6) Payable on demand or at a definite time; and (7) Payable in currency.

the instrument must be signed by the maker if a note, by the drawer if it is a draft (my signature on rent check) any authentication, found anywhere on the instrument, qualifies. not a formal standard

1) Order: To be negotiable, the note or draft must use the word "Order" or the word "Assigns" in connection with the payee's name (Pay to "the order of..." "the assigns off..." "to ___ or his order." -NOTE: "Pay to" is insufficient. Instrument with "Pay to" is non-negotiable. 2) Bearer: If the instrument is not payable to order, then to be negotiable it must be payable to bearer, meaning that it is payable to anyone who has it. -All of the following satisfy the standard: "Pay to bearer." "Pay to the order of bearer." "Pay to Andy Garcia or bearer." "Pay to cash." (article 3 term of art) "Pay to the order of cash." (article 3 term of art)). -if it said "pay to andy garcia" itis NOT negotiable and is just a contract

1) Must be certain and fixed: a specifically ascertainable sum. -you must be able to calculate how much is to be paid, either from what the writing says, or reference to an outside source 2) Note: If instrument states that it is payable with interest, but does not state how much interest, it is still negotiable because the rate is judgment rate (the rate on a court judgment), which is set by state statute and therefore fixed. -Calculation of the interest rate may be ascertained by a reference in the instrument to a generally accepted commercial or financial index. -If rate is on face, negotiable.

1) Unconditional -Any conditional language creates a contract and is non-negotiable. Ex. "I promise to pay if...". -The holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment. Ex. "Governed by" or "subject to". -Conditional if it limits payment to a particular source or fund → Nonnegotiable. -By contrast, merely referring to another writing does not of itself make the promise or order conditional. Further, a promise or order is not conditional simply because it refers to another writing for a statement of rights with respect to collateral, prepayment or acceleration. (Reference to an outside source regarding an ancillary matter is ok). 2) No additional -Cannot promise to pay a sum certain and accompany it with the promise to give goods/services.

1) On Demand: An instrument is payable on demand when it specifically states that it is payable "On demand" or "at sight" or "on presentation." -If the instrument is silent as to the time of payment, it is still negotiable and payable on demand. 2) Definite Time: An instrument is payable at a definite time if, by its terms, it is payable on or before a stated date or at a fixed period after a stated date. Need stated date, not "60 days after signing" -Note: Acceleration clauses are permissible, and do not destroy negotiability. -Ex. "On Feb. 1, 2003, but this becomes immediately due and payable if prior to that time the Giants win the Super Bowl." Negotiable. -If payable on a future date, date must be certain. -Ex. "Payable when my first grandchild is born" or "upon my Father's death"→non-negotiable.

Payable in Money, including foreign currency, BUT NOT IN GOODS.

Defendant signed the negotiable instrument. Claim depends on who D is: 1) The maker: promisor in promissory note—merely by signing his name to the instrument, the maker enters into a contract, whereby he agrees to pay the instrument. If he fails to pay, he can be sued. 2) The drawer: the party who signs the check (draft)—by signing, if it bounces, and drawer is notified, drawer promises to pay. If drawer fails to do so, he can be sued. 3) The indorser: an indorser signs his name on the back of the instrument—by signing, if the maker or drawer of the instrument does not pay, and the original promisee or payee (now the indorser using the instrument for payment to another) is given notice, the indorser promises to pay (or he can be sued). -When the words "Without Recourse" accompany the signature: A term of art used by indorsers and drawers: It represents a disclaimer of liability Without recourse passes title, but not signature liability. 4) The drawee: the party who pays the draft -typically the bank; the drawee does not sign, and therefore is not liable under signature liability.

1) Defendant has good title to the instrument. 2) All signatures are genuine and authorized (Forgery is a breach of warranty). 3) The instrument has not been materially altered. (Tampered with = it is defective). 4) There is no defense or claim good against the defendant, meaning that the instrument is enforceable. 5) Defendant has no knowledge of any bankruptcy or insolvency proceeding against the maker or drawer.

seller's liability for selling a defective instrument. 1) Who is defendant? Any transferor who sells the negotiable instrument (i.e. Donors cannot be sued). 2) Who can sue for breach of warranty? -If defendant indorsed the instrument (i.e., signed on the back), any plaintiff in possession of the instrument may sue seller. (when defendant indorses, warranties run with the instrument). -If defendant did not indorse the instrument, then only the defendant's immediate transferee may sue. (No indorsement = warranties will not run with the instrument). example: G indorses her paycheck from Paramount and remits the check to her agent for services. Her agent then remits teh check to her stylist for his services. the check bounces. may stylist sue g? yes, because g was not a donor, and she endorsed the check (so the warranties run with the instrument) example: will, who never indorses his paycheck from NBC, remits the check to his agent, who in turn remits to stylist. the check bounces, may stylist sue will? no, will did not indorse the check, so the warranties did not run with the instrument

Due negotiation or "duly negotiated" means that there has been a proper transfer of the instrument. If the instrument has been properly transferred, the transferee is a holder and may be eligible to be a holder in due course (HDC). If the instrument is transferred improperly, the transferee is not a holder and cannot qualify HDC. 1) Payable to order: When the instrument is payable to the order of a specific payee, it is negotiated by delivery of the instrument to that payee. -Any further negotiation requires that the payee indorse the instrument and deliver it to the transferee. No indorsement, not a valid transfer! -The indorsement must be authorized and valid. -example: paula loses her paycheck, payable to order. simon finds it, signs paula's name on the back, and cashes it at randy's music shop. is randy a holder? No. this is a bad transfer because the instrument was payable to order, and therefore the apyee (paula) had to endorse it. because she never did, randy cannot be a holder in due course 2) Payable to bearer: If the instrument is payable to bearer, indorsement is not required for negotiation. -payable to bearer means any person in possession 3) *Types of Indorsements: Every one must be either special or blank and restrictive or unrestrictive. -The special indorsement: The special indorsement is one that names a particular person as "indorsee." The indorsee must sign in order for the instrument to be further negotiated. i. Ex. A signs his paycheck "Pay to B". B is the indorsee and must sign to transfer. -The blank indorsement: The blank indorsement is one that does not name a specific indorsee. It may be negotiated by delivery alone. -The restrictive indorsement contains a condition. Condition must be met to negotiate. i. Ex. Check signed "For deposit only" cannot be cashed. If lost before deposited and cashed by 3rd party at a bank, the bank is not a holder and the indorser can recover from bank in conversion.

1) On the local testing day, you have been presented with a writing calling for the payment of writing. WHOSSP elements are present. T his is a negotiable instrument. IT has been transferred to another. Ask whether the transfer is proper by asking if it was duly negotiated. If yes, the transferee is a holder, and ask if transferee as a holder is eligible to be a holder in due course. 2) A holder in due course (HDC) is a holder who takes the instrument: i. for value; and ii. in good faith; and iii. without notice that it is overdue or has been dishonored or is subject to any defense or claim.

The holder must give value for the instrument (can be less than the legal value). Note that giving value does NOT mean giving consideration, which is a contract principle. -A mere promise is not value. Ex. Check indorsed based on promise to do something - holder can never be a HDC. -Old value is good value for Art. 3. Ex. Check indorsed to pay for goods already delivered - this is value - holder can be HDC.

Good faith means honesty in fact (this is a subjective test, sometimes referred to as the rule of the pure heart and the empty head).

The holder must acquire the instrument without notice that it is overdue, has been dishonored or is subject to any defense or claim. The notice requirement imposes an objective test. It asks, did the holder know or have reason to know of the problem? *Notice that the instrument is overdue: i.e., that it should already have been paid. If the holder has notice or reason to know that the instrument is overdue → not a holder in due course. 1) Payable at definite time: Holder buys after pay date, cannot qualify as a HDC. 2) Principal in arrears: If holder had notice that a payment or more of principal is in arrears, he or she cannot qualify as a HDC. -Interest in arrears: If holder takes with notice that one or more payments of interest are in arrears he can nonetheless qualify as a HDC. *Notice of any defense or claim against the negotiable instrument's enforcement: 1) when the appearance of the instrument gives notice: "Void" or "Paid" on the face, the holder cannot qualify as a HDC. 2) notice that obligation of any party is voidable -Obligation may be voidable for example if seller defrauds buyer. As between Buyer and Seller, the obligation is voidable. If Seller negotiates the instrument to a 3rd party, the 3rd party could still qualify as a holder in due course if she did not have notice or reason to know of Buyer's defense. 3) *notice of a competing claim to negotiable instrument: If the instrument is lost by or stolen from the true owner, the transferee could still qualify as a HDC if the instrument has been properly transferred and the transferee did not have notice or reason to know of the theft or loss. 4) notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty: Here the standard is ACTUAL KNOWLEDGE. Holder must actually know of the breach of duty; absent actual knowledge, holder can qualify as HDC.

1) The basic principle: A transferee acquires whatever rights her transferor had (the transferee takes shelter in the status of her transferor). 2) When a Donee or someone with Notice can be HDC: This rule allows the transferee "to step into the shoes" of the HDC, even though she otherwise clearly fails to meet the requirements of due course holding. -Thus, transferee has all the rights of a HDC even though transferee is a donee or otherwise fails to meet the requirements of due course holding.

1) the context: On the local testing day, you have been presented with a writing calling for the payment of writing. WHOSSP elements are present. T his is a negotiable instrument. IT has been transferred to another. Ask whether the transfer is proper by asking if it was duly negotiated. If yes, the transferee is a holder. Ask if transferee as a holder is eligible to be a holder in due course. If she has satisfied the prongs needed to be a HDC, now ask what thebenefits are for that holder being a HDC 2) The rule: A holder in due course (and subsequent transferees who take "shelter" in that status) takes the instrument free from claims and personal defenses and subject only to real defenses. -The Holder in Due Course takes free from claims: A claim is a right to a negotiable instrument because of superior ownership. If a negotiable instrument is duly negotiated to a holder in due course, the holder in due course defeats the superior owner. -The Holder in Due Course takes free from personal defenses: Personal defenses include every defense available in ordinary contract actions such as: (1) lack of consideration, (2) fraud in the inducement (lie to induce payment), (3) unconscionability, (4) waiver, (5) estoppel. -The Holder in Due Course takes subject to real defenses ("MAD FiFI4"): (1) Material Alteration, (2) Duress; (3) Fraud in Factum (lie about the instrument), (4) Incapacity, (5) Illegality, (6) Infancy, (7) Insolvency. *"Material alteration" as a real defense: A material alteration is a change in terms of the instrument. Ex. Maker writes $100 on a check, and Payee changes to $2100, then sells to HDC. Maker is liable only for $100. -Note: if maker was negligent, he is estopped from raising material alteration as a defense. Negligence includes leaving blanks or leaving wide spaces on the check. *The difference between "real" fraud (in factum) and personal fraud (in the inducement) -"Real" fraud, known as fraud in the factum, is assertable against an HDC. "Real" fraud means that there has been a misrepresentation about the instrument. (Ex. Maker is lied to about the contents of the instruments and signs.) -Personal fraud, meaning fraud in the inducement, is a personal defense. It is ineffective against an HDC. (Ex. Makers is sold a fake diamond ring after being told it is diamond. Fake is discovered. The check is now held by HDC. Defense cannot be asserted.)

1) To honor customer's check: -The bank must honor its customer's check if there are sufficient funds to cover the check. 2) Insufficient funds: -A bank may choose to honor a check even if the customer has insufficient funds, in which case the customer is liable to the bank for the overdraft. 3) Wrongful dishonor: -If the bank wrongfully dishonors a check, the customer can recover damages for whatever harm is proximately caused by the wrongful dishonor. 4) Death of customer: -The death of the customer does not revoke the bank's authority to pay a check until the bank i) knows of the death, and ii) has a reasonable time to act on such knowledge. 5) **The bank must honor a check as drawn. -Thus, it cannot charge the customer's account: i) if the drawer's signature was forged ii) for more money than the original order (i.e., alteration of amount by third party); iii) if the bank pays the wrong person (i.e., forgery of payee or indorsee's signature); or iv) if the check is post-dated (the bank must not pay it before the stated date). 6) Stop payment orders: -an oral stop payment order is binding on the bank for 14 days unless renewed in writing within that period. -A written stop payment order is binding for 6 months, renewable every six months in writing. -If the bank pays in spite of a stop payment order, the customer has the burden of proving that a loss has occurred, and the amount of the loss.

1) The basic context: writing checks without authority. -For example, an employee signs employer's name without authority, or someone steals your checkbook and writes checks. Think about the following: 2) The properly payable rule: -The drawee bank that honors a forged or materially altered check must recredit the drawer's account, as long as the drawer was not negligent. 3) The drawee bank's remedies (the thief has fled or is judgment proof): - The theif is always liable. -The drawer is also liable, if negligent 4) When is the drawer negligent? a) Negligence includes leaving blank or open space on the instrument. b) Negligence includes failing to follow internal procedures designed to avoid forgeries. -For example, employer is negligent when it keeps a signature stamp in the same unlocked drawer as the company's checks. c) ** The bank statement rule: negligence includes failure to examine one's bank statement. -If a customer fails to report a forgery or alteration within a reasonable time, he or she is estopped from demanding recredit from the bank. -A customer has to read the statements in order to discover errors. Onus is on the customer to report errors promptly or be estopped from belatedly asserting a complaint. d) The fictitious payee rule: -If an imposter induces the drawer to write a check, the drawer is negligent. e) The employee indorsement rule: -An employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks -An employer must monitor his employees.