Weak Areas

Question 1

Negotiability

Answer 1

An instrument must be a written and signed:

1. Unconditional
2. Promise or order to pay
3. A fixed amount of money (with or without interest) that:
   a. is payable to order or bearer when issued or first in possession of holder
   b. is payable on demand or at a definite time; and
   c. states no unauthorized undertaking or instruction by the person promising or ordering payment.

Note: principal due under the instrument must be fixed. Variable or indexed interest rates are acceptable.

Question 2

Unconditional

Answer 2

An instrument is unconditional (not negotiable) if:

1. expressly states a condition for payment; or
2. it states that the promise or order is subject to or governed by another writing.

NOT conditional merely because it:

1. Refers to another writing regarding collateral, prepayment, or acceleration
2. limits payment to a particular source or fund
3. requires a countersignature of a specimen signature (ex: traveler’s check); or
4. contains a statement required by law that the holder is subject to claims and defenses of the original payee.

Question 3

When is an instrument payable to the bearer

Answer 3

1. states that it is payable to bearer or otherwise indicated the possessor is entitled to payment
2. does not name a payee; or
3. is payable to “cash” or otherwise indicated that it is not payable to an identified person.

Question 4

Criteria for when an instrument is payable at a “definite time?

Answer 4

1. On a fixed date
2. after elapse of a specified period after sight; or
3. at a time readily ascertainable when the instrument is issued.

Note: Events that will occur on an uncertain date (ex: at my death) are not readily ascertainable.

Note: Acceleration clauses do not destroy negotiability. Extensions at the option of the maker, and extensions that are automatic on the happening of an event are acceptable if the extension is to a further definite time stated in the instrument.

Question 5

Which undertaking instruments will not destroy negotiability?

Answer 5

1. An undertaking or power to give, maintain, or protect collateral;
2. An authorization or power given to the holder to confess judgment or to realize on or dispose of collateral; and
3. a waiver of the benefit of a law that protects the obligor.

Question 6

How does one become a holder in due course (HDC)?

Answer 6

Through a transfer that qualifies as a negotiation. The stepds needed to negotiate an instrument depend on whether the instrument is payable to bearer or to order.

Question 7

How do you negotiate a bearer instrument?

Answer 7

By transferring possession of the instrument.

Question 8

How do you negotiate an order instrument?

Answer 8

By transferrin possession along with the identified persons indorsement.

Note: Payees indorsement must be authorized and valid.

Question 9

Steps to become a HDC?

Answer 9

1. Must be a holder: person in possession of an instrument with the right to enforce th einstrument. The instrument must be payable to bearer or to the person in possession and free of forgery.
2. Must be in due course: Holder takes for value, in good faith, and without notice.

Question 10

What counts as value?

Answer 10

1. persomance of the agreed consideration
2. Acquisition b the holder of a lien or a security interest in the instrument
3. takign the instrument as payment of or security for an antecedent debt
4. trading a negotiable insturment for another instrument; or
5. giving the instrument in exchange for incurring an irrevocable obligation to a third person b the person taking the instrument.

Note: An executory promise not value unless it is an irrevocable obligation to a third party.

Note: Discounts are allows so long as the full price agreed on has been given

Question 11

What is good faith?

Answer 11

Honesty in fact (subjective) and observance of reasonable commercial standards (objective)

Question 12

When is an instrument overdue?

Answer 12

1. Any part of the principal is overdue
2. an acceleration has been made; or
3. more than a reasonable time has elapsed after issue of a demand instrument (for checks, 90 days)

Question 13

What facts constitute notice?

Answer 13

1. Instrument overdue
2. claims to the instrument
3. defenses or claims in recoupment
4. unauthorized signature or alteration
5. noticenot received in a time and manner to give a reasonable opportunity to act on it

Question 14

What facts DO NOT constitute notice?

Answer 14

1. instrment antedated, postdated, undated
2. instrument was issued in return for an executory promise, unless the purchaser has notice that a defense or claim has arisen from the terms thereof
3. any party signed for accommodation
4. an incomplete instrument has been completed, unless the purchaser has notice of any improper completion.
5. any person negotiating the instrument was a fiduciary, unless the purchaser also knows that the negotiation constituted a breach of trust.
6. that there has been a default in payment of interest
7. there is a public filing or recording of a document concerning the instrument
8. the instrument was sold at a discount; and
9. notice of discharge of a party, other than a discharge in an insolvency proceedings.

Question 15

When is HDC status determined?

Answer 15

At the moment the instrment is negotiated to the holder or when sh gives value, whichever occurs later.

Question 16

HDC Shelter Rule

Answer 16

A transferee acquires whatever rights her transferor had and takes shelter int he status of her trasnferor. Purpose of the rule is to protect the negotiability f commercial paper

Exception: No HDC rights to persons who were parties to fraud or illegality affecting the instrument.

Remote transferees: do not acquire rights of transferror id you are a transferee after the holder failed to obtain HDC rights because she was a party to fraud or illegality.

Question 17

What types of defenses can HDCs enforce an instrument to?

Answer 17

REAL defenses. HDC takes free of personal defenses and claims

Question 18

11 Real defenses

Answer 18

1. Forgery (forgery of any name other than payee or special endorsee doesn’t affect the right to enforce)
2. Fraud in the factum (real fraud; no real knowledge or opportunity to learn of its character or essential terms)
3. alteration of instrument
4. incapacity to contract
5. infancy
6. illegality
7. duress
8. discharge in insolvency proceedings
9. statute of limitations
10. accomodation (suretyship) defenses (by signing an instrument, an accomodation part incurs liability without being a direct beneficiary)
11. discharges known to HDC (takes subject to discharging events named in Article 3 and other acts that would discharge an obligation to pay under a simple contract))

Question 19

2 Personal defenses

Answer 19

May not be raised against HDC

1. Simple contract defenses (lack of consideration, failure of consideration, breach of warranty, fraud int he inducement, etc)
2. Must be one’s own defenses, except (1) accommodation party can raise most defenses availablt to party accommodated, and (2) payor must raise the defense of theft if known.

Question 20

Theft Exception to Personal Defenses

Answer 20

If the defense that a non-HDC acquired the instrument by theft ad the person holding the instrument is in wrongful possession is to be used, it must be raised if known by the person paying, or payment will not result in discharge of liability.

Question 21

Who may enforce an instrument?

Answer 21

1. a holder
2. a nonholder in possession with rights of a holder (ex: subrogee); or
3. a person not in possession but entitled to enforce (ex: lost, stolen, or destroyed instrument)

Question 22

Burden of proof in trial procedure for enforcement?

Answer 22

1. signatures are genuine; and

2. the person presenting the instrument is entitled to enforce it.

Question 23

Who can bring an action for conversion?

Answer 23

A person entitled to possession may bring action for conversion of th instrument, except for issuers, payees, and indorsees who never received delivery.

Question 24

How to vouch in a party?

Answer 24

If D to a suit on an instrument has a right of recourse against someone else if he is required to pay, then he may give that third person written notice of the litigation. If after receiving notice, the third person fails to appear and defend, he will be bound by any determination of fact common to a suit against him by the party giving notice. A person vouched in may also vouch in persons liable to him.

Question 25

Who can be liable on a instrument?

Answer 25

1. maker of note, issuer of cashier's check 2. indorsers 3. transferor 4. drawer 5. drawee 6. acceptor 7. accommodation parties

Question 26

How can a holder look to an indorser for payment?

Answer 26

1. presentment 2. dishonor 3. notice of dishonor

Question 27

When is presentment excused?

Answer 27

1. the person entitled to present cannot with reasonable diligence do so 2. maker has repudiated the obligation to pay or is dead or insolvent 3. by istrment terms, presentment is unnecessary 4. the obligor has waived presentmet, or 5. the drawer instucted the drawee not to pay or the drawee was not obligated to pay

Question 28

When is a check dishonored?

Answer 28

If the bank returns the check or sends written notice that it is dishonoring before: 1. final payment; or 2. bank's midnight deadline Notice of dishonor: Notice may be given by any commercially reasonable means, and generally must be given within 30 days after dishonor. Need not be given to the maker of a note or the drawer of a draft.

Question 29

When is notice of dishonor entirely excused?

Answer 29

1. terms of the instrument make it unnecessary; or | 2. the obligor waives notice

Question 30

Liability of Indorser

Answer 30

Always analyze contract and warranty liability and ehy either or both are applicable. 1. Contract liability: Basic obligation to pay according to the terms of the instrument at the time of indorsement - arises merely from the indorser's signing her name on the instrument, although obligation can be negated by also writing "without recourse" on instrument. 2. Warranty liability: When an indorser transfers an instrument for consideration, the indorser becomes liable as a transferor.

Question 31

Transferor's 5 Transfer Warranties

Answer 31

Warranties run to all subsequent holders if the transfer is by indorsemet, but run only to the immediate transferee if the transfer is not by indorsement. Present, notice of dishonor, etc is irrelevant to warranty liability . 1. Entitled to enforce the instrument or item 2. all signatures are authentic and authorized 3. the instrument or item has not been altered 4. no defense or claim of any party is good against her; and 5. no knowlede of any insolvency proceedings that have been instituted against the maker, acceptor, or drwer.

Question 32

When can a bank not charge an account?

Answer 32

1. if there is no order by the depositor 2. for more money than the original order 3. if the bank pays the wrong person; or 4. if the item is postdated and the customer notifies the bank of the postdating. If the bank violated these principles, the customer is entitled to a recredit on her account.

Question 33

Does a death of a customer revoke bank's authority t pay a check?

Answer 33

Not until the bank: 1. knows of the death; and 2. has reasonable time to act on the knowledge Even with knowledge, the bank may continue paying checks for 10 days after the date of death unless someone claiming an interest in the account orders that payment be stopped.

Question 34

How long is a stop payment order effective?

Answer 34

Under UCC, an oral stop payment order is effective for 14 days ad then lapses unless confirmed in writing within tht period A written stop payment order is binding for 6 months. If the bank pays an item in spite of a stop payment order, the customer has the burden of proving that a loss as occurred and the amount of the loss.

Question 35

What happens when an interest in an instrument is issued to an unintended payee?

Answer 35

1. any person in possession of the instrument is a holder; and 2. an indorsement in a name similar to that of the named payee is effective as an indorsement.

Question 36

What constitutes negligence?

Answer 36

1. leaving blanks or spaces on the instrument, 2. mailing the instrument to someone with the same name as the payee, and 3. failing to follow internal procedures designed to avoid forgeries.

Question 37

Unauthorized Signatures requirements

Answer 37

General Rule: Forged signatures are valid only as the signature of the forger and are invald as a signature of the name payee. Exceptions: Forgery will be valid as the name forged when: 1. fictitious payee's signature forged 2. entrusted employee forges signature 3. negligence contributes to forgery 4. bank statement rule violated - failure to discover forgeries and alterations within a reasonable time after receiving bank statement 5. bank certifies - estoppel by certification.

Question 38

Actions of Third Party to Protect Claim

Answer 38

For a third party to protect his claim to the instrument, he can 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.

Question 39

When is payment of a negotiable instrument not final?

Answer 39

1. The payor can pursue those who breach transfer warranties, and 2. the rule of finality operates oly in favor of persons who took for value and in good faith and those who in good faith change their position in reliance on the payment or acceptance. If the personw ho receives payment is not one of the persons described in (2) above, an action to recover the payment can be maintained.

Question 40

Presentment Warranties on Unaccepted Draft

Answer 40

On unaccepted drafts, persons obtaining payment and previous transferors warrant that: 1. warrantor is entitled to enforce the draft or is authorized by one who is 2. draft has not been altered; and 3. warrantor has no knowledge that the drawer's signature is unauthorized Forged indorser's signature destroys good title but a forged drawer's signature does not.

Question 41

When is collateral impaired?

Answer 41

1. Security interest is not perfected or otherwise filed 2. collateral is released without obtaining substitute collateral 3. there is failure to perform acts required to preserve the collateral's value; or 4. there if failure to dispose of collateral as the law requires.