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BAR EXAM
Commercial Paper - Texas
49
Law
Post-Graduate
07/18/2013

Additional Law Flashcards

 


 

Cards

Term
Note
Definition
Promise to pay money - a two-party instrument between the maker (obligor) and the payee (promisee)
Term
Certificate of deposit
Definition
Note issued by financial institution - financial institution acknowledges receipt of money and promises payee/depositor to repay the money
Term
Draft
Definition
AKA a check

Order to pay money - 3-party instrument

Drawer - person ordering payment
Drawee - person to make payment
Payee - person to receive payment
Term
Requirements for Check (Draft)
Definition
Financial institution is the drawee
Payable on demand (whenever payee wants it)
Term
Types of Checks
Definition
-Ordinary
-Certified: bank has accepted it and agreed to pay
-Cashiers: drawer and drawee are same bank, person buying the check is the remitter (amt debited from bank customer's acct)
-Tellers: check drawn by one bank on another bank - person buying the check is the remitter
-Travellers: demand instrument requiring countersignature by a person whose specimen signature already appears on the instrument
Term
Remotely-Created Item (Demand Draft)
Definition
A draft not signed by the drawer but created with the drawer's authority so that a third party can get paid from the drawer's account at the bank (3rd party is usually a seller in an Internet transaction or when you pay bills over the phone by giving creditor your checking acct #)
Term
Negotiability
Definition
Refers to the form of the instrument - it's determined at the time of issuance

*If it says it's NON-NEGOTIABLE, then it is - can't opt in
Term
Importance of Negotiability
Definition
If paper is negotiable and transferred (properly negotiated), it can reach the hands of a special good faith purchaser called a holder in due course (HDC) who gets better rights than the transferor and can get paid from the obligor even if the obligor has defenses like good reasons not to pay under normal contract law
Term
What makes an instrument negotiable?
Definition
-In writing
-Signed by maker or drawer (mark X, signature, thumbprint, computer-generated)
-Unconditional Promise or Order to Pay
-Fixed Amount
-In Money
-No Other Undertaking or Instruction
-Payable on Demand OR at a Definite Time
-Has Words of Negotiability
Term
What makes a promise or order to pay UNCONDITIONAL?
Definition
-Presumption of such
-Items that make CONDITIONAL:
-Express condition to payment
-Promise subject to another record
-Incorporation by reference (rights or obligations with respect to the promise or order are stated in another record
)
-Items that DO NOT make it CONDITIONAL:
-Statement of consideration ("I promise to pay $50 to ABC for a TV")
-Reference to another record ("as per", "accordance with")
-Incorporation by Reference of Items that Wouldn't Hurt Holder: rights regarding collateral, prepayment (right to pay early), acceleration (right to get paid early upon some event)
-Limitation of Payment to a Particular Fund or Source
-Countersignature
-Consumer Protection Language
Term
Interest
Definition
There's a presumption of no interest (like an ordinary check)

Interest may be stated but not violate the fixed amount requirement if it still states an amt of money

Can also include reference to outside sources
Term
Payable in Money
Definition
-Authorized medium of exchange: foreign or domestic, no Monopoly money

CANNOT be payable in goods or services

WORDS PREVAIL OVER FIGURES - if it says "$500" but it's written "five thousand", then it's $5000
Term
No Other Undertaking or Instruction
Definition
JUST promises to pay money - not a full contract

EXCEPTIONS: permitted undertakings or instructions, promises concerning collateral ("the maker will provide additional collateral"), confession of judgment clauses, waiver of law meant to benefit the obligor
Term
Payable on Demand at a Definite Time
Definition
Look for express language: "on demand"

If instrument doesn't state the date it's due, it's a silent instrument

Express language stating it's due at a definite time must be paid by then (look for dates, fixed periods of time, etc.)

-CAN prepay, OR accelerate the due date ("payable on January 1, 2015 but if Uncle Fred dies earlier, may accelerate note to 30 days after Fred's death")
Term
Words of Negotiability
Definition
BEARER PAPER: "good luck on the bar exam", "payable to bearer" - doesn't identify a person as payee

ORDER LANGUAGE: "to the order of Frank Smith"

IF BOTH ORDER AND BEARER LANGUAGE - BEARER CONTROLS!!

Exception for checks: order or bearer language requirement is waived (ONLY for checks!!)
Term
Negotiation
Definition
Transfer of a negotiable instrument so transferee is a HOLDER - payee transfers the instrument to a 3rd party rather than just getting the money, e.g., as payment for a sale, to a donee as a gift, etc.
Term
Holder Status
Definition
-Possession of negotiable instrument
-Good tite (for bearer, that means possession; for order, that means possession plus necessary endorsements)
Term
Indorsements
Definition
Signature on the back of the instrument

Blank - payee signature only - no particular person to whom it should be paid - this creates BEARER PAPER

Special indorsements - payee's signature PLUS designation of new person to whom instrument payable - creates ORDER PAPER

Restrictive indorsement - makes it only for deposit or collection ("for deposit into my BOA acct #123 only")

ID of person to whom instrument is payable - intent determines initial payee, if it's unclear on its face

Multiple payees - "and" separates the names of the payees (requires ALL payees to indorse), "or" also separates (requires ANY ONE of the payees)
Term
Other Indorsement Issues
Definition
Transferee's right to transferor's indorsement - if instrument is transferred for value, transferee has specifically enforceable right if it's missing

Depositary Bank Becomes Holder Even W/o Transferee's Signature

Misspelled - payee can indorse with correct name

Payee lacking capacity can effectively indorse
Term
HOLDERS IN DUE COURSE
Definition
Important when obligor raises a defense to payment - regular holders would lose to a defense to payment (like maker not wanting to pay because product is defective)

HDC can obtain better rights and take FREE of this and most other defenses
Term
Elements of HDC Status
Definition
Negotiable instrument
Holder
Authenticity not apparently questioned (doesn't bear evidence of forgery or alteration or isn't otherwise so irregular or incomplete as to call it into question)
Holder must pay value (could even pay less than the face value - also, past consideration IS considered value)

Good faith - honesty in fact and observance of reasonable commercial standards of fair dealing

Without notice at time of acquisition (NOTICE is actual knowledge - subjective; receipt of a notice coupled with a reasonable time to act on it; person has reason to know based on facts and circumstances - just filing doesn't put someone on notice)
Term
HDC Doesn't Have Notice of
Definition
Instrument principal overdue (more than 90 days)

Instrument dishonored (check marked insufficient funds)

Uncured default with respect to payment of another instrument issued as part of the same series

Unauthorized signature

Alteration

Any claims

Any defense or claim in recoupment (any reason obligor doesn't want to pay - minority, incapacity, etc.)
Term
Shelter Rule
Definition
Person can get HDC rights without qualifying as a HDC if:

-transfer of an instrument vests the rights that the transferror had (HDC rights pass with the note) BUT person can't get HDC rights by shelter if they were a party to fraud re: the instrument

BURDEN OF PROOF is on person claiming HDC status or rights by shelter
Term
HDC Subject to "Real Defenses"
Definition
Subject to "real defenses": infancy, duress which voids obligation, lack of legal capacity making obligation void, illegality making obligation void, fraud in the execution (signer lacked knowledge of instrument's character or reasonable opportunity to learn of it), discharge in insolvency, omission of required consumer protection language, SOL (6 yrs from due date - if unaccepted draft, 3 yrs after dishonor/10 yrs after issue), payment to former holder, alteration, unauthorized signatures and forgeries
Term
HDC Protected from "Personal Defenses"
Definition
Failure of consideration, breach of warranty, fraud in the inducement
Term
"Perfect defendant"
Definition
HDC is free from claims of others to the instrument
Term
Contract liability
Definition
Basis is a person's signature on an instrument

Signatures by agents: binding principal (follow general law), binding agent (but escapes personal liability if P is identified in instrument and sig shows it was made on P's behalf)
Term
Liability of Agent on an Instrument
Definition
If P isn't identified on instrument through signature, agent is liable to the HDC unless they can prove the holder had notice of the representative nature of agent's signature, OR to non-holder in due course unless agent can prove that the original parties didn't intend the agent to be liable

NO liability if principal's name is on the check!
Term
Liability of Maker of Note
Definition
Primary liability - must pay instrument when it's due according to its terms at the time it was issued

Liable to holder or indorser who paid instrument

Defenses - depends on status of holder
Term
Liability of Drawer of Draft
Definition
Can't disclaim liability on a check but can on other drafts

Only liable if there is i) presentment to drawee within 30 days and ii) dishonor
Term
Indorser of Note or Draft
Definition
If payee indorses check and writes "without recourse", prevents him from incurring contract liability - just effective to pass title

Indorsers are liable in the order of their signatures - sue prior indorsers for payment; liable to later indorsers

Secondary liability - only if i) presentment, ii) dishonor and iii) notice of dishonor
Term
Drawee
Definition
Makes no negotiable instruments contract - if A draws a check for $300 to B, and the check bounces, B can't sue the bank from which the check was drawn

Acceptance or Certification - may agree to pay by signing, but no obligation to accept, and if drawee doesn't sign, can't be sued for it

Final payment: when drawee bank pays the item in cash or doesn't revoke a provisional settlement by the midnight deadline of the next banking day after the day of receipt (if bank provisionally issues a check but then waits to see if customer puts enough $ in the acct, then doesn't withdraw the check, it's issued!)

Conversion liability - drawee who pays on forged indorsement is liable - MUST have received delivery of the instrument
Term
Payment of Checks after the Drawer's Death
Definition
Generally, drawee bank may continue to pay checks until it knows drawer has died and has a reasonable opportunity to act on that knowledge

Drawee bank may pay for NO MORE THAN 10 DAYS after drawyer's death, but if someone claiming interest requests the drawee bank stop paying immediately, they must do so
Term
Accommodation Parties
Definition
Person who signs an instrument to lend his credit to another party but who doesn't get any direct benefit

ACCOMMODATED: principal/debtor/obligor (person with bad credit)

ACCOMMODATION: surety/cosignor (person with good credit)

HOLDER: creditor/obligee (person who wants payment assured)

Liability is capacity in which accommodation party signs - presumed as a guaranty of payment

CAN limit language - "collection guaranteed only" - creditor has to try to recover from obligor first

If surety pays the instrument, they are entitled to recover from the obligor/debtor
Term
Anomalous indorsement
Definition
Indorsement by a person who wasn't the holder of the instrument - outside the chain of title - is notice of its accommodation character
Term
Transfer Warranties
Definition
Made by transferor who receives consideration - not in a gift context

Made to immediate transferee, subsequent transferees if transferor indorsed - drawer and maker can NEVER sue for breach of transfer warranty (they get instruments presented to them, not transferred)

Warrantor entitled to enforce the instrument (basically holder status)

All signatures authentic and authorized

No alteration

No good defenses against transferor

No knowledge of insolvency proceedings

*ONLY WARRANTY WHERE WARRANTOR'S LACK OF KNOWLEDGE IS RELEVANT

Can't disclaim checks
Can disclaim non-checks
Term
Presentment Warranties
Definition
Made by presenter and previous transferors

Made to parties who pay in good faith - maker, drawee, acceptor

(Law firm pays clerk with a check for $500 drawn on Texas state Bank - clerk deposits into his acct at ONB - ONB presents to TSB for payment and TSB pays - clerk and ONB made presentment warranties to TSB)

Warranties when unaccepted draft presented to drawee (like cashing a paycheck) - warrantor entitled to enforce draft or obtain payment, no alteration, no knowledge of unauthorized drawer's signature
Term
Warranty vs. Indorser's Contract
Definition
If P is holder: if payor hasn't paid the instrument, then the holder will sue the indorser on the contract breach

If P is payor: if P paid then later discovers they shouldn't have (check was forged or note was altered), payor will attempt to sue the indorser for breach of warranty
Term
Failure to Produce Original Instrument
Definition
(if lost, inadvertently destroyed, or stolen)

Enforcement by person not in possession - if they were a holder when the loss occurred and the loss wasn't due to transfer or lawful seizure, and they can't reasonably get the original - protection is required by security or bond
Term
Forged Drawer's Signature
Definition
Alleged drawer is NOT liable

Drawee bank must recredit alleged drawer's account as check wasn't properly payable unless drawee bank has a defense

Bank can't pass on the loss UNLESS breach of presentment warranty
Term
How can bank defend having to re-credit an account that was drawn on from a forged check?
Definition
Drawer's negligence - leaving checkbook out in the open

Bank statement rule - drawer has a duty to inspect their bank statement and cancel checks in a timely manner and report forgeries to bank

Forger drawer's signatures must be reported within 1 yr regardless of bank or customer's negligence

Repeat offender rule - if the same person is forging a series of checks, drawer must report within 30 days of when the statement was available
Term
Forged Indorsements
Definition
Irrelevant for bearer paper b/c indorsement isn't needed

Forgery breaks chain of title for order paper and check isn't properly payable - drawer may demand bank (drawee) recredit his account
Term
Impostor Rule
Definition
drawer or maker may be estopped to deny the validity of forged indorsement if they acted carelessly (responsible for determining true identity of payee)
Term
Bank's defenses to liability for forged indorsements
Definition
Impostor rule

Fraudulent indorsement by employee entrusted with check

Drawer's negligence

Failure to timely sue (drawer must sue within 3 yrs)
Term
Alteration
Definition
Obligor doesn't want to pay because the instrument was altered

-any unauthorized change in an instrument that purports to modify the obligation of a party - amt, date, names of payees, or interest rate
Term
Alteration - Effect on HDC
Definition
HDC can enforce for the original amount (if A issues a promissory note to B for $100, and B alters it to read $1000 and sells it to C, C can enforce against A for $100, and then A has a defense of alteration for the other $900)

Unauthorized completion - HDC may enforce as completed (A signs a check but leaves the amount blank, hands it to B saying he can spend up to $100, but B writes the check out for $1000 - A is liable for $1000)
Term
Alteration - Effect on non-HDC
Definition
If fraudulently made by holder, obligor is totally discharged

If not fraudulently made, obligor is liable under the original terms
Term
Alteration - Not Properly Payable
Definition
If A issues a check to B for $100 but B alters it and cashes it for $1000, A may recover against his bank because the check was NPP
Term
Bank's Defenses to Alteration
Definition
Drawer's negligence

Bank statement rule - drawer has to report alterations to the drawee bank within 1 yr

Breach of transfer and presentment warranties of no alteration
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