serves a substitute for cash (ex: paycheck)

and is also used for credit (ex: promissory note)

negotiable instrument

negotiated

holder in due course

takes free from personal defenses and claims, but is subject to real defenses

note (aka two party paper)

Instrument where maker promises to pay payee (where promise by bank to repay= certificate of deposit)

The Maker

and

The Payee

NOTE: there are only two parties but there can be more than 2 people involved

they have joint and several liability to the holder which means the holder can sue them together or pick only one to sue

If the holder choses to sue only one, that one has the right of contribution from the other co-maker.  Discharge of one co-maker by a person entitled to enforce the instrument does NOT affect the right of contribution. 

Draft (three party paper)

Instrument where drawer ORDERS drawee to pay payee. (where payable on demand and drawn on bank-even w/o words of negotiability= check)

drawer

drawee

payee

the drawer is secondarily liable or conditionally liable (enters into K that he will pay the draft according to it's terms when signed)

when you draw a check, you are saying to payee that they should go to the drawee to get the money and only if the drawee doesn't honor the draft should they come to you

signature other than that of maker, drawer or acceptor (acceptor is drawee who has agreed to pay the instrument)

usually on the back of the note or draft

1. Special or blank

2. restrictive or unrestrictive

3. qualified or unqualified

4. anomalous or nonanomalous

special indorsement indentifies the person to whom payable (ex: Pay Indorsee, P. Payee, /s/ Maggie)

blank does not ( /s/ Maggie)

restrictive indorsement limits payment (ex: for deposit only)

unrestrictive doesn't limit payment

qualified indorsement ("without recourse") negates secondary liability (ex: indorser doesn't have to pay if bank doesn't- may have to pay under a different theory but not under this)

unqualified doesn't negate secondary liability

This deals with a suretyship (one who backs the debt of another)

anomalous indicates accomodation (surety) ("out of chain"- an indorsement that is out of the chaim of indorsements indicates a surety)

Accomodation parties are liable in capacity in which they sign (don't need consideration to be a surety)

Surety has right to recourse against accomodatED party

secondary liability- very similar to liability of a drawer

indorser enters into a K that if have presentment, dishonor and notice of dishonor, he will pay on the instrument according to its terms at the time of the indorsement

The holder in due course rule (if the holder is a holder is due course, the maker or drawer will have to pay unless a real defense applies)

The HDC rule: if a negotiable instrument, which includes ____, is negotiated to an HDC, he takes free of personal defenses and claims and is subject only to real defenses. 

Yes, if the agent was authorized.

1. there can be no express conditions (meaning language)

impled or constructive conditions are permissible (implied= conduct, constructive= in the law (remedy))

2. not subject to another writing

"secured by..." is permissible

3. limitation of funds is okay

If the note doesn't say anything, it's demand paper (silence is demand)

Any acceleration clause is okay

- conditions modify promise to pay while acceleration clauses modify time to pay

-could be malpractice not to include

-otherwise negotiable instument payable "on death of my rich uncle, Sam Dough"- this is non-negotiable b/c not payable on demand b/c no one dies on demand and not a definite time

-otherwise negotiable instrument payable "1/1/9999, accelerated by death of my uncle, Sam Dough" is negotiable b/c payable at definite time but accelerated- that's okay

must transfer entire instrument (employee indorses check "50% to A; 50% to B"- not okay)

AND

it is effective even if there is an impediment (ex: 5 year old signs over her birthday check- that's ok)

proper indorsement and delivery

ex: assume instrument payable to order of Sue Jones.  In order for Sue to "negotiate" it to Isobel, she must indorse and deliver

mere delivery alone

ex: assume instrument payable to cash.  In order for Sue to "negotiate" it to Isobel, Sue must deliver

If an instrument says it is "payable to cash" or "to the order of cash" (so it doesn't name a certain person) then it's bearer paper- it doesn't matter if it says "to order"

LOOK at whether the payee is named or not!!

we look at the last indorsement to see if it is order or bearer paper

ex: assume instrument payable to order of Sue Jones.  She indorses it, "Pay Bob /s/ Sue Jones," and delivers it to Bob.  In order for Bob to "negotiate" it to Sally, Bob must indorse and deliver b/c special indorsement makes it order paper

it is bearer paper

ex: if sue would have indorsed it "/s/ Sue" and delivered it to Bob, what would Bob have to do to "negotiate" it to Sally?

just deliver it

for value

in good faith

w/o knowledge or notice

executed consideration- the consideration must have been performed

value includes antecedent (old) debts

can either be a full or partial HDC (time of payment governs status)

Value includes old debts

ex: lawyer earns $1000 three years ago but was not paid.  Yesterday, he received a $1000 negotiable instrument for the work done.  This IS value

S swindles a $1000 note from Maker.  S sells it to HDC for $500.  HDC is a full HDC so can collect $1000. 

HDC is to pay $250 today and $250 tomorrow.  Tonight he finds out about the swindle.  HDC is a partial HDC for $500. 

Would it help if HDC quickly made the payment of $250?

No, b/c time of payment governs status

first notice, then payment- not an HDC

first payment, then notice- you are an HDC (either full or partial depending on the circumstances)

Typically no b/c when you deposit a check they don't give you value right away- you have to wait to see if the check clears before you can draw on it (so not "for value")

But, yes, if it gives value

Honesty in fact (subjective)

AND

observance of reasonable commercial standards of fair dealing (merchant test/objective test)

overdueness (checks over 90 days old), dishonor, claim, defense, forgery, irregularity, or incompleteness which questions authenticity

basically- have to be w/o notice of any defenses  on the instrument

1. buyers who buy in bulk

2. buyers who buy from an estate

3. buyers who buy from a judicial sale

NOTE: these people can get HDC status under the shelter rule (ex: Macy's or dead Uncle Joe, or defendant was a HDC)

FAIDS

Forgery, fraud in factum, alteration, adjudicated insanity, infancy, illegality, duress, discharge in insolvency, suretyship defenses, statute of limitations

not regular fraud

this is switch document fraud (i gave you a document but told you it was something else in order to have you sign it)

3 years for drafts

6 years for notes

unless a demand instrument and there's been no demand- then 10 years

Human buys consumer goods or services on credit- NO HDC rule

Humans- not corporations

consumer goods- family goods

services- health clubs and dance studios

credit- 4 or more installments

anyone who take from a HDC, gets all right of HDC, except a participant in the fraud. 

ex: HDC gives, as a wedding present, a negotiable not to Sonny, who know the instrument was issued b/c of a fraud prepetrated on maker. 

Is Sonng an HDC? No b/c didn't take for value, in good faith w/o notice.  However, he has all the rights of an HDC b/c he took from than HDC (shelter rule)

1. the basic obligation of an indorser- secondary liability

2. in warranty (as a transferor)

Indorser cannot be held liable unless these 3 things happen:

1. presentment: holder goes to maker/drawee and demands payment

2. dishonor: primary party refuses to pay

3. notice of dishonor: holder tells secondary party (here it is the indorser) (obligation of the indorser is discharged if not given notice of dishonor) 

1. when an instrument is transferrered "without recourse" (b/c the instrument is qualified so the indorsers basic obligation is negated; but these words are not sufficient to negate warranty liability)

2. when there is no signature (negotiated by delivery alone; bearer paper) (b/c there is no indorsement since it's not signed there is not basic indorser liability, so need warranty liability)

1. issuance: no warranties given (this is when the neg. instrument is first made)

2. Transfer (movement for consideration; not presentment or issuance).  Applies even if there is not signature (i.e. delivery of bearer paper)

3. Presentment- final surrender; only possible plaintiff is maker or drawee

 right to enforce (title

all signatures are genuine

no alterations

no defenses against transferrer

no knowledge of insolvency of maker/drawer/drawee

right to enforce (title)

BUT NOT warranty of genuine signature

Drawee owes nothing to the holder unless acceptance (ceritification) (i.e. drawee signes the instrument)

If certification, drawee is liable for consequential damages

If certification, drawer is discharged of liability (bank is putting it's own credit on the line) 

it's contractual

Drawer put money in drawee (drawee will act as agent for collection) and drawee pays out according to drawer's order

Drawer v. Drawee

What things are properly payable?

1. overdraft: bank can pay it if they want to and you cannot complain when they want the $

2. date: irrelevant to the bank- they can pay it if they want to

3. not over stop payment: bank should NOT pay over a stop payment but if they do and they pay an HDC, you lose and they win

Drawer v. Drawee

What happens in the drawee doesn't pay, but should have?

drawer v. drawee

two situations where drawee does pay but should not have?

forged drawer

forged indorser

drawer v drawee

if the drawee does pay, but should not have, what is their liability

drawee is liable for breach of contract

drawee has to put the money back in drawers account

drawer v drawee

what are the exceptions to the general rule that if the drawee pays but shouldn't have, they are liable for breach of contract?

Fictitious indorsements are effective (so there is a fictitious payee) 

drawer negligent in the drafting

drawer negligent in the notifying

NOTE: the check here is made out to a fictitious payee, so it's unlike the other case where the check is made out to a real payee but the indorsement is forged by someone else

1. imposter- payee is an imposter (so they told you they were someone else- it's your own fault)(imposter then indoreses the check and cashes it)

2. corporate comptroller- the payee may be an actual creditor of the corporation but drawer doesn't own them anything right now, the comptroller just makes this bill up and makes the check for drawer to sign; comptroller indorses them and then cashes them

3. payroll padding- the person in charge of payroll makes up fake employees and makes checks for them and has drawer sign the checks; then indorses them with the fake name and cashes them

drawer v drawee

when is a drawer negligent is drafting?

1. leaves amt line blank or lots of space following the word one

2. leaves spaces and says "I trust you to put in the right amt"

3. mailing an instrument to a person having the same name as payee

4. failing to follow internal procedures designed to avoid forgories

**IF the drawer is negligent in drafting it will likely preclude him from asserting a real defense under the HDC analysis (therefore he will have to pay the amount written on the check and not what he originally wrote the check for)

drawer v drawee

what happens if the drawer is negligent in notifying the drawee (bank) that they mistakenly paid out when they should not have?

What are the limits here?

General rule: drawee will suffer the loss

Exception: we put the loss back on the drawee if drawee is negligent in paying 

Limits: no matter what, a customer is precluded from asserting an alteration or forgery claim:

forged drawer: 1 year after bank made instrument available to drawer

Forged indorsement: 3 years after cause of action accrues

multiple forgeries by same wrongdoer? 30 days

1. where the bank pays on a forged drawer's signature or other mistake) payment is final and no recovery is permitted from the innocent party whom the bank paid (bank also has to put the money back in drawers acct)

2. where the bank pays on a forged indorsement, payment is NOT final and the bank can recover from the innocent party whom it paid (breach of warrant of presentment- right to enforce (title)) (bank also has to put the $ back in drawers acct)

1. unliquidated or disputed claim (if no dispute, no accord and satisfaction)

2. instrument tended as full satisfaction (conspicuously)

3. collection is discharge of debtor's obligation (accord and satisfaction)

1. organization has a designated agent (conspicuously) and this prevents A&S unless sent to the agent

2. claimant tenders repayment w/in 90 days (avoids inadvertant A&S) (so you send them a check and say it is for full satisfaction and they send it back w/in 90 days and say "no it's not!")

at the later of the time the instrument is taken or when value is given

(so if you take the instrument, then are given notice of a defense, and then give value, you are not an HDC)

a person is precluded from raising alteration as a defense when the person's negligence substantially contributes to the alteration

(ex: drawer leaves a bunch of space after "one" and someone writes in "one hundred"- will be liable for whatever amt gets put in there)

Generally, only a holder has the right to enforce a note.  One may become a holder only through negotiation.  What is necessary for negotiation depends on whether the paper is bearer paper or order paper.

 If there are multiple payees, in order for order paper to be negotiated, all the payees must indorse.