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Commercial Paper
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Two- Party commercial paper where the maker promises to pay money to the payee or bearer

Draft (Check)

Three-Party commercial paper where the drawer orders that the drawee pay the payee

Types of Indorsements

Special: Indorser orders to pay to someone else (i.e. "Pay indorsee")

1. Order Paper

Blank: Signed name

1. Bearer paper

Qualified: Without Recourse

Restrictive: For Deposit only (Violation of restriction = Conversion).


* Last indorsement controls the paper


A negotiable instrument is one that is in:

1. In Writing

2. Signed by Maker

3. Unconditional

4. Promise or Order

5. To pay a fixed amount

6. Of Money

7. With No unauthorized promises other than:

a. Collateral

b. Confess judgment

c. Waive legal rights

8. On Demand or at a Definite Time

9. (NOTES ONLY) To "Order" or "Bearer" (whoever is holding it)




An instrument is negotiated when it is transferred to a subsequent party who becomes a holder.


Order: Proper indorsement (valid and authorized) plus delivery

Bearer: Delivery alone


*Forging the payee's name breaks the chain of title, and no subsequent possessors of the insturment can qualify as holders because there was never a proper negotiation.




Holder in Due Course

A Holder in Due Course can sue anyone who signed before him, and those sued can only use Real defenses instead of personal ones.


1. Holder

A. Possession

B. Good Title (free of forgeries or missing signatures of payee and any special indorsees)

1. Exception: Forgeries may be honored if forgery was a result of negligence on the part of the drawer.

2. Due Course

A. For value

1. unperformed promises not included

B. In good Faith: honesty in fact and reasonable commercial standards of fair dealing.

C. Without knowledge or notice of overdueness, dishonor, defenses, irregularity).

3. Exceptions (-)

A. Purchasing instrument at a judicial sale

B. Acquiring instrument by taking over an estate.

C. Purchasing instrument as part of a bulk transaction not in the regular course of business.

Real Defenses (FFAIIDDSS)

1. Forgery

** Forgery of names necessary to title prohibits proper negotiation and thus precludes later HDC.

2. Fraud in Fact (Signed without knowing)

3. Alteration of a material term (i.e. price)

4. Incapacity

5. Illegality

6. Duress

7. Discharge in Insolvency; Discharge with Notice

8. Suretyship with Notice

9. SOL

1. 6 years after due date. For checks, 6 years after due date or 10 years after date of check.

Personal Claims/Defenses

All defenses other than real defenses, including those available in ordinary contract actions


i.e. Ownership, misrepresentation, simple fraud, breach of K, breach of warranty, payment, discharge without notice.

The Shelter Rule

A transferee acquires whatever rights her transferor enjoyed, taking shelter in the status of her transferor.

1. HDC rights

2. Limitation: Does not apply if the transferee is a party to fraud or illegality affecting the instrument.

Holder v. Indorser

A.  Contract Liability

1. Prerequisites to Liability

a. Presentment

b. Dishonor (hasn't been paid)

c. Notice of Dishonor

2. Effect of Qualified ("without recourse") Indorsement =get out of liability

B. Breach of Transfer Warranty Libility

a. Made by anyone who transfers for consideration and runs to immediate transferee and all subsequent transferees if transfer is by indorsement

i. Good Title

ii. Genuine Signatures

iii. No Material Alteration

iv. No Defenses

v. No knowledge of insolvency proceedings.


Holder v. Drawee

Generally the Drawee has no liability unless it certifies the check. In this case, Acceptance by bank (certification) discharges the drawer.

Drawer v. Drawee

The Property Payable Rule: The bank must pay checks that are properly payable (wrongful dishonor) and not pay checks that are not properly payable (wrongful honor).


1. Stopping payment orders: Valid if customer has identified item and given bank notice. Oral notices are valid for 14 days and written notices are valid for 6 months

2. Stale Checks (6 months or older): Bank may pay if made in good faith but not required to.

3. Post-dated checks: Valid if customer gives bank notice and identifies item. Timelines are the same.

4. Checks paid after drawer's death: Properly payable until bank knows of death, but still has 10 days to pay even with notice.

5. Overdrafts: May pay but are not required to

6. Forgeries or altercations: Generally not properly payable.

A. However, may validate forgery or alteration if Drawer was negligent.

1. Check signed blank or in pencil.

2. Late notice to Bank.

B. Fictitious Indorsements are treated as Valid:

1. by imposters

2. by employees responsible for check writing who forge signatures

C. Common law

1. Ratification: ratifying sign

2. Authority: Giving authority

3. Estoppel

Drawee (Payor) Bank Recover

1. Forged Drawer's Signature: Payment is Final; no recovery for bank unless a restitution claim against a wrongful party the bank paid.

2. Forged indorsement:  Payment is not final, bank may recover from the party that presented the instrument or any prior transferor.

A. Presentment Warranties: Made by presenter and all prior transferors; run to drawee or maker

1. For Checks

a. Good title (forged indorsement, but not forged drawer's signature breaches this).

b. No Material Alteration

c. No knowledge drawer's signature is unauthorized.

2. Other Instruments

a. Good title.


Agents will not be personally liable in signing a signature line of check that is drawn on principal's account, provided that the principle's name is printed on the check, unambiguously indicates that the agent is signing as an agent. Otherwise, agent is liable to HDC and for non-HDC, permitted to introduce evidence that the original parties to the instrument did not intend for agent to be personal liable.

Accomodation Parties and Negotiable Instruments

An accomodation party is liable in capacity in which instrument is signed (usually indorser). No requirement that creditor try to collect from debtor prior to trying to collect from surety unless phrase "collection guaranteed" is included when surety signs instrument.


1. Defenses

A. All Primary Debtor's defenses except discharge in bankruptcy, infancy, or incapacity

B. Special

1. Creditor's extension of debtor's time to pay Contract discharges an accomodation party to the extent of the loss caused by the extension.

2. Other Material Modifications to Contract between debtor and Creditor

3. Impairment of Collateral Securing Contract between debtor and creditor.

4. If Creditor Discharges Principal, Surety is discharged to extent that Principal is.

5. If payment of an obligation on an instrument is tendered and refused, tender discharges any duty to pay interest on the instrument after the tender and discharges, to the extent of the tender, any person who may have had a right to recourse against the party making the tender.

Accord and Satisfaction

Negotiable instrument can accomplish an accord and satisfaction if:

1. the claim or obligation is disputed or unliquidated,

2. The person against whom the claim is asserted in good faith tenders an instrument

3. That conspicuously states that it is tendered in full payment of the obliagion and

4. the claimant obtains payment of the of the instrument.

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