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a. What’s the nature of the instrument?
b. Who can sue?
c. Who is liable?
d. In what way are they liable?
DRAFT: Three party instrument: A (1) drawer who orders a second party (2) (drawee) to pay a sum of money to a third party (3) (payee.)
Payable to order or bearer
On Demand or at a definite time
Unconditional promise or order
Fixed amount of money
No Undertaking or instruction
1. Cannot be any kind of express condition.
2. Cannot say that it’s subject to, or governed by, another writing: “subject to terms of K dated May 11.”
a. Cannot say that it's obligations are stated in another writing.
BUT, okay to reference the relevant contract, or subject, just not be contingent upon something else.
BUT, implied conditions okay: (for rental of machinery, implied that machinery is available; but not okay to state that check is *contingent* on it.)
* E.g. I promise to pay 10k, plus variable rate of int.
MONEY: No goods, services, real estate etc. (Those might work for a K, but not a negotiable instrument.)
*Not even okay as alternative: "100 or I mow your lawn."
Bearer = one that possesses it, whoeverhas the note.
It is payable to bearer if: (FourOptions)
a. States that it is “payable to bearer” or“order of bearer”
b. Does not state a payee
c. States it is payable to cash, or
d. Indicates it is not payable to anidentified person.
Payable to order if it is payableto an identified person. (“Check to Wayne Barnes.”)
**Exam Note** if contains order andbearer language, bearer language trumps!
i. Payable to Wayne and Christy: this is joint, and you both have to negotiate and sign.
ii. Payable to Wayne or Christy: either person can negotiate and sign
iii. Ambiugous? (And/or, or just both names); then go with alternative (or.) Either person can negotiate and sign.
Will say “This is payableon demand.” Any time the payee wants.
Can also say, “Payable on sight.”
If it doesn’t say a time, deemed tobe on demand.
a. Will say, this is due Dec 15, 2015.
b. Or, this is payable 90 days from today.
c. Can also be hinged upon a specific event:I promise to pay on X day, unless I have a drought and can’t harvest, then Iwill pay within one year following.
d. Can make notes payable on occurrence ofevent, but NOT if too uncertain. (Death uncertain; marriage not.)
1. *Can be subject to prepayment.
2. *Acceleration is okay, too.
3. *Extension at holder’s option also okay.
*BUT, for extension, if at the maker/drawer's option, must be reasonable:
*If it says, I promise to pay Jim 10,000 on certain day, but it’s extendable for 6 mths = okay. BUT, not okay to extende indefinitely.
RULE: Most undertakings destroy negotiability:
1. Not okay: “I promise to pay 10k, and also to paint house, and mow lawn, and etc.”
2. THREE EXCEPTIONS:
--> Maintain collateral (for promiseto pay backed by collateral: “I promise to take care of the collateral.)
--> Authorization or power to confess judgment: if I default on this, you don’t have to litigate, I confess.
--> Promise to waive benefit of any law intended for obligor’s protection
Voluntary or involuntary transfer ofpossession of instrument by person other than issuer to a person who therebybecomes its holder.
Gist. Negotiation = the transfer, whichis the whole point of this. If done correctly, the new person (the holder) willbe able to enforce the note.
(1) Possession, and (2) indorsement
Options 1: Sign name – “blankindorsement.” Just converted note to bearer paper; now whoever holds it
Options 2: Sign name and say “pay specific person.” Now it’s order paper– can only be endorsed by that person if he then signs it.
The person you gave it to has specifically enforceable right to get you to indorse it.
Recipient can write her name above the first signature to convert to order paper.
Now, even though she may have received a blank indorsement, her indorsement is also required for a negotiation to someone elese.
Absolute restraints are invalid:
"To Henry older, and no one else." That restraint is invalid, and he can negotiate it with someone else.
(2) Corp exceeds powers
(3) Fraud, duress, mistake
(4) Part of illegal transaction
(5) Made in breach of duty
Gist: these areeffective, but voidable/rescindable at the option of the minor, or other party.
If the negotiation has passed one step further (minor -> holder 1, then holder 1 -> holder 2), that second holder is a “holder in due course” and his can’t be undone.
Minor may have defense if sued, but cannot get the check back at this stage.
o (1) Holder
o (2) Holder in Due Course
o (3) Non-holder that has possession andhas rights of holder somehow
o (4) Someone not even in possession thatcan enforce it. (Usually, person was once in possession, but it was lost or stolen.)
Person in possession of instrument if:
(1) Instrument is payable to bearer, or
(2) Instrument is payable to identified person, and that person is in possession of instrument
*First holder of instrument = payee.
Usually, no one can be a holder after this.
Forgery breaks the chain of title and "prevents the possessor of an instrument from being a holder."
Fictitious Payee Rule:someone on inside of company who makes someone up, and pays fictious people. Thisis enforceable bc employer is also responsible (negligent).
Imposter Rule: whenperson induces someone to endorse something to through impersonating.
§ E.g.You pretend to be someone who is owed money, and you forge an indorsement when you get it.
**Exam application: when a HDC gets it, it's effective!
Must be the Holder of an instrument that wasnot forged
Must take the instrument for Value
o Value: Similar to consideration: money,goods, etc.
o Exceptexecutory promise does not work. If you just promise to do something, you aren’tyet a holder in due course (you could just not deliver the widgets; valuehasn’t yet been given.)
o Okay if payment for preexisting debt.
o Exam Note: A gift of a check = no value! (So can’t be a holder in due course ifyou were just given a check for no value.)
Basically, it's (1) overdue or (2) has been dishonored and, you know it:
Overdue happens when:
(1) Day after day demand for payment has been made.
(2) If a check, more than 90 days since date of instrument
(3) If not a check, when it has been outstanding for an unreasonably long period of time.
o Sometimes, even if requirements ofholder of course can be met, still can’t have that status:
§ (1)Bought at bankruptcy sale
§ (2)Bought as part of a bulk transaction. (Buying the whole biz; not normal.)
§ (3)Take as a successor in interest to an estate.
** THESE ARE NOT HDCS!
Rule: Ifthe person you got it from was a holder in due course, you get holder in duecourse status derivatively.
§ Evena gift transferee can get holder indue course status this way.
§ Evenif you had reason to know something that the first holder in due course didn’t(that he was getting a bad note, for example), you still get his holder in due course status.
If you committed fraud or illegality.
(I.e. you transfer it to someone who has holder in due course, and then you get it back from someone – can’t *launder* like this.)
o If note is lost or stolen, then you need:
(1)Proof that person was in possessionand was entitled to enforce it at the time it was lost.
(2)Loss of possession was not voluntary
(3)Person cannot reasonably obtain possession of instrument: lost, destroyed or inwrongful possession (stolen).
Signatories: if you sign something, youare liable. But if you haven’t signedit, then you aren’t liable. (Or if an agent hasn’t signed for you).
§ Ifagent is authorized, to avoid liability he must:
· (1) make clear who actually principal isn the signature,
· (2) make clear you are acting in arepresentative capacity.
§ Whatif agent is careless?
· If he makes it ambiguous, and holder indue course gets this, we hold the agent personally liable!
§ Exception:checks – it if says “this is an ABC Corp. check” everyoneshould know that this is an agent.
§ If you didn’t authorize it or sign it, you can’t be liable!(So principal won’t be liable.)
§ But,if an agent signs someone else’s name without authority, then its as though hesigned his own name! (He is thenliable.)
(1) Primary liability: has to pay whenit’s time to pay (demanded, or time when it comes due.)
(2) Incomplete instrument?
E.g.if some part of the note is blank (i.e. dollar amount). Codesays: this is dumb, and you are liable for howeverit gets filed in!
o (1) You aren’t promising anything here;just telling bank to write the check.
o (2) Secondary liability: if bankdishonors (check bounces), then the person can come to the drawer
§ Gist:you promise to pay if the drawee doesn’t.
(1) Not liable immediately for a check.
(2) Have to have the check presented, andthen bank decides whether to undertake to become obligated = acceptance.
(Processof acceptance = certification).
Ifthe bank dishonors, even if there’s enough money in there, still not liable.
*Warranties accompany an instrumentwhen it is transferred. Transferor warrants: "I- DEAF"
(1) No knowledge of insolvency
(2) Instrument is not subject to defense or claim in recoupment of anyparty against transferor
(3) That he is entitled to enforce instrument.
(3) No alterations
(4) No forgeries (signatures are authentic and authorized
Anyone who endorses an instrument has secondary liability.
If the maker of the instrument does not pay and the indorser is given notice, indorser is liable.
*NOte: UNLESS there has been a qualified endorsement, "Signed Paul, without recourse" -- then there's no secondary liability.
o One who signs instrument for purpose oflending name to it.
o Next holder doesn’t trust the maker orformer holder, and demands greater assurance.
o Rule: Accomodation party is liable incapacity in which they signed.
§ Ifthey signed to support the maker, the liable as a co-marker.
§ Ifthe signed to support an indorser, then have secondary liability as a co-indorser.
§ Not liable for transfer warranties.
§ *Can never be liable to the person you accommodated.
§ Except as otherwise noted, if two people have same liability on a note, they will be jointly and severally liable.
Requirements: TPIR ["TiPIR}
(1) Must be on Time: can’t demand until the date it’s due.
(2) Can demand that the instrument be Physically presented
(3) Can demand Identification of party presenting
(4) Entitled to get a signed Receipt once you’ve paid it. – proof for the future sono one else can claim.
§ Personentitled to present cannot with reasonable diligence make presentment
§ Makeror acceptor has repudiated an obligation to pay instrument, or is dead orinsolvent
§ Byterms, presentment not required
§ Draweror indorser whose obligation is being enforced has waived presentment
§ Drawerhas instructed drawee not to pay or accept draft, or drawee was not obligatedto pay the draft.
(1) Warrantor is entitled to enforce thedraft. (No unauthorized endorsements.)
(2) Warrant that it has not been altered.
(3) Warrant that you have no knowledgethat signature of drawer of the one who issued it was forged or unauthorized
*Gist: If fraud happens, and later draweehas to refund money, he can then goto the one who presented it for payment for presentment warranty.
- Get in touch with anyone who has secondary liable toput them on notice.
*Deadlinesfor giving notice of dishonor:
· (1) Bank has to give notice to otherbanks fast -- by midnight of thefollowing banking day.
· (2) For everyone else, 30 days afterdishonor.
First, Plaintiff to Establish Signatures
- P (holder) to establish (1) validity of signatures AND (2) that he is entitled toenforce the instrument.
- Presumedthat the signatures are valid.
Second, Burden then on D to AnnounceDefense
- Then the burdenshifts to the one being sued.
Third, back to the P to show: HDC
- Holderin due course statutes basically trumps all.
RULE: An HDC takes the instrument "free and clear of any claims."
Gist: Protected from claims saying, “this was stolen before it got to you, I want itback.”
Also free from claims of recoupment: if there’s a breach of warranty claim thathappened earlier down the chain, holder in due course is also free from this.
Youth: generally voidable, and so this is still valid.
Fraud: in factum (not in inducement) (e.g. rock star)
Duress: must be serious, threat of physical force (only if it renders void, not voidable)
Illegality of transaction (if renders void, not v-able)
Lack of legal capacity
Discharge in insolvency proceedings: bankruptcy.
Discharge of which the holder has notice.
*These are like real defenses, but alittle different.
W/ others, at least people were liablebefore hand, but with these, if there’s a forgery, that person should reallynever have been liable in the first place.
If alteration is fraudulent, then party’s whose obligation is effected is discharged, EXCEPT as to HDC. (HDC can only enforce for original terms.)
E.g: Paul adds a zero to something that Matt Maker made. Paul has no claim of anything any longer. Butwhen it gets passed on to Henry Holder, then it’s back to the original terms –Henry can hold Matt accountable for the amount before the alteration.
§ If your substantial negligencecontributed to the alteration, then you can't redeem money.
· Matt left it blank and was negligentabout allowing someone else to alter, then Henry Holder will be able to hold Matt Maker (not Paul) liable for theoriginal obligation.
Forgery of issuance is available asdefense against holder in due course. (Diff from alterations!)
§ Ifyou don’t sign something, you can’t be liable!
§ Instead,forger is liable: E.g. Frank Forger forges a note with MattMakers name and then endorses Paul Payee and then it goes on to Henry Holder.
§ Henry Holder must now go after Frank.
§ Can’tfind Frank? Can go after any other holder in the medium term who endorsedit, for breach of transfer warranties. (I.e. go after Paul Payee)
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