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Southern Methodist University
Bar Review 3
Bar Review 3
Southern Methodist University
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Approach to Commercial Paper Problems
Identify Type of Paper
Is instrument negotiable?
Instrument was properly negotiated?
Determine if transferee s a holder in due course
π's cause(s) of action: K, warranty, tort, or not payable
Can ∆ pass liability
Step 1: Identify instrument
Step 1: Note
Note: promise to pay as a 2 party instrument
Cert. of Deposit - note issued by a financial institution (FI)
FI acknowledges receipt of money
FI promises to repay
Step 1: Draft
Draft: Order to pay as a 3 party instrument
drawer - person ordering payment
drawee - person making payment
payee - person receiving payment
Step 1: Draft (checks requirements)
FI is drawee
payable on demand
Step 1: Draft (checks types)
Types of checks
Certified checks - FI has agreed to pay
Cashier's check - FI is drawer and drawee
remitter - purchases check
Teller's checks - check drawn by one FI on another
Traveler's checks - demand instrument with counter-signature
Step 1: Draft (Remotely-created item)
Draft not signed by drawer but created with drawer's authority so that 3d party can get paid from drawer's account at a bank.
Usually 3d party is an Internet seller or paying bills over phone using checking account number
Step 3: Negotiability (Requirements)
Writing - no specificity
Signed by maker or drawer - any symbol
Unconditional promise or order to pay
No other undertaking or instruction
Payable on demand or at a definite time
Contains words of negotiability
Step 3: Negotiability (meaning & importance)
Form of instrument determined at time of issuance
Can opt-out except check (cannot opt in)
If negotiable and negotiated, can lead to holder in due course
Step 3: Negotiability: Unconditional Promise/Order to Pay
Express condition to payment
Promise "subject to"/"governed by" another record
Incorporation by reference in another record
Step 3: Negotiability: No effect on unconditional promise
Statement of consideration - not conditional
Reference: "as per" or "in accordance with"
Incorporation by Reference of Items that Would not Hurt Holder*
Limit Payment to Fund or Source
Consumer protection language (stop HDC)
Step 3: Negotiability: Incorporation by Reference of Items that Would not Hurt Holder
Rights regarding collateral
Prepayment - right of obligor to pay early
Acceleration - Right of holder to get paid early upon some event
Step 3: Negotiability: Fixed Amount
Principal must be determined
May have interest if:
Amount of money - $20 interest
Fixed or variable rate - 5% this year and 7% next
Reference to outside source - 2% above prime rate
No interest stated = no interest
Interest but not specified = judgment rate
Step 3: Negotiability: In Money
Can be any medium authorized or adopted by a domestic or foreign government as part of its currency.
Payment cannot be in goods or services
In interpretation: words > figures
Step 3: Negotiability: No other undertaking or instruction
Not a full contract - "couriers w/o luggage"
Promises concerning collateral
Confession of Judgment clauses - unenforceable in TX
Waiver of law meant to benefit obligor
Step 3: Negotiability: Payable on Demand or At A Definite Time
At Definite Time
Fixe Period after sight or acceptance
Time Readily Ascertainable at the Time the Promise is Issued
Step 3: Negotiability: At A Definite Time (No effect)
Permitted date change matters that dont effect
Prepayment - obligor can pay early
Accelerate of due date - payee upon certain named events
Provisions in instrument extending the due date
holder - anytime
auto in instrument or obligor - definite time
Step 3: Negotiability: Contains words of negotiability
Payable to (the order of) bearer
Indication that possessor entitled to payment
No payee stated (bearer paper)
"to (order of) cash"
Not payable to identifiable person
Exception for checks - waived if only prob.
Step 4: Negotiation
Transfer of the note from the payee to a
Step 4: Negotiation (Holder Requirements)
Possession of Negotiable Instrument
Bearer = possession
Order = possession
Step 4: Negotiation (Indorsements)
Blank indorsements - payee signature only ...
creates bearer paper
Signature - normally on back
Special Indorsements - signature
designation of new person
creates order paper
Restrictive indorsement - limits use "for deposit in my bank acct # ...."
Step 4: Negotiation (Identifying payee for indorsement)
Ambiguous - issuer's intent
"and" - all payees must indorse
"or" - any payee can indorse
Step 4: Negotiation (Misc. Indorsement issues)
If for value, transferee can get specific performance of indorsement.
Depositary bank becomes holder even w/o t'ee signature.
Misspelled name - can be indorse with either name or both
Payee can indorse even if lacking capacity
Step 5: Holder in Due Course (benefits)
Ordinary holder has rights to receive payment, but HDC has better rights over a holder and can take despite personal defenses raised by maker.
Step 5: Holder in Due Course (Requirements)
Authenticity not apparently questioned - no apparent forgery, alteration, or substantial incompleteness/irregularity
Holder must pay value
Without notice at time of instrument acquisition
Step 5: Holder in Due Course: Paying value
Can be for any value, but if the value is substantially small - no good faith
If the t'ee only pays part of the consideration then they are only an HDC for the portion paid.
Past consideration counts as value.
Step 5: Holder in Due Course: Good Faith
Honesty in fact (subjective)
Observance of reasonable commercial standards of fair dealing (objective)
Step 5: Holder in Due Course: Without notice (notice)
Receipt of a notice coupled with reasonable time to act on notice
Reason to know from facts and circumstances person knows
RECORD NOTICE IS NOT SUFFICIENT
Step 5: Holder in Due Course: Without Notice (notice examples)
Check due = 90 days
Overdue interest is not notice
Uncured default of another inst. issued as part of same series
Any defenses or claims in recoupment (counterclaim)
Step 5: Holder in Due Course: Shelter Rule
Even a holder does not qualify as HDC, can have rights by shelter. If the transfer was from an HDC then the transferee has HDC rights (but is not an HDC).
EXCEPTION: A person who was party to fraud or illegality - cannot get HDC rights by shelter
Step 5: Holder in Due Course: Burden
The burden to prove HDC status is upon the person asserting HDC status.
Person must prove all elements or proving that person sheltering under met all the elements.
Step 5: Holder in Due Course: Rights subject to real defenses
Lack of Capacity
Fraud in the Execution (factum)*
Omission of Required Consumer Protection Language
Payment to former holder
Unauthorized Signatures & Forgeries
Step 5: Holder in Due Course: Fraud in the factum
Signer lacked knowledge of instrument's character or essential terms
Signer lacked reasonable opportunity to learn of the instrument's character or essential terms.
Step 5: Holder in Due Course: Statute of Limitations
Note - 6 yrs from the date of issue
Unaccepted draft (check) - earlier of either
3 yrs from the date of dishonor
10 yrs from the date of issue
Step 5: Holder in Due Course: Over Personal Defenses
All other defenses
Failure of consideration
Breach of warranty
Fraud in the inducement - fraud about quality
Can still sue the committer of fraud
HDC can take over any claimant
Step 6: Type of Liability (Contract = bound by signature)
Liability arises when a proper payee has not been paid. The primary basis of K liability is a person's signature.
Binding agent - assume agent sign's agent's name & P is bound
if agent not authorized = forgery
Need instrument to bring claim
Step 6: Type of Liability (Contract: is the agent bound by signature)
Agent is not liable if
P Identified in Instrument
Signature unambiguously shows made on behalf of P
Liability if above not met
HDC - liable unless HDC had notice of signature's nature
Non-HDC - liable unless parties did not intend agent to be liable
Step 6: Type of Liability (Contract agency's liability: Special Rule for Checks)
The agent is not personally liable if the P's name is on the check.
Step 6: Type of Liability (Contract: Maker of Note)
Primary Liability - no conditions precedent
Maker must pay when it is due
Liable to holder or indorser who paid instrument
Defenses - effectiveness depends upon HDC
Step 6: Type of Liability (Contract: Drawer of Draft)
Can disclaim liability on anything but check
Secondary liability only if
Presentment to drawee within 30 days
Dishonor - drawee refuses to pay the instrument
Step 6: Type of Liability (Contract: Indorser of note or draft)
Can disclaim liability
Order of liability
Indorsers are liable to each other in order of their signatures
Secondary liability only if
Presentment to maker or drawee w/i 30 days of indorsement
Notice of dishonor to indorser w/i 30 days of dishonor
Step 6: Type of Liability (Contract: Drawee)
Generally, drawee makes no negotiable instrument Ks.
Drawee can certify or accept to create liability
no obligation to accept and no suit for failure to accept
Once drawee makes final payment all contract claims are terminated and no suit but warranty
Step 6: Type of Liability (Contract: Drawee (cont))
Drawee is liable for conversion (tort) for paying a forged instrument. π must receive the instrument.
After Drawer's death
D'ee can pay until it knows d'er died
After notice, can pay for 10 days unless person w/ interest tells them to stop paying.
Step 6: Type of Liability (Contract: Accommodation Parties (Definition))
Co-Signers, Sureties, and Guarantors - person who signs an instrument to lend his or her credit to another party but does not receive any benefit from the money.
Accommodated party - principal/debtor
Accommodation party - surety/co-signer
Step 6: Type of Liability (Contract: Accommodation Parties (Liability))
Liable in capacity which party signs; no special K.
May limit liability to guarantee of collection only (seek accommodated party first)
Can sue accommodated party
Can be created by
Anomalous indorsement - outside of chain of title
Step 6: Type of Liability (Warranty)
Implied warranties are created by
transfer or presentment
but not indorsement
Possession is not needed like it is with K liability
Warranty liability survives the final payment of the instrument.
Step 6: Type of Liability (Warranty: Transfer Warranties from and to whom?)
Transferor who receives consideration makes a transfer warranty
Don't arise in a gift context
The warranty is made to
subsequent t'ees if t'or indorsed
Later collecting banks gets warranty w/o indorsement
Never to drawee or maker
Step 6: Type of Liability (Warranty: Transfer Warranties arise when)
Warrantor is entitled to enforce the instrument (basically warrants holder status)
All signatures authentic and authorized
No good defenses against t'or
No knowledge of insolvency proceedings
If remotely-created, drawer actually authorized
Step 6: Type of Liability (Warranty: Disclaiming Warranties)
Checks - cannot disclaim
Non-checks - may disclaim ("without warranties")
Step 6: Type of Liability (Warranty: Presentment Warranties)
Made on presentment (mutually exclusive with transfer warranties)
Presenter's and previous t'ors make the warranty
Made to parties who pay in good faith, that is, maker or drawee or acceptor
Step 6: Type of Liability (Warranty: Presentment Warranties: Unaccepted drafts presented to drawee)
Warrantor entitled to enforce draft or obtain payment
No knowledge of unauthorized drawer's signature
RCI, person identified as drawer authorized the item
Step 6: Type of Liability (Warranty: Presentment: Other Instrument presented)
Warrantor entitled to enforce draft or obtain payment.
Step 6: Type of Liability (Warranty: Warranty v. Indorser's K)
If π is the holder, payor has not paid then holder sues indorser on indorser's K
If the π is payor, payor has paid, payor will attempt to sue indorser for breach of warranty.
Discharge by Holder
Holder of a instrument may discharge obligation by surrendering to obligor, destroying it, writing void, etc.
Effect of Instrument on underlying obligation
Payment by Cert., cashier's, or teller's check - underlying obligation discharged as if paid in cash.
Uncertified checks & notes - obligation suspended
If later paid, discharged
If later dishonored, holder may sue on either instrument or obligation
Failure to produce original instrument
Enforced by person not in possession
Person was holder when loss happened
Loss not due to transfer or lawful seizure
Person cannot reasonably obtain original
Protection for Payor required - security or bond
Overdraft - bank may pay even if it creates an overdraft on account
Postdated checks - bank may pay now unless customer gives bank notice of the postdating which it describes with reasonable certainty.
Stop Payment Orders
Must be in writing
Described item w/ certainty
Valid for 6 mo.; can be renewed
Reqs not met
No loss - customer would have to pay even if payment had been stopped (HDC)
Remitter cannot stop
Wrongful Dishonor (rare)
Drawee dishonors properly payable check. Only the drawer has standing; the payee has no privity of K.
Damages - All damages including cost to defend
Drawee Bank defenses
Payment would have overdrawn
Check is more than 6 mo. old - "stale" check (good chk)
Payment in Full Check
A check (or accompanying communication) on which drawer conspicuously indicates that cashing is payment of debt unliquidated or subject to bona fide dispute.
Payment operates as an accord and satisfaction when cashed
Exceptions to Payment in Full Check
Payee returns the money w/i 90 days
Payee is an organization and had previously notified the drawer of a particular person or address to send payments in full checks.
Forgery and Alteration: Forged Maker's Signature
Alleged maker is not liable
Conduct can ratify forgery and cause Alleged maker to be unable to claim forgery
Forger is liable because his signature appears on the note (even if wrong name).
Forgery and Alteration: Forged Drawer's Signature
Alleged drawer is not liable
Drawee bank must re-credit drawer's account unless breach of presentment warranties (unusual)
Drawee takes risk unless presenter knew it was unauthorized
D'er negligence substantially contrib.
Bank statement rule*
Forgery and Alteration: Bank Statement Rule
General rule: C has a duty to inspect bank statement. If c doesn't & bank can prove further loss (not finding forger), c precluded
Must report to bank w/i 1 yr
Repeat offender: 1 forges series of checks 30 days to report to recover sub. forgeries
Forgery and Alteration: Forged Indorsement: Effect
Bearer paper: no effect because not necessary
Order paper: forgery breaks the chain of title and check is not properly payable.
drawer may demand drawee bank recredit account
Forgery and Alteration: Forged Indorsement: Some party precluded from asserting forgery of payee's name
Maker/drawer - IMPOSTER RULE estops denying of validity of indorsement
Payee - Fraudulent indorsement by employee entrusted with check
Forgery and Alteration: Forged Indorsement: IMPOSTER RULE
maker/drawer estopped from denying of indorsement validity
4 main fact patterns
M should determine P'ee's identity
M should determine P'ee's authority - Am. Red Cross
Co. should supervise treasurer who cashes to self
Co. should supervise treasurer's sec.
Forgery and Alteration: Forged Indorsement: Drawee Liability if not precluded
Conversion liability to payee
Not properly payable liability to Drawer
Fraudulent indorsement by employee entrusted with check
Failure to timely sue - 3 years SoL
Forgery and Alteration: Forged Indorsement: Presenter Liability
Drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of
entitled to enforce
Forgery and Alteration: Forged Indorsement: Transferor Liability
Presenter who loses to payor for breach of presentment warranty of good title may sue entitites further up the chain for breach of the various transfer warranties of :
entitled to enforce
all signatures authentic or authorized
no good defenses
Forgery and Alteration: Alteration (defense)
Obligor does not want to pay because instrument was altered. Two types:
Change in obligation - amount, date, names of payees, or interest rate
Altered checks are not properly payable
Bank statement rule
Forgery and Alteration: Alteration (effect on holders)
Change in obligation - can enforce for original amount
Unauthorized completion - may enforce as completed
Fraudulently made by holder - total discharge of obligor
Not made by holder - obligor liable under original terms
Forgery and Alteration: Alteration (breach of warranties)
There are transfer and presentment warranties warranting that an instrument has not been altered.
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