July 13, 2010. 1. Possession of the instrument

July 13, 2010

1. Possession of the instrument

2. Good Title

Depends on words of negotiability found on the instrument.

2. Good Title

Bearer words = possession alone is good title

2. Good Title

Order words = properly indorsed

Indorsement – Generally

Signature by payee (or later holder), normally on the back.

Blank indorsement

Signature by payee only.

Creates bearer paper so later negotiations are by transfer of possession.

Special indorsement

Signature by payee which names new person entitled to the money.

Creates order paper so later negotiations need indorsement of new person.

Restrictive indorsement

Signature by payee indicating “for deposit” or “for collection” only.

If bank does not comply, bank is liable for conversion.

“Pay to the order of George Bush.”

First U.S. President named George Bush?

Second U.S. President named George Bush?

Some other person with the name of George Bush?

“Pay to the order of William Bell and Walter Bishop.”

Both must indorse to negotiate.

“Pay to the order of William Bell or Walter Bishop.”

Only one must indorse to negotiate.

“Pay to the order of William Bell and/or Walter Bishop.”

Only one must indorse to negotiate.

If transferred for value, transferee has specifically enforceable right to transferor’s indorsement.

If transferred for value, transferee has specifically enforceable right to transferor’s indorsement.

If check deposited in your account, bank becomes holder even without your indorsement.

“Pay to the order of Jerry W. Beyer.”

Indorse in incorrect name (“Jerry W. Beyer”), or

Indorse in correct name (“Gerry W. Beyer”), but

Person giving value may require both indorsements.

A payee without legal capacity (e.g., minor or incompetent) may indorse.

1. Negotiable instrument.

2. Held by a holder.

3. Authenticity of instrument not apparently questioned.

4. Holder paid value.

Value may be different from face value.

Not a gift.

5. Holder in good faith:

5. Holder in good faith:

a. Honesty in fact (subjective), plus

5. Holder in good faith:

a. Honesty in fact (subjective), plus

b. Observance of reas0nable commercial standards of fair dealing (objective).

6. Without notice of the following things at the time instrument acquired:

6. Without notice of the following things at the time instrument acquired:

a. Principal overdue

▪ Note = due date has passed

▪ Check = more than 90 days from date of issue

6. Without notice of the following things at the time instrument acquired: a. Principal overdue b. Instrument dishonored

Note = maker refused to pay Check = drawee bounces check

6. Without notice of the following things at the time instrument acquired: a. Principal overdue b. Instrument dishonored c. Unauthorized signature

6. Without notice of the following things at the time instrument acquired: a. Principal overdue b. Instrument dishonored c. Unauthorized signature d. Alteration

6. Without notice of the following things at the time instrument acquired: a. Principal overdue b. Instrument dishonored c. Unauthorized signature d. Alteration e. Any claim

6. Without notice of the following things at the time instrument acquired: a. Principal overdue b. Instrument dishonored c. Unauthorized signature d. Alteration e. Any claim f. Any defense or claim in recoupment

(counterclaim)

What does notice mean?

What does notice mean?

1. Actual knowledge (subjective)

What does notice mean?

1. Actual knowledge (subjective) 2. Receipt of a notice

What does notice mean?

1. Actual knowledge (subjective) 2. Receipt of a notice 3. Reason to know based on facts

and circumstances

Shelter Rule – HDC rights pass along with instrument.

Maker Payee

HDC

Holder

gift

1. Infancy

Normally, under 18 years old

2. Duress

3. Lack of Legal Capacity

4. Illegality making obligation void

5. Fraud in the execution (fraud in the factum)

6. Bankruptcy discharge

7. Omission of required consumer protection language

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR.

8. Statute of Limitations

Note = 6 years from due date

8. Statute of Limitations

Note = 6 years from due date

Check = earlier of:

1. 3 years after dishonor, or

2. 10 years after issue.

9. Obligor pays former holder before receiving notice from current holder that instrument has been transferred.

10. Alteration

11. Unauthorized signatures and forgeries

[covered in detail later]

Examples:

Non-delivery of goods Defective goods Non-performance of services Misrepresentation of goods Breach of warranty

No one can take an instrument away from a holder in due course, even the true owner.

Principal = MegaStore, Inc.

Agent = Nancy, the bookkeeper authorized

to sign checks

Issue = Is Nancy personally liable when she

signs notes and checks for MegaStore?

Agent (Nancy) can avoid personal liability if:

1. Identify principal (MegaStore, Inc.) on the

note, and

Agent (Nancy) can avoid personal liability if: 1. Identify principal (MegaStore, Inc.) on

the note, and

2. Indicate agent (Nancy) is signing for principal (MegaStore, Inc.) for example:

Nancy, as agent for MegaStore, Inc.

Nancy, bookkeeper. MegaStore, Inc. by Nancy

Agent (Nancy) can avoid personal liability if the instrument is a check and principal’s name (MegaStore) is on the check.

Primary liability to holder.

No conditions to payment other than note being due.

Secondary liability to holder.

Secondary liability to holder.

Conditions on drawer’s liability to holder:

1. Presentment to drawee within 30 days of issue (but, non-compliance only a problem if drawee becomes insolvent), and

Secondary liability to holder.

Conditions on drawer’s liability to holder:

1. Presentment to drawee within 30 days of issue (but, non-compliance only a problem if drawee becomes insolvent), and

2. Dishonor (drawee refuses to pay)

Secondary liability to holder.

Conditions on indorser’s liability to holder: 1. Presentment to maker or drawee

within 30 days of indorsement (non-compliance discharges indorser’s liability),

Secondary liability to holder.

Conditions on indorser’s liability to holder: 1. Presentment to maker or drawee

within 30 days of indorsement (non-compliance discharges indorser’s liability),

2. Dishonor (maker or drawee refuses to pay), and

Secondary liability to holder.

Conditions on indorser’s liability to holder: 1. Presentment to maker or drawee

within 30 days of indorsement (non-compliance discharges indorser’s liability),

2. Dishonor (maker or drawee refuses to pay), and

3. Notice of dishonor to indorser within 30 days of dishonor.

Disclaimer of liability allowed.

Order of liability if several indorsers = liable in order of signatures.

Sue prior indorsers for payment.

Liable to later indorsers.

None – drawee did not sign draft/check.

Acceptance or Certification – Drawee signs the draft.

Acceptance or Certification – Drawee signs the draft:

1. Drawee primarily liable.

2. Drawer discharged.

3. Indorsers discharged.

Final Payment ends contract actions on check.

Final Payment ends contract actions on check.

Final payment occurs when: 1. Drawee bank pays the item in

cash, or

Final Payment ends contract actions on check.

Final payment occurs when: 1. Drawee bank pays the item in cash,

or 2. Drawee bank does not revoke

provisional settlement by “midnight deadline,” that is, midnight of the next banking day after the banking day of receipt.

Liable in capacity in which accommodation party signs.

1. Maker

Liable in capacity in which accommodation party signs.

1. Maker

2. Indorser (name outside chain of title)

Presumed to be a guaranty of payment.

Can expressly limit guaranty to one of collection only.

Implied – arise automatically.

Implied – arise automatically.

Off-instrument liability so possession of the instrument is NOT necessary to recover.

Implied – arise automatically.

Off-instrument liability so possession of the instrument is NOT necessary to recover.

Goal is to get money back that was improperly paid previously.

Who makes transfer warranties?

Person who transfers the instrument AND receives consideration for the instrument.

To whom are transfer warranties made?

1. Immediate transferee, and

2. Subsequent transferees if transferor (1) indorsed or (2) if instrument is a check passing through collection process.

What are the transfer warranties? 1. Transferor was a holder at time

of transfer.

What are the transfer warranties? 1. Transferor was a holder at time

of transfer. 2. All signatures authentic and

authorized.

What are the transfer warranties? 1. Transferor was a holder at time

of transfer. 2. All signatures authentic and

authorized. 3. The instrument has not been

altered.

What are the transfer warranties? 1. Transferor was a holder at time of

transfer. 2. All signatures authentic and

authorized. 3. The instrument has not been

altered. 4. No defense would defeat the

transferor’s ability to collect the money (“perfect plaintiff” warranty).

What are the transfer warranties? 1. Transferor was a holder at time of

transfer. 2. All signatures authentic and

authorized. 3. The instrument has not been altered. 4. No defense would defeat the

transferor’s ability to collect the money (“perfect plaintiff” warranty).

5. Transferor has no knowledge of bankruptcy of maker, acceptor, or drawer.

What are the transfer warranties? 1. Transferor was a holder at time of

transfer. 2. All signatures authentic and authorized. 3. The instrument has not been altered. 4. No defense would defeat the

transferor’s ability to collect the money (“perfect plaintiff” warranty).

5. Transferor has no knowledge of bankruptcy of maker, acceptor, or drawer.

6. If remotely created item, that alleged drawer authorized the item.

Disclaiming warranties:

1. Check = transferor cannot disclaim

2. Notes and non-check drafts – transferor may disclaim

Who makes presentment warranties?

1. Person who presents the instrument for payment, and

2. All previous transferors of the instrument.

To whom are presentment warranties made?

1. Note = Maker

2. Draft = Drawee or acceptor

What are the presentment warranties on a non-certified check or draft?

1. Presenter (and prior transferors) were holders at the time of presentment (or transfer).

What are the presentment warranties on a non-certified check or draft?

1. Presenter (and prior transferors) were holders at the time of presentment (or transfer).

2. Instrument is not altered.

What are the presentment warranties on a non-certified check or draft?

1. Presenter (and prior transferors) were holders at the time of presentment (or transfer).

2. Instrument is not altered. 3. Presenter (and prior transferors) had

no knowledge of an unauthorized drawer’s signature.

What is the presentment warranty on a note?

Presenter (and prior transferors) were holders at the time of presentment (or transfer).

Disclaiming warranties:

1. Check = cannot disclaim

2. Notes and non-check drafts = may disclaim