I. Types of Commercial Papera. Notes

i. Promissory note is a written promise by a maker 3-103(a)(7) (person promising to pay) to pay money to a payee (person designated to receive the money)

1. Promise – an undertaking to pay and thus must be more than a mere acknowledgement of debt (IOU is not a note)

2. CD – a note signed by a bank acknowledging receipt of money coupled with a duty to repay the debt; courts in conflict whether Art. 3 or 8 governs

b. Drafts i. An instrument in which the drawer 3-103(a)(4) (person creating the instrument

ordering payment) orders (3-103(8)) a designated drawee 3-103(a)(5) (party ordered to pay the money; bank) to pay money to a 3rd person (payee – person designated to receive the money); Also called bills of exchange; Must ID drawee with reasonable certainty

1. Checks 3-104(f) – if the draft names a bank as the drawee (payor) and is payable on demand, then it is a check; if not on a bank, just a draft

a. Traveler’s Checks – drawn on a bank; requiring countersignature by the person whose specimen signature is already signed to the check

b. Cashier’s checks – drawn by a bank on itself (drawer/drawee the same [3-104(g)]); person buying such a check intending to transfer it to another to pay a debt is a remitter(must be made out to someone else)

c. Teller’s checks – drawn by a bank on another bank; person who buys such a check intending to transfer it to another to pay a debt is a remitter (3-103(a)(15)

2. Requirement of an Order to Pay – More than a mere authorization required; must be an order

II. Holders in Due Course Protected by Lawa. Holders in Due Course 3-302. – requirements of negotiation and negotiability are met; bona

fide purchaser pays value for the instrument without notice of claims or defenses to it, then purchaser becomes a HDC

b. Special Status - HDC immune from most defenses of prior parties who are liable on the instrument

i. Prior parties must pay the HDCii. Non-HDC’s take an instrument subject to all valid claims and defenses

iii. EXCEPTION - Consumer credit transactions – FTC regulation requiring a notice to be included in promissory notes and k; has effect of preventing a credit company from being an HDC, meaning a consumer can assert claims and defenses against then; even if absent, is applied per law [personal, family, household]

III. Negotiabilitya. Technical form the instrument must meet to be subject to Article 3 of UCCb. To be negotiable, instrument must be in writing, signed by maker or drawer, contain an

unconditional promise or order, to pay a fixed amount of money, on demand or at a definite time; contain the words of negotiability; and be free from unauthorized promises

c. If not negotiable, then it is a mere contract (subject to all claims and defenses) and HDC impossible

d. When deposit a check at your bank you are asking the bank to do you a favor and get the money for you from the drawee bank

e. Requirements – if all not met, not negotiable and Art. 3 does not applyi. Written Instrument – must be in writing; need not be paper; definitions state in writing

and signedii. Signature of Maker or Drawer – any mark or symbol made by the maker or drawer with

present intent to authenticate is sufficient. 1-201(b37); 3-401(b).1. Signature by Agent or With Assumed or Trade Name – binds maker or drawer.

3-401(a); 3-402.

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2. Unauthorized or Forged Signatures – will not bind maker absent ratification or estoppel but will bind actual signer. 3-403; 1-201(43)

3. Burden of Establishing Signatures – rebuttable presumption that a signature is valid

a. D must plead invalidity and the burden shifts to P to prove validity; D must then produce evidence of forgery or P recovers

4. Location of Signature – placed anywhere on instrument so long as intended to authenticate the writing

iii. §3-106 Unconditional Promise or Order to Pay 1. Promissory note must contain an unconditional promise; draft must contain an

unconditional order2. Purchaser must be able to determine the terms and conditions from the four

corners of the instrument3. Implied Conditions – implied or constructive conditions permissible but express

conditions make the instrument nonnegotiable4. Reference to Other Agreements – Mere reference to a separate agreement

between the same parties does not impair negotiabilitya. “as per” or “in accordance with” is permissible. 3-106(a)b. “subject to” or “governed by” destroys negotiability. 3-106(a)(ii)

5. Descriptions of Consideration – a description of collateral or of other transactions connected with the instrument is not a condition; therefore negotiability is not destroyed

6. Incorporation of a Separate Document – Mere reference to or description of another document is permissible; incorporation destroys negotiability

a. Separate terms for prepayment or acceleration are permissible if all other elements met. 3-106(b)(i)

b. Reference to another document is also permissible concerning rights to collateral if all other elements met. 3-106(b)(i)

7. Statement of Security – a description (but not incorporation) of the collateral and security agreement does not affect negotiability

iv. Fixed Amount of Money 1. Money – the medium of exchange authorized or adopted by a domestic or foreign

government as part of its currency. 1-201(24)a. Foreign currency – money does not only mean US currency; presumed to

be payable in foreign or US currency unless instrument limits payment to foreign currency. §3-107

2. Fixed Amount – Absolute certainty as to sum due at all times is not required but must be ascertainable by mathematical computation; interest rates can be fixed, variable, or based on outside source, such as a bank’s prime rate or the local judgment rate. 3-112(b). Line of credit does not meet requirement because don’t know how much is due.

a. Interest is always ascertainable because default is payment at judgment rate if not ascertainable

3. Accord and Satisfaction – 3-311(b) – To encourage informal dispute resolutiona. need conspicuous statement on or accompanying check giving notice

to other party; was tendered in good faith as full satisfaction of the claim (to resolve dispute); that the amount of the claim was unliquidated or subject to a bona fide dispute; and the claimant obtained payment of the instrument. 3-311(a). If so, then claim discharged

b. Liquidated – settled and agreed upon4. Claim not discharged if repay within 90 days after payment of the instrument

(drawee bank). 3-311(c)(2) – exception to 3-311 (b)

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5. Claim not discharged if an organization proves that they notified other party of a designated person, office or place who was to receive communications concerning disputed debts. 3-311(c)(1) – exception to 3-311(b)

6. Section (c) does not apply if the claimant knew (actual knowledge) that within a reasonable time before collection of the instrument was initiated, the instrument was tendered in full satisfaction of the claim 3-311(d)

v. On Demand or at a Definite Time (if neither than non-negotiable)1. Face of instrument must show when or upon what events the obligation is due2. Demand Instruments – instrument is payable upon demand if so expressed, or

no time for payment is stated. 3-108(a) ; date determines the time of payment (not payable before the date of the instrument). 3-113.

3. Time Instruments – An instrument payable at a definite time in the future is a time instrument extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event

a. Payable on elapse of specified time after sight or acceptance; or at a fixed date or time readily ascertainable at the time the order or promise was issued, s/t rights of prepayment, acceleration, extension at option of holder,

b. §3-113 Date of Instrument i. (a) May be antedated or postdated; instrument payable on demand

is not payable before the date of the instrument1. Exception – payor bank allowed to pay a postdated check

unless the drawer has notified the bank of the post-datingii. Date Left Off – if date left off and maturity depends on a date

being stated, instrument not enforceable until date filled in by someone with authority

1. 3-113(b) if instrument is undated, its date is the date of its issue

c. Acceleration Clauses – either the maker or the holder may be given the unconditional right to accelerate the maturity date;

i. holder must have good faith belief that the prospect of payment is impaired in order to accelerate “at will”

d. Maker holds right to prepaymente. Extension Clauses – Extension of maturity date at option of the holder

is valid; extension at option of maker or upon happening of an event is permissible only if the further definite time(new maturity date is stated) in the instrument

4. Impact of Datesa. Undated instruments are payable at any time, on demandb. Antedated or postdated instruments are payable on or after the date

stated5. Incomplete Instruments – 3-115. Signed writing, incomplete but signer intended

it to be completed by the addition of words or numbers. If avi. Words of Negotiability

1. Instrument must be payable “to bearer” or “to order of” a specified payee2. A promise or order, other than a check, is not an instrument if at the time issued

or first comes into possession of a holder, it contains conspicuous words stating it is non-negotiable

3. Order Instrument – may be drawn payable to maker or drawer, payee; several payees; partnership, estate, trust, or fund, or representative of such entity; public office or officeholder; pay to John Smith or order

a. Pay to order of JSb. Pay to JS or order

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4. Bearer Instrument – drawn payable to bearer, or to a specified person or bearer, or to “cash,” or any other indication that does not purport to designate a specific payee; pay to John Smith or bearer

a. Pay to bearer, order of bearer, or otherwise indicates that the person in possession is entitled to payment (payable to cash /Merry Christmas – not to an identified person)

b. If payable to bearer it can’t be payable to orderi. Ex. Pay to order of JS or bearer

ii. **bearer language controls***5. Effect of Omitting words – if not payable to order or bearer, then nonnegotiable

a. EXCEPT words of negotiability not required for checks and HDC status not affected by their absence

b. But Art. 3 may govern rights and liabilities of the involved parties by analogy; but no one can be a HDC and it is technically not a negotiable instrument; parties can also opt-in to Article three

6. §3-115 Incomplete Instruments – a signed writing whether or not issued by the signer, the contents of which show that at the time of the signing that it is incomplete but the signer intended it to be completed by the addition of words or numbers

a. If an instrument per 3-104, is enforceable according to its termsi. Pay to the order of _________

1. Incomplete, enforceable according to it’s terms, bearer because doesn’t state payee

b. If not an instrument per 3-104, enforceable once completed (ex. Check without amount filled in)

7. §3-110 - ID of person to Whom Instrument Payable a. Can be a name, office, number, or account numberb. Payable to estate – is a personc. Payable to office or person described as holding officed. Payable to person described as agent or representative of a named or

identified persone. Payable to a fund or organization that is not a legal entity, then payable

to representativevii. No Other Promise Requirement

1. With the exception of promises affecting security, the instrument may not contain any other undertaking or instruction by the person promising or demanding payment to do any act in addition to the payment of money

f. Ambiguities in Instrumentsi. Rules of Construction

1. Words v. Figures - sum denoted by words controls over a sum expressed in figures

2. Handwriting v. Typing/printing – where ambiguities exist, handwriting prevails over typed or printed; typed over printed

ii. Description of Payee1. An instrument payable to the agent is treated as being payable to the principal2. If payable to an entity (partnership) it is considered payable to the current

representatives thereofiii. Omission of Interest Rate

1. If instrument payable with interest, but no rate stated, the state’s statutory “judgment rate” is applied

IV. §3-201 Negotiationa. Transfer and Negotiation

i. Three stages: issuance, transfer; presentmentii. Have to be a holder in order to be a holder in due course

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b. Terms i. Negotiation – the process by which an instrument is transferred by a person other than

the issuer to another who qualifies as a holder. 3-201(a); creates holder status (1st element of HDC)

ii. Holder – 1-201(21) – person in possession of a negotiable instrument that is payable to either bearer or to an identified person that is the person in possession ; a holder is also a PEEI regardless of whether an owner or has unlawfully; thief can’t be a HDC of bearer paper because never good faith and takes it with notice of claims against it; thief can’t be holder of order paper because must be payable to the name of the person in possession

iii. Issue 3-105(a) – the first delivery of an instrument by a maker or drawer to a holder or remitter

1. Remitter involves cashier’s check. Bank is drawer; creditor is payee, customer requesting check is remitter. Here, bank issues to remitter who then sends to creditor

a. Remitter is not a holder because she does not have title to the checkiv. Transfer 3-203 – a delivery by a person other than the issuer for the purpose of giving

one the right to enforce the instrumentv. Person entitled to enforce (PEEI) 3-301 (good title)– the holder and certain other

persons; Anyone in possession of bearer paper is a holder; order paper must be indorsed and transferred before another may become a holder. A person may be a PEEI even though the person is not the owner of the instrument or is in wrongful possession of the instrument

vi. §3-203 – Transfer Rights – transfer regardless of whether it is a negotiation, vests in the transferee any right of the transferor to enforce the instrument

vii. Drawee – party against whom the instrument is drawn; bank is also the “payor bank”viii. §4-105 (3) Payor bank – the bank that can pay the money because it was drawn on that

bankix. §4-105 (2) Depository bank – first bank to take an item even though it is also the payor

bank, unless the item is presented for immediate payment over the counterx. §4-105 (5) Collecting Bank – a bank handling an item for collection except the payor

bankxi. §4-105 (6) Presenting Bank – a bank presenting an item except a payor bank

xii. §4-205 – Depository Bank Holder of Unindorsed Item – the bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item, and if the bank satisfies the other requirements

1. This is an EXCEPTION to the normal negotiability rulesc. Negotiation Process

i. Bearer Instruments – bearer paper is negotiated simply by transfer because possession qualifies a transferee as a holder

ii. Order Instruments – Delivery of an order to a named payee is sufficient for negotiation1. Further negotiation requires a valid indorsement and transfer to the

transferee2. Unauthorized indorsements of required signatures prevent negotiation and

subsequent transferees no matter how innocent or far down the line do not become holders

3. Multiple Payees – 3-110(d) a. “and” – payable jointly and all must endorseb. “or” or “and/or” – payable alternatively and indorsement by one of the

payees is negotiationc. If unclear (such as stacked) , it is presumed to be in the alternative

4. Location of Indorsement – must be written somewhere on the instrumenta. Usually on the back

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b. May be an allonge 3-204(a) (separate paper firmly attached to instrument); ok even if room to indorse on instrument; common law it had to be glued; now may be stapled (not folded in)

5. Effect of Delivery Without Indorsement – transfer without necessary indorsement does not constitute a negotiation, and transferee does not become a holder and cannot negotiate the instrument (except where a bank takes for collection) even though it may be effective to transfer possession

a. Indorsement later obtained – transferee then becomes holder6. Indorsement of Partial Interests 3-203(d) – an indorsement must convey the

entire instrument; if attempts to convey less than the whole then it is not a negotiation

iii. Indorsements 3-204 – look to purpose; a signature is an indorsement if the instrument does not indicate an unambiguous intent of the signer not to sign as an indorser

1. Conversion – intent to exercise dominion or control over the chattel of another and deprivation to such an extent that the actor may be justly required to pay the owner the full value of the chattel (cannot get title from a thief)

2. Forgery § 3-403 Unauthorized Signature– no one can be a holder because the indorsement was not valid

a. Payee’s Indorsement must be authorized and valid; forging prevents further negotiation and no subsequent possessors can be holders; instrument remains property of original holder

b. Any unauthorized indorsement of the payee’s name or any special indorsee’s name is not a valid negotiation and gives subsequent transferees no legal rights in the instrument no matter how innocent they are or how far removed they are removed from the forgery

c. Unauthorized signature may be ratified 3-403(a); comment 2d. Forger becomes liable for the instrument 3-403(a) but limited to parties

who accept in good faith; if they know it is unauthorized then they cannot recover from the signer

i. Presumption that signature is valide. §3-306 Claims to an Instrument

i. A person taking an instrument, other than a person having HDC rights, is subject to a claim of a property or possessory right in the instrument or its proceeds including a claim to rescind a negotiation and to recover the instrument or its proceeds

3. Special Indorsements 3-205(a) – if the payee of order paper names a new payee; any further negotiation requires the valid indorsement of the new payee (creates order paper)

a. Words of Negotiability – such as pay to the order of are not required when indorsing; key time of words of negotiability is at the time of issue or when first came into possession of holder (remember a check does not need it at the time of issue)

4. Blank Indorsements 3-205(b) – if the payee of order paper indorses without naming a new payee this is a blank indorsement and converts it to bearer paper; can be converted back to order paper by writing a new payee above the last indorsement. Note, once converted to bearer paper, an unauthorized signature (thief) has no effect on holder status of a subsequent holder party (3-201 – transfer of possession whether voluntary or involuntary)

5. Multiple Indorsements – If the instrument has been indorsed several times, the last valid indorsement controls what is necessary for further negotiation

6. Qualified Indorsements – 3-415 - “without recourse” limits indorser liability7. Restrictive Indorsements §3-206 – If instrument bears “for deposit only” or blank

indorsement, a person other than a bank, who purchases the instrument when so indorsed converts the instrument; depository bank who purchases instrument or

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takes it for collection converts the instrument; a payor bank that is also the depository bank or that takes the instrument for immediate payment over the counter other than a collecting bank converts the instrument

8. Anomalous Indorsement 3-205(d) - an indorsement by one who is not a holder (“surety”) made for the purpose of incurring the indorser’s liability on the note

9. Common Problems with Indorsements a. Wrong or Misspelled Name – 3-204(d) payable to a holder but holder’s

name inaccurately reflected (misspelled or wrong), payee may indorse in that name, payee’s own name, or both names; a payor may require both names to be signed

b. Ambiguities – 3-204(a) Any ambiguity concerning the capacity in which a signature is made is usually resolved in favor of an indorsement; parol evidence to show otherwise is not admissible; any signature conclusively presumed to be an indorsement

i. Exception – 1-303 - trade usage – court’s may note that a signature in the right lower corner of a note, by usage of trade, is a maker’s signature rather than an indorser’s name

V. §3-302 Holder in Due Course i. Determined at the later of when the instrument is negotiated to the holder and/or when the

holder gives valueii. Remember – cannot be an HDC if the instrument is non-negotiable

iii. Requirements:1. A holder – possession pursuant to a valid negotiation, does not bear apparent evidence

of forgery (must be apparent on its face) or alteration, or is not otherwise so irregular or incomplete so as to call into question its authenticity (holder is a PEEI)

a. (1) Possession and (2) for non-bearer paper be the person identified in the instrument (payee or special indorsee)

2. Who takes the instrument for value a. § 3-303 (a) Value – issued or transferred for a promise of performance (to the

extent the promise has been performed), transferee acquires a security interest, issued or transferred as payment of [a debt], or security for an antecedent claim, issued or transferred in exchange for a negotiable instrument, or in exchange for the incurring of an irrevocable obligation to a 3rd party by the person taking the instrument

b. §3-302-(d) Part performance of a promise equates to HDC status equal to value of the partial performance

3. Whether or not someone qualifies as HDC is measured at the moment he gives value for the instrument; things happening after value is given (receiving notice of problems) do not destroy HDC status once achieved

4. A gift of an instrument will never create HDC status in the done (even if under the shelter rule they may get similar rights)

5. FTC – personal use (consumer) v. business usei. Executor promises not value – a promise to give value in the future is

NOT enough for HDC status (a holder can be a partial HDC if only part of the consideration is executor)

ii. Antecedent Debt - The holder takes for value when taking the instrument as security for or in payment of an antecedent debt

iii. Lien (security interest) - to qualify, must be acquired by agreement rather than by legal process

iv. § 4-210 Security Interest of Collecting Bank Items – a collecting bank gives value any time it has a security interest in the item. §4-211; Merely crediting a depositor’s account is not value; the giving of provisional credit by a bank pending payment by the drawee bank is not value; the bank has a security interest and becomes an HDC when it

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allows withdrawals against the instrument; or if there is an agreement which states that credit is immediately available as of right; or if the person makes an advance on or against the item

1. (b) FIFO rule – credits first given are first withdrawn (if bank allows withdrawal of a part of a provisional credit, then their security interest is in that partial amount); if check later dishonored, bank has right to revoke provisional credit

b. §3-414 Obligation of Drawer – if an unaccepted draft (check) is dishonored the drawer is obliged to pay the draft

i. Special Circumstance : purchaser mere successor to prior instrument – Even though having paid for an instrument, the following merely succeed in transferors rights and are not HDC

1. estate, judicial sale, or purchase as part of a bulk transactionii. Federal Regulatory Agencies - federal law gives holder status to federal

regulatory agencies (FDIC) who take possession of negotiable instruments when they take over a failed financial institution

c. § 3-303(b) Consideration – any consideration sufficient to support a simple ki. If instrument issued without consideration, then drawer or maker has a

defense (Outside of Art. III, consideration = value); an instrument issued for value is also considered consideration. §3-303

6. In good faith , anda. Purchases must have demonstrated honesty in fact [subj] and the purchaser

must observe reasonable commercial standards of fair dealing – concerned with fair conduct not care with which an act was performed [obj] §3-103(a)(6)

i. And standards themselves must be reasonable7. Without notice that it is overdue or has been dishonored, or of claims or defenses

against it (think (1) is it overdue? And (2) did they have notice?)a. Measured by the reasonable person standard [obj]b. Without Notice that it’s Overdue – exists if purchaser had knowledge (or reason

to know) of default or acceleration, or took a demand instrument after demand was made or beyond a reasonable time after the instrument’s issue.

i. §3-304(b) principle payable in installments and due date not accelerated, overdue upon default – instrument overdue until default cured; not payable in installments and due date not accelerated instrument overdue the day after the due date

ii. §3-304 (c) Notice of default on interest payment is not notice but notice of default in principle is

iii. § 3-304 (a) Demand instruments – a demand instrument becomes overdue at the earliest of the following times: (1) the day after demand for payment; (2) if it is a check, 90 days after its date; or (3) if it is not a check, when the instrument has been outstanding for a period of time after its date which is unreasonably long under the circumstances non-

iv. §3-113 – instrument payable on demand is not payable before the date of the instrument

c. Without Notice that it has been Dishonored – exists if purchaser had knowledge (or reason to know) that the instrument was returned after presentment without payment or acceptance within the allotted time

d. Without Notice that the Instrument Contains an Unauthorized Signature or Has Been Altered

e. Without Notice of Defenses or Claims - i. § 3-306 Claims to an instrument – a person taking an instrument other

than the HDC, is subject to claims of a property or possessory right in the

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instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds

ii. Time when notice received – effective notice must be received by purchaser in such a manner and time as to allow a reasonable opportunity to act on it §3-302 (f)

1. Purchaser’s good faith and notice are determined at the time the purchaser acquires and gives value for the instrument as a holder

iii. Imputed Notice (red light doctrine) – notice imputed to purchaser where instrument bears “apparent evidence of forgery or alteration or is . . . otherwise so irregular or incomplete as to call into question its authenticity”

f. Forgery i. §3-401(a) – a person is not liable on an instrument unless (i) the

person signed the instrument1. Not a defense through 3 -305 but a defense

ii. §3-403 (a) – an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value …

1. Unauthorized – forgery or exceeds authorization2. Full liability on the instrument unless the person who takes

or pays on the instrument knows the signature is unauthorized

iii. Still have a NI if the drawer’s signature is forged, but they are not liable(§3-401) (the forger is)

iv. §3-406 – Negligence contributing to Forged Signature / Alteration of Instrument

1. A person who fails to exercise reasonable care is precluded from asserting the forgery against a person who in good faith, pays the instrument or takes it for value or collection

v. Traveler’s Checks1. §3-106(c) – remember to be a NI, there must be an

unconditional promise or order BUT if a promise or order requires, as a condition for payment, a countersignature by a person whose specimen signature appears on the promise or order, this condition does not make it unconditional per Art. III (because the signature is for the ID of the signer not an indorsement)

a. Failure to countersign is a defense to the obligation of the issuer but does not prevent a transferee from becoming a holder

vi. §3-308 – Proof of Signatures and Status as HDC –; D must specifically deny validity of signature in pleadings (or its considered admitted) → burden of persuasion shifts to P to establish validity of signature, but presumption arises - that signatures on instrument are valid and authorized unless the action is to enforce the liability of the purported signer and the signer is dead or incompetent; D must produce some evidence that would support a finding that the signature is forged or unauthorized

vii. ‘Closed Eyes’ Doctrine – good faith does not require due care, but a purchaser cannot ignore obvious problems

1. Many courts impute notice if purchaser was closely connected to the transaction creating the instrument (preparation, agency, continuous dealings with seller); Federal and state consumer protection laws have adopted this doctrine

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g. § 3-307 Notice of Breach of Fiduciary Duty – may not qualify as an HDC if the transferee (i) takes the instrument from a fiduciary for collection or value, (ii) with knowledge of the fiduciary status of the fiduciary, and (iii) the represented person (who is owed the fiduciary duty) makes a claim to the instrument or its proceeds on the basis of it being a breach of fiduciary duty [knowledge = actual knowledge]

h. Fiduciary is a corporate officer, director, agent, trustee, partner or other with fiduciary duty

i. Taker is the person conducting the transaction and if they do not have knowledge than the section doesn’t apply because American express does not have knowledge

i. Notice that the negotiator is a fiduciary does NOT give notice of a claim to the instrument; notice of a breach of fiduciary duty is what gives notice

ii. Taker has notice of the breach of fiduciary duty if taken for payment of their personal debt or placed in an account that is not that of the fiduciary

iii. Person who has taken the instrument with notice of breach must surrender the instrument or its proceeds to the person represented by the fiduciary

j. Waiver of Defenses by K – permissible but limited by the good faith and notice requirements and consumer protection statutes

k. Other i. Purchase at Discount – does not necessarily indicate lack of good faith;

BUT HDC may be denied where there is a very large discount coupled with suspicious circumstances

ii. Constructive Notice – filing or recording does not constitute noticeiii. Forgotten Notice – may remain HDC if good faith obvious even where

time lapse is longiv. Successors to HDC – in certain circumstances, a transferee can acquire the rights of an HDC

without qualifying as a HDCv. §3-203 Transfer of Instrument / Rights Acquired

1. (a) Instrument transferred when delivered by person other than issuer for purpose of giving the right to enforce it

2. (b) Whether or not a negotiation, transfer vests in the transferee any rights of the transferor including HDC status unless transferee engaged in fraud or illegality affecting the instrument [The Shelter Rule] [same as law of assignment in contracts]

3. (c) If instrument transferred for value and transferee does not become a holder due to lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation does not occur until the indorsement is made

a. NOT a holder (but is a PEEI) until indorsement by transferor made; until that time if receives notice of defense or claim, then does not qualify as HDC

4. (d) if transferor purports to transfer < entire instrument, no negotiation occurs and transferee has no Article III rights (just rights of a partial assignee)

vi. §3-415 Obligation of Indorser – if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed; OR (ii) if the indorser indorsed an incomplete instrument, according to its terms when completed. The obligation of the indorser is owed to a PEEI or to a subsequent indorser who paid the instrument under this section

vii. §3-414 Obligation of Issuer of Note or Cashier’s Check – the issuer is obliged to pay the note (i) according to its terms at the time it was issued, or if not issued, at the time it first came into possession of a holder, OR (ii) if the issuer signed an incomplete

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instrument, according to its terms when completed; the obligation is owed to a PEEI or to an indorser who paid the instrument under §3-415

viii. HDC Rights and Remote Transferees 1. ALL subsequent transferees from an HDC acquire the same HDC rights, unless

those rights are cut off by a transferee who is disqualified from HDC by a shelter rule exception

a. Note – transferor does not transfer any rights to sue him (the transferor)b. Even if Lorenzo takes the note as gift knowing the car is defective, he still

wins because he’s not an HDC (even though he has the rights of his assignor’s HDC)

c. Think real v. personal defenses – can only assert real defenses against an HDC; if negotiate the instrument and the assignee received the rights of the HDC (the transferee is NOT an HDC, but derives his rights from the transferor – personal defenses are good against the subsequent transferees) IF transferred to an actual HDC, then personal defenses not assertable

ix. §3-207 – Reacquisition 1. Occurs if instrument transferred back to a former holder2. Reacquires his HDC status if he used to be HDC3. He may cancel indorsements made after reacquirer 1st became a holder4. If cancellation causes instrument to be payable to reacquirer or to bearer, then

reacquirer can negotiate instrument5. An indorser whose indorsement is cancelled is discharged, and the discharge is

effective against any subsequent holder x. Federal Regulation – FTC – no holder in due course in consumer transactions

1. any consumer credit k must contain notice that any holder or assignee is “subject to all claims and defenses which the debtor could assert against the seller of goods or services” covered by the k (intended to prevent waiver as a defense)

2. §3-106(d) if the notice is added to the note, then it becomes non-negotiable because the maker has not made an unconditional promise, BUT the UCC contains an express statement that in spite of the inclusion of such a notice preserving the consumer’s defenses, Art. 3 still applies to the instrument even though there can be no HDC of an instrument bearing this notice

3. Scope of rule – interstate commerce; consumer credit k (purchase or lease of consumer goods and services; direct lender loans made to a consumer by a lending institution affiliated with the seller (by common control) or that has had consumers referred to it by the seller on a regular basis

a. Credit card transactions excluded – because a credit card holder could assert most defenses against the card issuer under the Fed Truth in Lending Act

xi. Burden of Proof for HDC 1. Burden of Establishing Defenses – presumption that every holder is entitled to recover

once he establishes the validity of the signatures and can produce the instrumenta. HDC only needs to prove status only when a D establishes a defense that would

negate the HDC status2. Burden of Establishing HDC – after showing a defense exists, a holder must prove HDC

status beyond a preponderance of the evidence or defeat the defense on the meritsVI. Real and Personal Claims and Defenses

a. Terms i. Claim – a claim to a NI is an affirmative cause of action for recovery on the instrument

based on superior ownership rights of the claimantii. Defense – a ground for refusing to pay on an instrument. Real defenses are good

against a HDC whereas personal defenses cannot be asserted against a HDC

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iii. §3-305(a)(3) Claim in Recoupment – the right of someone who owes a debt to subtract from the amount due damages arising from the same transaction for which the instrument was given; but the claim may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought. may be asserted against any non-HDC, but may be asserted against an HDC only if the claim is against the HDC [see problem 33 p. 79]

iv. Can a Payee be an HDC ? Yes; when the HDC is the original party to the transaction and the claim arises out of that transaction, then personal and recoupment defenses are assertable against the original HDC. This is an exception to the original rule

v. Obligor – party to the instrument who is being sued by the holder of the instrument (all of his defenses go through 3-305

b. §3-305 (a) Real Defenses – assertable against HDC and non-HDC [all holders s/t these defenses]

i. Infancy – a real defense if it would be a defense under state k law; if state law does not make a k of an infant void or voidable then it’s merely a personal defense

1. §3-202 (b) – Negotiation s/t Recission – negotiation may be rescinded, but those remedies may not be asserted against a subsequent HDC or a person paying the instrument in good faith and without knowledge of facts that are the basis for rescission or other remedy

2. §3-306 – a person other than an HDC, is subject to a claim of property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds

3. NOTE – could get the check back from a non-HDC; be clear it is a negotiation (not just an issuance); HDC can keep the note and sue other parties on the note

ii. Incapacity – incapacity to contract (declared incompetent by judicial proceeding or corporations that fail to take the necessary legal steps to conduct business in the state) that renders a k void (from it’s inception) under state law constitutes a real defense; however a personal defense arises if the obligation is merely voidable

iii. Illegality – illegality in the underlying transaction (NOT the instrument) that renders the obligation void and is a real defense even if HDC had nothing to do with the illegality; if the obligation is merely voidable under state law, then it is a personal defense; only when an obligation is deemed “entirely null and void” under local law that a real defense arises

iv. Duress – one party acts involuntarily; can be either real or personal depending on the degree of duress; signed at gunpoint – void; signed under threat of prosecuting son for theft, probably voidable

v. Fraud in the Factum (Real Fraud) – (fraud in the execution) where fraud has induced one to sign the instrument with neither knowledge nor reasonable opportunity to learn of the instrument’s character and essential terms

1. Excusable ignorance – of the contents of the writing; if D failed to take reasonable steps to ascertain the nature of the transaction, then real fraud cannot be asserted

2. Reasonable opportunity to Obtain Knowledge – intelligence, education, business experience, ability to read or understand English

3. Most fraud is personal (in the inducement) and thus un-assertable against an HDC

vi. Discharge in Insolvency – includes an assignment for the benefit of creditors and any proceeding to liquidate or rehabilitate the estate of the involved person; always a real defense, regardless of what subsequent holders know or don’t know about the insolvency; any other discharge is not effective against an HDC unless that holder, at the time of acquisition, knew of the discharge

vii. §3-416(a) Transfer Warranties - a person who transfers an instrument for consideration warrants to the transferee, and if the transfer is by indorsement, to any subsequent transferee that

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1. (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer

viii. §3-302(b) - Discharge Known to HDC – excused from one’s obligation; except for discharge in insolvency (bankruptcy), discharge is a (real) defense ONLY if the HDC had notice of the discharge when becoming an HDC; mere public filing and recording do not constitute notice

1. §3-604(a) - Cancellation of Liability – A holder may cancel the liability of a prior party by striking out that party’s signature; consideration not necessary for a valid cancellation; this doesn’t give notice of a problem with the instrument, but gives the HDC notice that the stricken name person is no longer liable on the instrument

2. §3-601(a) - Agreement Not To Sue – An agreement that discharges liability on a simple k will also discharge liability on a NI; assertable as a real defense against any later HDC if the HDC knew of the agreement before acquiring the instrument

3. Discharge Usually a Personal Defense – Unless HDC knows of the discharge or the discharge is apparent from the face of the instrument (line drawn through signature), it is a personal defense; payment by a party discharges that party (§3-602(a), but unless the payment was apparent on the instrument, a later HDC could compel payment again)

a. BUT the original d/c party can pass his additional liability on to the original payee in a quasi-k suit for money had and received

b. §3-602(b) – (d) - an obligor on an instrument can continue to pay the original payee until notified that the instrument has been transferred and is discharged up to the amount of these payments

c. (b) considered paid if payment made to a person formerly entitled to enforce the note only if at the time of the payment the person obliged to pay had not received adequate notification that the note has been transferred and that payment is to be made to the transferee; a notification is adequate only if signed by transferor or transferee, reasonably ID the transferred note, and provides an address at which payments are to be subsequently made; upon request the transferee shall seasonably furnish reasonable proof that the note has been transferred; unless transferee complies with the request, a payment to the person that formerly was entitled to enforce the note is effective even if the person obliged to pay the note has received a notification

d. There is a right to request the note back when paide. Obligation discharged upon payment; discharge not effective against a

person acquiring the rights of an HDC without notice of the instrument4. Caution – certain discharging events also give notice of problems with the

instrument and will prevent due course holding such as delay in presentment such as delay in presentment (alerts to possible discharge of parties and that the instrument is overdue)

ix. Suretyship – If an HDC knew prior to acquiring an instrument that some of the prior parties were sureties (accommodation parties), the HDC takes subject to the surety defenses; but if he did not know that a prior party signed a surety, the Suretyship defenses, being personal, cannot be asserted

x. Alteration of Instrument – a change in the terms of the instrument (thief alters amount) may be a partial real defense; distinguish alteration with unauthorized completion (fills in a blank) where the maker will generally be liable for the full amount of the unauthorized completion

xi. Forgery – no subsequent holder can be an HDC if a name necessary to proper negotiation (payee or any special indorsee) is forged; but if the person whose name is

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forged ratifies the unauthorized signature or is estopped from denying it, subsequent takers can qualify as HDC’s

1. §3-401 – Signature – a person is not liable on an instrument unless the person signed the instrument

2. §3-403 – an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value

a. So you can have a negotiable instrument even if forged3. Proper negotiation requires names of payee and special indorser. These are

necessary indorsements. No person after can be a holder because it wasn’t a proper indorsement. Forgery of any other name (maker, drawer, etc…) does not affect negotiation or holder status, subsequent parties may be HDC if they meet the tests;

4. Even so, the person whose name was forged or placed by an unauthorized agent has a real defense if unauthorized signature unless the person has ratified the signature or is estopped from denying it;

5. Countersignatures on traveler’s checks are not indorsements, but merely for identification

a. §3-106 - the necessity of a countersignature does not make a promise or order conditional for the purposes of NI requirements under 3-104(a); failure to countersign is a defense to the obligation of the issuer, but a failure does not prevent a transferee of the instrument from becoming a holder of the instrument; all defenses (real and personal) are good against holders/PEEI. BUT if an HDC, not good against

c. Claims Against Negotiable Instruments i. Non-HDC Subject to Valid Claims – Unless the transferee is an HDC or has rights under

the “shelter rule”, the instrument is taken subject to all valid claimsii. Valid Claim – an affirmative right to a NI because of superior ownership – HDC takes

free of such claimsiii. Defense – a ground for refusing to pay all or part of a NI; real defenses can be asserted

against an HDC, personal defenses cannot. They can be asserted against a non-HDC1. On an exam where the oblige refuses to pay, consider are they an HDC? What is

the nature of the defenses?iv. §3-305(a)(3) and (b) Claim in Recoupment – the right of one who owes a debt to

subtract from the amount due damages arising from the same transaction that gave rise to the instrument; claim may be asserted against non-HDC or an HDC only if the claim is against the HDC

d. §3-305(b) Personal Defenses i. Assertable only against non-HDC’s; any defense that would be available if the PEEI

were enforcing a right of payment under a simple kii. Common Examples

1. Failure of Consideration (breach of k; claim in recoupment) although a NI must be supported by sufficient consideration, consideration is technically not a prerequisite to negotiability; rather, the absence of consideration is a valid defense to an instrument in the hands of a non-HDC

a. §3-303(b) Partial consideration – if a holder pays only part of the agreed consideration, he will be a proportional HDC; but if a non-HDC is involved he can assert partial failure of consideration as a defense

b. Burden of proof on defendant-obligor2. Claims or Defenses of another (“jus tertii) – usually a party must rely on his own

defenses and cannot use the claims or defenses of 3rd parties unless the 3rd party joins the suit and personally asserts the claim against the PEEI

a. Payment rule - §3-602 – liability of a party on an instrument is discharged by a good faith payment to a holder; (e) the obligation is not discharged if

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the person making the payment knows that the instrument is a stolen instrument and pays a person it knows is in wrongful possession of the instrument.

i. But note, this is n/a to a person who is NOT in wrongful possession; an HDC is NOT in wrongful possession

ii. Also not discharged if payment is made with knowledge by the payor that payment is prohibited by injunction by a court

iii. For either of these under (e) there has to be an enforceable claim under 3-306 against the party receiving payment (an HDC takes free of a claim of property or possessory right in the instrument)

b. Exceptions where jus tertii may be asserted against a non-HDC ; instrument has been lost or stolen; these defenses must be investigated to determine if payment was in “good faith” and result in discharge

i. Theft – a defense that a non-HDC acquired the instrument by theft or that title of non-HDC was derived from theft; must be raised by one making payment before paying at the risk of continued liability; payment without raising the issue or knowing it is stolen would be in bad faith and would not discharge the payor from liability. §3-305(c)

ii. Violation of Restrictive Indorsement - same duty of a payor to investigate upon penalty of continued liability exists where a 3rd person claims that there was no compliance with a restrictive indorsement (“for deposit only”)

iii. Policy reason – if unable to raise 3rd party rights in these situations, the person making payment is exposed to the possibility of double payment

c. §3-305(d) Surety’s Use of Principal’s Defenses – allowed except for the principal’s discharge in insolvency, infancy, or lack of legal capacity

VII. Liability of the Partiesa. (1) Who are the parties (label); (2) What are the causes of action; (3) What defenses

are possible; (4) Can liabilities be passed to someone else?b. §3-604 – a PEEI may discharge the obligation of a party to pay the instrument in any manner

(surrender instrument, destruction, striking out signature); can you take back the discharge if unintentional? Depends on jurisdiction – Ky – ineffective if unintentional)

c. Suits on the Underlying Obligation – the “Merger Rule”(CL) i. The obligation underlying the issuance of an instrument is merged into that instrument

and is not available as a cause of action unless the parties have agreed otherwiseii. §3-310 (b) – Suspension of Underlying Obligation

1. if a note or uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if cash were paid

a. Suspension continues until dishonored; payment of the check discharges the obligation

2. If a NI is accepted as a conditional payment for the underlying obligation, that obligation cannot support a cause of action until the instrument is presented for payment and dishonored

a. Partial payment – if the instrument is only partial payment, then the obligation is suspended “pro tanto” (by that much)

b. Choices available to holder upon dishonor – can sue on the instrument, the underlying obligation, or both, but only one recovery permitted

c. Discharge of instrument – if liability on the instrument is discharged in any way, the obligation is also discharged (because of the merger)

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d. In the case of an instrument of a third person which is negotiated to the obligee by the obligor on the instrument, discharge of the obligor also discharges the obligation

i. See prob. 60ii. Fair because Grosvenor never paid, his debt to B was never

satisfied because the check was dishonored; B negotiated the check for his merchandise – no windfall to him, it is fair for him to be discharged on his indorser’s obligation and the obligation itself (3-310); G could only have been discharged on the rare occasion of 3-414(f) (not presented within 30 days; bank fails; he transfers his drawer’s rights to the PEEI

iii. Cancelation of Underlying Obligation 1. §3-310(a) – Cashier’s Check - a certified or cashier’s check that is taken for

payment discharges their obligation as long as the person who owed the obligation is not liable on the instrument; so, if there is indorser’s or other liability, they can sue under that

2. §3-310(b) – actual payment of a check or note discharges the obligation; once instrument is dishonored, underlying k “divorced” from the instrument and separate causes of action are available

d. Contract Suits – Suits “on the Instrument” i. Signature on an instrument = implied k obligation; Art. 3 calls them “obligations” –

promise implied in law; this is liability on the instrumentii. §3-401(a) – a person is not liable on the instrument unless (i) the person signed the

instrument (so no k obligation until signed)iii. Commercial Paper Contracts – merely signing a negotiable instrument is an enforceable

promise1. Procedural rights – some parties who may be liable on the instrument because

their names appear on the instrument are entitled to procedural rights of presentment or notice of dishonor

iv. §3-412 Maker’s Obligation (primary liability)1. Obligation is to pay the note according to its terms at the time of signature –

ABSOLUTE liability. (maker of note and bank issuing a cashier’s check = issuers; personal defense = non-issuance); owed to a PEEI or to an indorser who paid the instrument under §3-415.

2. > one maker – jointly and severally liable. §3-116(a); right of contribution (their equal share). §3-116 (b)

3. Generally no procedural rights4. Incomplete instruments – if signs a note with blanks or spaces, is bound by the

subsequently filled-in terms5. Co-Makers – if 2 or more sign a note, they are jointly and severally liable a co-

maker who pays the full amount has a right of contribution from the other parties; signature in lower right corner is intended to be a maker

v. §3-414 Drawer’s Obligation (n/a to cashier’s checks) (Secondary Liability – look to someone else for payment 1st) (FINISH)

1. If an unaccepted draft is dishonored the drawer is obliged to pay the draft according to its terms at the time issued or at the time it first comes into possession of a holder

2. Must first be presented in order to be dishonoreda. §3-501 – Presentment

i. a demand made by or on behalf of a PEEI to pay the instrument or accept the draft made to the drawee

ii. may be made at the place of payment of an instrument; made by any commercially available means (oral, written, electronic);

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effective to any one of two or more makers, acceptors, drawees, or other payors

iii. person presenting must exhibit instrument, give reasonable ID (thumbprint OK), and if made on behalf of another, reasonable evidence of authority to so do; and sign receipt or surrender instrument if full payment made [NOTE – if person refuses to give their thumbprint, then they have not duly presented and there can be no dishonor]

iv. without dishonoring, party to whom presentment made may return it for lack of necessary indorsement or refuse payment for failure of presentment to comply

v. party to whom presentment is made may treat presentment as occurring on the next biz day after presentment if they have established a cut-off period not earlier than 2pm

b. §3-502 – Dishonor i. If payable on demand, dishonored if not paid day of presentment

ii. If not payable on demand and is payable at or through a bank, dishonored if presentment duly made and not paid on the day it becomes payable or day of presentment whichever is later

iii. If (ii) n/a, note is dishonored if not paid on day it becomes payableiv. FIISH

c. §4-404 – bank under no obligation to a customer with a checking account to pay a check other than a certified check which is presented > 6 months after its date, but it may charge a customer for a payment made thereafter in good faith

d. §3-502 – Dishonor i. If payable on demand, note is dishonored if presentment duly

made to the maker and is not paid on day of presentmentii. If not payable on demand and is payable at or through a bank, the

note is dishonored if presentment duly made and the note is not paid on the day it becomes payable or day of presentment, whichever is later

iii. Dishonor of unaccepted draft other than documentary draft1. If check duly presented other than for immediate payment

over the counter, check is dishonored if payor bank makes timely return or sends timely notice

e. §3-503 – Notice of Dishonor i. Obligations of indorser and drawer may not be enforced unless

they are given notice or notice is excusedii. May be given by any person and by any reasonable means; is

sufficient if it reasonable ID the instrument and indicates that it has been dishonored or not been paid or accepted; return of an instrument given to a bank is sufficient notice

iii. If taken for collection by a bank, notice of dishonor must be given by bank before MN of the next banking day following the banking day that the bank receives notice of dishonor OR by any other person within 30 days following the day on which the person receives notice of the dishonor

1. With respect to any other instrument (not collected by bank) notice of dishonor must be given within 30 days following the day on which dishonor occurs

f. §3-504 – Excused Presentment and Notice of Dishonor i. EXCUSED Presentment– if person entitled to present cannot with

reasonable diligence make presentment; maker or acceptor has

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repudiated an obligation or is dead or insolvent; by the terms of the instrument it is not required; drawer or indorser has waived; or drawer instructed drawee not to pay or accept the draft or drawee not obligated to the drawer

ii. EXCUSED Dishonor – terms of instrument say it’s not necessary OR the party whose obligation is being enforced waived notice of dishonor (waiver of presentment is also a waiver of dishonor)

iii. DELAY Notice of Dishonor – excused if caused by circumstances beyond their control and the person giving notice exercised reasonable diligence after the cause of the delay ceased to operate

vi. §3-415 Indorser’s Obligation (Secondary Liability) 1. Secondary obligation – certain technical conditions must be met before indorser

can be sued under this obligation (presentment; [notice of] dishonor; and under certain circumstances notice of dishonor - §3-503); only goes to subsequent parties not prior parties

2. Obligation is owed to a PEEI or to a subsequent indorser3. Indorser becomes a type of surety for all prior parties and promises to pay any

later holder4. The promise is conditioned on the indorser first being accorded the procedural

rights of presentment and dishonora. If notice of dishonor required under §3-503, and notice not given, the

liability of the indorser is discharged b. In order for indorser to be liable on a check then notice of dishonor

requiredc. Notice need not be “received” so long as given in a reasonable manner;

return of an instrument to a bank is sufficient notice3-4155. Indorser’s don’t generally have J&S; could if instrument were joint payees and

both indorsed or 2 or more anomalous indorsers6. Indorsement ‘Without Recourse’ – above obligation (indorser’s obligation)

avoided if adds “without recourse” to signature; this is a qualified indorsement and transfers the instrument without incurring liability

7. Indorsement of Bearer Instruments – bearer paper does not need an indorsement to be negotiable; but a transferee may insist on an unqualified indorsement in order to acquire the transferor’s indorsement liability

8. Multiple Indorsers – CL presumes that when one person indorses after another, the later indorser can recover in full from the prior indorser, but UCC changes this rule between joint payees, two or more anomalous indorsers, and co-makers – they are liable to each other only for their proportionate share (§3-116)

a. Reacquisition and cancellation – if a prior indorser reacquires an instrument, he may cancel indorsements made between the time he formerly held the instrument and the present; this discharges those indorsers from liability to any subsequent holder, including HDC’s; intervening indorsers are automatically discharged from liability to the reacquirer upon reacquisition

vii. §3-416 - Transfer Warranty 1. A person who transfers an instrument warrants to transferee, or if transferred

by indorsement, to any subsequent transfereea. Warrantor entitled to enforce instrumentb. All sigs authorized and authenticatedc. Instrument has not been alteredd. Instrument not subject to defense or claim in recoupment which could be

asserted against the warrantor

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e. Warrantor has no knowledge of insolvency proceeding with respect to maker or acceptor, or drawer (if unaccepted draft)

2. Person to whom warranties made may recover damages from warrantors 3. Warranties cannot be disclaimed with regard to checks; unless notice of breach

of warranty given within 30 days after claimant has reason to know of the breach, liability of warrantor is discharged to extent loss caused by delay in giving notice

viii. Surety’s Obligation 1. Anomalous indorsement – an indorsement by one who is not a holder. §3-205(d)

a. They are J&S liable to each otherb. General indorser’s liability to subsequent indorsers is n/a

2. Obligations are construed strictly in favor of the surety; also has state and CL rights

3. CL Rights – exoneration, subrogation, reimbursement, and contribution4. A “professional” indicates a commercial transaction – FTC says no holder in due

course5. Terms

a. A surety is an accommodation party (accommodation party gets no direct benefit)

b. A principal is the accommodated partyc. A surety who adds words of guarantee to the signature is a surety and a

guarantor6. A surety may prove accommodation status against a knowledgeable HDC or

against a non-holder, but if HDC has no reason to know that a party is a surety, the HDC will take free of the suretyship defenses. §3-605 (h).

7. Obligation of accommodation party – accommodation makers and drawers have same obligations as makers and drawers plus special surety rights

a. §3-305(d) - in an action to enforce an obligation of an accommodation party to pay an instrument, the accommodation party may assert 3 rd party defenses (accommodated party); (except discharges of insolvency, infancy, lack of legal capacity) against the PEEI

8. Proof of Surety Statusa. Oral proof permissible, except as to HDC without notice of surety statusb. Anomalous indorsements (outside the chain of title) – every subsequent

taker is presumed to know that it was a surety’s signature9. Surety Not Liable to Principal – not liable to the accommodated party regardless

of the order of signatures10. Remedial Rights

a. Recourse (f) – accommodation party entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party; an accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party

b. Reimbursement – see (f) belowc. Exoneration – (CL) implied duty of every principal to perform and

exonerate surety from liability; compel principal to pay or payee to accept payment

d. Subrogation – if the surety is forced to pay off the creditor, the surety is subrogated to whatever rights the creditor had (equitable assignment of creditors right)

e. Contribution – right to partial reimbursement of co-sureties of their proportion

f. Strictissimi Juris – a surety is a “favorite with the law,” thus surety prevails if possible

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i. Effect of modification – see §3-605 belowii. If the creditor releases the principal from liability on the 1st k or

gives the debtor a binding extension of time in which to pay, the surety is discharged UNLESS

1. Surety consents OR2. Creditor informs principal of the preservation of the

surety’s rights against the principal11. §3-419(a) –a party who signs the instrument for the purposes of incurring

liability on the instrument without being a direct beneficiary of the value of the instrument (co-signer)

12. §3-419 (b) - An accommodation party is obliged to pay the instrument in the capacity in which the accommodation party signs (maker, drawer, acceptor, indorser); liability regardless of whether he receives consideration

a. A person who signs in lower right corner of note is presumed to be a co-maker or drawer if draft

b. Remember that an indorser is required to get notice of dishonor, if not given notice then his obligation ends

c. Only applies to accommodation party’s who sign the instrument; if signs a separate Suretyship agreement, then CL applies

13. Obligation of Guarantor of Collection a. If surety adds words to the signature unambiguously guaranteeing

collection, the holder must first attempt all steps necessary to obtain payment from the principal or show that such steps would be useless; if accommodated party doesn’t pay, secondary’s liability dependent on either

i. Execution of judgment against the other party has been returned unsatisfied;

ii. Other party insolvent or in insolvency proceeding;iii. Other party can’t be served with process; ORiv. o/w apparent that payment can’t be obtained from the other party

b. If surety signs merely as guarantor, then he is liable in the capacity he signed and cannot require the holder to first attempt to collect from the maker or acceptor; he is obliged to pay the amount due to PEEI in the same circumstances as the accommodated party would be obliged

14. §3-419(c) – a person signing an instrument is presumed to be an accommodation party and there is notice that the instrument is signed for accommodation if the signature is an anomalous indorsement OR is accompanied by words indicating that he is acting as a surety or guarantor

a. The obligation of an accommodation party to pay the instrument is not affected by the fact that the PEEI had notice when the instrument was taken by that person that the person signed the instrument as an accommodation party

15. §3-419 (f) – an accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party

16. Tender of Payment Rule – if a surety (or indorser) tenders payment at maturity and is refused, the surety is still liable for the full amount but NOT any subsequent amounts (interest); if tender made by the principal, the surety is completely discharged

17. Impairment of Collateral – if the holder “impairs” the collateral for an instrument by failing to take reasonable care, non-consenting sureties are discharged up to the amount of the impairment; failure to perfect a security interest is an impairment

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18. Agreements between Creditor and Principal – when a holder fails to collect payment at maturity, the surety is not discharged, BUT when a holder and principal agree to extend or suspend the time of payment, a non-consenting surety is discharged

a. Agreements not to sue – holder’s agreement not to sue principal does not discharge non-consenting surety

b. Agreements to Modify Terms – such agreements discharge non-consenting sureties

c. Consent by Surety – if surety consents to an extension, he is not discharged; consent may be implied from the circumstances or express in the terms of the original instrument

d. New Notes – if a new note is issued, the surety is discharged19.§3-603 - Tender of Payment

a. If tender of payment made to a PEEI, effect of tender governed by simple k principles

b. If tender of payment made to a PEEI is refused, there is discharge to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse (makers have no right of recourse against themselves; accommodated party has no right of recourse against accommodation party; BUT accommodation party has right of recourse (reimbursement) against accommodated party)

c. If tender of payment on an amount due is made to a PEEI, the obligation of the obligor to pay interest after the due date is discharged; if presentment is required with respect to an instrument and the obligor is ready and able to pay on the due date at every place of payment stated in the instrument, the obligor is deemed to have made tender of payment on the due date to the PEEI

20. Secondary Obligor – accommodation party and indorsers21.§3-605 – Discharge of Secondary Obligors [DEFENSES of Sureties]

a. If PEEI releases the obligations of a principal obligor, then with regard to the secondary obligor:

i. Obligations of principal to secondary are unaffected with regard to previous payments; unless release preserve the secondary’s recourse, then principal released from any other duties to the secondary

ii. Unless release provides that PEEI retains a right to enforce against the secondary, the secondary is discharged to the same extent as the principal from any unperformed portion on the instrument; if instrument is a check, and secondary’s obligation is indorser’s, then secondary is discharged regardless of the language or circumstances of the release

iii. If secondary not discharged per ii, the secondary is discharged to the extent of the value of the consideration for the release, and to extent that release would o/w cause secondary a loss

b. If PEEI grants principal an extension, then with regard to the secondaryi. Obligations of principal to secondary are unaffected with regard to

previous payments; unless release preserve the secondary’s recourse, then the extension correspondingly extends time for performance of any other duties owed to the secondary by the principal

ii. Secondary is discharged to the extent that the extension would o/w cause the secondary a loss (burden of proof on secondary)

iii. If secondary not discharged per ii, secondary may perform its obligations to a PEEI as if the time for payment had not been

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extended (pay and seek reimbursement at that time) , or unless the terms of the extension provide that the PEEI retains the right to enforce the instrument against the secondary as if the time had not been extended, treat the time for performance of its obligations as having been extended accordingly (or extend); if bank decides to hold secondary liable at time note due then he can’t extend it

c. If PEEI agrees to a modification (with / without consideration) other than extension / release, then (interest rate change; change repayment schedule)

i. Obligations of principal to secondary are unaffected with regard to previous payments; the modification correspondingly modifies any other duties owed to the secondary by the principal

ii. Secondary is discharged from any unperformed portion of the obligation to the extent that the modification would o/w cause the secondary a loss

iii. If secondary not discharged under ii, secondary has choice: may satisfy its obligation as if modification had not occurred, or treat its obligation as having been modified accordingly

d. If obligation of principal is secured by an interest in collateral, and the PEEI impairs the collateral (interest reduced to below value of recourse; failure to obtain / maintain perfection / recordation of collateral; release of collateral without substitute; failure to perform a duty to reserve the collateral), the obligation of the secondary obligor is discharged to the extent of the impairment

e. A secondary obligor is not discharged unless the PEEI knows he is a secondary obligor under 3-419(c)

f. Secondary obligor not discharged if he consents to event or conduct that is the basis of the discharge, or instrument / separate agreement provides for waiver; consent by principal to an act that would lead to discharge constitutes consent by the secondary if the secondary controls the principal or deals with the PEEI on behalf of the principal

g. A release or extension preserves the secondary’s recourse if the terms provide

i. PEEI retains the right to enforce against the secondary ANDii. The recourse of the secondary continues as if the release had not

been grantede. §3-409 – Acceptance of Draft; Certified Check (acceptance = certification)

i. Acceptance = drawee’s signed agreement to pay a draft as presented1. Must be written on the draft (may consist of drawee’s name alone)2. Absent acceptance, not obligated to pay

ii. May be made at any time and becomes effective when notification is given per instructions or the accepted draft is delivered for the purpose of giving right on the acceptance to any person

iii. May be accepted even if not signed by drawer, in incomplete, overdue, or dishonorediv. Certified check – check accepted by the bank upon which it was drawn

1. Acceptance may be made as in (i) m above or by a writing on the check indicating it is certified

2. Drawee has no obligation to certify the check and refusal to certify is not a dishonor

v. Remember, drawer’s obligation (on instrument and underlying obligation) discharged upon acceptance by bank. §3-414(c); also indorser’s liability is discharged if accepted by bank after indorsement. §3-415 (d)

f. §3-413 – Acceptor’s Obligation

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i. Acceptor is obliged to pay draft 1. (i) according to its terms at the time it was accepted even though it says payable

as originally drawn2. (ii) if the acceptance varies the terms of the draft, then according to the terms as

drafted; OR3. (iii) if acceptance is of an incomplete draft, according to its terms when

completedii. Obligation owed to PEEI the draft or to the drawer or indorser who paid the draft

iii. If certification or other acceptance, states the amount certified, then obliged to the amount stated

1. If does not state the amount and the amount is subsequently raised, And2. The instrument is then negotiated to an HDC, the obligation is of the amount

when taken by the HDCiv. Note – failure to pay is a dishonor, failure to certify is not

g. §3-402 – Signature by Agent i. If person signs an instrument by signing the name of the represented person or the

signer, the represented person is bound by the signature as if it were his own on a k1. If represented person is bound, then signature of representative is the

authorized signature and the represented person is liable on the instrument, whether or not identified on the instrument

ii. If the representative signs the instrument and his signature is the authorized signature of the represented person, then

1. If unambiguously shows that the signature is made on behalf of the represented person who is identified on the instrument, then representative is not liable on the instrument

iii. If form of signature does not show unambiguously that signature made in representative capacity OR represented person not ID in instrument

1. Representative is liable on the instrument to an HDC who took the instrument without notice that the agent was not intended to be liable on the instrument

2. Representative liable to any other person unless he proves that the original parties did not intend he be liable on the instrument

iv. If representative signs name as drawer on check without indication of agent status and check payable from account of the represented person who is ID on check, then signer not liable if signature is an authorized signature of the represented person

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