BARBRI - Commercial Paper

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What is "money paper"? What is an "order?"

pieces of paper that direct money from one person to another. A check (draft). Bank account holder (drawer) orders bank ("payor bank" or "drawee") to pay out money from a deposit account to a third person ("payee") Drawer and drawee are the same bank (e.g. the bank orders itself to pay). Customer who buys a cashier's check is called a remitter. A promissory note. Certificate of Deposit (CD) = bank's promise to pay you back your deposited money in the future.

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One thing that obviously makes an instrument not negotiable? What is "issuance?"

Instrument states conspicuously that it is not negotiable. Drawer of check or maker of note turns it over to payee for the first time. When payee accepts instrument, underlying obligation is suspended until instrument is paid (discharge) or dishonored (reinstatement) If payee accepts a cashier's check, obligation is discharged immediately.

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What is a cashier's check? What is a "promise?"

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What is the effect of issuance on the underlying obligation?

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Requirements for commercial paper to be negotiable? (7)

1. Written & signed promise to pay 2. Unconditional 3. Transfer money (not a car or wheat) 4. Fixed amount 5. Words of negotiability 6. Definite time for payment 7. No extraneous undertakings No explicitly making payment subject to another document although unstated conditions might be enforceable between maker and payee. 1. Note can refer to an accompanying loan agreement or security agreement 2. Note can limit payment to a particular source Perhaps even pursuant to a formula, even floating interest rate. - if terms are contradictory, words > numbers; handwritten > typed 1. Bearer paper: "bearer" or "____" payee line or "cash" 2. Order paper: pay "to the order of [person]" or pay to a particular identified person "or order"

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"Accord and Satisfaction:" When does a discounted "full payment" instrument work to finalize settlement of disputed obligations?

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Negotiability: Unconditional

1. Drawer must act in good faith to settle a bona fide dispute w/ regard to existence or amount of debt. 2. The "full payment" legend appears conspicuously on instrument 3. The payee obtains payment & doesn't refund that payment w/in 90 days Has no effect.

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Negotiability: Fixed Amount

"Accord and Satisfaction:" Effect of crossing of the "full payment" legend, "reserving rights," accepting the money "under protest"? Meaning of "negotiation"?

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Negotiability: Words of Negotiability

Payee (and people after her) can "negotiate" the instrument and pass rights to payment under that instrument to other people, like cash. Only a holder. Anyone in possession of it is a holder & entitled to enforce. Only the person identified as payee can be a holder (if that person is in possession) entitled to enforce. Currently holder simply passes possession (perhaps involuntarily -- to a thief!)

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Negotiability: Definite Time for Payment Negotiability: No Extraneous Undertakings

Default, if no time listed = UPON DEMAND - prepayment & acceleration are OK No promises or orders to do anything other than paying money. THREE EXCEPTIONS: 1. Give/maintain/protect collateral securing the note 2. Allow holder to confess judgment or dispose of collateral, or 3. Waive protections for maker/endorser (e.g. right to notice of dishonor)

Who can negotiate an instrument? Who is a holder of bearer paper? Who is a holder of order paper?

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Bearer paper: how can some new person become the holder who is entitled to enforce?

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Order paper: how can some new person become the holder who is entitled to enforce? Types of indorsement (3) Blank Indorsement

Current holder must pass possession and indorse the instrument (sign on back).

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Accommodation Party Protections: Discharge

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1. Blank indorsement 2. Special indorsement 3. Restrictive indorsement Simply signing the back of a check makes order paper into bearer paper. (anyone, including a thief, can become the next holder) Signature under instruction directing payment to specific person. Instrument is now (or still) order paper, payable only to the new identified person. Signature + "For deposit only" - requires money from payment to go into the indorser's deposit account. - we should all do this! (safer) A signature of a third party surety who guarantees payment Lawyer has a promissory note from baker. He passes the note to blacksmith as payment for horseshoe, & signs it as a surety. Someone signs a note as a comaker, with the clear and known intention of guaranteeing to lender that the note/loan will be repaid. ex: your parents sign when you buy a car.
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Extending the principal obligor's time to pay, modifying the note, or impairing the collateral (i.e. by failing to perfect) discharges secondary obligors who do not consent to such modification, but only to the extent that such modification/impairment causes them loss. B has a complete defense to liability. B's obligations were discharged when A extended the payment time. B is discharged to the full amount because the extension hurt B. A was able to pay and, had A done so, B would have been off the hook forever.

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Special Indorsement

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Restrictive Endorsement

B co-signed on A's purchase of a car. B signed on a note for a $5000 loan. When the note came due, A had the money to pay but asked lender for an extension. A then disappeared. What defenses does B have to payment of the $5000 loan? How can a former holder enforce a lost or stolen instrument?

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What is an anomalous endorsement? Ye Olde-Tyme Anomalous Endoresement Modern Anomalous Endoresment

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1. Must prove, by other evidence, the terms of the instrument and entitlement to enforce it, including that she was the holder when instrument was lost/stolen. 2. Maker gets "adequate protection" against someone else coming forward. Can enforce the instrument FREE of claims and all FREE of all defenses except real defenses. ex: original payee did not give proper consideration for the instrument, or maker already paid the original payee -- maker must nonetheless pay the HDC and sue the original payee for recovery! 1. Must be the holder of the instrument (proper negotiation) 2. Must have acquired the instrument for "value" 3. Must have taken the instrument in "good faith" 4. Must have acquired the instrument w/o notice of defects Value can be anything of past or present value - Future promises are not "value" until performed

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What are the rights of a holder in due course?

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Anomalous Endorsement: what does the guarantee ("accommodation party") promise? Protections for Accommodation Parties? Accommodation Party Protections: Release

Guarantor promises to pay as soon as the primary obligor defaults -- no need to pursue collection against the primary obligor first. 1. Release 2. Possible Discharge In Illinois, note holder release of principal obligor does NOT release secondary obligors (accommodation parties) - This is opposite of UCC 3-605. (release of principal would also release secondary under the UCC).

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Requirements to be an HDC? (4)

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HDC: Value

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HDC: Good faith

Honesty in fact (subjective) and the observance of reasonable standards of commercial fair dealing (objective) 1. Instrument is overdue, dishonored , or in principal payment default 2. Instrument contains an unauthorized signature or has been altered 3. Someone has a claim to the instrument 4. Drawer or maker of the instrument has a defense to payment or a claim in recoupment Payor is late in making principal payments (OK if late in making interest payments, but not principal) Instrument contains a forged signature or has been altered - No OBVIOUS signs of tampering or forgery!! Someone else has a property right to get the instrument back - e.g., from a thief Contract defenses - aka failure of consideration, payment, etc. No. A never "ordered" payment so nobody can ever become a holder, and an HDC must be a holder.

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What is "fraud in the factum?"

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HDC: Defects (4)

Maker did not know or have any reasonable way of knowing that the paper he signed was an instrument. - this is an exceedingly rare unicorn, because, how the hell do you not realize you're signing a check? Maker was tricked into signing an instrument in relation to a fraudulent scheme - e.g. fake charity, fake goods, etc. THIS IS NOT A REAL DEFENSE.

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What is "fraud in the inducement?"

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HDC Defects: What is principal payment default? HDC Defects: Unauthorized Signature or Alteration HDC Defects: Claim to Instrument HDC: Defense to Payment A has a check, payable to A. A loses this check before endorsing. Can someone else become an HDC? A has a check, payable to A. A loses this check after endorsing. Can the finder become an HDC? HDC: Shelter principle

Enforcing Against Endorsers: Requirements (2) Enforcing Against Endorsers: Dishonor by Bank

1. Dishonor by bank 2. Timely notice of dishonor is given to endorser (about 1 month)

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Bank refuses to pay a note or check when due & presented - Conversely, if maker of a note tries to pay and holder refuses tender of payment, the secondary liability of endorsers & accommodation parities is discharged to the extent of the amount of the tender. 1. Maker of a note is principally liable - liable when due 2. Drawer of a check is secondarily liable liable only after dishonor by bank Yes, they can, unlike makers and drawers How? -- by signing "without recourse"

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Liability of Makers & Drawers? Can endorsers waive liability to pay dishonored instruments? Liability on transfer warranties?

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No. Finder didn't give value. Also finder probably didn't have "good faith" b/c taking a check found on the ground is bad.

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Even someone who is not an HDC can inherit the rights of an HDC. Ex: holder acquired the instrument as a gift from an HDC. Clearly the holder is not an HDC b/c didn't give value. Nonetheless, has the rights of an HDC under the shelter principle 1. Infancy of the maker/drawer 2 Illegality of the debt underlying the instrument (i.e. I write a promissory note to my heroin dealer) 3. Fraud in the Factum 4. Discharge in bankruptcy of the debt

1. Anyone who transfers an instrument in exchange for value makes all transfer warranties to transferee. 2. Anyone who transfers an instrument in exchange for value and ALSO endorses the instrument makes transfer warranties not just to that transferee but to any subsequent transferee. 1. Transferor is entitled to enforce the instrument (proper negotiation) 2. All signatures are authentic and authorized 3. The instrument has not been altered 4. The instrument is not subject to any defense or claim that can be asserted against the transferor (failure of consideration, duress, infancy, etc.) 5. The transferor doesn't know that the maker/drawer has initiated bankruptcy.

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Transfer Warranties (5)

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"Real Defenses:" the 4 defenses to paying an HDC

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Forged Signature: Drawer or Maker (Front of Check) Forged Signature: Endorsement (Back of Check)

Only someone who actually signs an instrument is liable; the forger is liable even if he signed someone else's name. - Payor bank can't charge drawer's account for forged checks; they are not properly payable Negotiation = improper. Possessor is NOT a holder, and instrument is NOT properly payable to that person. - For checks, proper payee of a stolen check has a cause of action for conversion against depository bank or payor bank who gave payee's money to thief over forged endorsement. If maker's, drawer's, or payee's failure of ordinary care substantially contributed to (facilitated) the forgery (or alteration), the maker/drawer/payee will be precluded from asserting the forgery or alteration against anyone who gave value for the instrument in good faith. If the entity asserting preclusion based on the maker's, drawer's, or payee's negligence ALSO failed to exercise ordinary care in paying the item, the loss is distributed per each party's negligence (comparative negligence) - Ex: Small business person leaves checks lying out; employee takes check and forges for some amount. This may be failure of ordinary care. 1. Fictitious payees (any indorsement in the fictitious name is effective) 2. Imposters (an imposter can effectively negotiate by endorsing in the named payee's name) 3. "Responsible Employee" Employee charged w/ check processing duties fraudulently endorses employer's instrument; forged endorsement is effective to negotiate the instrument. NOTE: only applies to endorsements, not forged drawer signature (aka applies to signatures on BACK, not FRONT) Discharges maker/drawer liability *BUT, exceptions...(2)

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Fraudulently changed instrument: Enforceable

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Issued instrument fraudulently changed from its original terms can be enforced according to its original terms, but only by someone who acquired the instrument for value, in good faith, and without notice of the alteration. - however, negligence defense might preclude drawer from asserting an alteration in defense to paying the instrument as altered Father gave son a $100 check to buy school clothes, made out to Sears. Son changed $100 to $1000. Bank can enforce for $100.

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Enforceable Fraudulently Changed Instrument: Example Fraudulently Completed Instrument: Enforceable

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Forgery: Negligence

A signed but incomplete instrument (e.g. amount left blank) later fraudulently completed can be enforced according to its terms as completed , but only by someone who acquired it for value, in good faith, and w/o notice of the completion. UCC Article 3

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Forgery: Comparative Negligence

What is the source of law for commercial paper? Drawer Defined Drawee Defined

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The party who signs the check (draft) The party that pays the draft - usually the bank

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Odd cases in which forged instruments are presumed valid & effective (3) Forged Instrument: Responsible Employee

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Fraudulent Alteration or Completion: General Rule