Even if a holder does not qualify as a HDC, he still may have rights of HDC by shelter. General Rule: The transfer of an instrument vests in the transferee the rights that the transferor had Exception: A person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter. Warning: Having HDC rights via shelter does not make you a HDC.

Commercial Paper. 124 good questions, nicely answered!

Q: Element (5) of Negotiability: 'in Money'

Authorized Medium or Exchange. Medium of exchange authorized/adopted by a domestic/foreign government as part of its currency. Includes foreign money. May be payable in foreign money. Unless limited to payment in foreign money, could also be paid with equivalent US money. Cannot be payable in goods or services. Words v Figures = Words Prevail . Example: A check provides that it is payable for '$550' in numerals but 'five hundred dollars' in words. The check is payable for $500.

Q: Element (6) of Negotiability: No other undertaking or instruction

General Rule: Instrument must not be a full contract. Negotiable instruments are just promises/orders to pay money. 3 Exceptions: Permitted Undertakings or Instructions: (1) Promises concerning collateral; (2) Confession of judgment clauses (note: invalid under TX law); (3) Waiver of law meant to benefit obligor (maker/drawer).

Element (3) of Negotiability: When a Promise/Order Conditional (and thus not negotiable): 3 situations

Expressly states a condition to payment.
States that the promise or order (or rights and obligations subject thereto) is "subject to" or "governed by" another writing.

Note: Merely referring to or stating that the promise/order arises out of a separate writing does not make the promise/order conditional.

Element (3) of Negotiability: Items that Do Note Make Promise/Order Conditional (5 situations) - CMR

Refers to another record for a statement of rights regarding collateral, prepayment, or acceleration.
Limits payment to a particular source or fund
Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise/order (such conditions are commonly placed on traveler's checks); or
Contains a statement required by law that the holder is subject to claims and defenses of the original payee (consumer protection language. Note that while this does not bar negotiability, it will prevent holder from being a HDC).

Element (4) of Negotiability: What is "Fixed"?

Principal Must Be Fixed: To be negotiable, the principal due under the instrument must be fixed.
Interest Need Not Be Fixed: No interest will be due unless the instrument provides for the payment of interest.

Element (4) of Negotiability: Interest

Presumption = No Interest. A silent instrument bears no interest.
If interest is stated, 3 permissible forms: (1) amount of money ["$500"]; (2) fixed or variable rate ["5%"]; (3) reference to outside source ["2% above the prime rate"].
Failure to State Interest Rate = Judgment Rate. A note which merely provides for "interest" is negotiable and the interest will be at the judgment rate.

Element (5) of Negotiability: "Money" - Defined

Money is any medium of exchange currently authorized or adopted by the government (e.g., "currency"). Requiring foreign currency payment does not destroy negotiability, but requiring payment in something other than money (even as an alternative; e.g.., "$300 or an ounce of god") makes an instrument non-negotiable.

Element (5) of Negotiability: "in Money"

Authorized Medium or Exchange. Medium of exchange authorized/adopted by a domestic/foreign government as part of its currency.
Includes foreign money. May be payable in foreign money. Unless limited to payment in foreign money, could also be paid with equivalent US money.
Cannot be payable in goods or services.
Words v Figures = Words Prevail. Example: A check provides that it is payable for "$550" in numerals but "five hundred dollars" in words. The check is payable for $500.

Element (6) of Negotiability: "No Other/[Unauthorized] Undertakings or Instructions" - Gen RLE

To be negotiable, an instrument generally cannot contain any unauthorized undertakings or instructions (promises). However, the Code explicitly permits 3 undertakings/instructions that may be included.

Element (6) of Negotiability: "No Other/[Unauthorized] Undertakings or Instructions" - Exception

The Code explicitly permits 3 undertakings/instructions which may be included (still negotiable).

(1) An undertaking/power to give, maintain, or protect collateral;
(2) An authorization/power to the holder to confess judgment or realize on or dispose of collateral;* and
(3) A waiver of the benefit of any law intended for the advantage/protection of the obligor (e.g., waiver of presentment, notice of dishonor, etc).

Any other promise/undertaking will destroy negotiability. *Confession of judgment clauses are invalid under TX Law. However, the inclusion of one will not hurt negotiability.

Element (6) of Negotiability: No other undertaking or instruction

General Rule: Instrument must not be a full contract. Negotiable instruments are just promises/orders to pay money.
3 Exceptions: Permitted Undertakings or Instructions:

(1) Promises concerning collateral;

(2) Confession of judgment clauses (note: invalid under TX law);
(3) Waiver of law meant to benefit obligor (maker/drawer).

Element (7) of Negotiability: Payable "On Demand"

An instrument is payable on demand if it either (A) states that it is payable "on demand" or "at sight," or otherwise indicates that it is payable at the will of the holder [Express Statement]; or (B) does not state a time for payment [Silent Instruments: if the instrument does not state the date it is due, it is a demand instrument].

Element (7) of Negotiability: Payable "at a Definite Time"

An instrument is payable at a definite time if it is payable: (a) on a fixed date ("April 1, 2018"); (b) on elapse of a specified period of time after sight or acceptance ("60 days after presentment for payment"); OR (c) at some time readily ascertainable at the time the instrument is issued.

Note: The time stated may be subject to rights of prepayment, acceleration, extension at the option of the holder, or extension to a further definite time either automatically or at the option of the maker or acceptor.

Element (7) of Negotiability: Payable "at a Definite Time" - Express Statements

Date stated in the instrument ("August 1, 2015")

Fixed period after sight or acceptance ("90 days after sight")
Time readily ascertainable at the time the promise/order is issued ("on the first day of Fall 2015").

Element (7) of Negotiability: 3 Permitted date-change matters that do not prevent the instrument from being "payable at a definite time"

Prepayment of Instrument. Right of obligor to pay earlier than stated date.
Acceleration of Due Date. Right of holder to demand payment earlier than stated date upon certain named events.
Provision in Instrument Extending the Due date: by holder = to any time; by obligor = to a later, definite time stand in the instrument; or automatically upon condition stated in instrument = to a later definite time stated in instrument.

Element (8) Words of Negotiability ["Payable to Order or Bearer"] - In Gen

To be negotiable, an instrument must be (a) payable to order or (b) payable to bearer. (a) Order paper is payable only to the person named in the order. (b) Bearer paper is payable to anyone legitimately possessing the instrument.

Element (8) of Negotiability: "Payable to Order"

A promise/order is payable "to order" if it is payable to the order of either: (a) an identified person ("pay to the order of John Smith") OR (B) an identified person or order ("Pay John Smith or his order").

Element (8): Bearer Language

"Payable to Bearer"
"Payable to the order of bearer"
"to cash" or "to order of cash"
Indication that possessor entitle to payment
No payee stated (a check which the drawer signs but does not fill in the name of payee = bearer paper)
Not payable to an identified person (A check payable to "Good Luck on the Bar Exam" = bearer paper)

Holder Status: "Good Title" to Order Paper

With order paper, there must be (1) possession plus (2) the necessary indorsements.

Special Indorsement (not Blank)

A "special indorsement" is one that names a particular person as "indorsee" ("pay John Smith"). The indorsee must sign in order for the instrument to be further negotiated.

Blank Indorsement (not Special)

A "blank" indorsement is a signature that is not accompanied by the naming of a specific indorsee. Blank indorsements create bearer paper, which may then be negotiated by delivery alone.

Qualified Indorsements (v Unqualified)

An indorsement that adds the words "without recourse" is a "qualified indorsement." The effect is to limit the legal liability otherwise imposed under the Code (TBCC).

Restrictive Indorsements (v Unrestricted)

Any other language added to an indorsement creates a "restrictive" indorsement. Examples include:

(1) Conditions (Pay Flora Flowers only if she has paid her daughter all the money still owing her under her father's will");
(2) Trust indorsements ("pay John Due in trust for Jane Doe"); and
(3) Indorsements restricting further negotiation to the check collection system ("for deposit only," "pay any bank")

Blank Indorsements: (1) How is this done? (2) Effect?

(1) How Done = Payee signature only.

Simplest type of indorsement consisting merely of payee's signature, i.e., no particular person is named to whom the instrument is now payable.

(2) Effect = creates bearer paper.

Thus, further negotiations may be done by transfer of possession alone.

Restrictive Indorsements (AKA For Deposit or Collection)

A restrictive indorsement limiting what may be done with the instrument.

Negotiation: Identifying the Person to Whom the Instrument was Made Payable (the payee)

(1) Intent of Issuer Determines Initial Payee

(2) Multiple Payees:

"And" separates all the names of the payees: Requires all payees to indorse.
"Or" or "and/or" separate the names of the payees: Requires any one of the payees to indorse.

Negotiation: Effect of Transferring an Order Instrument without an Indorsement

The delivery of an order instrument without indorsement (or with one of several instruments missing) may be effective to transfer possession, but it does not constitute a negotiation until the indorsement is made.

Rights of Transferee without Indorsement (Order Paper)

Unless and until he obtains the indorsement, the transferee of the order instrument does not have the status of a holder, and certainly cannot qualify as a HDC.

Result: He cannot negotiate the instrument (negotiation requires a transfer of the right to enforce, which the transferee will be unable to provide until the missing indorsement is procedure. However, the transferee is not entirely without rights: (a) Suit to compel indorsement; (b) Suit to enforce the instrument (once due).

Other Indorsement Issues: (1) Transferee's Right to Transferor's Indorsement

If the instrument is transferred for value, the transferee has a specifically enforceable right to the transferor's indorsement. Either (1) Suit to Compel Indorsement; (2) Suit to Enforce Instrument

Other Indorsement Issues: (2) Depositary Bank Becomes Holder Even Without Transferee's Signature

Depositary bank becomes a holder even if payee deposits a check into payee's account without endorsing it.

"A depositary bank (a bank in which an item is first deposited) that takes an instrument "for collection" becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not endorsed the instrument.

Other Indorsement Issues: (4) Payee Lacking Capacity May Effectively Indorse

Negotiation is effective even if the payee was a minor, incompetent, etc

Holders in Due Course: Overview

Whether the transferee of a negotiable instrument qualifies as a HDC affects his liability on the instrument and the claims or defenses that may be asserted against him. Determining whether someone is a HDC is a 2-step process: (1) Must determine whether the person is a "holder" and (2) Must determine whether the person is in "due course"

TBCC Definition of Holder in Due Course

Under the UCC (incorporated into TBCC), a holder in due course is a holder who takes the instrument: (1) For value; (2) In good faith; and (3) without notice that:

(a) The instrument is overdue or has been dishonored;
(b) The instrument contains an unauthorized signature or has been altered;
(c) There is a claim to the instrument; or
(d) Any party has a defense or claim in recoupment

And (6) the instrument (a) does not bear apparent evidence of forgery/alteration or (b) is not so irregular or incomplete as to call into question its authenticity.

HDC Element (1) Negotiable instrument

Negotiable instrument. A (1) written and (2) signed: (3) unconditional (4) promise or order to pay (5) a fixed amount of money, that: (6) is payable to order or to bearer; (7) is payable on demand or at a definite time; and (8) does not state any unauthorized undertaking or instruction.

HDC Element (2): Holder

The person in possession of the instrument (transferee) must be a "holder," meaning that the transferee must have possession and a right to enforce the instrument. The instrument must be free of forgeries of those names necessary to the chain of title (the payee and any special indorsees).

HDC Element (3): Authenticity not apparently questioned

The instrument (1) does not bear such evidence of forgery or alteration and (2) is not otherwise so irregular or incomplete as to call its authenticity into question.

Example: Henry obtains a promissory note which has obvious erasures and which has been taped back together after being ripped into a dozen pieces.

HDC Element (4) Holder Pays "Value" - In Brief

The holder must pay value for the instrument to deserve the special protection for a HDC.

HDC Element (5): Good Faith

Good faith means (1) honesty in fact (subjective: what the actor actually believed) and (2) the observance of reasonable commercial standards of fair dealing (objective: the actor must proceed fairly in light of the facts and commercial standards).

HDC Element (6): Without Notice

The holder must purchase the instrument without notice of 7 things:

(1) Instrument (principal) overdue;
(2) Instrument dishonored.
(3) Uncured default with respect to payment of another instrument issued as part of the same series;
(4) Unauthorized signature
(5) Alteration
(6) Any claim to the instrument
(7) Any defense or claim in recoupment

HDC Element (6): Without Notice - What Constitutes Notice?

Notice includes both (1) actual knowledge [subjective standard] and (2) reason to know from the facts surrounding the transaction [objective standard].

HDC Element (6): Without Notice - When and How must Notice be Received

To be effective, notice must be received at such time and in such manner as to give a reasonable opportunity to act on it.

HDC Element (6): Without Notice of (1) Instrument Overdue

The purchaser has notice that an instrument is overdue if he has reason to know any of the following: (A) Any part of principal overdue; (2) Acceleration made; (3) Demand made.

Overdue = Due date has past.

For a check = 90 days after issue.
Overdue interest is not notice; only have notice if the principal is overdue.

HDC Element (6): Without Notice of (2) Instrument Dishonored

Instrument not paid upon proper demand, such as a check marked insufficient funds.

HDC Element (6): Without Notice of (6) Claims to the Instrument

TO be a HDC, a holder cannot have notice of any claim to the instrument. Thus, the holder cannot have notice:

(a) that another has a property or possessory right in the instrument or its proceeds (instrument was wrongfully taken form the other's possession);or
(b) that negotiation is rescindable (negotiation from an infant may be rescinded if other law so provides)

HDC Element (6): Without Notice of (7) Any Defense or Claim in Recoupment

To be a HDC, the holder must not have notice of any (a) defenses available to the obligor (e.g., infancy, duress, failure of consideration, etc) or (b) claim in recoupment (a claim that reduces the amount payable) by the obligor.

Claim: Any reason obligor does not want to pay (lack of capacity, fraud)
Recoupment: Like a counter-claim. Obligor's claim against payee arising out of the transaction giving rise to the paper.

HDC - Shelter Rule

Even if a holder does not qualify as a HDC, he still may have rights of HDC by shelter.

General Rule: The transfer of an instrument vests in the transferee the rights that the transferor had
Exception: A person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter.
Warning: Having HDC rights via shelter does not make you a HDC.

HDC Status: Burden of Proof

The burden of proof is on the person claiming HDC status

Element 8: If both order language and bearer language?

Bearer language controls. A check payable "to the order of John Smith or Bearer" is bearer paper.

Negotiation [transfer of negotiable instrument so transferee is a holder]: Overview

The key protection under UCC Article 3 is HDC status. To become a HDC, one must first become a holder of a negotiable instrument. Becoming a holder of a negotiable instrument requires proper negotiation. Negotiation is the process specified by Article 3 for transferring a negotiable instrument.

Negotiation: Holder Status - 2 elements

Possession of the instrument; and
Good Title (right to enforce the instrument.

Note: Method of obtaining good title depends on the words of negotiability)

Rights of HDC are Subject to 11 "Real Defenses" (R.D)

Infancy
Duress which voids obligation
Lack of legal capacity making obligation void
Illegality making obligation void
Fraud in the Execution
Discharge in Insolvency (bankruptcy)
Omission of Required Consumer Protection Language
Statute of Limitations
Payment to Former Holder
Alteration
Unauthorized Signature + Forgeries

R.D. 5: Fraud in the Execution (AKA fraud in the fact)

Signer lacked (1) knowledge of the instrument's character or essential terms; and (2) reasonable opportunity to learn of the instrument's character or essential terms. Here, signer lacked the intent to sign a promise to order or pay.

Note. This is an "excusable ignorance" test. Courts will look at a variety of factors, such as signer's intelligence, education, business experience, and ability to read + understand English

R.D. #7: Omission of Required Consumer Protection Language

TX and/or Fed law require certain instruments in consumer transactions to contain language stating that a transferee remains subject to claims or defenses that the issuer could assert against the original payee (transferor).

If the instrument does not contain required language, it will be treated as if it actually does contain that language. Thus, the issuer may assert against an HDC all claims and defenses that would have been available otherwise.

R.D. #8: Statute of Limitations - Note + Unaccepted Draft.

Note: 6 years from the due date (not the issue date).
In TX, mortgage notes = 4 years.
Unaccepted Draft (check): Earlier of (a) 3 years after dishonor or (b) 10 years after issue.

R.D. #9: Payment to Former Holder

The liability of the person obligated to pay on an instrument is discharged by a payment to a person who was formerly entitled to enforce the notice, UNLESS the obligated party has received proper notice that the note was transferred and that payment is now to be made to the new holder (transferee).

A notification is adequate only if: (1) signed by the transferor or transferee, (2) reasonably identifies the transferred not, and (3) provides an address at which subsequent payments are to be made.

HDC is protected from "personal defenses" - Complete Definition

Personal defenses cannot be asserted against one having rights of an HDC, but any transferee of a negotiable instrument without HDC rights takes the instrument subject to all personal defenses, which include every defense available in a simple contract action (e.g., the contract out of which the commercial paper arose was not properly or fully performed).

HDC is protected from "personal defenses" - In Brief

Apart from the 11 Res, the HDC prevails against all other defenses of the obligor, under either the UCC or common law. For example:

Failure of Consideration (non-delivery of goods, non-performance of services)
Breach of Warranty
Fraud in the Inducement (maker knows that he is signing a promissory note, but is misled regarding the quality of goods; maker signs note without reading it because he was in a hurry).

HDC is free from claims of others to the instrument

No claimant can take an instrument from HDC; HDC is a "perfect defendant"

HDC + Claims in Recoupment

A claim in recoupment may not be asserted against a HDC, but may be asserted against other transferees of the instrument in order to reduce the amount owing on the instrument.

HDC Rights Overview

An HDC can enforce an instrument subject only to real defenses (HDC takes free of personal defenses and claims). If the holder is not an HDC, the obligated party may assert any of the ordinary contract considerations (failure of consideration, etc). If the holder is an HDC, the obligated party is limited to the 11 so-called real defenses.

Contract Liability [AKA Liability of the Parties]: Global Question?

Who may be held liable on an instrument.

Liability of the Parties: Overview

A number of parties to a negotiable instrument may be held liable simply because their names appear on the instrument. Generally, no one may be held liable unless his signature or the signature of an authorized representative is on the instrument.

Contract Liability: 6 Main Potentially Liable Parties

Agents
Maker of Note
Drawer of Draft
Indorser of Note/Draft
Drawee
Accommodation Parties

Contract Liability: (1) Signature by Agent: General Rules.

Principal bound? Follow agency law.
Agent bound: If agent not authorized, personally liable. If agent is authorized, still may be personally liable--subject to 2 element test.

Contract Liability: (1) Signature by Agent: Authorized Agent escapes personal liability....

Authorized agent is not personally liable if (1) principal identified in instrument; and (2) signature unambiguously shows that it was made on behalf of principal.

I.e., Alice Agent signs a promissory note on behalf of Paul Principal "Paul Principal, by Alice Agent." Alternatives: "Agent for" or "treasurer," etc. Show you're signing as an agent.

Contract Liability: (1) Signature by Agent: Agent's personal liability to HDC v Non-HDC

Liability of Agent

To HDC: Agent is liable to HDC unless the A can prove that the holder had notice of the representative nature of A's signature.
To Non-HDC: Agent is liable to non-HDC unless A can prove that the original parties did not intend for the agent to be liable.

Contract Liability: (1) Signature by Agent--If Agent is Not Authorized

Actually, then it's a forgery. Alleged agent is bound. Purported principal is not.

Contract Liability: Maker of Note

Primary Liability -- No Conditions Precedent. Maker must pay instrument when due according to its terms at the time it was issued (or when incomplete instrument completed).
Liable To: Holder or Indorser Who Paid Instrument.
Defenses: Maker may raise defenses, effectiveness depends on status of holder (HDC v normal holder).

Contract Liability: Drawer of Draft - Disclaiming Liability

Drawer may not disclaim liability on a check, but may disclaim liability on other drafts.

Contract Liability: Drawer (Draft) - Secondary Liability

Drawer liable only after two conditions satisfied: (1) Presentment to drawee within 30 days and (2) Dishonor--drawee refuses to pay the instrument upon a proper presentment.

Contract Liability: Indorser of Note or Draft - (A) Liability disclaimers?

Liability disclaimers allowed.

Example: The payee of a check, Paul Parsons, endorses the check "without recourse, Paul Parsons." This endorsement prevents Paul from incurring the contract liability of an endorser; the indorsement is effective merely to pass title.

Contract Liability: Indorser of Note or Draft - (B) Order of Liability

Indorsers are liable to each other in the order of their signatures.

Sue prior endorsers for payment
Liable to later endorsers

Contract Liability: Drawee -- (A) General Rule

A drawee makes no negotiable instruments contract.

Contract Liability: Drawee -- (B) Acceptance or Certification

The drawee may agree to pay the draft by signing it (certification). The drawee has no obligation to accept a draft and cannot be sued for failing to accept. Certification discharges the drawer and all prior endorsers.

Contract Liability: Drawee -- (C) Final Payment

Once a drawee bank finally pays a check, contract actions (e.g, the drawer's and endorser's contracts) may no longer be pursued and the drawee bank may not recover on the check from the persons it paid, unless there is a breach of a presentment warranty.

Final payment occurs when the drawee bank: (a) pays the item in cash or (b) does not revoke a provisional settlement by the midnight deadline--that is, midnight of the next banking day after the banking day or receipt.

Liability: Drawee --Conversion (Tort) Liability if Drawee Pays on Forged Instrument

Drawee who pays on a forged instrument is liable to the payee in conversion. Person suing in conversion must have received delivery of the instrument. No conversion action if check never reaches payee because it was lost in the mail.

Liability: Drawee --Payment of Checks after the Drawer's Death

General Rule. Drawee bank may continue to pay checks until it (1) knows that the drawer has died and (2) has a reasonable opportunity to act on that knowledge.

Effect of Notice of Death. Drawee bank may pay for no more than 10 days after the drawer's death if the bank knows of the death. But, if someone claiming an interest in the account requests that the drawee bank stop paying the drawer's checks immediately, then the bank must comply.

Contract Liability: Accommodation Parties - (A) Definition

A person who signs an instrument to lend his credit to another party but does not receive any direct benefit (does not receive any of the borrowed money).

Contract Liability: Accommodation Parties - (B) Parties

Accommodated Party--principal/debtor/obligor (the person w/ bad credit).
Accommodation Party--surety/co-signer (the person w/ good credit).
Holder--creditor/obligee (the person who wants payment assured).

Contract Liability: Accommodation Parties - (C) Liability Generally

Accommodation party is liable in capacity in which he signs; no-special contract. Presumed to be a guaranty of payment. (Holder can collect from accommodation partly without first attempting to collect from accommodated party.

Contract Liability: Accommodation Parties - (D) Limiting Liability to Collection Only

The accommodation party may include express language limiting the contract to a guarantee of collection only ("collection guaranteed only").

Contract Liability: Accommodation Parties - (E) Reimbursement

If the accommodation party (surety) pays the instrument, he is entitled to reimbursement from the accommodated party (maker, indorser).

Contract Liability: Accommodation Parties - (F) Demonstrating Accommodation Status - 2 Ways

Express language
Anomalous Endorsement: An endorsement by a person who was not the holder of the instrument (endorsement outside the chain of title) is notice of its accommodation character.

Warranty Liability: Overview

These are implied warranties (arise automatically)
Warranty liability is off the instrument since warranties are created by transfer/presentment, not the indorsement of the instrument.
To use a warranty, possession of the instrument is NOT required (as it is for contract liability).
Warranty liability survives the final payment of the instrument.

(1) Transfer Warranties (TWs): (A) Arise when?

When an instrument is transferred. But note: TWs do not arise in a gift context; the person transferring (transferor) must receive consideration before the TWs are implied.

(1) Transfer Warranties (TWs): (C) To Whom are TWs Made (plaintiff)?

Immediate transferee;
Subsequent transferees if transferor endorsed (note, in the banking context, liability runs to any subsequent collecting bank even without endorsement);

(1) Transfer Warranties (TWs): (D) Who can never sue for breach of TW?

Drawee and maker can never sue for breach of TW--They get instruments presented to them, not transferred.

(1) TWs: (F) List of the Six Transfer Warranties

Warrantor (transferor) is entitled to enforce the instrument (warranty of holder status).
All signatures are authentic and authorized
No alteration
Not good defenses against transferor (warrantor)
No knowledge of insolvency proceedings
If remotely created item, the person identified as the drawer actually authorized the item.

(1) Transfer Warranty #4: No Good Defenses Against Transferor (Warrantor)

Warranty that the instrument is not subject to any defenses that could be successfully asserted against the transferor. Thus, transferor warrants that, if transferor were a plaintiff on the instrument, no defense that anyone has could defeat transferor. A "perfect plaintiff" warranty.

(1) Transfer Warranty #5: No knowledge of insolvency proceedings

Warranty that the transferor (warrantor) has no knowledge of insolvency proceedings against the maker, acceptor, or drawer of an unaccepted draft.

Note: This is the only warranty where the warrantor's lack of knowledge is relevant.

(1) Transfer Warranties: (G) Disclaimer

Checks = cannot disclaim
Non-checks = can disclaim ("without warranties")

Note: CF; TWs v PWs

Do not confuse presentment warranties and transfer warranties. They are mutually exclusive. A plaintiff can only have 1 of these warranty causes of action although a person might make both warranties.

(2) Presentment Warranties: (B) Who makes (defendant)?

Presenter, and
Previous transferors

(2) Presentment Warranties: (C): Made to Whom (plaintiff)?

Made to parties who pay in good faith--that is, maker, drawee, or acceptor.

(2) Presentment Warranties: (D) Warranties when unaccepted draft presented to drawee (4)

Example: Normal check (cashing paycheck).

Warrantor entitled to enforce draft or obtain payment
No alteration
No knowledge of unauthorized Drawer's signature
If remotely-created item, that person identified as the drawer authorized the item

(2) Presentment Warranties: (E) Warranties when other instruments (not unaccepted draft) presented?

Example: dishonored draft to indorser; note to maker.

Warrantor entitled to enforce draft or obtain judgment.

Warranty v Endorser's Contract: How do you know when P should bring suit against the indorser for (a) breach of warranty or (B) breach of contract?

Determine identity of plaintiff.

If P is Holder: If the payor has not paid the instrument (check bounces, promissory note not paid by maker), then the holder will sue the indorser on the endorser's K.
If P is Payor: If the payor has paid and later discovers that payor should not have paid (check was forged, note was altered), then payor will attempt to sue the indorser for breach of warranty (TW or PW, as appropriate under the facts).

Other Issues: (1) Discharge by Holder

Holder may discharge obligation by surrendering the instrument to obligor, destroy it, canceling it (writing "void), etc.

Other Issues: (2) Effect of Instrument on Underlying Obligation

Payment by Certified Check, Cashier's Check, or Seller's Check = Underlying obligation discharged as if the person was paid in cash.
Uncertified Check + Notes = Underlying obligation suspended. . . (a) If check or note is later paid, obligation is discharged. (b) If check/note is dishonored, holder may sue on either instrument or underlying obligation.

Other Issues: (3) Failure to Produce Original Instrument

Examples: Original lost, inadvertently destroyed, stolen.

Enforcement by Person Not in Possession: (1) Person was a holder (entitled to enforce) when loss occurred; (2) Loss not due to transfer or lawful seizure; and (3) person cannot reasonably obtain the original.

Protection for PayorRequired--e.g., bond, security, etc.

Other Issues: (6) Stop Payment Orders - Requirements

Must be in a writing that (a) is dated, (b) is signed, and (c) describes item with reasonable certainty (account #, check #, and amount).

Oral stop payment orders are unenforceable in Texas. But bank may stop payment if it wants to be nice to the customer.

Other Issues: (6) Stop Payment Orders - Duration

Properly executed stop payment orders are valid for 6 months and can be renewed.

Other Issues: (6) Stop Payment Orders - Bank's Defenses

Stop payment order did not comply with requirements (written, dated, signed, description of item)
No Loss: Customer would have to pay the check even if payment was stopped.

Other Issues: (6) Stop Payment Orders - Special Rules for Cashier's Checks and Teller's Checks

Remitter cannot stop payment.
Bank can stop payment (but then risks liability for expenses, lost interest, and consequential damages).

Other Issues: (7) Wrongful Dishonor--(A) Defined

Drawee dishonoring a properly payable check.

(7) Wrongful Dishonor--(B) Who has standing to complain?

The drawer may bring action against the drawee for bouncing a check it should have paid.
The payee may not sue the drawee bank (even if the drawee bank should have paid the check and drawer had sufficient funds to cover the check).

(7) Wrongful Dishonor--(C) Damages

The drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing hot checks.

(7) Wrongful Dishonor--(D) Drawee Bank's Defenses

Payment would overdraw the drawer's account.
Check is more than 6 months old (note that bank is allowed to honor a "stale" check as long as it does so in good faith).

Other Issues: (8) Payment in Full Check - (A) Defined

A check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing payment which is unliquidated or subject to a bona fide dispute.

(8) Payment in Full Check - (A) Effect and (B) Exceptions

(A) Effect. If the payee cashes the payment in full check, the check operates as an accord and satisfaction.

(B) Two Exceptions.

Payee returns the money within 90 days (undoes the accord + satisfaction)
Payee is an organization and had previously notified the drawer of a particular person or address to which to send payment in full checks.

(9) Forgery + Alteration - (A) Forged Maker's Signature

Alleged Maker is Not Liable b/c the maker's signature does not appear on the note. But, alleged maker's conduct may ratify the forgery or cause alleged maker to be precluded from denying the forgery.
Forger is Liable on the note because the forger's signature appears thereon.

(9) Forgery + Alteration - (B) Forged Drawer's Signature

Alleged drawer is not liable.

Drawee bank must re-credit the alleged drawer's account as check was not properly payable (NPP), unless drawee bank has a defense.

(9) Forgery + Alteration - (B) Forged Drawer's Signature: Drawee Bank unable to pass on loss unless breach of PW.

Drawee bank unable to pass on loss, unless breach of PW. Normally, no presentment warranties (entitled to enforce, no alteration, etc) will be breached; parties had right to enforce the forger's obligation. Forger is real drawer b/c he signed when he forged the alleged drawer's signature. Drawee bank takes the risk that drawer's signature was unauthorized, unless presenter actually knew it was unauthorized.

(9)(B) Forged Drawer's Signature: Bank's Defenses to Re-Crediting #2: Bank Statement Rule - General Rule

General Rule. Customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and to report forgeries to bank. If customer does not and bank can prove a loss beyond original mistaken payment (did not catch forger), customer precluded.
Warning: Forged drawer's signature must be reported to bank within 1 year regardless of customer's negligence.

Bank Statement Rule: Repeat Offender Rule

If the same person is forging a series of checks, the drawer must report the foregoes within 30 days of when the statement was available. If drawer does not, the bank will not reaccredit the account for the subsequent forgeries by the same person.

(9) Forgery + Alteration: (C) Forged Indorsements - (1) Effect of Forgery of Payee's Name

Bearer Paper: Since endorsement not necessary to negotiate bearer paper, forgery of endorsement is irrelevant.
Order Paper: Forgery breaks chain of title and check is not properly payable. Drawer may demand that the drawee bank re-credit his account.

(C) Forged Indorsements - (2) Two Situations Where a Party is Precluded from Asserting Forgery of Payee's Name

Imposter Rule--drawee/maker estopped to deny validity of forged endorsement.
Fraudulent Endorsement by Employees--Payee Estopped.

#1) Imposter Rule--drawee/maker estopped to deny validity of forged endorsement.

The issuer, maker, or drawer will be estopped from denying the validity of a forged inducement where the maker/drawer/issuer is deemed to have acted carelessly in issuing the check and thus to have contributed to the forgery.

#2: Fraudulent Endorsement by Employees--Payee Estopped.

If an employer entrusts an employee (or independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent endorsement, the endorsement iseffective. Payee is estopped from asserting the forgery.

(C) Forged Indorsements: (3) Liability of Drawee

Conversion Liability to Payee. Payee can sue the payor bank (as well as the depositary bank and non-bank converters) for conversion; OR
NPP Liability to Drawer. The drawer of a check can sue the payor/drawee bank, as a check with a forged payee's name is NPP.
Drawee bank protected from 2X liability. A successful conversion action against drawee bank by payee will eliminate drawer's NPP action.

(C) Forged Indorsements: (3) Liability of Drawee - Bank's Defenses

Imposter Rule
Fraudulent Endorsement by Employee Entrusted with Check
Drawer's Negligence
Failure to Timely Sue (drawer must sue within 3 years).

(C) Forged Indorsements: (4) Liability of Presenter (to Drawee bank)

If drawee bank pays damages, it can then sue the presenter and those prior to the presented for breaching the PW of entitled to enforce (the forged endorsement broke the chain of title so that no one could become a holder.

(C) Forged Indorsements: (5) Liability of Transferor (to Presenter).

If a transferor (presenter) loses to the (drawee) payor bank for breach of PW of good title, presenter may then sue entities further up the chain for breach of the various TWs of (1) entitled to enforce, (2) all signatures authentic or authorized, and (3) no good defenses.

(9)(D) Alteration - (b) Effect on HBC

Change in Obligation: HDC may enforce for original amount (not altered amount)
Unauthorized Completion: HDC may enforce as completed (full amount, includes alteration)

(9)(D) Alteration - (c) Effect on Non-HDC

Fraudulently made by holder = total discharge of obligor.
Not fraudulently made = obligor liable under original terms.

(9)(D) Alteration - (d) Not Properly Payable - General Rule

An altered check is NPP.

Commercial Paper

124 important questions on Commercial Paper