
1. Identify the type of paper.
 Promissory note (including CDs)
 Draft (including checks and remote-created
items)

2. Identify the parties, for example:
▪
▪
▪
▪
▪
▪
▪
▪
▪
Maker
Drawer
Payee
Drawee
Indorser
Holder
Accommodation Party
Depositary Bank
Payor Bank

3. Is instrument negotiable (form):
▪
▪
▪
▪
▪
▪
▪
▪
In writing
Signed by maker or drawer
Unconditional promise or order to pay
Fixed amount
Of money
No other undertaking or instruction
Payable on demand or at a definite time
Words of negotiability (order or bearer language)

4. Was instrument properly negotiated
(transferred to a holder):
 Bearer paper = possession
 Order paper = possession plus necessary
indorsements
▪ Blank (creates bearer paper)
▪ Special (names new owner)
▪ Restrictive (e.g., for deposit only)

5. Does holder qualify as HDC?
 Negotiable instrument
 Holder status
 Authenticity not apparently questioned
 Holder gave value for the instrument
 Holder took instrument in good faith
 Holder was without notice
▪ E.g., overdue, dishonored, unauthorized signature,
alteration, claim, defense, claim in recoupment

5. HDC issues
 Shelter Rule – taker from HDC may receive HDC
rights
 Subject to real defenses
▪
▪
▪
▪
▪
Infancy
Duress voiding obligation
Lack of legal capacity making obligation void
Illegality making obligation void
Fraud in the execution
[continued]

5. HDC issues [continued]
 Subject to real defenses [continued]
▪ Bankruptcy discharge
▪ Omission of required consumer protection language
▪ Statute of limitations
▪ Payment by obligor without notice to former holder
▪ Alteration
▪ Unauthorized signatures and forgeries
[continued]

5. HDC issues [continued]
 Takes free of personal defenses
 Takes free of all claims
 Burden of proof on HDC
 HDC status sometimes denied by statute

6. Liability of Parties – General Approach
 Who wants the money (plaintiff)?
 Who does not want to pay (defendant)?
 What are plaintiff’s legal theories of recovery?
 What defenses may the defendant raise?
 If the defendant is a loser, may liability be
passed on to another party?

7. Contract liability
 Underlying obligation
 Maker’s contract
 Indorser’s contract
 Accommodation parties
 Drawer’s contract
 Drawee’s contract (acceptance and
certification)
 Signature by agents
[continued]

7. Contract liability [continued]
 Checking Account
▪
▪
▪
▪
▪
▪
▪
Properly payable
Wrongful dishonor
Customer’s death or incompetence
Setoff
Stop payment orders
Final payment
Charge back

8. Warranty Liability
 Transfer warranties
▪ Entitled to enforce (holder status)
▪ Signatures authentic and authorized
▪ No alteration
▪ No defense good against transferor (perfect plaintiff)
▪ No knowledge of insolvency proceeding against
maker, drawer, or acceptor
▪ If remotely created item, the person identified as the
drawer authorized the item

8. Warranty Liability [continued]
 Presentment warranties (checks)
▪ Entitled to enforce
▪ No alteration
▪ No knowledge of unauthorized drawer’s signature
▪ If remotely-created item, the person identified as the
drawer authorized the item.
 Presentment warranty (notes)
▪ Entitled to enforce

9. Conversion Liability
 Wrongful dominion
 Drawee bank paying on forged indorsement
10. Forgery





Maker’s signature
Drawer’s signature
Indorsement
Forgery validation
▪
▪
▪
▪
▪
▪
Ratification
No loss
Impostor Rule (estops issuer)
Fraudulent indorsement by payee’s employee
(estops payee)
Negligence
Bank statement rule

11. Alteration
 Types
 Effect on HDC
 Effect on non-HDC
 Defenses
▪ Negligence
▪ Bank statement rule

12. Other issues
 Discharge by h0lder
 Failure to produce original instrument
 Overdrafts
 Postdated “checks”
 Payment in full checks
Madonna
Maker
Negotiable?
Prince
Payee
HDC?
1.
2.
3.
4.
5.
6.
Negotiable?
HDC?
D v. P on underlying obligation
D v. M on maker’s contract
D v. P on indorser’s contract
D v. P on transfer warranties
Disco
Bob
Maker
$500 note
defective watch
Al
Payee
blank indorsement
lost note
Cal
$350
Tom
Taylor
Drawer
SPO
Check 1 -- $2,500 for furniture
Check 2 -- $1,500 for refrigerator
XYZ
Payee
Cashed checks
Closed account
First Bank
LNB
Drawee
Provides indorsement
Della
theft
[alleged drawer]
Stella
issuance
[drawer & forger]
Fred
[fictitious payee]
NPP
CNB
Drawee
Corner Grocery
State Bank
[depositary bank]

Effect of death of drawer/depositor