July 13, 2010

1. Possession of the instrument

2. Good Title
 Depends on words of negotiability found on the
instrument.

2. Good Title
 Bearer words = possession alone is good title

2. Good Title
 Order words = properly indorsed

Indorsement – Generally
 Signature by payee (or later holder), normally
on the back.

Blank indorsement
 Signature by payee only.
 Creates bearer paper so later negotiations are
by transfer of possession.

Special indorsement
 Signature by payee which names new person
entitled to the money.
 Creates order paper so later negotiations need
indorsement of new person.

Restrictive indorsement
 Signature by payee indicating “for deposit” or
“for collection” only.
 If bank does not comply, bank is liable for
conversion.

“Pay to the order of George Bush.”
 First U.S. President named George Bush?
 Second U.S. President named George Bush?
 Some other person with the name of George
Bush?

“Pay to the order of William Bell and Walter
Bishop.”
 Both must indorse to negotiate.

“Pay to the order of William Bell or Walter
Bishop.”
 Only one must indorse to negotiate.

“Pay to the order of William Bell and/or
Walter Bishop.”
 Only one must indorse to negotiate.

If transferred for value, transferee has
specifically enforceable right to transferor’s
indorsement.

If transferred for value, transferee has
specifically enforceable right to transferor’s
indorsement.

If check deposited in your account, bank
becomes holder even without your
indorsement.

“Pay to the order of Jerry W. Beyer.”
 Indorse in incorrect name (“Jerry W. Beyer”), or
 Indorse in correct name (“Gerry W. Beyer”), but
 Person giving value may require both
indorsements.

A payee without legal capacity (e.g., minor
or incompetent) may indorse.

1. Negotiable instrument.

2. Held by a holder.

3. Authenticity of instrument not
apparently questioned.

4. Holder paid value.
 Value may be different from face value.
 Not a gift.

5. Holder in good faith:

5. Holder in good faith:
 a. Honesty in fact (subjective), plus

5. Holder in good faith:
 a. Honesty in fact (subjective), plus
 b. Observance of reas0nable commercial
standards of fair dealing (objective).

6. Without notice of the following things at
the time instrument acquired:

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
▪ Note = due date has passed
▪ Check = more than 90 days from date of issue

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
 b. Instrument dishonored
Note = maker refused to pay
Check = drawee bounces check

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
 b. Instrument dishonored
 c. Unauthorized signature

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
 b. Instrument dishonored
 c. Unauthorized signature
 d. Alteration

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
 b. Instrument dishonored
 c. Unauthorized signature
 d. Alteration
 e. Any claim

6. Without notice of the following things at
the time instrument acquired:
 a. Principal overdue
 b. Instrument dishonored
 c. Unauthorized signature
 d. Alteration
 e. Any claim
 f. Any defense or claim in recoupment
(counterclaim)

What does notice mean?

What does notice mean?
 1. Actual knowledge (subjective)

What does notice mean?
 1. Actual knowledge (subjective)
 2. Receipt of a notice

What does notice mean?
 1. Actual knowledge (subjective)
 2. Receipt of a notice
 3. Reason to know based on facts and
circumstances

Shelter Rule – HDC rights pass along with
instrument.
Maker
Payee
HDC
gift
Holder

1. Infancy
Normally,
under 18
years old

2. Duress

3. Lack of Legal Capacity

4. Illegality making obligation void

5. Fraud in the execution (fraud in the
factum)

6. Bankruptcy discharge

7. Omission of required consumer
protection language
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS
SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE
DEBTOR COULD ASSERT AGAINST THE SELLER OF
GOODS OR SERVICES OBTAINED PURSUANT HERETO
OR WITH THE PROCEEDS HEREOF. RECOVERY
HEREUNDER BY THE DEBTOR SHALL NOT EXCEED
AMOUNTS PAID BY THE DEBTOR.

8. Statute of Limitations
 Note = 6 years from due date

8. Statute of Limitations
 Note = 6 years from due date
 Check = earlier of:
1. 3 years after dishonor, or
2. 10 years after issue.

9. Obligor pays former holder before
receiving notice from current holder
that instrument has been transferred.

10. Alteration

11. Unauthorized signatures and forgeries
[covered in detail later]

Examples:
 Non-delivery of goods
 Defective goods
 Non-performance of services
 Misrepresentation of goods
 Breach of warranty

No one can take an instrument away from a
holder in due course, even the true owner.

Principal = MegaStore, Inc.

Agent = Nancy, the bookkeeper authorized
to sign checks

Issue = Is Nancy personally liable when she
signs notes and checks for
MegaStore?

Agent (Nancy) can avoid personal liability
if:
 1. Identify principal (MegaStore, Inc.) on the
note, and

Agent (Nancy) can avoid personal liability
if:
 1. Identify principal (MegaStore, Inc.) on the
note, and
 2. Indicate agent (Nancy) is signing for principal
(MegaStore, Inc.) for example:
Nancy, as agent for MegaStore, Inc.
Nancy, bookkeeper.
MegaStore, Inc. by Nancy

Agent (Nancy) can avoid personal liability if
the instrument is a check and principal’s
name (MegaStore) is on the check.

Primary liability to holder.

No conditions to payment other than note
being due.

Secondary liability to holder.

Secondary liability to holder.

Conditions on drawer’s liability to holder:
 1. Presentment to drawee within 30 days of
issue (but, non-compliance only a problem if
drawee becomes insolvent), and

Secondary liability to holder.

Conditions on drawer’s liability to holder:
 1. Presentment to drawee within 30 days of
issue (but, non-compliance only a problem if
drawee becomes insolvent), and
 2. Dishonor (drawee refuses to pay)

Secondary liability to holder.

Conditions on indorser’s liability to holder:
 1. Presentment to maker or drawee within 30
days of indorsement (non-compliance
discharges indorser’s liability),

Secondary liability to holder.

Conditions on indorser’s liability to holder:
 1. Presentment to maker or drawee within 30
days of indorsement (non-compliance
discharges indorser’s liability),
 2. Dishonor (maker or drawee refuses to pay),
and

Secondary liability to holder.

Conditions on indorser’s liability to holder:
 1. Presentment to maker or drawee within 30
days of indorsement (non-compliance
discharges indorser’s liability),
 2. Dishonor (maker or drawee refuses to pay),
and
 3. Notice of dishonor to indorser within 30 days
of dishonor.

Disclaimer of liability allowed.

Order of liability if several indorsers = liable
in order of signatures.
 Sue prior indorsers for payment.
 Liable to later indorsers.

None – drawee did not sign draft/check.

Acceptance or Certification – Drawee signs
the draft.

Acceptance or Certification – Drawee signs
the draft:
 1. Drawee primarily liable.
 2. Drawer discharged.
 3. Indorsers discharged.

Final Payment ends contract actions on
check.

Final Payment ends contract actions on
check.

Final payment occurs when:
 1. Drawee bank pays the item in cash, or

Final Payment ends contract actions on
check.

Final payment occurs when:
 1. Drawee bank pays the item in cash, or
 2. Drawee bank does not revoke provisional
settlement by “midnight deadline,” that is,
midnight of the next banking day after the
banking day of receipt.

Liable in capacity in which accommodation
party signs.
 1. Maker

Liable in capacity in which accommodation
party signs.
 1. Maker
 2. Indorser (name outside chain of title)

Presumed to be a guaranty of payment.

Can expressly limit guaranty to one of
collection only.

Implied – arise automatically.

Implied – arise automatically.

Off-instrument liability so possession of the
instrument is NOT necessary to recover.

Implied – arise automatically.

Off-instrument liability so possession of the
instrument is NOT necessary to recover.

Goal is to get money back that was
improperly paid previously.

Who makes transfer warranties?
 Person who transfers the instrument AND
receives consideration for the instrument.

To whom are transfer warranties made?
 1. Immediate transferee, and
 2. Subsequent transferees if transferor (1)
indorsed or (2) if instrument is a check passing
through collection process.

What are the transfer warranties?
 1. Transferor was a holder at time of transfer.

What are the transfer warranties?
 1. Transferor was a holder at time of transfer.
 2. All signatures authentic and authorized.

What are the transfer warranties?
 1. Transferor was a holder at time of transfer.
 2. All signatures authentic and authorized.
 3. The instrument has not been altered.

What are the transfer warranties?
 1. Transferor was a holder at time of transfer.
 2. All signatures authentic and authorized.
 3. The instrument has not been altered.
 4. No defense would defeat the transferor’s
ability to collect the money (“perfect plaintiff”
warranty).

What are the transfer warranties?
 1. Transferor was a holder at time of transfer.
 2. All signatures authentic and authorized.
 3. The instrument has not been altered.
 4. No defense would defeat the transferor’s
ability to collect the money (“perfect plaintiff”
warranty).
 5. Transferor has no knowledge of bankruptcy
of maker, acceptor, or drawer.

What are the transfer warranties?




1. Transferor was a holder at time of transfer.
2. All signatures authentic and authorized.
3. The instrument has not been altered.
4. No defense would defeat the transferor’s ability
to collect the money (“perfect plaintiff” warranty).
 5. Transferor has no knowledge of bankruptcy of
maker, acceptor, or drawer.
 6. If remotely created item, that alleged drawer
authorized the item.

Disclaiming warranties:
 1. Check = transferor cannot disclaim
 2. Notes and non-check drafts – transferor may
disclaim

Who makes presentment warranties?
 1. Person who presents the instrument for
payment, and
 2. All previous transferors of the instrument.

To whom are presentment warranties
made?
 1. Note = Maker
 2. Draft = Drawee or acceptor

What are the presentment warranties on a
non-certified check or draft?
 1. Presenter (and prior transferors) were
holders at the time of presentment (or transfer).

What are the presentment warranties on a
non-certified check or draft?
 1. Presenter (and prior transferors) were
holders at the time of presentment (or transfer).
 2. Instrument is not altered.

What are the presentment warranties on a
non-certified check or draft?
 1. Presenter (and prior transferors) were
holders at the time of presentment (or transfer).
 2. Instrument is not altered.
 3. Presenter (and prior transferors) had no
knowledge of an unauthorized drawer’s
signature.

What is the presentment warranty on a
note?
 Presenter (and prior transferors) were holders at
the time of presentment (or transfer).

Disclaiming warranties:
 1. Check = cannot disclaim
 2. Notes and non-check drafts = may disclaim