Comm Law Negotiability - 425[1]

8/6/2019 Comm Law Negotiability - 425[1]

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NEGOTIABILITY

Types of negotiable InstrumentsMoney – a bill of exchange, draft from the US TreasuryNote – Written promise to pay money

CD – certificate of deposit – note written by bankDraft – order from one person to another

§3-104(a): An Article is a Negotiable Instrument if it is,-- an unconditional promise to pay a fixed amount-- with or without interest-- (1) is payable to bearer -- (2) is payable at a certain time or on demand. Buyer must

be able to tell the earliest date due-- (3) does not require bearer to do anything

The Negotiability ConceptMust be in Writing (Promise or order)Signed – an X is OK!Unconditional Promise – can’t have conditions on it

– unsafe for future holdersImplied Conditions – by 3-106, referencing other documents does not

make it non-negotiable. Countersigning is not necessary ontraveler’s checks.

Consideration – “Void in 90 days” – usually non-neg, but common lawsays it is negotiable

Fixed amount of money –must be able to tell its value on its face –

Note words “of MONEY”Courier without luggage – no additional promises can be on instrumentPayable on Demand – instrument does not need to be dated, but holder

needs to know when its due. (if there is no date to be paid, it isassumed on demand

Payable to Bearer – Making payable to bearer creates privity. Payable to“order” is payable to the order of named payee

Payable to (blank) is an incomplete instrument. OK if intended to becompleted. Burden is on person claiming lack of authority tocomplete

Ex: Ill give you $1000 upon presentment and car – nonnego, 2 nd promise

Ill give you $1000 with the car as security -- negotiable

COMMERCIAL LAW II OUTLINE Page 1 of 7Walter M. Spader, Jr.

Last Printed on 5/10/2011 at 22:29 A5/P5



NEGOTIATION

Transfer and NegotiationThree Stages of an Instrument’s Life

1) Issuance

2) Transfer 3) Presentment

You can only be holder after a valid negotiation.Must have possession and be identified on the instrument

Special/Blank IndorsementBlank Indorsement -- Signing the back automatically makes it a bearer

instrumentSpecial Indorsement – signing the back “to the order of”

Forgery of Payee’s Name

No one can be a holder unless they are named…after payee indorses,anything is possible, but there can never be a holder after a forgery of payee’s name (no valid negotiations)





HOLDERS IN DUE COURSE

Woodworth p 344: No one can be a holder in due course of a non-negotiableinstruments”

Acquiring Status of HIDC §3-302

Payee is usually not a HIDC (has knowledge of underlying problems and obtainsit from an issuance not a negotiation)

1) No apparent forgery2) holder took instrument

i) for valueii) in good faithiii) without notice of overdue/dishonored/defaultiv) without notice of unauthorized signature/alterations

v) without notice of claim against it by 3-306vi) without notice of a defense

Holder – must get instrument from a valid negotiation

For Value §3-303Gift will never make a holder in due course

Good Faith/NoticeNotice can be “forgotten” if considerable time has passed“Closely Connected Doctrine” can’t get HIDC status in closetransactions (p384)

Overdue Instrument §3-304ON DEMAND:Day after demandChecks – 90 daysInstruments – unreasonably longPAYABLE AT A DEFINITE TIMEDefault of an installmentDay after due date

Shelter Rule – can step in the shoes of the holder in due course





Real & Personal Defenses3-305(a)(1) – real Defenses3-305(a)(2) – personal defenses3-305(a)(3) claim of recoupment

Real Defenses – low transaction costs – HIDC is subject to them!Fraud in factumInfancy – can be reasserted at age 18DuressLack of legal capacityIllegality of the transaction (ie. Statute says no gambling debts)Discharge in insolvency proceeding(Forgery is not a real defense by public policy)

Personal Defenses – high transaction costs – not valid against a HIDCBreach of warranty

Fraud in inducementEstoppelFailure of considerationDischarge by payment – obligor will have to pay new holder and go for

recoupmentPartial Payment – Should be noted on the instrument, debtor’s obligationConditional Issuance is a defense as in non-issuance

Recoupment

By 3-308, holder has the burden of showing they are HIDCMust be a STRONG rebutable presumption that the signature is proper

Signatures are presumed proper Obligor must deny propernessObligor must present evidence that supports argument

Once trier-of-fact is satisfied with evidence, the burden shifts to party assertingThe signature is proper

(a mere denial does not overcome presumption – having handwriting samplesmay!)

Only claim a non-holder in due course takes free of defense is a perfectedsecurity interest in a secure T/A

Jus Tertii -- ?? p424





LIABILITY

Exam Approach to Liability1) Who are the parties (drawer, payee, maker, indorser, guarantor)2) What are the causes for action

3) What are the defenses4) Can liability be passed?

Underlying ObligationOnce the instrument was accepted, the duty of the underlying obligationwas merged .

Liability on the InstrumentOf Maker – absolutely liable to payOf Indorser – presentment, dishonor, notice of dishonor Of Surety --

Of AgentAccommodation Party – follow rules of agency

If language says guaranteeing collection, only a guarantee if:1) unsatisfied execution of judgment2) insolvent debtor 3) no service possible4) otherwise can’t obtain payment (refusal to pay not enough)





BANKS

Checking AccountTypewritten terms prevail over printed terms, handwritten terms prevail

ver both, words prevail over numbers

A bank that misapplies funds cannot be sued for a conversion! P492

Properly Payable Rule – Banks must follow customer’s orders exactlyIf you sign the check in your checkbook and lose it you are liable

If a bank wrongfully dishonors a check, it is liable for expenses related to it

Death – Bank shouldn’t honor checks once notified of death, until thenthey have to pay. With knowledge they can cash checks for 10days unless they get order of claims against the account. Many

states have statutes that banks must freeze accounts to pay taxes

Stop Payment – expenses borne by bank, if bank mistakenly cashescheck, it can step in shows of customer and sue for recoupment

Bank Statement, 4-406, minimum duty of bank is to provide a statement of item number, amount & date of payment

Banks should only not honor check if it is 100% sure it shouldn’t honor it





WRONGDOING & ERROR

Forgery of Payee’s NameWithout a valid indorsement by the payee, no future holder can be a HIDC(or even a holder!)

Presentment warranty – You know of nothing to defect presentmentTransfer warranty – you know nothing defective in the transfer The policy of the law is to hold the person with the best chance to catch theforgery liable. Expenses of collection are recoverable – attorneys fees generallynot

Forgery of Drawer’s Name

Prince v Neal – What is the Rule?

Validation of the ForgeryRatification – with knowledge of the forgery, maker can ratify it

Ratification per se…w/knowledge of forgery, kept silent…Estopped from suing for conversion

Imposter Rule – Imposter Rule validate the forgery of the payees namewhen the drawer has been duped…and it is proper to put liability ondrawer

Employee Endorsement Rule – If employees conduct forgery, employer isliable b/c they choose the employee!

Negligence Rule – estopped from complaining, b/c forgery substantiallycontributed to forgery (Young v Grote – shouldn’t let his wife havechecks). Negligence is a defense, not an affirmative cause of action

Bank Statement Rule – customers have a duty to check their bankStatements

Final Payment Rule – Banks have the duty to know their customer’ssignatures

When a check is dishonored, you can either sue on the instrument or the

underlying promise



Documents

Comm Law Negotiability - 425[1]