2. What requirements must an instrument meet to be negotiable? What requirements must an instrument meet to be negotiable? What are the requirements for attaining the status of a holder in due course (HDC)? What are the requirements for attaining the status of a holder in due course (HDC)? What is the difference between signature liability and warranty liability?  What is the difference between signature liability and warranty liability?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

3. Certain defenses are valid against all holders, including HDCs. What are these defenses called? Name four defenses that fall within this category. Certain defenses are valid against all holders, including HDCs. What are these defenses called? Name four defenses that fall within this category. Certain defenses can be used against an ordinary holder but are not effective against an HDC. What are these defenses called? Name four defenses that fall within this category. Certain defenses can be used against an ordinary holder but are not effective against an HDC. What are these defenses called? Name four defenses that fall within this category. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3

4. A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. Most negotiable instruments are paper documents, referred to as commercial paper. Most negotiable instruments are paper documents, referred to as commercial paper. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

5. The UCC specifies four types of negotiable instruments: The UCC specifies four types of negotiable instruments: – Drafts, Checks, Notes, and Certificates of Deposit.  Can be Orders to Pay or Promises to Pay. Can also be demand instruments or time instruments. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5

6. Drafts and Checks (Orders to Pay). Drafts and Checks (Orders to Pay). – Unconditional order involves three parties: Drawer (creator of draft), Drawee (financial institution) and Payee. – Most common type of draft is a bank check. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6

7. Drafts and Checks (cont’d). Drafts and Checks (cont’d). – Time Drafts and Sight Drafts. Time Draft: payable certain future time. Sight Draft: payable on sight. May be payable on acceptance (drawee’s written promise to pay the draft when due). – Trade Acceptances: seller of goods is both drawer and payee. Buyer of goods is the drawee. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

8. Drafts and Checks (cont’d). Drafts and Checks (cont’d). – Checks. Three parties: Writer of the check is drawer, the bank is drawee, and person to whom check is made is payee. Checks are payable on demand. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

9. Promissory Notes and Certificates of Deposit (Promises to Pay). Promissory Notes and Certificates of Deposit (Promises to Pay). – Promissory Notes are two party instruments: Maker (Promisor) and Bearer (Promisee). Can be payable at a definite time or on demand. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9

10. Promissory Notes and Certificates of Deposit (cont’d). Promissory Notes and Certificates of Deposit (cont’d). – Certificate of Deposit: type of note issued when a party deposits funds with a bank, and bank promises to repay funds with interest on certain date. – Bank is maker, and Depositor is Payee. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10

11. For an instrument to be negotiable, it must: For an instrument to be negotiable, it must: – Be in Writing. Permanence. Portability. – Be Signed by the Maker or Drawer. Signature Requirements: manual or by a device. Placement of the Signature.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11

12. Be an Unconditional Promise or Order to Pay. Be an Unconditional Promise or Order to Pay. – Promise or Order. – Unconditionality of the Promise or Order. State a Fixed Amount of Money. State a Fixed Amount of Money. – Ascertainable. – U.S. Currency. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12

13. Be Payable on Demand or at a Definite Time. Be Payable on Demand or at a Definite Time. – On Demand: “Payable at sight” or “Payable upon presentment.” Roger Development, LLC v. National City Bank CASE 22.1 Roger Development, LLC v. National City Bank (2010). Why doesn’t the duty of good faith apply to lenders seeking payment on demand notes? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

14. Be Payable on Demand or at a Definite Time (continued). Be Payable on Demand or at a Definite Time (continued). – Payable at a Definite Time: specified date, within definite period of time, date or time readily ascertainable.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

15. Be Payable on Demand or at a Definite Time (cont’d). Be Payable on Demand or at a Definite Time (cont’d). – Acceleration Clause: allows holder to demand full payment if a certain event occurs. – Extension Clause: allows date of maturity to be extended into the future. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

16. Payable to Order or Bearer. Payable to Order or Bearer. – Order Instruments: payable to “the order of” an identified person, or to “an identified person or order.” – Bearer Instruments: the holder is the payee. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

17. Factors That Do Not Affect Negotiability. Factors That Do Not Affect Negotiability. – Omission of Date. – Postdating or Antedating. – Handwritten Terms outweigh typewritten and preprinted terms. – Words outweigh figures.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17

18. Factors That Do Not Affect Negotiability (cont’d). Factors That Do Not Affect Negotiability (cont’d). – If instrument states “with interest” but doesn’t specify the rate, it is the judgment rate of interest. – Check is negotiable even if there is a “nonnegotiable” note on it. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18

19. A negotiable instrument can be transferred by assignment or negotiation. A negotiable instrument can be transferred by assignment or negotiation. Transfer by Assignment. Transfer by Assignment. – Similar to assignments discussed in Chapter 17. Transferree is the assignee, rather than a holder. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19

20. Transfer by Negotiation. Transfer by Negotiation. – Negotiating Order Instruments: requires both indorsement and delivery. – Negotiating Bearer Instruments: delivery only. Indorsement is not necessary. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20

21. Signature with or without additional words or comments. Signature with or without additional words or comments. Blank Indorsements: does not specify a particular indorsee and may consist of a mere signature. Blank Indorsements: does not specify a particular indorsee and may consist of a mere signature. Special Indorsements: contains signature and identifies payee.  Special Indorsements: contains signature and identifies payee.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21

22. Qualified Indorsements : indorser who does not wish to be liable (“without recourse”). Qualified Indorsements : indorser who does not wish to be liable (“without recourse”). – Effect of Qualified Indorsements. – Special versus Blank Indorsements. Hammett v. Deutsche Bank National Co. – CASE 22.2 Hammett v. Deutsche Bank National Co. (2010). What was the legal effect of the blank qualified indorsement? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22

23. Restrictive Indorsements: requires indorsee to comply with certain instructions regarding funds. Restrictive Indorsements: requires indorsee to comply with certain instructions regarding funds. – Conditional Indorsements. – Indorsements for Deposit or Collection. – Trust (Agency) Indorsements. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23

24. Miscellaneous Indorsement Problems Miscellaneous Indorsement Problems – Misspelled Names. Indorsement should generally be identical to name on instrument. – Alternative or Joint Payees: either may indorse. Jointly - both must indorse.. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24

25. Holder versus Holder in Due Course (HDC). Holder versus Holder in Due Course (HDC). – Holder possess an order or bearer paper and the instrument is drawn or indorsed to the holder. – HDC: holder plus takes for value, takes in good faith, and without notice of defense to payment.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25

26. Requirements for HDC Status. Requirements for HDC Status. – Taking For Value: No value if gift or inheritance. Not the same as consideration. Holder can take for value by: Performing the instrument’s promise. Acquiring a security interest or other lien in the instrument.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26

27. Requirements for HDC Status (cont’d). Requirements for HDC Status (cont’d). – Taking For Good Faith. Honesty in fact and observance of reasonable commercial standards of fair dealing. Only applies to holder, not transferor. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27

28. Requirements for HDC Status (cont’d). Requirements for HDC Status (cont’d). – Taking Without Notice (cont’d). Holder takes the instrument with notice if he knows/has reason to know: – Instrument is overdue. – Instrument has been dishonored. – At least one instrument has an uncured default. – Contains an unauthorized signature or alteration. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28

29. Requirements for HDC Status (cont’d). Requirements for HDC Status (cont’d). – Taking Without Notice (cont’d). Holder takes the instrument with notice if he knows/has reason to know: – Defense or claim against the instrument. – The instrument is so irregular or incomplete as to call into question its authenticity. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29

30. Requirements for HDC Status (cont’d). Requirements for HDC Status (cont’d). – Taking Without Notice (cont’d). South Central Bank of Daviess County v. Lynnville National Bank CASE 22.3 South Central Bank of Daviess County v. Lynnville National Bank (2009). What were the ‘real’ defenses the HDC could have raised? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30

31. Requirements for HDC Status (cont’d). Requirements for HDC Status (cont’d). – Holder Through an HDC. Shelter Principle: A person who is not an HDC but who derives her title through an HDC can acquire the rights and defenses of an HDC. Extends benefits of HDC and allows HDC to dispose of instrument. Limitations on the Shelter Principle: no fraud, illegality, claim or defense. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31

32. Signature Liability. Signature Liability. – Relates to signatures on instruments. – Signers of negotiable instruments are potentially liable for amount stated on instrument. Primary Liability: Makers/Acceptors.  Secondary Liability: Drawers/Indorsers. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32

33. Signature Liability. Signature Liability. – Primary Liability. Makers promise to pay the note and are obligated to pay terms of instrument at time of signing. Acceptors: drawee promises to pay an instrument when presented for payment.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33

34. Signature Liability (cont’d). Signature Liability (cont’d). – Secondary Liability. Proper Presentment. – Must be timely (checks w/in 30 days). – Dishonor? Proper Notice. – Manner of Notice in any Reasonable manner. – Notice to Indorsers. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34

35. Signature Liability (cont’d). Signature Liability (cont’d). – Unauthorized Signatures arise in two situations: Forgery: does not bind Principal but Bank may be liable if negligent. Unauthorized Signature: Agent is personally liable, but Principal is not, unless ratified. Exceptions.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35

36. Signature Liability (cont’d). Signature Liability (cont’d). – Unauthorized Signatures (cont’d). Exceptions. – Ratification of Signature: principal become liable. – Negligence: party who substantially contributed to forgery is liable. – Holder in Due Course: person who forges a check can be held liable for payment by an HDC. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36

37. Signature Liability (cont’d). Signature Liability (cont’d). – Special Rules for Unauthorized Indorsements: does not bind maker/drawer except: Imposter Rule: imposter indorsement will be effective. Fictitious Payee Rule: payee’s indorsement is not a forgery and an innocent holder can hold the maker liable. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37

38. Warranty Liability. Warranty Liability. – Transferors make certain implied warranties regarding instruments they negotiate. – Warranty Liability not subject to conditions of proper presentment, dishonor, or notice. – Warranties: Transfer or Presentment.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38

39. Warranty Liability (cont’d). Warranty Liability (cont’d). – Transfer Warranties. Following transfer warranties extend to all subsequent holders: Transferor is entitled to enforce the instrument. Signatures are authentic and authorized.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39

40. Warranty Liability (cont’d). Warranty Liability (cont’d). – Transfer Warranties. Following transfer warranties extend to all subsequent holders: Instrument has not been altered. Instrument not subject to defense. Transferor has no notice of insolvency. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40

41. Warranty Liability (cont’d). Warranty Liability (cont’d). – Transfer Warranties. Parties to Whom Warranty Liability Extends: Extends warranty to any holder who takes in good faith. Without indorsement, warranties extend only to immediate transferee. Recovery for Breach of Warranty: good faith holder can sue for breach of warranty. Notice of the claim within 30 days. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41

42. Warranty Liability (cont’d). Warranty Liability (cont’d). – Presentment Warranties: person who presents an instrument makes the following presentment warranties: No missing or unauthorized indorsements. Instrument has not been altered. Person obtaining payment has no knowledge signature is unauthorized. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42

43. Universal (or Real) - can be used to defeat a holder and a HDC.  Universal (or Real) - can be used to defeat a holder and a HDC.  Personal - can be used to defeat a holder but not a HDC.  Personal - can be used to defeat a holder but not a HDC.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43

44. Universal Defenses. Universal Defenses. – Forgery of maker’s or drawer’s signature. Or if an authorized agent exceeds his authority to the amount which exceeds his authority. – Fraud in the Execution: the ”autograph” situation, not fraud in the inducement.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44

45. Universal Defenses (cont’d). Universal Defenses (cont’d). – Material Alteration: changes the contract terms in any way. Making any changes in the amount, date, or rate of interest is material. Complete or Partial Defense: material alteration is a complete defense against a holder, partial defense against an HDC.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45

46. Universal Defenses (cont’d). Universal Defenses (cont’d). – Discharge in Bankruptcy. – Minority (infancy): to the extent allowed by state law. – Illegality: statute must make transaction illegal and void. – Mental Incapacity: adjudicated by court.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46

47. Universal Defenses (cont’d). Universal Defenses (cont’d). – Extreme Duress: If instrument signed under threat of immediate force or violence. Personal Defenses: valid against holders but not HDC’s. Personal Defenses: valid against holders but not HDC’s. – Breach of Contract or Warranty. – Lack or Failure of Consideration.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47

48. Personal Defenses (cont’d). Personal Defenses (cont’d). – Fraud in the Inducement (Ordinary Fraud). – Illegality: if statute provides transaction is voidable, only a personal defense. – Mental Incapacity: not severe enough to make void. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48

49. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49

50. Federal Limitations on the Rights of HDC’s. Federal Limitations on the Rights of HDC’s. – FTC Rule 433: severely limits rights of HDC’s in consumer credit transactions. – Effect of the Rule: allows consumer to assert any defense she might have against the seller of goods or services, against the subsequent HDC as well. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50

51. Discharge from Liability on an instrument can occur by: Discharge from Liability on an instrument can occur by: – Payment or Tender of Payment. – Cancellation or Surrender. – Reacquisition. – Impairment of Recourse. – Impairment of Collateral. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51