1. July 13, 2010

3.  1. Possession of the instrument

4.  2. Good Title  Depends on words of negotiability found on the instrument.

5.  2. Good Title  Bearer words = possession alone is good title

6.  2. Good Title  Order words = properly indorsed

7.  Indorsement – Generally  Signature by payee (or later holder), normally on the back.

8.  Blank indorsement  Signature by payee only.  Creates bearer paper so later negotiations are by transfer of possession.

9.  Special indorsement  Signature by payee which names new person entitled to the money.  Creates order paper so later negotiations need indorsement of new person.

10.  Restrictive indorsement  Signature by payee indicating “for deposit” or “for collection” only.  If bank does not comply, bank is liable for conversion.

11.  “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?

12.  “Pay to the order of William Bell and Walter Bishop.”  Both must indorse to negotiate.

13.  “Pay to the order of William Bell or Walter Bishop.”  Only one must indorse to negotiate.

14.  “Pay to the order of William Bell and/or Walter Bishop.”  Only one must indorse to negotiate.

15.  If transferred for value, transferee has specifically enforceable right to transferor’s indorsement.

16.  If check deposited in your account, bank becomes holder even without your indorsement.

17.  “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.

18.  A payee without legal capacity (e.g., minor or incompetent) may indorse.

20.  1. Negotiable instrument.

21.  2. Held by a holder.

22.  3. Authenticity of instrument not apparently questioned.

23.  4. Holder paid value.  Value may be different from face value.  Not a gift.

24.  5. Holder in good faith:

25.  a. Honesty in fact (subjective), plus

26.  5. Holder in good faith:  a. Honesty in fact (subjective), plus  b. Observance of reas0nable commercial standards of fair dealing (objective).

27.  6. Without notice of the following things at the time instrument acquired:

28.  a. Principal overdue ▪ Note = due date has passed ▪ Check = more than 90 days from date of issue

29.  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

30.  6. Without notice of the following things at the time instrument acquired:  a. Principal overdue  b. Instrument dishonored  c. Unauthorized signature

31.  6. Without notice of the following things at the time instrument acquired:  a. Principal overdue  b. Instrument dishonored  c. Unauthorized signature  d. Alteration

32.  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

33.  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)

34.  What does notice mean?

35.  1. Actual knowledge (subjective)

36.  What does notice mean?  1. Actual knowledge (subjective)  2. Receipt of a notice

37.  What does notice mean?  1. Actual knowledge (subjective)  2. Receipt of a notice  3. Reason to know based on facts and circumstances

38.  Shelter Rule – HDC rights pass along with instrument. Maker Payee HDC Holder gift

40.  1. Infancy Normally, under 18 years old

41.  2. Duress

42.  3. Lack of Legal Capacity

43.  4. Illegality making obligation void

44.  5. Fraud in the execution (fraud in the factum)

45.  6. Bankruptcy discharge

46.  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.

47.  8. Statute of Limitations  Note = 6 years from due date

48.  8. Statute of Limitations  Note = 6 years from due date  Check = earlier of: 1. 3 years after dishonor, or 2. 10 years after issue.

49.  9. Obligor pays former holder before receiving notice from current holder that instrument has been transferred.

50.  10. Alteration  11. Unauthorized signatures and forgeries [covered in detail later]

51.  Examples:  Non-delivery of goods  Defective goods  Non-performance of services  Misrepresentation of goods  Breach of warranty

52.  No one can take an instrument away from a holder in due course, even the true owner.

53.  Principal = MegaStore, Inc.  Agent = Nancy, the bookkeeper authorized to sign checks  Issue = Is Nancy personally liable when she signs notes and checks for MegaStore?

54.  Agent (Nancy) can avoid personal liability if:  1. Identify principal (MegaStore, Inc.) on the note, and

55.  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

56.  Agent (Nancy) can avoid personal liability if the instrument is a check and principal’s name (MegaStore) is on the check.

57.  Primary liability to holder.  No conditions to payment other than note being due.

58.  Secondary liability to holder.

59.  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

60.  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)

61.  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),

62.  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

63.  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.

64.  Disclaimer of liability allowed.

65.  Order of liability if several indorsers = liable in order of signatures.  Sue prior indorsers for payment.  Liable to later indorsers.

66.  None – drawee did not sign draft/check.

67.  Acceptance or Certification – Drawee signs the draft.

68.  Acceptance or Certification – Drawee signs the draft:  1. Drawee primarily liable.  2. Drawer discharged.  3. Indorsers discharged.

69.  Final Payment ends contract actions on check.

70.  Final payment occurs when:  1. Drawee bank pays the item in cash, or

71.  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.

73.  Liable in capacity in which accommodation party signs.  1. Maker

74.  Liable in capacity in which accommodation party signs.  1. Maker  2. Indorser (name outside chain of title)

75.  Presumed to be a guaranty of payment.

76.  Can expressly limit guaranty to one of collection only.

78.  Implied – arise automatically.

79.  Off-instrument liability so possession of the instrument is NOT necessary to recover.

80.  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.

81.  Who makes transfer warranties?  Person who transfers the instrument AND receives consideration for the instrument.

82.  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.

83.  What are the transfer warranties?  1. Transferor was a holder at time of transfer.

84.  What are the transfer warranties?  1. Transferor was a holder at time of transfer.  2. All signatures authentic and authorized.

85.  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.

86.  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).

87.  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.

88.  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.

89.  Disclaiming warranties:  1. Check = transferor cannot disclaim  2. Notes and non-check drafts – transferor may disclaim

90.  Who makes presentment warranties?  1. Person who presents the instrument for payment, and  2. All previous transferors of the instrument.

91.  To whom are presentment warranties made?  1. Note = Maker  2. Draft = Drawee or acceptor

92.  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).

93.  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.

94.  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.

95.  What is the presentment warranty on a note?  Presenter (and prior transferors) were holders at the time of presentment (or transfer).

96.  Disclaiming warranties:  1. Check = cannot disclaim  2. Notes and non-check drafts = may disclaim