a. Liability vis-à-vis Notes: Suretyship Outline b. Generally i. Definition: 1.

Contract where one assumes the debt of another 2. Anomalous endorser is surety! ii. Cast of characters 1. Debtor / principal – the person who has the debt. 2. Creditor – the person to whom the debt is owed 3. Surety / Obligor – the person who assumes the debt of the debtor iii. Distinguish between: 1. All of these are suretys in the general sense; the way to distinguish between them is to look to the manifest intent. There was a long hypo for this – basically, we give the parties what they want, not necessarily what they say. 2. Specific surety: a. Primary obligor who signs in lower right hand corner as an accommodation maker b. As soon as the debt is owing, the creditor can go against the surety or the other party. c. Primary liability d. Ex: Parent signing for minor 3. Guarantor: a. Secondary obligor who signs on back as an accommodation endorser, thereby forming a contract of guarantee b. Subject to liability only if primary obligor will not pay c. Secondary liability 4. Guarantor of Collectibility: a. Signs on face or back of the instrument, but specifies “I am guaranteeing collection only” or something similar b. Subject to liability if sue debtor and cannot collect c. Secondary liability + 5. Preferred kinds a. The creditor will always want a strict surety b/c then he basically has two people he can collect from. b. The surety always wants to be a guarantor of collectibility c. Statute of Frauds and suretyship i. Rule 1. Suretyships are subject to the statute of frauds and therefore must be in writing. All promises to backstop the debt of another must be in writing. 2. Even if less than $500 – still in SOF as under the suretyship provision ii. Exception: Main Purpose Rule 1. If main purpose of the promise is to benefit the surety instead of the debtor, then oral promises are enforceable

a. Policy – if you made the promise to benefit yourself, then you probably really made the promise. b. Ex: Contractor calls you, wants to buy materials on credit, and the material man says credit too thin. Call the creditor and say that you will backstop. Binding b/c the main purpose is to get the building built, not to help out the debtor. d. Creation of a suretyship i. By Contract … consideration 1. B/c a suretyship is a contract, there must be consideration. 2. Compensated Surety a. Consideration = Money b. Actually paid to be surety 3. Gratuitous Surety a. Surety does it out of love and affection for the debtor. b. Need to look at a few things to determine if a Gratuitous Surety will be bound. i. Current Surety = surety at the same time. 1. If all promises were made at the same, then the consideration is whatever was bought. 2. Dad signs as surety for son for car. Car is the consideration and thus, the surety is bound. ii. Noncurrent Surety = Promises were made at different times 1. If surety on a negotiable instrument, code says no consideration necessary, bound in the capacity signed (front as a maker, back as an endorser) 2. If surety on a nonnegotiable instrument, no consideration then not bound. 4. So who isn’t bound? A non-negotiable, non-current, gratuitous surety. Everyone else is bound. ii. By operation of law 1. Constructive suretyship 2. 3rd party contracts with a debtor and no novation (substitute party), debtor becomes a surety by operation of law 3. Spak signs promissory note for mortgage. Spak sells house to another dude and this dude agrees to pay Spak’s house payments. Spak becomes a surety for the guy making the house payments. Might do this b/c when Spak got his mortgage, he locked in at 4%, and now the bank would charge 7% interest. e. Rights of a surety i. Against creditor: Surety v. Creditor 1. No rights other than obligation to pay 2. Notice

a. No right of notice of debtor default – Creditor does not have to inform surety of debtor default (this can be bad for surety if there is an acceleration clause). 3. Compel Collection – Can Surety compel creditor to go to debtor first? a. Primary surety = no, maker i. Strict sureties cannot because they are primarily liable b. Secondary surety = yes, only endorser 4. Application of the security held – Can the surety require that the item being held as security be sold before the creditor comes after him? a. No – If there is security, the surety cannot require it to be sold. b. Exception – Illinois Equity – Where the surety can show that it is crucial for the surety and the creditor can easily sell at a lost cost to him the security, may be able to require that the security held be sold. 5. Application of funds a. If there is more than one debt between the debtor and the creditor (but surety is only surety to one of the debts), the surety cannot require that any payment be applied against the back stopped debt. b. Only the debtor can require this and if he is silent then it is up to the creditor. Creditor will always apply to nonbackstopped debt ii. Against debtor: Surety v. Debtor 1. Right to exoneration a. Suit to compel payment: Surety v. Debtor saying pay the debt before the debtor comes to me. Don’t have to do anything first – does not have to pay a dime! The creditor does not have to wait for the suit to end – so may have to pay before suit is over. b. Right triggered by relationship 2. Right to subrogation a. When surety has paid in full, he takes the place of the creditor and has all the rights the creditor had toward the debtor. Steps into shoes of creditor b. Derived right from full satisfaction; triggered by full payment of debt 3. Right to reimbursement/indemnification a. Surety pays any part of the debt—he is entitled to get it back from the debtor. Must pay something first. b. Right triggered by payment iii. Against co-surety: Surety v. Surety 1. Co-surety generally

a. One who does not want the whole risk so they make contracts with other to determine the liability b. Makers are jointly and severally liable for the entire debt 2. Right to exoneration a. Suit to compel payment of fair share … Surety can sue cosurety to require payment of his share b. The instrument will specify what each surety’s share is – if it is silent, then a court will assume there was supposed to be an equal share. 3. Right to subrogation a. Triggered by payment of the full amount … step into the shoes of the creditor and has same rights against co-surety as the creditor would b. As such, may be able to collect entire debt from a co-surety 4. Right to contribution a. If pay more than fair share, right to get that amount back. b. Triggered by payment of more than fair share 5. Case: Pace v. Pace – a. Promissory note, 16K, payable to Cheek. b. Three co-makers i. Talbot – debtor ii. Pace 1 – surety iii. Pace 2 – surety c. Cheek could get 16K from any of them, as co-makers. d. Does Cheek know that the two Paces are sureties? Yes – he insisted on it. Subsequent holders might not know that. e. Bankruptcy – by Talbot. 100% bankrupt. Cheek wants to collect. If he goes to Talbot, dead and nothing from estate. Pace 1 is dead and paying 50 cents on the dollar. So he collects 16K from Pace 2. f. So what can Pace 2 do? i. Against Talbot – nothing b/c he’s VERY dead and broke. ii. Brother’s estate – co-surety. 1. Exoneration – Pony up 8K, estate is paying ½, so this is worth 4K. 2. Contribution – Pony up your fair share. Worth 4K 3. Subrogation – Since I satisfied the debt in full, Talbot could have sued bro for 16K, and will collect 8K! f. Defenses of Surety: Debtor Defenses i. The surety can use the any of the debtor’s defenses where 1. the debt was illegitimate and 2. the creditor had unclean hands. ii. Surety cannot use the following defenses of the debtor:

Non-filing under Article 9 Agency Problems: a. An agent is not bound if he: 1. Discharged pro tanto. What is the effect on the surety if D and C decide to change the K – check shack instead of 10 story building? 2. but agrees to take them back b/c there is now a surety. Where agent signs a commercial paper on behalf of a principal ii. extent surety can show a loss as a result of the change ii. There is a surety. 3 Surety 1.II. and his representative capacity iii. infancy insanity bankruptcy Surety may use these defenses if he himself is infant. and D goes bankrupt! 3. The party represented OR 1. Types of Variation of Risk 1. 3. The representative capacity is not necessary – check by law shows representative capacity iv. If surety was not compensated for being surety. SIGNS (his own name) and 2. indicates on the paper: a. . Release of a co-surity a. or bankrupt. the party represented b. Generally: i. 2. Noncompensated surety 1. 4. Agent is bound if he: 1. Modification of K a. Extension of time: a. indicates the party represented (should be on check) 3. DOES NOT indicate a. Creditor holds 50 shares of IBM stock. Creditor decides not to hold one of three co-sureties 5. 4. Release of Security a. insane. What is the effect on S if you wait one month. then five months. CHECK rule: Agent is not bound if he 1. Compensated or Art. D and C K that payments will be made on the first. 2. then he is totally discharged from any obligation. SIGNS (his own name) and 2. iii. g. Change thus requires gratuitous surety’s consent. Variation of risk: Any change made without the sureties consent i. Debtor and creditor make K to build a building for 10M. SIGNS (his own name) and 2.

Both bound 4. identifying agent status but not the party represented a. principal and “by” own name. Agent signs principals name a. Agent did not sign his own name. Hypo: Signs for principal. signs for self. Joining the military 2.b. Neither Bound ii. there is an argument that the “treasurer” is a description and not an indication of representative capacity. Forgery rule: A forged instrument is totally effective as to the forger. Agent signs own name. Making a will 4. Principal bound b. Agent signs principals name and agents name a. Possible outcomes 1. “treasurer”. General power of attorney allows agent to make almost any contract that principal could make with four exceptions: 1. Voting in an election ii. Application i. If. Agent signs without noted representative capacity . Principal bound 2. Principal bound b. Both bound 5. Principle is ALWAYS bound b. Scenarios 1. Both bound 6. Agent bound 3. the principal is not bound. 7. Agent signs principals name. but totally ineffective as to the forged. agent a. Both bound b. however. b/c the capacity is “treasurer. Agent is bound b/c he did not indicate the party represented and his representative capacity 3. Specific power of attorney only gives agent specific authority c. Power of Atty i. Agent is most likely not bound. Agent signs and notes representative capacity and the party represented a. Agent signs agent’s name a. His representative capacity v. c.” However. Marriage by proxy 3. 2. i. Principal bound 4. the agent wrote down the principal’s name b/c he looks like the principal (ie forgery).

” The back of the check is as follows: Pay John Smith /s/ Rudy . Indorser Liability i. and acceptors usually sign on the front. Definition i. Ex: Dan Drawer draws a check payable to the order of Paula Payee and gives it to her. Presentment: Holder must go to the primary party (maker/drawee) and demand payment 2. Blank 1. No one after Flora can qualify as a holder w/o Flora’s valid indorsement. /s/ Paula Payee. 4. Notice of dishonor: Holder tells the secondary party c. Ex: John Smith has a check in his possession made payable “to the order of cash. Flora Flowers. blank) 2. If blank = bearer paper 3. Negotiating the instrument (special v. drawer. Contract of secondary liability ii. Indorsor a. a. Signature other than that of the maker. Principal bound … b. Usually on the back. b. Restricting payment of the instrument (restrictive) 3. blank does not specify (can be cashed by anyone!) a. so she indorses it “Pay to Flora Flowers. representative capacity unnecessary on a check – therefore agent is not bound III. Acceptor is the drawee who has agreed to pay the instrument iii. Types of indorsements i. Allonge: a piece of paper may be attached and considered part of the instrument as long as it is attached firmly.” Paula wishes to negotiate the check to her mother.” This special indorsement means that Flora alone (upon obtaining possession) is the only possible “holder” of the check. Agent signs without noting representative capacity on a check a. Generally 1. If special = order paper 2. Special specifies the person or agency to whom it is further payable. b/c makers. Four purposes of an indorsement: 1. Requires (before liability) 1. Dishonor: Primary party refuses payment 3. or acceptor 1. Both bound 8. Indorsements—Holder v. Incurring indorser’s liability (unqualified) 4. ii. drawers. Show suretyship iv. Special v. which makes Paula a “holder.a.

He indorsed it “Pete Payee for Deposit. Conditional Restrictive: “Pay X only if they deliver food in satisfactory manner iv. When he left he was pick-pocketed by Hot Harry who took it to a betting parlor and lost it. Result a. Can still be liability under warranty theory. ii. Accommodation endorser on the back = surety b. c. Unqualified 1.This check was bearer paper when drawn since it was payable to cash. Unqualified does not say “without recourse” iii. Purports to prohibit further negotiation: “Pay X only” i. For deposit only i. but not under contract theory 2.” Pete can indorse and further negotiate.” since he was planning to go to the bank right after work. Anomalous v. Unrestrictive 1. One of four types: a. out of chain endorsements. the bank on which the check was drawn. Signature between two essential circles in the chain. The Parlor and Gambler’s National are liable for converting the check. Surety has right of recourse against accommodated party . Qualified v. Trust restrictive: “To X for the benefit of Y” d. Nonanomalous 1. Restrictive v. 2. 2. Thus the check can be negotiated further only if it is indorsed by John Smith and delivered. The betting facility took it to its bank. Ex: Pete Payee received his paycheck at work. Disclaiming liability a. Generally a. Ex: Check indorsed “pay Pete Payee only. Does not in fact prevent further transfer or negotiation of the instrument ii. Gamblers National who credited the parlor’s account and forwarded the check to Employer’s National. Rudy Ochoa turned it into order paper by putting the special indorsement (“Pay John Smith”) on it. b. Qualified says “w/o recourse” thereby negating the contract of secondary liability. Any other language added to an indorsement creates a restrcitve indorsement.

then the warranty protection extends to all subsequent transferees. then warranty protection only to the Contracts Contract of Maker Contract of Indorser Contract of Drawer Contract of Acceptor When Made Who Makes Are signatures necessary? Is consideration necessary To Whom there is liability Made when the contract is signed Maker. B. . If Dad signs as a Maker under Peter’s (the son) signature. We expect to see C’s indorsement. This identifies suretyships. as an indorser. this would make him an accommodation Indorser. but instead there is one by X on the back of the check. an infant in this state. A. acceptor Yes No – liable in the capacity signed regardless All subsequent holders. Another way that Dad could sign is on the back of the instrument. Peter Payee. Pay B. Example: The face of the instrument says it is payable to Peter Payee. This is because the code says all accommodation parties are sureties and they are liable in the capacity that they signed. If transfer with no indorsement. 4. Contracts in Negotiable Instruments Types Warranties Transfer: • Title • Signatures Genuine • No alterations • No defenses • No knowledge of insolvency Presentment • Right to Enforce • Sigs Genuine At either transfer or presentment (see above) Never made at issuance Anyone who transfers for consideration No Yes If transfer by an indorsement. the Dad is a co-maker. a. Warranties v. The indorsement by X is out of the chain. d.3. drawer. “I found out that you are only 17. Then there is an indorsement by C. liable secondarily. Example: Max wants to buy a car from Peter. Peter Payee says to Max. indorser. On the back on the instrument the indorsement chain says pay A. This is anomalous. I don’t like to sell cars to infants because they can disaffirm. Pay C. Get your Dad to sign the note with you. This means that the Payee or the holder can go against Peter or his Dad.

can disclaim except for checks Actual loss. dishonor. therefore require presentment. warr’or: Warrants that there are no defenses. Contracts a. At issuance i. There still may be insolvency. Right to enforce ii. Right to enforce ii. Contract of an endorser 3-415 – conditionally liable c. Contract of a drawer 3-414 – secondarily liable d. Warranties a. Warranty of title: Person warrants that he has title to the instrument b. No knowledge of insolvency: Just warrants that indorser doesn’t have any knowledge of insolvency. No alteration iv. Contract of a Maker 3-412 – liable to pay (primarily liable) b. Who makes warranties and contracts . Upon transfer (movement for consideration even if lacking signature) i. No protection b. 2. Upon presentment (final surrender) i. but not more than face value No. Contracts a. No defenses vs. Contract of an acceptor 3-413 – primarily liable ii. When warranties and contracts are made 1. Warranties of Transfer (Do not need to sign to make these warranties – just have to transfer for consideration) a. No alterations: Warrants there have been no alterations made to the instrument d. No knowledge of insolvency by transferor c. e. Made when the contract is signed iii. contracts of secondary liability. Signature genuine iii. except for check Yes Face value Yes. All signatures are genuine: Warrants that all signatures on the instrument are genuine c.Permissibility of disclaimers Damages for breach Condition precedent immediate transferee Yes. Warranties Made and Contracts Made 1. notice within 30 days i. NO warranty of genuine signatures 2. No defenses v.

Yes Damages for breach 1. vi. No. b. Warranties a. Yes. presentment 2. except checks 2. Presentment . Yes Is consideration or value necessary 1. A person who transfers for consideration 2. Actual loss but not more than the face value 2. Warranty a. and notice within 30 days. Contracts a. only transfers for consideration 2. 1. Warranty a. Contracts a. dishonor. Warranties a. Contracts a. If transfer by an endorsement then the warranty protection extends to all subsequent transferees b. Face value Condition Precedent 1. Warranties a. Warranty a. No. 3-105(a): endorser 1. No. Notice of dishonor ii. Contracts a. Contracts a. Contract a. drawer. drawer i. can hold all makers and all endorsers Permissibility of disclaimers 1. Contracts a. endorser. except for checks 2. requires consideration 2. 414: Drawer 1. acceptor Signatures necessary for 1.iv. If transfer with no endorsement then the warranty protection only applies to the immediate transferee 2. Warranty a. Yes – endorser. … contracts of secondary liability therefore require presentment. All subsequent holders. Yes. viii. Yes. i. vii. Maker. liable in the capacity signed regardless of consideration To whom is there liability 1. v. dishonor 3.

Definition a. You did some work. 3. Types i. Used for Credit b. Note—two party paper 1. but there will always be these too parties. To let you off the hook for no reason is unfair. the maker is bound by the filled in amount b. Someone gives you something. Primary liability c. Promissory note. 2. An instrument where a maker promises to pay a payee b. Serves as a substitute for cash ii. Parties (roles) a. presume equal . Maker—may be co-makers b. Liability of comakers to each other is purely contractual but if they do not give percentages. you have given up nothing. Dishonor 3. Protest – for international drafts Article 3 – Commercial Paper Holder in Due Course Rule: . b. otherwise unjust enrichment a. CD (bank promising to repay holder). Commercial Paper Generally a. Could be more than two parties.Negotiable Instrument  3-104 . you get a check. Notice of Dishonor 4. If more than one than joint and several liability i. Two parties – two roles – maker and payee.Negotiated  3-201 . Even if signed when blank. Ex: a. etc. Liability of Maker a. Purposes i. c.2. 1 for 1.To a Holder in Due Course  3-302 . Pro-Tanto – must show suffer loss. Payee—may multiple payees 4.Who takes free from personal defenses and claims subject only to real defenses  3-305 IV. If you draw a draft. Certificate of Deposit = Where promise by bank to repay 3. b/c you got something for it.

Difference between Note and Draft 1. Can have just words b. then will pay for it. Parties Pay . Draft—three party paper 1. Can have just numbers c. Only common party on both instruments is the payee. Drawee – Bank (usually) c. draft is order to pay 2. Inconsistent words and numbers a.Maker b. 4. Statute of limitations: Six years I promise to pay to the order Of _______Peter Payee___________ $100 ___Max Maker___ ii.5. Conditional/secondary – will only pay if the payee goes through certain conditions. Note is promise. Drawers draw drafts c. Drawer -. even if lacking the words of negotiability 2. Check = Payable on demand. Definition a. Makers make notes b. An instrument where drawer orders a drawee to pay a payee. Statute of limitations – 3 years To: Drawee National Bank to the order _____Patricia Payee Of One-Hundred --. Liability of drawer a. Parties a. the words prevail 5. Requires presentment (to drawee) and if dishonored. a. drawn on bank. Payee – gets $$ 3. If different/inconsistent. b.Dollars $100 Donna Drawer iii.

Forgery a. i. 3. Indorsers—Can be parties to notes or drafts V. Operative as to forger. not to party whose name is forged— totally ineffective as to name forged. it does not matter what it is written on a. Ex: Someone sends in income tax payment with a check. Article III does not apply and apply regular contract law. made in any other manner 2. Can be handwritten. x’s. Maker Step 1 – NO NOTES YET!! a. Elements i. Negotiable instrument: i. Principal is liable if the agent is authorized c. Agency Issues a. Burden of Establishing Signatures [§3-308(a)] . drawn on the bank. Can use any mark as signature that person is known for or has adopted. Makers—Primary party to a note ii. 3. totally effective as to name of forger 5. See Infra b. typed. printed. They will say here is the shirt off their back. Determined through tangibility 2. Only bound if the maker/drawer signed it or someone signed it with their authorization. ii. Definition 1. Signed by Maker/Drawer 1. Drawers—Secondary party to a draft iii. a. Writing 1. The concept of negotiability: Negotiable Instrument—Holder v. Need not be on paper. So test is adoption – can be stamps. This is a negotiable instrument – it is a writing b/c it is TANGIBLE. Agent is liable if signed without showing represented party or representative capacity 4. etc. Ex: Where person promises pope to pay $500 in front of 500 witnesses – not negotiable b/c not oral. Signed writing containing an unconditional promise or order to pay a fixed amount of money to order or bearer on demand or at a definite time with no unauthorized promises ii. As long as it is in writing. Cannot be oral a.i. May be enforceable under contract theory. written on a shirt. b. If does not meet 1.

i. Note: mere reference to another writing is irrelevant to negotiability and rights of HDC’s (unless the HDC knows of the terms of the separate writing). Commercial paper is supposed to be a simple substitute for money – therefore no conditions are permitted d. Constructive – from the law iii. b. Implied or constructive conditions acceptable i. Ex: A promisory note stating that it is given as a down payment on a K to rent an apartment is not conditional merely b/c of the possibility that the building might burn down. i. Effect: Δ must then produce evidence of forgery etc. Implied – conduct ii. iv. i. a. Note – conditions are just fine and dandy in contract law. Ex: Statements that use “as per” or “accordance with” ii. Where Δ raises issue in pleading: If the defendant or obligor raises an issue in the pleadings as the validity of any signature. Π must prove genuineness w/o the presumption. Exception – Death/Incompetence of Signer: where the signer has died or become incompetent. the burden is on Π (as the party claiming under the signature) to prove that the signature is genuine. c. Refers to another writing for a statement of rights regarding collateral. or acceleration. c.a. Presumption of Validity: Π has rebuttable presumption that all signatures are genuineor authorized. d.. Could not evaluate the worth of an instrument if the liability of its maker or drawer were conditioned upon an extraneous matter 2. No express conditions—cannot modify the act of payment b. Conditions: A negotiable instrument cannot have conditions. Ex: A draft stating that it is “drawn under a letter of credit. each signature on an instrument is deemed admitted. Policy – purchaser needs to be able to tell what he is getting merely by looking at the instrument. Unconditional 1. prepayment. but as b/t two parties the writing modifies or . Writing will not be deemed unconditional merely b/c it: a. Ex: A promisory note stating that “this note arises out of a K signed this date” is negotiable iii. iii. Where Δ’s pleadings do not raise issue: Unless specifically denied in the pleadings. or the plaintiff-holder will be entitled to recover.

Generally a. adjusted each six months based on the then prevailing bank rates in New York City” is negotiable.) c. 6 or 7 is not a fixed amount . Interest is irrelevant to whether the amount is fixed or variable ii. Gives descriptions of consideration or other transactions: A description of collateral or of other transactions connected with the instrument does not by itself. However. the principal due under the instrument must be fixed. i. watch out for parol evidence issues. 2. Ex: “Pay to the order of John Smith” ii. Ex: “I promise to pay…” 2. Can be with or without interest 1. “%” is shorthand for “order” v. Unspecified Interest Rate: The judgment rate (rate on a court judgment) will be applied where the instrument states “with interest” but does not say how much interest. Promise or Order 1. Examples a. Ex: A promisory note describing in detail the K that gave rise to the note (including all of the K terms) is negotiable as long as the promisory note is not made subject to the K (see below. Limits payment to a particular source or fund i. b. Ex: “I promise to pay out of funds from my next wheat crop” d. To pay a fixed amount 1. Ex: “3% over prime. Promise: A promise is a written undertaking to pay signed by the person undertaking to pay. To be negotiable. i. b. i.” iii. iv. Requires a countersignature as a condition to payment by a person whose specimen signature appears on the promise or order. Interest i. A draft must contain an order to pay a.controls terms of the instrument. i. A note must contain a promise to pay a. Order: An order is a written instruction to pay money signed by the person giving the order. Ex: This is normally done in travelers checks. Can be a fixed or variable rate 1. make the instrument conditional as to matters described.

Ex: “Pay to the order of John Smith or his order. DM in Frankfurt (can domicile a note) e. The maker or drawer 1. Woodcarvings ii. iii. Cuba is not recognized by US c. $400 or ounce of gold 2. ii. US gold b. Cannot domicile in two places. Does not qualify: a. Two types of negotiable instruments 2. To several payees jointly or severally 1. Partnership or other unincorporated association v. 1. Ex: “Pay to the order of either X or Y” iv. trust. %_____________ or bearer is a fixed amount vi.” ii. Dollars in New York (can domicile a note) i. In this case it is payable to the order of the representative of such entity 2. a. To order or bearer 1. Ex: A check drawn to the “Community Chest” may be cashed by its representative. % ____________ is a fixed amount c. 1. If amount if given in foreign money. Ex: “Pay to the order of John Smith” 2. Ex: The maker can write a check to herself (the obligor). Order paper is payable only to that person named or his order and requires the payee’s indorsement for further negotiation. . Order Paper: names a specific payee. or fund. Gold b. A payee or drawee who is not the maker. Lire (foreign money is acceptable as long as gov’t recognized by US) i. Does qualify a. DM d. Payment in the alternative if alternative is other consideration than money i.b. An instrument may be drawn to the order of: i. Of money 1. can be paid in its equivalent in US dollars at the current bank exchange rate at the time and place the instrument is paid – as long as the instrument doesn’t specify otherwise. Ex: “Pay to the order of X and Y” 2. Estate. vii. Other consideration i.

Identification of Payee: The person to whom an instrument is payable is governed by the intent of the maker or drawer. Ex: “Pay to John Doe or bearer” 2. A specified person or bearer 1. the law construes it as being payable on demand. An instrument is payable to bearer only if it is drawn payable to: i. Ex: name. 4. 3. Ex: “to the order of the County Tax Collector” 2. Ex: “I promise to pay Bearer” 3. On demand.g. Ex: “to the order of John Jones. viii. “pay to the order of John Jones and bearer”) the bearer language controls. Ex: “I promise to pay to the order of Merry Christmas” b. a. Tax Collector” – in which case it is paid to the incumbent holder of the office. Instrument is payable on demand if it is expressly made so payable OR there is it fails to state a time for payment i. Ex: “Pay to the order of Happy Birthday” creates bearer paper. Note: If it purports to a specific person it is Order paper. Public Office or Officeholder 1.vi. Ex: “Pay to order and bearer” iii. Demand paper is like cash and time paper is for borrowing. office. a. Bearer Paper is unspecific and is payable to anyone legitimately possessing the instrument and can be transferred without indorsement just like cash. Bearer paper controls: If an instrument is payable both to order and to bearer (e. at will. On demand or at a definite time 1. Bearer 1. Ex: “Pay to bearer” 2. Ex: “Pay to order of bearer” ii.” 2. Where there is no maturity date on the instrument. account number (if done by account number it is payable only to the person on the account). and multiple payees may be named. and parol evidence to the contrary is inadmissible.. at sight are all ok and are considered demand ii. 1. A payee may be identified by any means. . a. Ex: “Pay to the order or cash” iv. Cash 1. Or any other indication that does not purport to designate a specific payee.

Ex: “Payable on my Uncle Sam’s death” is not negotiable iv. April 1. On will 5. the instrument is not enforceable until the date is filled in by someone with authority to do so. Ex: “Payable 30 days after my uncle Sam’s death” is not negotiable.g. If the date is left off the instrument and its maturity depends on a date being stated (e. Acceleration Clauses: Code permits i. Maker can extend to 2003 (not a condition because a condition modifies the act of payment and this only modifies the time of payment) . On sight 4. Note: remember that an instrument stating that it is payable “at” sight is a demand instrument. At a time readily ascertainable when the instrument is issued. i. Definite time: a. c. “payable 60 days after _____”). Uncertain time of certain event or date left off i. Ex: “On or before February 10. On demand 2. the whole amount becomes due” iii. An instrument is payable at a definite time in the future.2. Examples of Acceptable clauses 1. not whether or not payment will occur ii. 2008” (or at any date in the future) 3. 30 days after sight 6. 2008 (or at any date in the future) ii.. 2001 2. On 1/1/06 3. After elapse of a specified period after sight or acceptance 1. “if you miss one payment. b. iii. Ex: “Sixty days after sight” (or any period more or less than 60 days) a. Ex: “On February 10. Note: if the date is inserted by someone without the authority to do so the rules on alteration apply. Ex: “Sixty days after date” (or any period more or less then 60 days) 2. ii. On a fixed date: 1. Ex: dated. iii. Acceptable because only modify the time to pay.

NOT 30 days after the 2001 world series (already passed) 3. 1. ii. The holder always has the option of giving extra time for payment. Ex: “extension at the option of holder” is negotiable and deemed payable at a definite time. NOT maker can extend (illusory. The purpose of this is to keep the document free of clutter. If there is no date then nonnegotiable. Ex: A promise to pay $500 and deliver a quantity of goods makes the instrument nonnegotiable. Extensions at the Option of the Holder: This type is always permitted whereas the other two are not. Ex: “in six months. . Extension Clauses: Clauses that extend rather than shorten the time when payment is due. Ex – ok: “This instrument may be extended by the maker for one month after the original due date. Ex – not ok: An instrument containing the clause. Examples of unacceptable clauses 1. NOT on the death of X (do not presume everyone dies) d. 2. NOT 30 days after the world series in 2006 (not certain event will occur) 2. Extensions at the Option of the Maker or Drawer: OK If the extension is to extend to a further definite time stated in the instrument. ix. There are three kinds: i. no enforcement) 4. 1. but extended another six months if my crop fails” with a date would be negotiable. On 1/1/9999 accelerated by the death of X (allow acceleration clauses) 8. NO UNAUTHORIZED UNDERTAKING OR INSTRUCTIONS [§104(a)(3)]: The instrument must not state any other undertaking or instruction by the person promising or demanding payment to do any act in addition to the payment of money. 1. “This instrument can be extended at the option of the maker” is nonnegotiable b/c it does not specify when it is due.” is negotiable.7. 2. 1. Silence (presumes demand) iv. iii. Extensions that are Automatic on the Happening of An Event: These are very popular with farmers.

An undertaking or power to give. b. a. A waiver of the benefit of any law that protects the obligor i. Are the following problems negotiable? d.” ii. c. c. and the assignee picks up the rights of the assignor. $100 in wood carvings? Not negotiable because the amount must be money . A non-negotiable instrument is merely a K that has been assigned. Ex: Waiver of presentment. A non-negotiable instrument can still have value (possibly more than a negotiable instrument) ii. i. Ex: Even if payee crosses off the “payment in full” it is still negotiable. homestead exemption.2. Ex: confession of judgment against the promisor if the note is not paid when due is permissible. An authorization or power to the holder to confess judgment or realize on or dispose of collateral. “Payment in full” clauses [§3-311]: the addition of such a clause does not destroy the negotiability of a check and the payee who cashes such a check has no further rights against the drawer unless. Ex: a promise to pay $500 or to deliver goods. a. Exceptions: The UCC permits three undertakings or instructions to be included: a. or protect collateral. Maker signs a promisory note to pay $100 in wood or wood carvings? No because it must be a fixed amount of money and the or makes is not fixed. Ex: a provision requiring the promisor to protect security deposited for the loan. e. 3. and i. trial by jury. payee returns the check within 90 days or the drawer sent it to the wrong place. Wording an instrument giving the holder the election of requiring some act to be done in lieu of payment of money destroys the negotiability of the instrument. maintain. do not destroy negotiability. i. 1. Non-negotiable Instrument i. whichever is requested. d. is nonnegotiable. notice of dishonor. Ex: It is common amongst debtors who pay disputed debts by check to add a clause stating that by cashing the check the creditor/payee acknowledges it as “payment in full” for the entire amount owed. Can sue for breach of contract if non-negotiable.

A (blank) instrument that says literally nothing? Yes this is negotiable b/c silence is demand under [3-108]. It takes a rule of construction. h. j. this is demand paper. r. No. n. 30 days after sight? Yes.50 cents. 1. In gold? No. 30 days after acceptance? negotiable. they are money. The law presumes per annum if “interest of what” is not specified. At sight or at will? Yes. . t. payable at a definite time u. this is not negotiable. But the “or” means that they are not going to always be even as a fixed amount. 30 days after the 2002 World Series? No. p. In US Gold Coins? Yes. g. 500$ in NY or 1. v. this is negotiable. this is not a definite time. it will still be a fixed amount i. They use the Judgment Rule. If you made it payable for one or the other it would be negotiable. From pension funds? Yes. q. l.000 DM in Frankfurt? As of today 1 DM is worth .000 Deutch Marks in Franfurt? Can you domicile it to say where it will be paid? Yes. o. On Demand? Yes.f. With ____% interest? Even though the % is blank it is negotiable. There might not even be a world series. On 1/1/06? Yes this is at a definite time. this is not a condition. m. With 2% discount if paid 1/1/01? Fixed amount even though there are two different amounts possible because it’s either one or the other. 30 days after the 2000 World Series? It is not negotiable if you made it for this even though it has in fact occurred. k. not negotiable must be money. Presumption is demand. It would be ok to say 500 dollars in NY or 500 dollars in Frankfurt. With ___10% interest? Fixed amount even though no specific time is given because constructively written with rates of interest is a presumption of per annum. this is negotiable because on demand means as soon as you give it. This is negotiable b/c by act of congress US gold coins are considered money. s. Italian Lira or Deutch Marks? Yes.

Promise to pay order of _____? Yes. it is a post-obit note. this is the opposite of an acceleration (which is ok) but it gets you the same principle backwards. kk. The maker may extend to 1/1/06? Yes. I promise to pay to a can of sardines? Yes this is bearer. “to the order of” or “to bearer” cc. jj. It is bearer if it does not purport to be payable to a specific payee. On the death of my rich Uncle Charles? No. For an installment contract. The maker may extend (provision) the time for payment? No. z. Or? No . Non-negotiable (opt out)? This is not negotiable. because a holder can always extend. Negotiable instrument (opt in)? Not negotiable. However. must actually put the words (unless using a check). the holder may extend? Yes. Pay to John? Not negotiable because words of negotiability are necessary. but the words to pay order of must be there if they are not then it is non-negotiable. entire instrument is due immediately”? This is an acceleration clause that is negotiable. this is illusory. There is no proof to the proposition that everyone dies. Peter and Mary tax payer? Yes ll. gg. Promise to pay _____ or bearer? Yes. ee. You never have to ask for money. Pay to John (on a check)? negotiable under the UCC. words of negotiability aren’t needed dd. to be negotiable it must be payable on demand or time to order or to bearer so we simply read it as bearer since no name is given. can’t opt in to using words of negotiability. hh. To be negotiable it must be payable on demand or at a definite time and these may never occur. “if no payment or mortgage is breached. you can always opt out. aa. acceleration clauses don’t destroy negotiability x. ii. y.w. Holder may extend to 1/1/06? Yes he may extend to a definite time bb. ff. On 1/1/9999 however if my uncle dies b/f then it is on that day? Yes because it is an acceleration clause.

ss. qq. Is this a negotiable draft? Why or Why not? To: Dan Duke P.mm. The above is a negotiable note since it (i) is in writing. 123 Market Street Erehwon.000). . and (vii) contains no unauthorized undertaking or instruction. NY No. (v) on demand (since no time is stated for payment it is considered payable on demand). Box 37 Denver.O. 123 On demand (v) the undersigned promises to pay (iii) Bearer (vi) $1.200). (vi) to order (“the order of Pam Payee”). Colorado January 1. Inc. (iii) contains an unconditional order to pay (“To: Dan Duke…Pay”). (vi) to bearer.200 Twelve Hundred and 00/100-------------dollars (iv) Max Maker Markets. (ii) is signed by the Pres.000 Five thousand and 00/100----------------dollars (iv) /s/ Debbie Dante (ii) The above is a negotiable draft since it (i) is in writing. 1997 Pay (iii) to the order (vi) of Pam Payee $5. (iv) a fixed amount of money ($5. Inc. (ii) is signed by the maker (Debbie Dante). (iv) a fixed amount of money ($1. pp. (iii) contains an unconditional promise to pay (“the undersigned promises to pay”). Is this a negotiable note? Why or Why not? Max Maker Markets. (v) on demand (b/c no payment date is stated). (ii) maker (Max Maker). rr. At prime rate? A government statement is allowed. If no date? Yes it is presumed payable on demand from the date of issue. “Two hundred dollars” ($300)? This is payable for two hundred not 300. By /s/ Max Maker. and (vii) contains no unauthorized undertaking or instruction. Instrument does not say where? No oo. Words prevail over figures. And or? No nn.

An instrument payable to order of Sue Jones. i. Transfer: Transfer is not necessarily negotiation. 1. Look to the last endorsement to determine whether it was special or blank and what is necessary to make the next acquiror a “holder” ii. iii. If negotiation  HOLDER ii. the check is stolen from her by Harry Thief. EXC: cases of ratification or estoppel ii. Must transfer the entire instrument v.VI. Indorsement must be valid – The right to enforce will not pass unless the payee’s indorsement is authorized and valid. Order paper requires proper endorsement plus delivery. 3. Negotiation (negotiated)—Holder v. 1. 1. Ex: Payee is 5 years old vi. Two Applications i. The signature is effective even though there is an impediment. Holder is person in possession of instrument with right to enforce it. In order for Sue to negotiate it to Isobel. Vs. whether voluntary or involuntary. If purported to prohibit negotiation. Last Endorsement Rule of the UCC i. Three parties even though there are visually on the note only two vii. 1. that person is the holder as soon as she gets possession. Impediments do not affect negotiation. if the instrument is payable to an identified person. Holder: A person in possession of an instrument if the instrument is payable to bearer. Sue must indorse it and deliver it. Forging the payee’s name breaks the chain of title and no subsequent possessors of the instrument can qualify as holders or a person entitled to enforce the instrument. Ex: Dan Drawer writes a check payable to the order of Paula Payee. Particular kind of transfer making the transferee a holder iv. you don’t. Generally i. Paper can go from order to bearer and bearer to order depending on the chain of indorsements c. Too bad! b. Forgery: Breaks the chain of title. Before indorsement by Paula. All negotiations are transfers. of an instrument to a person other than the issuer to a person who thereby becomes its holder. Negotiation: Transfer of possession. Remitter: 1. it is order paper requiring another endorsement 2. Last Endorsement Rule of the UCC: Where the last endorsement is special. eg. 1. Maker step 2 a. who signs . a.

Effect of transferring an Order Instrument without Indorsement: The delivery of an order instrument without required indorsements may transfer possession but is not a negotiation. the indorsement is placed on the reverse side of the instrument. Ex: Check made payable to George and Martha Washington requires that both of them sign to negotiate it further. staple. No one taking the check after the forgery (not Harry. Attach a piece of paper called an allonge – an attachment so firmly fixed there to that it has to be part there of. ii. Unclear if Jointly or Severally: then it is presumed to be and/or. Ex: Check payable to George or Martha Washington or a check to George and/or Martha Washington can be negotiated by the indorsement of either payee and that signature is sufficient to transfer title. Jointly: Connected by “and. Multiple Payees are Ok 1. a. Ex – of Allonge: You want a paycheck cashed and you go to Jewel and write pay Jewel signed Mike.” If there is a subsequent negotiation all parties have to sign. 1. Wonder bread puts pay Flower signed Wonder bread. safety pin are all allonges. Severally: Connected by “and/or” and for a subsequent negotiation a signature by any one of them is sufficient to transfer title. Typically. or acceptor) must be written on the instrument. The check is still the property of Paula Payee.e. What can it be affixed with? Scotch tape. Forgers National. . Impediments are irrelevant except for forgery.“Paula Payee” on the back and deposits the check in his account at Forgers National Bank for collection from Big Bucks Bank (“the drawee bank”). iv. 3. but it may also properly be placed on the front or on an allonge – i. or subsequent transferees) can qualify as a “holder” or a “person entitled to enforce the instrument. If they don’t both sign the subsequent transferee is not a holder. 2. a.” 4. Location of Indorsement [§3-204(a)]: An indorsement (any signature other then maker. They put pay Wonder bread signed Jewel. paper affixed to the instrument. iii. Wonder bread wants to pay Spak but there is no more room what happens.. a. drawer.

a. the transferee does not have the status of a holder and is not an HDC. Thus for example. A holder is prima facie entitled to recover i. the burden is always on the Δ to prove some defense. c. Ex: Check drawn payable to A and B. Note: this rule only applies for collection. it would have no power to supply the customer’s indorsement. This is true even if the customer had not indorsed the instrument. once the signatures are established. Different Rules For Banks [§4-205(1)]: A depository bank that takes an unindorsed instrument for collection becomes a holder if the customer was a holder at the time of delivery. if the instrument is due. Sue to Compel Indorsement: If she paid value for the instrument. Notice of Adverse Claim or Defense [§3-203(c)]: For the purpose of determining whether the transferee had notice of any adverse claim or defense to the instrument (an essential element for due course holing). the transferee . Also. the transferee can bring suit to enforce it without indorsement. the rule does not insulate the bank for mishandling funds represented by the instrument. b. Bank is liable to B for conversion of her interest in the check.1. Note [§3-308]: lacking status of holder gives transferee the burden of proving the validity. i. Sue to Enforce w/o Indorsement: Similarly. It makes no difference that the bank was acting in good faith. 1.e. Ex: If the transferee finds out about any defense or claim in the interval b/t the time of paying for and obtaining possession of the instrument and the time the missing indorsement is obtained. When Indorsement Obtained Later: Upon obtaining the transferor’s indorsement. the transferee can sue in equity to compel indorsement. if the bank held an instrument as collateral for a loan to a customer. Bank cashes check on A’s signature only and forward check for collection (supplying B’s indorsement). transferee becomes a holder – having both the right to enforce and possession. HDC Status: The transferee may qualify as an HDC if other requirements are met. a. 2. Rights of Transferee without Indorsement: Unless and until she obtains the indorsement. her knowledge is measured as of the time she obtains the missing indorsement. 3. She can: a.. b.

Performance of the agreed upon consideration b. Exception – Partial Payment of Instrument: Indorsement of the balance of a partially paid note is a negotiation (e. Overdue 3. “knowledge” of 1. Value i. Ex: Jerry is indebted to Ben for $2. /s/ Paula Payee. Taking the instrument as payment of or security for an antecedent debt i. 1. Ex: Dan Drawer draws a check payable to the order of Paula Payee. Maker step 3 d. Sue must deliver a.g. eg. who indorses it: “Pay George Washington two-thirds and Martha Washington one-third. 2. An instrument payable to cash. Last Endorsement Rule of the UCC: Where the last endorsement is blank. FIRST – must be 1) negotiable instrument 2) negotiated to holder THEN 3) HDC e. Irregularity 2. Claims 4. Defenses f. Any of the following constitutes value a.” Neither George nor Martha qualifies as a holder. Without notice. but VALUE. In good faith iii. it is bearer paper requiring only delivery 2. Bearer paper requires mere delivery: Anyone in possession of bearer paper is a holder thereof. 1.000 bearer . Definition: Value means performed consideration. this is NOT consideration. In order for Sue to negotiate it to Isobel. v. an installment note).cannot qualify as an HDC. vi. Holder in Due Course—Holder v. 1. Elements i. Partial Indorsement is Not Negotiation: An indorsement that attempts to convey less then complete amount of the instrument is not a negotiation and the transferee is not a holder. Jerry negotiates to Ben a $3. In payment of that debt. Remember. ii. Taken for value ii. Acquisition by the holder of a lien or a security interest in the instrument c. The rationale being that a cause of action on a negotiable instrument cannot be split up.500..

Ben has given value for the note. EXC: Availability retainer: Where atty gets a retainer and it does not go into client trust account. The following do NOT constitute value: a. Notice: 1. EXAMPLE: A bum offers to sell you a $1MM instrument for a bottle of wine. A bank can be an HDC if it gives value. Used to secure time and NOT advance fees. Includes both actual notice and reason to know from facts surrounding the transaction a. Yesterday he received a $1000 negotiable instrument for the work done. Holder must purchase instrument without notice (knowledge or reason to know) that it is OVERDUE. ii.note payable to Jerry. cashing a check. Finder of note cannot be HDC b/c did not take for value. this is value d. Giving a negotiable instrument for the instrument e. Value means performed consideration. Note or check from a client in return for services. The test includes what a reasonable prudent person would do. eg. Would you have honestly taken in good faith? No. ii. This is not value because it is executory. In Good Faith i. Executory Promise: A promise to give value in the future is not value. allow drawing on account before check clears iii. Eg. Eg. Giving the instrument in exchange for incurring an irrevocable obligation to a third party 2. i. or has been DISHONORED. Lawyer earned $1000 three years ago but was not paid. ii. Value is not the same as consideration and a promise to pay for future service is not value— Lawyer receives $1000 negotiable instrument as an advance on fees. g. Overdue . but instead goes into personal account. Bank as an HDC 1. Without notice i. It is not something you are going to do in the future. iii. Subjective portion—Honesty in fact ii. not executed although it is consideration iii. OBJECTIVE TEST iii. iv. h. Which test do we use? This appears to differ between old UCC and new UCC. Objective portion—Observance of reasonable commercial standards of fair dealing iii. or of ANY DEFENSE OR CLAIM to it on the part of any person. A bank typically cannot be an HDC because did not give for value 2.

90 days 2. Dishonored 1. Someone acquiring a check after this time could not become a HDC. For checks. Existence of Default on overdue Principal a. Checks: Become overdue 90 days after their date.1. Acceleration a. Demand Instruments: Instruments currently dated or payable “at sight” or “on demand” become overdue as follows: a. the purchaser must have acquired it b/f midnight on the date set for its payment. Other Instruments: such as promisory notes that are demand instruments become overdue according to a fact test: “when the instrument has been outstanding for a period of time after its date which is unreasonably long under the circumstances of the particular case in light of the nature of the instrument and usage of trade. d. b. Claims: Notice of claims prevents HDC status. An acceleration has been made c. Handwriting on a typewritten document … indication of incompleteness of due date v. Person has notice that an instrument is overdue if: a. Any unauthorized signature or alteration that one has notice of will prevent them from becoming an HDC 2. If Ira purchases the note in 1995. 4. Ex: Knowledge of the obligors default in payment of other obligations or instruments does not prevent due course holding. he cannot qualify as an HDC –since he has reason to know that the note is overdue. c. Ex: Knowledge of a default merely in interest payments does not prevent due course holding. More than a reasonable time has elapsed after issue of demand instrument i.” iv. notice that the maker has defaulted on any installment of principal makes it impossible for a subsequent purchaser to be an HDC. 2002. Ex: Where an instrument bears a fixed maturity date. b. Ex: If the principal is payable in installments. but payable earlier if Bill Clinton should win the presidency. Any defense or claim or IRREGULARITY 1. issued at the same time maturing on different dates).. which includes knowledge that . unless the instruments were on the same series (i. 3. Any part of the principal is overdue b. Ex: Ira Investor buys a promisory note having a maturity date of Feb 1. A claim is a defense to payment obligations.e.

Defenses or Recoupment: Notice of defenses (e. or 7. That an incomplete instrument has been completed. postdated. b. Incomplete Instrument a. Written “NULL & VOID” 6. infancy.g. or undated. Missing “I” in language of negotiability d.. That any party signed for accommodation. 2. Blank payee … bearer paper. That there has been a default in payment of interest. 2. if the transferee acquires notice of a claim or defense prior to negotiation or the giving of value. not HDC 5. Dates looks like it might have been added 4. Time at Which HDC Status Determined: i. Notice of Facts NOT Defeating HDC 1. 4. Does not call into question: a. 3. If draft is missing a drawee. Missing numerals for amount but words appear. Apparent evidence of forgery. e. Instrument is antedated. Irregularity a. That there is a public filing or recording of a document (e.. . Stamp “PAID” e. 6. duress) or claims in recoupment by the obligor (which reduce the amount payable) prevent HDC status. alterations a. Instrument was issued in return for an executory promise unless the purchaser has notice that a defense or claim has arisen from the terms thereof. d. Missing language of negotiability on note or draft. Missing language of negotiability on check. At the moment the instrument is negotiated to the holder and when she give value. i. vi. she will not qualify as an HDC.g. 5. unless she has notice of any improper completion. Missing drawee on three party paper … must be a drawee to determine who pays. Missing date: “after the above date ____” not HDC i. That any person negotiating it was a fiduciary. unless she also knows that the negotiation constituted a breach of trust. Thus. c. whichever occurs later. Handwriting on a typewritten document … indication of incompleteness of due date b. But NOT merely no date (demand) b. 3. c. security agreement) concerning the instrument or that the instrument was sold at a discount.another party has property or possessory right or that a fiduciary has negotiated the instrument for his own benefit. A missing payee is ok – merely bearer paper c. Missing additional interest amount to be paid … assume judgment rate.

1. who qualifies as an HDC. Ex: M signs a promisory note payable to A. an HDC. Where there is a bulk sale of instruments. Federal law trumps state law. since his father has that status. 2. since none has paid value.j. Note on shelter: There is no difference b/t being an HDC yourself and being a Non-HDC with the rights of an HDC. E then took shelter in D’s status. but because Marshall Fields was an HDC. and E do not qualify as HDC’s in their own right. Partial HDC i. In certain circs. however. including the notes and drafts. the buyer cannot be a HDC for those instruments. H makes a gift of the note to his son. CAN get rights of an HDC under the Shelter Doctrine 3. The buyer (Macy’s) is not an HDC. 3. 4. D. D likewise received all of C’s rights (which include B’s HDC rights). Exception to Shelter Rule: No HDC rights are given to persons who were parties to a fraud or illegality affecting the instrument. a transferee can acquire the rights of an HDC without actually qualifying as an HDC. Ex: Where Marshal Fields is sold – everything including the cash registers is sold. C. Buyer in Bulk: 1. which included acquisition of B’s HDC rights. Shelter Rule: A transferee acquires whatever rights her transferor has and thus is said to take “shelter” in the status of her transferor. they are HDC even if purchase was in bulk. Nevertheless. who negotiates it to B. S. ii. unless they are transferees after the holder failed to obtain HDC rights b/c she was a party to fraud or illegality. 1. If a HDC agrees to pay half today and half tomorrow and finds out about a swindle before paying second half. C obtained B’s HDC rights under the shelter rule. Ex: A promisory note is held by H. Successors to Holders in Due Course: Shelter Doctrine i. iii. Macy’s is covered under the Shelter doctrine. If you have the rights of an HDC you prevail. all subsequent transferees will acquire the same HDC rights. 2. who in turn donates the note to E. . The result would be the same even if S knew of some defense to the instrument. A seller may discount a note and the buyer would still be a full HDC ii. The purpose of the rule is to protect the free negotiability of commercial paper. Since S paid no consideration for the note he obviously would not otherwise qualify as an HDC. EXC: Where federal agency takes as successor in interest. and when C gave the note to D. EXCs: Owners who are never an HDC (but may have the rights of an HDC under the shelter doctrine) i. he is a partial HDC for the full amount —code adopts a ratable/proportional principal for HDC k. HDC Rights and Remote Transferees: Once a person qualifies as an HDC. who makes a gift of it to D. S succeeds to the rights of an HDC too. l. B makes a gift of the to C.

real fraud where you didn’t know what you were doing 2. Judicial Sale 1. Real Defenses—FFAAIIDDSS: (HDC takes subject to these) i. Forgery 1. HDC takes free of all personal defenses. Negotiable instrument ii. even though it turned out to be glass. Consideration c. CAN get rights of an HDC under the shelter doctrine if seller was HDC iii. 3. Alteration 1. Totally ineffective as to name forged. g. HDC iv. Personal Defense Fraud: Usually lie cases a. CAN get rights of HDC if decedent was HDC. iii. d. NOW -. but still takes subject to the real defenses. Maker step 4 m.Defenses n. A purchaser of instruments from an estate cannot be an HDC. totally effective as to forger ii. actually causes arthritis. Like partial forgery . the buyer cannot be an HDC. a.ii. Real fraud – lack of knowledge by the maker. Key—switch document fraud. Ex: Contract is switched between time maker sees it and the time she signs it. This is personal fraud b/c purchaser knew they were buying something. Execution d. General Rule i. Real Defense Fraud: Usually switch cases a. Where instruments sold to a good faith purchaser during a sale to satisfy a judgment. Ex: Autograph of celeb turned into sig on a note – real fraud b/c celeb didn’t know what he was signing. Purchase from an Estate 1. 2. Defenses—Holder v. Ex: Buys “diamonds” that are really just glass. Procurement c. Inception b. Personal fraud. o. 2. MUST have already established – i. Factum f. Negotiated iii. Essence e. Ex: Cure for arthritis. Fraud in Factum 1. Inducement b.

Duress 1. Renders instrument a nullity Infancy 1. If divorced. a. however. This person is negligent and cannot assert alteration offense against an HDC. Ex: Person writes check for $50. Void duress: imminent fear of great bodily harm to self or to person to whom you own legal duty. STD: Station of life test b. Must be adjudicated – not merely claiming insanity 2. illegal subject matter. 4.iv. Ex: mink coat/caviar for trust fund baby 3. 4. Ex: paid to kill maker’s wife – illegal subject matter so void. Article 4 – 4 years (forgery) . Necessity depends on the person a. personal defense 3.000. not illegal purpose a. Ex: Purchase of something that is eventually used for illegal purpose – voidable. certain forms of “gambling” are authorized by statute. Person is obligated to pay only the $50. 6 years for notes 3. A payee not qualified to do business in a state is a personal defense everywhere but Arkansas where it is deemed to be illegality 5. Maker is liable only to extent of pre-altered amount 3. EXC: Negligence – where person is negligent and therefore the note/draft is altered. b. a. Voidable duress is a Personal defense: “I’ll tell” Discharge in Bankruptcy 1. See previous infancy sections Illegality 1. 2. In IL. vi. Ex: Person writes check for $50 and does not draw a line to block out the rest of the space and the crook writes in $500. later altered to $5000. v. there is a general law against gambling. Cannot squeeze blood from a turnip Statute of Limitations 1. viii. NO LONGER infant once married a. vii. Need not prove the illegality in writing – must merely testify to the illegality. Nullifies the obligation of the obligor 2. still not infant even if under 18 4. May not be a defense if for a necessity 2. ix. 3 years for drafts 2. Contract is void 2. Adjudicated Insanity 1. NO LONGER infant if joined military 5. Gambling: Illegal in some jurisdictions a.

A personal defense is any defense that is not a real defense ii. But if the finder sold it to someone that new person in good faith. 2. converting it into bearer). Defenses arising from the inception of the contract 2. Facts: Conviser got it as a gift (no value). Personal Defenses i. (Claims is an affirmative like Defenses is a negative) Example of a Claim: A person loses a bearer instrument (bearer on its face or a paycheck that was signed on the back. then 10 years x. Therefore. iii. iii. Issue: Is he an HDC? . Variation of risk so long as you have notice of the surety 2. Anyone who takes after an HDC. Defenses arising from the execution of the contract 4. Defenses arising from the procurement of the contract 3. r. the maker would have to pay. Allow the world to be a marketplace. because a prior owner was a holder.4. although the current owner may not be a holder as demonstrated by the rules. the current owner gets the rights of an HDC. /s HDC 2. Shelter Doctrine (umbrella/umbrella protection) i. without notice that new person would be a HIDC. 3. Timing of Real defenses 1. in bad faith and with actual knowledge of fraud. Real v. Example 1. Defenses arising from the factum of the contract q. Defenses arising from the inducement of the contract. except if the true owner is found. ii. The new person still takes free of this claim. because he (new owner) is a HIDC and he takes free of all claims and defenses. (1) If the makers sued the new person. 2. Expand and give power to the HDC rule. Timing of Personal defenses 1. under property law that lost property goes to the finder. Surety defenses if known 1. p. Defenses arising from the consideration of the contract. The finder would not be an HIDC because he didn’t give value. If there is notice that the person exercising the defense is a surety. for value. because the defenses of failure of consideration or lost defenses are just personal defenses. Shelter Rule 1. If demand instrument and no demand. Claims I) Claims The HIDC of a negotiable instrument takes free from all other defense as well as claims. Endorsement: Pay Conviser. Defenses arising from the essence of the contract 5. variation of risk is a defense. If he came to the maker. Purpose 1. gets the rights of an HDC.

inventory. Drawer puts money in drawee and drawee pays out according to drawers orders 2. Drawer/Drawee relationship (contractual and properly payable rule) i. Health club contracts 2. Checks and Drafts—Drawer v. Properly Payable Rule 1. could get out of the deal if you can show that the person who claims to be an HDC is not because he is CLOSELY RELATED to the crook. Situation 1. Occurs where the bank pays a check where there are insufficient funds in the bank . federal law (FTC) trumps. VII. Purchaser can refuse to pay the finance company if you have a real defense. Drawee a. Answer: YES: He can win under the Shelter Doctrine a. Consumer goods 1. Not corporation 2. Or consumer services 1. Must be more than 4 vi. Dance studio contracts v. On credit 1. Goods for family use 2. 2. ii. Can also sue the finance company for previous payments made because of the fraud. HDC rule has been abolished in part (ameliorated) by the FTC Rule where: i. Two other ways for Maker to get out of paying HDC: s. Not land. Human buys 1. t. Even without the FTC rule. equipment 3. General Rule a. Car is a consumer good (if for family use) iv. Overdrafts a. payment in at least five installments a. Contractual relationship between you and your bank. Bank has advantage b/c they both draft the contract and draft the law ii. HDC rule is state law. Aliens are ok iii. Contractual relationship a. You put money in the bank and they pay out according to your order.4.

Dealing (Imposter) . Saying to the bank that you want them to cancel an order … withdrawing an order to the bank to pay b. Post dated checks a. not a check b. it is ineffective as a real order … if you didn’t sign it.b. Stop payment a. Bank does not have to pay on an overdraft but if they do then they can charge the customer for a loan even though the customer did not ask 3. Liability a. Drawee is liable to drawer for wrongful dishonor 2. Bank can pay on it if it wants to but doesn’t have to c. Dead drawers a. Drawee is liable to drawer for breach of contract 2. Allows someone other than the intended payee to cash the check b. It is a wrongful dishonor for the bank not to pay something if there is money available to pay it b. Stale checks a. they don’t have to pay attention to the date—date is irrelevant 4. Forged drawer a. The bank can pay it if they want to. A stale check is one that is predated b. Dates are unimportant but the bank can pay if want 5. Cannot enter into an agreement with you to have a clause that says you cannot hold them responsible for damages b. Bank cannot get away with paying on a stop payment except for shelter or subrogation when they pay an HDC iii. If drawee should not have paid but did—constitutes breach 1. If drawee should have paid but did not—constitutes breach 1. Exceptions—Drawer negligence. Still a draft. Cannot contract away iv. drawer becomes responsible a. Contract away a. Fictitious payee rule i. The bank should not have paid and they are responsible— the bank must return the money to the account if they paid out on a forged indorser 4. Where there is a forgery. but it is a time draft. Death does not terminate the agency relationship 6. you are not ordering the bank to pay b. A bank should not pay if the customer is dead but they can of they want to b. Forged indorser a. Wrongful dishonor a. The bank must return the money to the account if they paid out on a forged drawer 3.

Pay to the order of Marshall Fields 2. Eg. ect … if one person does everything. Forged endorser 1. Drawer will suffer. Accounting (Corporate Comptroller) 1. preparing the books. Not Negligence 1. What is negligence? 1. taking the deposits in. Blank checks left in easy to steal places ii. Never have the same person crediting the accounts as preparing the deposits. it is effective 3. Negligence in dealing a. Either the payee or drawer will suffer. Leave lots of space following a word c. Drawee suffers when pays without asking for any form of identification ii. Easily erasable paper 3. not the bank ii. Negligence in accounting a. Where dealing with an imposter. Pay to the order of Robert Redford 2. Leaving the amount line blank 2. Drawer Negligence in drafting i. Pencill 2. 3-year limit . Forged drawer 1. Drawer Negligence in notifying drawee i. Where get a dishonest employee that is preparing checks for you and then endorse them in pencil only to later erase them 3. Shifts the loss to the employer where negligent in overseeing their own funds b. General Rule 1. Drawer must be prompt in notifying the bank or they do not have to put the money back iii. it is easy to steal 3. Limits to Rule 1. Negligence in hiring 2. any indorsement is effective—even though it is not a real signature. 1-year limit iv.1. Hiring (Payroll Padding) 1. Don’t use Protectograph 4. Eg. not the bank iii.

still has secondary liability IX. Drawee-Payee relationship – Payee v. Extrinsic evidence of acceptance a. Generally 1. Third party beneficiary a. Price v. Drawer i. Bank: Forged Drawer i. A note merely suspends obligation until the check clears iii. A signature … where the drawee signs it. not a trust 4. Holder in due course rule works c. Secondary liability ii. the bank loses with no negligence exception ii. Payment is final. Trust a. 2. What is an Acceptance? 1. Drawee has primary liability but the drawer is not discharged. Holder-Drawer (payee) relationship—Holder v. 30 days from when you get the statement back b. Drawees suffer on notes with forged drawers . Example 1. Effect of Acceptance 1. Drawing is not an assignment of funds 2. Where W hands S a check and the bank wont pay … there is no relationship between the bank and the payee unless the bank accepts the check. No relationship without drawee acceptance ii. Generic acceptance a. Third party beneficiary is not acceptance b. Trust is not acceptance b. Multiple forgeries by the same wrongdoer 1. Where the bank certifies the check. Drawee i. there is an acceptance 2. On drawee: Primary liability b.v. Where W says to the bank. Certifying a check a. there is a relationship. Finality of Payment a. Assignment 1. Acceptance must be on the instrument v. Generally a. On drawer: Discharge of liability 2. One person names a legal title holder c. Specific acceptance: eg. Check notification is not an assignment iv. Ill give you $500 and then Ill give S $50 … this is not how it works 3. Does not work since it is a contract with a bank to pay a draft. 3.

Presenters (the innocent party) suffers upon notes with forged endorsers. Finality of payment is also extended to information under the banks control like account information. c. If there are both a forged drawer and a forded endorser then payment in final iii. Payment is not final and the bank can recover from the innocent party paid with no negligence exception ii. . If the drawee is the USA then payment is always final ii. Canal Bank: Forged endorser i.b. Other issues i.

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