Article 4 Commercial Paper Rule Chart (1)

8/12/2019 Article 4 Commercial Paper Rule Chart (1)

http://slidepdf.com/reader/full/article-4-commercial-paper-rule-chart-1 1/5

G r e g n n e c i a D a r r e t t A r t i c l e 4 C o m m e r c i a l P a p e r C h a r t

Liabilities of the Parties Bank Deposits and Collections Forgery or Alteration of Negot

Transfer Warranties

Any movement of the instrument except issuance or presentment

is a transfer. (4-207)

Person Entitled to Enforce: the transferor has taken the instrument

through a valid negotiation and is a holder.This would be breached if there is a forgery of payee or

indorsee signature.

Valid Signatures: All Signatures are valid and authorized.

This would be breached by a forged signature on bearer

paper even though negotiation would not be destroyed.

No Alterations: Warrants against any alterations. An alteration is

any change to the terms of the agreement.

No defenses against the t ransferor: no legal defenses or claims of

recoupment that are good against the transferor. (No legal

problems being transferred with the instrument).

No knowledge of insolvency proceedings: the transferor has no

knowledge of any insolvency proceeding.

Need Consideration for Transfer Warranties. A transferor who

receives no consideration makes no transfer warranties

Notice Requirement: once a person knows of a breach, they

have 30 days to give notice to the warrantor. Failure to give

notice discharges the liability of the warrantor to any loss

caused by the delay.

Two Rules to Remember:1) A bank may only charge a customer’s account if the item is

properly payable

2) Once final payment has been made, a bank loses the right to

return items.

Wrongful Dishonor (Only Drawer): if a check or item is properlypayable but the bank wrongfully refuses to honor it, the drawer has a

cause of action against the bank for wrongful dishonor.

Death or Incompetence of Customer:

1) If a bank collects or pays taken prior to knowledge of

incompetency or death, the banks actions are valid.

2) For post actions, where the bank has knowledge of death a

bank may elect to pay for 10 days after the death.

3) Stop Payment: any person who claims an interest in the

customer’s account may order stop payment or certify checks

during the 10-day period, which terminates the banks

authority to do so.

A properly payable item that may over draft the customer account

can still be paid, but does not have to be, the bank chooses.

If insufficient funds in account, remember the bank does not have to

honor the check. However if the bank does, the customer is liable to

the bank for the overdraft and may also be charged a fee.

If an alteration has occurred, the bank may only charge the account

according to the original terms of the item unless the customer’s

negligence lead to the alteration.

Postdated checks: postdated checks are properly payable unless thecustomer gives the bank notice of the postdating before the bank

pays or certifies the check.

Validation of Forgery or Al

For unauthorized signatures, the main rul

and an unauthorized signature will not be

person whose name is signed unless that p

from denying it.

A customer will become precluded when t

way that contributes to the loss making th

responsible for the loss among the other in

instrument.

1. Issuing the instrument to the nam

a payee.

2. Leaving blank spaces on the instru

3. Failing to notify the bank of proble

statement (forgeries, alterations) w

further losses.

Payment to Agent: delivery of a negotiabl

authorized agent of the payee is the same payee.

Validation of Forgery or Alteration:

1. An unauthorized signature will not

of the person whose name is signe

precluded from denying it. Circum

forgery will be validated because t

is used has done something to pre

the forgery issue.

2. Impostor Rule: Carelessness of the

issuing an instrument may make it

payee’s name will be forged. This etitle to later transferees, so that th

the instrument inspite of the forge




Stop Payment Orders: an item that the bank has stopped payment on

is not properly payable. A customer can stop payment by giving

notice that reasonably identifies the item and the bank has a

reasonable opportunity to act on it.

Oral Notice: Stop payment can be oral but it is only good for

14 days unless renewed in writing.

Written Notice: A written stop payment is good for 6 monthsbut may be renewed for another 6 months in writing.

If an HDC is in the chain of Transferees the customer could not

recover for a bank paying over a stop payment because the

customer would have to pay the HDC.

Right of Subrogation: if an item is not properly payable, but the bank

pays anyway the bank is subrogated (steps into the shoes of) any

person connected with the check (drawer, payee, holder, or holder in

due course) for preventing unjust enrichment.

Right of Setoff from Bank: to subtract from the customer’s account

any debt the customer owed the bank. No notice is required.

Final Payment: if final payment has occurred it is too late for the bank

to setoff.

Customer’s Duty to Examine Bank Statements: After a bank pays an

item, it cancels them and returns the items to the customer with a

statement of account. If a customer fails to use reasonable care in

promptly examine the statement and reporting any unauthorized

signatures or alterations on an item, it may validate the improper

payment.

Where depositary bank and payor bank are one and the same: if the

check drawer and the payee happen to have accounts at the same

bank, that bank will be both the depositary bank and the payor bank.

a. Issuance to an impostor: a

pretends to be someone e

maker are duped into issu

impostor, the resulting for

name is still effective.

b. Issuances to fictitious pay

intended to have interest

drawer does not intend fo

have any interest in the innamed payee is a fictitious

forgery if the payee’s nam

negotiate the instrument.

c. Employer’s responsibility

indorsements by employe

entrusted with responsibil

responsible for the forgery

with responsibility in hand

3. An employer is responsible for fra

made by employees entrusted wit

instrument.

4. If the employer is someone who is

responsibility for the instrument, tineffective as the signature of the

was signed.

Negligence Rule: Can also validate FORFER

A failure to exercise ordinary care

contributes to an alteration or a fo

is precluded from asserting the alt

against whom a person in good fai

or takes it for value or for collectio

Ordinary Care:

a. Leaving blanks or spaces on the in

blank or a space without authority

however if the maker or drawer lethe wrongdoer, the maker or draw

to complain.




Final Settlement Rule: all provisional settlements firm up and

become final settlements. Dishonor is no longer possible and after a

reasonable time the depositor may treat the item as paid.

Right of Chargeback: before final payment, a depositary bank or any

other collecting bank that learns the item will not be made may

chargeback (reverse) any provisional settlements given to its

customer.

Failure to use ordinary care: all banks must use ordinary care in

collecting items, if not they are liable on the item.

Final Settlement Effect on Right to Charge Back: the depositary banks

right to chargeback ceases once final settlement occurs, at the

moment payor bank makes final payment.

Final Payment:

Cash: When the payor bank hands over the cash, final payment has

occurred and it is too late to dishonor.

Settlement: final payment occurs when a bank settles for an item and

cannot revoke it.

Failure to Revoke provisional Settlement: if a payor bank has made a

provisional settlement, the payor bank has until midnight of the

following banking day of presentment to reverse the provisional

settlement and send the item back. If it fails to do this the provisional

settlement becomes final and final payment occurs.

Rights of Payor Bank After Final Payment: once final payment occurs,

the payor bank must pay and cannot recover the payment made

unless :

1) Bad faith of presenter- mistake or fraud will allow a payor

bank to undo final payment.2) Presentment Warranties- final payment does not deprive the

payor bank of its rights to sue for preach of presentment

warranties.

b. Mailing an instrument to someone

name of payee

c. Failure to follow internal procedu

follow check forgery procedure.

d. Failure to guard signing device: if

stamp is used to place maker or dr

they are negligent if it is not closel

the wrong hands.

Bank Statement Rule: Failure to examine tform of negligence that can preclude the d

alteration.

After receiving the bank statement the cu

use reasonable care in examining ti for a

of the customers own name as drawer

Effect of Failure to Examine bank statemen

report a forgery or alteration problem wit

amount of time the customer is estopped

the item was not properly payable, if the b

loss other than the original payment cause

Repeated Offender Rule: Where the state

available to the customer for a reasonable

than 30 days) and there is no complaint ab

signature or alteration, the customer is est

demanding recredit on any other items for

same wrongdoer and subsequently paid by

customer gives notice.

Banks Failure to Exercise Ordinary Care: W

exercise ordinary care in paying a heck wh

sloppy or an alteration is obvious then the

repeated wrongdoer rule do not apply.

Statute of Limitations: If a customer does

made more than one year after the statem




available to the customer, the customer is

does complain within one year and the ban

appropriate action, the statue of limitation

3 years.

If the bank has a defense due to the bank

must raise the defense with its customer,

places the money back in the customer’s a

not pass its loss on to prior parties throughsuits.

Presentment WarrantiesNeal v. Price: As between an innocent holder and a drawee

who had both been duped by an unauthorized drawer’s

signature, the drawee must bear the loss and could not

recover what the drawee paid the holder on presentment.

Once final payment has occurred, the drawee cannot undo

the transaction and recover the money paid unless a

presentment warranty has been breached or the person whoreceived payment was not acting in good faith.

Unaccepted Draft:

Person Entitled to Enforce: the transferor has taken the instrument

through a valid negotiation and is a holder.

This would be breached if there is a forgery of payee or

indorsee signature.

No Alterations: That there is no alteration of the instrument.

This is not for a maker of notes or acceptors of drafts.

No Knowledge that signature of drawer or maker is

unauthorized: Presenter has no knowledge that the signature

of the drawer or maker is unauthorized.

Alteration

The alteration of an instrument c

transfer and presentment warran

negligence can preclude the party

the alteration defense.

Alteration is occurs when a persoinstrument in anyway.

Fraudulent Alteration- if fraudule

occurs all prior nonnegligent part

discharged from liability on the in

the underlying obligation.

If an alteration was caused by th

party that party is not discharged

Discharge is a personal defense,

bank or an HDC may enforce the i




Price v. Neal: Policy is that the drawee is supposed to

know the drawers signature, and the drawee cannot

pass the loss back to an innocent party.

Notice Requirement: once a person knows of a breach, they

have 30 days to give notice to the warrantor. Failure to give

notice discharges the liability of the warrantor to any losscaused by the delay.

the discharged party according to

or according to its completed ter

the unauthorized completion of a

Conversion (Payee):Conversion is a theft of a negotiable instrument or any other

wrongful taking of an instrument.

Restrictive Indorsement: indorsement with a restriction.

Violation of the restriction would be conversion.

Restriction on transfer: an indorsement with a restriction on

further transfer does not stop transfer to the next person.

The proper plaintiff in a conversion action is the payee, or the

person whose property rights are being violated by the

transfers.

A payee may not sue for conversion action unless they also

received delivery of the instrument either directly or through

an agent.

Indorser Liability: Secondarily liable parties are entitled to

presentment, dishonor, and notice of dishonor.

Lost, Destroyed, or Stolen

If an instrument is loss, destroyed, or stole

still sue upon it, but first must prove owne

reason for not producing the instrument.

Article 4 Commercial Paper Rule Chart (1)

Documents

Transcript of Article 4 Commercial Paper Rule Chart (1)