Mid-Term Review Session
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Transcript of Mid-Term Review Session
Mid-Term Review SessionCommercial Paper
Analytical Framework
1. Identify the type of paper.
Promissory note (including CDs)
Draft (including checks and remote-created items)
Analytical Framework
2. Identify the parties, for example:▪ Maker▪ Drawer▪ Payee▪ Drawee▪ Indorser▪ Holder▪ Accommodation Party▪ Depositary Bank▪ Payor Bank
Analytical Framework
3. Is instrument negotiable (form):▪ In writing▪ Signed by maker or drawer▪ Unconditional promise or order to pay▪ Fixed amount▪ Of money▪ No other undertaking or instruction▪ Payable on demand or at a definite time▪ Words of negotiability (order or bearer
language)
Analytical Framework
4. Was instrument properly negotiated (transferred to a holder): Bearer paper = possession Order paper = possession plus
necessary indorsements▪ Blank (creates bearer paper)▪ Special (names new owner)▪ Restrictive (e.g., for deposit only)
Analytical Framework
5. Does holder qualify as HDC? Negotiable instrument Holder status Authenticity not apparently questioned Holder gave value for the instrument Holder took instrument in good faith Holder was without notice▪ E.g., overdue, dishonored, unauthorized
signature, alteration, claim, defense, claim in recoupment
Analytical Framework
5. HDC issues Shelter Rule – taker from HDC may
receive HDC rights Subject to real defenses▪ Infancy▪ Duress voiding obligation▪ Lack of legal capacity making obligation
void▪ Illegality making obligation void▪ Fraud in the execution[continued]
Analytical Framework
5. HDC issues [continued]
Subject to real defenses [continued]▪ Bankruptcy discharge▪ Omission of required consumer protection
language▪ Statute of limitations▪ Payment by obligor without notice to former
holder▪ Alteration▪ Unauthorized signatures and forgeries[continued]
Analytical Framework
5. HDC issues [continued]
Takes free of personal defenses Takes free of all claims Burden of proof on HDC HDC status sometimes denied by
statute
Analytical Framework
6. Liability of Parties – General Approach
Who wants the money (plaintiff)? Who does not want to pay (defendant)? What are plaintiff’s legal theories of
recovery? What defenses may the defendant raise? If the defendant is a loser, may liability
be passed on to another party?
Analytical Framework
7. Contract liability Underlying obligation Maker’s contract Indorser’s contract Accommodation parties Drawer’s contract Drawee’s contract (acceptance and
certification) Signature by agents
[continued]
Analytical Framework
7. Contract liability [continued] Checking Account▪ Properly payable▪ Wrongful dishonor▪ Customer’s death or incompetence▪ Setoff▪ Stop payment orders▪ Final payment▪ Charge back
Analytical Framework
8. Warranty Liability Transfer warranties▪ Entitled to enforce (holder status)▪ Signatures authentic and authorized▪ No alteration▪ No defense good against transferor (perfect
plaintiff)▪ No knowledge of insolvency proceeding
against maker, drawer, or acceptor▪ If remotely created item, the person
identified as the drawer authorized the item
Analytical Framework
8. Warranty Liability [continued] Presentment warranties (checks)▪ Entitled to enforce▪ No alteration▪ No knowledge of unauthorized drawer’s
signature▪ If remotely-created item, the person
identified as the drawer authorized the item.
Presentment warranty (notes)▪ Entitled to enforce
Analytical Framework
9. Conversion Liability
Wrongful dominion Drawee bank paying on forged
indorsement
Analytical Framework 10. Forgery
Maker’s signature Drawer’s signature Indorsement Forgery validation▪ Ratification▪ No loss▪ Impostor Rule (estops issuer)▪ Fraudulent indorsement by payee’s
employee (estops payee)▪ Negligence▪ Bank statement rule
Analytical Framework
11. Alteration Types Effect on HDC Effect on non-HDC Defenses▪ Negligence▪ Bank statement rule
Analytical Framework
12. Other issues
Discharge by h0lder Failure to produce original
instrument Overdrafts Postdated “checks” Payment in full checks
Sample Objective Questions
Sample Essay 1
Madonna PrinceMaker Payee
Disco
Negotiable?
HDC?presentmentdishonor
1. Negotiable?2. HDC?3. D v. P on underlying obligation4. D v. M on maker’s contract5. D v. P on indorser’s contract6. D v. P on transfer warranties
Sample Essay 2
Bob AlMaker Payee
Cal
Tom
$500 notedefective watch
blank indorsementlost note
$350
Sample Essay 3
Taylor XYZDrawer Payee
First
BankLNBDrawee
Check 1 -- $2,500 for furniture
Check 2 -- $1,500 for refrigerator
Cashed checksClosed accountSPO
Provides indorsementpresentment
Dishonored for NSF
Sample Essay 4
Della Stella Fred[alleged drawer] [drawer & forger] [fictitious payee]
CNB Corner GroceryDrawee State Bank[depositary bank]
theft issuance
presentmentfinal payment
NPP
Sample Essay 5
Effect of death of drawer/depositor