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Art. 3 (Commc'l paper) & Art. 4 (Bank Deposits & Collections)

A. Types of Instruments
1. Notes: promise to pay
PROM. NOTE: written promise by maker to pay money to payee
2. Drafts: order issued by Drawer to pay money to Payee
CHECK: Drawer orders drawee bank to pay out to payee
SALES DRAFT: Buyer signs draft for goods & seller is payee
3. Either must have order or promise to pay (IOU only acknowledges; not "I authorize")

II. NEGOTIABILITY (if not negotiable K law applies)

A. Elements of Negotiability: signed writing, w/ uncondtn'l promise or order to pay sum certain on demand or at particular future date
1. Signature: anything intending to authenticate
2. Uncondtn'l Prom./Order to Pay
a. No express conditions b/4 will pay allowed
b. Can refer to other documents; not make subject to
c. Can't limit to a particular fund (except trusts, estate, govt entities, partnerships, uninc. ass'ns)
d. Maker/Drawer can't clutter up w/ other promises, orders, like having prom. note + sec. agreemt 1 paper (except: cognotive note to confer J OK in bus. trans.)
3. Time of Payment
a. Demand Instrument payable on demand (check)
b. Time Instrument on particular date (prom. note)
(1) acceleration clauses OK
(2) extension clauses NOT OK, unless holder's right
(3) can't be s/to indefinite event; MAKES IT NON-NEGOTIABLE even if event has already occurred
4. To Pay a Sum Certain
a. Must be able figure from face how much it's worth
b. Must have specified interest rate or NOT a negot. instrument (if "with interest" assumed J rate) (5/3 prime no good)
c. Must be prom. to pay in MONEY (legal tender any ctry)


A. Words of Negotiation
1. Order Paper: payable to order of named payee or his assigns
2. Bearer Paper: payable to whoever possesses it (payable to bearer, cash, something stupid, X or bearer)
-> X and bearer is ORDER unless "bearer" handwritten or typed in

B. What is Negotiation?
Transferring instrumt in such fashion transferee becomes holder
1. Holder: transferee w/ both poss'n & good title (if NOT holder, may be simply K'l assignee)
2. For Bearer Paper: negotiate by delivery
a. Finder or thief of bearer paper treated as holder (all except true owner, and true owner probably can't even take if thief already negotiated title onto another)
b. Special Indorsement: bearer to order
3. For Order Paper: negotiate by indorsement + delivery
a. Finder or thief of order paper NOT treated as holder
-> If forges & passes, title does not pass
b. Indorsement in Blank: order to bearer

Takes an instrument by negotn, for value and in good faith, w/o notice of problems, claims or defenses good against it

A. Requirements for Holder in Due Course
1. By Negotiation
2. For Value: PAST consideration OK but NOT executory promises
3. In Good Faith: Subjective (white heart/empty head)
4. W/O Notice: Objective standard; didn't know or have reason to know of problems, claims, defenses (POST-negotn knowledge is OK)

B. Special Problems w/ HIDC
1. Closely-Connected Doctrine: payee & alleged HIDC have cont'g bus. relationship & "close connection"
-> Cts deny HIDC status, esp. if maker/drawer consumer
-> (car defectiv can assert against dealer's fin. co. though claims HIDC)
-> So can't take in good faith w/o notice if too closely connected
2. Shelter Rule (not HIDC in own right; may got as gift)
a. Get whatever rts your transferor had (so if Drawer/Maker now claiming won't pay based on pers. defense you say no good)
b. Be careful though b/c if your transferor got directly from Seller, might know of problems so NOT "w/o knowlg"

C. Rights of a HIDC: only a few (REAL) defenses good against HIDC
1. Real Defenses
a. Infancy: maker/drawer infant & not for necessities
b. Void Obligations: illegal trans., gambling debts, mental incompetency, prepd entertainment K, pyramid selling scheme
c. Fraud in Factum: sign when told it's something else (vs. fraud in the inducement NOT a defense)
d. Forgery: of order paper breaks title; you claiming to be HIDC can't really be a holder
e. Material Alteration: partial real defense
2. Personal Defenses (goods don't work)
a. Good against ordinary holders; usually just claim those you have against holder
b. BUT can claim as defense a 3P's claim to the instrument IF: person in poss'n holds thru title chain w/ theft or paying such person violates restv indorsement terms
3. If D questions P's HIDC status, P must prove via direct or shelter (in proving he's a "holder" there's a rebuttable presumption signatures valid, not forged)


A. Liability for the Underlying Obligation
1. Merger Rule: when negotiable instrument issued, underlying trans. suspended (temporarily merges into instrument)
2. If note/check paid, it & trans. discharged
3. If dishonored, obligation resurfaces & sue on instrument or breach of K on underlying obligation
-> EXCEPT if bank gave cert'd/cashier's check (underlying obligation considered PAID)

B. Liability in Contract (Liab. on the Instrument)
SIGNATURES on instrument create implied Ks to pay later holders
1. Promissory Notes
a. Maker's K: K of primary liability for payment when holder presents (bottom rt corner presumed maker)
b. Indorser's K: K of 2dy liab. for payment if maker won't -> signature in funny place considered "indorser's K"
2. Drafts (checks)
a. Drawer's K: K of 2dy liab. to pay if bank won't (bottom rt corner presumed drawer)
b. Indorser's K: K of 2dy liab. to pay if bank won't
-> To hold Indorser liable MUST (1) present check w/in 7 days
after indorsement or (2) give notice of dishonor to indorser w/in 3 days c. Acceptor's K
(1) Of Bank: If signs on ck (certifies) then primary liab. & everyone on ck DISCHARGED except certifier
(2) Of Buyer on Sales Draft: if B signs, engaging acceptor's K w/ promise to pay S
3. Typical K Issues
a. Basic Dishonor of Note by Insolvent Maker
-> 1 who presented can sue on Maker/Indorser Ks (insolvency not REAL defense against HIDC)
b. Basic Dishonor of NSF Check
-> Payor bank returns thru "chargeback" system to depositary bank to inital depositor
-> Depositor then sues on Drawer K or Indorser's Ks
c. Basic Stop Payment of Check by Drawer
-> Bank catches & obeys then goes thru "chargeback"
-> Depositor then sues on Drawer's or Indorsers' Ks
-> Drawer better have REAL defense if depositor HIDC
d. Basic Stop Payment and Subrogation
-> Bank PAID over stop; Drawer says not properly payable and put money back
-> Bank can Subrogate (stand in shoes of) BANK WINS
(1) Put $ back, stand as Drawer & go after payee/Seller for defective goods
(2) Or stand in shoes of HIDC against Payee so Payee can't assert pers. defense against bank
(3) Or stand as Payee & sue Drawer if no rt to stop payment

C. Liability of a Surety (Accommodation Parties/Guarantors)
(lend their credit to another) (liable in capacity they sign)
1. Accommodation Co-Maker: engaged Maker's K
a. Accommodator/surety signs to help out
b. BUT if loan benefits both, simple co-Makers (not accommodation)
2. Accommodation Indorser: engaged Indorser's K
3. Accommodators can always sue 1 accommodated; NEVER REVERSED
4. Notice of Accommodation Status
a. If A indorses above P, world knows "outside chain" and
accommodtn party (subseq. holder & HIDC on notice)
b. If A indorses above P on bearer ("to P or bearer") no "notice to
(1) against holders A can use oral proof Accmdtn status to assert
suretyship defenses
(2) against HIDC can't do so or assert special defenses
c. Best to just write "accommodation" above name
5. Suretyship Special Defenses
a. Tender of Payment
(1) Accmdtn party tenders & refused, owes ONLY amt and no costs,
interests and fees
(2) Accommodated party (principal) tenders & refused, accmdtn
party & all indorsers discharged (costs, fees, interest stop too)
b. Impairment of Collateral (accmdtn wants be sure principal's
pledged collateral safe)
(1) Accmdtn party and indorsers discharged if bank fails to
record/file security interest
c. Agreements w/ Principal
(1) If holder releases w/o surety/indorser's consent a maker when
knows maker had accomdtn party, accomdtn party & indorsers also released
unless "reserved rights"
(2) If bank gives principal time extension on due loan w/o
consent/permission surety or indorsers, we're discharged unless holder
"reserves rights"
-> Either case the deal is off
d. If later holder strikes any indorsement w/o consent of later
indorsers whose recourse will be impaired, they're released
e. If indorsed back in circle to original indorser, intervening
indorsers discharged to avoid circular case
6. Guarantors (when accmdtn party engages a guarantee)
a. "Payment Guaranteed": promise same as co-Maker & come to me for
payment even b/4 actual maker
b. "Collection Guaranteed": must 1st go for those ahead me
-> SUE them 1st, get J, only if uncollectable, to me
c. if not specified, law presumes a PAYMENT GUARANTEE

D. Liability of an Agent
1. Unauthorized Signature
a. Not an agent signs for me, I'm not liable (they are)
b. Same for forgers (forgery my name acts as forger's signature and
HE'S liable, not me)
2. Authorized Signature
B (agent) signs:
"Payable to Y, signed Principal" (not disclosing agency)
"Payable to Y, signed Agent as agent (not disclosing prin)
a. If Signs Prin.'s name & indicates agent, NO PERS. LIAB.
b. If Signs not disclosing both (1) signing for Prin. and (2) is an
-> doesn't matter 3P knew agent didn't want pers. liab
c. If Signs not disclosing either (1) signing for Prin. or (2) is
an Agent:
(a) immediate parties Parol OK to show no intent agent to be
pers. liab.

E. Warranty Liability
What you DID w/ instrument vs. how you signed it
1. Kinds of Warranties
a. Transfer Warranty: if got consideration, transfer W to immediate
transferee (negotiated by delivery only); if also indorsed transfer W to
-> if w/o recourse, giving MODIFIED transfer W only that you
know of no defenses
-> NO transfer Ws to drawees or makers, who get presentment Ws
-> Transfer Warranties Are:
(1) W of Good Title (no forged indorsements; signatures good)
(2) No material alterations
(3) No defenses good against transferor
(4) No knowledge of insolvency proceedings
b. Presentment Warranty: made to drawee/maker by presenter and all
prior transferors on presentment of instrument
-> Presentment Warranties Are:
(1) Good Title
(2) No knowledge of forged Drawer or Maker Signtr
(3) No material alterations
c. Warranties with Notes
(1) Maker "issues" to payee; later transfers can be w/ or w/o
negotiation; until "presentment" to maker
(2) Forged Indorsement:
(a) Maker won't pay, sue forger or later holders on transfer W
(b) Maker pays, Payee says stolen & forged so Maker pays again.
Seeks reimbursement on presentmt W good title, then up line on transfer
Ws to forger (last to deal w/ forger loses)
-> ASK FOR EACH PERSON: did they give any Ks? (not if bearer) Ws?
d. Warranties with Checks
(1) Transfers bet. depositary & collecting banks; Final
Collecting/Intermediary Bank presents to Payor
(2) Forged Drawer's Signature
(a) Payor Bank dishonors, depositor uses W rights (and K rights
b/c forged signature no valid title to transfer) up the line & again
last to deal w/ forger
(b) Payor Bank pays, stuck Price v. Neil
-> Must recredit acct
-> Same rule if pay an NSF check
-> NO SUBROGATION (that's pd over stop pymt)!
(3) Forged Indorsement, Payment, Payee back to Drawer
(a) Payor Bank pays (normal); Payee wants another check from
Drawer b/c stolen; Drawer complains to Bank
-> Payor Bk recredits, goes to CB on presentmt W good title,
CB v. DB for transfer W good title, up chain to 1st to deal w/ forger
(4) Forged Indorsement, Payee Conversion Action
(a) Payor Bank pays (normal); Payee not pd & goes against Bank
b/c doesn't want to tick Drawer
-> Sues Bank for conversion b/c pd over forged indorsement
-> Same result up line to 1st deal w/ forger

F. Conversion Liability
1. Drawee's failure to either pay or return instrument presented to
it is conversion
2. Forgery & Conversion: ANYONE paying $ on forged indorsement liable
for conversion
a. Person whose name forged can sue anyone who paid $ (so then
Bank's deduction may be OK if payee got pd via a conversion suit)
b. If Payee sues Drawee Bank for conversion, Bank goes vs.
presenter on PRESENTMENT W
3. Restrictive Indorsements
a. If valid restv indorsement breached, party accepting liable in
conversion ("pay Doe in trust for May" yet transferee takes)
b. "For Deposit Only"
(1) If anyone other than bank takes it, liable for conversion
(2) If 1st bank does anything other than proper deposit, liable
for conversion (later banks in chain excused)


A. Payment to Authorized Agent
-> Drawer ck to payee's agent, forged by agent; can't sue Drawer;

B. Bank Liability for Mistaken Payments
-> Drawee bank bear risk if pays prior good faith party on forged
Drawer's signtr
-> Same if Maker pd note over forged Maker's signature
-> Doctrine EXPANDED & Drawee liable for ALL losses not covered by
Presentment W if paid (e.g. paid NSF check)

C. Validation of the Forgery or Alteration
-> Forger liable under K liab. as if signed true name
-> Person forged can be liable if ratified or precluded from denying
1. Preclusion Rules (precluded from assertg unauthzd signtr)
a. Impostor Rule
(1) Drawer mets guy Y who says "I'm X, make check to X & signs X"
not forgery; title passes; Drawer LOSES
-> If had said X's agent that's forgery
(2) Fictitious Payee-insider job (someone w/ auth. gets checks
made to nonreal and real but no intent to give; not forgery by insider;
Drawer should have been more careful
b. Negligence Rules
(1) I contrib. to forgery/alteration, can't claim unauth.
signtr/material alteratn against later non-negligent parties (If bank
neglig. too, off hook)
c. Bank Statement Rule
(1) Duty to examine to prevent more forgery/altertn; bank liable
for 1st, not later ones, unless Bank also negligent
(2) Customer can't complain after 1 yr post-statement or 3 yrs on
forged indorsements
(3) Bank has duty to assert defenses against Drawer of why $ shouldn't be put back or loses Warrty actions upstream (if waives
defense & recredits, own loss & can't sue on presentment Ws
2. Double Forgery
a. Payor/Drawee bank eats loss if pays on forged Drawer & forged
indorsement (forger true drawer & payee forgery valid by Imposter Rule
b/c forger didn't intend NAMED payee get any interest in check)

The material alteration must be made by a holder w/ fraudulent intent
-> Change in instrument altering person's K
-> Material not "amt" but that changes K of the parties
-> If person who got after alteration only holder, MAKER NOT LIABLE ON
-> Holder/HIDC still have action against transferor for breach of no
material alteration
-> If Maker left amt blank & told Payee to fill in, if person who got
after known incorrect amt put in holder, MAKER NOT LIABLE; But if HIDC,
since put in stream commerce liable full amt


A. Properly Payable Rule
1. Payor can only charge acct if ck properly payable (follows
customer order exactly) (can pay if wants to)
2. Not properly payable if: missing/forged signatures, postdated
checks, stop payment orders

B. Wrongful Dishonor: resp. for damages if wrongfuly refuse to pay

C. Stop Payment Orders
-> Oral or written w/ enough info for bank to prevent payment
-> Oral good 14 days (renew in writing); written good 6 mos.
-> If wrongfully pays, can subrogate
-> Customer must prove didn't obey & amt of loss

D. Stale Checks: over 6 mos. can dishonor or pay; NOT if certified

E. Death or Incompetence of Drawer: can keep paying cks 10 days after
discovery unless ANYONE asks to stop

F. Check Collection: Payor bank must dishonor b/4 midnite bankg day
-> Bank provisional credits final; only COA presentmt W breach
1. Expedited Funds Availability Act (EFTA) & Regulation CC
a. DEPOSITARY BANK make $100 cash avail. bus. day after; local ck
rest w/in 2 days & non-local w/in 5 days (if using by check, 6 bus. days
if cash)
-> Wire transfers must avail. 1st bus day post-recpt
b. PAYOR BANK must dishonor by midnite deadline, THEN get notice
back to DEPOSITARY w/in 2 bus days local ck or 4 non-local or method =ly
fast as brought ck forward
-> ck over $2,500 must rept direct to depositary bank

OHIO: no accord & satisftn if payee receives "payment in full", strikes
out, puts "cashes under protest, all rts reserved" & cashes

X. ARTICLE 4A - FUNDS TRANSFERS (for bus. wires; consumer is EFTA)

A. Steps in Transaction
1. Originator makes/starts payment order
Payment Order: instn of Sender to Receiving Bk, transmitted by oral, electronic or written commtn, for another bank to pay amt to bene'y, w/ no other condtn than time of payment
2. Originator gives to O's bank (sender), who sends to receiving bank
3. Every Receiving bank accepts it, executes & sends on
4. Ultimately reaches beneficiary's bank (bene'y bank) who's
responsible to put in bene'y acct

B. Liability (mistakes borne by 1 who made them)
1. If wrong amt sent, bank who did so gets from party pd to
2. If wrong bene'y pd, bank who did must recover from wrong 1
3. If duplicate paymt sent, bank who sent double goes against 1 who collected twice
4. If Transfer Not Completed: Originator doesn't have to pay or refund if correct bene'y not paid ($ back guarantee)
5. If Originator's Paymt Order Unauthzd: if O's bank shows had commercially reas. security system, followed it, order came from O's e/ee or agent w/ access to O's confidential info, O then stuck

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