a. Liability vis--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 isnt 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 Spaks 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. Dont 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 debthe 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 suretys 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 hes VERY dead and broke. ii. Brothers estate co-surety. 1. Exoneration Pony up 8K, estate is paying , 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 debtors defenses where 1. the debt was illegitimate and 2. the creditor had unclean hands. ii. Surety cannot use the following defenses of the debtor:

II.

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

1. 2. 3. 4.

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

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

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

3. Example: The face of the instrument says it is payable to Peter Payee. On the back on the instrument the indorsement chain says pay A, Peter Payee, Pay B, A, Pay C, B. We expect to see Cs indorsement, but instead there is one by X on the back of the check. Then there is an indorsement by C. The indorsement by X is out of the chain. This is anomalous. This identifies suretyships. This is because the code says all accommodation parties are sureties and they are liable in the capacity that they signed. 4. Example: Max wants to buy a car from Peter. Peter Payee says to Max, I found out that you are only 17, an infant in this state. Get your Dad to sign the note with you, I dont like to sell cars to infants because they can disaffirm. If Dad signs as a Maker under Peters (the son) signature, the Dad is a co-maker. This means that the Payee or the holder can go against Peter or his Dad. Another way that Dad could sign is on the back of the instrument, this would make him an accommodation Indorser, liable secondarily, as an indorser. a. d. Warranties v. 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, then the warranty protection extends to all subsequent transferees. If transfer with no indorsement, 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, drawer, indorser, acceptor Yes No liable in the capacity signed regardless All subsequent holders.

Permissibility of disclaimers Damages for breach Condition precedent

immediate transferee Yes, can disclaim except for checks Actual loss, but not more than face value No, except for check

Yes Face value Yes, contracts of secondary liability, therefore require presentment, dishonor, notice within 30 days

i. Warranties Made and Contracts Made 1. Warranties of Transfer (Do not need to sign to make these warranties just have to transfer for consideration) a. Warranty of title: Person warrants that he has title to the instrument b. All signatures are genuine: Warrants that all signatures on the instrument are genuine c. No alterations: Warrants there have been no alterations made to the instrument d. No defenses vs. warror: Warrants that there are no defenses. e. No knowledge of insolvency: Just warrants that indorser doesnt have any knowledge of insolvency. There still may be insolvency. 2. Contracts a. Contract of a Maker 3-412 liable to pay (primarily liable) b. Contract of an endorser 3-415 conditionally liable c. Contract of a drawer 3-414 secondarily liable d. Contract of an acceptor 3-413 primarily liable ii. When warranties and contracts are made 1. Warranties a. At issuance i. No protection b. Upon transfer (movement for consideration even if lacking signature) i. Right to enforce ii. Signature genuine iii. No alteration iv. No defenses v. No knowledge of insolvency by transferor c. Upon presentment (final surrender) i. Right to enforce ii. NO warranty of genuine signatures 2. Contracts a. Made when the contract is signed iii. Who makes warranties and contracts

iv.

v.

vi.

vii.

viii.

i.

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

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

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

Pay

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

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

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

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

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

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

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

2. 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. a. Ex: a promise to pay $500 or to deliver goods, whichever is requested, is nonnegotiable. 3. Exceptions: The UCC permits three undertakings or instructions to be included: a. An undertaking or power to give, maintain, or protect collateral. i. Ex: a provision requiring the promisor to protect security deposited for the loan. b. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; and i. Ex: confession of judgment against the promisor if the note is not paid when due is permissible. c. A waiver of the benefit of any law that protects the obligor i. Ex: Waiver of presentment, notice of dishonor, homestead exemption, trial by jury, do not destroy negotiability. d. 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, payee returns the check within 90 days or the drawer sent it to the wrong place. i. 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. ii. Ex: Even if payee crosses off the payment in full it is still negotiable. c. Non-negotiable Instrument i. A non-negotiable instrument can still have value (possibly more than a negotiable instrument) ii. Can sue for breach of contract if non-negotiable. 1. A non-negotiable instrument is merely a K that has been assigned, and the assignee picks up the rights of the assignor. a. Are the following problems negotiable? d. 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. e. $100 in wood carvings? Not negotiable because the amount must be money

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

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

mm.

And or? No

nn. Instrument does not say where? No oo. If no date? Yes it is presumed payable on demand from the date of issue. pp. Two hundred dollars ($300)? This is payable for two hundred not 300. Words prevail over figures. qq. At prime rate? A government statement is allowed. rr. Is this a negotiable note? Why or Why not?
Max Maker Markets, Inc. 123 Market Street Erehwon, NY No. 123

On demand (v) the undersigned promises to pay (iii) Bearer (vi) $1,200 Twelve Hundred and 00/100-------------dollars (iv) Max Maker Markets, Inc. By /s/ Max Maker,

The above is a negotiable note since it (i) is in writing, (ii) is signed by the Pres. (ii) maker (Max Maker), (iii) contains an unconditional promise to pay (the undersigned promises to pay), (iv) a fixed amount of money ($1,200), (v) on demand (b/c no payment date is stated), (vi) to bearer, and (vii) contains no unauthorized undertaking or instruction. ss. Is this a negotiable draft? Why or Why not? To: Dan Duke P.O. Box 37 Denver, Colorado January 1, 1997

Pay (iii) to the order (vi) of Pam Payee $5,000 Five thousand and 00/100----------------dollars (iv) /s/ Debbie Dante (ii) The above is a negotiable draft since it (i) is in writing, (ii) is signed by the maker (Debbie Dante), (iii) contains an unconditional order to pay (To: Dan DukePay), (iv) a fixed amount of money ($5,000), (v) on demand (since no time is stated for payment it is considered payable on demand), (vi) to order (the order of Pam Payee), and (vii) contains no unauthorized undertaking or instruction.

VI.

Negotiation (negotiated)Holder v. Maker step 2 a. Generally i. Negotiation: Transfer of possession, whether voluntary or involuntary, of an instrument to a person other than the issuer to a person who thereby becomes its holder. 1. If negotiation HOLDER ii. Holder: A person in possession of an instrument if the instrument is payable to bearer; if the instrument is payable to an identified person, that person is the holder as soon as she gets possession. 1. Holder is person in possession of instrument with right to enforce it. iii. Vs. Transfer: Transfer is not necessarily negotiation. All negotiations are transfers. 1. Particular kind of transfer making the transferee a holder iv. Must transfer the entire instrument v. Impediments do not affect negotiation. The signature is effective even though there is an impediment. 1. Ex: Payee is 5 years old vi. Remitter: 1. Three parties even though there are visually on the note only two vii. If purported to prohibit negotiation, you dont. Too bad! b. Last Endorsement Rule of the UCC i. 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. Paper can go from order to bearer and bearer to order depending on the chain of indorsements c. Two Applications i. Order paper requires proper endorsement plus delivery. 1. Last Endorsement Rule of the UCC: Where the last endorsement is special, it is order paper requiring another endorsement 2. eg. An instrument payable to order of Sue Jones. In order for Sue to negotiate it to Isobel, Sue must indorse it and deliver it. 3. Indorsement must be valid The right to enforce will not pass unless the payees indorsement is authorized and valid. a. Forgery: Breaks the chain of title. Forging the payees 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. i. EXC: cases of ratification or estoppel ii. Ex: Dan Drawer writes a check payable to the order of Paula Payee. Before indorsement by Paula, the check is stolen from her by Harry Thief, who signs

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). The check is still the property of Paula Payee. No one taking the check after the forgery (not Harry, Forgers National, or subsequent transferees) can qualify as a holder or a person entitled to enforce the instrument. 4. Impediments are irrelevant except for forgery. ii. Multiple Payees are Ok 1. Jointly: Connected by and. If there is a subsequent negotiation all parties have to sign. a. Ex: Check made payable to George and Martha Washington requires that both of them sign to negotiate it further. If they dont both sign the subsequent transferee is not a holder. 2. Severally: Connected by and/or and for a subsequent negotiation a signature by any one of them is sufficient to transfer title. a. 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. 3. Unclear if Jointly or Severally: then it is presumed to be and/or. iii. Location of Indorsement [3-204(a)]: An indorsement (any signature other then maker, drawer, or acceptor) must be written on the instrument. Typically, the indorsement is placed on the reverse side of the instrument, but it may also properly be placed on the front or on an allonge i.e., paper affixed to the instrument. 1. Ex of Allonge: You want a paycheck cashed and you go to Jewel and write pay Jewel signed Mike. They put pay Wonder bread signed Jewel. Wonder bread puts pay Flower signed Wonder bread. Wonder bread wants to pay Spak but there is no more room what happens. Attach a piece of paper called an allonge an attachment so firmly fixed there to that it has to be part there of. a. What can it be affixed with? Scotch tape, staple, safety pin are all allonges. iv. 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.

1. Rights of Transferee without Indorsement: Unless and until she obtains the indorsement, the transferee does not have the status of a holder and is not an HDC. She can: a. Sue to Compel Indorsement: If she paid value for the instrument, the transferee can sue in equity to compel indorsement. b. Sue to Enforce w/o Indorsement: Similarly, if the instrument is due, the transferee can bring suit to enforce it without indorsement. c. Note [3-308]: lacking status of holder gives transferee the burden of proving the validity. A holder is prima facie entitled to recover i.e., once the signatures are established, the burden is always on the to prove some defense. 2. 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. This is true even if the customer had not indorsed the instrument. a. Note: this rule only applies for collection. Thus for example, if the bank held an instrument as collateral for a loan to a customer, it would have no power to supply the customers indorsement. Also, the rule does not insulate the bank for mishandling funds represented by the instrument. b. Ex: Check drawn payable to A and B; Bank cashes check on As signature only and forward check for collection (supplying Bs indorsement). Bank is liable to B for conversion of her interest in the check. It makes no difference that the bank was acting in good faith. 3. When Indorsement Obtained Later: Upon obtaining the transferors indorsement, transferee becomes a holder having both the right to enforce and possession. a. HDC Status: The transferee may qualify as an HDC if other requirements are met. i. 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), her knowledge is measured as of the time she obtains the missing indorsement. 1. 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, the transferee

cannot qualify as an HDC. v. 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. The rationale being that a cause of action on a negotiable instrument cannot be split up. 1. Ex: Dan Drawer draws a check payable to the order of Paula Payee, who indorses it: Pay George Washington two-thirds and Martha Washington one-third, /s/ Paula Payee. Neither George nor Martha qualifies as a holder. 2. Exception Partial Payment of Instrument: Indorsement of the balance of a partially paid note is a negotiation (e.g., an installment note). vi. Bearer paper requires mere delivery: Anyone in possession of bearer paper is a holder thereof. 1. Last Endorsement Rule of the UCC: Where the last endorsement is blank, it is bearer paper requiring only delivery 2. eg. An instrument payable to cash. In order for Sue to negotiate it to Isobel, Sue must deliver a. Holder in Due CourseHolder v. Maker step 3 d. FIRST must be 1) negotiable instrument 2) negotiated to holder THEN 3) HDC e. Elements i. Taken for value ii. In good faith iii. Without notice, knowledge of 1. Irregularity 2. Overdue 3. Claims 4. Defenses f. Value i. Definition: Value means performed consideration. 1. Any of the following constitutes value a. Performance of the agreed upon consideration b. Acquisition by the holder of a lien or a security interest in the instrument c. Taking the instrument as payment of or security for an antecedent debt i. Remember, this is NOT consideration, but VALUE. ii. Ex: Jerry is indebted to Ben for $2,500. In payment of that debt, Jerry negotiates to Ben a $3,000 bearer

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

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

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

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

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

iv. v.

vi.

vii.

viii. ix.

2. Maker is liable only to extent of pre-altered amount 3. Ex: Person writes check for $50, later altered to $5000. Person is obligated to pay only the $50. 4. EXC: Negligence where person is negligent and therefore the note/draft is altered. a. 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 $500,000. This person is negligent and cannot assert alteration offense against an HDC. Adjudicated Insanity 1. Must be adjudicated not merely claiming insanity 2. Renders instrument a nullity Infancy 1. May not be a defense if for a necessity 2. Necessity depends on the person a. STD: Station of life test b. Ex: mink coat/caviar for trust fund baby 3. NO LONGER infant once married a. If divorced, still not infant even if under 18 4. NO LONGER infant if joined military 5. See previous infancy sections Illegality 1. Contract is void 2. illegal subject matter, not illegal purpose a. Ex: paid to kill makers wife illegal subject matter so void. b. Ex: Purchase of something that is eventually used for illegal purpose voidable, personal defense 3. Need not prove the illegality in writing must merely testify to the illegality. 4. 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. Gambling: Illegal in some jurisdictions a. In IL, there is a general law against gambling; however, certain forms of gambling are authorized by statute. Duress 1. Void duress: imminent fear of great bodily harm to self or to person to whom you own legal duty. a. Nullifies the obligation of the obligor 2. Voidable duress is a Personal defense: Ill tell Discharge in Bankruptcy 1. Cannot squeeze blood from a turnip Statute of Limitations 1. 3 years for drafts 2. 6 years for notes 3. Article 4 4 years (forgery)

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

4. Answer: YES: He can win under the Shelter Doctrine a. Two other ways for Maker to get out of paying HDC: s. HDC rule has been abolished in part (ameliorated) by the FTC Rule where: i. HDC rule is state law, federal law (FTC) trumps. ii. Human buys 1. Not corporation 2. Aliens are ok iii. Consumer goods 1. Goods for family use 2. Not land, inventory, equipment 3. Car is a consumer good (if for family use) iv. Or consumer services 1. Health club contracts 2. Dance studio contracts v. On credit 1. payment in at least five installments a. Must be more than 4 vi. Purchaser can refuse to pay the finance company if you have a real defense. Can also sue the finance company for previous payments made because of the fraud. t. Even without the FTC rule, 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.

VII.

Checks and DraftsDrawer v. Drawee a. Drawer/Drawee relationship (contractual and properly payable rule) i. Situation 1. Drawer puts money in drawee and drawee pays out according to drawers orders 2. Contractual relationship a. Bank has advantage b/c they both draft the contract and draft the law ii. Properly Payable Rule 1. General Rule a. Contractual relationship between you and your bank. You put money in the bank and they pay out according to your order. 2. Overdrafts a. Occurs where the bank pays a check where there are insufficient funds in the bank

b. 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. Post dated checks a. Still a draft, but it is a time draft, not a check b. The bank can pay it if they want to, they dont have to pay attention to the datedate is irrelevant 4. Stale checks a. A stale check is one that is predated b. Bank can pay on it if it wants to but doesnt have to c. Dates are unimportant but the bank can pay if want 5. Dead drawers a. A bank should not pay if the customer is dead but they can of they want to b. Death does not terminate the agency relationship 6. Stop payment a. Saying to the bank that you want them to cancel an order withdrawing an order to the bank to pay 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 have paid but did notconstitutes breach 1. Wrongful dishonor a. It is a wrongful dishonor for the bank not to pay something if there is money available to pay it b. Drawee is liable to drawer for wrongful dishonor 2. Contract away a. Cannot enter into an agreement with you to have a clause that says you cannot hold them responsible for damages b. Cannot contract away iv. If drawee should not have paid but didconstitutes breach 1. Liability a. Drawee is liable to drawer for breach of contract 2. Forged drawer a. Where there is a forgery, it is ineffective as a real order if you didnt sign it, you are not ordering the bank to pay b. The bank must return the money to the account if they paid out on a forged drawer 3. Forged indorser a. Allows someone other than the intended payee to cash the check b. 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. ExceptionsDrawer negligence, drawer becomes responsible a. Fictitious payee rule i. Dealing (Imposter)

1. Negligence in dealing a. Eg. Pay to the order of Robert Redford 2. Where dealing with an imposter, any indorsement is effectiveeven though it is not a real signature, it is effective 3. Drawer will suffer, not the bank ii. Accounting (Corporate Comptroller) 1. Negligence in accounting a. Eg. Pay to the order of Marshall Fields 2. Never have the same person crediting the accounts as preparing the deposits, taking the deposits in, preparing the books, ect if one person does everything, it is easy to steal 3. Either the payee or drawer will suffer, not the bank iii. Hiring (Payroll Padding) 1. Negligence in hiring 2. 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. Drawer Negligence in drafting i. Not Negligence 1. Pencill 2. Easily erasable paper 3. Dont use Protectograph 4. Blank checks left in easy to steal places ii. What is negligence? 1. Leaving the amount line blank 2. Leave lots of space following a word c. Drawer Negligence in notifying drawee i. General Rule 1. Drawee suffers when pays without asking for any form of identification ii. Limits to Rule 1. Drawer must be prompt in notifying the bank or they do not have to put the money back iii. Forged drawer 1. 1-year limit iv. Forged endorser 1. 3-year limit

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

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