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Friday, December 14, 2012

Commercial Paper Law Outline

Outline and Notes for Commercial Paper and Transactions

Negotiability
-Allows parties to structure commercial transactions so that the means of payment may be freely transferred by the payee and the right to payment is not tied to the underlying transaction.
-Freely transferable. (worth more than a non-negotiable note).
3-104 Negotiable Instrument: unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the order if it is:
1.  payable to bearer or order at time issued or first comes into holder’s possession.
2.  is payable on demand or at a definite time; and
3.  does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.
Promise a written undertaking to pay money signed by the person undertaking to pay.
-An acknowledgement of an obligation is not a promise unless obligor also undertakes to pay the obligation.

Order: a written instruction to pay money signed by the person giving the instruction.
-An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.
-The writing must be signed.  The person or their authorized representative made (by hand or machine), any symbol intending to authenticate the writing.

Must be a
fixed amount of money.  
-The holder of the instrument should be able to just look at the instrument and figure out what they are entitled to receive.
-
Variable Interest Rates are permitted, and may make reference to information not on the note.

Must be an
unconditional promise or order.
-The signer of a negotiable instrument promises to pay unconditionally.
-A promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another record, or (iii) that rights or obligations with respect to the promise or order are stated in another record.  A reference to another record does not of itself make the promise or order conditional.
-A promise or order is NOT made conditional by (i) a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source.

To be payable, a note must be payable to bearer or order.
3-109(a) A promise or order is payable to
bearer if it:
(1) States that it is payable to bearer or to the
order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
(2) does not state a payee; or
(3) States that it is payable to or the order of cash or otherwise indicates that it is not payable to an identified person.
(b) A promise or order that is not payable to bearer is
payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order.  A promise or order that is payable to order is payable to the identified person.(18)
Personal Promise (not negotiable): “I promise to pay x $1000) is NOT negotiable.

-
Instrument must be payable on DEMAND or at a DEFINITE time. (20)
3-108 “payable on demand” if it (1) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment.

(b) a promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates of time or times readily ascertainable at the time the promise or order is issued, subject to the rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, or (iv) extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
~Holder can extend indefinitely.  (Only holder)
~A note is payable on demand if it does not state any time of payment.
Parties to the InstrumentAs the instrument goes from person to person, who has the right to payment?
Holder: Someone is a holder if two things are true:
(1) she is in possession of the instrument; and
(2) it is payable to her.

Check: Issued by drawer.
Note: Issued by maker.

3-105
Issue means the first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person.

PRESENTMENT VERSUS TRANSFER (31)
3-203
Transfer (a) An instrument is transferred when it is delivered by a person OTHER than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.
-The transferee receives whatever rights the transferor had.

-Transfer = right to enforce the instrument.
-The transferor potentially makes warranties (that the instrument is not stolen, that the issuer is obliged to pay, and that it has not been altered.) to the transferee and subsequent parties.

3-501
Presentment means a demand made by or on behalf of a person entitled to enforce an instrument (i) to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank, or (ii) to accept a draft made to the drawee.  
Typical CheckDana (Issued) - Paula (transfer) BDA Bank (Presented) Bank of America
[Drawer]            [Payee]              [Depository Bank]         [Payor/Drawee Bank]
Typical NoteBorrower (Issuer) - Bank (transfer) - Finance Company
[Maker]                   [Payee]               [Transferee]
-Transferee makes presentment to maker.
-Finance company could present the note when due directly to borrower (not the case with checks)
-As with checks, if note is presented and not paid, the holder may present it to others who signed (indorsers).

-When written, the instrument is either payable to bearer (whoever is in possession of the instrument) or to an identified person or persons.  
-
What if the issuer does not get the name quite right?
3-110 Identification of Person to Whom Instrument is Payable(a) the person to whom an instrument is initially payable is determined by the INTENT of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument.

~Peter, Paul
and Mary: “It is payable to ALL of them and may be negotiated, discharged, or enforced by ALL of them.”
~Peter, Paul,
or Mary: “It is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument.”
Bearer Paper - payable to whoever has it.
If: Instrument is payable to an identified person,
~If payable to Paul: he can use an indorsement to make it payable to Helen.
1.  If check is payable to Paul, he can just sign his name. [BLANK INDORSEMENT]
~Now it’s payable to whoever has it.  
~If Paul intends to give it to Helen, but by endorsing it ahead of time, it is sent and lost, or if he stolen, it will be payable to whoever finds or receives it.

2.  “Pay Helen, Signed Paul.”  [SPECIAL INDORSEMENT]
~Now check is payable only to Helen.

3-205 (a) If an endorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a
special indorsement.  
-When specially endorsed, an instrument becomes payable to the identified person and may be negotiated ONLY by the endorsement of that person.  

(b) If an indorsement is made by the holder of an instrument and it is not a special endorsement, it is a
blank indorsement.  When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.

3-204(a)
Indorsement means a signature, other than that of a signer as maker, drawee, or acceptor, that alone or accompanied by other words made on an instrument for the purposes of:
(i) negotiating the instrument,

(ii) restricting payment on the instrument, or
(iii) incurring indorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement UNLESS the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement.
-For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is part of the instrument.


-Paul can give helen the right to payment simply by transferring the check to her.
3-203(b) Transfer of an Instrument vests in the transferee any right of the transferor to enforce the instrument.
Is there a paper affixed to the instrument?  If so, it is part of the instrument.

Three reasons to make indorsements (34):
1.  To negotiate the instrument.
2.  To restrict payment.  Can use a special endorsement to restrict payment (makes it less risky)
UCC also permits a
restrictive indorsement, “For Deposit Only, Paul” after which only a bank can become a holder.
-If Paul merely signed “Paul” and given check to Helen, it would be bearer paper.  Helen can restrict payment to her by writing “Pay Helen” over Paul’s signature.
3.  To indorse an instrument is to incur
indorser’s liability“To promise to pay if the instrument is not paid.
In general, anyone who signs a negotiable instrument promises to pay it.  
By signing an indorser becomes a guarantor.

How can Patrick give Leah the rights of a holder?
A.  Sign “Patrick” and hand her the check (blank indorsement - bearer paper)
B.  Sign “Pay Leah, Patrick” and hand her the check (special indorsement)
C.  Hand her the check, intending to make her entitled to payment (Transfer).

How would a check issued by Dana to Patrick become payable to Theif?
A.  Patrick signs “Patrick” and hands Leah the check.  Thief steals it from her wallet.

Check: “payable to Patrick.”  Thief steals a check and forge’s Patrick’s Signature.  Thief cashes check at Check Cashers.
A.  Check Cashers only got Thief’s rights.
B.  Check was payable to Patrick, Patrick never transferred the check or indorsed it, so it is still payable only to him.

Holder:  In possession of a check payable to you.
-Must be in possession.
-May still have right to be paid on the check, however.
-Anyone in possession of bearer paper is the holder.

The Underlying Transaction and “Paid in Full”
-If someone takes an ordinary check or note for an obligation, that suspends the obligation but it doesn’t discharge it. (42)
-If check is DISHONORED, can sue for not paying.
-If the instrument is dishonored and is now in the hands of someone else, X may not sue Y on the underlying obligation, because that would expose Y to double liability.
CASHIER’S CHECK
-If Y offers X a cashier’s check in payment, and X takes it, that discharges the obligation to pay.  (Even if bank becomes insolvent).
Rationale: To procure a cashier’s check, the customer must pay the bank in advance.

“Payment in Full” (47)
-Where parties are in dispute to settle a debt, “Payment in Full” or similar words written on a note or check will be given effect - if the recipient cashes the check - if the check is offered in good faith to settle a bona fide dispute, and the words are written CONSPICUOUSLY.  
Good Faith is honesty in fact and the observance of reasonable commercial standards of fair dealing.  
-There must be a bona fide dispute about the amount of the debt, 3-311 will not apply where the parties agree about how much is owed.

Enforcement of a LOST, STOLEN or DESTROYED instrument, and the PEEI
-If an instrument is lost or stolen or destroyed, the owner can still enforce it.

-Court may require the owner to provide security to the person paying, to guard against the risk of paying twice, if a holder in due course shows up with the instrument.

3-309
Enforcement of a Lost, Destroyed, or Stolen Instrument(a) a person not in possession of an instrument is entitled to enforce the instrument if:
(1) the person seeking to enforce the instrument
(A) was entitled to enforce the instrument when loss of possession occurred, or
(B) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred.
(2) the loss of possession was NOT the result of a transfer by the person or a lawful seizure; AND
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
The Person Entitled to Enforce the Instrument (PEEI)
(1) Holder (in possession of an instrument payable to them), or
(2) Transferee from a holder, or
(3) Owner of lost, stolen, or destroyed instrument, who retains the right to enforce it.

3-301 Person entitled to Enforce the Instrument (59)

Warranty Liability: Persons that transfer or present the instrument give warranty that they are the PEEI.
Conversion: Someone who takes or pays the instrument from a non-PEEI is liable to the PEEI.

-Bank must pay check that is property payable only to the PEEI.
-When an instrument is stolen, the ex-holder still has the right to payment.  The thief gets physical possession, but not the rights of the owner.  
Liability on the Instrument (Signers Promise to Pay the PEEI) (65)
-One that signs an instrument may be liable to pay the person entitled to enforce the instrument (PEEI).
-Drawee bank is not liable on the instrument to PEEI UNLESS drawee bank signed it.

-If sign “without recourse”, not a promise to pay, not liable.Maker’s Liability If Marvin issues a note, he is liable.  HIs liability depends on the terms of the note, such as amount and due date.  
-If bank issues a
Cashier’s Check, it is liable to pay the instrument according to its terms.
Obligation of Issuer of Note or Cashier’s Check-The maker of a negotiable promissory note is liable, according to the terms of the note as issued or completed.  

3-412 Obligation of Issuer of Note or Cashier’s Check
-obliged to pay the instrument (i) according to its terms at the time it was issued, or if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed.
-The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument.
Note signed with KEY TERMS BLANK?-Marvin is liable to the PEEI, according to the terms of the note when he signed it (or as completed, if Marvin unwisely signed with key terms blank).
-A bank that certifies a check is liable on the check.
Obligation of a Drawer-If Dana writes a check, she does not expect the holder to come to her for payment.
-The holder should present the check to the drawee bank for payment.
-If the drawee bank declines to pay the check, however, Dana is liable.
-If a check is dishonored, the drawer is liable to pay the PEEI according to its terms as issued (or as completed if drawer unwisely signed a blank check). 3-414(b)
Obligation of Indorser (67)
An indorser, like the drawer of a check, is liable on the instrument if it is
dishonored.
-An indorser will not be liable unless they receive proper notice of dishonor, and (if a check) it is not presented or deposited within 30 days of indorsement.
-An indorser is not liable if they indorse a note
“without recourse.”
3-415. Obligation of Indorser
Drawee Bank-Normally does not sign the check, so it it is not liable on the instrument.

3-408 Drawee Not Liable on Unaccepted Draft
-If the drawee signs the check (certifying or accepting the check), it is obliged to pay the check (3-409)

Maker of a Note - Liable, according to terms of the note as issued or completed.

Issuer of cashier’s check - liable.
Drawer of check - liable if check dishonored.
Indorser - liable if instrument dishonored, receives proper notice of dishonor, did not indorse “without recourse” and (if a check) presented or deposited within 30 days.
Drawee bank - not liable unless it signed the check.
Defenses: the drawer, for example, may be able to defend by showing she did not receive promised goods (does not work against holder in due course).
Signature (69)
-A person is not liable unless they signed the instrument (themselves or through a representative).  

-A signature can be any symbol intended to authenticate a writing.
-A forged signature does not count as the person’s signature.

3-401 Signature
3-403 Unauthorized Signature
3-402 Signature by Representative.
(a) If a person acting or purporting to act as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract.

-If the form of the signature shows unambiguously that the signature is made on behalf of the represented person who is identified in the instrument, the representative is not liable on the instrument.

-A person is liable on an instrument if only she or her representative signed it.

-Even a forged signature may count against a person who is deemed negligent.
-Those that sign are liable to the PEEI or to a subsequent indorser that paid.
-An indorser guarantees the promises of those whose signatures are on the instrument, and may recover from them if she has to pay in their place.
-If an instrument is
dishonored, any indorser is liable to the PEEI.  Any indorser that pays is entitled to collect from previous indorsers.
-By indorsing, you guarantee payment not only to that individual, but to any subsequent PEEI or indorser.
-An indorser promises to pay if the instrument is dishonored.


Have presentment and dishonor occurred?-A drawer or indorser is not liable UNTIL the instrument is properly presented and dishonored. (unless excused, i.e. check lost or known to be unpayable.)
-The drawer and indorsers become liable if the instrument is dishonored.  
3-502
Dishonor occurs if the instrument is properly presented after it becomes due and the party refuses to pay.
3-501
Presentment is demand for payment by the PEEI and may be made by any commercially reasonable means, including an oral, written, or electronic communication.  
-The party presenting must (i) exhibit the instrument, (ii) give reasonable identification and, if presentment is made on behalf of another person, reasonable evidence of authority to do so, and (iii) sign a receipt on the instrument for any payment made or surrender the instrument if full payment made.

-Dishonor requires a proper presentment.  To present the instrument, the PEEI must demand payment (or certification of a check) from the obligee or drawee.  Presentment must be made in a reasonable manner, at a reasonable time.  The PEEI must exhibit the instrument, give identification, and sign receipt on the instrument.  If the PEEI does not make a proper presentment, there is no dishonor and the liability of the drawer and indorsers is not triggered.  

-Presentment, along with notice of dishonor may be excused.

-Failure to give notice of dishonor is excused if the delay was caused by circumstances beyond the control of the person giving the notice and the person giving the notice exercised reasonable diligence after the cause of the delay ceased to operate.  
Joint and Several Liability (Contribution) (78)
-Parties that sign as coparties may have rights of contribution, but each is liable for the full amount to the holder.
-A party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint/several liability contribution in accordance with applicable law.
Defenses, Discharge, and Claims to the Instrument (81)
-When a holder enforces the instrument, the signer may raise any defense to payment she has (except to a holder in due course).
-One who signs a negotiable instrument promises to pay it, whether or not they sign as an issuer, an indorser, or a bank that certifies the check.

-That promise may not be enforceable if the signer has a defense to raise or if the instrument is subject to a claim or discharged.  

A mere holder of an instrument is subject to:
1.  Any defense or discharged provided by UCC Article 3,

2.  Any defense that would be available in a contract case (breach of k, breach of warranty, misrepresentation),  and
3.  Any claim to recoupment arising out of the transaction.

-If instrument is issue without consideration.
-Defense of nonissuance and conditional issuance.  
THE HOLDER IN DUE COURSE (95)
-A holder in due course may enforce a negotiable instrument without being subject to most defenses or claims to the instrument.
-HIDC doctrine serves to make negotiable instruments more freely negotiable.  An HIDC can acquire a negotiable instrument without worrying whether it is subject to defenses, because the HIDC will take free of those defenses.  So the HIDC doctrine makes negotiable instruments more valuable.

Becoming a holder in due course.
1.  HOLDER
-person must be in possession of an instrument, and the instrument must be payable to that person.  

-If bearer paper, than it is payable to whoever is in possession.
-If
order paper, then any necessary indorsements must be on the instrument or be deemed to be there.

2.  VALUE
-Someone does not get the special rights of a HIDC unless they have given up something substantial.  
UCC 3-303
Value can be given by, 1.  A promise of performance, to the extent that the promise has been performed,

2.  instrument is payment or collateral for a debt, even if preexisting,
3.  Exchange for another instrument,
4. Incurring an irrevocable obligation to a third party.

-Making a promise does not constitute giving value.  

3. NO NOTICE

-The no notice requirement prevents someone from becoming a HIDC if they had notice of the claim or defense, or to the facts that should have raised questions about the instrument.
-Someone has notice of a fact when she knows or should have known it.

One must take the instrument without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series,
without notice that the instrument contains an unauthorized signature or has been altered.

without notice of any claim to the instrument, and
without notice that any party has a defense or claim in recoupment.

-Is the party closely associated with the payee?  (103)

4.  GOOD FAITH
-One cannot be a HIDC if she does not take the instrument in good faith.
-Good faith is “Honesty in fact and the observance of reasonable commercial standards of fair dealing” (1-201)
-i.e. bank knows that seller often fails to deliver required items.

5. Shelter Rule (106)
-When an instrument is transferred, the transferee automatically gets the rights of the transferor.
-If a HIDC transfers an instrument, the transferee gets the rights of the HIDC, even if the transferee does not give value or takes in bad faith, or has notice of a problem.

-Transfer of HIDC rights are only barred if transferee was engaged in fraud or illegality affecting the instrument.

HIDC doctrine does not apply to consumer credit sale notes.
The Rights of a Holder in Due Course (111)
HIDC is subject only to a small set of defenses, known as the real defenses.
3-305(a)(2)
-infancy of the obligor to the extent it is a defense to a simple contract.

-duress, lack of legal capacity, or illegality of the transaction, which under other law, nullifies the obligation of the obligor.
-fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms.
-discharge of the obligor in insolvency proceedings.

Duress: high standard, i.e., gun to my head.
Fraud in the Making: “fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms.”

Discharge by payment or other means:  If the HIDC takes a $8000 note with notice that $5000 has been paid, the HIDC would be entitled to collect only on the remaining $3000.
-Where payment is made to a former person entitled to enforce the instrument (PEEI), there is a discharge effective against the real PEEI, even a HIDC, unless the PEEI has given notice of the transfer to the obligor.
Theft, Forgery, Alteration, Warranties (127)
-Someone who signs an instrument promises to pay it, but only according to the terms of the instrument that they sign.
-A presenter or transferor makes the presentment warranty whether she indorses or not.


TRANSFER WARRANTY

Was the check transferred?-Anyone that transfers a check for consideration makes a transfer warranty.
-A transferor for consideration warrants there is no legal reason why the instrument would not be paid.
-Does not warrant that the signers have money to pay their obligations.
-The warranty runs to the transferee and (if indorsed by warrantor) subsequent transferees.

-When a check or note is transferred, the transferee gets a broad warranty that amounts to “there’s no legal reason for you not to get paid on this check.  All of the signatures on it are authentic.  There are no problems with the underlying transaction.  It is not stolen.  It hasn’t been altered, and was signed by the person should have signed it.  You should be able to turn around, present this check, and get paid.  And, if the bank doesn’t pay it, all the signatures you see on it are authentic, and you can recover from any of those people who signed it.  There’s no legal problem with this check.”

3-416 Transfer Warranties (129)

PRESENTMENT WARRANTY
-When an instrument is presented, a party that pays gets a somewhat narrower warranty.
-For checks it is: “I am the PEEI, and this check has not been altered. 3-416(a)
-For notes: “I am the PEEI”
-The drawee gets no warranty about the authenticity of the drawer’s signature (unless the warrantor actually knows of the forgery.)

-Drawee bank has customer’s signatures on file, so can check before paying.
-Strict liability, same as transfer warranty.  HIDC can still be liable for breach of warranty.
The Validation Rules (142)
-Change the rules, sometimes someone else is in a better position to avoid the loss.

NEGLIGENCE RULE
3-406 Negligence Contributing to Forged Signature or Alteration of Instrument
(a) A person whose failure to exercise ordinary care substantially contributes to an alternation of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
-Shifts the loss where one of the parties is negligent.  
-Incentive to act with due care.
-There must be negligence that substantially contributes to the making or the forgery or alteration.  


THE IMPOSTER RULE
(a) If an imposter, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the imposter, or to a person acting in concert with the imposter, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

THE FICTITIOUS PAYEE RULE
-Where a person makes a list of checks and puts fictitious people on them.
-Because the check was made to a fictitious person, the forged endorsement is effective, which means that the check is properly payable, and the money can come out of the employer’s account.

EMPLOYEE INDORSEMENT RULE
-Employee includes an independent contractor and employee of an independent contractor retained by the employer.
-Fraudulent Indorsement means (i) in the case of an instrument payable to employer, a forged indorsement purporting to be that of the employer, or (ii) in the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee.
-Where a check has a forged indorsement or alternation, the loss is likely to fall on the party that took the check from the bad actor.

-If someone employs an individual, and the individual makes a fraudulent indorsement, the fraudulent indorsement is effective.

COMPARATIVE NEGLIGENCE APPLIES
-If the court finds that another party was negligent, it can allocate the loss accordingly.
It can split the loss between the two, according to respective fault.
CONVERSION (155) (interference with owner’s rights)
Employer - Paula - Robin Steals - Depo - Drawee Pays
Robin, Depo, and Drawee are all liable to Paula for conversion.
Conversion: the unauthorized use of someone’s property to their detriment.
-Liability imposed on anyone who takes in instrument from someone not entitled to enforce it, or who pays a non-PEEI.

-One that steals an instrument is liable for conversion.

-One that takes an instrument from a non-PEEI or who pays a non-PEEI, is liable for conversion.

3-420 Conversion of an Instrument
(a) The law applicable to conversion of personal property applies to instruments.  An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.
-Just as warranty imposes liability on someone passing on a stolen instrument, conversion applies liability on someone taking a stolen instrument.

(b) Under action for conversion, (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff’s interest on the instrument.
Who can bring a conversion action?-An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee who did not receive delivery of the instrument either directly or through delivery to an agent or co-payee.
-The payee of a stolen check can bring an action for conversion.
-Only the named payee, not those claiming an interest in the instrument, may bring an action.

After an instrument is stolen, the person the instrument is payable to may go after the thief and anyone who takes from the thief, directly or indirectly.
-Conversion does not depend on fault.
-Those that took from the thief are liable, even if they took the check innocently.
-A payee that never received the check may not bring a conversion action.

-Bearer Paper?  Thief steals it, becomes holder, and hence PEEI.  (Thief liable since stole check).  If thief transfers, they take from PEEI and are not liable for conversion.
Safe Harbor-Protection against conversion liability for intermediary banks.
(Intermediary bank doesn’t have money, liable if proceeds have not been passed on, however).
Guarantors/Accommodation Parties (165)
-If someone signs an instrument to incur liability on the instrument without being a direct beneficiary of the value given for the instrument (co-sign) they are an accommodation party.
-They are liable on the instrument, but have some special rights.
-If they are required to pay, they are entitled to reimbursement from the principal obligor.
-If creditor does something to increase the risk on the guaranty, accommodation party may have defense to payment.  

Defenses and Discharge - If risky party had a defense to payment, guarantor can raise some of these defenses against the lender.  
When a signer is an accommodation party. (167)
3-419(a) if an instrument is issued for value given for the benefit of a party to the instrument (“accommodated party”) and another party to the instrument (“accommodation party”) signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party for “accommodation.”  
-Issued for the benefit of the accommodated party, signed for the purpose of incurring liability and was not a direct beneficiary of the value.  
-An accommodation party may sign in any capacity and is liable in that capacity.
-Liable even if it does not get consideration.
-If the signature was an anomalous indorsement (an indorsement not necessary to negotiate the instrument) there is a presumption of accommodation status.
-”Collection Guaranteed” means only that will guarantee collection against primary obligor.
Defenses and Discharge of Accommodation Party (170)
3-305(d).  In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under (a) that the accommodated party could assert against the person entitled to enforce the instrument,
except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.
-Guarantor can only raise defenses that accommodated party could raise.

-If P is holder in due course, cuts away defenses.
-If lender modifies the terms of the debt by agreement with accommodated party, that discharges guarantor if it causes him a loss.  Same with impairing collateral.
-
Must have notice:  Protections exist ONLY if person enforcing the instrument knows has notice of accommodation party.
-There may be a
Waiver (guarantor signs rights away).  (174).
4-401 When a bank may charge a customer’s account
-A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft.  An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.

-A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item.
-A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:
(1) the original terms of the altered item; or

(2) the terms of the completed item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper.

“Properly Payable” means
1.  Customer authorized payment (signed the check).

2.  Bank paid the person entitled to enforce the instrument (PEEI)
3.  No alterations (but bank may pay original amount to a holder in good faith).

4.  No stop payment order in effect (3-403)
5.  No effective post-dating.

6.  No notice of customer’s death or incompetency (4-403).
7.  Whether a clause in the deposit contract applies, and if so, whether the clause is enforceable (4-103(a)).

8.  Not sufficient funds (NSF): no wrongful dishonor if insufficient funds in account, but bank may pay.
9.  Likewise may pay stale check in good faith (4-404).

An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.

-If a thief gets my checkbook and forges my name, I didn’t authorize that item.  So, if my bank pays that check, it is not entitled to reimbursement from me.
-If bank has paid WRONG person (someone other than PEEI), bank not entitled to reimbursement.
-Bank must pay the right amount (not an altered amount).

OVERDRAFTS
4-401(a) A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft.

STALE CHECKS
4-404.  Bank Not Obliged to Pay Check More than Six Months Old.
A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.

POST-DATING
-Customer may post-date, but must give bank notice (187).
-Must describe the check with reasonable certainty.


STOP PAYMENT
4-403 Customer’s Right to Stop Payment; Burden of Proof of Loss.
(a) A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account or close the account by an order of the bank describing the item or account with reasonable certainty received at a time and in a manner that affords a bank reasonable opportunity to act on it before any action by the bank with respect to the item described...

-Effective for 6 months (lapses after 14 days if original order is oral and not confirmed).
-Burden of proof on customer.
DEATH OR INCOMPETENCE
-Bank must pay despite death or incompetence of customer, until notice.
4-405. Death or Incompetence of Customer.

A reasonable Clause in the Deposit Contract may Affect Bank’s Right to Reimbursement.
4-103(a) (192)

Fees - Not Regulated by UCC
-Banks and customers are free to agree on fees that banks charge.


Bank that pays by mistake may seek restitution if that results in unjust enrichment. (194)

BANK STATEMENT RULE
4-406. Customer’s Duty to Discover and Report Unauthorized Signatures or Alteration.
-Failure to complain about the unauthorized checks for more than a year means that the firm can’t get the money back from their bank.

-Must check account statement regularly.
-Must check for checks that were paid that the customer did not sign, and checks that were paid that had been altered.

-Doesn’t require that customer check to see if there were checks that were paid over a forged endorsement.
-Multiple series of wrongdoings by the same person: the customer may take the loss for check number 2, 3, etc.

DUTIES OF DEPOSITORY BANK (204)
-Depository bank has a duty to use ordinary care.  If it does, not liable for loss owing to other causes.
4-202 (a) A collecting bank must exercise ordinary care in:

(1) presenting an item or sending it for presentment.
(2) sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank’s transferor after learning that the item has not been paid or accepted, as the case may be;

(3) settling for an item when the bank receives final settlement; and
(4) notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.


CHARGEBACK
-If depository bank makes funds available on a check during collection, and the check is not paid, the depository bank has a right of chargeback.

-Receiving money when depositing a check is not receiving payment on the check.  Rather, it is simply receiving a conditional loan of the money, and the right to keep it depends on whether the drawee bank pays the check.

FUNDS AVAILABILITY RULES (206)
-When an item is deposited (up to $5000 in deposits a day), the bank must make the funds available in a certain time.

Depository Bank may make itself Liable on a Check.
-If the depository bank promises that a check will be paid, or is negligent in leading the customer to rely on payment, it may be liable for the amount of a check that is dishonored.
WRONGFUL DISHONOR (217)
-A drawee bank is liable for wrongful dishonor if it fails to pay a check that is properly payable.
-Wrongful dishonor liability runs to the bank’s customer (the one who wrote the check) NOT to the person with the check.

-Liability is all damages proximately caused, which may greatly exceed amount of check.

4-402 (a) a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an
overdraft unless it has agreed to pay the overdraft.
CHECK PAYMENT - MIDNIGHT DEADLINE (227).
-When a check is presented, the drawee becomes obliged to pay if final payment occurs.  
-Final payment occurs if the drawee pays the check (in cash or irrevocably makes the funds available)

-If bank wishes to dishonor, it must act in time, or is stuck with the obligation to pay.
-Midnight deadline passes at midnight the day after presentment.  
-Branch banks are treated as separate banks.

4-215 Final Payment of an Item (229)
Final payment can occur as follows:
1.  If the check is presented and the Drawee bank pays it in case, then final payment has occurred.

2.  If check is presented and Drawee bank settles unprovisionally (that is, puts the money in an account without a right to revoke).
3.  Midnight deadline: If the check is presented and the drawee bank does not dishonor the check by midnight deadline.  


Final Payment refers to the bank losing its ability to dishonor the check.  If final payment occurs the bank is obliged to pay the check.

The Effects of Final Payment
-Drawee can no longer dishonor the check.
-Drawee gets a presentment warranty from the person who presented it and from previous people who transferred the check.  If the check is stolen or altered, the bank will have a theory to recover.  

When does the Midnight Deadline Pass?
“midnight on the next banking day following the banking day on which it receives the relevant item.”
-Only banking days count.
-Banks may set an afternoon hour of 2 P.M. or later as a cutoff hour for the handling of money and items and the making of entries on its books.

Return Requirement (233)

-If bank decides to dishonor, has to send check back



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