Thread: Commercial Paper

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Commercial Paper

I)Definitions:Two kinds of commercial paper under UCC 3
A)Promissory Note: (UCC§3-104(e)): An instrument where a maker promises to pay a payee. This is also known as a promissory note.
1)Particular Notes: Certificate of Deposit (UCC§3-104(j)): A particular kind of note where the promise is by a bank to repay.
2)Elements of a Note: “I promise to pay to the order of Peter Payee a Hundred Dollars, signed Max Maker.” Max has an obligation to pay according to the tenor of the instrument he signed. Even if he signed it with no amount, he is bound by the filled in amount.
B)Draft: (UCC§3-104(e)): Instrument where a drawer orders a drawee to pay a payee. Generically these are three party instruments.
1)Particular Draft: Check (UCC 3-104(c)) Payable on demand, drawn on a bank, even though it doesn’t have the words of negotiability.
2)Elements of a draft: “To drawee (bank), pay to the order of Patricia Payee a Hundred Dollars, signed Donna Drawer”
3)Obligation on 3 party paper:
(a)Drawer: Secondary liability to the paying by a drawee. Liability is based on the getting of conditions precedent (required (i.e. notice of dishonor)). UCC§3-414.
C)Differences between a note and draft.
1)A note is a promise, a draft is an order to pay.
2)The only common party on both instruments is the payee. Because makers make notes, and drawers draw drafts.
D)Indorsers are anyone who signs on the instrument other than the maker of a note, the drawer of a draft, or the acceptor of a draft
·Acceptor is the person who as a drawee accepts the draft. This is a form of primary liability. This is like being a maker.
·Indorsers are those who usually who sign on the back. (Payee indorses).

There are four qualities, which are totally unrelated, of an indorsement, they are:
1)Special or Blank Indorsement
(a)Special (UCC§3-205(a)):if it specifies or identifies the person or agency to whom it is payable.
(b)Blank (UCC§3-205(b)): does not specify to whom it is payable.
2)Restrictive or Un-restrictive Indorsement:
(a)Restrictive (UCC§3-206): limits the payment. (i.e. “For Deposit Only”). Bank has to be careful or they can be seen as converting the money.
(b)Un-Restrictive
3)Qualified or Un-qualified:
(a)Qualified indorsement (UCC§3-415): uses the magic words “without recourse.” This has significance because it goes to the contract of secondary liability. (An indorser enters into a contract of second liability that says: If you the holder of the instrument present it to the maker or drawee (this is known as presentment), and they don’t pay it (dishonor), and you tell me about it (notice of dishonor) then I will pay you, unless the magic words (without recourse) are used.) This negates the obligation of secondary liability if the words “without recourse” are used. This can be found for:
(1)Indorser in UCC§3-415(b)
(2)Drawer in UCC§3-414(e)
(b)Un-qualified Indorsements: No magic words.
4)Anomalous or non-anomalous Indorsements:
(a)Anomalous (UCC§3-205(d)): Indicates accommodation. Accommodation parties are liable in the capacity in which they signed according to the UCC.
(b)Suretyships and co-sureties can be involved as an accommodation party.
(c)Anomalous indorsements are those which are out of the chain.
(1)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 C’s 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.
(2)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 don’t like to sell cars to infants because they can disaffirm. If Dad signs as a Maker under Peter’s (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.
(d)§3-419(b): All accommodation parties are liable in the capacity in which they sign. This indicates that that an individual debtor is not liable to the surety, even though it looks like it on the face of the instrument.
(1) Example: A debtor says to the surety, “Do me a favor, I want to borrow some money and I need your signature. The surety can sign either signs
(e)Non-Anomalous:
5)Suretyship is a contract where one assumes the obligations of another. You have to have 3 people a creditor, debtor, and a surety. The surety is backing up the debt of the debtor. In a Suretyship the rights of the surety as against the debtor are 3 fold:
(a)right to force the debtor to pay at common law (exoneration),
(b)the right to get any payments that thy make back (reimbursement);
(c)if they pay the entire debt they have the rights of subrogation which are the rights the creditor had.
6)Co-suretys: are people who agree to share the risks, they (surety) have similar rights.
(a)right of exoneration where on surety can force the other surety to pony up their portions of the bill,
(b)right of contribution if a surety pays anything more than his fair share,
(c)and the right of subrogation if the surety pays the entire debt he steps into the rights of the creditor.
7)Surtety Defenses:
(a)Variation of Risk: This means without a waiver if the debtor and creditor make a contract, with a surety present, and the debtor and/or creditor change the contract in any way, the surety can claim a variation of risk and possibly a discharge.
E)Acceptor: are drawees who agree to pay the instrument. This is a form of primary liability like a maker (UCC §3-413)
1)UCC§3-413(b) Where a bank certifies a check, they must put the amount in their certification box. If they don’t do that, the bank will have to pay the altered amount.

II)Issue Spotting and Answers: The core of Commercial Paper is the HIDC rule in Article 3. The rule is where you have a negotiable instrument (form §3-100 series of code) and where the negotiable instrument is negotiated (transfer §3-200 series of code) and that negotiated instrument is negotiated to a HIDC. Then the HIDC will take free from personal defenses and claims subject only to real defenses (3-300 series of code). The way you spot issues in a Commercial paper exam is to look to the call of the question and ask:
A)What does the individual want to know? Mostly he is going to want to know the rights of the holder of the instrument (possessor) as against the maker (of a note) or the drawer (of a draft). If this is the case look to the HIDC rule. Is the HIDC rule applicable or not?
B)What are the rights of the holder (possessor) as against an indorsers? Contract of secondary liability
C)What are the rights of the holder (possessor) as against the drawee? What is the relationship here?
D)What are the rights of the drawer as against the drawee? What is the drawers relationship with the bank?

E)Bank recovery, payment by mistake, finality of payment : Price v. Neal. Finality of payment doctrine
Who is quarrelling with who?

III)Negotiability: UCC 3-104(a): A negotiable instrument is one that is (A) an unconditional promise or order (B) to pay a fixed amount of money with no other amount of authorized promise (C) on demand or at a definite time (D) to bearer or to order. All of these elements must be present for an instrument to be negotiable. The other requirements for negotiability are that the are written (UCC 3-103(a)(9)) and signed (UCC 3-103(a)(6)).
Writing: The negotiable instrument does not have to be on paper. Someone sends in their income tax payment with a check , drawn on the bank, written on a shirt. They will say here is the shirt off my back. This is a negotiable instrument. It is a writing because it is tangible.
·Could have an oral contract, but no oral negotiable instrument
Signed: Problems with signatures. A person is not bound unless they sign or the instrument is signed with their authorization. The person has no liability if they don’t sign the instrument.
·UCC 3-403 If another person fraudulently signs another’s name to the instrument, the signor is liable. They have adopted the name.
·UCC 3-402 Under agency law, the principal is usually found liable under contract law. Ordinarily if signing as an agent agency law would prevail. If an undisclosed agent signs an instrument for a principal, he would be bound personally to a HIDC if they didn’t know he was an agent. The agent wouldn’t be bound if he could show that the HIDC knew he was an agent, and knew who the principal was and he was acting for the principal.
Conditions: are promise modifiers. These are OK in contract law. Commercial is supposed to be a simple substitute for money. If it is conditional it is non-negotiable. Express conditions (on the instrument) are not allowed. Implied (conduct) and constructive (from the law) conditions are OK. Having a security in the instrument ( a mere reference). DO YOU HAVE TO LOOK BEYOND THE 4 CORNERS OF THE INSTRUMENT? IF IT IS A REFERENCE, NO. IF IT REFERS TO CONDITIONS ON ANOTHER INSTRUMENTS, YES.
Promise is a promise. An IOU is not a promise
Order is an order.
Fixed amount is determined by looking at the instrument. Interest is OK (variable of fixed).
Money: foreign money is OK.
No other authorized promise: Don’t want a bunch of baggage added.
Exceptions: Collateral Promises: This is OK
Waiver of rights (i.e. payment of attorney fees if a
default)

On demand (or at sight) or if it doesn’t say anything. This is a demand
note. Because it is silent to the time of payment.
Definite Time: Time instrument. Code permits all acceleration clauses.
Acceleration Clause: If you miss one payment, the entire
instrument comes due.
Extension Clause: If at the option of a holder is fine. If it is at the
option of the maker, it has to be to a further definite time (e.g. I
promise to pay to your order 2 years from now, but if I win the
lottery, I’ll pay you right away.)
To bearer or to order: Bearer means anyone who possesses the
instrument. Order means Peter Payee can sign on the back “pay Mary
signed Peter Payee” and she’ll sign on the back “pay Connie signed
Mary”, etc. It will circulate in the economy like cash.

HIDC takes free of all personal defenses or claims subject only to real defenses. (there may still be a cause of action against the maker.
Non-negotiable Instruments can still have a value (possibly more than a negotiable instrument). A negotiable instrument that is signed by a person for $1MM by a student is worth absolutely nothing, because the student can’t pay it. However, if it was a non-negotiable instrument, Article III does not apply, but contract law does. Therefore you can sue them and prove breach of contract, and they would have to use personal defenses (which are not available under HIDC rule).

IV)Negotiation: (Transfer): Negotiation is transfer of possession to a holder. The rules for transfer are:
1)Is the instrument an order or bearer instrument?
a)Order Instrument: requires a proper indorsement and delivery. Proper indorsement means that it cannot be a forgery. Delivery means possession.
b)Bearer Instrument: may be negotiated by mere delivery alone. Bearer paper is payable to the bearer. (e.g. $5 bill is bearer paper)
2)Determination whether it is order or bearer by looking at the last indorsement.
a)Special Indorsements specify a specific indorsee: Order paper. (Pay Albert Payee)
b)Last indorsement is blank. This is bearer paper. Another indorsement is not required. (Albert Payee) This can be converted back to order paper (Pay Dorothy, Payee)
3)Do we have a HIDC?

V)HIDC Rule: provides where you have a negotiable instrument and it is negotiated to a HIDC, that holder takes free from personal defenses and claims, subject only to real defenses.
Example #1: Earl says he’ll paint any car for $80. He paints your car, and you sign a paper w/o reading it. The bank calls and says you owe them $900. You go back to Earl and ask what gives. He explains that $80 gets you his standard paint job, however, you asked for the car to be painted the same as it was, so he had to do extra work, etc. You say you won’t pay. He says well you’ll have to take that up with the bank who he sold the paper to, they are the HIDC and you will have to pay them. The thing you signed was a negotiable instrument, and it was negotiated (a particular kind of transfer) to the HIDC ( the buyer who bought it from Earl), he takes free from a personal defenses, and your defense here is fraud ( a personal defense).
Example #2: You get a pay check and sign the pay check with your name on the back. You lose the signed pay check or it is stolen. The finder or the thief sells it to someone who purchases it in good faith. That person cashes it at Krogers. Can you get the check back from Krogers? Can you get another check from your employer for the work that you did? NO. It’s just like cash. Where you have a negotiable instrument and it is negotiated to a HIDC that holder takes free from personal defenses and claims subject to real defenses.
1)HIDC is a holder who takes for value and in good faith, and without knowledge or notice of overdueness, dishonor, claim, defenses, forgery, irregularity or incompleteness which questions authenticity. To be a HIDC you have to take for value, in good faith, without notice of problems. If you are not a HIDC you can still enforce the instrument subject to defenses. Elements of HIDC:
a)Value: is executed or performed consideration. It is not executory consideration. (e.g. If you give me a negotiable instrument for my promise to do legal services in the future, there is not the giving of value)
·Old Debts: This is value, but it is not consideration under common law.
·Exceptions:
ØThe giving of a negotiable instrument for a negotiable instrument
ØThe giving of an irrevocable obligation to a 3rd person for the negotiable instrument.
EXAMPLE #1: Assume that I have a $100 negotiable instrument, payable to me. I offer to sell it to someone for $50. The buyer goes to the maker and he claims a personal defense (fraud). The buyer can collect the full $100. This is not a partial HIDC problem.
EXAMPLE #2: Assume that I have a $100 negotiable instrument, payable to me. I offer to sell it to someone for $50. The buyer says OK I’ll give you $25 now and the rest in a week. The buyer finds out that the instrument was issued pursuant to a fraud. The buyer is a partial HIDC now. The reason is that the time the buyer gave value governs the time of notice and good faith. The buyer had only given 50% of the sell price, therefore he can only collect 50% of the value of the instrument or $50.
b)In good faith: The test is honesty in fact and the observance of reasonable commercial standards of fair dealing.
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.
c)Without knowledge of notice:
(1)Notice: That what you actually know, what you have been made aware of, what you have reason to know. Notice is broader than knowledge.
d)Problems:
(1)Overdueness: Key is that if the check is over 90 days old is overdue.
(2)Dishonored, claims, defenses (forgery), irregularity: What if someone asked if you would cash a check for them. The check says on it “Null and Void” or “Paid.” This would be an irregularity. You could end up being the owner, but not a HIDC.
e)3 non HIDC: who could take in good faith for value without notice. But wouldn’t be HIDC.
(1)Buyers in Bulk: A person buys a business, including checks payable to the business.
(a)Federal Exception: A federal agency taking as successors in interest are HIDC, even though they are in bulk. Federal law trumps state law.
(2)Buying from an estate: If there is insufficient cash to pay all the bills, the executor can sell a note in the estate. or a sheriff sale of a note. In both cases the buyer would be the owner, but not a HIDC.
(3)Judicial Sale:
2)Have a negotiable instrument that has been negotiated and you are a HIDC you will take free from all personal defenses and claims. You will take subject to real defenses.
3)FTC RULE re: HIDC: Where a human (not a corporation) buys consumer goods (goods for family use purposes) or consumer services (services include health club membership and dance studios) on credit (credit transaction is defined as more than 4 payments) then there is no HIDC rule. You won’t have to pay.
EXAMPLE: You buy property for retirement, the FTC rule does not apply, so the person selling you the property is a HIDC of the promissory note that you signed.
Automobile is a consumer good that was purchased on credit, you could assert personal defense (i.e. fraud) against the finance company under the FTC rule/
Without the FTC rule you could get out of the deal if you can show that the person who claims to be an HIDC isn’t because he is so closely connected to the crook.

4)SHELTER RULE: Anyone who takes after an HIDC gets the rights of the HIDC. The purpose of this rule is to aid the HIDC.
EXAMPLE: (i.e. Sam gives a negotiable instrument as a wedding present to his son Charles. Charles knew the instrument was originally issued pursuant to a fraud. Sam, the giver, may have been an HIDC, Charlie isn’t because he didn’t give value, and had bad faith with notice, yet he gets the rights of an HIDC, because he took after a HIDC (Sam). Anyone who takes after an HIDC gets the rights under this doctrine. THERE IS NO DIFFERENCE UNDER THE LAW BETWEEN A HIDC AND A PERSON WHO CAN CLAIM THE RIGHTS OF A HIDC UNDER THE SHELTER DOCTRINE.
(1)Exception: If a crook swindles someone, gets the paper, then negotiates it to a HIDC, then buys it back, he will not have the advantage of Shelter. He can’t wash the paper in the hands of an HIDC. Other than the crook everyone else gets Shelter.
(2)3 NON HIDC UNDER THE SHELTER DOCTRINE
(a)Bulk Purchases: A person buys a store and gets the checks owed to the store. The new owner is not a HIDC, but if the store was a HIDC, he gets the rights of a HIDC.
(b)Estate: Uncle Louie died and the executor sold a note. The purchaser was not a HIDC, but if Uncle Louie was an HIDC, so the purchaser would get the rights of an HIDC under the Shelter Doctrine.
(c)Judicial Sales: Someone owed money, the sheriff attached a note and sold the note to a good faith purchaser at a judicial sale. The purchaser would get the rights of an HIDC under the Shelter Doctrine.

VI)Defenses:
a)Personal Defense are all defenses that are not real.
b)Real Defenses: The HIDC of a negotiable instrument takes free from all other defense as well as claims. There are 10 real defenses the pneumonic is
F F A A I I D D S S

Forgery: If someone signs a name without authorization. The forger is liable, but the name he used would not be.
Fraud in Factum: THIS IS NOT REGULAR FRAUD LIKE THE PREVIOUS EXAMPLES. (Switch Document Fraud): Ex. Someone is given a document and reads it. Then the document is switched with other terms on it – and the sign it. This is Fraud in Factum.
Alteration: If a person writes a check for $50 and it is later altered to $5000, this is an alteration. The person is obliged to only pay the $50
Exception to Alteration: Negligence: If you write a check for $5
and leave a space and the crook writes in $500,000, you are
negligent.
Adjudicated Insanity: Insanity alone does not do it. The person must
have been found by a court to be insane. This would render the
instrument a nullity.
Infancy: Anyone who is under 17 years old. They can get out of their
contracts except for necessities. Must be a non necessity contract to use it
as a defense.
Illegality: to the extent it is a nullity. It has to be a void contract to use this
as a defense. If you sign a promissory note in consideration of a murder,
you don’t have to pay it. All you have to do is testify that it was for a
murder. You do not have to prove in writing.
Duress: which renders the contract void. Void duress (A gun pointed at your head.) Voidable duress (Sign the contract or I’ll tell the police) is
not a defense, only void duress.
Discharge in insolvency (Bankruptcy) You owed money, but you owe no
one because you have been “discharged” of the debts. This is a defense.
Suretyship Defenses only if there was notice that the person exercising the defense was a surety. (Suretyship is where one assumes the debt of another. All accommodation parties are sureties.) The defenses are called variation of risk. You can waive all defenses. These are real defenses. You know that someone is a surety if they guarantee collection, payment, or the anomalous indorser. (If he is out of the chain, that person is a surety.) EXAM KEY: Assuming no waiver the modification would be a defense. (e.g. If the modification of risk was an extension of time, the burden is on the surety. If it was a modification of the contract, they burden is on the holder.)
Statute of Limitations have run. You have waited too long.
Forgery has a statute of limitations of 3 years. Article 4 has a statute of limitations of 4 years. The general rule for anything other than forgery is 6 years, unless it is a demand instrument and no demand is made then it is 10 years.

VII)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 didn’t 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.

VIII)Indorser’s Liability: The holder is seeking payment against the indorser. What is the contract o an indorser? “I will pay if I get certain conditions precedent.” This is negated if the indorser signs with “without recourse.” Indorsement is any signature other than the maker, drawer or drawee (acceptor).
Example: You receive a check, sign it (indorse it) and cash it at Kroger Store. What would the food store’s bank have to go through to make you pay? Conditions precedent which are:
(1)PRESENTMENT: They must have a presentment (This is made by anyone who holds the instrument to the primary party and they go to the store and say pay me. Checks must be presented within 30 days or there is a delay in presentment.
(2)DISHONOR: Following presentment the primary party will either pay or not pay (dishonor).
(3)NOTICE OF DISHONOR: This person who expected to get cash and didn’t will go to the secondary liable person (indorser) and tell them that the instrument was dishonored. Proper time frame for this is important because the indorser will not have to pay if he doesn’t get these “conditions precedent” in a timely manner. The time for this is
(a)Banks: Midnight deadline of the next business day for Banks.
(b)Everyone Else: 30 days, because most people may not know the rules.
Notice of dishonor can be given to anyone on the instrument. You would
move up the chain. If you are indorsement 7 then 6 through 1 could be held
liable by you. Unless there is a problem with a Suretyship.
(4)EXAM HINT: I have an instrument that was indorsed without recourse, or in the alternative that no one signed at all. It was bearer paper, and they obviously never signed it, and an indorser who doesn’t indorse is not an indorser. If was given alone (only delivery) because it was bearer paper or if it was purchased without recourse indorsement you must look to a warrant theory of recovery.
(5)Warranties: The theory of warranty protection is to put the losses to put the losses on the wrongdoers or the one who dealt with the wrongdoer, to the extent that it is possible. There are 3 life phases in the life of a negotiable instrument.
(a)Issuance: This is where a maker makes or a drawer draws and gives it to someone. There are no warranties at this phase.
(b)Transfer: This is any movement of the instrument for consideration. You make warranties, even if you don’t sign the instrument as long as there was the giving of consideration.
5 Transfer Warranties are:
·The transferor can enforce the instrument. He has holder status. There are no necessary forgeries in the chain.
·All signatures are valid.
·No alteration
·No defenses against the warrantor.
·No knowledge of insolvency (This is not that there isn’t insolvent.) If the drawer went broke, you cannot be held liable on the basis of a breach of warranty, because you never made a warranty that he was solvent.
(c)Presentment: Holder goes to the maker of the note or the drawee of the draft and presents it (final surrender of the instrument). The way to remember presentment warranties is that there can be only 2 possible plaintiffs – makers or drawees.
3 Presentment Warranties are:
·The transferor can enforce the instrument. He has holder status. There are no necessary forgeries in the chain. (TITLE)
·No alteration
·No knowledge of unauthorized signing of the drawer.
WARRANTY THEORIES ARE USED: If there is a transfer for consideration and you can’t use the obligation or contract theory found by Indorsers or drawers in the UCC.

IX)Drawer’s Liability: Holder of the instrument as against the drawee. (Who is the holder and who is the drawee) (e.g. I give you my watch and you give me a check. The check is drawn on your bank, you are the drawer, bank is the drawee, and I’d be the payee. Assume I (as the payee) or if it is indorsed the ultimate holder go to the drawee (bank) and say please pay me. The drawee refuses. Can the holder make the drawee pay? No. There is no relationship between the payee or holder and the drawee. Exception: Unless the drawee accepts the check, then they assume primary liability like a maker.
Acceptance: means the drawee is accepting primary liability on the instrument like a maker. (This is done by the drawee signing the check.)
QUESTION: As the holder could you say to the bank, look bank I know you have no liability because you have not accepted (or in the case of a check that you have not certified the check), but I want to claim a principal from contract law called an assignment of funds. After all the depositor has funds in the bank, and by signing the check he has assigned the money to me. This is not correct, According to the UCC a drawing of a draft is not the assignment of funds.
Where a check is accepted then the drawer’s liability is discharged.

UCC ARTICLE 4 BANK COLLECTION PROCESS (This really protects the banks)

X)Drawee Contract: This is the relationship between you and the bank. This is a contractual relationship spelled out on the signature card. You put money in the bank, and they pay out according to your order. (as long as they are properly payable.
Properly Payable Rule:
(a)Post Dated Checks: If you post date the instrument it is still properly payable unless you give them a stop payment order.
(b)Overdrafts: It is not properly payable if it creates an overdraft (but the bank can pay it and create a loan)
(c)Stale Checks: A bank can pay out on a stale check (one over 6 months old). This check is still properly payable.
(d)Death of drawer: If the drawer is dead, the bank can payout.
(e)Drawer death known by drawee: If the bank knows that the drawer is dead, the bank can pay out up to 10 days after they know you are dead. Unless someone who claims an interest (i.e. trustee) tells them not to pay – this is a stop payment order and the bank can’t payout.
(f)Stop Payment order is valid for 14 days if it is oral and 6 months if in writing and it can be renewed in writing.

BANKS CANNOT CONTRACT OUT THEIR RESPONSIBILITIES:
Where there is a properly payable rule, the bank can pay out even though the extrinsic things take place. Banks will try to include in the contract that they will try to honor stop payment orders or and avoid wrongful dishonors.

1)If the bank (drawer) doesn’t pay but they should have, they are liable for breach of contract (wrongfully dishonor)
Wrongful Dishonor Rule : Banks are liable for damages from wrongful dishonor. (e.g. I have your check, go to the bank and try to cash it and the bank refuses. I ask if you have sufficient funds, and the bank says yes. Why won’t you pay me. The bank responds “because I don’t have to” Banks do not have to pay the holder. But if the bank dishonors, when they should have paid, you the drawer can recover any damages you can prove because of the wrongful dishonor. The holder cannot do anything to the bank . Damages could include going to jail for writing a bad check. The damage would be collectable.

2)If the bank (drawer) pays, but they shouldn’t, the bank is liable for breach of contract.
Example #1: Drawer name is forged. When someone forges your name, and they ultimately get the check cashed and the check is presented, the bank won’t pay if they see it’s forged. But if they do, and when you review your bank statement, and you find a forgery. You call the bank and tell them that the instrument was a forgery, the bank must put the money back.
Example #2: Forged indorsement. This is the same principal as above. If you mailed me a check, and it was stolen from my mailbox. The crook forged my indorsement and took it to Krogers and cashed it. The store sends it to the bank.
Would you know that the indorsement on the check was forged when you get it back from the bank? No.
You do know there was a forged indorsement when the payee calls and demands payment. When you show him the check, he then tells you he didn’t sign it. You can make the bank put the money back.
Subrogation Rule: If the bank paid to a HIDC, the bank will get the rights of the HIDC under the right of subrogation.
3 Categories of Exceptions: Drawer Negligence. The risk of loss can be shifted from the bank to the drawer.
1)Imposter Rule: (e.g. you (drawer) hire someone to work for them. You ask them if they are honest. He prepares check for you to sign. He does not prepare checks payable to himself. He creates check made out to real people, but not intended to be paid to them. Instead he forges the indorsement and deposits the checks in his own account. Any indorsement in the name of these fictitious payees is effective (not a forgery). The people who take after them are owners. You will suffer a loss as against the bank. This exception also applies to payees. Normally you would be able to get a replacement check, but not in this case where this crook works for you. You should control the security of your office.
2)Drawer Negligence in the Drafting Rule: Drawer have to pay
(a)Mechanical Signature: A crook gets a hold of this. He stole your signature.
(b)Blanks in the amount line
(c)Leaving the amount blank
3)Ratification of a forgery Rule: This is typically a spouse or child forges you indorsement a check made out to you. (If this is consistently done, you have set a precedence according to may courts of ratification.)
Drawer Negligence to Notify Rule: You have a duty to review your bank statement and notify the bank of any forged indorsements of if a check was written by someone other than you. If this isn’t done ASAP
(1)Forgery of a drawers signature 1 year.
(2)Forged Indorsement 3 years.
(3)Multiple forgeries by the same wrongdoer you have only 30 days to notify the bank.
EXCEPTIONS TO THESE RULES: If the bank fails to exercise ordinary care, then comparative negligence will be used. A kind of case where the bank suffers is where they consistently take corporate checks and they deposit them in personal bank accounts.

XI)Bank Collection: When is your money available?
1)Bank Availability of Funds:
a)Cash: Next Banking day (after 2PM)
b)Check: Depository Bank is Payor Bank: (On Us Item) Federal Law has made it the next banking day just like cash (It was 2nd Banking Day before)
c)Regular Checks: Expedited Fund Availability Act: Regulation CC. The bank use to take advantage of the float.
(1)Next Business Day Availability for Government Checks, Teller, Cashiers and Certified Checks or Wire Transfers.
(2)Ordinaries Checks depends on what Federal Reserve District you are located in.
·Local District: There is a limitation of the 2nd Business Day.
·Different District: Limitation is the 5th Business Day.
d)Exceptions: New Accounts, Checks over $5,000, re-deposited checks, repeated overdraft, or an “Emergency.”

XII)Bank Recovery (Finality of Payment) Price v. Neal: This is where a mistake has taken place. Banks will not pay on forgeries if they know there is a forgery.
1)Drawer Forgery: Bank pays out on a forged drawers signature. The forger took the check to Krogers and cashed it. Krogers deposited it on their depository bank. The depository bank presented the check to the payor bank (drawee) and the check was paid by mistake. The drawer, when he reviews his bank statement sees the forgery, gives notice to the drawee (Payor) bank of the forgery, and demands that the funds be replaced back in to his account. The bank does so.
(a)Can the bank go to Krogers or their bank and say there was contributory negligence among all of them, and they should share in the loss?
(b)DOCTRINE OF PRICE v. NEAL says where the bank pays on a forged drawer’s signature or other mistake, (i.e. $50 in your account and they honored $100 instrument) then payment is final, and no recovery is permitted from the innocent party whom the bank paid. (also known as the FINALITY DOCTRINE.
Bank cannot charge the customer or payee, however they could charge the forger (if they can find him)
2)Indorser’s Forgery: If the bank pays out on a forged indorsement, the bank will pay because you actually wrote this instrument and they are afraid of wrongful dishonor. They think it is genuine. The bank will only find out when drawer gets a call from the payee and finds out payee did not negotiate the instrument. This is not the case where drawee or payee were negligent. Drawee will still have to pay because the underlying obligation is still open. Drawee will call the bank and tell them to replace the money into the account and they will.
(a)Can the bank go back against the presenter? Yes. (Canal Bank v. Albany Bank) Because of breach of warrant of the presentment warranty that there are no forgeries.
3)Price v. Neal Signature Cards: of drawers (customers) but no bank has signature cards of indorsements.
(a)When a check is presented on a forged drawers signature the bank can prevent this by checking the signature.
(b)When a check is presented on a forged indorsement signature there is nothing the bank could do.
Thus the bank is permitted to recover back from the presenter in a forced indorsement but not from a forged drawer. The code puts these doctrines together in the warranty of presentment.
4)Warranty of Presentment: When you present the instrument you warrant that you had title to it. (that there were no forgeries of necessary indorsements).
(a)When someone forges an instrument the forgery is ineffective as to the name forged, but fully effective as to the name of the forger.
(b)Drawer Forgery: There is finality of payment on a drawer forgery. There was not breach of warranty of presentment. Therefore there is no way for the bank to recover. Payment is final in favor of a HIDC.
(c)Forged Indorsement: There was a breach of warranty of presentment warranty. The code permits recovery back on a forged indorsement.
5)What happens if on the same instrument if there is a forged drawer’s signature and a forged indorser’s signature? The crook who works for a company forges the name of his employer, and then he goes ahead and forges an indorsement on the back to get it cashed. Does Price v. Neal apply? Under Warranty of Presentment you must look at the
(a)Does he breach a warranty: We use Price v. Neal, because the Warranty was not breached in the Drawer forgery and the false signature was ineffective as to his boss, but effective as to the forger himself. When the presenter warranted title, he actually had title. Because of the IMPOSTER RULE the forged indorsement isn’t considered a forgery. Where both signatures are on an instrument then Price v. Neal applies.
6)What happens if the drawee is the United States government? The Federal government is under the Federal Common Law.
7)Accord and Satisfaction: Historically this was a method of discharge. Where 2 contracting parties had a dispute. If one party submitted to the other party a check that said “This is in total and complete satisfaction of the obligation” and the other party cashed the check, this was a discharge called accord and satisfaction. The code use to provide that the person who cashed the check could cross these words out, and treat it like an adhesion contract, and write in the place of those words “with reservation of my rights.” This did not result in accord and satisfaction and games were being played back and forth.
(a)New Code does away with inadvertent accord and satisfactions. The code says that:
(1)There has to be a disputed claim (if there were no disputed claim there will never be accord and satisfaction.
(2)There must be an instrument tendered as full satisfaction. It must be conspicuously labeled that “this is in full satisfaction as to what I owe you.” (Preprinted words on checks are not allowed)
(3)If the other person cashes the check there is a full discharge and no reservation of rights is permitted.
(4)2 Exceptions that will prevent accord and satisfaction:
·The Payee is an organization and can designate an agent for purposes of settlement. (If you send checks to the organization they are going to designate an agent for purposes of settlement. In the contract (conspicuously) it is spelled out that checks for settlement checks must be sent the specified agent. If checks are sent to the organization, even if they say they are for settlement, they can be cashed without any accord and satisfaction, because they weren’t sent to the agent.
·If the check (or payment) marked “for complete satisfaction” is sent and 40 days later the payee asks for his money, the drawer will respond that it was paid if full because the check was marked “for complete satisfaction” was deposited by the payee. The payee then can send the money back within 90 days of the initial check and start the process of getting accord and satisfaction from the beginning. This prevents inadvertent accord and satisfaction.
XIII)Lost Instruments: Article 3
1)Lost, Destroyed or Stolen Instruments: If a note or a draft is lost, destroyed, or stolen you can get a replacement issue by proving up the terms, telling what happened, and no longer do you have to offer up a surety bond. All that must be done is give adequate protection. (i.e. A letter that you’ll make up the loss if the check shows up may be enough). How do you know that something is lost, destroyed or stolen? Some are obvious. Under Article 3 no surety bond is needed.
2)Cashier, Teller, and Certified Checks: These are treated by the public as if they were cash. The UCC says the giving of these kinds of checks, unlike other kinds of checks actually discharges any underlying obligation. (i.e. If I wanted to buy a building with an uncertified check this does not discharge the obligation. I don’t own the building and when that check bounces the seller can come looking for me. If a certified, cashiers, or teller’s check was given and it bounced the payee could not go after me. They could only go after the bank.
(a)Cashier Check: the same bank is the drawee and drawer.
(b)Teller Check:: some banks draw on another bank.
(c)Certified Check: is where you are the drawer and go to your bank (drawee) and ask them to certify that the money is available. It is important that the bank certify to a certain amount. If a certified check is altered the bank could be liable for the altered amount, unless they certified to a certain amount. Then they would only owe up to that amount.
3)What do you do if you lose a cashier, teller or certified check? The code has a provision that says that you go to the drawee and file a claim (I lost it and I’m sorry). You take the claim and put it away for 90 days (this is the ineffective period). 90 days after the check has not been paid, they can read your claim and refund your money.
(a)If the check is presented after 90 days the check is considered stale, and they don’t have to pay it.
(b)If they don’t pay it the holder can still sue. You will have to make good to the bank or holder under this rule. The bank would be subrogated or have the rights of an HIDC under this rule.