Payment Systems - Verdun - Summer 2011- Final

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    PAYMENT SYSTEMSVERDUNSUMMER2011

    NEGOTIABLE INSTRUMENTS ................................................................................................................................................................................ 4I) INTRODUCTION ............................................................................................................................................................................................ 4

    A) Negotiable Instruments (NI) ........................................................................................................................................................................ 4B) Governing Law: UCC.................................................................................................................................................................................. 4C) Types of Negotiable Instruments (notes & drafts) ....................................................................................................................................... 4

    II) REQUIREMENTS FOR NEGOTIABILITY ................................................................................................................................................... 4

    A) Introduction ................................................................................................................................................................................................. 4B) 3-104(a): Negotiability Requirements & Applicable Code Sections ........................................................................................................... 4

    HOLDER IN DUE COURSE (HDC) ............................................................................................................................................................................ 6I) HDC RULE ...................................................................................................................................................................................................... 6

    II) HOLDER STATUS .......................................................................................................................................................................................... 6A) General Rule ................................................................................................................................................................................................ 6B) Ways of Acquiring Holder Status: Issuance or Negotiation ........................................................................................................................ 6C) Indorsement ................................................................................................................................................................................................. 6D) 4-205(1): Depositary Banks Status as Holder............................................................................................................................................ 7

    III) VALUE ............................................................................................................................................................................................................. 7A) Promise of Performance .............................................................................................................................................................................. 7

    B) SI or Lien ..................................................................................................................................................................................................... 7C) For Antecedent ClaimTaken for value if Instrument issued or transferred as payment or, or security for, an antecedent claim ............. 7D) 3-303(a): Negotiable Instrument or Irrevocable Commitment ..................................................................................................................... 7E) GiftsGift of an instrument will never create HDC statute in the donee (no value given) ......................................................................... 7

    IV) GOOD FAITH (GF) ......................................................................................................................................................................................... 7A) IntroductionGF is partially subjective & partially objective .................................................................................................................... 7B) Subjective ElementHonesty in fact .......................................................................................................................................................... 7C) 3-103(a)(4): Objective Element - Requires observance of reason_ commercial standards of fair dealing .................................................. 7

    V) NOTICE ........................................................................................................................................................................................................... 9A) Introduction ................................................................................................................................................................................................. 9B) Manner of Obtaining Notice ........................................................................................................................................................................ 9C) Situation Involving Notice Issues ................................................................................................................................................................ 9

    VI) DEFENSES, CLAIMS TO THE INSTRUMENT, CLAIMS IN RECOUPMENT & DISCHARGES ........................................................... 10A) 3-308(b): Recovery from Obligor .............................................................................................................................................................. 10B) Real Defenses - Defenses that all Holders (including HDC) takes Subject to ........................................................................................... 10C) Personal Defenses - Defenses that only Non-HDC takes Subject to.......................................................................................................... 11D) Discharges (other than Discharges in Bankruptcy) .................................................................................................................................... 11

    VII) TRANSFER OF INSTRUMENT & SHELTER RULE ................................................................................................................................ 12A) 3-203(b): Rights of TransfereeWhen instrument is transferred, transfer vests in transferee all rights of his transferor ......................... 12B) 3-203(c): Right to Transferors Indorsement ............................................................................................................................................. 12C) The Shelter Rule ........................................................................................................................................................................................ 12D) 3-207: Reacquisition by Prior Holder ........................................................................................................................................................ 12

    VIII) DEFENSES & CLAIMS TO BANK CHECKS ........................................................................................................................................... 12A) Right of Bank to Raise Defenses ............................................................................................................................................................... 12B) 3-411(b): Penalty for Wrongfully Refusing to Pay .................................................................................................................................... 12C) 3-411(c): Banks defenses to liability for expenses and consequential damages ....................................................................................... 12

    NATURE OF LIABILITY ON INSTRUMENTS ...................................................................................................................................................... 12I) LIABILITY OF MAKER/ISSUER, DRAWER, DRAWEE AND INDORSER ............................................................................................ 12

    A) Introduction ............................................................................................................................................................................................... 12B) 3-412: Obligation of Maker/Issuer ............................................................................................................................................................ 12C) 3-414: Obligation of Drawer ..................................................................................................................................................................... 13D) 3-408: Obligation of Drawee ..................................................................................................................................................................... 13E) 3-415: Obligation of Indorser .................................................................................................................................................................... 13

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    II) PRESENTMENT, DISHONOR & NOTICE OF DISHONOR ...................................................................................................................... 13A) Introduction ............................................................................................................................................................................................... 13B) Presentment ............................................................................................................................................................................................... 13C) Dishonor .................................................................................................................................................................................................... 14D) Notice of Dishonor .................................................................................................................................................................................... 14

    III) ACCOMMODATION PARTIES ................................................................................................................................................................... 14A) What is an Accommodation Party? ........................................................................................................................................................... 14B) Relationship b/w Accommodation & Accommodated parties ................................................................................................................... 16

    C) Relationship b/w Accommodation Parties ................................................................................................................................................. 16D) Discharge of Indorsers & Accommodation Parties .................................................................................................................................... 16

    IV) LIABILITY OF AGENTS, PRINCIPALS, AND CO-OBLIGORS ............................................................................................................... 17A) Liability of Represented Person ................................................................................................................................................................. 17B) Liability of Representative ........................................................................................................................................................................ 17C) Liability of Persons Signing in the Same Capacity in the Same Transaction ............................................................................................ 17

    V) EFFECT OF TAKING INSTRUMENT ON THE UNDERLYING OBLIGATION ...................................................................................... 19A) Ordinary Instruments ................................................................................................................................................................................. 19B) Bank Checks .............................................................................................................................................................................................. 19

    VI) ENFORCEMENT OF LOST, DESTROYED, OR STOLEN INSTRUMENTS ............................................................................................ 19A) Ordinary Instruments ................................................................................................................................................................................. 19

    B) Bank Checks .............................................................................................................................................................................................. 19

    FORGERY, ALTERATION, AND OTHER FRAUDULENT ACTIVITY............................................................................................................. 20I) UNAUTHORIZED SIGNATURES ............................................................................................................................................................... 20

    A) 3-403(a): Introduction ............................................................................................................................................................................... 20B) 2 Consequences of Unauthorized Signature .............................................................................................................................................. 20C) Transfer Warranties ................................................................................................................................................................................... 20D) Presentment Warranties ............................................................................................................................................................................. 20E) Recovery by Payor of Payment Made by Mistake ..................................................................................................................................... 20F) Conversion ................................................................................................................................................................................................ 20G) Application of Rules .................................................................................................................................................................................. 21

    II) ALTERATIONS & INCOMPLETE INSTRUMENTS .................................................................................................................................. 22A) 3-407(a): What is an Alteration? ............................................................................................................................................................... 22

    B) Allocation of Loss in Case of Alteration ................................................................................................................................................... 22C) Discharge of Party Whose Obligation is Affected ..................................................................................................................................... 22D) Incomplete Instruments ............................................................................................................................................................................. 22

    III) GROUNDS OF PRECLUSION ...................................................................................................................................................................... 23A) 3-403(a): Ratification ................................................................................................................................................................................ 23B) 1-103: EstoppelA party may be estopped to deny the authenticity of a signature.................................................................................. 23C) Negligence Rule ........................................................................................................................................................................................ 23D) Imposters Rule & Fictitious Payees ........................................................................................................................................................... 23E) Bank Statement Rule ................................................................................................................................................................................. 24

    IV) RESTRICTIVE INDORSEMENTS ............................................................................................................................................................... 25A) Introduction ............................................................................................................................................................................................... 25B) 3-206(c): For Deposit Restrictive Indorsement ......................................................................................................................................... 25

    C) 3-206: Effect of For Deposit or For Collection Indorsement .............................................................................................................. 25

    PAYOR BANK/CUSTOMER RELATIONSHIP ...................................................................................................................................................... 25I) WHEN ITEM PROPERLY PAYABLE ......................................................................................................................................................... 25

    A) Properly Payable Rule ............................................................................................................................................................................... 25B) 4-401(c): Postdated Checks ....................................................................................................................................................................... 25C) 4-404: Bank not obligated to pay check 6 months old ............................................................................................................................... 25D) Banks Right of Set-off.............................................................................................................................................................................. 26E) 4-405(b): Death or incompetence of customer .......................................................................................................................................... 26

    II) VARIATION BY AGREEMENT .................................................................................................................................................................. 26

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    III) WRONGFUL DISHONOR ....................................................................................................................................................................... 26A) 4-402(a): Banks Liability ......................................................................................................................................................................... 26B) Sufficient Funds in Account ...................................................................................................................................................................... 26

    IV) CUSTOMERS RIGHT TO STOP PAYMENT ........................................................................................................................................ 26A) 4-403(a): Customer has a right to stop payment of any item drawn on its account ................................................................................... 26B) 4-403(b): Requirement s for Stop Payment Order ..................................................................................................................................... 26C) 4-303(a):Timeliness of Stop Payment Orders ............................................................................................................................................ 27D) 4-403(c): Damages for payment in violation of stop payment order ......................................................................................................... 27

    E) Payor banks right of subrogation on Improper Payment .......................................................................................................................... 27

    V) FUNDS AVAILABILITY UNDER REGULATION CC ............................................................................................................................... 27A) Introduction ............................................................................................................................................................................................... 27B) Reg CC 229.10: Funds Subject to Next-Day Availability ......................................................................................................................... 28C) Availability of Ordinary Checks ................................................................................................................................................................ 28

    BANK COLLECTION PROCESS ............................................................................................................................................................................. 28I) INTRODUCTION TO THE CHECK COLLECTION PROCESS ................................................................................................................. 28

    A) Check Collection Process - Generally ....................................................................................................................................................... 28B) Types of Banks under Art. 4 ...................................................................................................................................................................... 28C) Variation by Agreement ............................................................................................................................................................................ 28

    II) DUTIES OF PAYOR BANK ......................................................................................................................................................................... 29

    A) 4-301(a): Duty to pay or settle on day of presentment ............................................................................................................................... 29B) Means of Dishonoring Item ....................................................................................................................................................................... 29C) Final Payment ............................................................................................................................................................................................ 29D) Duties to Return Unpaid Items .................................................................................................................................................................. 30

    III) DUTIES OF COLLECTING BANKS ............................................................................................................................................................. 30A) Collecting Banks Status as Agent............................................................................................................................................................. 30B) Right of Chargeback .................................................................................................................................................................................. 31C) Duty of Collecting Bank to Use Ordinary Care in Collecting and Returning Items .................................................................................. 31D) Check 21 (Check Truncation) .................................................................................................................................................................... 31

    ELECTRONIC BANKING ......................................................................................................................................................................................... 32I) WIRE TRANSFERS (AKA WHOLESALE FUNDS TRANSFERS) ............................................................................................................ 32

    A) Terminology .............................................................................................................................................................................................. 32

    B) What is a Fund Transfer ............................................................................................................................................................................ 32C) Payment Obligations in Chain of Title ...................................................................................................................................................... 32D) Duties & Liabilities of Receiving Bank ..................................................................................................................................................... 32E) Duties of Beneficiarys Bank..................................................................................................................................................................... 33F) 4A-406(a): Effect of Acceptance on Underlying Obligation ..................................................................................................................... 34G) Cancellation (Stopping Payment) of Payment Order ................................................................................................................................. 34H) Liability for Authorized Payment Orders .................................................................................................................................................. 36I) Liability for Unauthorized Payment Orders............................................................................................................................................... 36J) Erroneous Payment Orders ........................................................................................................................................................................ 36K) Misdescriptions ......................................................................................................................................................................................... 37

    II) CONSUMER ELECTRONIC FUND TRANSFERS ..................................................................................................................................... 38A) Introduction ............................................................................................................................................................................................... 38B) Consumer Liability for Unauthorized Transfers ........................................................................................................................................ 38C) Stopping Payment of Electronic Fund Transfers ....................................................................................................................................... 39D) Consumer Liability to 3P in Event of System Malfunction ....................................................................................................................... 39E) Documentation Requirements ................................................................................................................................................................... 39F) Error Resolution Procedures ...................................................................................................................................................................... 39

    III) LENDER CREDIT CARDS ........................................................................................................................................................................... 40A) Terminology in Credit Card Transactions ................................................................................................................................................. 40B) Law Governing Credit Card Transactions ................................................................................................................................................. 40C) Liability for Unauthorized Use .................................................................................................................................................................. 40D) Right to Refuse Payment ........................................................................................................................................................................... 40

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    NEGOTIABLE INSTRUMENTS

    I) INTRODUCTIONA) Negotiable Instruments (NI)

    1) GenerallyNI is a cross b/w a contract & money2) Primary Difference from Ordinary Contract Right

    (i) Assignee of an ordinary contract takes subject to all defenses to which assignor took subject(ii) Holder in Due Course (HDC) of a NI takes free from virtually all defenses

    B) Governing Law: UCC1) Art. 3 - Governs writings meeting negotiability requirements of 3-104(a) (excludes money, investment securities & payment order)2) Art. 4 - Governs the bank collection process for items3) 3-102(b) & 4-102(a): Art. 4 Prevails over Art. 3 if there are any conflicts in the results b/w them

    C) Types of Negotiable Instruments (notes & drafts)1) Notes

    (i) Definition - Promise by 1 party (maker) to pay another party (payee) a sum of money (serves as credit function to evidence debt)(ii) 3-104(j): Certificates of Deposit (CoD) - CoD is a note issued by a bank

    2) Drafts - Draft is a 3 party instrument by which the drawer orders a person called the drawee to pay the payee(i) 3-104(f): Checks - Drafts drawn on bank (called either drawee bank or payor bank) that are payable on demand(ii) 3-104(g): Cashiers Check If check is drawn by bank on itself (bank both drawer & drawee)(iii)

    3-104(h): Tellers Check If one bank draws a draft on another bank or makes the draft payable through another bank(iv) Travelers Checks(a) 3-104(i): To be one, check must require as a payment condition, a countersignature by person whose specimen appears on it(b) 3-106(c): HDC does not take subject to the risk that the travels check was stolen & countersignature forged

    II) REQUIREMENTS FOR NEGOTIABILITYA) Introduction

    1) Only a writing complying w/ requirements of 3-104(a) is a NI & negotiability is determined solely by reference to its 4 corners2) A separate agreement cant affect the negotiability of an instrument

    B) 3-104(a): Negotiability Requirements & Applicable Code Sections1) Signed WritingMust be in writing & must be signed by the maker or drawer; signature can be

    (i) 1-201(37): Any symbol executed/adopted w/ present intent 2 adopt or accept writing (printed,stamped,written,initials,thumbprint)(ii) 3-401(b): Sig may be made manually or by a device or machine & may be any name, including assumed or trade name

    2) 3-106: Unconditional Promise or Order(i) Generally - A promise or an order that is expressly conditioned upon the happening of a specified even is not unconditional(ii) 3-106(a): A promise or order is unconditional UNLESS it states:

    (a) An express condition to payment(b) That the promise or order is subject to or governed by another writing, or(c) That rights or obligations w/ respect to promise or order are stated in another writing(d) However, a reference to another writing does not of itself make promise or order conditional

    (iii) 3-106(b): Except - A promise or order is not made conditional(a) By reference to another writing for a statement of rights w/ respect to collateral, prepayment, or acceleration, or(b) B/c payment is limited to resort to a particular fund or source

    (iv) Implied Conditions - Instrument is not made conditional by(a) Implied or constructive conditions on it (fact its possible that maker will no longer have liability), or(b) If the provisions on the instrument only restates the law

    (v) Example(a) Conditional (not NI b/c expressly condition) - I promise to pay $100 to the order of Doe ifhe conveys Blackacre (BA) to me(b) Unconditional (b/c condition implied) - In consideration of Does promise to convey BA, I promise to pay $100K to the

    order of Doe

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    3) 3-112: Principal sum must be payable in a fixed amount of money(i) Generally - Instrument must allow the ready calculation of the amount that the make or drawer has promised to pay(ii) Money

    (a) 1-201(24): Medium of exchange authorized or adopted by a domestic or foreign govt as a part of its currency (b) 3-107: May be payable in foreign currency, but presumed to be payable in US or foreign unless instruments limits to foreign

    (iii) 3-112: Interest(a) Interest and other charges do not have to be payable in a fixed amount(b) Instrument may state obligation to pay interest as a fixed or variable amount of money or rate(c) Amount or rate of interest may require reference to information not contained in the instrument w/o destroying negotiability

    4) 3-109: Must be payable to bearer or to order(i) 3-109(a): Bearer Paper - Promise or order is payable to bearer if it

    (a) States that it is payable to bearer; does not state a payee, it is payable to an unidentified person, or(b) Use language indicating that person in possession is entitled to payment (e..g., to holder, cash, or to the order of cash)

    (ii) 3-109(b): Order Paper (must say order on it)(a) Instrument is payable to order if it is payable to the order of [an identified person] or to [identified person] or order(b) When an instrument is payable both to order and to bearer, the instrument is payable to bearer

    (iii) 3-109(c): Transforming bear paper to order paper and vice versa(a)

    Instrument payable to bearer may become payable to identified person if it is specially indorsed pursuant to 3-205(a).(b) Instrument payable to identified person may become payable to bearer if it is indorsed in blank pursuant to 3-205(b)

    (iv) 3-104(c): Check Exception(a) Checks that otherwise meet the requirements of 3-104(a) is still a negotiable instrument(b) Even if it is not made payable to order or bearer

    5) 3-108: Must be payable on demand or at a definite time(i) 3-108(a): Payable on Demand - Promise or order is payable on demand if it states that it is

    (a) Payable on demand, presentation, or at sight, otherwise indicates that it is payable at will of the holder, or(b) Fails to state when payment is due(c) Instrument otherwise payable on demand remains payable on demand even if it is postdated or antedated

    (ii) 3-108(b): Payable at a definite time(a) Promise or order is payable at a definite time if it is payable

    (i) At a fixed date, definite period after a stated date, or(ii) On elapse of a definite period of time after sight or acceptance

    (b) Instrument that is otherwise payable at a definite time remains so even if(i) Time of payment is subject to acceleration, prepayment, or holder has right to extend time of payment indefinitely, or(ii) Extension to a further definite time, at option of maker or acceptor, or automatically upon or after a specified event

    (c) Incomplete Instruments(i) A note or draft payable at a fixed period after date that does not state a date is an incomplete instrument(ii) Once it is completed by the addition of a date, instrument becomes payable at a definite time

    6) 3-104(a)(3): Courier w/o Luggage(i) Limitation - Instrument must not state any other undertakings or instruction by person promising or ordering payment, except(ii) Collateral - Negotiable instrument may contain an undertaking or a power to

    (a) Give, maintain, or protect collateral to secure payment(b) Including provision granting holder SI in collateral, securing obligation in instrument itself & any other obligation of obligor

    (iii) Confessing Judgment/ Disposing of Collateral/Waiver of Benefit of Law(a) Negotiable instrument may also contain an authorization or power of the holder to confess judgment or(b) Realize on, or dispose of, collateral, or a waiver of benefit of any law intended for advantage/protection of obligor

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    HOLDER IN DUE COURSE (HDC)

    I) HDC RULEA) 3-302(a) - To obtain HDC status, purchaser of instrument must take it as a holder, for value, in GF, & w/o notice of certain proscribed facts

    II) HOLDER STATUSA) General Rule

    1) In order for a person to qualify as holder of an instrument, person must have possession of instrument, and2) The obligation evidenced by the instrument must run to him

    B) Ways of Acquiring Holder Status: Issuance or Negotiation1) 3-105(a): Issuance

    (i) Instrument is issued when it is first delivered by maker or drawer to either a holder or nonholder(ii) For the purpose of giving rights on the instrument to any person

    2) 3-201: Negotiation(i) 3-201(a)

    (a) Negotiation is a transfer of possession of an instrument, whether voluntary or involuntary, by a person, other than issuer(b) To another person who thereby becomes its holder

    (ii) Payable to Bearer(a)

    When an instrument is payable to bearer, transfer of possession alone is sufficient for negotiation(b) Therefore, a thief or finder of an instrument payable to bearer becomes holder even if transfer was involuntary

    (iii) 3-201(b): Payable to Order - To negotiate instrument payable to order, it must also be indorsed to that person or to bearerC) Indorsement

    1) 3-201(b): Generally(i) Authorized Signature - Indorsement sufficient to negotiate instrument must be written by or on behalf of the holder(ii) Forged or Unauthorized Indorsement

    (a) A forged or unauthorized indorsement is not effective to negotiate the instrument(b) If indorsement in chain of title is forged or unauthorized, no transferee subsequent to it can become a holder

    2) Types of Indorsements2 Types of indorsements can be used to negotiate an instrument(i) 3-205(a): Special IndorsementsIdentifies the person to whom the instrument is payable(ii) 3-205(b): Blank Indorsement

    (a) Indorsement that is not payable to an indentified person (e.g., signed w/o naming payee or accompanied w/ pay to bearer) (b) Instrument indorsed in blank becomes payable to bearer & any person who possesses it becomes its holder

    (iii) 3-205(c): Conversion of blank to special indorsement(a) Any holder of an instrument indorsed in blank may convert the blank indorsement into a special indorsement by(b) Writing over the signature of the indorser the name of an indorsee

    3) 3-204(a): Indorsement must be written on instrument (can be a separate piece of paper if that paper is affixed to the instrument)4) 3-205: Manner of negotiation depends on last indorsement (determining whether it is bearer paper or order paper)5) 3-110: Determining who may indorse as payee

    (i) Generally(a) Person to whom instrument is initially payable (therefore, able to indorse) determined by intent of person signing instrument(b) Or, in the name of the issuer, or on behalf of the issuer whether or not that person is authorized

    (ii) 3-110(a): Need not be real name of payee(a) Generally - Instrument payable to person intended by signer even if payee is indentified by name other than real name(b) 3-204(d): Whether payee designated by true name or name on instrument, both are effective to negotiate instrument

    (iii) 3-110(a): More than one person signing as issuer(a) If an instrument is signed by more than 1 person as maker or drawer & each signer intends a different person(b) Instrument is payable to any person intended by any one of the signers

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    (iv) Intent of forger determinative(a) When drawers signature on the check is forged (b) The payee is the person to whom the forger intended that payment be made

    (v) 3-110(b): Checkwriting Machine - When signature of the issuer is made by automated means(a) Identity of payee is determined by the intent of the person who supplied the name of the payee(b) Whether or not the person was an authorized agent or even connected w/ the issuer

    (vi) 3-110(d): Two or More PayeesInstrument payable to 2 or more payees is payable to them either jointly or in the alternative(a) Jointly - If instrument is payable jointly, all payees must participate in any negotiation, discharge, or enforcement of it(b) Alternative - If payable in the alternative may be negotiated, discharged, or enforced by any payee who is in possession of it

    D) 4-205(1): Depositary Banks Status as Holder1) If a customer delivers an item to a depositary bank for collection, whether or not the customer indorses the item2) Depositary bank becomes a holder of the item at the time it receives the item of the customer3) If the customer, at the time of delivery, was a holder of the item

    III) VALUEA) Promise of Performance

    1) 3-303(a)(1)(i) Instrument is issued or transferred for value when its taken for a promise of performance, to extent promise has been performed(ii) Any promise that would constitute consideration under contract law constitutes a promise of performance under Art. 3

    2) 3-302(d)(i) When a holder has only partially performed agreed-on consideration, holder has rights of a HDC to extent of(ii) Fraction of amount payable under instrument equal to value of partial performance divided by value of promised performance

    B) SI or Lien1) Generally - Holder takes for value to extent she acquires SI in, or other lien on, the instrument other than a lien by judicial proceedings2) SI in InstrumentHolder may acquire a SI or a lien on an instrument in 2 ways:

    (i) 3-303(a)(2): Voluntary transfer by debtor, usually an Art. 9 SI, or(ii) 4-210(a): SI that a collecting bank automatically acquires in an item

    (a) Collecting bank acquires SI in items deposited w/ it to extent that provisional credit given customer on item is withdrawn, or(b) When collecting bank applies item in part or in full payment of a debt owed to it by its customer

    (iii) 4-210(b): FIFO Rule - Funds first in r first out; therefore, if depositor has funds available & withdraws, bank not HDC for those $3) 3-303(a): Lien on Instrument

    (i) GenerallyA person who has a lien on an instrument by operation of law takes instrument for value (e.g.,bankers lien)(ii) Lien acquired by judicial process (attachment, garnishment, or execution)Does not constitute value

    4) 3-302(e): Lienholder or secured party takes instrument for value only to extent of amount owed on underlying debtC) For Antecedent ClaimTaken for value if Instrument issued or transferred as payment or, or security for, an antecedent claimD) 3-303(a): Negotiable Instrument or Irrevocable Commitment

    1) An instrument is taken for value if it is issued or transferred in exchange for a negotiable instrument or2) For the incurring of an irrevocable commitment to a 3P by the person taking the instrument

    E) GiftsGift of an instrument will never create HDC statute in the donee (no value given)IV) GOOD FAITH (GF)

    A) IntroductionGF is partially subjective & partially objectiveB) Subjective ElementHonesty in fact

    1) The particular holder must be honest in fact in the transaction2) Person is honest in fact if she honestly is unaware of claim or defense even though a reason_ person would have been

    C) 3-103(a)(4): Objective Element - Requires observance of reason_ commercial standards of fair dealing1) Conduct of the holder comported w/ industry or commercial standards applicable to the transactions, and

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    2) Those standards were reasonable standards intended to result in fair dealing

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    V) NOTICEA) Introduction

    1) 3-302(a)(2): Notice of Infirmity - Holder cant become HDC if it has notice of any infirmity in instrument or in underlying transaction2) If holder has noticeHolder is completely denied HDC status & takes subject to all claims, defenses, & claims in recoupment3) Effect of Subsequent NoticeOnce purchaser becomes HDC, notice subsequently obtained does not destroy its HDC status

    B) Manner of Obtaining Notice1) Actual Knowledge

    (i) Holder has actual knowledge of an infirmity when she is(ii) Subjectively aware of the existence of the claim, defense, or claim in recoupment

    2) Notification(i) 1-201(26): Person receives a notice or notification when it comes to her attention or when it is duly delivered(ii) 3-302(a)(2)(iii): Effective Notification

    (a) Notification is effective even if holder didnt actually read the notification & thereby acquire actual knowledge(b) However, notification must be received at such time & in such manner as to give a reason_ opportunity to act on it

    3) 1-201(25)(c): Reason to Know(i) Generally

    (a) Purchaser may also have notice of an infirmity if, from all the facts and circum known to him at the time in question,(b) He has reason to know of the infirmity

    (ii) Duty to Inquire(a) GenerallyIf instrument appears 2b negotiable in form & regular on its face, holder has no duty to inquire into defenses(b) Duty to Inquire Test

    (i) Whether a reason_ person, considering all the facts & circum known to holder, would have further investigated and(ii) Thereby discovered existence of the claim, defense, or claim in recoupment

    (c) Suspicious Circumstances(i) Holder must investigate if suspicious circum indicate that some infirmity exists in instrument or underlying transaction(ii) If it appears from facts & circum that reason_ businessman wud have found purchase suspicious

    C) Situation Involving Notice Issues1) Executory Promise(i) Knowledge that instrument was issued or negotiated in return for executory promise does not give a purchaser notice

    (ii) Purchaser does not have a duty to inquire as to whether promise has been performed(iii) Purchase has notice only if she has notice that a breach has already occurred

    2) Purchase at a Discount(i) Purchaser is not imputed w/ notice solely b/c her knowledge that the instrument was purchased at a substantial discount(ii) However, purchaser has a duty to inquire as to why the instrument is selling at such as l arge discount

    3) Close Connection Doctrine(i) Denies HDC Status

    (a) Where a close bus. association b/w payee & one who purchases instrument from him(b) Purchaser is said to be on notice of defenses that the payee has knowledge of

    (ii) Determining Close Connection(a) Is buyer-transferee alter ego of seller-transferor? Same officers, personnel, or location?(b) Who drafted original promissory note?(c) Is buyer-transferee mentioned in the note?(d) Does seller-transferor sell paper to other buyers, or is buyer-transferee the only market?(e) Did buyer-transferee get involved in transaction by which note was created (such as conducting a credit check)?(f) Did buyer-transferee have some knowledge of seller-transferors poor past performance of similar contracts?

    4) 3-307: Notice of Breach of Fiduciary DutyPurchaser deemed to have notice if(i) 3-307(b)(iii): Represented person makes a claim to the instrument(ii) 3-307(b)(ii): Taker knows that person w/ whom he is dealing is a fiduciary

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    (iii) 3 Situations Involving Notice of Breach of Fiduciary Duty(a) 3-307(b)(2): When instrument made payable to represented party or to fiduciary as such

    (i) Taker has notice of a breach of fiduciary duty if instrument is taken in payment of, or as security fora. Debt known by taker to be personal debt of fiduciaryb. Taken in a transaction known to taker to be for personal benefit of the fiduciary, orc. Deposited in an account other than the fiduciary, as such, or of the represented person

    (ii) Holder not deemed to have notice unless it knows that value is being given for personal benefit of fiduciary(b) 3-307(b)(4): When instrument drawn or made by represented person or fiduciary as such directly to taker

    (i) Taker has notice of a breach of fiduciary duty if instrument is taken in payment of, or as security fora. Debt known by taker to be the personal debt of fiduciaryb. Taken in a transaction known to taker to be for personal benefit of the fiduciary, orc. Deposited in an account other than the fiduciary as such or of the represented person

    (ii) Holder not deemed to have notice unless it knows that the value is being given for the personal benefit of the fiduciary(c) 3-307(b)(3): When payable to fiduciary personally (e.g., tustees paying themselves out of a trust)

    (i) Taker has notice of a breach of fiduciary duty only if it has actual knowledge of breach(ii) Holder must therefore know not only that the value is being applied for personal benefit of the fiduciary, but(iii) Also that such application is a breach of her fiduciary duty

    5) 3-302(a)(1): Notice that instrument is forged, altered, or otherwise irregular(i) Purchaser cant be HDC if instrument, when issued or negotiated to holderbears such apparent evd of forgery, alteration, or(ii)

    is otherwise so irregular or incomplete that instrument on its face is so suspect that reason_ person would question its authenticity

    6) Notice that instrument is overdue or has been dishonored(i) 3-302(a)(2)(iii): Purchaser denied HDC status if he has notice than an instrument is overdue or has been dishonored(ii) When Instrument is Overdue

    (a) 3-304(a)(1)-(2): ChecksEarlier of, day after day demand for payment is duly made or 90 days after its stated date(b) 3-304(a)(1) & (3): Other demand instrumentsThey become overdue at the earlier

    (i) The date after the day demand for payment is duly made, or(ii) When the instrument has been outstanding for a period of time after its date that is unreason_ long

    (c) 3-304(b)(1): When date accelerated(i) Once an instrument has been accelerated causing the entire principal amount to be immediately due(ii) The instrument becomes overdue on the day after the accelerated due date

    (d) 3-304(b)(1): Payable in Installments(i) Absent acceleration, instrument payable in installments becomes overdue upon default for nonpayment of installment(ii) Instrument remains overdue until the default is cured

    (e) 3-304(b)(2): Not payable in installments - Absent acceleration, instru not payable in install overdue on day after its due date(f) 3-304(c): Interest -Not overdue is theres only a default in interest (as long as there is no default in payment of principal)

    7) 3-302: Notice of Discharge(i) Notice of the discharge of a party, other than a discharge in an insolvency proceeding, is not notice of a defense(ii) However, a holder who has notice of a discharge will take subject to any discharge of which he has notice(iii) Taker denied HDC if he knows that the maker, drawer, or acceptor has been discharged in insolvency proceedings

    VI) DEFENSES, CLAIMS TO THE INSTRUMENT, CLAIMS IN RECOUPMENT & DISCHARGESA) 3-308(b): Recovery from Obligor

    1) Any holder or person w/ rights of a holder (i.e., person entitled to enforce an instrument)2) May recover from obligor in absence of a claim to the instrument, defense, claim in recoupment, or discharge

    B) Real Defenses - Defenses that all Holders (including HDC) takes Subject to1) 3-305(a)(3) & (b): Defenses & claims in recoupment assertible against holder itself arising from transaction instrument was issued2) 3-305(a)(1)(i): Infancy - To the extent that the obligors infancy is a defense to a simple contract

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    3) 3-305(a)(1)(ii): Incapacity, duress, or illegality(i) Legal incapacity (e.g., mental incompetency or corp statutory incapacity to execute instruments exceeding its corp powers)(ii) Duress, or illegality (e.g., use of instrument to pay a gambling debt)(iii) To extent that such defenses render obligation of obligor a nullity (only if statutes or case law makes transaction void)

    4) 3-305(a)(1)(iii): Fraud in the Factum(i) Obligor induced by fraud to sign instrument

    (a) W/ neither knowledge, nor reason_ opportunity to learn,(b) Of instruments character or its essential terms

    (ii) Example of Fraud in Fact - Maker who is tricked into signing note in belief that it is merely receipt or some other doc(iii) Instruments Character

    (a) Obligor is ignorant of instruments character if he is under impression that(b) He is signing something other than a promise to pay money

    (iv) Essential Terms(a) Obligor ignorant of the instruments essential terms if he believes, for example,(b) That he is signing a note payable in 2 years when, in fact, it is payable on demand

    (v) Except - Knew or Should have Known(a) Obligor cant raise defense if he, under the circum, knew or should have discovered character or essential terms(b) If obligor had the opportunity to, but did not, read the instrument, the defense will not be available

    5) 3-305(a)(1)(iv): Discharge in insolvency proceedingDischarge in insolvency proceedings is a defense against any personC) Personal Defenses - Defenses that only Non-HDC takes Subject to

    1) Introduction(i) Generally - Following defenses are available only against person who do not have the rights of HDC(ii) 3-305(b): All these defenses are cut off when the instrument is acquired by a HDC

    2) 3-305(a)(2): Ordinary Defenses(i) A person not having the rights of HDC takes subject to virtually any defenses including(ii) Any defense that would be available if the obligation rose out of an ordinary contract

    3) 3-305(a)(3): Claims in Recoupment - Claim in recoupment is assertible against any person not having rights as HDC4) 3-306: Claims to the Instrument(i) Person who lacks HDC takes instrument subject to all valid claims of property or possessory interest in instrument or its proceeds

    (ii) Including a claim to rescind a negotiation & to recover the instrument or its proceedsD) Discharges (other than Discharges in Bankruptcy)

    1) 3-601(b): Introduction(i) Discharge effective against any person except HDC who was w/o notice of discharge when she took instrument(ii) However, HDC does have notice if payments are made directly to HDC

    2) 3-602(a): Discharge by Payment(i) Instrument discharged to extent that payment is made by or on behalf of party obliged to pay it & to person entitled to enforce it(ii) Payment must be made to person entitled to enforce instrument for discharge

    3) 3-604(a): Discharge by cancellation or renunciation(i) A person entitled to enforce an instrument may, w/o consideration, discharge any party to the instrument(ii) In any manner apparent on the face of the instrument or the indorsement by

    (a) Renouncing its rights in a signed writing or surrender of the instrument to the party to be discharged(b) Unless cancellation, renunciation, or surrender is ineffective if its unintentional, unauthorized, or procured by fraud/mistake

    4) 3-601(a): Discharge of simple contract(i) Party is discharged from liability on instrument to another party by any act or agreement w/ such party(ii) That would discharge a simple contract for the payment of money

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    VII)TRANSFER OF INSTRUMENT & SHELTER RULEA) 3-203(b): Rights of TransfereeWhen instrument is transferred, transfer vests in transferee all rights of his transferorB) 3-203(c): Right to Transferors Indorsement

    1) If transferee does not become holder of instrument b/c transferor failed to supply a necessary indorsement, and2) If transfer is for value, transferee has the specifically enforceable right to obtain transferors unqualified indorsement

    C) The Shelter Rule1) 3-203(b): Shelter Rule

    (i) Transferee may acquire rights of HDC through transfer even if transferee does not himself qualify as HDC(ii) E.g., if a HDC gives instrument as a gift (no value) transferee still acquires the rights of a HDC

    2) 3-305(b): Includes right to take free of all claims, defenses, & claims in recoupment to same extent as his transferor/HDC3) Subsequent Transferees

    (i) Subsequent transferee are also is entitled to any rights transferor inherited from his own transferor, but(ii) Subject to any claim of ownership, recoupment, or defense to which his transferor/HDC would take subject

    4) 3-203(b): Except(i) No transferee who has engaged in any fraud or illegality affecting the instrument can acquire the rights of HDC(ii) Through a transfer directly or indirectly from a HDC

    D)

    3-207: Reacquisition by Prior Holder1) On reacquisition of instrument, reacquirer is given right to cancel any indorsement not necessary to its chain of title2) Thereby enabling it to become holder of instrument & have right to further negotiate the instrument3) Indorsers are Discharged

    (i) Reacquirers cancellation of intervening indorsements discharges any indorser whose indorsement has been cancellation(ii) By virtue of the cancellation, subsequent purchasers are deemed to have notice of the canceled indorsers discharge

    VIII) DEFENSES & CLAIMS TO BANK CHECKSA) Right of Bank to Raise Defenses

    1) Obligated bank retains same right as drawer of check to raise defenses or 3P claims2) However, certain penalties are assessed against bank if it wrongfully refuses to pay a bank check

    B) 3-411(b): Penalty for Wrongfully Refusing to Pay1) Obligated bank that wrongfully refuses to pay bank check is liable to person asserting right to enforce check for any2) Expenses, including atty fees and loss of interest resulting from the nonpayment, and3) Consequential damages if obligated bank refuses to pay check after receiving notice of particular circum giving rise to them

    C) 3-411(c): Banks defenses to liability for expenses and consequential damages 1) Obligated bank suspends payments (i.e., is insolvent)2) Obligated bank has reason_ grounds to believe that banks claim or defense is availabl e against person entitled to enforce instrument

    (i) If bank has a defense of its own arising out of issuance of the bank check and(a) Reason_ believes that this defense would be assertible against the holder(b) Bank not liable for either consequential damages or expenses, whether or not it is successful in raising the defense(c) But is liable for holders loss of interest on those funds

    (ii) Obligated bank receives no protection if it unsuccessfully attempts to raise 3P claim to the instrument3) Obligated bank has a reason_ doubt that the person is entitled to payment or4) Obligated bank is prohibited by law from making payment

    NATURE OF LIABILITY ON INSTRUMENTS

    I) LIABILITY OF MAKER/ISSUER, DRAWER, DRAWEE AND INDORSERA) Introduction

    1) A party may sign a negotiable instrument in various capacities2) Maker of a note or issuer ofcashers check(the bank), drawer of a draft, and an indorser

    B) 3-412: Obligation of Maker/Issuer1) Generally

    (i) Maker of a promissory note & bank issuing a cashiers check are absolutely liable on the instrument (ii) Obligation is owned to a person entitled to enforce the instrument or to an indorser who paid for the instrument

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    2) More than 1 Maker - Presumed to be j&s liable, but they have a right to contribution from their co-makersC) 3-414: Obligation of Drawer

    1) 3-414(b): Dishonor by drawee must occur b/f a drawer is liable on a draft; liability as a drawer is not conditioned on notice of dishonor2) 3-414(c): Drawer is completely discharged when a draft is accepted by a bank

    D) 3-408: Obligation of Drawee1) A check or other draft does not itself operate as an assignment of any of the drawers funds held by the drawee 2) Drawee is not liable to the holder UNLESS the drawee accepts the draft

    E) 3-415: Obligation of Indorser1) 3-204(a): When is a signature an indorsement - Signature is deemed to be an indorsement regardless of signers intent unless

    (i) Accompanying words, terms of the instrument, place of the signature, or other circum unambiguously indicate(ii) That the signature is made for a purpose other than as an indorsement

    2) When Indorser is Liable(i) 3-415(a): Indorser not liable until instrument has been dishonored and, unless notice is excused, notice of dishonor is given(ii) 3-415(a): Indorsers obligation to pay is owed to person who entitled to enforce instrument or to subsequent indorser who pays it(iii) 3-415(b): However, an indorser may disclaim liability on his indorsers contract by indorsing instrument w/o recourse

    3) When Indorsers Liability is Discharged(i) 3-415(c): If notice of dishonor of instrument is required by 3-503 & notice not given to indorser(ii) 3-415(d): If a draft is accepted by a bank after an indorsement is made(iii) 3-415(e): If check is not presented for payment or given to depositary bank for collection w/i 30 days after day indorsement made

    II) PRESENTMENT, DISHONOR & NOTICE OF DISHONORA) Introduction

    1) Dishonor of instrument is a condition to liability of both drawer & indorser2) Instrument is dishonored when drawee or maker refuses, or fails, to pays instrument on a proper presentment for payment3) When presentment is excused, dishonor occurs only if the instrument is not duly paid

    B) Presentment1) 3-501(a): Presentment

    (i) Presentment is a demand for payment made by, or on behalf of, the person entitled to enforce the instrument(ii) Presentment for payment must be made to drawee or to a party obliged to pay the instrument

    2) 3-501(b)(1): Manner of Presentment - Presentment may be made by commercially reason_ means: orally, writing, or by elect comm.3) 3-501(b)(1): Where presentment can be made (except Reg CC determines where check may be presented)

    (i) In absence of Fed Reg, clearinghouse rule, or contrary agreement,(ii) Presentment made wherever drawee/maker can be found even if instrument specifies a particular place of payment(iii) If party expected to pay cant be found, instrument may be presented at its place of payment

    4) 3-501(b)(2): Rights of drawer to required ID (w/o dishonoring instrument)(i) Once a demand for payment is made, party to whom presentment is made has right to demand, w/o dishonoring instrument(ii) That presenter exhibit instrument, show reason_ ID, & give a signed receipt on instrument or surrender it on full payment

    5) Effect of Delay in Presentment(i) 4-415(e): Indorsers Liability

    (a) Indorser of a check is discharged from indorsers liability if check is not presented for payment or(b) Given to a depositary bank for collection w/i 30 days after her indorsement

    (ii) 3-414(f): Drawer Liability(a) Drawer of check is discharged only when check is not presented for payment or given to a depositary bank for collection(b) W/i 30 days of checks stated date & only to extent that she is deprived of funds maintained w/ drawee bank(c) B/c drawee bank has suspended payment after expiration of the 30 day period and failed to make payment on the check

    6) When Presentment Excused(i) Generally - When presentment or delay in presentment is excused, presentment treated as having been made w/i prescribed time(ii) When Presentment is Excused

    (a) 3-504(a)(i): Excused if it cant be made by the exercise of reason_ diligence (b) 3-504(a)(v): Excused as to drawer when drawer has instructed drawee not to pay draft (doesnt apply to indorser)(c) 3-504(a)(iv): Excused when drawer or indorser has no reason to expect or right to require that instrument be paid(d) 3-504(a)(iii): When presentment waived under terms of instrument, excused as to drawer or indorser

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    (e) 3-504(a)(ii): Excused when maker repudiates obligation to pay the instrument or is in insolvency proceedings or has diedC) Dishonor

    1) 3-502(a)(1): Demand NoteDishonored if the note is not paid on the day of presentment2) 3-502(a)(3): Note not payable on DemandDishonored if it is not paid the day it becomes payable (no presentment required)3) 3-502(b)(1): Dishonor of Check (other than for immediate payment over counter)

    (i) Return Check or NoticePayor bank returns check or sends notice of dishonor/nonpayment in compliance w/ 4-301 & 4-302(ii) Payor Bank becomes Accountable - Payor bank fails to promptly return check (or send notice of nonpayment) & fails to settle

    4) 3-502(b)(2): Dishonor of Demand Draft (includes checks presented over the counter) - Not paid on the day of presentment5) Dishonor of Draft not Payable on Demand

    (i) 3-502(b)(3)(i): If draft is presented for payment & its not paid on day it is due or day of presentment, whichever is later(ii) 3-502(c): However, payment may be delayed w/o dishonor until close of drawees 3 bus. day following day payment required

    D) Notice of Dishonor1) Introduction

    (i) 3-415(c): Unless excused, a delay in giving notice of dishonor discharges indorser(ii) 3-503: However, delay in dishonor does not discharge a drawer

    2)

    3-503(b): Manner - Notice of dishonor may be given by any commercially reason_ means: oral, electronic, phone, or in writing

    3) 3-503(c): Time w/i which notice of dishonor must be given(i) Instrument not taken for collection30 days

    (a) When an instrument is not taken by a collecting bank for collection(b) Notice of dishonor must be given w/i 30 days after day on which the instrument is dishonored

    (ii) Instrument is taken for collectionMidnight rule(a) When an instrument is taken by a collecting bank for collection(b) Collecting bank must give notice of dishonor b/f midnight of next banking day following banking day(c) On which the bank receives notice of dishonor

    (iii) Persons, other than collecting bank30 days(a) Persons, other than collecting bank must give notice of dishonor w/i 30 days following the day(b) On which the person receives notice of dishonor

    4) 3-504(c): When delay in notice of dishonor is excused(i) A delay in giving notice of dishonor is excused if delay is caused by circum beyond control of person and(ii) Person giving notice exercises reason_ diligence after cause of delay ceases to operate

    5) 3-504(b)(ii): When notice of dishonor excusedWhenever it is waived in the instrument or otherwiseIII) SURETIES & ACCOMMODATION PARTIES

    A) What is an Accommodation Party?1) 3-419(a): Accommodation Party

    (i) If an instrument is issued for value given for benefit of a party to the instrument (accommodated party) and(ii) Another party to the instrument (accommodation party) signs instrument for purpose of incurring liability on it(iii) W/o being a direct bene of value given for the instrument, instrument is signed by accommodation party for accommodation

    2) 3-419(a): Person is accommodation party only when both the surety & debtor sign the same instrument3) 3-419(d): Guaranteeing Collection v. Guaranteeing Payment

    (i) Introduction(a) When collection guaranteed or equivalent words are added to a signature that unambiguously indicate(b) An intention to guarantee collection only, signer undertakes only a guaranty of collection (not of payment)

    (ii) Result(a) A guarantor of collection is obliged to pay amount due only if holder cant collect from the accommodated party(b) If guarantying payment, creditor may proceed directly against guarantor w/o first proceeding against accommodated party

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    4) 3-419(b): Accommodation party liable in capacity in which she signs (i.e., indorser, maker, acceptor, or drawer)

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    B) Relationship b/w Accommodation & Accommodated parties1) 3-419(e): No liability to accommodated party

    (i) An accommodation party is not liable on the instrument to the party accommodated, nor is he liable for(ii) Contribution to the accommodated party in the event of payment by the accommodated party

    2) 3-419(e): Right of Subrogation/Reimbursement(i) Accommodation party, on full payment of the instrument, is entitled to enforce the instrument against the party accommodated(ii) Accommodation party obtains all the rights of the party he paid both on the instrument and to any collateral

    C) Relationship b/w Accommodation Parties1) Generally

    (i) In absence of agreement to contrary, 2 parties who sign in same capacity in accommodation for another party are co-sureties(ii) Co-sureties are jointly and severally liable

    2) 3-116(b): Right of Contribution - One who pays disproportional share of obligation has right of contribution from other co-surety3) Defenses Available to Accommodation Party

    (i) 3-419: May not raise lack of consideration(a) As long as instrument was issued for value for the benefit of the accommodated party(b) Accommodation party may not raise defense of lack of consideration even though he has, in fact, received no benefit

    (ii)

    3-305(d): Right of accommodation party to raise accommodated partys defenses(a) Accommodation party pay raise any of accommodated partys defenses or claims in recoupment (b) However, accommodation party may not raise, as a defense to his own obligation to pay(c) Accommodated partys discharge in insolvency proceedings, infancy, or lack of legal capacity

    D) Discharge of Indorsers & Accommodation Parties1) 3-605(a): Right to a discharge under 3-605 is limited to accommodation parties & indorsers2) 3-605(h): To be discharged person entitled to enforce instrument must have knowledge or notice of the accommodation status

    (i) That the party has signed as guarantor, surety, or accommodation party, or(ii) From fact that signature is an anomalous indorsement that is presumed to be made in capacity of accommodation party

    3) 3-605(b): Release of Principal Debtor(i) Release of principal debtor (discharge by cancellation or renunciation) does not discharge accommodation party or indorser(ii) Notwithstanding release of principal debtor, accommodation party or indorser retains both right of recourse on the instrument and(iii) Right of reimbursement against the principal debtor

    4) If there is notice of Accommodation & then Extension or Modification(i) 3-605(c) & (d): Extension & Modifications

    (a) An accommodation party or indorser, having a right of recourse against principal debtor, may be entitled to discharged(b) If person entitled to enforce instrument materially modifies obligation of, or grants & extension to principal debtor

    (ii) 3-605(c) & (d): Extent of Discharge(a) Extension or modification granted to principal debtor only discharges accommodation party or indorser to extent that(b) It causes accommodation party or indorser a loss w/ respect to his right of recourse against the principal debtor

    (iii) 3-605(i): Consent & WaiverAny party who consent to a modification or extension is not discharged (consent may be implied)5) Impairment of Collateral & Discharge

    (i) 3-605(e): Generally - If obligation to pay instrument is secured by interest in collateral and(a) Person entitled to enforce instrument impairs value of the collateral(b) Obligation of indorser/accommodation party having right of recourse against obligor is discharged to extent of impairment

    (ii) 3-609(h): To be discharged person entitled to enforce instrument must have knowledge or notice of accommodation(a) An accommodation party or indorser is discharged under 3-605(e) only if person entitled to enforce the instrument(b) Knows of the accommodation or has notice of the accommodation under 3-419(c)

    (iii) 3-605(f): Discharge of Co-Obligors(a) If a person entitled to enforce instrument impairs value of interest in the collateral(b) Obligation of any party who is jointly & severally liable w/ respect to secured obligation is discharged

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    (c) To extent that impairment causes party asserting discharge to pay more than he would have otherwise(iv) 3-605(g): When is Collateral Impair

    (a) Generally(i) Impairment of collateral occurs when some unjustifiable act or omission(ii) On part of person entitled to enforce instrument causes collateral no long to be available to satisfy the instrument

    (b) Duty of Reasonable Care(i) Unless otherwise agreed, if collateral is property in possession of person entitled to enforce the instrument(ii) That person has duty to use reason_ care in its custody & possession of the collateral

    (c) Acts Constituting ImpairmentNonExclusive List(i) Failure to ProtectFailure to obtain or maintain perfection or recordation of the interest in collateral(ii) Release of CollateralRelease of collateral w/o substitution of collateral of equal value(iii) Duty to PreserveFailure to perform a duty to preserve the value of the collateral(iv) Improper DisposalFailure to comply w/ an applicable law in disposing of collateral

    (v) 3-605(i): Consent to Impairment of CollateralParty is denied discharge if he has consented to act constituting the impairmentIV) LIABILITY OF AGENTS, PRINCIPALS, AND CO-OBLIGORS

    A) Liability of Represented Person1) 3-402(a): Generally - Represented person is liable on instrument if representative is authorized to sign for represented person2) 3-402(a): In name of represented person - Rep may sign name of represented person either w/ or w/o, adding his own name or capacity3)

    3-401(a): Undisclosed Principal - Undisclosed principal is liable on instrument even though his signature or identify isnt on it

    B) Liability of Representative1) 3-403(a): Unauthorized Signature

    (i) If rep is not authorized to sign for represented person or exceeds his authority in making the signature(ii) The signature will operate as the signature of the representative personally

    2) Authorized Signatures(i) 3-401(a): Agent not personally liable if he signs in the represented persons name only(ii) 3-402(b)(1): Unambiguously Signs in Representative Capacity (representative capacity & representeds name)

    (a) An authorized rep who signs his own name to instrument is not personally liable(b) When rep signs his name together w/ his representative capacity & the represented persons name

    (iii) Ambiguous Signature(a) 3-402(b): Rep liability to HDC - When rep does not make it clear that he is signing on behalf of the represented person

    (i) Rep is personally liable to HDC who takes instrument w/o notice(ii) That rep was not intended by original parties to the instrument to be personally liable

    (b) 3-402(b)(2): As to other persons(i) As to any other person, the rep is liable on the instrument(ii) Unless he proves an actual agreement, whether express or implied, w/ payee that he was not personally liable

    (c) 3-402(c): Check Exception(i) Authorized rep who signs as drawer on check payable from account of represented person w/o indicating rep status(ii) Is not liable as long as represented person is identified somewhere on the check

    C) Liability of Persons Signing in the Same Capacity in the Same Transaction1) 3-116(a): Generally

    (i) Except as otherwise specified in the instrument, 2 or more persons who sign an instrument as makers, acceptors, or drawers(ii) Are jointly and severally liable in the capacity in which they sign

    2) Right of Contribution(i) 3-116(b): Unless parties otherwise agree, a party having j&s liability is entitled to contribution from his j&s obligors(ii) 3-116(c): If party having j&s liability is discharged by holder, his j&s obligors still have right to receive contribution from him

    3) 3-116(a): Liability of Indorsers(i) Subject to certain exceptions, indorsers are not jointly & severally liable(ii) Indorsers who are copayees and anomalous indorsers are jointly and severally liable

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    (iii) Unless 1 payee is accommodating the other payee or they agree to be liable otherwise than as jointly and severally

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    V) EFFECT OF TAKING INSTRUMENT ON THE UNDERLYING OBLIGATIONA) Ordinary Instruments

    1) Obligation Suspended(i) 3-310(b): Generally

    (a) Unless parties otherwise agree, when person entitled to enforce instrument takes ordinary instrument 4 underlying obligation(b) Obligation is suspended to same extent that obligation would be discharged if payment had been made in money

    (ii) 3-310(b)(1): Checks(a) When an uncertified check is taken, suspension of obligation continues until check is dishonored, paid, or certified(b) If check is paid or certified, obligation is discharged to extent of the amount of the check

    (iii) 3-310(b)(2): Notes(a) When note is taken, suspension of obligation continues until dishonor or payment of the note(b) The obligation is discharged to the extent that the note is paid

    2) Effect of Dishonor(i) 3-310(b)(3): Person entitled to enforce is the same person the underlying obligation is owed

    (a) When person entitled to the instrument is also the person who the underlying obligation is owed(b) The person may enforce the instrument or obligation once the instrument is dishonored

    (ii)

    3-310(b)(4): Person entitled to enforce is not the same person the underlying obligation is owed(a) When person entitled to enforce the instrument is not the person to whom the underlying obligation is owed(b) The person entitled to enforce the instrument may enforce only the instrument

    B) Bank Checks1) 3-310(a) & (c): Discharge of obligation

    (i) Unless otherwise agreed, if a bank check (or any other instrument on which a bank is a maker or acceptor)(ii) Is taken for an obligation, the obligation is discharged to the same extent as had payment been made in cash

    2) 3-310(a): Debtor Indorses Instrument(i) If the debtor indorses the instrument, although the underlying obligation is discharged(ii) His liability as an indorser on the instrument is not discharged

    VI) ENFORCEMENT OF LOST, DESTROYED, OR STOLEN INSTRUMENTSA) Ordinary Instruments

    1) 3-309(b): Generally - Person entitled to enforce instrument may maintain an action as if he had produced the instrument2) 3-309(b): What the claimant must prove

    (i) He was either holder or had rights of a holder at the time he lost possession(ii) Loss of possession was not the result of his transfer of the instrument or of a lawful seizure of the instrument(iii) Terms of the instrument include any terms necessary to make the instrument negotiable(iv) He cant reason_ obtain possession of instrument: destroyed, lost, in wrongful possession of unknown person

    B) Bank Checks1) 3-312(a)(3)(iii)

    (i) Only drawer or payee of certified check, & remitter or payee of a tellers or cashers check may proceed under 3 -312(ii) Indorsee of bank check is denied advantages of 3-312 & must proceed as if he were suing on an ordinary lost or stolen instrumen

    2) 3-312(b): Asserting Claim - Claimant must send comm.. to issuing bank asserting claim accompanied by a declaration of loss3) When Claim is Effective

    (i) 3-312(b)(2): Claim is not valid for 90 days; during 90-day period, bank may pay person entitled to enforce the check(ii) 3-312(b)(4): After the 90-day period, issuing bank becomes liable to claimant

    4) Bank discharge by payment to Claimant(i) 3-312(b)(4): Payment to claimant discharges banks liability to a person entitled to enforce the check(ii) 3-312(b): When applies to a HDC

    (a) If a HDC presents bank check after bank pays claimant, issuing bank may pay HDC & claimant obliged to repay bank(b) If bank refuses to pay the HDC, claimant must pay the holder

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    FORGERY, ALTERATION, AND OTHER FRAUDULENT ACTIVITY

    I) UNAUTHORIZED SIGNATURESA) 3-403(a): Introduction

    1) Subject to certain exceptions, unauthorized signature is ineffective as signature of person whose name is signed2) Unauthorized signature is effective as signature of unauthorized signer in favor of one who in GF pays instrument or takes it for value

    B) 2 Consequences of Unauthorized Signature1) 3-401(a): Person whose signature is signed is not liable on the instrument2) 3-201(b): If unauthorized signature is indorsement in chain of title, no person following unauthorized indorsement can be a holder

    C) Transfer Warranties1) 4-204(a)(1) & 3-416(a)(1): Transferor warrants that transferor is person entitled to enforce the instrument, and2) 4-204(a)(2) & 3-416(a)(2): That all signatures are authentic & authorized

    D) Presentment Warranties1) 4-208(a); 3-417(a): Payor Bank on a Check (and any drawee of an unaccepted draft) gets 3 warranties

    (i) That warrantor is entitled to enforce draft or authorized to obtain payment or acceptance on behalf of person entitled(ii) The warrantor has no knowledge that signature of drawer is unauthorized, and(iii) The draft has not been altered

    2)

    4-208(c); 3-417(c): Defenses against presentment warrantyDrawers negligence(i) If payor bank could have asserted drawers negligence against the drawer(ii) Person against whom payor bank is bringing breach of presentment warranty action(iii) May assert drawers negligence as a defense to payor banks action

    E) Recovery by Payor of Payment Made by Mistake1) Introduction

    (i) Even absent a presentment warranty, payor bank may be able to recover mistaken payment from its recipient under 3-418(ii) Drawee can revoke its acceptance in identical circumstances that it could recover payment had payment been made instead

    2) Typical Mistakes: Payment over forged drawers signature, check drawn on insufficient fun ds, or over valid stop payment order3) 3-418(c): Protected Persons - Payment may not be recovered from 2 classes of protected persons

    (i) Any person who takes the instrument in GF and for value, or(ii) Any person who has in GF changed position in reliance on the payment

    4) 3-418(d): Consequences when payment is recovered(i) In the event that payment is recovered, instrument is treated as having been dishonored(ii) Person from whom payment is recovered can enforce the instrument against the drawer, maker, or indorser

    F) Conversion1) 3-420(a): Generally - Instrument is converted if

    (i) It is taken by transfer, other than by negotiation, from person not entitled to enforce instrument(ii) If payor bank or other payor makes payment w/ respect to instrument to person not entitled to enforce or receive payment(iii) If indorsement in chain of title is unauthorized or missing(iv) Doesnt apply to instruments payable to bearer since they are negotiated by transfer of possession alone (no conversion possi ble)

    2) 3-420(c): When taking instrument by agent is conversion(i) Person other than depositary bank

    (a) Person who holds instrument solely as a rep of another person (other than depositary bank) who has, in GF(b) Dealt w/ an instrument or its proceeds on behalf on one who was not the person entitled to enforce the instrument(c) Is not liable in conversion or otherwise beyond the amount of any proceeds that it has not paid out

    (ii) Depositary Bank - Depositary bank is liable for conversion whether or not it acts n GF or retains any proceeds from the check3) 3-420(a): Who may bring an action for conversion

    (i) Proper party to bring action for conversion is person who, b/f theft or loss, was person entitled to enforce instrument(ii) Payee may bring action only if instrument has been delivered to her(iii) Action for conversion may not be brought by drawer, acceptor, or other issuer of the instrument

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    G) Application of Rules1) Signature of Maker or Acceptor Unauthorized

    (i) 3-401(a)(a) In absence of estoppel, ratification, or negligence, maker or acceptor is not liable on an instrument on which his signature(b) Is forged or unauthorized b/c he did not sign the instrument

    (ii) 3-418(a) If the maker or acceptor makes payment, they will suffer loss if person to whom payment is make is protected under 3 -418(b) B/c neither maker nor acceptor is given a presentment warranty as to the authenticity of his own signature

    2) Signature of Drawer is Unauthorized(i) 4-208(a)(3); 3-417(a)(3): Drawee Makes Payment & Effect of Presentment Warranty

    (a) When drawee makes payment of check or other draft w/ forged signature of drawer, drawee will usually suffer the loss(b) Neither presenter nor prior transferors warrant to drawee that drawers signature is genuine (c) The only warranty they make is that they have no knowledge that drawers signature is unauthorized

    (ii) Not Properly Payable & Drawees Remedies(a) 4-401(a): Drawee or payor bank may not debit drawers account b/c draft is not properly payable (b) 3-418(c): Drawee can only recover mistaken payment from a person who is not a protected party, or(c) 3-420(a): Drawee may sue in conversion against a person not entitled to enforce the instrument or receive payment

    (iii)

    3-416(a)(2); 4-207(a)(2): Drawee Does not Make Payment; Effect of Transfer Warranty(a) If drawee does not make payment, loss will go back down chain of title to the first solvent party after the forger(b) Transfer warranty given by each transferor that all signatures are genuine & authorized passes loss down chain of title

    3) When Indorsement is Unauthorized(i) Allocation of Loss when Check not Delivered to Payee

    (a) 3-420(a): Payee(i) When check or other draft has not been delivered to payee, payee has no right to sue for conversion(ii) Payee, however, retains whatever rights she had against drawer on underlying obligation for which check was taken

    (b) 3-417: Drawer(i) Drawer has no right to sue depositary or other collecting bank for conversion, or for breach of presentment warranty(ii) Drawer has not suffered a loss b/c payor bank may not debit his account under 3-401(a) (not properly payable)

    (c) 3-201(b): If unauthorized sig is indorsement in chain of title, no person following unauthorized indorsement can be holder(d) 4-208(a)(1); 3-417(a)(1): Presentment Warranty

    (i) Payor bank may recover from presenting bank & prior transferors(ii) From breach of their presentment warranty that they are a person entitled to enforce the instrument

    (e) 4-207(a)(1): Transfer Warranty(i) Whether or not the check is paid, loss will flow back to the 1st solvent transferor following the forgery(ii) B/c each transferor warrants that it is a person entitled to enforce the instrument

    (ii) Allocation of Loss After Deliv