Chapter 25-30 BLAW 3311 - 001
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Date Created: 05/01/16
IV. Negotiable Instruments Law (uniform commercial code) a. Assignments (review) 1) Law of assignments is important for contract law and also important because if you don’t understand the law of assignment, you will not understand the law of negotiable instruments. 2) A>K<b (b performs services for a and a give B money) B has a contract right to C to collect the money making B the assignor and C the assignee. C has the right to the collect the money from A; A has a defense against B either failure of consideration or some form of duress or misrepresentation (innocent or fraud of the inducement), undue influence, mistake. Anything to make the contract voidable. i. Article 3 of UCC: four kinds of instruments: 1. Drafts (orders to pay) – three party instruments, where you have a drawer, drawee, payee. The drawer is ordering the drawee to pay money to a payee. 2. Checks (orders to pay) - is a specialized form of draft. What separate a check from a generic draft? Well, in a check, the drawee is the bank. 3. Certificate of deposit (promises to pay) 4. Promissory notes (promises to pay) a. A has a promissory note payable to B. B winds up transfer negotiation to C. C is now the holder. Why did A sign the note payable to B? Because there’s an underlining contract. i. First element: its negotiable inform ii. Second element: The holder of the instrument is called the holder in due course. 1. Rights consists of personal defenses: a. Failure to consents b. Misrepresentation c. Fraud in the inducement i. Lets say, A was belly aching, he was defrauded. C has presented the note to A for payment, and A wants to assert one or more of these defenses. So, C attorney bring a lawsuit against A. The evidence that A and his attorney wants to introduce on any of these defense is inadmissible. The defenses do not apply. Why? Because C’s lawsuit is on the note. And those defenses all apply to the underlying contract. A could have asserted those defenses against B; because B was an underlying contract but was not an underlying to that contract. C lawsuit is based on the note, and not the underlying contract. However, if C was the assignee of an assignment contract then these defenses do apply. d. Undue influence e. Most duress f. Mistake b. If C says to pay the note but A says he didn’t sign that note then there’s a real defense (if these two elements are present, the instrument is negotiable and the instrument is in the hands of the holder in due courses, will then the law of negotiable instruments applies.) i. Real defenses: 1. Forgery a. A says he never signed a note and never seen the note in his life, however, it does has his signature on it. That is forgery. 2. Material alteration a. Lets say A did sign the note, and when the time comes to pay it. A notice the decimal was moved over and A then points out that’s not what he signed for. 3) What if one of these elements is not present? Either the instrument is not negotiable or C is not a holder in due course, or maybe both are missing. Does that mean the instrument is no good? No, it just means that if one of these elements is missing we don’t apply the law of negotiable instruments; we default to the law of assignments. Meaning exposure to all the defenses. Law of negotiable instruments: if the instrument is negotiable and C is a holder in due course, that mean immunity from the personal defenses, if A’s attorney wanted to introduce evidence on any of these defenses, the evidence would be inadmissible. Once it is established that the instrument is negotiable and the matter of law, there are no fact issues, on whether the instrument is negotiable. Strictly on the matter of form. Chapter 25 – The function and creation of negotiable instruments b. Introduction to negotiable instruments – drafts, checks, certificates of deposit and promissory notes and their functions 1) Why do these instruments have these special treatments? Lets take an example, a check. To pay a bill, the check goes through a payee and once its received to the drawee (bank); the check might go through several hands. Same thing with promissory notes. These instruments are substitutes for cash. c. Requirements for negotiability (sec. 3-104) 1) In writing and signed i. No such thing as an oral instrument. 2) Unconditional promise or order to pay i. If it is a CD or promissory note, that is a promise to pay. Checks and drafts are order to pay. Unconditional means that it is absolutely payable. The note should not say, pay to Billy Bubba Hawkins IF. 3) Sum certain in money and no other requirement for discharge i. Has to be payable in money, if a note say I promise to pay Billy bubba $5000 or it equivalent in peace court. That would be no negotiable because the maker in the note would have the options of discharging the note in some other way than the payment of the money. Well the maker of the note or if the drawee with the check or draft has the option of doing that then the instrument is not negotiable. Now it goes without saying that the holder of the instrument always has the option of accepting something. Sum certain in money, meaning let’s say Billy bubba promise to pay a reasonable amount of money. What’s the reasonable amount? Well, that would be non negotiable. To have a sum certain, what that means is that you would have to be able to look at the face of the instrument and determine what amount is required to discharge at any given time. For example, lets say it’s a promissory note; maybe the maker of the note signed the note last year. Now, we are several months in the terms of the note. Can you look at the face of the note, presupposing that it is current, and be able to tell is when is the day to discharge it. 4) Payable on demand or at a definite time i. What’s a demand instrument? An instrument is one that is payable anytime the holder demands payment. Like a check is a demand instrument. Payable at a definite time, what if the instrument does not state a time? Well by default, its going to be payable when on demand. What if its not a demand instrument, then that means it has to be payable at a definite time. So, if the note recites that the maker of the note will pay Billy Bubba when the maker of the note gets the money. That is not payable at a definite time. Payable at a definite time means its payable on a specific date or before a date. 1. Acceleration clause- giving the holder the right to call the note. If the note was due on April 14, 2016 but the maker of the note was over due by two weeks then the holder has the right to accelerate it. The most prevalent was missing the pay statement. 5) Payable to order to bearer i. That means that there’s a name payee. What if there’s not a name payee, then it will have to payable to bearer (whoever has the note). Chapter 26 – transferability and holder in due course d. Holder 1) Holder in due course rule. Section 3-302 (a) of UCC. i. What it takes for a transferee to be a holder in due course: A>instrument<B>C (C is the holder in due course) 1. Pay in full value a. Has to give B something. 2. C has to take the instruments in good faith a. There are no red flags in which surrounds that instruments. 3. C has to take the instruments without notice that is it over due or dishonored or any defenses of the instrument. 2) Shelter provision. Section 3-203 (b) of UCC. i. The transfer of an instrument invests in the transferee whatever rights the transferor has in that instrument. And these rights can include in holder in due course. D can be a holder in due course if C has those rights. ii. D doesn’t meet the requirement for sec. 3-302(a). C would have to be the holder of due course in order for D to get those rights. If C weren’t a holder in dues course then D would have to meet the requirements of Sec. 3-302(A). Even D knows he bought the instruments to C, D knows that A is belly aching about B ripping him off. D can get the right of a holder in due course if C has those rights. e. Negotiation and endorsement (What does it take to transfer?) 1) Bearer paper i. Lets say you have a check and pays out to cash. What does it take to negotiate that instrument? All it takes is delivery only. Its possible to transfer paper by delivery only. Endorsement – the holder signs his/her name prior to delivery. 2) Order paper i. It is payable to a named payee, will then the negotiation is twice as hard, because there are two elements rather than one. You not only have to hurry delivery, you have to an endorsement. 3) Types of endorsement (where the holder, transferor, signs the name on the instrument prior to delivery) 1. What if the back of the instruments is full of endorsement that there is no room anymore and you have to do further negotiations? You attach a piece of paper to it to continue the endorsement. This piece of paper is called allonge. ii. Blank 1. Where the transferor turns the instrument over and signs his/her name on it. Lets say there’s note payable to B, when B exchange this instrument to C. lets say B endorses with a blank endorser, that’s he just signs his name. The instrument is in the hands of C, when B endorses that instrument with a blank endorsement in affect, what did B do to that paper? He made a bearer paper, because it’s possible for C to negotiate that instrument by delivery only. D may want C’s endorsement on there, and so D accepts negotiation by delivery only. C transfers that instrument to D. that’s a valid negotiation. iii. Special 1. Is distinguishable from a blank endorsement in that if say if B would negotiate to C and had put on their pay to C and then signed it. That would be a special endorsement. Which would mean C would have to endorse the instrument. iv. Restrictive 1. One, which in some way restrict or even prohibits further negotiation of the instrument. Most common form of restrictive endorsement is “for deposit only.” Does that form of restrictive endorsement prohibits further negotiation of the instrument? Lets say a check payable to you is drawn to bank of America. And you do your banking to J.P. Morgan Chase. So you take that check to your bank to deposit in your checking account, does that check have to be further negotiated? It has to go through several banks. v. Unqualified 1. Lets say that D is negotiated to E is under an unqualified neg. and E is negotiated to F and is under a unqualified neg. and F is negotiated to G is under a unqualified endorsement. What we need to do is distinguish between primary and secondary. Who is primarily liable? A, the maker of the note. What about on a draft or a check, who is primarily liable? The drawer or the drawee? Drawee. But the drawee liability is on the draft or check attaches when draft or check is drawn? No, when the drawee accepts the draft or check. So what is the nature of the drawer liability? Secondary liability. The drawer in drafting that check and signing it is engaging that the drawer would stand behind the instrument if the drawee does not accepts it or if the drawee defaults after accepting it. 2. The endorser is secondary liable and primary liable is default. 3. Unqualified – is not qualified a. When the endorser endorses an unqualified endorsement. If there’s a unqualified endorsement then the endorser is engaging to be a secondary liable in the event the party, who is primary liable default. The secondary liability is not attached unless that party’s signature appears on the instrument. So incase of a check or a draft, the drawer signature appears right? So the drawer is secondary liable. b. Lets say the note is in the hands of G now, and G presents it to A for final payment. And A default. G is going to get his attorney. The attorney is going to sue A, but who else is going to get an invitation? Anybody who is secondary liable. G is going to A, F, E, D, but not C because he didn’t sign it. However, they will sue B because he is secondary liable. vi. Qualified 1. Qualified – E transferred to F at 12% discount off the principal, if E qualifies his endorsement then that makes it more valuable, because he is not secondary liable. E is a holder of this note and there’s a $45,000 balance on the note. E offers to sell the paper to F at a 8% discount off the principal and E says “I will sell it to you with an 8% discount for a qualified endorsement.” F said he wants a bigger discount because it’s a “qualified endorsement” that it’s more valuable. F is secondary liable but E is not. 2. Who is primary liable? A. (The maker of the note). What is the nature of the drawer liable is secondary while the drawee is primary liable. Chapter 27- Liability, Defenses, and Discharge f. Liability on negotiability instruments (NOTE: Related to chapter 25 material) 1) Primary and secondary liability i. Primary – makers of notes and CD’s and acceptors of checks and drafts. ii. Secondary – drawers of drafts and checks and unqualified endorsers 2) Warranty liability of transferors (elements) i. Sec 3-416 – any time any of these transfers takes place that means it’s a sale of an asset. Deal with transfer warranties. It goes the same to a negotiable instrument. This Sec. deals with transfer negotiability. 1. Any transfer for consideration makes the transferor liable for warranties to the very least to the mediate transferee. So, C would make these transfers to D but only to D, he didn’t endorse the instrument. a. Warranties: i. Warrantor is entitled to the warranties, the transfer of instrument. ii. All signatures that the instruments are authentic and authorized 1. Lets say when G presents the instruments to A, for payment, A says that not his signature. A implying of forgery. iii. The instrument has not been altered. This would link to real defense for material alteration. Which goes to the instrument itself not to the underlying contract. iv. The instrument is not subject to a defense or claim in recoupment of any party, which can be asserted against the warrantor. 1. The transferor who receives consideration transfer this instrument is warranting no defense. The warranty amounts to no defense make the seller a holder in due course. v. The warrantor has no knowledge of any insolvencies proceeding commence to the respect of the maker or acceptor in a case of an unaccepted draft to the drawer. 3) Presentment warranties g. Defenses 1) Universal or real defenses i. Sec 3-305: 1. Sub sec. A- the right to enforce the obligation of a party any instrument is subject to the following… a. A defense of an obligor based on infancies to the defense it is a defense to a simple commerce. b. Duress lack of legal capacity in legality of the transaction, which under other law nullifies the obligation of the obligor. i. “Under other law” meaning contract law ii. If it nullifies the obligations that would be a void contract. c. Fraud that induce the obligor to sign with neither knowledge nor legal opportunity to learn its character or its essential returns. i. What kind of fraud? Execution which makes it void d. Discharge of the obligor in insolvencies proceedings i. Bankruptcies 2) Personal defenses i. Failure of consideration – voidable ii. Minority results in a voidable contract iii. Look at outline h. Federal Trade Commission Rule (“Rule 433”) 1) 1979, say you a have a seller and a consumer of a product or service. The consumer would sign a note payable to the seller. And the seller would negotiate the note to the finance company. What if the product was defective or misrepresented or fraudulently sold? The consumer has a belly ache about it and tell the finance company would say stop. The finance company would say you have taken that up with the seller and not the finance company because they are a holder in due course. Back then consumers were constantly were getting ripped off and this rule was created for that reason. Caveat emptor – let the buyer beware. i. Discharge Chapter 28 j. Checks k. The bank-customer relationship l. Honoring checks 1) Overdrafts 2) Postdated checks 3) Stale checks 4) Death or incompetence of a customer 5) Stop-payment orders 6) Forged signatures on checks 7) Forged endorsement on checks 8) Altered checks m. Accepting deposits 1) Availability schedule for deposited checks 2) Interest bearing accounts 3) The collection process n. Electronic fund transfers 1) Types of EFT systems 2) Consumer fund transfers i. Unauthorized EFTs ii. Error resolution and damages o. E-money and online banking p. The Uniform Money Services Business Act Chapter 30 – Secured Transaction v. Secured transaction in personal property a. Overview a. A secured note as oppose to an unsecured note. Which is a secured by some form of collateral in a form of personal property. Secured transaction is in the form of an article 9 UCC transactions. Collateral would mean tangible or intangible personal property. Ex. Boat vehicle jewelry equipment/stock bonds or accounts receivable. b. Creating a security interest a. Attachment i. When creditors security interest in the collateral attaches will occur at either one of two times and whichever occurs is last. The creditors security interest and the collateral will attach to either upon the making of the security agreement itself or when the debtor acquires an interest in the collateral whichever occurs last. If the debtor already owns the collateral at the time the security agreement is made, well then the making of the security agreement occurs last. So then the creditors of the security interest will attach when that agreement is made. How could it be otherwise? What if these long proceeds represented by this promissory note the loan from the creditor to the debtor is for purpose for the debtor purchasing the collateral. That means that when the security agreement is made the debtor does not have an interest in the collateral yet, but when he goes out and purchases that collateral he is going to finance the purchase (example like a boat), goes out to see it and then buys it. When he buys the boat that is when the security interest will attach. b. Perfection i. Debtor is going to be in possession of the collateral, while he is paying out this note. Debtor can wind up selling that collateral to a bona fide purchaser, which would have the process of cutting off the creditor’s security interest in the collateral. This is where article 9 comes in; it views the form of commercial code. When these parties do these transactions and make this security agreement, they make three instruments, which are the security agreement, the note, and the finance statement (a document, where the debtor and creditor is named and the collateral is described). Then what the creditor will do is take that finance statement and record as a matter as public record. That recording will put the whole world on notice of this creditor’s security interest and the collateral described in that statement. So when that debtor ends up selling the collateral, the security interest will follow into the hands of another buyer. The buyer will not be a bona fide purchaser. 1. Billy Bubba wants to open up a sports goods store, retail; he goes to the bank and takes a business loan. Bubba will stock the store, use the store proceeds to purchase store inventory, called a floating lien. The security interest will attach when he buys the inventory. After buying inventory, the store opens and the first costumer named May. May has a 25 years class reunion coming up, and she wants to look goods. In the mean time, Billy bubba defaults on the bank note. Now, the bank has the right to repossess the funds. What about May’s purchases? Well the banks collaterals are any inventory in the store at any given time. May is an ordinary purchaser in the ordinary time of purchase of course of business. So, that means whatever she got, she will get for free and clear. a. What if bill bubba wants to sell the business? May wants to buy it so, she not just a retail purchaser, she will get that business, first the she has to check if Bubba’s name is on the financing statement. She needs to check if there’s a lien of file that will attach to anything, including the inventory or any accounts receivable. Next, call Bubba’s lawyer to tell them that Bubba still owes the bank money. c. Types of collateral d. Purchase money security interest c. Perfecting the security interest a. By failing i. Repossession – if the debtor has defaulted, may be the creditor calls up the debtor and says the bank they will repossess the collateral. ii. Self-help repossession – where the creditor is entitled to do so, by showing up and take the collateral but that can only be done without the breach of the peace. If the debtors pick up truck is locked up in the garaged. Well, to the breach of the peace for the repo man to go open the garage door, that’s a no. b. Without filing i. By possession ii. Automatic perfection in case of PMSI (purchase money security interest) in consumer goods under a written security agreement. 1. Can be perfect automatic, when it is created under a written security breach, where you simply, the filing of financing statement. When you create a security agreement and describe the collateral in terms of specific for other parties to understand. iii. Motor vehicles iv. Collateral moved to another jurisdiction 1. If it’s been properly perfected, lets say in the state of Texas, and the debtor wants to move it to Arkansas. It will continually to be perfected in the new state for a period up to four months, from the day it was moved. v. Effective time of perfection c. Scope of a SI (security interest) i. Floating lien in after- acquired property ii. Sale proceeds and future advances d. Priority of competing claims e. Other rights and duties under UCC Article 9 f. Default
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