NEGOTIABLE INSTRUMENT HYPOTHETICALS

Document Sample
NEGOTIABLE INSTRUMENT HYPOTHETICALS Powered By Docstoc
					                   NEGOTIABLE INSTRUMENT HYPOTHETICALS

1. Expressions – Implied v. Expressed

       A (the promisor)                                     B (the acceptor)




      C(the payee)

       Implied Expression – OK – B only pays when goods are delivered
       An Expression – NOT OK – B pays regardless of the delivery
              - Not a proper negotiable instrument b/c there is a condition imposed
                on the payment of the instrument.


2. Why must the language, “to the order” be present to keep the instrument
negotiable?

        - The language ensures a link of transferability from the original payee to the
endorsees.
        - This requirement only applies to non-check drafts. Checks do not require the
language, “to the order of” because soecific legislation (3:104c) has made this so and
policy considerations such as the millions of checks that need to be cashed.


3. The Negotiating a bearer draft with a COLLECTIVE INDORSEMENT

                                                              A draws a check on B (the bank)
                                                             A makes an employee the payee
                                        “For deposit only” – Written on the back of the check

       A (the drawer)                                       B (the bank)
                                A Check




      B(the payee)                                       Depository Bank

       - 3:206c – A person other than a bank that purchases this draft converts the
instrument unless the amount paid for the instrument is received by the indorser or
applied consistently with the indorsement.


                                            1
4. Reacquisition Example

                                                        D reacquires the instrument
                                        What parties can be removed from liability ?

       A (the drawer)                                      A (the bank)
                                A Check


                                    “To the order of”

      B(the payee)


            C


            D


            E


            F


            D

            - D may scratch out F and E’s name form the list of liability

5. The Birthday Check

                                                        A. Is C a holder in Due course?
                                                                       B. Is C a holder?

       A (the drawer)                                      A (the bank)
                                A $100 Check


                                    “To the order of”

      C(the payee)

A. No, because no value has been paid for the instrument
B. Yes, because C’s name is on the check, and C is in possession


                                            2
6. Breach of Transfer Warranty / Breach of Presentment Warranty


       A (the drawer)                                      X (the bank)
                                A Check




      B(the payee)


             C

                  Forgery
            D     Pay D, Signed, C


            E



        - E goes to the bank for payment. E cannot be a holder b/c of the forgery of C’s
signature. If the bank pays E, the check was not properly paid; therefore, the bank will
credit A’s account and recover from E based on a breach of Presentment Warranty.

       - E will then sue D based on a breach of Transfer Warranty




                                            3
7. Un accepted Draft Presented for Payment: Alteration / Violation of Presentment
Warranty

       A (the drawer)                                 X (the bank)
                                 A $50 Check




      B(the payee)


            C

                 D alters the
           D     total to $500


           E




      - E is a holder because there is no forgery…he might be a HIDC
      - The bank will pay E $500. A may attack E based on Breach of Presentment
Warranty because the instrument was altered.




                                           4
8. The Bad Employee Example

                                           D stole the check and forged C’s signature
                                  D is A’s employee and has authority to sign checks

       A (the drawer)                                        X (the bank)




       B(the payee)


             C
                   Forgery
                   Pay D, Signed C
            D

       1- Is D a holder? No, b/c there is a forged indorsement. The bank will be able to
recover from D based on a breach of Presentment Warranty.

       2- When can D be a holder even though there is a forged indorsement?
Transfer by a nominal payee. D is an employee of A, and has authorization by A to sign
checks, and C must be a nominal payee.
       [Nominal payee – The check must not have been issued from the drawer to the
payee for C to have been a nominal payee. The instrument must have been stolen from
the very beginning by D. Therefore, if C is a nominal payee, then D is a holder.]

        3- Now, can the bank recover from D if C is a nominal payee, based on
breach of presentment warranty? D is now a holder so he is entitled to enforce…the
draft has not been altered…the holder has no knowledge of any forgery b/c D has been
authorized to sign the check.

3:417(c) - If a drawee asserts a claim for breach of warranty of presentment based
on an unauthorized indorsements or alteration of the draft, the warrantor may defend
by proving that the indorsement is effective under 3:404 nominal payee.

3:418 - Payment or Acceptance by Mistake
       - The bank could use this provision to collect monies paid to D. D cannot use
the defenses in subsections (d) b/c D is not in good faith

        4- D transfers the instrument to E. E is not a holder b/c of 3:404(b); therefore, the
bank may collect from E for breach of presentment. E will go after D based on violation
of transfer warranty



                                              5
9. Other drafts presented to the drawee for payment
                                                         B alters note from $50 to $500
                                                  B then negotiates the instrument to C
                                                    C then presents the instrument to A


       A (the maker)                                       B (the payee)
                                 A $50 Note




                  C

        - Is C a holder? Yes
        - How much can C recover from A? $50, 3:412 The maker is liable for the
terms at the time the instrument was issued to B. In other words, the maker is liable only
to the extent of the terms when the instrument was first issued.
        - How much may C recover from B? $450, Because B breached the one of the
transfer warranties which protects C from any alterations in the instrument.
        - Assume A pays C $500, Can A recover from B? No. Because this is a note
and is considered an “other instrument” and w/ regard to other instruments B warrants
only that he is the holder and there is no alteration warranty.


10. Order Draft, Transfer, Presentment Warranty, Transfer Warranty

       A (the drawer)                                      X (the drawee/payor bank)

           “to the order of B”



      B(the payee)           Forgery
                             Pay C, Signed B

             C                                      W (depository bank)


        - Is D a holder?
                - No, b/c there is a forged indorsement.
                - The payor bank may collect from the presenting bank based on a
violation of presentment warranty subsection 1. The depository bank may collect from C
based on a violation of transfer warranty subsection 1.




                                              6
11. Banking Day

       1- May 1, 2:01p.m. - Check Deposited
       2- May 2           - End of Banking Day
       3- May 3           - Midnight Deadline

12. Customer’s duty to notify bank of an unauthorized signature or alteration

       Example A-
       Customer receives statement of account-             May 1
       Customer notifies bank of alteration-               May 2

              Should the bank re-credit customer’s account?
                  - Yes, b/c prompt notification was given to the bank

       Example B-
       Same facts as Example A
       Same wrongdoer presents another unauthorized signature             May 10

              Should the bank re-credit customer’s account?
                - Yes, b/c notice was given on May 2 of the unauthorized signature

       Example C-
       Customer receives statement                                        May 1
       Same wrongdoer presents another unauthorized signature             May 10
       Same wrongdoer uses unauthorized Signature, again                  May 15
       No notification has been given to the bank                         July 1

              Should the bank re-credit the customer’s account?
               - No, b/c no notification has been given prior to the 2nd unauthorized
              withdrawl

13. Same wrongdoer Example
       Example A
       Statement arrives                                    May 1
             - Shows 1st forged check from                 April 15
       SAME Wrongdoer forges a 2nd check                    May 15
       Statement arrives                                   June 1
             - Shows 2nd forged check from                 May 15
       Customer notifies the bank of forgery               June 2

              Should the bank re-credit the customer’s account?




                                           7
                - No, the customer is precluded from recovery of BOTH checks because
of 4:406(d)(1) + (d)(2)…bank paid in good faith, before any notice, after reasonable
period of time.

       Example B
       Same facts as Example A
       Except that the customer notifies the bank on May 10

                Should the bank re-credit the customer’s account?
                - Yes, b/c the customer is not precluded from asserting the unauthorized
signature notification into evidence. In other words, the 2nd element of 4:406 has not been
satisfied.

       Example C
       How does the comparative negligence rule work?
       -In order to assert the comparative negligence rule (which is: The Bank
did not exercise ordinary care; therefore the customer and
the bank split the loss) the customer must notify the bank w/I 1 year.
Otherwise, the customer is absolutely precluded from recovering from the bank
regardless of whether the bank exercised ordinary care or not.




                                             8