Section 1
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Drafts /Checks
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Cards (53)
Section 1
(50 cards)
Drafts /Checks
These are a written order to pay a specified amount. When delivered to a bank, they allow the holder to receive payment under the terms of the check. A drawer orders a drawee (the bank) to pay money to the holder
PROPERLY PAYABLE CHECKLIST
● Imposter Rule. ● Bearer Paper. ● Fictitious Payee
SUBROGATION
If payor bank mistakenly paid over an effective Stop Payment Order it "may step into the shoes of a": HDC v. DRAWER PAYEE v. DRAWER DRAWER v. PAYEE This is an argument Drawee bank makes hypothetically to avoid Re-Credit
Collateral Classification
Classification is determined by the DEBTORS PRIMARY USE at the time the security interest attaches
Implied Warranty of Merchantability
In every sale by a merchant who deals in goods of the kind sold, there is an implied warranty that the goods are merchantable, meaning the goods are fit for the ordinary purpose for which such goods are used.
Nonconforming Goods
If the goods are nonconforming , then the buyer may reject the goods within a reasonable period of time after delivery and tender. ● Rejection. The buyer may reject the goods in full or in part. ○ The buyer may choose to cancel the contract or seek damages. ○ Notice. The buyer must notify the seller of its rejection and then hold the goods for a reasonable time to allow the seller to recover them. ■ The seller may be liable for expenses the buyer incurs in holding the property. ● Acceptance. A buyer is deemed to have accepted the goods if, after a reasonable period of inspection: ○ Express Acceptance, No Rejection, Objective Action. The buyer acts in a way that is inconsistent with the seller's ownership If the buyer accepts the goods, then the buyer is obligated to pay per the contract terms
REAL DEFENSES
REAL DEFENSES · Infancy of the obligor to the extent it is a defense to a simple contract · Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor · Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms (e.g. fraud in the essence/factum - telling someone the note is a receipt, etc.) · Discharge of the obligor in insolvency proceedings · [ALSO alterations of amounts on checks but NOT unauthorized/uncompleted but signed instruments] PERSONAL DEFENSES ● Failure of consideration, other k defences, agent acting on behalf of principal (not personally liable),
damages
Under Texas law, if a party effectively revokes acceptance, then the buyer is entitled to a refund of payment,incidental damages, and any consequential damages that were foreseeable to the seller at the time of contract
Negotiability
An instrument is negotiable if it is: written, signed, contains an unconditional promise to pay to order or bearer, a fixed sum of money, on demand or at a definite time, and which states no unauthorized undertakings
Bank Defenses
Customer Negligence. The customer's remedy for an improper payment may be limited if the customer's negligence contributed to the improper payment ● Bank Statement Rule ○ A customer is negligent if she does not properly review bank statements and timely report suspicious payments ○ if the customer waits longer than one year to contest an instrument, then she is precluded from compelling remedies for improper payment.
Presentment Warranties
ONLY DRAWEE CAN ASSERT PRESENTMENT WARRANTIES if an unaccepted draft is presented for payment AND the drawee pays, then the Presenter (and previous transferors) of the unaccepted draft warrants PAN: 1. Person Entitled to Enforce- Presenter is a Person Entitled to Enforce 2. Alterations- No Alterations 3. No notice of an unauthorized Drawer's signature
Stop Payment Provision
provides customers broad latitude to request a stop payment order for any (or no reason at all) if the ● request is made in writing and identifies the ● instrument with specificity.
Post Dated checks
Postdated checks are properly payable UNLESS 1- The customer notifies the bank with REASONABLE CERTAINTY and 2- Gives the bank OPPORTUNITY TO ACT.
NOT PROPERLY PAYABLE CHECKLIST
● The check has been ALTERED by third party! ● The drawer's signature has been FORGED ● Forgery of payee or special indorser. ● Check postdated ● Missing indorcements ● Customer has requested stop payment! *Not Properly Payable is a recovery*
Creditor Remedies— Possession
If a debtor defaults, then the creditor may take possession of and sell the collateral. Self-Help. If it can exercise self-help without breaching the peace, then a secured party may take possession of the property without judicial process. ● Equipment. If the collateral is equipment that is not easily moveable, then the secured party may make it unusable and dispose of it on the debtor's property. ● Conversion. If a secured party breaches the peace while exercising self-help, then she may be liable for conversion and for the debtor's actual and punitive damages. ○ Not Waivable under art 9 by debtor
Attachment
Attachment is the process by which the security interest becomes effective against the debtor ● Security agreement, or Creditor has possession of collateral ● Creditor gives value ● Debtor has rights in the collateral
Transfer Warranties
One who transfers an instrument, for CONSIDERATION, warrants: PANDA 1- PEE..........................................He/she is a Person Entitled to Enforce 2- Authorized and Authentic...All signatures are Authorized and Authentic 3- NO KNOWLDEGE .................No Knowledge of the drawer's insolvency 4- DEFENSES .............................No useable Defenses exist against the warrantor 5- ATLERTATIONS ....................No Alterations, on the Instrument
Creditor Remedies— Sale
After default, a secured party may sell, lease or license the collateral either in its condition when taken or after commercially reasonable preparation. ● Disposition may be by either public (auction) or private sale, and by one or more contracts ○ The sale must be commercially reasonable ■ assessed by the method, manner, time, place and terms of the sale ○ debtor and any sureties must have authenticated and reasonable notice of the sale ■ 10 days or more before transaction for non consumer sale
Shelter Doctrine
A transferee acquires whatever rights the transferor had.
Bonafide Purchaser
Lowest of low in regards to buyer. Priority rule: This buyer take free of any unperfected creditor if: a bonafide purchaser has 1. given value, 2. taken delivery, 3. had no knowledge of the security interest, and 4 before it is perfected
Types of Collateral
CONSUMER GOODS- Personal, family or household use INVENTORY- Good held for sale or lease in the ordinary course of business EQUIPMENT- "Catch All" category- Must determine NOT inventory, consumer good or Farm product ● INVENTORY VS EQUIPMENT- "long term use" vs "short term use" DOCUMENTS OF TITLES- Bill of loading. Airbill, Warehouse receipt FARM PRODUCT-crops, livestock, or supplies used in farming operations INSTRUMENTS- Negotiable instrument, checks, notes, drafts DOCUMENTS OF TITLES- Bill of lading. Airbill, Warehouse receipt. CHATTEL PAPER- a record that evidences both 1. A monetary obligation and 2. A security interest in, or a lease of specific goods GENERAL INTANGIBLES-Intellectual property, copyrights, patents, licenses etc INVESTMENT PROPERTY- stocks, bonds, mutual funds, brokerage accounts
HOLDER in DUE COURSE*
A HOLDER who takes for VALUE and in GOOD FAITH WITHOUT NOTICE OF DEFENSES or CLAIMS *Subject to REAL, insulated from Personal
Type of Collateral
holder
Person in physical possession of BEARER PAPER or or ORDER PAPER WITH PROPER INDORSEMENT
Implied Warranty of Fitness for a Particular Purpose.
The implied warranty of fitness for a particular purpose arises when a seller has reason to know the particular purpose for which the goods are to be used and knows that the buyer is relying on the seller's skill and judgment to select suitable goods
5 WAYS TO PERFECTION
Wrongful Dishonor
If a bank refuses to honor an instrument that is properly payable, then the bank may be liable to the customer for damages proximately caused by the wrongful dishonor. - No Liability for Wrongful Dishonor in the following circumstances: ● Overdrawn Funds ● "Stale" Instruments. If a check is more than 90 days old, then the bank may refuse to honor it without giving rise to liability.
Perfection
Perfection is when an attached security interest becomes superior to other interests and claims to the property ● Financing Statement. Filing a financing statement will perfect an interest in any kind of collateral except accounts and money.
Express Warranties
Any affirmation of fact or promise regarding goods gives rise to an express warranty that the goods will conform to that representation.
Types of Collateral
CONSUMER GOODS- Personal, family or household use INVENTORY- Good held for sale or lease in the ordinary course of business EQUIPMENT- "Catch All" category- Must determine NOT inventory, consumer good or Farm product ● INVENTORY VS EQUIPMENT- "long term use" vs "short term use" DOCUMENTS OF TITLES- Bill of loading. Airbill, Warehouse receipt FARM PRODUCT-crops, livestock, or supplies used in farming operations INSTRUMENTS- Negotiable instrument, checks, notes, drafts DOCUMENTS OF TITLES- Bill of lading. Airbill, Warehouse receipt. CHATTEL PAPER- a record that evidences both 1. A monetary obligation and 2. A security interest in, or a lease of specific goods GENERAL INTANGIBLES-Intellectual property, copyrights, patents, licenses etc INVESTMENT PROPERTY- stocks, bonds, mutual funds, brokerage accounts
Buyer in ordinary course of business
liability
1- MAKER- Primarily and absolutely liable, CO-MAKER-joint and severally liable 2- INDORSER- PDN- Secondarily Liable · Presentment to maker · Dishonor by maker · Notice of dishonor to indorser 3- ACCOMODATION- One who signs to incur liability on an instrument in which he (the signer) receives no benefit, Liable in the capacity in which the accommodation party signs 4- DRAWER-a drawer is "Primarily and Absolutely liable" on an instrument unaccepted draft that has been dishonored 5- DRAWEE- A drawee bank incurs liability when it accepts a draft, discharging the drawer of liability and any other previous indorsers
Improper Payment
A bank makes an improper payment if it makes payment on an instrument that was not properly payable (must recredit)
Conversion
action arises when payment is made to a Person who is someone NOT Entitled to Enforce instrument and is enforcing the instrument ONLY THE PERSON WHOSE PROPERTY RIGHTS ARE ADVERSELY AFFECTED MAY SUE FOR CONVERSION 1- Proper Plaintiffs only: a Payee or Indorser that payee has negotiated the instrument to 2- Must have Received Delivery of the instrument to maintain action for conversion 3- Can sue "Converter" or a Bank that makes or obtains payments to a NON-Payee
Theories of Liability
Anticipatory Repudiation
If, before either party has performed, one party repudiates the contract (indicates that they will not perform), then the other party may be entitled to damages for anticipatory repudiation. ● The compliant party must demonstrate that the other party's failure to perform will substantially impair the value of the contract for the non-breaching party. Remedies. The compliant party may await performance for a commercially reasonable time, seek remedies, and/or suspend performance.
Article 4 flow chart
Promissory Notes
These are a written promise to pay an obligation as specified in the writing. The maker promises to pay the payee or whoever legitimately stands in the payee's shoes.
PROPERLY PAYABLE
A draft is properly payable if it is 1- AUTHORIZED by the customer; and 2- Done in accordance with the bank/customer agreement.
ORDER OF ANALYSIS: OVERVIEW Article 9
1. CLASSIFY THE COLLATERAL 2. DETERMINE IF THERE HAS BEEN ATTACHMENT (secured creditor status) 3. DETERMINE IF THERE HAS BEEN PERFECTION 4. DETERMINE WHO HAS PRIORITY
Nonconforming Goods-revocation
buyer may revoke acceptance if ● the buyer subsequently learns that the goods are nonconforming, ● the nonconformity substantially impairs value, ● and the buyer complied with the proper notice requirements ○ Notify seller in writing and allow seller opportunity to recover property
FINANCIAL STATEMENT:
▪ DEBTOR NAME Signature and of debtor (signature from security agreement suffices) ● Individuals name- majority: IF DEBTOR HAS ○ Unexpired License issued by the state where the finance statement will be filed, NAME ON LICENSE (Exactly) ○ DOES NOT HAVE UNEXPIRED LICENSE- Debtors Name. Personal Name and Surname (NEVER TRADE NAME) ■ Mistakes are fine but, Errors cannot be seriously misleading- (depends on the search logic of that jurisdiction ■ If debtor changes name, the creditor is still perfected if the collateral was acquired by the debtor at the time of the name change or 4 months after. ❖ Creditor must watch out for after acquired collateral after 4 months of name change, they must amend the financial statement
Implied Warranties waivers
Generally, warranties can only be waived when the contract is formed Implied Warranties. Implied warranties may be waived if: ● "As Is." ○ Implied warranties are waived if the goods are sold "as is." ● Examination. ○ buyer is given an opportunity to examine the goods as far as the buyer requests, and the examination would have revealed any defects. ● Course of Dealing.
Security Interest will follow the collateral
into the hands of the subsequent purchaser. UNLESS Buyer can prove to be a "buyer in the ordinary course"
Finality of Payment Rule
Once payment is made on an instrument, payment is not revocable; however, a party who breaches a transfer warranty may be liable to return payment
Garage Sale Exception
Agent liability
Agent may bind the principal when acting w/actual or apparent authority. General Rule: to avoid personal liability on a contract, agent MUST: 1. Indicate she is signing in the capacity as agent; and 2. Indicate the principal. On drafts, Principal is liable for company checks that an employee w/authority signs even if employee does not indicate its capacity as an agent. Agent can be liable to HDC if: It did not have principal's name on it; and Did not state the agent was acting on behalf of the principal.
ORDER OF ANALYSIS: OVERVIEW Article 3
Holder Liability Defenses HDC
Purchase Money Security Interest (PMSI).
A purchase money security interest ("PMSI") is a special type of security interest in goods. It arises when: ● Retained Security Interest. The creditor sold the collateral in question to the debtor on credit and retained a security interest in the specific collateral. ● Advanced Funds. The creditor advanced the funds that the debtor used to purchase the collateral. Perfection. ● Consumer Goods—Automatic perfection ● Inventory—-Notice and Possession. To perfect a PMSI in inventory, the creditor must send authenticated notice to any secured party with an interest in the collateral. The notice must indicate the creditor's intent to perfect a PMSI, and the creditor must send the notice before the debtor takes possession of the collateral. Perfected on possession ● Other PMSI—-Financing Statement. To secure a PMSI in other goods, the creditor must file a financing statement within 20 days of transferring the goods.
Priority of Interests in Collateral.
First, Buyer in the Ordinary Course of Business (BIOC) and Garage Sale Buyers. Next, Perfected PMSIs. Then, Perfected Security Interests and Judicial Liens. Last, Ordinary Buyer
Section 2
(3 cards)