NI Outline

8/12/2019 NI Outline

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Chapter 1: Negotiability

Article 3- Negotiable instruments; deals with notes and drafts.

Article 4-Bank deposits and collections

Note- a written promise by the makerto pay money to thepayee

Draft- drawercreates a draft ordering the draweeto pay a 3rd

personpayee. If drawee is a bank then it is

called a check.

Cashiers check-drawn by the bank drawn on its self, both drawer and drawee.

Teller check- two different banks.

Instrument must be negotiable, if not negotiable- ordinary contract and no one can become a HDC.

To be negotiable: (WMPS DOUSIN)

Must be signed- any mark made with intent to authenticate. Unauthorized signatures will onlybind the actual signer (forger). If a person is claiming that their signature was forged, then they

must prove it.

Must be in writing not oral Sum certain-must be able to tell how much money you will be paid, can refer to interest. To order ofor bearer Must be payable in money (any currency used by government) Payable on demand or at particular time. (must be able to tell by the face, on demand

acceleration- payable earlier (doesnt hurt holder!)-doesnt destroy negotiability. Extension-non

negotiable unless it states the further date and when it will occur. (if date left off and maturity

depends on a date, the date must be filled in before its enforceable).

Without a conditional requirement-payable without certain conditions, can be implied but notexpress. only if subjects to govern by destroys negotiability as perin consideration-ok

(carrier without luggage). Shouldnt have to refer to another contract to determine the right of

payment. Things that can be in the instrument- waiver, promises about collateral, confess of

judgment, prepayment or acceleration.

Bearer paper- payable to whoever has it (holder)- too negotiable, even a thief can negotiate it.Like cash

Order paper- payable to a specific person. payable to the order of (specific person).(can be payable to a office holder- to the incumbent, partnership, estate, trust, fund). If payable

to John and Maria- both must sign instrument to endorsement. John or Maria-only one. John,

Maria- either one. Payable to the order of_______ (must be filled in before its negotiable). Pay

to john- not negotiable- must say pay to the order of.


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Chapter 2: Negotiation

Negotiation-process where an instrument is transferred by a person other than the issuer to a

subsequent party who then becomes a holder. (Bearer-anyone in possession) (order paper- named

payee)

To become a holder: bearer paper you just need possession of the instrument. For order paper you needpayee or special indorsee.

Named payee- 1st

holder.

A negotiable instrument goes thru 3 stages: Issuance (first delivery of an instrument; Transfer and

Presentment (demand made by or on behalf of a person entitled to enforce the instrument).

Blank endorsement- turns instrument to bearer paper.

Special Endorsement- to preserve order character- pay to John. No need to write to the order of

Forgery of the payee or special indorsee means that is not a proper negotiation- no one can become a

holder or a HDC.

Instrument paid to the order of a named payee no one can qualify as a new holder, until it is endorsed.

If an instrument is transferred without the necessary indorsement, it doesnt constitute a negotiation;

once the indorsement is later obtained, then the transferee becomes a holder

Current holder can convert a bearer paper to order paper.

Unendorsed checks to depository banks- bank automatically a holder. No need for endorsement.

No need to be a HDC to enforce instrument; only need to be a holder. (person entitled to enforce an

instrument)

Party who claims forgery must prove it.

Chapter 3: Holders in Due Course

HDC- must be established by the person.

To be a HDC: (GAIN) (good value, acted in good faith, ignorant of defenses, no knowledge of

dishonor/overdue)

Must be a holder, must have acquired the instrument in good faith (subjectively and objective

components) must have given value (unperformed promised is not value, only to the extent has been

rendered). Depository banks given value only to the extent they have given money. (can be partial HDC)

remember FIFO first in first out (you take old money out first). No extraordinary transactions. (not under

state law!) there must be no notice that its overdue or dishonor or knowledge of defenses at the


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moment they gave values. If they found out after they gave value, it doesnt matter. Closed eyes- cant

closed eyes when you could investigate. If you have notice that someone has become discharged, then

you can still be HDC but not against that specific person. Constructive notice- doesnt give notice of

defenses; forgotten notice doctrine-has worked but the court is very suspicious. If someone has notice

that the fiduciary is violating his fiduciary obligation and harming the person, and can have a claim

against them.

An instrument does not become overdue if theres default in payment of interest but no default in

payment of principal.

An instrument payable on demand becomes overdue if its a check, 90 days after its date.

Close connection between the payee and the entity trying to enforce- cant become a HDC

A transferee may not qualify as a HDC if the transferee takes the instrument from a fiduciary with

knowledge that that fiduciary has breached his fiduciary duty (used instrument as security for a personal

loan or to pay a personal debt)-transferee who takes the instrument with notice, must surrender theinstrument to the person represented by the fiduciary.

(Finance not in good faith, b/c of closed connection they had notice, or entities are the same legal entity

cant transfer from yourself to yourself to create a HDC status.

In a discount case, the holder pays less than the face value of the instrument ($5,000 for $6,000) but

pays full agreed upon consideration ($5,000) the holder is a HDC for the full value of $6,000

Antecedent debt- qualifies as value; lien (security interest) on instrument- value.

Shelter rule- you get whatever rights from your seller; HDC rights but not status. Exceptions are- party tofraud or illegality cant get HDC. (can obtain a HDC rights if no value is given such as a gift.

Reacquisition- you get whatever right you first had.

Rights of a HDC- free from all claims (trying to get the instrument back)

HDC takes free from most defenses and claims in recoupment of the obligor (signed the instruments)

Personal defenses are not good against a HDC

Claim in recoupment- subtract out the amount of damages from the amount you owe; not good againsta HDC because its a personal defense.

Real defenses are good against a holder and HDC: (infancy-depends on the state law; incapacity- severe

enough to void the whole instrument, such as mental incapacity; duress and illegality- must be extreme

enough to void the instrument, at gun point, not reporting to mom, complete deprived from free liberty;

illegality-if violates public policy, such as gambling obligation).


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Ordinary fraud is a personal defense; fraud in the factum- no knowledge as to its content and without a

reasonable opportunity to read over the content. If you have opportunity to read it over, then its a

personal defense. Rock star signing autographs and accidently signs the back of an instrument and

endorses it, no opportunity to figure it out; that is fraud in the factum-a real defense good against a

HDC.

Unauthorized signature is ineffective except as the signature of the forger.

Discharging bankruptcy- a real defense good against a HDC

Forgery of payees name or special endorsement- not a negotiable instrument, therefore no holder and

no HDC. Forgery of any other name (drawer, maker, etc) doesntaffect HDC status.

Forgery of the maker (maker never signed anything and didnt know of it)-no liability on the instrument,

even against a HDC.

Rights of a non HDC- all claims and defenses are valid against them.

If an instrument is paid, the person who paid is discharged from liability and can claim the instrument

back.

Chapter 4: Nature of Liability (causes of action)

A person is not liable on an instrument unless that person signed the instrument.

The underlying obligation- if an instrument is taken on the underlying obligation, it suspends the

obligation, until it is presented and dishonored. Until then, the underlying obligation is not a defense,

once it is dishonored the person can sue on the instrument or the underlying obligation or both- canrecover once only.

Cashiers checks, teller checks and certified checks- they pay the obligation- we treat them as cash;

therefore the underlying obligation dismissed!

Merger Rule-When you have a check or promissory note, obligation is merged into the note; discharge

on the note, also discharges the underlying obligation. Tearing up the note discharges not only the

liability on the instrument but also the underlying obligation!!

When you sign an instrument you create certain implied obligations, whether with intent or not

Makers obligation- primary obligation, to pay the instrument to the current holder or endorser who has

been forced to pay the instrument, unless you have a valid defense. If more than one maker (co-makers)

they are presumed to be jointly and severally liable, meaning you can sue one of them or all of them for

entire amount, and they are entitle to contribution. (if a maker signs a note with blanks or spaces, the

maker is bound by the subsequent filled in terms.


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Endorsers obligation- any unexplained signature on the instrument. Promise to pay to a holder or any

subsequent endorser. There must be certain criteria to be met, before they become liable: there must

be presentment to the maker, dishonor by the maker, and notice given to the endorser of the dishonor.

Secondary liability.

Presentment- surrenders of the instrument to the person who is supposed to pay it. (maker or drawee).

Notice of dishonor in checks-banks has 2 days; other have more time; if no notice, then endorser are

discharged of liability.

Without recourse-qualified endorsement; no endorser liability, no promise to pay it.

If more than one endorser in the same transaction (sureties) they have joint and several liabilities, and

can get contribution.

Anomalous endorsement- people who endorse the instrument but none of them are the payee. Can be

sued all together or just one for full amount and have the right to contribution. If a regular endorser

(meaning they were payees) they can be sued for the entire amount and dont have a right to

contribution.

Liability of the drawer- (draft) similar to the liability of the endorser, because it is secondary; subject to

presentment to the drawee, dishonor by the drawee; this must happen before the drawer can be liable.

Drawee fails to pay the instrument and the drawer is not notified of this, drawer is still liable (if drawee

is still in business) even theres no presentmentwithin a reasonable time and notice of dishonor within a

reasonable time. Unless- drawee bank has fail, drawer is off the hook; person can obtain his money for

the failure of the institution.

Presentment of checks to banks- across the counter; must endorse, show id, and surrender of check

upon presentment. If you refuse to do any of these, then no presentment has been made.

If across the counter- they have up until the closing of the business to make a decision whether to pay it

or not.

If thru the collection system, then banks have until the midnight deadline. Midnight of the banking day

following the banking day of receipt; (any other instrument within 30 days)

Drawee obligation- NONE! Because there must be a signature in order to be liable. Banks can become

liable if they certify the check. Payee cant sue the drawee bank unless the check has been certified,because the drawee is not liable. If you give the check to someone and they take it to the bank for

payment and the bank refuses even thought there is money to pay the check, the payee cant sue the

bank because they are not liable; you would have to sue the drawer of the check on the obligation. The

drawer can sue the bank for wrongful dishonor.


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If drawee signs the drafts, certifies the check (not obligated to do it, and not a dishonor if they refuse to

do so). Certifications of a check destroys everyone elses liability on the instrument except that of the

bank certifying the check.

Drafts are accepted by the drawee signing his or her name. (sales drafts) (CLASS NOTES!)

Signatures by an agent, in order to avoid personal liability- name principal andindicate the agent is

signing as an agent (representing) (Walgreens CO. by Christina Miller, president); with checks no need

say your representatives capacity, if check indicates the company or principal where the money is

coming from. If have not indicated the principal and agent capacity, a HDC can enforce personal liability;

unless the HDC knew that he was signing as a representative.

If an agent signs an instrument with authority from an on behalf of a principal, the principal is liable on

the instrument even if the principal is not named in the instrument.

Surety-accommodation party

Principal is the accommodated party.

Surety- person who is signing for the benefit of the principal (surety receives no benefit!) surety never

liable to principal.

3 contracts in a surety relationship:

1. Underlying obligation contract- principal borrows money from the creditor and agrees to repayit.

2. Surety contract-Surety promises to repay the creditor if the principal does not do so.3. Reimbursement- the principal promises to reimburse the surety if he is forced to do pay under

contract 2.

If more than one surety, then they may receive contribution and must be proportional.

If surety forced to pay off under contract 2; entitled to subrogation (step into the shoes of someone else

and exercise their right). Surety can step into the shoes of the creditor and sue the principal as if it were

the creditor if forced to pay. (right to collateral)

Principal- Accommodated party; surety is the accommodation party; and creditor- person entitled to

enforce the instrument.

If the surety signs on the bottom right front, it is considered a maker and a surety; if sign on the back,

considered an endorser and a surety; therefore liable as such.

Remedial rights for sureties:

1. Exoneration- note is due and you are the surety can get a court order ordering the principal topay and exonerate you.


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2. Subrogation- if surety is forced to pay the creditor, the surety steps in the shoes of the creditor;taking possession of the security (car, house, etc).

3. Contribution- right to partial reimbursement that co-sureties have against each other forproportional shares of debt.

Guarantor- kind of surety; guaranteeing collection only secondary obligation. Creditor must go to the

maker first and cant go to the surety until they do to court to get a judgment to get payment from theprincipal and they cant collect the money from him; then they can go to the surety. (must be a court

order).

Surety is never liable to the principal, it doesnt matter the other in which they signed; however the

principal is always liable to the surety no matter in which other they signed.

If surety tenders payment and it is refused, they still owe the money; but do not owe any subsequent

interest, because it could have been easily avoided by taking the money.

If principal makes the tender, and it is refused; still owe the money but no subsequent interest; alsoparties who are secondarily liable (such as sureties and endorsers) are completely discharged by refusal

of principal tendered.

Principal and creditors contracts that lead to surety discharge:

Impairment of collateral: in addition to obtaining your name as principal on a promissory note, creditor

makes you come up with collateral. If surety pays off the creditor, then they are entitled to the

collateral. If creditor impairs the value of collateral up to the extent of the impairment, the surety who

has not consented is discharged.

Extension of time does not discharge the surety, unless the surety can show that the extension prejudice

the surety.

Other material alteration (change in interest rate, amount owed); are presumed to discharged the

surety unless the creditor can prove that is not too harmful.

Chapter 5:

Relationship between the bank and its customers

Properly payable- payor bank (drawee) permitted to deduct from an account only if the check is properlypayable.

Properly payable- if authorized by the customer; banks must follow instructions. If not, bank must

recredit the account immediately.

Postdated checks- are properly payable! Unless the customer notifies the bank with enough time.


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If drawer forgets to sign a check but meant to pay the water company, bank may still pay it if they

believe that is what the customer wanted; but they are not obligated to do so.

Forgery of drawers name- not properly payable! Drawer didnt intend to pay, no instructions.

Forged or missing payee signature- not properly payable. (not for depository banks)

Stopping payment- checks not properly payable after notice.

Overdraft- banks may do so.

Alterations- from $50 to $500; bank in good faith pays 500; bank follows the instructions, therefore

properly payable for 50 not for the 500 must recredit the account $450.

If bank receives a check that was completed by someone else, it is still properly payable unless it has

notice that the completion is improper.

Bank wrongfully dishonors a check if it dishonors a check that is properly payable; bank is liable. (cost

must be proved).

Determining the balance; bank can look once, if the look a second time, then the second time counts.

Punitive damages allowed, if what the bank does is outrageous.

Stopping payment rules- customer or authorized person may stop payment or close the account, must

give the bank an order by describing the account and item with reasonable certainty receive in sufficient

time so that the bank may act on it. If more than one signature needed in the account (corporate

accounts), either person acting alone may close or stop payment.

Stop payment order is good for 6 months; but it lapses after 14 calendar days if it was oral. May be

renewed for additional 6 months if notice is given in writing within the original period.

Customer has no right to stop payment on cashiers check, tellers checks or certified checks, because

bank is the primary liable obligor.

If bank decides to stop payment on those checks, bank has to pay the check, interest and expenses;

however they have certain excuses.

If customer lost a cashiers, tellers, or certified checks- person who lost check must go to the bank fill

out a declaration of loss, if check comes in within 90 days of original date bank must pay it, but if doesnt

bank must recredit the customer and has no legal liability anymore, even if the check ends up in the

hands of a HDC, bank simply refers the HDC to the customer.

To stop payment, the customer must give enough information that a reasonable prudent banker given

this info can find the check and stop payment.


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Subrogation- if the banks fails the properly payable rule, bank might be able to escape liability by

subrogating in to the shoes of the payee or HDC (for example they paid a check when there was a stop

payment, bank would have to recredit the customer, but since the payee would have sued the drawer

on the underlying obligation and win; the banks doesnt have to recredit the account, because the

drawer would have had to pay anyway. (Same for a HDC)

Bank can also subrogate in to the customer, that way it can sue whomever they had to pay.

Checks become suspiciously old after 6 months- but if banks pay in good faith, then it is properly payable

otherwise not. If bank doesnt know the date (atm) still properly payable. If bank dishonored the check

because itsover 6 months, drawer is still liable (underlying obligation)-but payee has 3 years to bring a

cause of action!

Bank Statement Rule-customer is the person in best position to know if checks are forged. Duty to

examine the cancelled checks on statement, and report them immediately.

Check truncation- check photographed and then destroyed. Banks must provide enough info tocustomer about the check. (check number, amount and date of payment- safe harbor)

Banks must be able to give a legible copy of a check for a period of 7 years.

If bank sends statement account, customer must exercise reasonable promptness in examines the items

to determine if payments not authorized were made, because they were altered or signature had been

forged (usually 30 days). If a bank proves that the customer failed in respect to an item to comply with

duties imposed to them to report in time; then the customer cant go against the bank. Bank must also

prove that the delay caused a loss on the bank-very hard to accomplish! (i.e. Check forged and customer

notifies the bank, customer must be re credited; but if check was forged and customer failed to notifythe bank, the bank must prove that the delay cause loss, such as the forged had an account with the

same bank and they could have taken out the money, then the customer loses. All claim must be

brought within 1 year!) Banks are able to prove loss, if the same wrongdoer passed more than one

forged check, because the delay of the customer in reporting the problem caused them loss, because if

they wouldve know they wouldve never paid more checks! (Customers have up to 30 days to report

problems!).

If a bank is negligent in paying an item (obvious forgery) the bank is liable. The UCC applies comparative

negligence when both parties are negligent. (customer delayed, and bank was negligent).

If it is a forgery by the same wrongdoer, the customer has 30 days to report the forgery or alteration to

the bank.

Bank must raise any applicable defenses, such as the impostor rule or lose its right against prior parties

(breach of warranties). (if customer failed to report forgery or alteration within 1 year, then the bank is

not liable, but if chooses to recredit the customer, because they dont want to lose them, then they

must bear the loss and cant pass it to any other prior parties.


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Certain agreements can be changed, except bank cant get ridof their obligation of good faith, or duty to

observe ordinary care, can set standards to measure whether its doing that; unless standards are out of

the ordinary and unreasonable.

Customer bankruptcy, banks cant offset without the permission of the court before after they receive

official notice.

Check collection- banks can make funds available faster than what is required, they just cant take

longer.

Payor bank- is the drawee bank Depository bank- bank that first receives a check for deposit. Collecting bank- every bank that collects a check, including depository bank Presenting bank- bank that physically presents the check for payment Intermediate bank-Any bank in between the depository and presenting bank.

Drawn on the original bank (payor); deposited antitrust national (depository); federal bank in ny(intermediate) ; federal reserve in Cincinnati( intermediate, presenting); presented to original

If customer deposits cash, the bank must make funds available the next day.

Banking day- part of the day, where bank is open to the public to carry out substantially all functions.

(Saturday-bank is only open thru drive thru, then bank is not open for all functions, then Saturday is not

a banking day).

Bank cut off is usually at 2p.m.- if it is received after this hour, it is treated as being deposited on the

next banking day.

Check availability- if the check is both drawn and being deposited on the same bank (check from bank of

America, being deposited by customer on its bank of America account) onus item- bank has 1 day to

decide whether to pay it or not. (next day)

Checks from the government and checks from the same bank must be available on the next business day

(same applies for cashiers, teller, and certified checks)

If not deposited by the same bank of which is drawn, it is a transit item- if local, bank must give $100

dollar of next day availability; the rest of the check must be available for check writing purposes 2

business days after deposit. A customer can withdraw $100 cash after one business day and $400 cash

before 5p.m. on the second business day after deposit. (I deposit a check on my account for $5000, I can

get $100 the next business day, and the rest must be available for check writing purposes on the second

day; but if I want cash, I can get $100 the next day and $400 more on the second business day).

If nonlocal- $100 of next day availability, but the rest of the check is not available for 5 business days for

check writing purposes; if cash wanted can obtain $100 the next day and $400 by 5p.m. on the 5th

banking day after deposit, and the rest on the 6th

day..


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Provisional settlement in favor of who is depositing the check, and a provisional debt for whoever wrote

the check.

If payor bank that result gives final payment all provisional settlements are said to be final; final

payment means final settlement! Until that happens, if the check comes back, then the depository bank

can take out the provisional credit given. If final payment is made, then it cant dishonor the check.

The drawee bank (payor) is the only bank that can make final payment; if bank does any of the following

it made final payment:

Paid the item in cash-no dishonor possible Settling for the item, without the right to revoke the settlement. (cashiers check) Bank has made a provisional settlement for the item, and failed to revoke the settlement in the

time permitted. (time limit-by midnight deadline; unless they have agreed to another time limit;

midnight deadline- midnight on the next banking day following the banking day on which the

item was presented; item must be sent back before the deadline; bank may get an extension if

the item is received by the bank before they close following the midnight deadline, if they try to

make every effort to send it in time).

Charge back-depository bank (or any collecting bank) can charge back the provisional credit given to

customer, if the check was dishonored; must give notice within its midnight deadline alerting the check

is coming back. (2 banking days to send notice, since they got notice that the check was dishonored).

Federal law requires payor to send direct notice to the depository banks for checks over $2500, receive

of that notice would trigger the midnight deadline for depository bank to send notice to customer. If

depository bank does not send notice of charge back within their deadline, it has to credit any loss the

customer got because of the failure to get notice. However, if final payment was made by payor bank,then depository bank cannot charge back the customers account.

Undoing final payment- breach of presentment warranty or mistake or fraud due to the bad faith of the

presenter

These rules do not apply for: (but customer must be notified when funds become available)

new accounts (less than 30 days) large checks (over $5000) redeposited checks repeatedly overdrawn accounts uncollectible checks (based on banks belief) emergency conditions

4 legals events that interfere with routine payment of checks

1. Death of customer2. Stop payment orders


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3. Garnishment (legal process, such as incompetence or bankrupcy)4. Banks right to setoff

Any notice of these 4 legals are too late if bank has made final payment, certified, close to midnight

deadline. Once bank receives notice of these events, they must stop payment. Formal notice!

(bankruptcy, etc)

Banks are allowed to pay checks in any order.

Delays- delay by collecting bank or payor bank is excused, if theres interruption in communication or

computer system, suspension of payment by other banks, war, emergency conditions, or any other

circumstance if it is beyond their control and if bank exercises enough diligence as circumstances

require. Must convince the court. (Christmas is a predictable event!)

Wrongdoing and Error

Unauthorized signature- is ineffective except as the signature of the forger, in favor of a person who

takes the instrument in good faith thereafter. (forger is liable); if signature of more than one person is

required to constitute authorization (such as corporate accounts) one signature is not enough!

Forgery of the payees name is not properly payable-drawer gets relief. Bank recredits account, but if it

wants to get its money back (final payment was made), if the bank can find the forger, it can make him

pay, but bank cant find the forger, can sue for breach of presentment warranty.

No warranties on issuance

Presentment warranty (warranty of holder status) ONLY available to the drawee bank- anytime anyone

presents a draft to the drawee bank it warrants that: (same for Articles 3 and 4)

1. They are a person entitled to enforce the instrument. (if payees name is forged; not only makesthe person who physically presents the draft, but everyone in the chain becomes liable to the

drawee bank-that way the bank can sue the most solvent person in chain). Bank must give notice

within 30 days of learning about it, and 1 year to sue.

2. No alterations3. No knowledge that the drawer/makers signature unauthorized4. Everyone who transfers the instruments automatically makes presentment warrantiesdrawee

can sue anyone in the chain for breach of presentment warranties.

As between an innocent holder and drawee, the drawee must bear the loss. (Price v. Neal)

Transfer warranty (between issuance and presentment)- customer of bank makes a warranty to any

collecting bank:

1. person entitle to enforce the instrument (forgery of payee)2. all signatures are genuine (applies to bearer paper as well)


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3. instrument hasnt been altered4. no legal trouble (no defenses, or claims in recoupment of any party)5. no knowledge at the time the instrument was deposited of insolvency procedures. (bankruptcy)

(to pass the loss back to the wrongdoer; if he cant be found- to pass it over to the first person who

trusted the wrongdoer)

Notice of breach of warranty of transfer or on presentment must be given within 30 days after the

claimant has reason to know of the breach; failure to give such notice discharges the warrantor to the

extent of the discharge. Can file a cause of action within 3 years

Conversion- civil action for misappropriation of anothers property; doesnt need to be criminal.

Payment in violation of a restrictive indorsement (for deposit only) is conversion. (I endorse the back

of a check with for deposit only and the next indorsement is of a private person, not a depository

bank; then the bank didnt follow the orders, and thus violated a restrictive indorsement-can be sued in

conversion. (the only bank that is liable of a violation of restrictive indorsement is the first bank to takethe check-other banks are not liable, regardless of whether they knew or not).

Payment on a forged indorserment is conversion-person whose name is forged can sue in conversion.

(payee can sue because it has property rights; drawer has no property rights!)

An instrument is also converted if its taken by a transfer other than negotiations from a person not

entitled to enforce the instrument; or from a bank that makes or obtains payment for a person not

entitle to enforce it. An action for conversion cant be brought by the issuer nor by a payee or endorsee

who didnt receive delivery of the instrument (either directly or thru an agent or a co payee). Can sue

everyone who mishandles the check after he got it. (villain, depository bank and payor bank). Nodamages defense- if money gets to the right place, then no one suffers damages; once the drawee has

paid the payee in conversion, the drawer cant complain that the check wasnt property payable.

(forgery of the payees name) Payment on missing endorsement- drawer makes check to both Mary and

John (both signatures required to properly negotiate the instrument) both got property rights; only one

endorses the check and deposits it his personal checking account, his banks should pay the check, but if

it does-Mary can sue the bank in conversion.

Forgery of the drawersname: Price v. Neal- The drawee bank takes the risk that the drawers signature

is forged (drawee bank should know his customers signature!)Drawee bank can only get his moneybank from the forger not from innocent parties. (not properly payable) (warranties may apply)

Bulk filing- when checks come into t he drawee bank, they are not looked at, they are just filed in bulks,

if under certain amount. (doesnt violate the ordinary care clause).

If the drawee bank gets the check and realizes that the drawers name is forged before final payment,

they are supposed to send the check back.


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Alterations-any fraudulent unauthorized change in the terms of the check (amount, erasing things, filling

in blanks without authorization; doesnt include a forgery. Any obligor whose obligation is changed in

any way by the alteration is discharged of any liability, although a HDC can enforce the instrument

according to its original terms, and a drawee bank can do that also. (Mary gives her brother a $5 check,

and he raises the amount to $50, he then cashes the check at the drugstore, who then deposits it at

merchants bank, who presents it to the drawee bank and gets paid; when she find out the problem she

calls her bank and demands them to recredit her account because the check was only properly payable

for $5; the banks must recredit 45 to her account. Presentment and transfer warranties breached

Validating the wrongdoing (forgery and alteration):

1. Impostor Rule- pretending to be someone else; any time the issuer of the check has issued to itto someone pretending to be the payee, issuer cant complain of forgery! Drawers fault-properly

payable; no breach of warranties. If bank doesnt observe ordinary care, jury will divide up the

liability.

Any time the person writing the check doesnt intend for the named payee to actually get the

money or the named payees is fictitious-we validate the forgery of the payees name. (properly

payable-no breach of presentment and transfer warranties).

2. Employers Responsibility- any time an employer has trusted an employee with responsibilityforhandling of checks and the employee creates a forgery of the payees name, the employer cant

complain about it against later innocent parties. Employers should watch employees. Validates

the forgery where the employer is not only the drawer but also the payee of the instrument.

3. Negligence Rule (failure to exercise ordinary care) - a person whose failure to exercise ordinarycare substantially contributes to an alteration of an instrument or the making of a forged

signature on the instrument cant complain about the forgery. (Signature machines and stamps-

guard it carefully, if negligent they are going to be liable). If people carelessly leave blank spaces

that can be later filled, it is considered lack of ordinary care. Trusting the wrong person with your

checks is also negligent. (sending the check to the wrong person-negligent!) (failure to discover

wrongdoing-having the same person verify the checks and write the checks) if a depository bank

cashes a check that is payable to a corporation and dont ask any question--negligent

4. Bank Statement Rule- a customer has a duty to examine bank statements and canceled checksfor forgery or alteration. If the customer doesnt report a problem to the bank within a

reasonable time (usually 30 days), the customer is precluded from claiming that the item was not

properly payable if such delay cause the bank to suffer further loss. (customer fails to examine

bank statement for 4 months and the delay cause the bank a loss because the forger had an

account with the same bank, had they had notice, they wouldve taken the money out of the

forgers account- customers delay cause the bank to suffer further loss).

If forgery or alteration is by the same wrongdoer- if customer fails to report a problem within 30

days, the customer is estopped from demanding recredit on any other items forged or altered

during the delay by the same wrongdoer and subsequently paid by the bank.


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Ratification- any time someone know that someone is forging his or her name and doesnt say anything

(husband finds out that the wife has been forging his name in a series of checks, but doesnt say

anything-but once they get divorce he brings a conversion action against everyone who mishandles his

check on which he was the payee; he will not wing)

Double forgery of the drawer and payee- no warranties breached- when the forger sings his name to the

drawer line it only operates as his name- check drawn by the forger on the bank. When the forger writesthe check to a fictitious payee (impostor rule) validates the forgery of the payees name; the only thing

you have is a forged drawers signature, which is Price v. Neal, which means that the drawee bank must

deal with the loss.

Electronic Banking

Credit Cards (governed by the Truth and Lending Act)- If you use a credit card it must be an authorized

credit card, but only liable for $50 of unauthorized uses of credit cards-but not even $50 if you can notify

the credit card issuer before the $50 is even charged.

Debit cards (governed by the Electronic Transfer Act)- consumer must be given certain information at

the time the account is opened of the potential liabilities. Bank statements must reflect all electronic

funds transfer activity (may also have checks, as long as you can differentiate the two); once a year the

bank must send its customer a statement explaining what procedures must be followed in the event

that the customer believes the monthly statement is wrong. The ATM must be programmed to give

certain mandatory information.

Unsolicited credit cards cant be mailed (illegal), just credit cards that are replacing or applied for- if you

are mailed an unsolicited credit card, then you are not liable as long as you dont sign or use it.

Unsolicited debit cards may be mailed as long as the consumer must take some action before the card

becomes validated.

Pre-authorized electronic funds transfers- bank and consumer may agree to automatic transfers into and

out of the consumers bank account (pay rent, bills, etc); consumer may also stoop payment orally or in

writing by giving the bank at least 3 business days before the scheduled date of the preauthorized eft.

Errors resolutionfor credit cards- consumer must give the bank oral or written notice of the supposed

errors within 60 days of the bank sending the statement. Bank must investigate and recredit the accountif necessary- bank has 10 business days to investigate without recrediting the account. If more time

needed it can have up to 45 calendar days but must recredit the account. If after recrediting the

account, the bank finds no error, it must give the consumer 5 business days notice before withdrawing

the money and send a written explanation.

If you give your credit card to somebody else and they charge more than what you wanted/allowed

them to- you are responsible for all the charges even if you already told the bank not to let them charge


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anymore. But for debit cards- a simply phone call to the bank cuts off the customers responsibility for

further use of the debit cards. (the reason is because with credit card, they only problem you have is

consumer credit; while on the debit card money is leaving the bank account-more serious no money

for food, medicine, etc.)

Unauthorized use of debit cards- no more than $50 worth of liability and not even that amount if the

consumer manages to notify the bank before that charge is even made; 2 situations where theconsumer gets more liability than $50:

1. Consumer knows that his or her card has been stolen and doesnt report it for 2 business days.-then consumer has a liability of up to $500 (TOTAL) for unauthorized activity taken place after

the 2 business days on which to report.

2. Bank sends statement and reflects the unauthorized activity and 60 days pass; then consumerhas unlimited liability for unauthorized activity pass the 60 days up until they report it.

Consumer negligence doesnt increase his negligence.

If the bank violates any of the federal rules, it can be liable for actual damages and punitive damages

between $100 and $1000 plus costs and attorneys fees; action must be brought within 1 year of the

alleged violation.

NI Outline

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Transcript of NI Outline