ACCT 324: Chapter 27
38 Cards in this Set
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When goes a negotiation occur?
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occurs when multiple parties enter into an agreement meant to resolve conflict or another subject of interest
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Holder of instrument cannot collect when
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A party refuses to make payment on an instrument on the basis of breach of contract
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Holder in Due Course
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Has more extensive legal right, including freedom from competing claims and defenses
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4 basic requirements for a holder to be a HDC
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1. Must be holder of a complete and authentic negotiable instrument
2. Holder must take the instrument for value
3. Holder must take the instrument in good faith
4. Holder must take the instrument w/o the notice of defects
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Delivery
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means the physical handing of an instrument from someone entitled to it to the person intended to receive it.
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Endorsement
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is a signature
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Endorsement o
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...
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Allonge
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An additional piece of paper for endorsements
It's used when all space on paper have been filled by other endorsements
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3 Endorsements that affect the legal status of negotiable instruments
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Unqualified, Qualified and restrictive
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Unqualified endorsements
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Blank Unqualified and
Special Unqualified
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Blank Unqualified
Endorsements
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An endorsement that is either the payee's or the last endorsee's signature, nothing else
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Special Unqualified Endorsement
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Endorser's signature along with a named endorsee
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Qualified Endorsements
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Blank qualified: An endorsement that is either the payee's or the last endorsee's signature followed by "without recourse
Special qualified: An endorsement that is the endorser's signature followed by a named endorsee and the words "without recourse"
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Restrictive Endorsements
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Attempt to either limit the transferability of the instrument or control the manner of payment
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4 examples of restrictive endorsements given by UCC
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1. Endorsement for deposit or collection only
2. Endorsement to prohibit further endorsement
3. Conditional endorsement
4. Trust Endorsement
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Endorsement for Deposit or Collection Only
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an endorsement that restricts the instrument such that it must be collected by a bank for the endorser or for a particular account; the instrument cannot be cashed
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Endorsement to Prohibit Further Endorsement
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The operative word in it is "only", such as in "Pay to Oliver Twist only
While this endorsement does not prohibit further transfer, it does provide Oliver some protection. Even if he endorses this instrument over to someone else, because of the restrictive endorsement he is not liable …
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Conditional Endorsement
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Lets the endorser put a condition on payment(one that would destroy negotiability if it were on the face of the instrument but does not affect it here)
In effect, creates a defense for the endorser in the event that he does not live up to a preconceived promise
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Trust Endorsement
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used when the instrument is being transferred to an agent or trustee for the benefit of either the endorser or a third party
It might read "Pay to Jill Rogers in trust for LeBron Watkins" and then have either Watkin's or another endorser's signature. This endorsement gives the endorser…
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Noncriminal Endorsement Problems
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1.Misspelled Name
2. Payable to Legal Entity
3. Alternative or Joint Payees
when says "or" only need 1 sig
when says "and" need both sigs
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Holder-in-Due- Course Doctrine
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Has higher rights to a negotiated instrument than does an ordinary holder; a HDC does not shoulder the transaction risks
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Reason For Holder-In-Due-Course Status
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The law wants to encourage companies to engage in financial interactions
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Requirements for Holder-in-Due-Course Status
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1. The party must be a holder of a complete and authentic negotiable instrument
2. The holder must take the instrument for value
3. The holder must take the instrument in good faith
4. The holder must take the instrument without notice of defects
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What is a holder? (need to be a holder b4 a HDC)
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a party in possession of an instrument payable to the party or the bearer
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Why must the Instrument be Negotiable?
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If an instrument lacks any of the requirements for negotiability, the holder cannot be a a holder-in-due course (HDC)
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Exceptions to the Value Requirement
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UCC Section 3-303 states that a holder who takes negotiable instrument for value does not become an HDC if he or she:
1. Purchases the instrument at a judicial sale or under legal process
2. Acquires it through taking over an estate
3. Purchases it as part of a bulk transaction not in …
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What is good faith? and what correlates with it?
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Good Faith defined by the UCC
- honesty in fact and the observance of reasonable commercial standards of fair dealing"
HDC must take the negotiable instrument in good faith
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How can a holder take an instrument w/o notice?
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By taking an instrument w/o notice of various claims to or defects of the negotiable instrument
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A holder cannot be a HDC who has noticed or is aware of any of the following defects:
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1. The instrument is overdue
2. The instrument has been dishonored
3. The instrument was issued as part of a series that is in default
4. The instrument has been altered or contains an unauthorized signature
5. There is a claim to the instrument
6. Another party has a defe…
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What does it mean to have NOTICE?
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According to the UCC, a person has notice of a fact who either:
1. Has actual knowledge of the fact
2. Receives notice or notification of it
3. Has reason to know the fact exists
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How can a Demand instrument become overdue?
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A demand instrument becomes overdue if it has been outstanding for an unreasonably long period of time after its date.
- Demand instrument is a check, its overdue 90 days after its date
Date on the check gives another party notice of its overdue status; thus the party cannot be an…
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How can a Time Instrument become overdue?
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A time instrument becomes overdue at any time after the expressed date on it
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Dishonored Instruments
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An instrument is "dishonored" when a party refuses to pay it
Someone has no reason to know a note has been dishonored can become an HDC
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Claims or Defense
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A party who is aware of any claim or defense to an instrument has notice and cannot become an HDC
A party who had no reason to know various claims or defenses applied to an instrument, even though they exist, is not prevented from becoming an HDC
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Shelter Principle & HDC
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Generally, if an item is transferred from one person to another, the transferee acquires all the rights the transferor had in the item. This idea is called the "shelter principle"
It means that even a holder who cannot attain holder-in-due-course status can acquire the rights and privi…
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HDC may be free from what personal defenses?
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1. Lack or failure of consideration
2. Breach of Contract
3. Fraud in the inducement in the underlying contract
4. Illegality
5. Duress
6. Unauthorized completion or material alteration of the instrument
7. Unauthorized acquisition of the instrument
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The HDC is subject to what real defenses?
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1. Fraud in the essence
2. Discharge of the party liable through bankruptcy
3. Forgery
4. Material alteration of a completed instrument
5. Infancy-a party is below the legal age of consent
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Abuse of the HDC Doctrine
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-HDC status offer great protection to financial intermediaries
-Some intermediaries might attempt to abuse this protection
-THe FTC created several rules in the 1970's that help protect consumers against HDC abuse
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ACCT 324: Test 1