Gregnnecia Darrett Article 4 Commercial Paper Chart

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Liabilities of the Parties Transfer Warranties

Any movement of the instrument except issuance or presentment is a transfer. (4-207) Person Entitled to Enforce: the transferor has taken the instrument through a valid negotiation and is a holder. This would be breached if there is a forgery of payee or indorsee signature. Valid Signatures: All Signatures are valid and authorized. This would be breached by a forged signature on bearer paper even though negotiation would not be destroyed. No Alterations: Warrants against any alterations. An alteration is any change to the terms of the agreement. No defenses against the transferor: no legal defenses or claims of recoupment that are good against the transferor. (No legal problems being transferred with the instrument). No knowledge of insolvency proceedings: the transferor has no knowledge of any insolvency proceeding. Need Consideration for Transfer Warranties. A transferor who receives no consideration makes no transfer warranties

Bank Deposits and Collections

1) A bank may only charge a customers account if the item is properly payable 2) Once final payment has been made, a bank loses the right to return items. Wrongful Dishonor (Only Drawer): if a check or item is properly payable but the bank wrongfully refuses to honor it, the drawer has a cause of action against the bank for wrongful dishonor. Death or Incompetence of Customer: 1) If a bank collects or pays taken prior to knowledge of incompetency or death, the banks actions are valid. 2) For post actions, where the bank has knowledge of death a bank may elect to pay for 10 days after the death. 3) Stop Payment: any person who claims an interest in the customers account may order stop payment or certify checks during the 10-day period, which terminates the banks authority to do so. A properly payable item that may over draft the customer account can still be paid, but does not have to be, the bank chooses. If insufficient funds in account, remember the bank does not have to honor the check. However if the bank does, the customer is liable to the bank for the overdraft and may also be charged a fee. If an alteration has occurred, the bank may only charge the account according to the original terms of the item unless the customers negligence lead to the alteration. Postdated checks: postdated checks are properly payable unless the customer gives the bank notice of the postdating before the bank pays or certifies the check.

Forgery or Alteration of Negotiable Instrument Validation of Forgery or Alteration:

For unauthorized signatures, the main rule to remember is that and an unauthorized signature will not be deemed that of the person whose name is signed unless that person is precluded from denying it. A customer will become precluded when they act negligently in a way that contributes to the loss making that person the most responsible for the loss among the other innocent parties to the instrument. 1. Issuing the instrument to the name of someone posing as a payee. 2. Leaving blank spaces on the instrument 3. Failing to notify the bank of problems with the bank statement (forgeries, alterations) which cause the bank further losses. Payment to Agent: delivery of a negotiable instrument to an authorized agent of the payee is the same as delivery to the payee. Validation of Forgery or Alteration: 1. An unauthorized signature will not be deemed to be that of the person whose name is signed unless the person is precluded from denying it. Circumstances in which a forgery will be validated because the person whose name is used has done something to preclude him from raising the forgery issue. 2. Impostor Rule: Carelessness of the drawer or maker in issuing an instrument may make it very likely that the payees name will be forged. This effectively passes good title to later transferees, so that they qualify as holders of the instrument inspite of the forgery.

Two Rules to Remember:

Notice Requirement: once a person knows of a breach, they have 30 days to give notice to the warrantor. Failure to give notice discharges the liability of the warrantor to any loss caused by the delay.

Gregnnecia Darrett Article 4 Commercial Paper Chart Stop Payment Orders: an item that the bank has stopped payment on is not properly payable. A customer can stop payment by giving notice that reasonably identifies the item and the bank has a reasonable opportunity to act on it.

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a. Issuance to an impostor: an impostor is one who pretends to be someone else. If the drawer or maker are duped into issuing an instrument to an impostor, the resulting forgery of the payees name is still effective. Oral Notice: Stop payment can be oral but it is only good for b. Issuances to fictitious payee or payee not 14 days unless renewed in writing. intended to have interest in instrument: if the drawer does not intend for the named payee to Written Notice: A written stop payment is good for 6 months have any interest in the instrument, or if the but may be renewed for another 6 months in writing. named payee is a fictitious person 9made up) the forgery if the payees name is effective to negotiate the instrument. If an HDC is in the chain of Transferees the customer could not c. Employers responsibility for fraudulent recover for a bank paying over a stop payment because the indorsements by employee: if the employee is customer would have to pay the HDC. entrusted with responsibility, the employee is responsible for the forgery. Must be entrusted Right of Subrogation: if an item is not properly payable, but the bank with responsibility in handling the check. pays anyway the bank is subrogated (steps into the shoes of) any 3. An employer is responsible for fraudulent indorsements person connected with the check (drawer, payee, holder, or holder in made by employees entrusted with responsibility for an due course) for preventing unjust enrichment. instrument. 4. If the employer is someone who is not entrusted with Right of Setoff from Bank: to subtract from the customers account responsibility for the instrument, then the indorsement is any debt the customer owed the bank. No notice is required. ineffective as the signature of the person whose name was signed. Final Payment: if final payment has occurred it is too late for the bank Negligence Rule: Can also validate FORFERIES OR ALTERATIONS to setoff. A failure to exercise ordinary care which substantially contributes to an alteration or a forgery of an instrument Customers Duty to Examine Bank Statements: After a bank pays an is precluded from asserting the alteration or the forgery item, it cancels them and returns the items to the customer with a against whom a person in good faith pays the instrument statement of account. If a customer fails to use reasonable care in or takes it for value or for collection. promptly examine the statement and reporting any unauthorized signatures or alterations on an item, it may validate the improper Ordinary Care: payment. Where depositary bank and payor bank are one and the same: if the a. Leaving blanks or spaces on the instrument: filling in a check drawer and the payee happen to have accounts at the same blank or a space without authority is an alteration, bank, that bank will be both the depositary bank and the payor bank. however if the maker or drawer leaves blanks available to the wrongdoer, the maker or drawer should not be able to complain.

Gregnnecia Darrett Article 4 Commercial Paper Chart Final Settlement Rule: all provisional settlements firm up and become final settlements. Dishonor is no longer possible and after a reasonable time the depositor may treat the item as paid. Right of Chargeback: before final payment, a depositary bank or any other collecting bank that learns the item will not be made may chargeback (reverse) any provisional settlements given to its customer. Failure to use ordinary care: all banks must use ordinary care in collecting items, if not they are liable on the item. Final Settlement Effect on Right to Charge Back: the depositary banks right to chargeback ceases once final settlement occurs, at the moment payor bank makes final payment. Final Payment: Cash: When the payor bank hands over the cash, final payment has occurred and it is too late to dishonor. Settlement: final payment occurs when a bank settles for an item and cannot revoke it. Failure to Revoke provisional Settlement: if a payor bank has made a provisional settlement, the payor bank has until midnight of the following banking day of presentment to reverse the provisional settlement and send the item back. If it fails to do this the provisional settlement becomes final and final payment occurs. Rights of Payor Bank After Final Payment: once final payment occurs, the payor bank must pay and cannot recover the payment made unless : 1) Bad faith of presenter- mistake or fraud will allow a payor bank to undo final payment. 2) Presentment Warranties- final payment does not deprive the payor bank of its rights to sue for preach of presentment warranties.

Page |3 b. Mailing an instrument to someone with same or similar name of payee c. Failure to follow internal procedures: negligent not to follow check forgery procedure. d. Failure to guard signing device: if a machine or rubber stamp is used to place maker or drawer signature, then they are negligent if it is not closely guarded and gets in the wrong hands. Bank Statement Rule: Failure to examine the bank statement is a form of negligence that can preclude the defense of forgery or alteration. After receiving the bank statement the customer must promptly use reasonable care in examining ti for an unauthorized signing of the customers own name as drawer and any alteration. Effect of Failure to Examine bank statement: if customer fails to report a forgery or alteration problem within a reasonable amount of time the customer is estopped from complaining that the item was not properly payable, if the bank can prove further loss other than the original payment caused by the delay. Repeated Offender Rule: Where the statement has been available to the customer for a reasonable period a (not more than 30 days) and there is no complaint about an unauthorized signature or alteration, the customer is estopped from demanding recredit on any other items forged or altered by the same wrongdoer and subsequently paid by the bank until the customer gives notice. Banks Failure to Exercise Ordinary Care: Where the bank fails to exercise ordinary care in paying a heck where the forgery is sloppy or an alteration is obvious then the bank statement and repeated wrongdoer rule do not apply. Statute of Limitations: If a customer does not complaint that is made more than one year after the statement was made

Gregnnecia Darrett Article 4 Commercial Paper Chart

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Neal v. Price: As between an innocent holder and a drawee who had both been duped by an unauthorized drawers signature, the drawee must bear the loss and could not recover what the drawee paid the holder on presentment. Once final payment has occurred, the drawee cannot undo the transaction and recover the money paid unless a presentment warranty has been breached or the person who received payment was not acting in good faith.
Unaccepted Draft: Person Entitled to Enforce: the transferor has taken the instrument through a valid negotiation and is a holder. This would be breached if there is a forgery of payee or indorsee signature.

Presentment Warranties

Alteration The alteration of an instrument can result in both transfer and presentment warranties, and negligence can preclude the party from asserting the alteration defense. Alteration is occurs when a person changes the instrument in anyway. Fraudulent Alteration- if fraudulent alteration occurs all prior nonnegligent parties are completely discharged from liability on the instrument and on the underlying obligation. If an alteration was caused by the negligence of a party that party is not discharged. Discharge is a personal defense, a drawee/ payor bank or an HDC may enforce the instrument against

No Alterations: That there is no alteration of the instrument. This is not for a maker of notes or acceptors of drafts. No Knowledge that signature of drawer or maker is unauthorized: Presenter has no knowledge that the signature of the drawer or maker is unauthorized.

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Price v. Neal: Policy is that the drawee is supposed to know the drawers signature, and the drawee cannot pass the loss back to an innocent party. Notice Requirement: once a person knows of a breach, they have 30 days to give notice to the warrantor. Failure to give notice discharges the liability of the warrantor to any loss caused by the delay.

the discharged party according to its original terms or according to its completed terms if dealing with the unauthorized completion of an instrument.

Conversion is a theft of a negotiable instrument or any other wrongful taking of an instrument. Restrictive Indorsement: indorsement with a restriction. Violation of the restriction would be conversion. Restriction on transfer: an indorsement with a restriction on further transfer does not stop transfer to the next person. The proper plaintiff in a conversion action is the payee, or the person whose property rights are being violated by the transfers. A payee may not sue for conversion action unless they also received delivery of the instrument either directly or through an agent. Indorser Liability: Secondarily liable parties are entitled to presentment, dishonor, and notice of dishonor.

Conversion (Payee):

Lost, Destroyed, or Stolen Instruments

If an instrument is loss, destroyed, or stolen its true owner may still sue upon it, but first must prove ownership and explain the reason for not producing the instrument.