Revocation by Operation of Law
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Transcript Revocation by Operation of Law
1. Identify the type of paper.
Promissory note (including CDs)
Draft (including checks and remote-created
items)
2. Identify the parties, for example:
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Maker
Drawer
Payee
Drawee
Indorser
Holder
Accommodation Party
Depositary Bank
Payor Bank
3. Is instrument negotiable (form):
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In writing
Signed by maker or drawer
Unconditional promise or order to pay
Fixed amount
Of money
No other undertaking or instruction
Payable on demand or at a definite time
Words of negotiability (order or bearer language)
4. Was instrument properly negotiated
(transferred to a holder):
Bearer paper = possession
Order paper = possession plus necessary
indorsements
▪ Blank (creates bearer paper)
▪ Special (names new owner)
▪ Restrictive (e.g., for deposit only)
5. Does holder qualify as HDC?
Negotiable instrument
Holder status
Authenticity not apparently questioned
Holder gave value for the instrument
Holder took instrument in good faith
Holder was without notice
▪ E.g., overdue, dishonored, unauthorized signature,
alteration, claim, defense, claim in recoupment
5. HDC issues
Shelter Rule – taker from HDC may receive HDC
rights
Subject to real defenses
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Infancy
Duress voiding obligation
Lack of legal capacity making obligation void
Illegality making obligation void
Fraud in the execution
[continued]
5. HDC issues [continued]
Subject to real defenses [continued]
▪ Bankruptcy discharge
▪ Omission of required consumer protection language
▪ Statute of limitations
▪ Payment by obligor without notice to former holder
▪ Alteration
▪ Unauthorized signatures and forgeries
[continued]
5. HDC issues [continued]
Takes free of personal defenses
Takes free of all claims
Burden of proof on HDC
HDC status sometimes denied by statute
6. Liability of Parties – General Approach
Who wants the money (plaintiff)?
Who does not want to pay (defendant)?
What are plaintiff’s legal theories of recovery?
What defenses may the defendant raise?
If the defendant is a loser, may liability be
passed on to another party?
7. Contract liability
Underlying obligation
Maker’s contract
Indorser’s contract
Accommodation parties
Drawer’s contract
Drawee’s contract (acceptance and
certification)
Signature by agents
[continued]
7. Contract liability [continued]
Checking Account
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Properly payable
Wrongful dishonor
Customer’s death or incompetence
Setoff
Stop payment orders
Final payment
Charge back
8. Warranty Liability
Transfer warranties
▪ Entitled to enforce (holder status)
▪ Signatures authentic and authorized
▪ No alteration
▪ No defense good against transferor (perfect plaintiff)
▪ No knowledge of insolvency proceeding against
maker, drawer, or acceptor
▪ If remotely created item, the person identified as the
drawer authorized the item
8. Warranty Liability [continued]
Presentment warranties (checks)
▪ Entitled to enforce
▪ No alteration
▪ No knowledge of unauthorized drawer’s signature
▪ If remotely-created item, the person identified as the
drawer authorized the item.
Presentment warranty (notes)
▪ Entitled to enforce
9. Conversion Liability
Wrongful dominion
Drawee bank paying on forged indorsement
10. Forgery
Maker’s signature
Drawer’s signature
Indorsement
Forgery validation
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Ratification
No loss
Impostor Rule (estops issuer)
Fraudulent indorsement by payee’s employee
(estops payee)
Negligence
Bank statement rule
11. Alteration
Types
Effect on HDC
Effect on non-HDC
Defenses
▪ Negligence
▪ Bank statement rule
12. Other issues
Discharge by h0lder
Failure to produce original instrument
Overdrafts
Postdated “checks”
Payment in full checks
Madonna
Maker
Negotiable?
Prince
Payee
HDC?
1.
2.
3.
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Negotiable?
HDC?
D v. P on underlying obligation
D v. M on maker’s contract
D v. P on indorser’s contract
D v. P on transfer warranties
Disco
Bob
Maker
$500 note
defective watch
Al
Payee
blank indorsement
lost note
Cal
$350
Tom
Taylor
Drawer
SPO
Check 1 -- $2,500 for furniture
Check 2 -- $1,500 for refrigerator
XYZ
Payee
Cashed checks
Closed account
First Bank
LNB
Drawee
Provides indorsement
Della
theft
[alleged drawer]
Stella
issuance
[drawer & forger]
Fred
[fictitious payee]
NPP
CNB
Drawee
Corner Grocery
State Bank
[depositary bank]
Effect of death of drawer/depositor