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STEPS c. Payee—person to receive the payment. a. Principal Amount: must be able to determine the principal
1. Identify type of paper i. The person to receive payment (the money). amount due by looking at the instrument – can’t refer to outside
2. Identify parties 3. Check source for principal amount. Any dollar amount will do.
3. Determine if instrument is negotiable a. Requirements b. Interest
4. Determine if instrument was properly negotiated i. Bank is the Drawee, AND i. the fixed amount does not apply to interest
5. Determine if transferee is a holder in due course ii. Payable on demand. ii. Presumption = No Interest
6. Determine P’s causes of action b. Types of checks (A) If instrument is silent, there is no interest. Ex. ordinary
7. Determine D’s defenses i. Ordinary Check check)
8. If D is held liable, may D pass that liability to someone else? ii. Certified Check iii. Ways in which Interest may be stated which do NOT
(A) Ordinary check which bank has accepted, i.e., agreed to violate the “fixed amount” requirement
pay. (A) Specific amount of money
INTRODUCTION iii. Cashier’s Check (B) Fixed or variable rate
A. Basic Idea of Commercial Paper (A) Drawer and Drawee are same bank. (C) Reference to an outside source
1. Written instruments for the payment of money (B) Person buying the check is the remitter. Ex. A note which provides that interest is “2% above the prime rate” is
2. Fundamental Issues: iv. Teller’s Check negotiable even though an outside source must be consulted to determine
a. Person with the instrument wants to get paid. (A) Check drawn by one bank on another bank. the rate of interest.
b. Person obligated on instrument does not want to pay. (B) Person buying the check is the remitter. iv. Failure to state interest rate, but says that “there is interest” =
c. Person who paid the instrument now wants to recover the v. Traveler’s Check judgment rate
money from the person paid or someone else. (A) Demand instrument requiring the countersignature by a 2. Unconditional Promise or Order to Pay
B. Approach person whose specimen signature already appears on the a. Must be more than just an acknowledgement of a debt such as an
1. Identify type of paper (representation of money) instrument. IOU
2. Identify parties. 4. Remotely-Created Item (formerly called a “demand draft”) b. Presumption of Unconditional Promise or Order to Pay
3. Determine if instrument is negotiable. a. A draft not signed by the drawer but created with the c. Items that Make the Promise or Order Conditional and thus NOT
4. Determine if instrument was properly negotiated. drawer’s authority so that a 3P can get paid from drawer’s Negotiable
5. Determine if transferee is a holder in due course. account at a bank. i. Express condition to payment (Ex. “I promise to pay IF”)
6. Determine plaintiff’s cause(s) of action such as contract, b. 3P is usually a seller in an internet transaction or when you pay ii. Promise or order “subject to” or “governed by” another
warranty, tort, or not properly payable. bills over the telephone by giving creditor your checking account record
7. Determine defendant’s defenses. number. iii. Incorporation by reference
8. If defendant is held liable, may defendant pass liability on to (A) Rights or obligations with respect to the promise or order
another party? are stated in another record
NEGOTIABILITY d. Items that DO NOT make a Promise or Order Condition (thus,
-After ascertaining the type of paper and the identity of the parties, the next still negotiable)
IDENTIFY INSTRUMENT AND PARTIES step is to determine whether the paper is negotiable. i. Statement of consideration
-The first step in your analysis of any commercial paper problem is to ii. Reference to another record
identify the type of instrument involved and the parties. A. Meaning of Negotiability (A) “as per” or “in accordance with”
1. Refers to the form of the instrument. (B) this is negotiable because it is not conditioned on the
-The rules are often different based on the type of paper and the parties 2. Determined at time of issuance. terms of the other record
involved so it is essential to make correct identifications. 3. Opting out—If instrument says it is non-negotiable, it is non- (C) but NOT “subject to” or “governed by”
negotiable (unless it is a check). Cannot expressly opt in. iii. Incorporation by reference of items that would not hurt
A. NOTE B. Importance of Negotiability holder
1. Promise to Pay 1. Note: makes it way more valuable than normal K, b/c enhanced (A) Rights regarding collateral
a. A promise to pay money—a 2 party instrument. likelihood you’ll get paid. (B) Prepayment – right of obligor to pay early
2. Parties 2. In normal K law, a transferee gets no better rights than the transferor. (C) Acceleration – right of holder to get paid early upon
a. Maker—promisor (obligor)—Person who promises to pay. Thus, the obligor may raise all of the defenses (e.g., failure of some event
b. Payee—promisee—Person entitled to payment (money). consideration, fraud) it had against the transferor against the iv. Limitation of payment to a particular fund or source
3. Certificate of Deposit—note issued by a financial institution (i.e., transferee. v. Countersignature requirement
bank). 3. If the paper is negotiable (form) and properly negotiated (A) Ex. traveler’s check.
a. Financial institution acknowledges receipt of money, AND (transferred), it may reach the hands of a special good faith vi. Consumer protection language
b. Financial institution promises the payee/depositor to repay the purchaser called a holder in due course (HDC). (A) If language on note  buyer of note can’t be HDC
money. 4. HDC obtains better rights than transferor and thus can get paid from (B) BUT, lack of language is not a defense for maker
B. DRAFT (e.g., check) obligor even though the obligor (maker or drawer) has defenses 3. No other undertaking or instruction
1. Order to Pay (good reasons not to pay under K law). a. Instrument is NOT a full contract
a. An order to pay money—a 3 party instrument. 5. If instrument is not negotiable, it is not invalid or unenforceable; it is i. Negotiable instruments are just promises or orders to pay
2. Parties just a regular K. money. They are often called “couriers without luggage.”
a. Drawer—person ordering payment C. ***8 elements of Negotiability [memorize] To be negotiable, an b. Exceptions: Permitted Undertakings or Instructions
b. Drawee—person to make the payment. instrument must be: (8 elements) FUN SWMP Won i. Promises concerning collateral
i. In a check context, also called the payor bank. 1. Fixed amount ii. Confession of judgment clauses

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(A) Confession of j/m clauses are unenforceable in TX, but (1) if there is a check which the drawer signed, but does not F. For deposit or collection
that does not destroy negotiability. fill in the name of the payee, it is bearer paper 1. A restrictive indorsement limiting what may be done with the
iii. Waiver of law meant to benefit obligor (maker/drawer) (E) “to cash” or “to order of cash” instrument.
4. Signed (F) not payable to identified person G. Identification of person to whom instrument payable (the payee)
a. Any symbol executed or adopted by a party with the present (1) check payable to “happy birthday” is bearer paper 1. Intent of issuer Determines Initial Payee.
intent to authenticate a writing ii. Order language 2. Multiple Payees
b. Ex. signature, trade or assumed name, “x”, initials, typewritten, (A) Preprinted on our checks a. “And” separates the names of the payees
signature stamp, thumb print or computer generated signature (B) “pay to the order of name” i. Requires all payees to indorse.
c. TIP: X, writing Y’s name without authority, acts as X’s signature iii. If both order and bearer language, bearer controls b. “Or” or “and/or” separates the names of the payees
(forgery) (A) Ex. check payable “to the order of Frank Smith or bearer” i. Requires any one of the payees.
5. Written is bearer paper H. Other Indorsement Issues
a. No requirement about what is to be written or what it is to be iv. Exception for checks 1. Transferee’s Right to Transferor’s Indorsement
written on (A) If this is the only element of negotiability missing for a a. If instrument is transferred for value, transferee has specifically
6. In Money check, the order or bearer language requirements is enforceable right to the transferor’s indorsement.
a. Must be a medium of exchange authorized by a domestic or waived 2. Depositary Bank Becomes Holder Even Without Transferee’s
foreign government as a part of its currency (1) Ex. check with “payable to F. Smith” is negotiable. Signature
b. CANNOT be payable in goods or services (2) BUT note or non-check draft with same language a. Depositary bank becomes a holder even if payee deposits check in
c. Words v. Figures = words prevail would not be negotiable, b/c it lacks bearer language (a payee’s account without indorsing it.
i. VCR Amex example. person is named) and it does not contain order 3. Misspelled Payee’s Name—Payee May Indorse With Incorrect or
7. Payable language. Real Name.
a. On Demand OR b. Words of negotiability have ramifications beyond just 4. Payee Lacking Capacity May Effectively Indorse
i. Express Statements negotiability...can affect negotiation itself later in process. a. Negotiation is effective even if the payee was a minor,
(A) Ex. for payment “on demand” or “at sight” incompetent, unduly influenced, etc.
ii. Silent Instrument
(A) If instrument does not state the date it is due, it is a NEGOTIATION
demand instrument (e.g., ordinary check) A. Negotiation—Transfer of Negotiable Instrument so Transferee is a HOLDERS IN DUE COURSE
b. At a Definite Time holder. A. Rights of mere holder
i. Express statements 1. The payee transfers the instrument to a 3P rather than just getting the 1. Being a mere holder is normally all that one needs b/c a holder has
(A) Date stated in the instrument money, e.g., as payment for sale, to donee as gift, to bank to deposit lots of rights, such as the right to the money.
(1) Ex. “August 1, 2011” in payee’s account, etc. B. When HDC status relevant:
(B) Fixed period after sight or acceptance B. Holder Status (requirements) 1. HDC status is important when the obligor raises a defense to
(1) Ex. “90 days after sight” 1. Possession of negotiable instrument, AND payment.
(C) Time readily ascertainable at the time the promise or 2. Good Title 2. Ex. assume that maker of note does not want to pay b/c the product
order is issued a. The method of obtaining good title depends on the words of purchased was defective.
(1) Ex. “on first day of fall” is okay. negotiability used. a. As a mere holder, holder would lose to this defense, if it is valid
(2) BUT “on Fred’s death” is NOT okay. i. Bearer = possession is enough under basic contract law.
ii. Permitted date change matters that do not prevent instrument ii. Order = possession PLUS necessary endorsements. b. If holder is HDC, holder can obtain better rights than the
from being payable at a definite time C. Indorsements—Generally transferor and take free of this and most other defenses.
(A) Prepayment of Instrument 1. Signature C. Elements of HDC Status [Memorize]***
(1) right of obligor to pay earlier than stated date a. An indorsement is a signature on a negotiable instrument by 1. Negotiable Instrument
(B) Acceleration of Due Date someone other than the maker, drawer, or acceptor normally on 2. Holder
(1) right of holder to demand payment earlier than stated the back of the instrument. 3. Authenticity Not Apparently Questioned
date upon certain named events D. Blank Indorsements a. Instrument does not bear such evidence of forgery or alteration
(C) Provisions in Instrument Extending Due Date 1. How Done = Payee’s Signature Only or is not otherwise so irregular or incomplete as to call its
(1) by holder to extend time, then it can be to any time a. Simplest type of indorsement consisting merely of payee’s authenticity into question.
(2) by obligor, then to a later definite time stated in the signature, i.e., no particular person is named to whom the 4. Holder Must Pay Value
instrument instrument is now payable. a. The holder must pay value for the instrument to deserve the
(3) automatically upon condition state in the instrument = 2. Effect = Creates bearer Paper special protection.
to a later definite time state in the instrument a. Thus, further negotiations can be by transfer of possession alone. 5. Good Faith
8. Contains words of negotiability 3. Thief can get title. a. Honesty in fact PLUS
a. Two types of words that will satisfy this requirement E. Special Endorsements b. Observance of reasonable Commercial Standards of Fair
i. Bearer language 1. How Done = Payee’s signature PLUS designation of new person Dealing
(A) “payable to bearer” to whom instrument payable 6. Without Notice at Time of Instrument Acquisition
(B) “payable to order of bearer” 2. Effect = Creates ORDER paper a. Later notice does not matter—once you get HDC status, it cannot
(C) indication that possessor is entitled to payment a. Thus, further negotiations will require the indorsement of the be taken away.
(D) no payee stated person to whom it was made payable. b. Notice means:
3. Thief has no title. i. Actual knowledge—a subjective test.

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ii. Receipt of notice coupled with a reasonable to act on the iii. Courts will look at a variety of factors such as the signer’s a. Assume agent signs agent’s name and that principal is bound.
notice. intelligence, education, business experience, and ability to b. Key issue = Is agent personally liable?
iii. From all the facts and circumstances known to the person at read and understand English. c. Agent escapes Personal Liability if:
the time in question (subjective element), the person has 6. Discharge in Insolvency (Bankruptcy) i. Principal is identified in Instrument; AND
reason to know that it exists (objective element) 7. Omission of Required Consumer Protection Language ii. Signature unambiguously shows it Made on behalf of
c. Merely filing in the public records does not put a person on a. TX and/or Federal law requires certain instruments in consumer principal.
notice (unlike mortgages or secured credit). transactions to contain language stating that a transferee remains d. Liability of agent if above two elements not satisfied
i. Instrument (Principal) Overdue subject to claims or defenses that the issuer could assert against i. To Holder in Due Course
(A) Due Date has passed: the original payee. (A) Agent is liable to holder in due course UNLESS the agent
(1) For a check, 90 days after issue. b. If an instrument does not contain this language, the instrument is can prove that the holder had notice of the representative
(2) Overdue interest is not notice; only have notice is treated as if it actually contains that language and thus the issuer nature of agent’s signature.
principal is overdue. may assert against an HDC all claims and defenses that would ii. To Non-Holder in Due Course
ii. Instrument Dishonored have been available if the instrument had included the required (A) Agent is liable to a non-holder in due course unless agent
(A) Instrument not paid upon proper demand such as check language. can prove that the original parties did not intend the agent
marked insufficient funds. 8. Statute of Limitations to be liable.
iii. Uncured Default With Respect to Payment of Another a. Note e. Special Rule for Checks—no liability if principal’s name on
Instrument Issued as Part of the Same Series i. 6 years from the due date (not the issue date). check.
iv. Unauthorized signature b. Unaccepted Draft (e.g., a check) i. Agent for drawer is not personally liable if principal’s name is
v. Alteration i. Earlier of (1) 3 years after dishonor (bounce) OR 10 years on check (even if agent did not indicate agency capacity)
vi. Any claim after issue. 3. If Agent Not Authorized
vii.Any defenses or Claim in Recoupment 9. Payment to Former Holder a. Actually, it is then a forgery; alleged agent is bound but not
(A) Any reason obligor does not want to pay, e.g., minority, a. Liability of a person obligated to pay on an instrument may be purported principal.
lack of capacity, fraud, etc. discharged by payment to a person who was formerly entitled to B. Maker of Note (me w/r/t student loan)
(B) Recoupment is like a counterclaim, that is, obligor’s claim enforce the note unless the obligated party has received a proper 1. Primary Liability—no conditions precedent
against payee arising our of the transaction giving rise to notification that the note was transferred and that payment is to a. Maker must pay instrument when it is due according to its terms
the paper. be made to the new holder (the transferee). at the time it was issued (or when incomplete instrument
7. **Shelter Rule—Transferee Has Rights of Transferor b. A notification is adequate only if it is signed by the transferor or completed)
a. Even if a holder does not qualify as HDC, person may still have the transferee, reasonably identifies the transferred note, and 2. Liable to Holder or Indorser Who Paid Instrument
rights of HDC by shelter. provides an address at which payments subsequently are to be 3. Defenses
i. The Transfer of an instrument vests in the transferee the rights made. a. Maker may raise defenses
that the transferor had. [view it like property, sucka!] c. The defense to payment to a person who is no longer entitled to b. Effectiveness depends on status of holder (e.g., HDC or not).
b. Warning: Having HDC rights via shelter does not make you enforce is effective against an HDC. But, the HDC can prevent C. Drawer of Draft (me, writing personal check)
HDC. this defense from being effective by providing the proper notice. 1. Disclaiming Liability
c. Exception: A person who was a party to the fraud or illegality 10. Alteration [discussed below] a. Drawer may not disclaim liability on a check but may disclaim
affecting the instrument cannot get HDC rights by shelter. 11. Unauthorized Signatures & Forgeries [discussed below] liability on other drafts.
8. Burden of Proof is on Person claiming HDC status. B. Protected from “Personal Defenses” [Benefit] b. Ex. Writing “without recourse” before signature on check—
1. The HDC prevails against all other defenses of the obligor, either signer is liable b/c a drawer of a check may not disclaim liability.
under U.C.C. or common law, that are not real defenses. 2. Secondary Liability (Time Warner showing up @ my house
RIGHTS OF HOLDER IN DUE COURSE 2. Examples demanding payment on check I mailed them)
A. Subject to “Real Defenses” [limitation] **memorize** a. Failure of consideration (e.g., non-delivery of goods, non- a. Drawer liable only after two conditions are first satisfied:
1. Infancy performance of services). i. Presentment (to bank)
a. Infancy of obligor is real defense to the extent it is a defense to b. Breach of warranty. (A) Presentment to Drawee Within 30 Days
a simple K under state law. c. Fraud in the inducement (e.g., maker knows maker is signing a (B) Ex. You pay cable bill w/ check. Before cable company
2. Duress which voids obligation promissory note but is misled regarding quality of goods or maker can sue you to collect the check, company must first
3. Lack of Legal Capacity Making Obligation Void signs not without reading it because maker was in a hurry) present the check to bank. If company wants more than
4. Illegality Making Obligation Void C. HDC is Free From Claims of Others to the Instrument [Benefit] 30 days to present, you are still liable unless bank has
5. Fraud in the Execution (also called Fraud in the Factum) 1. No claimant can take an instrument from HDC; HDC is a “perfect become insolvent w/o insurance.
a. Signer lacked knowledge of the instrument’s character or defendant.” ii. Dishonor (bounce)
essential terms, AND (A) The drawee (bank) refuses to pay the instrument upon a
b. Signer lacked reasonable opportunity to learn of the instrument’s proper presentment.
character or essential terms. CONTRACT LIABILITY D. Indorser of note or draft
i. Thus, person lacked the intent to sign a promise or order to [& warranty liability below] 1. Liability disclaimer allowed
pay. Basis of liability: The primary basis of contract liability on an instrument is a. Ex.: Payee of check Paul, indorses check “without recourse,
ii. Note that this is an “excusable ignorance” test; merely stating a person’s signature. Paul.” This indorsement prevents Paul from incurring K liability
that you signed something w/o knowing what it was is not A. Signatures by Agents of an indorse; the indorsement is effective merely to pass title.
enough. 1. Binding Principal—follow general law 2. Order of liability
2. Binding Agent a. Indorsers are liable to each other in order of their signatures.

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i. Sue prior indorsers for payment. 4. Conversion (tort) liability if drawee pays on forged indorsement ii. Ex.: A check is payable to Paul. First indorsement on back is
ii. Liable to later indorsers. a. Drawee who pays on forged indorsement is liable to payee in to Arthur. Arthur is an anomalous indorsement because it is
b. Ex.: Payee Paul indorses note “pay to Susan Smith, Paul.” Susan conversion. outside chain of title.
then indorses note “pay to Tom Torres, Susan Smith.” If maker of b. Payee suing in conversion must have received delivery of
note does not pay, Tom may sue Susan and Paul on their instrument. No conversion action if check never reaches payee
indorser’s K. If Susan pays, Susan may then sue Paul on his because it was lost in mail. WARRANTY LIABILITY
indorser’s K. However, if Paul pays Tom, Paul may not sue 5. Payment of checks after drawer’s death A. Introduction
Susan; Paul’s only recourse is against maker. a. General rule 1. Transfer and presentment warranties are implied, so they arise
3. Secondary liability i. Drawee bank may continue to pay checks until it knows that automatically.
a. Indorser liable only after 3 conditions first satisfied: 1) drawer has died and has reasonable opportunity to act on that 2. Warranty liability is off instrument since warranties are created by
Presentment, 2) Dishonor; and 3) Notice of dishonor. knowledge. transfer or presentment, not indorsement of instrument.
b. Presentment to maker / drawee within 30 days of indorsement b. Effect of notice of death 3. To use a warranty, possession of instrument is not needed as it is
i. Ex.: Payee of check, Paula, indorse check “pay to Jose, i. Drawee bank may pay for no more than 10 days after drawer’s for K liability.
Paula.” Jose waits 2 months before presenting it to drawee for death if bank knows of drawer’s death. 4. Warranty liability survives final payment of instrument.
payment. Check bounces. Jose may not collect from Paula ii. But, if someone claiming an interest requests that drawee bank B. Transfer of warranties
because her liability was discharged after 30 days; Jose should stop paying drawer’s checks right away, drawee bank must 1. Who makes transfer warranties (D) – Transferor who receives
have presented to drawee within 30 days to hold Paula to her comply. consideration.
indorser’s K. F. Accommodation parties a. Transfer warranties do not arise in a gift context; person
c. Dishonor 1. Definition – Co-signers, sureties, and guarantors transferring must receive consideration before transfer warranties
i. Ex.: Bouncing of check (drawee did not pay check because a. Person who signs an instrument to lend his / her credit to another are implied.
drawer did not have sufficient funds in account to cover party but who does not receive any direct benefit, i.e., does not 2. To whom are transfer warranties made? (P)
check). receive any of borrowed money. a. Immediate transferee, and
d. Notice of dishonor to indorser within 30 days of dishonor 2. Parties b. Subsequent transferees if transferor indorsed
E. Drawee a. Accommodated party – principal / debtor / obligor i. Note that in banking context, liability runs to any subsequent
1. General rule i. Person with bad credit collecting bank even without indorsement.
a. Drawee makes no negotiable instruments K. ii. Executes instrument with holder. c. Drawee and maker never sue for breach of transfer warranty
b. Ex.: Dan draws a check on Bank for $300 payable to Paula. b. Accommodated party – surety / co-signer i. Drawee and maker can never sue for breach of transfer
Check bounces. Paula may not sue Bank to collect because it did i. Person with good credit. warranty – they get instruments presented to them, not
not sign check and thus has no liability on check. ii. Has accommodation K with holder. transferred.
2. Acceptance or certification c. Holder – creditor / obligee 3. Transfer warranties
a. Drawee may agree to pay draft by signing draft. i. Person who wants payment assured. a. Warrantor is entitled to enforce instrument
b. Drawee has no obligation to accept draft and cannot be sued for 3. Liability – generally i. Basically, this is a warranty of holder status.
failing to accept. a. Liable in capacity in which accommodation party signs; no b. All signatures authentic and authorized
c. Certification discharges drawer and all prior indorsers. special K. c. No alteration
d. Ex.: Dan draws check on Bank for $300 payable to Paula. Paula b. Presumed to be guaranty of payment. d. No good defenses against transferor
takes it to Bank and bank writes on check “Certified by Bank.” c. Ex.: Son convinces Mother to co-sign note and Dealer sells Son i. Instrument is not subject to any defenses could be successfully
Bank refuses to cash check when Paula later attempts to cash it. car. Mother is liable as accommodation maker, which means asserted against transferor.
Paula may sue Bank to collect $300 because Bank, drawee, Dealer may collect note from Mother and does not need to ii. Thus, transferor warrants that if transferor were a P on
signed check and thus incurred liability. Paula cannot sue Dan attempt to collect from Son first. instrument, no defense that anyone has could defeat transferor.
because Dan was discharged when Bank certified check. 4. Limiting liability to collection only iii. A perfect P warranty.
3. Final payment a. Accommodation party may include express language limiting K e. No knowledge of insolvency proceedings
a. Once drawee bank finally pays check, K actions (e.g.. drawer’s / to a guarantee of collection only. i. Warrantor has no knowledge of insolvency proceeding against
indorser’s K) may no longer be pursued. Drawee bank may not b. Ex.: If Mother writes, “collection guaranteed only,” then Dealer maker, acceptor, or drawer of an unaccepted draft.
recover on check from persons it paid unless there is a breach of must attempt to recover from Son or it is clear Dealer cannot ii. Not that this is only warranty where warrantor’s lack of
presentment warranty. collect from Son (e.g., is bankrupt or fled country). knowledge is relevant.
b. Final payment occurs when drawee bank 1) pays item in cash or 5. Reimbursement f. If remotely-created item, person identified as drawer
2) does not revoke a provisional settlement by midnight deadline, a. If accommodation party [surety] pays instrument, accommodation authorized item.
that is midnight of next banking day after banking day of receipt. party is entitled to reimbursement from accommodated party 4. Disclaiming warranties
c. Ex.: Dan draws check on Bank on $500 payable to Paula. Paula [maker, indorser]. a. Checks – cannot disclaim
deposits check in her account at Octopus National Bank (ONB). 6. Demonstrating accommodating status b. Non-checks – can disclaim (“without warranties”)
When ONB presents check to Bank, Bank provisionally gives a. Express language C. Presentment warranties
ONB $500. Bank then notices that Dan’s account has balance of b. Anomalous indorsement 1. Made on presentment
only $10, but decides to wait to see if Dan deposits enough i. An indorsement by person who was not holder of instrument, a. Warning: Do not confuse presentment and transfer warranties.
money to cover. If Bank does not revoke provisional settlement to i.e., an indorsement outside of chain of title, is notice of its Mutually exclusive.
ONB by midnight of next banking day, final payment occurs and accommodation character. b. P can only have 1 of these warranty causes of action although a
Bank may not recover money from ONB or Paula. (Bank may person might make both.
still pursue Dan for money.) 2. Who makes? (D)

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a. Presenter AND a. Oral stop payment orders are unenforceable in TX. C. Forged drawer’s signature
b. Previous transferors b. But, bank may stop to be nice to customer. 1. Alleged drawer is not liable
3. Made to parties who pay in good faith, that is maker, drawer, and 2. Requirements of writing 2. Drawee bank must recredit alleged drawer’s account as check
acceptor (P). a. Dated was “not properly payable” unless drawee bank has a defense.
a. Ex.: Law firm pays clerk with $500 check drawn on Bank. Clerk b. Signed 3. Bank unable to pass on loss unless breach of presentment
deposits into account at ONB. ONB present check to Bank for c. Describe item with certainty. warranty.
payment and Bank pays. Clerk and ONB made presentment i. Ex.: Account number, check number, and amount. a. Normally, no presentment warranties (entitled to enforce, no
warranties to Bank. 3. Valid for 6 months; can be renewed. alteration, no knowledge of forged drawer’s signature) will be
4. Warranties when unaccepted draft presented to drawee 4. Bank’s defenses if it pays over a stop payment order breached; parties had right to enforce forger’s obligation.
a. Warrantor entitled to enforce draft or obtain payment a. Stop payment order did not comply with requirements. b. Forger is real drawer because forger signed when forger forge
b. No alteration b. Customer would have to pay check even if payment had been alleged drawer’s signature.
c. No knowledge of unauthorized drawer’s signature stopped. c. Drawer takes risk that drawer’s signature unauthorized unless
d. If remotely-created, that person identified as drawer authorized 5. Cashier’s and teller’s checks presenter knew it was unauthorized.
item. a. Remitter cannot stop payment. 4. Bank’s defenses to recrediting [defenses to alleged drawer’s not
5. Warranty when other instruments presented b. Bank may stop payment. properly payable action]
a. Ex.: Dishonored draft to indorser; note to maker. i. But Bank then risk liability for expenses, lost interest, and a. Drawer’s negligence
b. Warrantor entitled to enforce draft or obtain payment. consequential damages. i. If drawer’s negligence substantially contributes to forgery of
D. Warranty v. indorser’s K G. Wrongful dishonor drawer’s name, drawer may not raise forgery.
1. How do you now whether P should bring suit against indorser for 1. Def.: Drawee dishonoring payable check. b. Bank statement rule – duty to inspect statement
breach of warranty or breach of indorser’s K? Determine identity 2. Who has standing to complain? i. General rule
of P! a. Drawer may bring action against drawee for bouncing check it (A) Customer (drawer) has duty to inspect bank statement and
2. If P is holder: If payor has not paid instrument (e.g., check bounces should have paid. canceled check in timely manner and report forgeries to
or promissory note is not paid by maker), then holder will sue b. Payee may not sue drawee bank even if drawee bank should have bank.
indorser on indorser’s K. paid check and drawer had sufficient funds to cover check. (B) If customer does not and bank can prove a loss beyond
3. If P is payor: If payor has paid and later discovers should not have 3. Damages: Drawer may recover all damage caused by wrongful original mistaken payment (e.g., not catch forger),
(e.g., check was forged or note was altered), then payor will attempt dishonor such as bounced check fee and expenses incurred defending customer precluded.
to sue indorser for warranty (transfer or prepayment). prosecution for writing hot checks. (C) Warning: Forged drawer’s signatures must be reported to
4. Drawee’s bank’s defenses bank within 1 year regardless of bank’s or customer’s
a. Payment would overdraw drawer’s account. negligence.
OTHER ISSUES b. Check is more 6 months old. ii. Repeat offender rule
A. Discharge by holder – cancellation, destruction, etc. i. Bank may honor “stale” check as long as it does in good faith. (A) If same person is forging a series of checks, drawer must
1. Holder may discharge obligation by surrendering instrument to H. Payment in full check report forgeries within 30 days of when statement was
obligor, destroying it, canceling it (e.g., writing “void”), etc. 1. Def.: Check (or accompanying communication) on which drawer available. If drawer does not do so, bank will not recredit
B. Effect of instrument on underlying obligation conspicuously indicates that cashing check acts as payment in full of account for subsequent forgeries by same person.
1. Payment by certified check, cashier’s check, or teller’s check = an existing obligation which is unliquidated or subject to a bona (B) Ex.: Fred steals 10 of Dave’s checks and forges his name.
underlying obligation discharged as if person paid in cash. fide dispute. Drawee bank pays first three checks and returns them
2. Uncertified checks and notes – underlying obligation is suspended. 2. Effect: Payment in full check operates as accord and satisfaction if with Dave’s February 2011 statement. The remaining 7
a. If check / note later paid, underlying obligation discharged. payee cashes check. checks are included with Dave’s May 2011 statement.
b. If check / note is dishonored, holder may sue on either instrument 3. Exceptions Dave does not inspect either statement until July 2011.
or underlying obligation. a. Pay returns money within 90 days. Dave will be precluded from asserting forgeries of last 7
C. Failure to produce original instrument b. Payee is an organization and had previously notified drawer of a checks because he did not report original forgeries within
- Ex.: Original lost, inadvertently destroyed, or stolen. particular person or address to send payment in full checks. 30 days of when he received his February 2011 statement.
1. Enforcement by person not in possession Dave may still be able to recover for original 3 forgeries
a. Person was in possession when loss occurred, because one year period has not elapsed unless drawee
b. Loss not due to transfer or lawful seizure, AND FORGERY & ALTERATION bank can prove it suffered a loss because of delay.
c. Person cannot reasonably obtain original. A. Introduction D. Forged indorsements
2. Protection for payor required – e.g., security / bond. 1. It is essential when dealing with forgery to determine whose 1. Effect of forgery of payee’s name
D. Overdrafts signature was forged because different rules apply abased on a. Bearer paper
1. Bank may charge customer’s account even if charge creates an identity / status of person whose name is forged. i. Since indorsement is not necessary to negotiate bearer paper,
overdraft. B. Forged maker’s signature forgery of indorsement is irrelevant.
E. Postdated “check” 1. Alleged maker not liable b. Order paper
1. Bank may pay postdated check unless customers gives bank a notice a. Alleged maker is not liable because maker’s signature does not i. Forger breaks chain of title and check is not properly payable.
of postdating which describes check with reasonable certainty. appear on note. Accordingly, drawer may demand that drawee bank recredit
F. Stop payment orders b. Alleged maker’s conduct may ratify forgery or cause alleged drawer’s account as check was not properly payable.
- Drawer (bank’s customer) may stop payment on check. Other parties maker to be precluded from denying forgery. 2. Situations where a party is precluded from asserting forgery of
have no authority to do so. 2. Forger is liable payee’s name
1. Must be in writing a. Forger is liable on note because forger’s signature appears on it.

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a. Imposter rule – drawer / maker estopped to deny validity of enforce (forged indorsement broke chain of title so no one i. Ex.: Martin signs a promissory note payable for $100 to
forged indorsement. could become holder). Evans. Evans leaves it on his desk. Unbeknownst to Evans, the
i. Issuer, maker or drawer, will be estopped from denying e. Liability of transferor cable TV guy expertly alters the note so it reads $1000 and
validity of forged indorsement. i. Presenter who loses to payor for breach of presentment returns it. Marin is still liable for original $100.
ii. These are situations where maker / drawer is deemed to have warranty of good title may sue entities further up chain for 4. Not properly payable
acted carelessly in issusing check and thus to have breach of various transfer warranties of: a. General rule
contributed to forgery. (A) Entitled to enforce, i. Altered check is not properly payable.
iii. Ex. #1: Paul pretends to be agent of American Red Cross. Dan (B) All signatures authentic or authorized, AND ii. Ex.: Dave issues check for $100 to Paula. Paula expertly alters
draw a check payable to American Red Cross. Paul forges its (C) No good defenses. check so it reads $100 and cashes it. Dave may recover against
signature. Paul’s forgery is effective and Dan is precluded ii. Ex.: Dan issues a check payable to Paul from Dan’s account at his bank because this check was not properly payable.
from asserting forgery in a not properly payable action against ONB. Tom steals Paul’s check, expertly forges Paul’s name, b. Bank’s defenses
drawee. Dan should have determined true nature of Paul’s and deposits check into his account at Bank. Bank presents i. Negligence
authority. check to ONB for payment and ONB pays. Shortly thereafter, (A) If drawer’s negligence substantially contributes to
iv. Ex. #2: Paul, the corporate treasurer, writes a check to Mike both Dan and Paul discover what happened and notify ONB alteration, drawer will be precluded form asserting
not intending mike to receive it, forges Mike’s name, and immediately. alteration.
cashes it. Paul’s forgery is effective and the corp. (drawer) is (A) ONB is liable either to 1) Dan for cashing check which ii. Bank statement rule
precluded from asserting forgery in a not properly payable was not properly payable or 2) Paul for converting (A) Drawer must report alterations to drawee bank within 1
action against drawee. Corp. should have better supervised its Paul’s property. year.
treasurer. (Same result if secretary to treasurer forges.) (B) After paying either Dan or Paul, ONB will bring a claim 5. Breach of transfer and presentment warranties of no alteration
b. Fraudulent indorsement by employees – payee estopped against Bank for breaching presentment warranty of a. Ex.: Dave issues $100 check to Paula. Paula expertly alter check
i. If an employer entrusts employee (or independent contract) entitle to enforce (Bank had no right to enforce check so it reads $1000 and cashes it. Dave timely reports alteration
with responsibility w.r.t. an instrument and employee makes a because forgery prevented it from being a holder). after receiving his bank statement and drawee bank recredits
fraudulent indorsement, then indorsement is effective. Payee is (C) Bank may then bring claim against Tom for breaching Dave’s account because this check was not properly payable.
estopped to assert forgery. transfer warranties of entitled to enforce, all signatures Dave’s bank may not sue up chain of banks for breach of
ii. Ex. #1: Dan hires Paul as bookkeeper who is responsible for authentic or authorized, and no good defenses. presentment warranty of no alteration and presenting bank may
making Dan’s deposits. Paul takes a check payable to Dan, E. Alteration sue up chain for breach of transfer warranty of no alteration.
forges Dan’s indorsement, and cashes check. Forged - Obligor does not want to pay because instrument was altered.
indorsement is effective because Dan entrusted Paul with 1. Types BASIC STRATEGY: 1) Identify type of paper involved, 2) Identify parties
responsibility w.r.t. check. Dan will be precluded from a. Change in obligation involved with paper and transaction, 3) Is instrument negotiable? (form) 4)
asserting forgery in attempting to recover from persons other i. Any unauthorized change in an instrument that purports to Was instrument properly negotiated? (transfer), 5) Is transferee HDC?
than Paul. modify obligation of a party such as amount, date, names of
iii. Ex. #2: Dan hires Paul as a janitor. Paul breaks into Dan’s safe payees, and interest rate.
LIABILITY OF PARTIES: 1) Who is attempting to recover (P)? Who is
and steals a check payable to Dan, forges Dan’s indorsement, b. Unauthorized completion
allegedly liable (D)? 3) What is cause of action asserted by P? What
and cashes check. Forged indorsement is not effective because i. Instrument is completed in an unauthorized manner which
defenses to liability may be raised by D? If D is held liable, to whom may
Dan not give Paul responsibility w.r.t. Check. Dan may assert affect party’s obligation.
liability be passed?
forgery in attempting to recover on check. 2. Effect on HDC
c. Liability of drawee a. Change in obligation – HDC may enforce for original amount
i. Conversion liability to payee i. Ex.: Mary issues a promissory note payable to Evans for $100.
(A) Payee can sue payor bank (as well as depository bank and Evans expertly alters note so it reads $1000 and then sells it to
non-bank converts) for conversion OR Harold who qualifies as a HDC. Harold may enforce note
ii. Not properly payable liability to drawer against Mary for $100, but she has a real defense of alteration
(A) Drawer of check can sue payor / drawee bank since a for $1000.
check with a forged payee’s name is not properly payable. b. Unauthorized completion – holder in due course may enforce
iii. Drawee protected from double liability as completed
(A) A successful conversion action against drawee by payee i. Ex.: Mary signs check, but leaves amount blank, and hands it
will eliminate drawer’s not properly payable action. to Evans stating, “You may but yourself a birthday present
iv. Bank’s defenses with this check, but you may not spend more than $100.”
(A) Imposter rule. Evans completes check for $1000 and transfers it to a bank
(B) Fraudulent indorsement by employee entrusted with which qualifies as HDC. Bank may enforce check against
check. Mary for $1000.
(C) Drawer’s negligence. 3. Effect on non-HDC
(D) Failure to timely sue (drawer must sue within 3 years). a. Fraudulent made by holder = Total discharge of obligor
i. Ex.: Martin signs a promissory note for $100 payable to
- If bank pays, it will then want to pass liability on… Evans. Evans expertly alters note so it reads $1000 and then
d. Liability of presenter tries to collect $1000 from Martin. Martin has no liability on
i. Drawee bank ban then sue presenter and those prior to note and is not even obligated to pay original $100.
presenter for breaching presentment warranty of entitled to b. Not fraudulently made = obligor liable under original terms

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