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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
Page |4 available to the customer, the customer is barred. If the customer does complain within one year and the bank fails to take appropriate action, the statue of limitation for article 3 matters is 3 years. If the bank has a defense due to the bank statement rule, it must raise the defense with its customer, if it does not and simply places the money back in the customers account, the bank may not pass its loss on to prior parties through breach of warranty suits.
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):