Payment Systems Outline

PAYMENT SYSTEMS
WALKER
2012
 
 
Types of Negotiable Instruments
Check – draft drawn on a bank (or other); “Pay to the order of…”
drawer – person who writes the check
payee – person who is getting paid
drawee – person paying it (bank)
Note – promise to later pay
Maker – person who drafts the note
Holder – in possession of the note payable to identifiable person or bearer
Make check out to Paul à give to Paul à Paul endorses and gives to Jane = Jane becomes the holder
If not payable to identifiable person, then payable to bearer.
 
Person entitled to enforce
holder with right to enforce
check to John Smith à John gives to brother Eddie.
Eddie a holder? – no, needs endorsement to Eddie
Eddie have right to enforce it? – if John intended him to have that right & giving to Eddie makes that presumption. = non-holder with right to enforce
3-309 – lack possession but still have the right to enforce if you meet these requirements.
 
Merger Doctrine – concept that the debt is “merged” into the instrument.
Delivery
Possession gives holder the right to enforce payment.
Negotiation – voluntary or involuntary transfer of the possession of the instrument
Endorsement
payable to a certain person, must be endorsed before collection
“blank endorsement” – indorsement makes note payable to bearer.
e.g. “I promise to pay $1,000 on April 1, 2000 to the bearer of this note.” = bearer paper
If X receives possession of this note, X may enforce because X is the holder, regardless of X’s ownership of the note.
Who made payable to?
Identifiable person – person possessing note must be that person OR that person gave it to you (shelter doctrine)
bearer paper – only need possession to enforce
 
SMS v. ABCO Homes – P trying to recover on note issued by D.  Ct. – Was P a holder of the note?  Yes – had possession payable to self and entitled to enforce note.  ADCO doesn’t want to pay SMS because it thinks only FDIC should be able to collect on the note.  SMS got the note from FDIC so has possession and has endorsement = holder and right to enforce the note, regardless of ownership or not.  Fact that FDIC included the note in a bundle of other notes still shows FDIC’s intent to give SMS right to enforce.  Ruling – SMS gets paid because they have the right to enforce the note.  Court does not want to get involved in ownership. 
Under UCC ownership doesn’t matter, only who has possession + endorsement.
To recover on a promissory note, the P must prove:
(1) the existence of the note in question;
(2) that the party sued signed the note;
(3) that the plaintiff is the owner or holder of the note; and
(4) that a certain balance is due and owing on the note.
“Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.  If an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder.  When an instrument is payable to an identifiable person, the “holder” is the person in possession if he is that identified person.
 
Lambert v. Barker – Barkers promise to pay Davis à Davis sells to Lambert (1979)
Barkers property to Beloff who conveys to Harwood.
Harwood conveys to Bugg (1980) when Davis falsely asserts he still had note.
1981 – Lambert wants to collect from Barkers & Harwoods à Harwoods said they paid off note to Davis
Ct. – Lambert holder of note and has right to enforce even if Harwoods paid someone else!
 
UCC 3-602: Payment
e.g. Your note transferred to ABC Co. from Chicago Bank.  Chicago Bank gives you notice that they sold note and you contact ABC for such proof, but ABC never supplies.  You later pay Chicago Bank à discharged because ABC never gave notice to you.
 
Good Faith Purchase: Freedom from Claims and Defenses
Miller v. Race – stolen note used to pay for lodging
bearer note – thief was a holder because he had possession and it was a bearer (illegality n/a)
Thief’s appearance – didn’t appear to be someone who would pass a bad note.
Hotel became the holder in due course
Rhodes v. Peacock – passed an endorsed check for clothing purchase
“pay to William Ingham, or order”, not drawn by a bank, stranger to seller
Ingham endorses check in blank (on back) à becomes bearer paper à stolen by now Holder in due course
Example: B induces by fraud A to issue note to B, B gives note to C, C cashes note
If B endorses to C = intent and holder
If B just gives to C = non-holder with right to enforce
So does C get paid? – C is not a holder in due course, therefore subject to defenses of A (in this instance, fraud)
Defenses – UCC 3-305
 
UCC 3-104: Negotiable Instrument
promise/order to pay fixed amount, with or w/o interest and
payable to bearer or to order at time issued or first comes into possession of holder
payable on demand or definite time
not state any instructions
e.g. “I promise to pay John Smith $5,000 plus 10% interest on January 1, 2005.”
Negotiable instrument? – NO, it’s a K only to John Smith
e.g. “I promise to pay to the order of John Smith $5,000 plus 10% interest on January 1, 200