NY Bar Exam Review - Secured Transactions/Commercial Paper

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What is the scope of Article 9?: Article 9 applies to consensual security interests in personalty and fixtures.
How does a creditor create and enforceable security interest in debtor's collateral, meaning, how does the creditor ATTACH?: VCR -
1) V - Value;
2) C - Contract;
3) R - Rights in the collateral
Once attached, how does the creditor attain PERFECTION?: By placing the world on record notice of that creditor's existence.
When more than one creditor has a stake in the same collateral, what are the rules of priority?: Generally, the first to perfect takes first; second to perfect takes second, etc.
What if the debtor defaults on the debt or obligation?: The article 9 creditor has statutory and judicial remedies.
What law applies whhere the collateral is real estate?: Law of mortgages?
What law applies when the collateral is personalty or fixtures/: Article 9
What is personalty?: In general, personalty equals goods.
What type of collateralizations does Article 9 apply to?: Only to voluntary or consensual collateralizations. Thus, does not apply to statutory or mechanics liens.
What is the entity who owes the money called?: The debtor.
What is the entity who lends the money called?: The secured party or secured creditor.
What is the contract or record called?: The security agreement.
What is the right that the creditor has in debtor's personalty or fixtures called?: The security interest.
What are the personnalty or fixtures that creditors can look to for satisfaction on the debt called?: Collateral.
What can the collateral be?: 1) Tangible goods;
2) Intangible or semi-intangibles
What does tangible collateral or goods mean?: 1) Consumer goods;
2) Equipment;
3) Inventory;
4) Farm products;
5) Fixtures
What are consumer goods?: Thos items used for personal, familial, or household purposes, such as a home dining room set, blender, oven, refrigerator, or car.
What is equipment?: Items used in business, such as Macy's cash registers, Mrs. Fiel's cookie ovens, Le Cirque restaurant's china, Dr. Dentist's dental chair, and Armani's sewing machines.
What is inventory?: Goods held for sale or lease, such as Circuit City's stock of stereos, Nordstrom's spring clothing line, or Ethan Allen's furniture line.
What are farm products?: Crops, livestock, and supplies used in farming operations, such as eggs, corn and cows in possession of a farmer.
Wha is the key for classigyin types of tangible collateral?: Primary use in the hands of the debtor, meaning this is a subjective standard - no absolutes (e.g, golf clubs in your hands are consumer goods; in Tiger Woods' hands, equipment; in the hands of sports store, inventory).
What ae intangibles or semi-intangibles?: For example, patent and trademark rights; copyrights; stocks, bonds, and mutual funds; proceeds received upon the sale of collateral; accounts (meaning any right to payment for gods or services); promissory notes and drafts.
What does attachment mean?: That the security interest is enforceable. To ask, Is the security interest enforceable? is to ask "Has it attached?
What are the three requirements for attachment?: VCR -
Value
Contract
Rights in the collateral.
What is the value requirement?: Value must be given by the creditor.
What is the contract requirement?: 1) A contract, called the security agreement, must evidence the secured transaction UNLESS the secured party has taken possession of the cllateral.
2) If the secured party is in possession of the collateral, there is no need for record. By contrast, if the debtor is in possession of the collateral, we need a record.
What are the requirements of the record?: The record must:
1) Be authenticated by the debtor (means signed or electronically marked);
and
2) Reasonably identify the collateral.
What is the rights requirement?: Debtor must have rights in the collateral.
What are "after-acquired collateral clauses"?: Taking a security interest "in all of X's inventory, whether now or hereafter acquired."
Are after-acquired collateral clausese enforceable?: Yes and increasingly becoming the norm.
What is perfection?: A publicity device.
It is soemthing that the secured party does to put the world on record or constructive notice of the secured partys' existence. Proper perfection helps to protect the secured party from competing creditors.
How can you attain perfection?: 1) By the secured party's taking possession of the collateral;
2) Automatic perfection for purchase money security interests (PMSIs) in consumer goods;
3) (Most common way): The secured party FILES NOTICE of the security interest in teh public records.
What is the rule of perfection for PMSIs?: Upon attachment, perfection is automatic.
What does proper filing do?: Puts the world of potentially competing creditors on record or constructive notice of the filer's claim.
What is filed to put the world on notice?: 1) The security agreement could be filed, but rarely is.
2) Instead, the document typically filed is called a financing statement.
What is a financing statement?: A very simple document whose only purpose is to provide interested parties with sufficient information to make follow-up inquiries.
How does Article 9 encourage filing?: Article 9 aims to encourage electronic filing, but is "media-neutral."
What are the requisite contents of a financing statement?: Buzzwords: Simple and sparce.
The financing statement need only contain:
1) Debtor's name and address;
2) Secured creditor's name and address; and
3) A description of the collateral.
What type of description of hte collateral is required?: In the financing statement, super-generic descriptions of hte collateral (such as "all of debtor's assets") are permissible.
**Where is the financing statement filed?: Filing is done centrally, with the state Secretary of State, in the state where the DEBTOR is located UNLESS, the collateral is timber, minerals, or fixtures, in which case, you file locally, in the county where the underlying realty is located.
Where is the debtor located?: 1) If the debtor is an individual, he or she is located in the state of her principle residence;
2) If the debtor is a registered organization (i.e., a corporation, a limited liability company, or a limited partnership), it is located in the state under whose laws it is orgaized.
What is the exception to central filing?: If the collateral is timber, minerals, or fixtures, file locally, in teh county where the UNDERLYING REALTY is located.
What is the rule with respect to priority?: Each claimant is entitled to satisfaction IN FULL before a subordinated claimant is entitled to take.
What types of creditors are there?: 1) Attached Unperfected Creditor (AUPie)
2) Lien Creditor (LC)
3) Perfected Attached Creditor (PAC);
4) Non-Ordinary Course Buyer (NOCue)
5) Buyer in Ordinary Course (BIOC)
6) General Unsecured Creditor (GUC)
What are Attached unperfected creditors (AUPies)?: These are Article 9 creditors who create an enforceable security interest, i.e., it attaches, but either never bother to perfect or try to perfect but botch the effort, perhaps by filing in the wrong place.
What are Lien creditors (LC's): These are general unsecured creditors who go to court to get a judicial lien on the collateral.
What are perfectly attached creditors (PACs)?: These are the Article 9 creditors who succeed in attaining perfection.
What are teh Non-Ordinary Course Buyers (NOCies)?: These are people who purchase the collateral outside teh ordinary stream of commerce (e.g., Steven Tyler buys a guitar from his auto mechanic).
Who are Buyers in Ordinary Course (BIOCs)?: These are people who purchsae the collateral from a merchant's inventory. For example, Steven Tyler buys a guitar from Sam Ash Guitar Store.
What are General Unsecured Creditors (GUCs): These are lenders who never bothered to take collateral.
What are the rankings for types of creditors?: Typically:
1) BIOC;
2) PAC;
3) LC;
4) NOCie;
5) AUPie;
6) GUC
What are an AUPies rights vs. The World?: 1) AUPie's interest is enforceable against the debtor and will defeat any subsequent AUPis as well as any GUC.
2) BUT, AUPie will lose to: PAC, LC, and ANY BUYER without knowledge of the security interest.
What are the rights of a PAC vs. The World?: 1) The basic rule is that PAC defeats all, EXCEPT:
a) The PAC who filed first;
b) Certain PMSI-holders;
c) the BIOC.
What is the rule where there is more than one PAC?: First in time, first in right.
When does Article 9 allow for filing?: For purposes of determining priority, Article 9 gives special effect to filing and allows for early filing, even at the onset of loan negotitations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will RELATE BACK to the early filing date.
What priority contests occur with PMSIs?: Between the after-acquired collateral financier (AACF) and the holder of a purchhase money security interest (PMSI).
Who is an AACF?: A secured creditor who takes as collateral a security interest "in all of Debtor's [business equipment, or inventory, etc.] whether now held of hereafter acquired. When you have an after-acquired collateral clause, you have an after acquired collateral financier (AACF)
How does the AACF collide with the PMSI-holder?: One of two ways:
1) The AACF v. the PMSI-holder when the collateral is equipment;
2) The AACF v. the PMSI-holder when the collateral is inventory.
Where you have an AACF PAC and a PMSI holder and the collateral is equipment, how can the PMSI holder achieve first priority in the newly acquied equipment?: All the PMSI holder must do is FILE PROPERLY within 20 days after the debtor takes possesion of the new equipment.
Where tyou have an AACF PAC and a PMSI holder and the collateral is inventory, how can the PMSI holder achieve first priority in teh newly acquired equipment?: The PMSI holder must:
1) FILE PROPERLY BEFORE debtor takes possession; AND
2) NOTIFY the AACF PAC BEFORE debtor takes possession.
What is the reason for the additional safeguards when hte collateral is inventory?: To prevent debtor from committing fraud (insofar as debtor might otherwise entice the AACF into extending additional value to it on teh basis of the new acquisition of inventory, failing to mention that he new inventory is already encumbered on behalf of the PMSI lender.
What is the rule where PAC v. BIOC?: General rule is that PAC loses to BIOC. A buyer in teh ordinary course of business takes free of a perfected security interest in seller's inventory.
What are the reasons for this rule?: To promote commerce and consumerism and to honor buyers' reasonable expectations.
What is default?: Where debtor is in breach, typically for failure to pay. Default is not defined in Article 9. Typically, it is defined in the security agreement.
Once the debtor has defaulted, what can our Article 9 secured creditor do?: 1) Self-help repossession;
2) Repossession by judicial action;
3) Strict foreclosure;
4) Sale;
5) The action for a deficiency judgment.
What is the rule with respect to self-help repossession?: Self-help repossession is permissible, so long as creditor does not breach the peace.
When does a breeach of the peace occur?: A breach of the peace occurs when the secured party's actiosn are LIKELY to cause violence.
What is the relevant question in evaluating self-help repossession?: Not whether or not an actual fight broke out, but whether the secured party did something provocative or likey to cause violence.
What always constitutes a breach of the peace?: 1) A repossession made over ANY PROTEST by the debtor, however mild the protest, constitutes a breach of the peace.
2) If the repossessor misuses the color of law, by, e.g., impersonating a law enforcement officer, he or she has used constructive force and therefore has breached the peace.
What is the consequence of breaching the peace?: Civil nad criminal penalties attach to creditor's misconduct.
What is the rule where repossession is of collateral in the debtor's home?: The home enjoys a zone of privacy. May not enter debtro's home without VOLUNTARY AND CONTEMPORANEOUS CONSENT.
What is the rule where repossession is of collateral outside the home?: May take the collateral so long as there is no debtor objection.
What is repossession by judicial action?: If the secured party chooses not to resort to self-help repossession, he or she may go to court to obtain a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.
What is strict foreclosure?: Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the outstanding debt. In other words, the creditor lawfully retains the collateral and the debt in turn is cancelled.
When does strict foreclosure work best?: When the value of hte collateral approximates the value of the outstanding debt.
How can you strictly foreclose?: To accomplish strict foreclosure, the secured party must send a written proposal to retain the collateral in satisfaction of the debt.
To whom is this proposal sent?: 1) When the collateral is consumer goods, the notice is sent to the debtor and any secondary obligors;
2) When the collateral is not consumer goods, the notice is sent to debtor and other secured parties who have told the foreclosing creditor of their security interest in the collateral, as well as perfected secured parties and secondary obligors.
What is a secondary obligor?: A secondary obligor is a guarantor of the underlyling debt.
What is the result if the parties object?: If any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will NOT be allowed. Instead, the collateral must be disposed of by sale.
For what reasons may a party object?: Any party can object for any reason or no reason whatsoever.
**What is the rule with respect to consumer goods?: The 60% Rule: If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in teh event of a PMSI, strict foreclosure is NOT allowed. Instad, the secured party must sell the collateral within 90 days or be liable in conversion.
What is the rule with respect to sale of the collateral?: The secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (i.e. a public auction) or private.
What are the governing guideposts for sale?: 1) Every aspect of the sale must be commercially reasonable;
2) Prior to the sale, reasoanble notice must be sent.
What always constitutes reasonable notice?: Article 9 provides standard notice forms which, if used, are prsumptively commercially reasoanble.
To whom must the notice be sent?: 1) If the collateral is consumer goods, notice must be sent to the debtor and any secondary obligors;
2) With all other types of collateral, notice must be sent to the debtor and those secured parties who have advised the foreclosing creditor of their security interest, as well as the perfected secured parties and secondary obligors.
What is the content of the notice?: Depends on the type of sale:
1) If dispostion is by PUBLIC sale, the notice must state the time and place of sale;
2) If disposition is by PRIVATE sale, the notice must state the time AFTER WHICH the sale will be made.
3) For consumer goods, additional consumer-protective provisions are mandatory, including how any deficiency will be calculated and how debtor can redeem the collateral.
How much advance notice is required?: No bright line right. The standard is one of commercial reasonableness. But, in a nonconsumer transaction, notice is deemed sent within a reasonable time if it is sent 10 days or more before the time of sale.
May the secured party buy at the sale?: 1) At a public sale, yes.
2) At a private sale, absent external market checks, no. (B/c too much potential for unregulated self-dealing)
What can the secured creditor do if the sale of the collateral nets less than the outstanding debt?: Proceed against the debtor for a deficiency judgment.
How is the deficiency calculated?: If a secured party sells collateral at a low price to an inside buyer, the price that an independent third party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency.
What are the debtor's rights of redemption?: 1) The debtor's right to redeem the collateral is cut off once the secured party has resold the collateral or completed a strict foreclosuer.
2) To redeem, the debtor must pay the amount owed (meaning the missed payment or payments) PLUS: accrued interest and secured party's reasoanble expenses, including attorney's fees.
3) If the security agreement contains an acceleration clause, to redeem the debtor must pay off the entire unpaid balance plus accrued interest plus secured party's reasonable expenses, including attorney's fees.
What is an acceleration clause?: Clause which permits the creditor to declare the full balance due in the event of default.
What is the bright line rule for commercial paper?: When a negotiable instrument is DULY NEGOTIATED to a HOLDER IN DUE COURSE, the holder in due course takes the instrument free of all claims to it, free of personal defenses, and subject only to real defenses.
What are the types of negotiable instruments?: 1) The Promissory Note (or "Note);
2) The Draft
What is the promissory note?: A promise-maker. It contains an affimative promise to pay, and not just a mere IOU.
Who are the parties to a promissory note?: 1) The promisor is called the maker;
2) The promisee is called the payee.
What is the draft?: The commander. It contains an order or command. A check is a draft b/c it contains a command or order.
Whoh are the parties to a draft?: 1) The DRAWER give the order;
2) The DRAWEE is ordered to do the paying;
3) The PAYEE is the beneficiary of the order, meaning the entity who collects.
Where does an indorser sign?: On the back.
How can you tell whether a writing is a negotiable instrument or just a contract?: To qualfy as a negotiable instrument, we need:
1) A writing;
2) payable to order or to bearer;
3) signed by the maker or drawer;
4) reciting a sum certin;
5) containing an unconditional promise or order, and no additional promises or orders;
6) payable on demand or at a definite time; and
7) payable in currency.
How can you remember the requirements for a writing to qualify as a negotiable instrument?: WOSSUP
W - Writing
O - payable to the Order or bearer
S - Signed by teh maker or drawer
S - for a Sum certain
u - Unconditional promise and no additional promises
P - Payale on demand or at a definite time
P - Payable in currency.
Who must sign the instrument?: Must be signed by the maker if it is a promissory note, or by the drawer if it is a draft.
What is required for signature?: Any authentication, found anywhere on the instrument, qualifies. (Could be initials, some defining mark, or a nickname, found in margins or anywhere else on hte paper) - NOT a formal standard.
What if a promise is in some way conditional?: A conditional promise involves a contract, not a negotiable instrument.
The instrument must contain an UNCONDITIONAL PROMISE to qualify as a promissory note or an UNCONDITIONAL ORDER to qualify as a draft.
What is the rule wiht respect to express conditions?: These create a contract, not a negotiable instrument.
What if the instrument endeavors to be "governed by" or "subject to" the terms of some other agreement?: If so, or if the instrument states thhat rights or obligations with respect to the promise or order are contained in another writing, it is non-negotiable. This is b/c the holder of a negotiable instrument should not be required to examine another document to determine rights with resepect to payment.
What is the rule where the instrument refers to another writing?: merely referring to another writing doesn't of itself make the promise or order conditional. Further, a promise or order is not conditional simply becuase it refers to another writing for a statement of rights wiht respect to collateral, prepayment, or acceleration.
When will the instrument be deemed conditional?: If it limits payment to a particular source or fund.
What does the sum certain or fixed amount requirement mean?: A specifically ascertainable sum. In other words, you must be able to calculate how much is to be paid, either from what the writing says or from reference to an outside source.
What if the instrument states that it is payable wiht interest, but does not state how much interest?: That's still negotiable. Here, the judgment rate (the rate on a court judgment), which is set by state statute and therefore fixed, will be applied.
Must the interest rate be calculated by looking only to the instrument itself?: No. Calculation of the interest rate may be ascertained by a reference in the instrument to a generally accepted commercial or financial index, compendium of interest rates, or announced rate of named financial institution.
What does currency mean?: Money.
What does money include?: Foreign currency.
What does money NOT mean?: Goods
What if the writing contains a promise to pay and some other promise?: Non-negotiable.
When is an instrument payable on demand?: When it specifically states that it is payable "on demand" or "at sight" or "on presentation."
What if the instrument is silent as to the time of payment?: It is still negotiable and deemed payable on demand.
When is an instrument payable at a definite time?: If, by its terms, it is payable ON OR BEFORE A STATED DATE, or AT A FIXED PERIOD AFTER A STATED DATE.
What is the rule with respect to acceleration clauses?: They are permissible and do not destroy negotiability.
BUT, future event must be linked to a date certain.
How is an instrument payable to order?: To be negotiable, the note or draft must use the word "order" or the word "assigns" in connection with the payee's name.
How is an instrument payable to bearer?: If an instrument is not payable to order, then to be negotiable, it must be payable to bearer, meaning that it is payable to anyone who has it. Examples which satisfy the standard:
1) Pay to bearer;
2) Pay to the order of bearer;
3) Pay to Andy Garcia or bearer;
4) Pay to cash;
5) Pay to the order of cash.
Is a writing that states "Pay to Andy Garcia" negotiable?: No. It is non-negotiable. It is just a contract. Becuase it does not contain the word order or assigns or bearer.
On what theories may the D be sued in a commercial paper hypo?: 1) Contract or Signature Liability;
2) Warranty or Transfer Liability
What is the context of contract or signature liability?: D signed the negotiable instrument. Signing it is a promise to pay it.
Who signs the negotiable instrument? (Who is D?): 1) The maker - the promisor in the promissory note;
2) The indorser - signs on the back of the instrument;
3) The drawer - the party who signs the check
Who typically does NOT sign the instrument?: The drawee - the party who pays the draft (typically the bank). No signature and therefore no liability.
What is the effect of the maker or promisor's signature?: By signing his name to the instrument, he enters into a K, whereby he agrees to pay the instrument. If he fails to pay, he can be sued.
What is the effect of hte indorsor's signature?: The indorsor promises that if the check bounces, and he is given notice of that fact, he will pay.
What is the effect of the drawer's signature?: The drawee promises that if it bounces, and he is notified, he will pay.
What is the result when the words "without recourse" accompany the signature?: Without recourse is a term of art used by indorsers and drawers. It represents a disclaimer of liability. Without recourse passes title, but NOT signature liability.
What is warranty or transfer liability?: Seller's liability for selling a defective instrument.
Who is the D? Who may be sued for breach of warranty?: Any transferor who SELLS the negotiable instrument. Thus, if transferor is not a donor, he can be sued.
Who is entitled to sue the D for breach of warranty?: 1) If D indorsed the instrument (i.e., signed on the back), any P in possession of the instrument may sue).
2) If D did not indorse the instrument, then only the D's immediate transferee may sue. The warranties will not run with the instrument
What warranties are made by D?: 1) D promises that P has good title to the instrument;
2) D promises that all signatures are genuine and authorized (forgery is a breach of warranty);
3) D promises that the instrument has not been materially altered. (if facts tell you that the instrument has been tampered with, it's defective);
4) D promises that there is no defense or claim good against the D, meaning that the instrument is enforceable;
5) D promises that she has no knowledge of any bankruptcy or insolvency proceeding against the maker or drawer.
What does due negotiation or "duly negotiated" mean?: That there has been a proper transfer of the instrument.
If the instrument has been properly transferred, what is the transferee?: A holder, and may be eligble to be a holder in due course.
If the instrument has been improperly transferred, what is the transferree?: Not a holder and cannot qualify as a holdr in due course.
How is an instrument negotiated when it is payable to order?: When the instrument is payable to the order of a specific payee, it is negotiated by delivery of the instrument to that payee. Any further negotiation requires that the payee indorse the instrument and deliver it to the transferree. The indorsement must be authorized and valid.
How is an instrument negotiated if it is payable to bearer?: If the instrument is payable to bearer, indorsement is not required.
What types of indoresement are there?: 1) The special indorsement;
2) The blank indorsement;
3) The restrictive indorsement
What is the special indorsement?: One that names a particular person as "indorsee." The indorsee must sign in order for the instrument to be further negotiated.
What is the blank indorsement?: The blank indorsement is one that does not name a specific indorsee. It may be negotiated by delivery alone.
What is the restrictive indorsement?: The restrictive indorsement contains a condition. e.g., for deposit only.
Where a check is indorsed "for deposit only" and stolen and thief cashes it at bank, is bank a holder?: No. Bank blew it by not paying attention to the restriciton.
What are the origianl owner's rights?: Recover from bank in conversion.
Who is a holder in due course (HDC)?: A holder in due course (HDC) is a holder who takes the instrument:
1) for value; and
2) in good faith; and
3) without notice that it is overdue or has been dishonored or is subject to any defense or claim.
What is the "for value" requirement?: The holder must give value for the instrument. Note that giving value does NOT mean giving consideration, which is a contract principle.
How do consideration and value differ?: 1) A mere promise is not value;
2) Old value is good value.
What is the "in good faith" requirement?: Good faith means honesty in fact (this is a subjective test, sometimes referred to as the rule of the pure heart and empty head).
What is the "without notice" requiement?: The holder must acquire the instrument without notice that it is overdue, has been dishonored, or is subject to any defense or claim. The notice requirement imposes an OBJECTIVE test. It asks, did the holder KNOw or HAVE REASON TO KNOW of the problem?
What are the rules with respect to notice that the instrument is overdue?: 1) Where it is payable at a definite time and the time is past when the holder buys the instrument;
2) Where holder had notice that a payment or more of PRINCIPAL is in arrears, cannot qualify as HDC;
3) Where hodler takes with notice that one or more payments of INTEREST are in arrears, he can nonetheless qualify as a HDC.
What are the rules with respect to notice of any defense or claim agaisnt the negotiable instrument's enforcement?: 1) When the appearance of the instrument gives notice (e.g., stamped "PAID" or "VOID"), holder can't be an HDC;
2) When the obligation of any party is voidable, the holder can still be an HDC unless they had notice or reason to know of the voidability;
3) Notice of competing claim to negotiable instrument: If the instrument is lost by or stolen from teh true owner, the transferee could still qualify as a HDC if the instrument has been properly transferred and the transferee did not have notice or reason to know of the theft or loss;
4) Notice that fiduciary has negotiated instrument in breach of his fiduciary duty: Transferee will still qualify as HDC UNLESS he actually knew of the breach (*Only place where standard is one ofactual knowledge).
How does the shelter rule apply to HDC?: A transferee acquires whatever rights her transferor had. In other words, the transferee takes shelter in the status of her transferor. Transferee "steps into the shoes" of the HDC, even t hough she otherwise clearly fails to meet the requirements of due course holding. So, transferee can have all the rights of a HDC even though she is a mere donee or otherwise fails to meet the requirements of due course holding.
What is the rule where a transferee is an HDC?: A HDC (and subsequent transferees who take "shelter" in thaht status) takes the instrument free from claims, free from personal defenses and subject ONLY to real defenses.
What does it mean that the HDC takes free from claims?: A claim is a right to a negotiable instrument because of superior ownership. If a negotiable instrument is duly negotiated to a holder in due course, the HDC defesats the superior owner.
What are personal defenses?: Personal defenses include every defense available in ordinary contract actions, such as:
1) lack of consideration;
2) unconscionability;
3) waiver;
4) estoppel;
5) fraud in the inducement.
What are the real defenses?: MAD FIFI^4

MA - Material Alteration (change in terms of instrument)
D - Duress;
FIF - Fraud In the Factum
I - Incapacity
I - Infancy
I - Insolvency
I - Illegality
What is a material alteration?: A change in the terms that hte maker or drawer inserted in the instrument
Where there is a material alteration, what is maker liable for?: Only the original amount filled in by him, not the altered amount.
What if maker was negligent?: If maker was negligent, he is estopped from raising material alteration as a defense.
What does negligence include?: Leaving blanks or leaving wide spaces on the check.
What is the difference b/t real fraud and personal fraud?: 1) Real fraud, known as fraud in teh factum, is assertable against an HDC. Real fraud means that there has been a misrepresentation about the instrument. (about what it is)
2) Personal fraud, meaning fraud in the inducement, is a personal defense. It is ineffective against an HDC.

As long as the maker KNEW she was signing a negoitable instrument, she has no defense against a subsequent HDC, even if she was fradulently induced in to signing. BUT, if she did not know that what she was signing was a negotiable instrument, she will have a defense agaisnt the HDC.

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