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REG Exam > BL - Commercial Paper > Flashcards

BL - Commercial Paper Flashcards

1
Q

What are the key elements of a valid Partnership?

A

Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.

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2
Q

Can corporations and other partnerships become partners in a partnership?

A

Yes; corporations and other partnerships can become partners of a partnership

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3
Q

Name the Basics of Partnership Formation - Form of agreement and intent

A

Agreement can be very informal - either ORAL; IMPLIED or WRITTEN

Intent is to make a profit

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4
Q

When must a partnership agreement be in writing?

A

Must be WRITTEN if partnership activity falls within Statute of Frauds:

A. Can’t be completed in 1 year

B. Even if partners reside in different states; not necessary unless within Statute of Frauds

C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing

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5
Q

How are profits shared in a partnership?

A

Profit sharing is equal by default

A. Unless partnership agreement says otherwise

B. Unless specified; sharing of losses follows same pattern as sharing of profits

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6
Q

What is the Liability of General Partners in a partnership?

A

Joint Liability - Partners are collectively liable for debts/torts

Several Liability - Partners are individually liable for debts/torts

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7
Q

Which assets may creditors of a partnership go after; and in which order?

A

Creditors must go after partnership assets first before suing partners individually

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8
Q

What are the rights of a General Partner in a partnership?

A

General Partners have joint control over the management of the partnership and its affairs

Unanimous vote needed to change the structure of the partnership

Each partner has full right to inspect partnership accounting and business

Partner has the authority to assign their interest to another partner

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9
Q

What does and does NOT happen when a General Partner assigns their partnership interest to someone else?

A
  1. Other party gets that partner’s share of the profits and/or capital contribution.
  2. Does NOT give assignee authority to vote on partnership business
  3. Assignee does NOT have right to inspect partnership books
  4. Assignor still maintains liability
  5. Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.
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10
Q

What is the actual authority of a partner in a partnership?

A

Has authority to bind the partners to a contract.

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11
Q

What is the APPARENT authority of a partner in a partnership?

A

A third party reasonably believes partner has authority to bind partnership to contract

Cannot use apparent authority to add a new partner

Cannot use apparent authority to sell or bind partnership assets

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12
Q

With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?

A

Partner not liable assuming notice given.

Notice must be given to nullify apparent authority

People who had knowledge of their role must be personally notified

Public must be notified

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13
Q

With respect to PRECEDING debts; what is the liability of a partner in a partnership?

A

Old partners: Jointly and severally liable unless creditors grant novation

New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.

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14
Q

What happens upon the death of a partner in a partnership?

A

Partner’s estate gets share of partnership profits and capital account

Estate does NOT get any partnership assets

Remainder of partners own partnership assets

Heirs of decedent are not added as partners unless remaining partners unanimously agree

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15
Q

What happens during the winding up of a partnership and in what order?

A
  1. Creditors get paid; Partners can also be creditors
  2. Distributions in arrears get paid
  3. Partners get return of Capital accounts
  4. Any remaining distributions

Note: NO documents need to be filed with state to dissolve general partnership.

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16
Q

What are the requirements to form a Limited Partnership?

A

Governed by state L.P. laws

Must file L.P. certificate with Sec. of State

Only General Partners must be listed

Future additions or subtractions of G.P. require certificate to be updated with state

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17
Q

How are profits and losses split in a Limited Partnership?

A

Unlike G.P.; L.P. profits/losses are split according to capital contributions by default

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18
Q

True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time.

A

True.

A Limited Partner; however; cannot also be a General Partner and maintain limited liability.

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19
Q

Do limited partners have a fiduciary responsibility to a Limited Partnership?

A

No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership

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20
Q

What authority does a limited partner have under a Limited Partnership?

A
  1. Right to inspect records of the business.
  2. Can still vote on partnership business without losing limited liability
  3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
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21
Q

What limitations does a limited partner have in a Limited Partnership?

A
  1. They have no authority as an agent to bind the partnership
  2. They can’t participate in management decisions and maintain limited liability.
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22
Q

What is the liability of a limited partner in a Limited Partnership?

A

Limited partners are liable to the extent of their capital contributions only

Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions

Becomes liable to third parties IF they knew of their involvement

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23
Q

When does the dissolution of a Limited Partnership occur?

A

Automatically happens

  1. Once final General Partner leaves
  2. Time specified in certificate lapses
  3. Event specified in certificate happens
  4. Unanimous consent by partners
  5. Illegal activity
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24
Q

What is required to form a Limited Liability Partnership (LLP)?

A
  1. Majority vote required to form LLP
  2. Articles of LLP filed with Secretary of State
  3. Governed by laws of that State
  4. Limited Liability Partnership must be in name
  5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
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25
Q

What are the key aspects of a Limited Liability Company (LLC)?

A

Members can participate in management and retain limited liability

Members don’t own any interest in LLC property

Members can assign interest; but not transfer it

Members divide profits equally unless otherwise stated

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26
Q

What are the key aspects of Joint Ventures (JV)?

A

Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert

Ability to bind other JV partners is limited

JV partners still have a fiduciary responsibility to JV

No state filings or paperwork necessary

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27
Q

What are the key aspects of a corporation?

A

Shareholders have limited liability to the extent of their capital contribution

C Corporations have a perpetual life and continue even after shareholder death

Corporations are a separate legal entity from their owners and can own property; sue; be sued

Corporations must file Articles of Incorporation in state of governance

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28
Q

What are some of the advantages of a corporation?

A

Ability to raise capital

Limited liability - unless actions occur that pierce the veil

Ease of ownership transfer

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29
Q

What actions can pierce the veil of a corporation?

A

Commingling of assets

Fraud

Under-capitalization

30
Q

How is a corporation governed?

A

Board adopts Corporate Bylaws to govern company business

31
Q

What items are required in a corporations Articles of Incorporation?

A

Name; purpose; powers of Corporation

Name of registered agent & incorporators

Stock share classes authorized; par values

Name of corporate officers NOT required

32
Q

What is the biggest disadvantage of a corporation?

A

Double taxation

33
Q

How are corporations formed by promoters?

A

Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation.

A promoter may profit from work performed if the corporation is aware of it.

34
Q

When is a corporation liable for pre-incorporation actions taken by a Promoter?

A

Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts.

35
Q

In how many states must a corporation incorporate?

A

Corporations are only incorporated in one state

Become adomestic corp. in that state

Become aforeign corp. in any other state they do business in

36
Q

Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.

A

Dividends are NOT a shareholder right

Once declared; dividends become a liability to corporation

37
Q

What are key aspects related to the holding of Preferred Stock?

A

No voting rights

Get first rights to dividends and liquidation

Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders

Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders

38
Q

What aspects are related to all classes of corporate stock?

A

Valid consideration must be given for shares

Cash; property; or prior services performed

No promises to pay or perform services

39
Q

What are the key aspects of Treasury Stock?

A

No Gain/Loss recognized on Treasury stock

Have no voting rights

Can be re-purchased below par

Cannot produce dividends

40
Q

What is a stock subscription and what is required for it to be valid?

A

An offer to buy shares of stock

Must be accepted by corporation to be valid

Offer cannot be revoked for 6 months

Subscriber becomes liable once accepted

41
Q

When is a corporation liable for torts by employees?

A

If committed within the normal scope of the employee’s job

Even if they were disobeying orders

Per respondeat superior

42
Q

What are the key aspects of a corporate officer?

A

Appointed by the Board of Directors

Act as Agents

Owe a fiduciary duty to the corporation

Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)

43
Q

What are the key aspects of a corporation’s board of directors (BOD)?

A

Elected by shareholders

Owe fiduciary duty to corporation

Must act in good faith to avoid being liable for bad judgment

Good faith is NOT a defense for negligence

44
Q

What is Ultra Vires?

A

Corporation management acting beyond what the Articles of Incorporation allow

Shareholders can sue for Ultra Vires

45
Q

When is inspecting Board minutes the right of a shareholder?

A

Shareholders can inspect Board minutes and records only if request is in good faith

46
Q

Who must approve mergers and consolidations?

A

Boards must approve

Shareholders must approve by Majority

Disapproving shareholders can get an appraisal and get their stock back at current market price

Merger does NOT need creditor approval

47
Q

What characterizes a Professional Corporation?

A

Shares owned only by licensed professionals (CPAs; attorneys; etc.)

Limited Liability for debts

Personal Liability for negligence

48
Q

Who can and cannot own an S-Corporation?

A

CAN be owned by Estates; Trusts; and Individuals

CANNOT be owned by a C-Corporation

49
Q

What is the primary advantage of an S-Corporation?

A

Avoidance of Double Taxation

50
Q

What are the disadvantages of an S-Corporation?

A

No more than 100 shareholders allowed

One class of stock allowed

Shareholders must be US Citizens/Residents

51
Q

What is a promissory note?

A

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

52
Q

What is a draft?

A

A commercial paper involving three parties- a drawer; a payee and a drawee

A drawer orders a sum to be paid to a payee by the drawee

May be payable on demand or in the future

53
Q

What is a check?

A

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer

Drawer - person writing the check

Payee - person being paid

Drawee - the bank

54
Q

What is the difference between a post-dated check and a negotiable time draft?

A

A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

55
Q

What is a trade acceptance?

A

Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability

56
Q

What is the purpose of the negotiation of commercial paper?

A

Transfers ownership to another party

57
Q

What is required to maintain the negotiability of a commercial paper?

A

Must be in writing

Signed by drawer/maker

Be without conditions for payment (other than limitations on payment sources)

Amount of money must be stated

Payable to order or bearer

58
Q

What characteristics will cancel the negotiability of a commercial paper?

A

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

59
Q

What is required to negotiate Order Paper?

A

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

60
Q

What are the major types of endorsements on commercial paper?

A

Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

61
Q

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

A

Within 7 days

62
Q

On a commercial paper; which value will supersede - words or numerical dollar amount?

A

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

63
Q

Define primary liability with respect to a contract.

A

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay

64
Q

Define secondary liability with respect to contract liability

A

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

65
Q

Define contract liability.

A

Guarantees payment of a liability

66
Q

When does warranty liability occur?

A

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

67
Q

What five warranties occur with every commercial paper transfer?

A

Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate

68
Q

What are the requirements for a holder to be a holder in due course?

A

Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC

Having no knowledge of defenses again instrument; i.e. problems with the instrument

Giving a present value for the instrument (a future value doesnt count)

69
Q

What are the personal defenses against a holder in due course (HDC) which will LOSE?

A

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts

70
Q

What are the REAL defenses against a holder in due course (HDC); which will WIN?

A

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)

Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution

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