Chapter 7 Section 1: Commercial Paper Flashcards
Why were commercial paper laws created?
To provide a convenient and safe substitute for cash
What is a note?
Two-party commercial paper, bearing a promise by one party to pay money to another.
What is a certificate of deposit?
Two-party commercial paper, involving a bank and a payee
What is a draft?
Three-party commercial paper. An order by the drawer to the drawee, demanding that the drawee pay money to the payee.
What makes a draft a check?
The drawee must be a bank and it must be payable on demand
What is a trade acceptance?
A draft drawn by the payee on the drawee and accepted by the drawee
What is a time instrument?
Commercial paper with a maturity date
What are the seven requirements for negotiability?
Writing Signed Unconditional promise Fixed amount of money On demand or definite time Order or bearer (not checks)
For definite time, does at death count?
No, because we don’t know when that will be. It could say “the earlier of October 1 or death”
Does the back determine negotiability?
No
What is the difference between “order of” and “bearer”
Pay to the order of is a specific person, and needs a signature to pass it along
Bearer is whoever holds it. It does not need a signature to be passed along
Which has trump on an instrument - words or figures?
Words
What if the instrument isn’t negotiable?
There can be no holder in due course. It’s treated as an ordinary contract.
What is the benefit of being a holder in due course?
Freedom from many defenses that a maker or drawer might have against payment
What is the first step in becoming an HDC?
Becoming a holder - someone with good title to the paper.
What is required to become a holder of bearer paper?
Delivery
What is required to become a holder of order paper?
Delivery and endorsement
If there are multiple endorsements, what decides if it’s order or bearer?
The last one
What is a special endorsement?
Names a specific party (order paper)
Does an endorsement need to say “order of”?
No
What is a blank endorsement?
Does not name a new endorsee (bearer paper). Just has the signature of the holder.
What if a necessary endorsement is missing or forged?
The chain of title is broken and no subsequent transferee can become a holder
What if the drawer or maker’s signature is forged?
This is not a break in the chain of title. The forgery is seen as the genuine signature of the forger, and the transferees are holders.
What is a qualified endorsement?
It says “without recourse.” It means there is no guarantee of payment by the endorser. Removes contract liability, but not warranty liability.
What is a restrictive endorsement? Does it restrict further negotiation?
It says “for deposit” or “for collection” etc. It specifies the use or conditions of the instrument.
No
What are the four requirements to be an HDC?
Take the paper:
- for value
- in good faith
- without notice of defenses
- it must be negotiable
What if one of the four HDC requirements is missing?
You have the same rights as a transferor
Does postdating, antedating, or discounting constitute notice of defenses?
No, they’re all okay.
What if a non-HDC gets the instrument from an HDC?
The non has the rights of an HDC
What are the real defenses?
FAIDS
Fraud in execution Forgery of necessary signature Adjudicated insanity Alteration (material) of instrument Infancy Illegality Duress Discharge in bankruptcy Suretyship defenses Statute of limitations
What if your defense is not a real one?
Then it’s personal, and can’t be raised against an HDC. Only real ones can.
What is the order of liability if it is a note or CD?
- Maker
2. Endorser
What is the order of liability if it is a check or draft?
- Drawee if the accept
2. Drawer and endorsers
Is the drawer ever primarily liable?
No. Only secondarily
What does an oral stop order do?
Written?
Tells the bank to not honor an instrument for 14 days.
6 months, you can renew it.
What are the three requirements for an endorser to be liable?
- The holder presents the instrument to the maker or drawee for payment
- The maker or drawee dishonors it
- The endorser is given proper notice of the dishonor.
What is the exception to the endorser being secondarily liable?
If they endorse it without recourse
What is warranty liability?
You can’t get out of it, an it applies to anyone who transfers an instrument for consideration
What are the five transfers of warranty?
- Good title
- All signatures are genuine
- Instrument has not been materially altered
- No defense of any party is good
- No knowledge of any insolvency proceeds
Who is liable in a forgery?
The forger
What if there is a forgery, but the forger is missing?
- Forgery of drawer’s name
- Forgery of payee’s name
- drawee liable upon acceptance (they should know their customer’s signature
- Does not usually pass good title
What is the impostor rule?
The drawee is not liable - someone pretends to be someone else. If a maker or drawer issues an instrument to an impostor, any resulting forgery will be effective.
What is the fictitious payee rule?
The corporation is liable - it is issuing commercial paper to a payee whom he does not actually intend to have any interest in the instrument. The resulting forgery is effective to pass good title.
Give a few methods of discharge?
Payment, satisfaction, or tender
Cancellation or renunciation (destroy instrument or cross out signature)
Delay in presentment or failure to give notice of dishonor
Acceptance or certification by bank
