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CPA: REG > Chapter 7 Section 1: Commercial Paper > Flashcards

Chapter 7 Section 1: Commercial Paper Flashcards

1
Q

Why were commercial paper laws created?

A

To provide a convenient and safe substitute for cash

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2
Q

What is a note?

A

Two-party commercial paper, bearing a promise by one party to pay money to another.

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3
Q

What is a certificate of deposit?

A

Two-party commercial paper, involving a bank and a payee

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4
Q

What is a draft?

A

Three-party commercial paper. An order by the drawer to the drawee, demanding that the drawee pay money to the payee.

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5
Q

What makes a draft a check?

A

The drawee must be a bank and it must be payable on demand

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6
Q

What is a trade acceptance?

A

A draft drawn by the payee on the drawee and accepted by the drawee

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7
Q

What is a time instrument?

A

Commercial paper with a maturity date

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8
Q

What are the seven requirements for negotiability?

A 
Writing
Signed
Unconditional promise
Fixed amount of money
On demand or definite time
Order or bearer (not checks)
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9
Q

For definite time, does at death count?

A

No, because we don’t know when that will be. It could say “the earlier of October 1 or death”

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10
Q

Does the back determine negotiability?

A

No

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11
Q

What is the difference between “order of” and “bearer”

A

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

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12
Q

Which has trump on an instrument - words or figures?

A

Words

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13
Q

What if the instrument isn’t negotiable?

A

There can be no holder in due course. It’s treated as an ordinary contract.

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14
Q

What is the benefit of being a holder in due course?

A

Freedom from many defenses that a maker or drawer might have against payment

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15
Q

What is the first step in becoming an HDC?

A

Becoming a holder - someone with good title to the paper.

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16
Q

What is required to become a holder of bearer paper?

A

Delivery

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17
Q

What is required to become a holder of order paper?

A

Delivery and endorsement

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18
Q

If there are multiple endorsements, what decides if it’s order or bearer?

A

The last one

19
Q

What is a special endorsement?

A

Names a specific party (order paper)

20
Q

Does an endorsement need to say “order of”?

A

No

21
Q

What is a blank endorsement?

A

Does not name a new endorsee (bearer paper). Just has the signature of the holder.

22
Q

What if a necessary endorsement is missing or forged?

A

The chain of title is broken and no subsequent transferee can become a holder

23
Q

What if the drawer or maker’s signature is forged?

A

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.

24
Q

What is a qualified endorsement?

A

It says “without recourse.” It means there is no guarantee of payment by the endorser. Removes contract liability, but not warranty liability.

25
Q

What is a restrictive endorsement? Does it restrict further negotiation?

A

It says “for deposit” or “for collection” etc. It specifies the use or conditions of the instrument.
No

26
Q

What are the four requirements to be an HDC?

A

Take the paper:

  1. for value
  2. in good faith
  3. without notice of defenses
  4. it must be negotiable
27
Q

What if one of the four HDC requirements is missing?

A

You have the same rights as a transferor

28
Q

Does postdating, antedating, or discounting constitute notice of defenses?

A

No, they’re all okay.

29
Q

What if a non-HDC gets the instrument from an HDC?

A

The non has the rights of an HDC

30
Q

What are the real defenses?

FAIDS

A 
Fraud in execution
Forgery of necessary signature
Adjudicated insanity
Alteration (material) of instrument
Infancy
Illegality
Duress
Discharge in bankruptcy
Suretyship defenses
Statute of limitations
31
Q

What if your defense is not a real one?

A

Then it’s personal, and can’t be raised against an HDC. Only real ones can.

32
Q

What is the order of liability if it is a note or CD?

A
  1. Maker

2. Endorser

33
Q

What is the order of liability if it is a check or draft?

A
  1. Drawee if the accept

2. Drawer and endorsers

34
Q

Is the drawer ever primarily liable?

A

No. Only secondarily

35
Q

What does an oral stop order do?

Written?

A

Tells the bank to not honor an instrument for 14 days.

6 months, you can renew it.

36
Q

What are the three requirements for an endorser to be liable?

A
  1. The holder presents the instrument to the maker or drawee for payment
  2. The maker or drawee dishonors it
  3. The endorser is given proper notice of the dishonor.
37
Q

What is the exception to the endorser being secondarily liable?

A

If they endorse it without recourse

38
Q

What is warranty liability?

A

You can’t get out of it, an it applies to anyone who transfers an instrument for consideration

39
Q

What are the five transfers of warranty?

A
  1. Good title
  2. All signatures are genuine
  3. Instrument has not been materially altered
  4. No defense of any party is good
  5. No knowledge of any insolvency proceeds
40
Q

Who is liable in a forgery?

A

The forger

41
Q

What if there is a forgery, but the forger is missing?

  1. Forgery of drawer’s name
  2. Forgery of payee’s name
A
  1. drawee liable upon acceptance (they should know their customer’s signature
  2. Does not usually pass good title
42
Q

What is the impostor rule?

A

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.

43
Q

What is the fictitious payee rule?

A

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.

44
Q

Give a few methods of discharge?

A

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

CPA: REG (35 decks)

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