Chapter 7 Section 1: Commercial Paper

Question 1

Why were commercial paper laws created?

Answer 1

To provide a convenient and safe substitute for cash

Question 2

What is a note?

Answer 2

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

Question 3

What is a certificate of deposit?

Answer 3

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

Question 4

What is a draft?

Answer 4

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

Question 5

What makes a draft a check?

Answer 5

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

Question 6

What is a trade acceptance?

Answer 6

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

Question 7

What is a time instrument?

Answer 7

Commercial paper with a maturity date

Question 8

What are the seven requirements for negotiability?

Answer 8

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

Question 9

For definite time, does at death count?

Answer 9

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

Question 10

Does the back determine negotiability?

Answer 10

No

Question 11

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

Answer 11

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

Question 12

Which has trump on an instrument - words or figures?

Answer 12

Words

Question 13

What if the instrument isn’t negotiable?

Answer 13

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

Question 14

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

Answer 14

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

Question 15

What is the first step in becoming an HDC?

Answer 15

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

Question 16

What is required to become a holder of bearer paper?

Answer 16

Delivery

Question 17

What is required to become a holder of order paper?

Answer 17

Delivery and endorsement

Question 18

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

Answer 18

The last one

Question 19

What is a special endorsement?

Answer 19

Names a specific party (order paper)

Question 20

Does an endorsement need to say “order of”?

Answer 20

No

Question 21

What is a blank endorsement?

Answer 21

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

Question 22

What if a necessary endorsement is missing or forged?

Answer 22

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

Question 23

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

Answer 23

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.

Question 24

What is a qualified endorsement?

Answer 24

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

Question 25

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

Answer 25

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

Question 26

What are the four requirements to be an HDC?

Answer 26

Take the paper: 1. for value 2. in good faith 3. without notice of defenses 4. it must be negotiable

Question 27

What if one of the four HDC requirements is missing?

Answer 27

You have the same rights as a transferor

Question 28

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

Answer 28

No, they're all okay.

Question 29

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

Answer 29

The non has the rights of an HDC

Question 30

What are the real defenses? FAIDS

Answer 30

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

Question 31

What if your defense is not a real one?

Answer 31

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

Question 32

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

Answer 32

1. Maker | 2. Endorser

Question 33

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

Answer 33

1. Drawee if the accept | 2. Drawer and endorsers

Question 34

Is the drawer ever primarily liable?

Answer 34

No. Only secondarily

Question 35

What does an oral stop order do? | Written?

Answer 35

Tells the bank to not honor an instrument for 14 days. | 6 months, you can renew it.

Question 36

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

Answer 36

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.

Question 37

What is the exception to the endorser being secondarily liable?

Answer 37

If they endorse it without recourse

Question 38

What is warranty liability?

Answer 38

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

Question 39

What are the five transfers of warranty?

Answer 39

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

Question 40

Who is liable in a forgery?

Answer 40

The forger

Question 41

What if there is a forgery, but the forger is missing? 1. Forgery of drawer's name 2. Forgery of payee's name

Answer 41

1. drawee liable upon acceptance (they should know their customer's signature 2. Does not usually pass good title

Question 42

What is the impostor rule?

Answer 42

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.

Question 43

What is the fictitious payee rule?

Answer 43

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.

Question 44

Give a few methods of discharge?

Answer 44

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