Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

REG > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

What is a promissory note?

A

A PROMISE.

Specifically, a promise by one party to pay a specific amount to another party

Two parties involved - maker and a payee/bearer

Can reference other transactions without harming the instrument’s negotiability

Example: Bank Certificate of Deposit (CD), this is a special type of note

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a draft?

A

An ORDER.

Specifically, a commercial paper involving three parties- a drawer; a drawee (who receives the order); and a payee

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

May be payable on demand or in the future

Checks are a special type of draft. A bank must be the drawee. Checks are also unique in that they are payable on demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a check?

A

A check is a type of draft that is:

1) Drawn on a bank and
2) Payable ON DEMAND

Drawer - person writing the check

Payee - person being paid

Drawee - the bank

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a trade acceptance?

A

This is a type of draft. Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is required to maintain the negotiability (also known as proper form) of commercial paper?

A

Must be in writing

Signed by drawer (draft)/maker (note)

Contain an unconditional promise (note) or order (draft) to pay

Be for a fixed amount of money - and money only (i.e. no services or goods)

Payable on demand or at a definite time (checks always payable on demand, does not need a date)

Payable to order or bearer (Exception: checks)

Contain no additional unauthorized promises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is required to maintain the negotiability (also known as proper form) of commercial paper?

A

Must be in writing

Signed by drawer (draft)/maker (note)

Contain an unconditional promise (note) or order (draft) to pay

Be for a fixed amount of money - and money only (i.e. no services or goods)

Payable on demand or at a definite time

Payable to order or bearer (Exception: checks)

Contain no additional unauthorized promises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the major types of endorsements on commercial paper?

A

Endorsements are ALWAYS on the back, and do not destroy or create negotiability.

Blank - Doesn’t name a new payee; transforms into a bearer paper

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

Restrictive - Adds restrictions; doesn’t stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
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’

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define contract liability.

A

Guarantees payment of a liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
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 don’t know that it’s stolen; you’re 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 doesn’t count)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Which UCC Article governs commercial paper, otherwise known as negotiable instruments?

A

UCC Article 3.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are the magic words for an instrument to be negotiable?

A

The front or “face” of the instrument MUST include the words “to order” or to “bearer”.

The only exception: Checks!

24
Q

What is the Holder in Due Course (HDC) Rule?

A

If a negotiable instrument is negotiated to a holder in due course, the holder in due course will take the instrument subject to very few defenses. More specifically, subject to real defenses only not personal defenses.

25
Q

Does the UCC Article 3 apply to money?

A

No.

26
Q

Is power of attorney acceptable as a signature for a maker/drawer?

A

Yes.

Note: The UCC is very liberal in what constitutes a writing and a signature. You could sign Mickey Mouse if you wanted to and it counts as your mark.

27
Q

In determining proper form for a negotiable instrument (i.e. what makes it negotiable), what makes up an “unconditional promise or order”?

A

No terms are in a separate agreement. It cannot be subject to or governed by another agreement.

No express conditions (i.e. “if and only if” language)

28
Q

What are the permissible conditions under an “unconditional promise or order”?

A

Implied conditions (of law or that consideration was given)

Statements (i.e. “this instrument is given in exchange for” or”made in accordance with” or “per the transaction”)

References to other writings with rights regarding collateral, prepayment or acceleration.

Limits payment to a particular source or fund (“I promise to pay out of my next wheat crop”)

29
Q

What makes up a fixed amount of money in a negotiable instrument?

A

Amount must be

1) fixed and stated on the face of the instrument
2) money only (currency or foreign currency only, i.e. no services or goods)

NOTE: Can include interest, a stated discount or addition (if paid before or after the date fixed for payment), or cost of collection and attorney’s fees upon default.

30
Q

Do acceleration clauses destroy negotiability?

A

No. A definite time still exists because the latest date for payment is still known.

31
Q

Do extension clauses destroy negotiability?

A

No. The latest date that payment can be due can still be determined from the face of the instrument.

32
Q

What happens if an instrument has no date on its face?

A

It is still permissible and negotiable. Undated instruments are payable on demand.

However, if it says, “payable 90 days after stated date” and there is no stated date, it is not negotiable.

Note: equally, antedating and postdating do not destroy negotiability. Also, checks do not have to be dated, they are always payable on demand.

33
Q

On a negotiable instrument, name the order of most to least controlling: typed, printed and handwritten.

A

Handwritten, typed, printed.

34
Q

Where a sum is expressed in words and figures, which controls if there is a discrepancy?

A

Words will always control.

35
Q

What happens if the instrument is not negotiable?

A

There can be no holder in due course, it is treated as an ordinary contract subject to any defense.

36
Q

Why do you want to be a holder in due course?

A

Because you will have freedom from many defenses that a maker or drawer might have against payment.

37
Q

What are the steps to becoming an HDC?

A

1) Become a holder of a NEGOTIABLE instrument (i.e. proper form)
2) For Value
3) In good faith
4) Without notice of any defenses to or claims of ownership

38
Q

How do you become a holder under bearer paper and under order paper?

A

Bearer paper - Mere delivery.

Order paper - delivery AND endorsement

39
Q

In UCC negotiable instruments, the last endorsement controls whether it becomes order paper or bearer paper. How?

A

Special Endorsement - Naming a specific party, order paper

Blank Endorsement = Mere signature of holder, does not name a new party = bearer paper

Note: magic words are not required on the back of the instrument (endorsements). Further, nothing on the back can create or destroy negotiability.

40
Q

What are qualified endorsements? And how do they help an endorser’s liability?

A

A qualified endorsement is usually denoted by “without recourse”. Here the endorser sheds secondary liability in contract (not in warranty). For example, if instrument bounces, no recourse to endorser.

41
Q

What are restrictive endorsements?

A

No effect on negotiability, but specifies use (i.e. “for deposit only”) or conditions use.

42
Q

What does it mean to break the chain of title on negotiable paper?

A

If the payee’s or special endorsee’s signature is missing or is forged, the chain of title is broken and no subsequent transfers can become a holder (i.e. no good title).

Note: in forgery, the UCC treats the forgery as the genuine signature of the forger, thus negotiable paper of the forger.

43
Q

In becoming an HDC, you would need to prove that you obtained the negotiable instrument for value. What is value?

A

Different from consideration in contract law. Value is:

  • Performance of the agreed consideration (paying for it)
  • Acquisition of a lien or a security interest in the instrument
  • Taking the instrument as payment or security for an antecedent debt
  • Giving a negotiable instrument for the instrument
  • Making an irrevocable commitment to third parties (i.e. letters of credit).

A promise to give value in the FUTURE (called executory promise) is NOT value.

Also, value does not have to be fair.

44
Q

In becoming an HDC, you need to prove you acquired the negotiable instrument in good faith. What does this mean?

A

Honesty in fact. No fraud, no conspiring of wrongdoing.

45
Q

In becoming an HDC, you need to prove you acquired the negotiable instrument “without notice” of any defenses to or claims of ownership. How?

A

Without notice or knowledge that the instrument is:

  • overdue or has been accelerated
  • demand has already been made (or deemed made by more than 30 days for a check)
  • dishonored
  • evidence of forgery/alteration/incomplete
  • or of any defense claim against the instrument
46
Q

What is the shelter doctrine for an HDC?

A

If a negotiable instrument transfers from an existing HDC to someone who does not qualify as an HDC, they are automatically granted rights of an HDC if they “hold” it (i.e. it was proper form to negotiate and it was properly endorsed to not break chain of title).

47
Q

How do you tackle an HDC question on the exam?

A

Approach the questions in 4 steps:
1) What the holder a holder of a negotiable instrument? If not, they are not an HDC.
Remember bearer paper = mere possession; order paper = possession and PROPER endorsement.
2) Did the holder give value?
3) Did the holder take the instrument in good faith?
4) Did the holder take the instrument without notice of any defenses to or claims of ownership?

All 4 must be answered yes to be an HDC.

48
Q

What happens if you do not retain the rights of an HDC?

A

The maker (of a note) or drawer (of a draft) can successfully assert ANY defense in a simple contract action (i.e. failure of consideration, fraud, nonperformance, breach of contract, etc.)

49
Q

If you are an HDC, you are only subject to real defenses, not personal defenses. What are real defenses?

A

F.A.I.D.S.
Fraud in the Execution; Forgery
Adjudicated Insanity; Alteration (material)
Infancy; Illegality
Duress (extreme); Discharge in bankruptcy
Suretyship; Statute of limitations

50
Q

What are personal defenses?

A

Anything except FAIDS

For reference:
F.A.I.D.S.
Fraud in the Execution; Forgery
Adjudicated Insanity; Alteration (material)
Infancy; Illegality
Duress (extreme); Discharge in bankruptcy
Suretyship; Statute of limitations

51
Q

Who are primarily liable in a negotiable instrument?

A

The maker (of a note) and a drawee (of an order, however only after acceptance). In the case of drawee of an order, once signed, it discharges all prior parties/endorsers. This is also effective upon certification of a check from a bank (i.e. certified check).

52
Q

Who are secondarily liable in a negotiable instrument?

A

Must be with proper notice!

For a note/cd = endorsers
For a draft/check = drawer and endorsers

Exception: Qualified Endorsement (i.e. “without recourse”) - an endorser can negate contract liability with this type of endorsement. However, not warranty liability.

53
Q

What are warranty liabilities that an endorser cannot cancel with the term “without recourse”?

A

Implicit warranties:

  • entitled to enforce/has good title
  • signatures are authorized
  • not materially altered
  • no defense of any party is good against him
  • no knowledge of insolvency

NOTE: if it is not endorsed, the warranties run only to the immediate transferee and not prior holders. If it is endorsed, everyone is on it.

54
Q

Can you limit warranty liability?

A

Yes, “the transferor makes no warranties” disclaimer language. Except on checks.

55
Q

How do you discharge a negotiable instrument?

A

By payment or satisfaction in full.
By cancellation or renunciation
By destruction of lining through signatures
By impairing collateral or recourse (i.e. releases)
By delay or failure to give notice of dishonor
By acceptance or certification of a draft by a bank.

To ensure your discharge will be effective against HDC’s, always stamp “PAID”. A discharge is not a real defense - remember FAIDS. However by stamping “PAID”, you are technically voiding them as a holder.

REG (18 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions