Commercial Paper Flashcards
Negotiable Instrument Definition
A writing signed by a maker/drawer containing an unconditional promise or order to pay a fixed amount of money on demand or at a definite time.
Difference Between Note and Draft
Note - 2 party promise to pay
Maker (promisor) – Payee
Draft - 3 party order to pay
Drawer (payer) – Drawee (bank) – Payee
Check Definition
Financial instrument making a promise to pay
Payable on demand
Unconditional Attributes
- Required for negotiability
- Presumption of unconditionality
- Any statement that does not hurt the rights of the holder to payment
- “per” or “in accordance with”
Conditional Attributes
- Express conditions limiting the holder’s rights to payment
- “subject to” or “governed by”
- Incorporation by reference that affects holder’s right to payment
If interest is not stated on the instrument…
Presumption of no interest
If interest stated but the rate is not given or discernible, court will apply the judgment rate.
What is meant by “no further undertaking or instruction?”
Can only concern the payment of money, or
- Promises of collateral
- Waiver of law to benefit of maker/drawer
- Confession of judgment
Rules for Words of Negotiability
- If blank, “to bearer,” or “to cash” it is BEARER PAPER
- If “to order of [payee]” or “[payee] or his order” it is ORDER PAPER
- If language of both, or neither, then the instrument is BEARER PAPER.
What is required to be a “Holder?”
- Physical possession of the instrument, &
- Good title
- Bearer: possession
- Order: possession + indorsements
Holder in Due Course (HDC) Elements
- Negotiable instrument
- Holder status
- Authenticity not apparently questioned
- Any value paid
- Good faith
- W/o notice of claims
What is considered adequate notice for a holder?
- Actual notice - Information in fact and a reasonable time to act
- Apparent notice - Person had reason to know based on the facts and circumstances
Examples of Notice
- Check more than 90 days past due date
- Instrument dishonored
- Uncured default on another instrument of the same series
- Unauthorized signature
- Alterations
- Claims by 3Ps
- Defense or claim of recoupment
What defenses is an HDC subject to?
“DIS IS FUBAR”
D - duress I - incapacity S - statute of limitations (5 years) I - infancy S - signatures are unauthorized F - fraud in execution U - unlawful/illegality B - bankruptcy A - alteration R - REAL DEFENSES
Fraud in the Execution
Signer was without knowledge of the essential terms or character of the instrument, and was without a reasonable opportunity to learn of them.
When is an agent bound under the contract theory of liability?
- Agent signed without Principal’s authority,
- Principal not identified in instrument, and either
- HDC w/o notice of representative nature, or
- Non-HDC w/ intent to bind Agent specifically
When is a drawee (bank) bound under the contract theory of liability?
No signature = No liability
- Acceptance - agreement to pay by signing
- Certification - discharges drawer and prior indorsers
- Conversion - payee received delivery of forged instrument
- Death of drawer - may continue to pay drawer’s checks until
- Knowledge of death w/ reasonable time to act
- ≤ 10 days from death
- Must stop immed. if req. by person w/ interest in account
Who has primary liability on a note?
The maker of a note is primarily liable for payment upon presentment by a holder/indorser who paid value for it.
Who has primary/secondary liability on a draft?
The DRAWER of a draft is liable if dishonored by drawee upon presentment within 30 days. May disclaim (except for checks).
The INDORSER is liable to later indorsers if presentment occurs within 30 days, the draft is dishonored by drawee, and the indorser receives notice within 30 days of such dishonor.
May disclaim liability.
What is an accommodation?
An arrangement where the person signing a note is not receiving the benefit.
Accommodated party - principal
Accommodating party - surety
Holder - creditor
ACCOMMODATING PARTY IS LIABLE FOR PAYMENT (or collection, if so limited) and is entitled to reimbursement from accommodated party.
What is a Transfer Warranty?
Guaranty of payment made by transferor (∆) who received payment, to immediate transferee, and subsequent transferees if ∆ indorsed.
What is covered by Transfer Warranty?
- Transferor has good title
- All signatures are authentic & authorized
- No alterations
- No defenses against transferor
- No knowledge of insolvency
Cannot be disclaimed for checks
What is a Presentment Warranty?
Guaranty of drawee payment by the presenter and previous transferors to party who pays in good faith.
What is covered by Presentment Warranty?
Presentment to Drawee:
- Presenter has good title
- No alterations
- No knowledge of forgery
Presentment to Others:
1. Presenter has good title
Cannot be disclaimed for checks
Effect of instrument marked “Payment In Full”
If CONSPICUOUSLY INDICATED on payment of EXISTING OBLIGATION or obligation subject to BONA FIDE DISPUTE, operates as ACCORD AND SATISFACTION if not returned within 90 days.
