Commercial Paper Flashcards
Steps to a commercial paper question
- identify the type of paper
- identify the parties
- determine whether the instrument is negotiable
- determine whether transferee was a holder in due course
- determine P’s COA
- determine D’s defenses
- can D pass liability
What are the two basic instruments of commercial paper?
- note
- draft
UCC doesn’t apply to money
What is a note and who are parties to a note?
a note is a promise to pay money - it is a two party instrument
- maker - person who owes money
- payee - person entitled to payment
What is a draft?
a draft is an order to pay - 3 party instrument
- drawer - person ordering payment
- drawee - person to make the payment (check context, payor bank)
- payee - person to receive the payment
What is a check?
type of draft
A draft will qualify as a check if (1) bank is the drawee; and (2) the instrument is payable on demand
What are the types of checks?
- certified check - bank has agreed to pay
- cashier’s check - drawer and drawee are the same bank
- teller’s check - draft drawn by one bank to another
- traveler’s check - requires counter signature
when is negotiability determined?
form of the instrument at the time of issuance
Can you opt in or out of negotiability?
You can opt out but not in
Why is negotiability important?
if negotiable and properly negotiated, it can reach the hands of a holder in due course who gets better rights than the transferor and can get paid even if the obligor has defenses to payment
what are the elements of a negotiable instrument?
an instrument must be written and signed:
- unconditional
- promise or order to pay
- a fixed amount of money that:
- is payable to order or bearer
- is payable on demand or at a definite time; and
- states no unauthorized undertaking or instruction by the person promising or ordering payment.
Element 1 of Negotiability
Writing
there aren’t any requirements concerning what is to be written on or written with
Element 2 of negotiability
Signed
maker or drawer’s signature may be any symbol executed or adopted by a party with present intent to authenticate a writing
- any symbol even a X
Element Three
Unconditional promise or order to pay
- promise must be more than a mere acknowledgement of a debt (can’t be an IOU) - must contain an express promise to pay
What are items that make a promise conditional?
- contains an express condition to payment (I promise IF)
- states the promise is subject to or governed by another record
- the rights or obligations with respect to the promise or order are stated in another record
Items that do not make a promise conditional
not conditional merely because:
- states the consideration required for payment
- refers to another record (as per, in accordance with)
- incorporates by reference items that wouldn’t hurt the holder:
rights regarding collateral, prepayment, acceleration,
- limits payment to a particular fund or source
- requires a countersignature of a specimen signature
- contains a statement required by law
Element 4
Fixed Amount
you must be able to look at the instrument and determine the principal amount due
- presumption that there is no interest but can state otherwise
Element 5
in money
money is any medium of exchange authorized by a domestic or foreign government as part of its currency
- cannot be goods or services
- words prevail over figures
element 6
no other undertaking or instruction
negotiable instruments are just promises to pay money
authorized instructions:
- promises to give, maintain, or protect collateral
- confess judgment
- waiver of law meant to benefit obligor
Element 7
Payable on demand or at a definite time
fixed date or on demand
- cannot be “when Uncle Fred dies” not readily acertainable
Element 8
Contain words of negotiability
- to bearer
- states that it is payable to bearer
- does not name a payee
- payable to cash - to order
- payable to an identifiable person
What happens if an instrument contains bearer and order language?
bearer language controls
words of negotiability missing on a check?
if it is the only element missing, the bearer or order language is waived
What is a holder?
possession and good title
How to negotiate a bear instrument?
negotiated by transferring possession of the instrument
how to negotiate an order instrument?
possession + necessary indorsements (signature by someone other than the maker, drawer, or acceptor)
how to negotiate to a specific payee?
transferring possession plus the identified person’s indorsement
Kinds of indorsements
- bank or special
- qualified or unqualified
- restrictive or unrestictive
What is a blank indorsement?
signature that isn’t accompanied by the naming of a specific indorsee (probably how most people sign checks)
- indorser merely signs his own name
A check is payable “to the order of Frank Smith.” Frank signs his name on the back of the check. Frank has made a ______ indorsement and the check is now _______ paper. Who can cash it?
blank indorsement
bearer paper
anyone can cash it
What is a special indorsement?
payee’s signature + designation of a new person to whom the instrument is payable
A check is payable “to the order of Frank Smith.” Frank writes on the back “Pay to Susan Cortez” and then signs his name. Frank has made a _____ indorsement and the check is _____ paper. Further negotiation will need ____ indorsement.
special
order
Susan’s
What is a qualifed indorsement?
“without recourse” - limits the contract liability imposed on indorsers
What is a restrictive indorsement
generally ineffective to limit transfer - pay to Pete payee only
BUT
for deposit / for collection must be paid consistently with the indorsement
What are the two steps to determining HDC status?
- is the person a holder?
- does the person hold in due course?
burden is on the person claiming HDC status
What is a holder in due course?
holder - person in possession of an instrument with the right to enforce it
due course - holder takes for value, in good faith, without notice
When is HDC status relevant?
important when the obligor raises a defense to payment
what is HDC good faith require?
honesty in fact (subjective) and observance of reasonable commercial standards (objective)
When does a holder not become a HDC
instrument taken by legal process or purchase at judicial sale, acquiring as a successor in interest to an estate, purchasing as part of a bulk transaction
When is HDC status determined?
at the moment the instrument is negotiated to the holder or when the holder gives value, whichever is later
can there be irregularities in the instrument?
no, for HDC status the instrument shouldn’t bear evidence of forgery or alteration as to call its authenticity into question
What constitutes value for HDC?
- performance of agreed consideration
- acquisition by the holder of a lien or security interest in the instrument (other than a judicial lien)
- taking the instrument as payment
- trading for another instrument
- irrevocable obligation to a third person
without notice requirement for HDC
without actual notice and reason to known
notice must be received in a time and manner with reasonable opportunity to act on it
public records does not = notice
facts constituting notice
- instrument is overdue
- instrument is dishonored
- uncured default
- unauthorized signature
- claims to the instrument
Shelter Rule for HDC
if an HDC transfers an instrument, their transferee and subsequent transferees get the HDC rights
An HDC can enforce an instrument subject only to ____ defenses
real defenses not personal defensens
What are real defenses?
- infancy
- duress
- incapacity to contract
- illegality
- fraud in the factum (real fraud)
fraud causes the obligor to sign an instrument:
a. without knowledge of the instrument’s character or essential terms; and
b. without reasonable opportunity to learn of the instrument’s character or essential terms
What is the statute of limitations on an instrument and how does this affect a HDC?
3 years - unaccepted drafts, against issuers/acceptors of cashier’s checks, certified checks (After demand), breach of warranty, enforce other art 3 rights
6 years - notes payable at a definite time or on demand, certificates of deposit
** prevents HDC from enforcing **
FAIDS
Real defenses
Forgery Fraud Alteration Adjudicated incompetency Infancy Illegality Duress Discharge (by insolvency or that is otherwise known by HDC) Statute of Limitations Suretyship
What are the 4 personal defenses?
- lack of consideration
- breach of warranty
- fraud in the inducement
- claims or defenses of another
Personal defenses and HDC
cannot be asserted against HDC
what is fraud in the inducement?
personal defense - party knew what they were signing but were lied to or misled in a way that caused them to execute the payment
Who can take an instrument from a HDC?
no one, an HDC is a perfect defendant
can someone be held liable if their signature is not on the instrument?
No
liability of the principal if agent signed
liable if agent had authority to sign
ratification
estoppel where principal’s negligence contributed to the making of their unauthorized signature
liability of agent
not personally liable if principal is identified and signature shows it was made on behalf of the principle
liable if doesn’t show signature was made in a representative nature and:
a. holder is HDC unless agent can prove HDC has notice of representative nature of agent
b. not HDC and agent can prove original parties did not intend for agent to be liable.
What if agent is not authorized?
forgery and agent is bound but not the principle
before a holder can look to an indorser for payment, what must they do?
presentment, dishonor, notice of dishonor
can you disclaim liability on any instrument?
no, all instruments except checks
contact liability vs warranty liability
contract - you want the money
warranty - already paid, want the money back
who makes warranties?
transferor who receives consideration makes warranties
Who are warranties made to?
- immediate transferee
- all subsequent transferees
**for consideration – gift transferees are not protected
- drawees and makers may never sue for breach of transfer warranty because they get instruments presented to them, not transferred
what are the transfer warranties?
- transferor is entitled to enforce the instrument
- all signatures are authentic and authorized
- the instrument has not been altered
- no defense or claim is good against the transferor
- transferor has no knowledge of any insolvency proceedings
can warranties be disclaimed?
yes but not for checks
Who are plaintiffs in presentment warranties?
plaintiffs are parties who pay in good faith (maker, drawee, acceptor)
What are presentment warranties?
drawee, like a bank, can recover for beach. (even HDC)
persons obtaining payment warrant:
1. warrantor is entitled to enforce the draft or is authorized by the one who is
- draft has not been altered
- warrantor has no knowledge that the drawer’s signature is unauthorized
4.
How to determine whether to bring suit against indorser for breach of warranty or breach of indorser’s contract?
- if P is holder and the check bounces, holder will sue the indorser for indorser’s contract
- if P is payor, and payor has paid and later discovers payor shouldn’t have paid, can sue indoroser for breach of warranty
how long is an oral vs written stop payment order good for?
oral - effective for 14 days
written - binding for 6 months
Bank’s defenses for wrongful dishonor
- payment would overdraw drawer’s account
2. check is more than 6 months old - not obligated to pay
effect of forgery of payee’s name
breaks chain of title
effect of forgery of names not necessary to chain of title
won’t keep later takers from becoming holders
effect of forgery of drawer’s name
does not break chain of title because the forgery operates as the genuine signature of the forger
- drawer is not liable
- drawee (bank) has to recredit your account unless presentment warranties were breached (not breached by forged signature)
bank’s defenses to forged drawer’s name
- drawer negligence
- leaving blank spaces, mailing the instrument to someone with the same name, failing to follow internal procedures - bank statement rule - customer/drawer has a duty to inspect bank statements and cancel checks within 1 year from the date the statement was available to the customer
- repeat offender rule - drawer must report forgeries within 30 days of when the statement was available
forged indorsements - effect of forging the payee’s name
someone issues you a check and someone steals it and signs it as you
bearer paper - irrelevant because indorsement isn’t needed for negotiation
order paper - breaks the chain of title
When is a payee precluded from asserting forgery?
- imposter rule - careless in issuing the check
- fraudulent indorsements by employees - payee estopped
- sign for your employer with instrument they entrusted you with
liability of drawee for forged indorsement of payee
payee can sue for conversion or sue not-properly payable
bank’s defenses to forged payee indorsement
imposter rule
fraudulent indorsement by employee entrusted with check
drawer’s negligence
failure to timely sue (within 3 years)
forgery will be valid as the name forged when: (5)
- fictitious payee’s signature forged - issuance to an imposter or payee not intended to have an interest in the instrument
- employee entrusted forges signature
- negligence contributes to forgery
- bank statement rule violated
- bank certifies
effect on HDC - change in obligation alteration
HDC may enforce in accordance with its original terms
effect on HDC - unauthorized completion
if an instrument was completed in an unauthorized manner, HDC may enforce according to its terms completed
fraudulent and non-fraudulent alteration made by holder
fraud - obligator is discharged completely
non - obligor is liable for original terms
