Commercial Paper

Question 1

Negotiable Instrument

Answer 1

A negotiable instrument is an instrument that is capable of transfer by endorsement or delivery.

Question 2

Unconditional Promise to Pay

Answer 2

In Michigan, a negotiable instrument operates as an unconditional promise/order to pay a fixed amount IF

1. Payable to bearer
2. Payable on demand or at a definite time
3. no indication of any other act/obligation except the payment

Despite these 3 elements, oral conditions (e.g. don’t cash the check until you’ve worked for 6 months) are allowed and DO NOT change the unconditional promise nature of the instrument because the condition is not on the face of the instrument.

Question 3

Bearer Paper

Answer 3

A bearer paper can be negotiated by transfer of possession alone. In other words, a bearer paper is payable to whoever holds possession of the instrument. (e.g. if A indorses a check, and a thief steals it, the thief may negotiate the check to a holder)

Question 4

Order Paper

Answer 4

Order paper can be negotiated only be transfer PLUS indorsement of holder. In other words, the instrument is payable to the holder only if the paper was issued or property endorsed to that person.

Question 5

Holder in Due Course

Answer 5

A holder in due course takes the instrument free of defenses that might otherwise be valid and prevent payment of the instrument.

A holder in due course is someone who:

1. took the instrument for value
2. took the instrument in good faith
3. took the instrument without notice of an unauthorized signature or that there is any defense to payment of the instrument

Question 6

Payment in full

Answer 6

If an instrument provides, on its face, “payment in full” then the instrument is, in fact, payment in full IF:
1. Instrument conspicuously states that it tenders full payment
2. Recipient of the check obtains the payment (e.g. cashes the check)
3. Debt is disputed OR unliquidated
(this is the most commonly missing element)
4. the person who tendered the instrument acted in good faith when tendering it for full payment

Question 7

Recourse against a bank that cashes a forged check

Answer 7

payee may bring an action if the payee can prove:

1. he was in possession of the instruments before they were stolen (no one else could have had control)
2. the terms of the instruments stolen
3. that he was the named payee of the instruments