Commercial Paper Flashcards
Notes: (negotiable instrument)
Promise to pay $$, evidence of a loan
(1) Maker: owes the $$
(2) Payee
Commercial paper:
UCC Article 3: describes documents used to exchange or represent money.
A Negotiable instrument is a type of commercial paper:
two types: (1) notes and (2) drafts
Drafts
Orders a 3rd party to make a payment on your behalf & is a substitute for cash
(1) Drawer (2) Drawee (3) Payee
TIP: check
Transfer
assignment:
A contract transaction: assignee has same right to enforce payment as if original party, subject to any warranty or contract defenses
NEGOTIATION:
If transferred via negotiation, receiving party is a holder. Holder takes CONTROL of payment obligation. Only negotiable instruments can be negotiated
negotiability
For a note or draft to be negotiable it MUST be:
(1) In WRITING
(2) SIGNED: by maker or drawer
(3) UNCONDITIONAL promise to pay
(4) To ORDER or bearer: [order: person; bearer: to bearer]
(5) A FIXED AMOUNT
(6) Of MONEY: “$$ & goods” = non-negotiable
(7) PAYABLE at a fixed TIME or on demand
(8) With no UNAUTHORIZED UNDERTAKINGS or instructions
TIP: writing non-negotiable on instrument destroys negotiability, except check
Negotiation
Once negotiable, the instrument can be negotiated to third parties. Method depends on type of instrument:
ORDER PAPER: Delivery + Indorsement
BEARER PAPER: Delivery Only
INDORSEMENTS: [last indorsement controls]
(1) BLANK indorsement: if done on order paper, becomes
bearer
(2) SPECIAL indorsement: signs and specifies a third party; if
done on bearer, becomes order
(3) QUALIFIED indorsement: “to X with no recourse” limits
indorser’s liability
LOST/STOLEN: if entitled to enforce, but no longer in possession, may still enforce if they can prove: (1) ownership and (2) the facts that prevent production
HOLDER IN DUE COURSE
If receive ownership via negotiation = holder: subject to personal defenses
1: NEGOTIABLE: Signed; writing; unconditional; promise to pay; fixed amount of money; to order or bearer; at definite time; no unauthorized
2: Transfer via NEGOTIATION: Order: delivery + indorsement;
Bearer: delivery
3: for VALUE: Cannot be given as a gift; devised
4: GOOD FAITH: Subjective: honesty in fact
Objective: reasonable commercial standards of fair dealing
5: NO NOTICE OF DEFECTS:
(1) claims
(2) defenses
(3) unauthorized signatures
(4) altered
(5) discharged
Benefits of HDC:
an HDC is protected from all “personal defenses” and is only subject to “real defenses”
(1) Forgery of necessary party
(2) Fraud in the factum
(3) Altered
(4) Adjudicated incompetent
(5) Illegality
(6) Incapacity
(7) Duress [extreme]
(8) Discharge by insolvency
(9) Suretyships
(10) Statute of Limitations: 5 years
SHELTER RULE: anyone who takes ownership from an HDC inherits HDC protections but is not a holder himself so cannot negotiate further but can still assign. BUT: transfer via fraud or illegality breaks chain and is not afforded HDC protections
Liabilities:
Primary:
Makers + acceptors [drawees that accept] have an unqualified obligation to make payment, if they fail to make payment then seek payment from those who are secondarily liable
Indorser: Secondarily liable; 3 Pre-Reqs: (1) Presentment: present to primary party for payment (2) Dishonor: primary party refuses (3) Notice of Dishonor: to indorser
Drawer:
Only liable IF drawee fails to accept; same pre-reqs: (1) presentment; (2) dishonor; (3) notice of dishonor
Co maker:
Jointly and severally liable for full payment. Makers: primarily liable
Transfer Warranties
Transfer: sale of an instrument in exchange for consideration
5 WARRANTIES:
(1) Transferor is entitled to enforce the instrument
(2) Signatures are authentic and authorized
(3) Instrument NOT altered (4) No defenses or claims
exist against transferor (5) No knowledge of
insolvency proceedings Order: all holders; bearer: only immediate transferee
TIP: if no consideration, holder only rely on indorser’s K liability
Presentment Warranties
A person who presents an instrument for payment
3 WARRANTIES:
(1) Entitled to enforce the instrument
(2) Instrument has not been altered
(3) No knowledge that the signatures are unauthorized
Stop Payment Orders/Stop Payment Orders
Stop Payment Orders: oral: 14 days; written 6 months
Stop Payment Orders once pays, payment is final & drawee usually can’t recover unless breach of presentment
essay template
HOW TO APPROACH A COMMERCIAL PAPER/NEGOTIABLE INSTRUMENTS ESSAY (1) What is a negotiable instrument? WOOPS FUN Writing Order On Demand (Definite Time) Promise (Order to Pay) Signed Fixed Amount Unconditional No additional undertakings
NOTE- Maker and Payee are the characters
DRAFT (checks)- Drawer, Drawee, and Payee are the characters (Drawee is usually a bank)
(2) How do we negotiate?
Negotiation, Transfer, Indorsements, Presentment
(3) How do we enforce a negotiable instrument?
HOLDER: Possession + Rights
HOLDER IN DUE COURSE: Value, good faith, without notice
Common Problems: Forgery, Fictitious Payee, Imposter
Shelter Doctrine- No fraud or illegality, they become a holder in due course
DEANS- No real Defenses, Entitled to enforce, No Alterations, No Knowledge. Signature authorized
WHAT WILL I HAVE TO WRITE?
(1) In your rule paragraphs, DEFINE the PAPER (check, note) and the CHARACTERS (Maker,
Drawer, Drawee, Payee). DEFINE what makes it negotiable (WOOPS FUN).
(2) Identifying the issue is like identifying how they negotiate. You will be presented with an issue with
the note or draft. FIND and DEFINE. Is it transfer or indorsement? What is the problem?
(3) Then solve the problem in your analysis, but don’t forget to DEFINE the solution in your rile paragraph by including the rule for holder, holder in due course, shelter doctrine, and applicable defenses, etc.
