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VA Bar 2023 > Commercial Paper > Flashcards

Commercial Paper Flashcards

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1
Q

What are the fundamental issues tested in Commercial paper?

A
  1. Person with instrument wants to get paid
  2. Person obligated on instrument doesn’t want to pay
  3. Person who paid the instrument now wants to recover the money from the person paid and or someone else.
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2
Q

What is the approach taken when answering Commercial Paper Questions?

A
  1. Identify the type of paper (representation of money).
  2. Identify parties.
  3. determine if instrument is negotiable
  4. determine if instrument was properly negotiated
  5. determine if transferee is holder in due course
  6. Determine P’s causes of action, such as contract, warranty, tort, or not properly payable.
  7. Determine defendant’s defenses
  8. I
    f D is held liable, may D pass liability on to another?
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3
Q

What are the two types of commercial paper instruments and the name for their parties?

A

Note: Maker and Payee

Draft: Drawer, drawee, payee

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4
Q

What are all the elements of a commercial paper note?

A
  1. promise to pay money - a two party instrument.
  2. the parties are a maker - the promissory (obligor) - person who promises to pay and payee - the promisee - person entitled to payment (the money).

Certificate of deposit - not issued by a financial institution. The institution acknowledges receipt of money, and promises the payee/depositor to repay the money.

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5
Q

What are all the elements of commercial paper draft?

A
  1. an order to pay money - three party instrument
  2. the parties are the drawer - person ordering payment, drawee - person to make payment, and payee - person to receive the payment.
  3. Check - requires financial institution to be drawee and payable on demand.

3a. types of checks

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6
Q

What are all the elements of commercial paper draft?

A
  1. an order to pay money - three party instrument
  2. the parties are the drawer - person ordering payment, drawee - person to make payment, and payee - person to receive the payment.
  3. Check - requires financial institution to be drawee and payable on demand.

3a. types of checks
- ordinary
-certified - check which bank has agreed to pay
-cashier check - drawer and drawee are same bank. Person buying check is remitter
- tellers check - check drawn by one bank on another back, person buying check is remitter
-Traveler’s check - demand instrument requiring countersignature by a person whose specimen signature already appears on instrument.

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7
Q

What is the meaning of negotiability?

A

refers to form of the instrument and is determined at the time of issuance.

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8
Q

What are the elements of Negotiability?

A

In writing

signed by maker or drawer

unconditional promise or order to pay

fixed amount

In money

No other undertaking or instruction

payable on demand or at definite time

Contains words of negotiability

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9
Q

What is the rule for signed by maker or drawer in commercial paper?

A

Any symbol executed or adopted by a party with present intent to authenticate a writing.

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10
Q

What is the rule for “unconditional promise or order to pay” in commercial paper?

A

must be more that a mere acknowledgement of a debt such as an I.O.U. There is a presumption of unconditional promise to pay.

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11
Q

What items make a promise or order conditional and thus non negotiable?

A
  1. Express condition to payment (if something happens)
  2. promise or order “subject to” or “governed by” another record.
  3. Incorporation by Reference of Rights or Obligations
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12
Q

What are items that do not make promise or order conditional?

A
  1. statement of consideration
  2. reference to another record (as per or in accordance with)
  3. incorporation by reference of items that would not hurt holder, such as rights regarding collateral, prepayment, acceleration
  4. limitation of payment or particular fund or source
  5. countersignature , i.e., traveler’s check
  6. Required by law
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13
Q

How do you determine if a commercial paper instrument has a “fixed amount?”

A

Must be able to look at instrument and determine the principal amount due.

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14
Q

If an instrument does not state how much interest is due, how is interest determined?

A

A silent instrument bears no interest.

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15
Q

What are ways in which interest may be stated that would not violate the “fixed amount” requirement?

A
  1. amount of money ($20 interest)
  2. fixed or variable rated (5% interest)
  3. Reference to outside sources (2% above the prime rate)
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16
Q

If a note provides “for interest” how is the interest rate determined?

A

Judgment rule

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17
Q

What are the elements for “payable on demand or at a definite time?”

A
  1. On demand through express statements or if silent, instrument is a demand instrument.
  2. At definite time though express statements
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18
Q

What are words of negotiability?

A

Bearer language and
Order language

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19
Q

What is bearer language?

A

“payable to bearer”
“payable to order of bearer”
indication that possessor entitled to payment
no payee stated
“to cash” or “to order of cash”
not payable to identified person

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20
Q

What is Order language?

A

Payable to (1) the order of an identified person; or (2) an identified person “or his/her order.”

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21
Q

What controls if there is both order and bearer language?

A

Bearer language.

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22
Q

What is the exception for checks regarding words of negotiability?

A

if this is the only element of negotiability missing for a check, the order or bearer language requirement is waived

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23
Q

What is Negotiation in Commercial Paper?

A

Transfer of negotiable instrument so that transferee is not the holder of the instrument.

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24
Q

How does one have holder status?

A

Possession of negotiable instrument and good title

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25
Q

What are the methods of obtaining good title in commercial paper?

A

will depend on the words of negotiability.

Bearer = possession

Order = possession plus necessary endorsements

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26
Q

What is an indorsement in commercial paper?

A

an indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument.

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27
Q

What is a Blank Indorsement and its effect?

A

Simplest type of indorsement consisting merely of payee’s signature.

creates bearer paper

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28
Q

What is a special endorsement and its effect?

A

Payee’s signature plus designation of new person to whom instrument is now payable.

creates order paper

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29
Q

What is a restrictive endorsement and its effect if not followed?

A

limits what may be done with the instrument

if the depositary bank does not comply with indorsement then it will be liable for conversion.

30
Q

How is the identification of the person to whom the instrument is payable determined?

A

intent of issuer determines initial payee

31
Q

When their are multiple payees how does “and” and “or” determine negotiability?

A

And : requires all payees to indorse

Or: requires any one of the payees to indorse.

32
Q

What are the elements for a holder in due course?

A
  1. Negotiable instrument
  2. Holder
  3. Authenticity not apparently questioned
    - instrument does not bear such evidence of forgery or altercation or is not otherwise so irregular or incomplete as to call its authenticity into question.
  4. Good faith
  5. Without notice at the time of instrument acquisition
33
Q

How is an HDC’s good faith determined?

A

honesty in fact (subjective) plus observance of reasonable commercial standards of fair dealing (objective).

34
Q

How is notice defined for an HDC?

A

actual knowledge - subjective test
Receipt of a notice coupled with a reasonable time to act on the notice
From all the facts and circumstances known to the persona at the time in question, the person has reason to know that it exists.

35
Q

What is the shelter rule for commercial paper?

A

even if the holder does not qualify as an HDC, person may still have rights of HDC by shelter.

The transfer of an instrument vests int eh transferee the rights that the transferor had.

36
Q

What rights do a HDC have?

A

Subject to real defenses. Protected from personal defenses. Free from claims of others to the instrument.

37
Q

What are real defenses?

A
  1. Infancy
  2. Duress which voids obligation
  3. lack of legal capacity making obligation void
  4. illegality making obligation void
  5. fraud in the execution (also called Fraud in Factum
  6. Discharge in insolvency (banckruptcy)
  7. Statute of Limitations
  8. Alteration
  9. Unauthorized signatures and forgeries
38
Q

What is fraud in the execution?

A
  1. signer lacked knowledge of the instrument’s character or essential terms and 2. signer lacked reasonable opportunity to learn of the instrument’s character or essential terms?
39
Q

What is the SOL for commercial paper?

A

6 year from the due date

For an unaccepted draft (check), SOL is the earlier of (1) three years after dishonor or (2) 10 years after issue.

40
Q

What are personal defenses to commercial paper?

A

examples are:

failure of consideration
breach of warranty
fraud in the inducement

41
Q

What is the primary basis for contract liability on an instrument?

A

A person’s signature

42
Q

How is contract liability determined for signatures by agent or principal on an instrument?

A

For binding the principal you follow general law.

For binding the agent:

agent escapes personal liability if the principal identified in instrument and signature unambiguously shows it was made on behalf of principal.

if the above elements are not satisfied then:

the agent will be liable to a HDC unless agent can prove that the holder had notice of the representative nature of agent’s signature.

the agent will be liable to a non-HDC unless agent can prove that the original parties did not intent the agent to be liable.

agent is not liable if principal’s name is on the check.

43
Q

Who may disclaim contract liability on commercial paper and how?

A

Drawer may not disclaim liability on a check but may disclaim liability on other drafts.

“without recourse”

44
Q

How does secondary contract liability of a drawer occur?

A

Drawer liable only after two conditions are first satisfied:

  1. presentment to drawee within 30 days
  2. dishonor upon presentment
45
Q

When may a liability disclaimer on a check be allowed?

A

When done by an endorser of the check. The effect will merely pass title.

46
Q

What is the order of liability for endorsers on an instrument?

A

indorsers are liable to each other in the order of their signatures.

sue prior indorsers for payment.

liable to other endorsers

47
Q

What is secondary liability of an endorser?

A

indorsser liable only after three conditions are first satisfied:

  1. presentment
  2. dishonor (however failure to present check to drawee within 30 days of indorsement discharges indorser.
  3. notice of dishonor within 30 days of dishonor
48
Q

What is the general contract rule of liability for a drawee?

A

A drawee makes no negotiable instruments contract.

49
Q

How does acceptance and certification affect a Drawee?

A

Drawee may agree to pay the draft by signing the draft

the drawee has no obligation to accept a draft and cannot be sued for failing to accept

certification discharges the drawer and all prior indorsers.

50
Q

what is the consequences of Drawees final payment on a check in contract actions?

A

the conract action may no longer be pursued and the drawee bank may not recover on the check from the person’s it paid unless there is a breach of presentment warranty.

51
Q

What is the conversion (tort) liability if Drawee pays on a forged indorsement?

A

drawee who pays on forged indorsement is liable to the payee in conversion.

person using in conversion must have received delivery or the instrument. no conversion action if check never reaches payee because it was lost in the mail.

52
Q

What is the rule on payment of checks after the drawer’s death?

A

General rule: drawee bank may continue to pay checks until it knows that the drawer has died and has a reasonable opportunity to act on that knowledge.

53
Q

What type of possession is required for implied warranties of commercial paper?

A

None.

54
Q

Who makes transfer warranties?

A

the Defendant. Transferor who receives consideration.

55
Q

To whom are transfer warranties made?

A

Plaintiff.

Immediate transferee and subsequent transferees if tansferor endorsed.

56
Q

What are the transfer warranties

A
  1. warrantor is entitled to enforce the instrument/ (warranty of holder status)
  2. all signatures authentic and authorized
  3. no alteration
  4. No good defense against transferor (perfect plaintiff warranty)
  5. No knowledge of insolvency proceedings
57
Q

How are transfer warranties disclaimed?

A

Checks - cannot be disclaimed
Non-checks - may disclaim (without warranties)

58
Q

What are the presentment warranties?

A

They are made on presentment by defendant (presenter and previous transferors)

They are made to parties who pay in good faith, that is maker, drawee, acceptor (plaintiff).

59
Q

What are the warranties for an unaccepted draft (normal check) presented to drawee?

A

Warrantor entitled to enforce draft or obtain payment

No alteration

No knowledge of unauthorized Drawer’s signature.

60
Q

What is the liability of a forged maker’s signature?

A

Not liable unless alleged maker’s conduct may ratify the forgery or cause the alleged maker to be precluded from denying forgery.

Forger is liable.

61
Q

What is the liability of a forged drawer’s signature?

A

Alleged drawer not liable.

Drawee bank must re-credit alleged drawer’s account as check was not properly payable unless drawee bank has a defense.

Bank unable to pass on loss unless breach of presentment warranty.

62
Q

What is the Bank Statement Rule?

A

Duty to inspect statement

Customer (drawer) has a duty to inspect statement and canceled checks in timely manner and report forgeries to bank.

If customer does not and bank can prove a loss beyond original mistaken payment (not catch forger), customer is precluded from claiming forgery.

63
Q

What is the effect of a forged indorsement on bearer and order paper?

A

Bearer - irrelevant

Order - forgery breaks claim of title and check is not properly payable. Accordingly, the drawer may demand the drawee bank recredit the drawer’s account as the check was not properly payable.

64
Q

What is the imposter rule?

A

drawer/maker estopped to deny validity of forged indorsement when deemed to have acted carelessly in issuing the check and thus contributed to the forgery.

65
Q

What is the rule on fraudulent endorsements by employees?

A

Payee estopped

if an employer entrusts an employee (or independent contractor) with responsibility with respect to an insturment and the employee makes a fraudulent indorsement the indorsement is effective. Payee is estopped to assert forgery.

66
Q

What are the different liabilities of the Drawee (bank)?

A
  1. Conversion liability to payee
  2. non properly payable liability to drawer
  3. Drawee protected from double liability
67
Q

What are Banks defenses?

A
  1. imposter rule
  2. fraudulent indorsement by employee entrusted with a check.
  3. drawer’s negligence
  4. Failure to timely sue.
68
Q

What are the two types of alteration to commercial paper?

A

Change in obligation - amount, date, name of payees, interest rate

Unauthorized completion - completed in unauthorized manner which affects the party’s obligation

69
Q

What is the effect of an alteration on an HDC?

A

for change in obligation - HDC may enforce for original amount.

for unauthorized completion - HDC may enforce as completed.

70
Q

What is the effect of an alteration on a NON-HDC

A

fraudulently made by holder = total discharge of obligor

not fraudulent made = obligor liable under original terms

71
Q

What is the general rule for a non properly payable check

A

an altered check is not properly payable.

72
Q

What are the banks defenses to an altered check?

A
  1. Drawer’s Negligence substantial contribution to alteration
  2. Bank Statement Rule
  3. Breach of transfer and presentment warranties of no alteration

VA Bar 2023 (13 decks)

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