Commercial Paper

Question 1

Commercial Paper Law

Answer 1

Article 3 & 4 of UCC- State Law

Question 2

Commercial Instrument

Answer 2

written instrument for the payment of maney

Question 3

Issues

Answer 3

 The person with the instrument wants to get paid
 The person obligated on the instrument does not want to pay
 The person who pays the instrument will now want to recover the money from the person who was paid or someone else

Question 4

Approach: 8 Steps

Answer 4

1) Identify the type of paper
2) Identify the parties
3) Determine whether the instrument is negotiable
4) Determine whether the instrument was properly negotiated
5) Determine whether the transferee is a holder in due course- BFP
6) Determine the plaintiff’s cause(s) of action, such as contract, warranty, tort, or not-properly-payable claims
7) Determine the defendant’s defenses
8) If the defendant is held liable, can the defendant pass liability on to another party?

Question 5

Step 1, Instruments: Types

Answer 5

Notes or Drafts

Question 6

Notes

Answer 6

• Promise to pay money- 2-party instrument
  Parties
• Maker: person who promises to pay – promisor, obligor
• Payee: person entitled to payment- promisee
  Certificates of Deposit(CD)
• A note issued by a bank that contains 1) receipt of money and 2) a promise to repay

Question 7

Draft

Answer 7

• Draft is an order to pay money- three party instrument
  1) Drawer: person ordering payment
  2) Drawee: person who makes the payment
  3) Payee: the person to receive the payment
  Check
• Type of draft that has
  1) Bank as drawee
  2) Payable on demand

Question 8

Types of Checks

Answer 8

• The certified check—an ordinary check which the bank has accepted (that is, agreed to pay)
• The cashier’s check—a draft where the drawer and drawee are the same bank. The person buying the check is called the remit- ter.
• The teller’s check—a draft drawn by one bank on another bank. The person buying the check is also called the remitter.
• The traveler’s check—a demand instrument requiring a counter- signature by a person whose specimen signature already appears on the instrument

Question 9

Step 3, Negotiability

Answer 9

• The form of the instrument and is determined at the time of issuance
• Negotiability is important because, under normal contract law, a transferee gets no better rights than the transferor. But, if the paper is negotiable and properly negotiated, it may reach the hands of a holder in due course and the holder in due course (“HDC”) gets better rights than the transferor and so can get paid even if the obligor (maker or drawer) has defenses to payment under normal contract law.

Question 10

Negotiability Elements *Commonly Tested

Answer 10

Must be:
 In writing
 Signed by maker or drawer
 Unconditional
 Promise or order to pay
 A fixed amount of money (with or without interest) 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

Question 11

Signed Writing

Answer 11

• To be negotiable there must be a written instrument- no requirements
• Signature: can have any symbol with intent to authenticate- compute, x, thumb print, stamp

Question 12

Unconditional

Answer 12

• Promise or order to pay
• More than a mere acknowledgement of a debt
• Conditional, not permissible:
   express condition, I promise to pay… if…- goes under contract law
   Subject to, governed by
   Rights or obligations: with respect to the promise or order are in another record- instrument must contain all of the terms
• Do not alter Unconditionality
   States consideration required for the payment
   Refers to the another record- ok bc not conditioned on terms of other contract
   Incorporates by reference items that would not hurt the holder, including: 10 rights regarding collateral 2) prepayment and 3) acceleration
   Limits payment to a particular fund or source: proceeds of my summer wheat crop
   Requires counter signature- travelers check
   Required by law: holder is subject to claims or defenses

Question 13

Fixed Amount

Answer 13

• Determine Principal amount due on the instrument
• Interest:
   Presumption is there is no interest
   Do not need to be fixed like principal but can be a fixed amount
   Fixed or variable rate of interest
   Reference to an outside source- 2% above the prime rate ok
   Plus interest- judgment rate

Question 14

In Money

Answer 14

• Includes foreign money
• Cannot be payable in goods and services
• Words prevail over figures: e.g. 550 five hundred

Question 15

No Other Undertaking or Instruction

Answer 15

• Other than the payment of money
• Courier without luggage
• Except: Promises to give, maintain or protect collateral, wavier of law for the obligor, an authorization to the holder to confess judgment

Question 16

Payable on Demand

Answer 16

• If it states payable on demand or at sight
• Definite time: if fixed date or period after sight—90 days after sight—a time readily ascertainable first day of fall but not when Fred dies
• Permitted Date change: prepayment of instrument or acceleration of due date, extending the due date

Question 17

Contains Words of Negotiability

Answer 17

• Must be order or bearer language to be under article 3 or 4 of UCC
• To Bearer: instrument is payable to bearer if it: (1) states that it is “payable to bearer” (“I promise to pay bearer”), “payable to the order of bearer,” or otherwise indicates the possessor is entitled to payment; (2) does not name a payee; or (3) is payable to “cash” or otherwise indicates that it isn’t payable to an identified person.
• To Order: if it is payable to the order of an identified person (for example, “pay to the order of Frank Smith”) or to an identified person or order (for example, “pay to Becky or her order”). Order language is typically pre-printed on checks.
• Order and Bearer: if both- bearer language controls
• Exception for checks: if this is the only element missing for a check, the language is waived bc we are afraid of check printing errors

Question 18

Step 4: Becoming a Holder

Answer 18

• Holder is a person in possession of an instrument with a right to enforce it. Must have 1) POSSESSION and 2) have GOOD TITLE (based on the words of negotiability
  Transfer of Instrument
• Can transfer to third party, steps necessary to negotiate an instrument depend on whether the instrument is payable to bearer or to order.
  Bearer Instruments
• Possession= good title
• Bearer instruments are negotiated by transferring possession of the instrument
  Order Instruments
• Possession + Indorsements= good title
• Indorsement to another:
   Negotiation to specific payee: transferring possession plus the identified person’s indorsement
   Payee’s Indorsement Must be Valid: authorized and valid
   Effect of transferring an order without an indorsement: may transfer possession but not an endorsement, so no holder status

Question 19

Indorsements

Answer 19

• Blank: signature on back of check
• Special: payee’s signature and designation of new person to whom the instrument is payable- Pay John Smith, Signed Peter Payee
• Qualified Indorsement: indorsement with the words without recourse- limits the contract liability imposed on indorsement
• Restrictive Indorsements: limit transfer- ex: for deposit in my account #
  Identification of Payee
• Intent of issuer: determines the initial payee
• Multiple payees: and- both must indorse, or either

Question 20

Indorsement Issues

Answer 20

• Transferees right to transferor’s endorsement: If instrument is transferred for value, the transferee has a specifically enforceable right to the transferor’s indorsement.
• Depositary bank becomes holder without transferee’s signature
• Misspelled Payee’s Name: may indorse with right or wrong name
• Lacking capacity- may endorse

Question 21

Step 5, Holder in Due Course HDC

Answer 21

• HDC takes free of most defenses, special kind of holder
• Due course: requires the holder to take for value, in good faith, and without notice

Question 22

HDC Requirements

Answer 22

1) Instrument must be negotiable
2) Must be a holder- possession +good title
3) Authenticity of instrument is not apparently questioned
4) Pay value: must pay consideration, gifts not ok, past consideration ok
5) Good faith: honesty in fact and reasonable commercial standards
6) Without notice:

Question 23

Notice

Answer 23

• includes actual notice and reason to know, merely filing is not notice (constructive notice), notice must be given and reasonable opportunity to act on it
• Notice: instrument tis overdue or dishonored (insufficient funds), or with notice of an unauthorized signature or notice of claims of defenses
• Not Notice: instrument is incorrectly dated, there has been a default in payment of interest, public filing or discharge of party
• Shelter Rule: may have rights under shelter if that was transferor’s status as an HDC and they do not qualify
• Exception to Shelter: fraud or illegality
• Burden to establish HDC is on the person asserting

Question 24

HDC Real Defenses

Answer 24

HDC is still subject to these- cannot say F-you pay me
- Infancy: Minor
- Duress
- Incapacity to contract- declared incompetent
- Illegality
- Fraud in the Factum: without knowledge of what they were signing=lack of intent to sign
- Bankruptcy
- SOL: 3 years if bounced, 6 years after due, 10 years after issue
- Alteration and Forgeries

Question 25

HDC Personal Defenses

Answer 25

HDC wins against Personal Defenses- F-you pay me
- Failure of Consideration or nonperformance- non-delivery or nonperformance
- Breach of warranty
- Fraud in Inducement: maker was not aware of terms
- Claims or defenses of another: no claimant can take it from them

Question 26

Step 6, Contract liability of Parties

Answer 26

• Goal: to collect the money in the first instance
• No contract liability without a signature

Question 27

Signatures by Agents

Answer 27

• Same as agency law- yes if authorized
• Is agent liable? No if principle is identified in instrument and signature shows they were an agent: Alice Smith signs a promissory note “Paul Parsons, by Alice Smith.” Alice isn’t personally liable on the note because the note identifies the principal (Paul Parsons) and the word “by” unambiguously shows that Alice signed on behalf of Paul
• Personally liable if the signature is not in representative capacity or principal is not identified on instrument:
  1) Holder is an HDC: agent will be liable unless they can prove the HDC had notice of the representative nature of agent’s signature
  2) Holder is not an HDC: and agent cannot prove the parties did not intend agent to be liable

Question 28

Libility

Answer 28

• Maker: primary liability and must pay, liable to holder or endorser
• Drawer of Draft: Secondary Liability: if you write check, may not disclaim liability on check, only liable after conditions: 1) Presentment and 2) dishonor
   Presentment: tried to cash
   Dishonor: bounced
• Indorser of Note or Draft: arises merely from the indorser’s signing of their name on the instrument
• Order of Liability: liable to each other in order of their signatures Example: The payee of a note, Paul Parsons, indorses the note, “pay to Susan Smith, Paul Parsons.” That’s a good special indorsement. Susan then indorses the note, “pay to Tom Torres, Susan Smith.” If the maker of the note doesn’t pay, Tom, the current holder, may sue Susan and Paul on their indorser’s contract. If Susan pays, Susan may then sue Paul on his indorser’s contract. But, if Paul pays Tom, Paul may not sue Susan. Paul’s only recourse is against the maker on the maker’s contract.
• Secondary Liability: holder must present, dishonor and provide notice of dishonor within 30 days, can still sue the drawer
• Drawee: general rule: draft makes no negotiable instruments to contract and do not have any liability unless they sign the check
• Final Payment: final payment end contract obligations

Question 29

Accommodation Parties

Answer 29

• Co-signors, Sureties
• Accommodated Party: person with crappy credit
• Accommodated Party: person with good credit
• Holder: bank
• Liability: depends on how they sign,
   No special contract: presumed a guarantor
• limit liability : by writing on collection only, they cannot come after if the main person flees
• Reimbursement: entitled to instrument from other party
• Proof of Accommodation Status: A person signing an instrument is presumed to be an accommodation party. Notice of accommodation status is accomplished either by express language indicating the person is signing as a surety or guarantor, or by an anomalous indorsement (signature of a person who wasn’t a holder and was outside the chain of title). To give the accommodation party the benefit of any discharge relating to his character as surety, parol evidence is generally allowed to show accommodation, except when the holder is an HDC without notice of the accommodation.

Question 30

Warranty Liability

Answer 30

Goal: trying to get the money back
Implied Warranties
1. transfer warranties
2. Presentment warranties
3. Warranty v. Indorser’s Contract

Question 31

Transfer Warranties

Answer 31

• Transferors D: any transferor who receives consideration, not gifts.
• Transferees P: immediate transferee and to subsequent transferees if transferor
   The immediate transferee whether or not the transfer is by indorsement
   All subsequent transferees if the transfer is by indorsement
   For banks, the liability runs to any subsequent collecting bank even without indorsement
  Drawees and makers can never sue for breach of transfer warranty—they get instruments presented to them, not transferred.
• Transfer Warranties: in general transferor warrants that
  1) entitled to enforce
  2) signatures are authentic and authorized
  3) the instrument has not been altered
  4) no defense or claim of any party is good against the transferor
  5) no knowledge of insolvency proceedings

Question 32

Presentment Warranties

Answer 32

*Cannot have both implied and presentment
- Makes: Presenters and previous transferors
- Who to: plaintiffs in a presentment warranty action are parties who pay in good faith—a maker, drawee, or acceptor.
- Warranties: On unaccepted drafts, persons obtaining payment and previous transferors warrant that:
1) The warrantor is entitled to enforce the draft or is authorized by one who is (in essence a warranty of “good title”—that there are no unauthorized or missing indorsements)
2) The draft has not been altered and
3) The warrantor has no knowledge that the drawer’s signature is unauthorized

Question 33

Warranty v. Indorser’s Contract

Answer 33

• If P is holder: if the payor hasn’t paid the instrument – check bounced, the holder will sue the indorser on the indorser’s contract
• If P is payor: If the payor has paid and later discovers the payor shouldn’t have paid because, for example, the check was forged or the note was altered, the payor will attempt to sue the indorser for breach of warranty (transfer or presentment, as appropriate under the facts).

Question 34

Other Issues

Answer 34

Discharge by holder
Failure to produce original instrument
overdrafts
postdated checks
Stop payment
Wrongful Dishonor
Payment in Full Check

Question 35

Discharge by Holder

Answer 35

• By cancellation or renunciation:
  1) If payment is made by a certified check, cashier’s check, or teller’s check, the underlying obligation is discharged as if the person paid in cash. For payment with uncertified checks and notes, the underlying obligation is only suspended.
  2) If the check or note is later paid, the underlying obligation will be discharged. If the check or note is dishonored, the holder may sue on either the instrument or the underlying obligation.

Question 36

Failure to Produce Original Instrument

Answer 36

• If a person can’t produce an instrument because it is lost, destroyed, or stolen, the person will be entitled to enforce the instrument if they can prove:
  1) They were in possession of the instrument and entitled to en- force it when the loss occurred
  2) The terms of the instrument, and
  3) The facts that prevent production of the original instrument

Question 37

Overdrafts & Postdated Checks

Answer 37

Overdrafts
- Obliged to honor insufficient funds to cover the draft, so the customer is liable
Postdated Checks
- Not allowed, bank will pay unless customer notifies bank

Question 38

Stop Payment

Answer 38

• Oral order is effective within 14 days,
• Written is binding for 6 months, can renew
• Bank defense: did not properly stop or they were legally required to pay

Question 39

Wrongful Dishonor

Answer 39

• Bank bounces check but you had funds
• Customer can bring action, payee cannot sue bank

Question 40

Payment in Full Check

Answer 40

• A payment in full check is a check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation that is unliquidated or subject to a bona fide dispute.
• 90 day return payment to dispute
• Effect: payment in full operates as an accord and satisfaction if the payee cashes the check

Question 41

Step 7: Forgery **Commonly Tested

Answer 41

It is essential when dealing with forgery to determine whose signature was forged because different rules apply based on the identity/ status of the person whose name is forged. If the chain of title is broken, no subsequent possessors will qualify as holders. Forgeries you may see on the exam:
- Forgery of the payee’s name breaks the chain of title
- Forgery of names not necessary to the chain of title won’t keep later takers from becoming holders
- Forgery of the drawer’s name does not break the chain of title because the forgery operates as the genuine signature of the forger

Question 42

Forged Maker’s Signature

Answer 42

• Purported maker is not liable
• Forger is liable
• Example: Fred signs your name to a promissory note. You are not liable on the note because you didn’t sign the note. Fred is liable because his sig- nature, albeit in the letters that spell your name, appears on the note

Question 43

Forged Drawer

Answer 43

• Someone stole your checks and wrote them out
• Purported drawer is not liable because they did not order them to do so
• Unless they have a defense (breach of presentment warranty) , the drawee bank must recredit the “drawer’s” account because the check was not properly payable.
• No Presentment warranties breached: The bank who pays over a forged drawer’s signature is unable to pass on the loss unless there was a breach of the presentment warranties – they buy forgery insurance
• Example: Fred steals Dan’s checkbook and forges Dan’s signature to a check payable to “Cash” for $200. Fred cashes the check at the Corner Grocery Store. Fred’s forgery of Dan’s name acts as Fred’s signature and thus Fred is liable on the drawer’s contract. If the drawee bank does pay the check, it cannot recover from Corner Grocery because Grocery did not breach any presentment warranties unless it knew that Dan’s name was forged.

Question 44

Bank Defenses

Answer 44

• Drawer Negligence: failure to exercise ordinary care
   Negligence: include: (1) leaving blanks or spaces on the instrument; (2) mailing the instrument to someone with the same name as the payee; and (3) failing to follow internal procedures designed to avoid forgeries.
• Bank Statement Rule: duty to inspect in timely manner and report forgeries, if they do not they may be liable. Forged drawer’s signatures must be reported to the bank within 1 year from the date the instrument became available to the customer
• **Repeat Offender: If the same person is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available. If the drawer doesn’t do so, the bank won’t recredit the account for the subsequent forgeries by the same person.
• Example: Fred carefully removes 10 checks from Dave’s checkbook and forges Dave’s name as drawer. The drawee bank pays the first 3 checks and returns them with Dave’s February 2010 statement. The remaining 7 checks are included with Dave’s May 2010 statement. Dave doesn’t inspect either statement until July 2010. Dave will be precluded from asserting the forgeries of the last 7 checks because he didn’t report the original forgeries within 30 days of when he received his February 2010 statement. Dave may still be able to recover for the original 3 forgeries because the 1-year period hasn’t elapsed (unless the drawee bank can prove it suffered a loss because of the delay).

Question 45

Forging Payee’s Name

Answer 45

• Bearer paper: Since indorsement isn’t necessary to negotiate bearer paper, forgery of an indorsement is irrelevant.
• Order paper: Forgery breaks chain of title and the check is not properly payable. Accordingly, the drawer may demand that the drawee bank recredit the drawer’s account as the check was not properly payable.
• Precluded from asserting Forgery:
  1) Imposter Rule: If an issuer, maker, or drawer is deemed to have acted carelessly in issuing the check, they are precluded from denying the validity of the indorsement because they are deemed to have contributed to the forgery.
  2) Fraudulent Indorsement by Employees-Payee Estopped: If an employer entrusts an employee (or independent contractor) with responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective. Payee is estopped to assert the forgery.
• Liability of Drawee
   Conversion to payee
   Not properly payable liability to drawer
   Drawee protected from double liability
   Bank defenses: imposter rule, fraudulent endorsement by employee entrusted with check, drawer’s negligence, failure to timely sue—within 3 years
• Liability of Presenter: The drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce. The forged indorsement broke the chain of title, so no one could become a holder.
• Liability of Transferor: The presenter who loses to the payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties of:
  1) Entitled to enforce
  2) All signatures authentic or authorized
  3) No good defenses
• Example: Dan issues a check payable to Paul from Dan’s account at Octopus National Bank (“ONB”). Tom steals Paul’s check, expertly forges Paul’s name, and deposits the check in Tom’s account at Texas State Bank. Texas State Bank presents the check to ONB for payment and ONB pays the check. Shortly thereafter, both Dan and Paul discover what happened and notify ONB immediately. ONB is liable either (1) to Dan for cashing a check which was not properly payable or (2) to Paul for converting Paul’s property. After paying either Dan or Paul, ONB will bring a claim against Texas State Bank for breaching the presentment warranty of entitled to enforce (Texas State Bank had no right to enforce the check because the forgery prevented it from being a holder). Texas State Bank may then bring a claim against Tom for breaching the transfer warranties of entitled to enforce, all signatures authentic or authorized, and no good defenses.

Question 46

Alteration Types

Answer 46

• Change in obligation: if the instrument has been changed, an HDC may enforce the instrument according to its original terms
• Unauthorized Completion: If the instrument was completed in an unauthorized manner, an HDC may enforce the instrument according to its terms as completed. F-you pay me
• Effect on Non-HDC:
  1) Fraudulent made by holder: Obligor discharged
  2) Alteration not fraudulent: obligor liable under original terms
• Not Properly Payable: altered check is not properly payable
• Defenses: bank Statement Rule- must report within 180 days of receiving statement or 1 year
• Breach of Transfer and Presentment Warranties: altered instrument breach the transfer and presentment warranties promising that there have been no alterations