Commercial paper

Question 1

Note

Answer 1

a written and signed promise by one party to pay money to another

Question 2

What are the elements of a negotiable instrument? (WUF UPDO)

Answer 2

(1) in Writing and signed
(2) unconditional
(3) fixed amount of money
(4)no unauthorized undertaking or instruction
(5) Promise or order to pay
(6) payable on Demand or at Definite time
(7) payable to Order or Bearer

Question 3

What are the elements of a negotiable instrument?

Answer 3

(1) in Writing and signed
(2) unconditional
(3) Fixed amount
(4) no Unauthorized undertaking or instruction
(5) Promise or order to pay
(6) payable on Demand or at Definite time
(7) payable to Order or Bearer

Question 4

What makes a promise or order conditional?

Answer 4

(1) express condition to payment
(2) states promise is “subject to” or “governed by” another record
(3) the rights or obligations w respect to the promise or order are in another record

Question 5

What items do NOT make a promise or order conditional?

Answer 5

(1) stating the consideration required for payment
(2) referring to another record (“as per”)
(3) Incorporating by references items that won’t hurt the holder, including rights regarding collateral, right of obligor to pay early and right of holder to get paid early.
(4) limiting payment to particular fund or source
(5) requiring a countersignature
(6) containing statement required by law that holder is subject to claims or defenses of original payee

Question 6

If an instrument is payable on or after a stated time or event that is certain to happen but uncertain as to when it will happen…

Answer 6

it is NOT negotiable because the time for payment is not readily ascertainable

Question 7

Is the following instrument negotiable or non-negotiable:

An instrument “payable 100 years from date but if my uncle Sal should die, payable on his death”

Answer 7

Negotiable. A clause that accelerates the time of payment upon the occurrence of an event is permissible.

Question 8

Is the following instrument negotiable or nonnegotiable:

An instrument “payable 3 months from date, which may be extended at option of Maker”

Answer 8

Non-negotiable. A clause that extends the time of payment at the option of the maker won’t affect negotiability as long as the extension is to a further definite time stated in the instrument. Here, no date is specified, so the instrument is not negotiable.

Question 9

What is an instrument that is payable to cash or otherwise doesn’t name a payee?

Answer 9

Bearer paper

Question 10

Ty writes a check payable to “cash.” How can Ty transfer the check to Kim?

Answer 10

He must simply deliver it to her. This is bearer paper, so a special indorsement naming payee is unnecessary. Kim is a holder as soon as she receives possession of the check.

Question 11

Drawer

Answer 11

person making payment of a draft

Question 12

Drawee

Answer 12

person to make payment of a draft

Question 13

Payee

Answer 13

person to receive payment of check or draft

Question 14

Maker

Answer 14

person who promises to pay a note

Question 15

When is a drawer liable?

Answer 15

when
(1) if the draft is a check, presentment within 30 days and
(2) dishonor (drawee refuses to pay)

Question 16

Who is primarily liable on a draft?

Answer 16

The drawee is primarily liable and obligated to pay when the draft is presented for payment. However, if drawee fails to pay within a reasonable time after presentment, drawer becomes obligated to pay, unless the bank accepted the draft.

Question 17

Accomodation party

Answer 17

One who signs an instrument for the purpose of lending her name and credit to another party to the instrument and who does not directly benefit from the value given. (surety)

Question 18

what happens if an accommodation party pays the instrument?

Answer 18

She acquires the rights of the party paid and will have an action on the instrument against the party accommodated

Question 19

Even though the holder satisfies the requirements that he take an instrument for value, in good faith and without notice of certain defects, he won’t become a holder in due course if he:

Answer 19

(1) purchases the instrument at judicial sale
(2) acquires the instrument from an estate (?)
(3) purchases instrument as part of bulk transaction not in regular course of business

Question 20

Is an instrument negotiable if it calls for payment with something other than money?

Answer 20

NO

Question 21

Holder

Answer 21

person in possession of an instrument with the right to enforce it

Question 22

Holder in due course

Answer 22

a holder who takes an instrument
(1) for value
(2) in good faith and
(3) without notice of any claims or defenses

Question 23

Ana issued Tim a $500 note in exchange for what Tim fraudulently claimed was a real diamond ring. The next day, Tim negotiated the note to Barb in exchange for a refrigerator. Barb then negotiated the note to Cesar in exchange for a television set. Later, Ana, Barb, and Cesar discover Tim’s fraud. Does Ana have an obligation to pay Barb on the note?

Answer 23

No. Someone who issues a note is obligated to pay the holder (i.e., the person in possession
of the note with the right to enforce it) according to the note’s terms unless she can assert a
defense. Thus Ana’s obligation would extend to Cesar, not Barb.

Question 24

Ana issued Tim a $500 note in exchange for what Tim fraudulently claimed was a real diamond ring. The next day, Tim negotiated the note to Barb in exchange for a refrigerator. Barb then negotiated the note to Cesar in exchange for a television set. Later, Ana, Barb, and Cesar discover Tim’s fraud. Can Ana assert any defenses against Cesar?

Answer 24

No. Tim’s fraudulent inducement would give Ana a personal defense to payment on the note, but only real defenses (e.g., incapacity, illegality) can be asserted against a holder in due course (“HDC”). An HDC is a holder who took an instrument (i) for value, (ii) in good faith, and (iii) without notice of any claims or defenses on it. Barb and Cesar each took the note for value (in
exchange for the items mentioned), and neither had notice of the fraud at that time. Thus,
if Cesar took the note in good faith, he was an HDC, against whom Ana cannot assert her
defense. Furthermore, if Barb took the note in good faith, she would pass her HDC rights
to Cesar under the shelter rule.

Question 25

Raj borrowed $10,000 from Ed. Raj agreed to repay the loan in 90 days by making a single
payment of $10,500. The additional $500 represented interest at a lawful rate. Raj delivered to Ed a signed and dated promissory note including these terms. On the 90th day, Ed demanded payment from Raj, but Ed could not produce the note, despite a diligent search. May Ed disregard the note and sue Raj for the amount owed?

Answer 25

No, because tendering the note suspended the underlying obligation. Unless otherwise agreed, if a promissory note is given to satisfy an obligation, the obligation is suspended to the same extent as if cash were given. Suspension continues until the note is paid or dishonored. If the note is paid, the obligation is discharged. Only if the note is dishonored (i.e., the maker refuses to pay when the note is presented) does the obligee have the option to sue on either the note or the obligation. However, if a note is lost, stolen, or destroyed, the obligation remains suspended to the extent of the instrument, and the obligee’s rights are limited to enforcement of the note.

Question 26

Raj borrowed $10,000 from Ed. Raj agreed to repay the loan in 90 days by making a single
payment of $10,500. The additional $500 represented interest at a lawful rate. Raj delivered to Ed a signed and dated promissory note including these terms. On the 90th day, Ed demanded payment from Raj, but Ed could not produce the note, despite a diligent search. If Raj refuses to pay because Ed can’t produce the note, what result?

Answer 26

If the party entitled to enforce an instrument cannot produce it because it was lost,
stolen, or destroyed, he still can sue on the instrument if he proves ownership, its terms,
and the facts that prevent its production.

Question 27

Dee drew a $100 check payable to the order of Pat. Sara later agreed to sell to Pat for
$100 a signed football. In exchange for the
football, Pat gave Dee’s $100 check to Sara, but did not indorse the check. What are Sara’s options?

Answer 27

Sara may bring suit in equity for a decree ordering Pat to indorse the check. An instrument payable to an identified person can be negotiated only by transferring possession along with that person’s indorsement (signature). The transferee has a right to bring suit to compel indorsement.

Question 28

Dee drew a $100 check payable to the order of Pat. Sara later agreed to sell to Pat for
$100 a signed football. In exchange for the
football, Pat gave Dee’s $100 check to Sara, but did not indorse the check. What is Sara?

Answer 28

Sara is a transferee. She is not a holder unless and until Pat indorses the check.

Question 29

Blank indorsement

Answer 29

a signature that isn’t accompanied by the naming of a specific indorsee. Creates bearer paper, so further negotiations may be made by deliver alone

Question 30

Qualified indorsement

Answer 30

One that adds the words “without recourse” and limits the liability otherwise imposed on indorsers under article 3.

Question 31

Special indorsement

Answer 31

Names a particular person as indorsee who must sign for the instrument to be further negotiated.

Question 32

Anomalous indorsement

Answer 32

One made by a person who isn’t a holder of the instrument and is presumed to be made for the purpose of accommodation

Question 33

Restrictive indorsement

Answer 33

One that includes language like “for collection”, “for deposit”. This can’t prevent further negotiation or transfer of the instrument, even if it purports to do so.

Question 34

Art received his paycheck and indorsed it “Art, for deposit.” On the way to deposit
the check, Art was mugged by Kip. Kip gave Art’s paycheck to Grocer in exchange
for groceries for his children. Grocer deposited the check in Grocer’s Domestic Bank.
Grocer’s Domestic Bank credited Grocer’s account and forwarded the check to Payroll
Bank, the bank on which the check was drawn. Payroll Bank paid the check. Which party
would not be liable for conversion?

Answer 34

Only Payroll Bank would not be liable for conversion. If an indorsement includes
words that indicate the purpose of having the instrument collected by a bank for the
indorser (e.g., “for deposit,” “for collection”), a person or depositary bank must pay the
instrument consistently with the indorsement or will be deemed to have converted it.
However, intermediary banks and the payor bank (unless it is also the depositary bank)
may disregard the restrictive indorsement. Thus, both Grocer and Grocer’s Domestic Bank
could be held liable for converting the check because it was not deposited in Art’s account,
but Payroll Bank cannot. Also, the U.C.C. allows an action for conversion when an instrument is transferred, in a manner other than by negotiation, from one who is not entitled to
enforce the instrument. Because Art restrictively indorsed this instrument for deposit only,
Kip would be liable.

Question 35

What constitutes notice such that someone is not a holder in due course?

Answer 35

(1) instrument is overdue, acceleration has been made, or more than a reasonable time has elapsed after issue of a demand instrument
(2) there is an uncured default in payment of another instrument of the same series
(3) instrument is dishonored
(4) unauthorized signature or alteration
(5) Notice of claims to the instrument
(6) notice of defenses

Question 36

Eva promises to paint Deb’s house next month, in exchange for Deb’s immediate transfer of a $1,000 bearer note due next week. Has Eva given value for purposes of holder in due course?

Answer 36

No, An executory promise is not itself value, unless it is an irrevocable obligation to a third
party. Not until the agreed-upon consideration has been performed has value been given
for purposes of Article 3.

Question 37

Eva gives Deb a $2,000 note as security for a quick loan. Has she given value for purposes of HDC?

Answer 37

Yes, a security interest in an instrument is value as long as it was not a judicial lien.

Question 38

Eva agrees to buy from Deb for $750 a $1,000 bearer note due in two months. Eva
pays Deb $750 in cash. Has Eva given value for purposes of HDC?

Answer 38

Yes. The value given in exchange for commercial paper need not be equivalent to the face amount
of the instrument; as long as the full price agreed upon is given, full value has been paid.

Question 39

Deb is indebted to Eva for $4,500. In payment of that debt, Deb transfers Eva a $5,000 bearer note. Has she given value for purposes of HDC?

Answer 39

Yes. Taking an instrument in payment of a preexisting debt is “value” within the definition of a holder in due course, even though it would not qualify as consideration under contract law. Additionally, the value given in exchange for commercial paper need not be equivalent to the face amount of the instrument; as long as the full price agreed upon is given, full value has been paid.

Question 40

If the instrument is a check, it becomes overdue after…

Answer 40

90 days after its date. After 90 days, the check is stale, and no taker may become a holder in due
course.

Question 41

What is notice of a claim to an instrument?

Answer 41

A claim is a property or possessory right to the instrument. If the purchaser knows that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary’s own debt or in any transaction for the fiduciary’s own benefit or has otherwise breached his duty, the purchaser has notice of a claim.

Question 42

To whom are transfer warranties made if an instrument is transferred without an indorsement?

Answer 42

The immediate transferee only

Question 43

When a person transfers an instrument for consideration, she warrants that: k sead

Answer 43

(i) she is entitled to enforce the instrument,
(ii) all signatures are authentic and authorized,
(iii) the instrument has not been altered,
(iv) no defense or claim of any party is good against her, and
(v) she has no knowledge of any insolvency proceeding that has been instituted against the maker, acceptor, or drawer.

Question 44

Can the defense of forgery of the drawer’s signature be asserted against a holder in due course?

Answer 44

No, Forgery of names necessary to title (e.g., payee, special indorsee) precludes holder in due course status because no one can obtain the right to enforce necessary to qualify as a holder. The forgery of any other name (e.g., maker, drawer) does not affect the right to enforce, and subsequent takers may be HDCs of the instrument if they otherwise qualify

Question 45

What are the 3 prequisites of an indorser’s liability?

Answer 45

Presentment
dishonor (i.e., the maker or drawee failing to
pay or accept within a reasonable time after presentment) and
the indorser being given notice of dishonor

Question 46

Presentment warranties

Answer 46

made by any person who obtains payment or acceptance of an instrument, and by any prior transferors. The warranties are made to any person who in good faith pays or accepts. Three presentment warranties apply to unaccepted drafts:
(i) the warrantor is entitled or authorized to enforce the draft, (ii) the instrument is not
altered, and (iii) the warrantor has no knowledge that the drawer’s signature is unauthorized. Only the first presentment warranty applies to instruments other than unaccepted
drafts.

Question 47

Three presentment warranties apply to unaccepted drafts:

Answer 47

(i) the warrantor is entitled or authorized to enforce the draft,
(ii) the instrument is not altered, and
(iii) the warrantor has no knowledge that the drawer’s signature is unauthorized. Only the first presentment warranty applies to instruments other than unaccepted drafts.

Question 48

Dara Loeb forges Jill Lee’s signature on an instrument. Under Article 3, the forgery
operates as the genuine signature of:

Answer 48

Dara. Under Article 3, a forgery operates as the genuine signature of the forger.