commercial paper Flashcards
elements of a negotiable instrument
1) writing, signed by the maker,
2) containing an unconditional promise, to pay a fixed amount of money,
3) to order or bearer,
4) payable on demand or at a definite time,
5) and without stating any additional undertaking or instruction.
If a promise or order contains an express condition to payment
it is not a negotiable instrument.
A negotiable instrument must be payable in money, which includes
currency and currency funds.
The principal amount to be paid also must be
a fixed amount of money, as defined by the instrument.
Under the UCC, a negotiable instrument may instruct that payment be in
foreign currency.
It is also permissible for the note to direct that the calculation of Euros be on
the due date of the note.
A negotiable instrument must be either
an order or a bearer instrument
An order instrument is payable only to
the person named or to his order.
for an order instrument the term ____________ must appear
“order” must appear
A bearer instrument, is payable to
anyone who possesses the instrument.
an instrument which contains both ________ and __________ language satisfies the UCC
“order and bearer” language
a negotiable instrument must be payable either __________ or at a ______________
either on demand or at a definite time
An instrument is payable at a definite time if it is payable:
(i) on a fixed date,
(ii) at the end of a definite period after sight or acceptance, or
(iii) at a time readily ascertainable when the instrument is issued.
“on payees birthday” renders the note non-negotiable because
thats not a definite time which the note is payable; must also have a specific date listed for payees birthday
whether there is an acceleration event that is uncertain to happen, but also a definite date upon which payment is due, does the uncertain acceleration clause affect negotiability
NO, An acceleration clause that keys payment to an event that is uncertain to happen does not destroy the negotiability of the note.
An instrument is payable to order if
it identifies a person (e.g., “Pay to the order of Joe Smith”) or order (“Pay Joe Smith or his order”)
To negotiate an order instrument, the holder must
transfer of possession of the instrument and indorse it
A “special indorsement” names
an identified person as indorsee in addition to the indorsement
when theres a “special indorsement”
The indorsee must sign in order for the instrument to be further negotiated.
restrictive words such as “only” in the indorsement are generally
ineffective as a limitation on the subsequent transfer of the instrument.
Unless explicitly stated, an instrument does not automatically convey
an interest payment
Interest may be
at a fixed or variable rate
Interest may be
determined by reference to other documents or information
If the instrument specifies only that interest will be paid, the rate is the
established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues.
Since the instrument does not specify otherwise, the interest begins to accrue as of
the date of the instrument.
When conflicting or contradictory terms exist within an instrument,
1) handwritten terms take precedence over typewritten terms,
2) typewritten terms over printed terms, and
3) words over numbers
Generally, the winning party is not entitled to attorney’s fees unless
the agreement specifically provides for it
a statute may grant the winning party the ability to collect
attorney’s fees,
no such statute is applicable under Virginia law
A holder in due course is
a party who took possession of an instrument, for value, in good faith, and without notice that the instrument had some type of defect including whether it had been dishonored.
HDC status may be protected in
subsequent transferrees, absent fraud.
A holder without due course status can enforce payment of the original obligation, but is subject to
the contractual defenses asserted by the maker/drawer
when a check to a payee is a gift, the payee is simply a
holder, because it was not for value.
when a check is already stamped to show it had been dishonored, the subsequent transferee is not a holder in due course, because
they have notice that the instrument was dishonored.
Where a transferee for value fails to become a holder because there was no endorsement, the transferee has an enforceable right to
achieve an unqualified endorsement from the transferor.
no negotiation until
the transferors endorsement is made.
A transferee can file an action at law against transferor seeking specific performance if
the transferor refuses to endorse.
restrictive indorsement
an indorsement that limits payment to a particular person or otherwise prohibiting further transfer or negotiation; is not effective to prevent further transfer or negotiation of the instrument.
In Virginia, the general rule is that a party is responsible for their own
own attorneys fees
a holder in due course is subject to the real defense of
infancy
where a drawer, upon reaching the age of majority, elects to disaffirm his obligation as drawer of the check because he was a minor at the time he issued it, a subsequent holder in due course cannot collect from
the original drawer, due to infancy defense
An indorser is ___________ liable on an instrument
secondarily
Because the check has been dishonored by the drawee bank, as an indorser on the check, they are liable to
any subsequent indorser of the check who has paid the check
There is no requirement that the subsequent indorser seek payment from the drawer of the check before seeking payment from
a prior indorser.
an indorser can disclaim liability arising from his indorsement of the check by
qualifying his indorsement with the words “without recourse.”
an indorser’s liability as an indorser of the check is discharged if
more than 30 days have passed since the indorsement.
an indorser is not liable unless the indorser receives notice of the dishonor (except when waived) within
30 days after the person seeking to hold the indorser liable received notice of the dishonor.
Generally, a customer may order his bank to
stop payment of a check
when a customer submits a valid stop payment order, the bank is usually required to
honor the stop payment order
if bank fails to honor a valid stop payment order, its no defense that it was due to
mistake or inadvertence
when bank makes payment contrary to a valid stop payment order, customer bears the burden to
prove loss
Once the drawee-bank has paid a check, it is subrogated to the rights of
any holder in due course (“HDC”), payee, or other holder on a check against the drawer.
when there is an HDC with respect to a check, the customer cannot prove loss because
the HDC could have demanded payment from the customer-drawer even if the bank complied with the stop-payment order.
customer must prove loss to have his account
recredited by the bank, that failed to honor the valid stop payment order
To become the HDC of a negotiable instrument such as a check, a person must
(i) take the instrument as a holder,
(ii) for value,
(iii) in good faith, and
(iv) without notice of certain infirmities of the instrument or the transaction out of which the instrument arose.
A person can become a holder through
negotiation.
Negotiation is
the delivery by a person other than the maker or drawer to any person who becomes the holder of the instrument.
If the instrument is payable to order, in addition to the transfer of possession, the instrument must be
indorsed by the holder in order to be negotiated
Because Uberts is an HDC of the check and could demand payment from Wilson even if First Bank complied with the stop order, Wilson cannot
prove loss; therefore bank is not required to recredit account upon customers demand
If a check is dishonored, the drawer has generally promised to pay the holder according to
the terms of the check when it was issued.
the drawer may usually refuse to pay a mere holder of the check if
the drawer has a defense that would permit it not to pay the payee.
the drawer may refuse to pay a HDC if the drawer has any
real defenses
Real defenses include
infancy, incapacity, duress, illegality, fraud, alteration and forgery, statute of limitations, and discharge in insolvency proceedings.
if a drawer of a dishonored check cant assert any real defenses against paying, a HDC can
compel drawer to pay the check
Generally, a bank can charge a customer’s account for checks that are
properly payable.
Generally, in order to be properly payable, the check must have been
authorized by the customer.
A check that contains a forged drawer’s signature or a forged indorsement (e.g., payee’s signature) is generally
not properly payable
In the case of a forged drawer’s signature, there has not been
an order to pay made by the customer.
