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.
In the case of a forged indorsement, the person that the customer ordered the bank to pay has
not been paid
Frazier stole a blank check, made it out to himself, and carefully signed a reasonable facsimile of Ali’s signature on the signature line. The check was therefore
unauthorized and not properly payable.
In limited circumstances, an unauthorized signature is treated as though
it was authorized.
examples of where an unauthorized signature on a check are treated as though it was authorized include:
1) negligence that substantially contributes to the forgery and also,
2) any failure by the customer to examine his bank statement and report the forgery.
if a check was not properly payable, the bank will likely be required to
credit the drawers account
Presentment is generally
a demand for payment by a person entitled to enforce the instrument.
Presentment warranties are made BY
any person who obtains payment
Presentment warranties are made to
any person who in good faith pays or accepts.
If a draft is presented to the drawee for payment, and the drawee pays or accepts the draft, the person seeking payment warrants in good faith that
(i) the warrantor is entitled to enforce the draft,
(ii) the draft has not been altered, and
(iii) the warrantor has no knowledge that the signature of the drawer is unauthorized.
In order to enforce a negotiable instrument, the person must become
a holder of the instrument through either issuance or negotiation.
Negotiation is
the delivery by a person other than the drawer to any other person
If the instrument is payable to order, in addition to transferring possession, the instrument must also be
indorsed in order to be negotiated.
To be negotiable, a draft (e.g., a check) must be
in writing and signed by the drawer, and it must contain an unconditional order to pay a fixed amount of money on demand without stating any additional undertaking or instruction.
A person can become a holder of a negotiable instrument through
issuance or negotiation.
An instrument is issued when
it is delivered (i.e., voluntarily transferred) by the maker or the drawer to anyone, whether a holder or non-holder, for the purpose of giving rights in the instrument to any other person.
Negotiation is
the delivery, regardless of voluntariness, by a person other than the maker or drawer to any other person who, therefore, becomes the holder of the instrument.
As a holder of the instrument, a person is entitled to
enforce it.
If the instrument is payable to bearer (i.e., a bearer instrument), negotiation occurs upon
the transfer of possession
If the instrument is payable to order, (i.e., order instrument), which a check initially is, in addition to the transfer of possession, the instrument must be
indorsed by the holder in order to be negotiated.
To become a holder in due course (HDC) of a negotiable instrument, a person must
take the instrument as a holder, for value, in good faith, and without notice of certain infirmities of the instrument or the transaction out of which the instrument arose.
The defenses available to an obligor denying payment will depend on whether
the person seeking to enforce the instrument is an HDC
If a non-HDC is seeking enforcement, an obligor can assert
personal defenses (all contract defenses, issuance, and claims in recoupment), and real defenses (infancy, incapacity, duress, illegality, fraud, discharge in insolvency, alteration and forgery, and statute of limitations).
an obligor can only assert real defenses against
an HDC.
Under the shelter rule, a person to whom an HDC transfers an instrument
usually acquires the rights of the HDC, even if the transferee herself would not qualify as an HDC.
exception to the HDC shelter rule is that a transferee who has engaged in fraud or illegality affecting the instrument
cannot acquire the rights of an HDC through transfer.
a transferee who is merely aware of an earlier fraud perpetrated by another
may enjoy the rights of a previous HDC.
When an instrument is transferred for value and the transferor fails to provide a necessary indorsement, a transferee is entitled to
specific performance to obtain the transferor’s endorsement.
a negotiable note requires
writing signed by maker
containing an unconditional promise to pay
a fixed amount of money
to order or bearer
on demand or at a definite time
without stating any unconditional undertaking or instrucitons
because an instrument contains language that is “payable to the order of John Hand or to bearer” it is
a bearer instrument
a bearer instrument can be negotiated merely by
its transfer to another person
proper negotiation of a bearer instrument to someone else at the very least renders that tranferee a
holder
regardless of whether there was consideration, as a holder, person can enforce an instrument against
maker/drawer
because an instrument is made payable to bearer and to order of specific person, the instrument is
a bearer instrument and may be negotiated simply by the delivery of instrument to the subsequent transferee; indorsement is not required for bearer instrument
although an instrument must be payable on demand or at a definite time to be negotiable, and instrument that does not specify a time at which it is payable is deemed
payable on demand
A person entitled to enforce an instrument who loses the instrument can nevertheless enforce it, provided
that person is able to prove the terms of the instrument and the person’s right to enforce the instrument.
under Article 3, a person’s right to enforce an instrument continues despite
the loss of the instrument.
As a mere holder, the supplier would be subject to
the corporation’s personal defenses arising from the contract
to be negotiable, an instrument must be payable either on demand or at a definite time. The fact that the note is payable two months after its issuance
meets this requirement
the payment of less than the face value of a note does not prevent the note from being
acquired for value and the taker of the note from qualifying as a holder in due course who takes free of personal defenses.
signing a promissory note as co-maker, and including the words”collection guaranteed” does what
limits liablity of co-maker, generally making him only liable if creditor is unable to compel other maker to pay note through judicial process. creditor can only seek satisfaction from accomodation party after claim is reduced to judgment, execution is returned unsatisfied.
a party who signs an instrument as an accommodation party cannot assert
lack of consideration for doing so as a defense.
When an employee, such as the treasurer here, is entrusted with responsibility with respect to a check, a fraudulent indorsement of that check by the employee is treated as
an effective indorsement
it is not necessary for the check with the forged payee’s signature be a valid obligation of the corporation in order to
impose responsibility on an employer for an employee’s forgery; the key is whether the employer entrusted the employee with responsibility with respect to the check.
Under the shelter principle, a transferee generally has the same rights to enforce an instrument as
the transferor had.
a personal defense, it is not valid in an action against
a holder in due course
general principles regarding the liability of a holder in due course apply to
a note as well as a draft
lack of consideration is a
personal defense, not a real defense
An authorized agent who signs his own name as drawer of a check of the principle is
not personally liable if the check is drawn on the principal’s account and identifies the principal
even though the treasurer (authorized agent) signed only his own name without indicating his representative capacity as treasurer of the corporation (principal), he would not be liable on the check as drawer because
the corporate check was drawn on a corporate bank account, which identifies the corporation.
an authorized agent is not personally liable if he signs a principal’s check that identifies
the principal and is drawn on the principal’s bank account.
An instrument is issued when
it is delivered (i.e., voluntarily transferred) by the maker or the drawer to anyone, whether a holder or non-holder, for the purpose of giving rights in the instrument to any other person.
Negotiation is
the delivery, regardless of voluntariness, by a person other than the maker or drawer to any other person who, therefore, becomes the holder of the instrument.
As a holder of the instrument, a person is
entitled to enforce it.
If the instrument is payable to bearer (i.e., a bearer instrument), negotiation occurs upon
the transfer of possession
If the instrument is payable to order, (i.e., order instrument), which a check initially is, in addition to the transfer of possession, the instrument must be
indorsed by the holder in order to be negotiated.
To become a holder in due course (HDC) of a negotiable instrument, a person must take the instrument as
a holder, for value, in good faith, and without notice of certain infirmities of the instrument or the transaction out of which the instrument arose.
The defenses available to an obligor denying payment will depend on whether the person seeking to enforce the instrument
is an HDC
If a non-HDC is seeking enforcement, an obligor can assert
personal defenses (all contract defenses, issuance, and claims in recoupment), and real defenses (infancy, incapacity, duress, illegality, fraud, discharge in insolvency, alteration and forgery, and statute of limitations)
personal defenses
all contract defenses, issuance, and claims in recoupment
real defenses
infancy, incapacity, duress, illegality, fraud, discharge in insolvency, alteration and forgery, and statute of limitations
an obligor can only assert real defenses against
an HDC
Under the shelter rule
a person to whom an HDC transfers an instrument usually acquires the rights of the HDC, even if the transferee herself would not qualify as an HDC.
The exception to the shelter rule is that
a transferee who has engaged in fraud or illegality affecting the instrument cannot acquire the rights of an HDC through transfer. (transferee merely aware of an earlier fraud by another still entitled to HDC shelter)
When an instrument is transferred for value and the transferor fails to provide a necessary indorsement, a transferee is entitled to
specific performance to obtain the transferor’s endorsement; file an action for specific performance to obtain transferor’s endorsement
Article 3 of the Uniform Commercial Code governs
commercial paper, which includes notes as negotiable instruments.
A note is
a two-party instrument in which the maker promises to pay the payee a sum of money.
a promissory note is generally used to
evidence an extension of credit
When conflicting or contradictory terms exist within an instrument
handwritten terms take precedence over typewritten terms,
typewritten terms over printed terms, and
words over numbers.
“FOR VALUE RECEIVED, I promise to pay Ned Naylor the sum of $18,000 (Twenty Thousand Dollars and no/100) . . ..”
Because words take precedence over numbers, the note will be enforceable for $20,000 (Twenty Thousand Dollars and no/100).
While the amount of the principal must be fixed, instruments may
accrue interest.
Unless stated, an instrument does not automatically compel
an interest payment.
If the instrument specifies only that interest will be paid, the rate is
1) the established judgment rate
2) in the jurisdiction of the place of payment of the instrument
3) at the time interest first accrues.
The primary purpose of Article 3 is to
establish a secure alternative to the use of cash in financial transactions.
Article 3 only applies to
negotiable instruments
Article 3 specific requirements for negotiability: to be negotiable an instrument must be
a writing, signed by a maker/drawer
containing an unconditional promise or order
to pay a fixed amount of money
to order or bearer
payable on demand or at a definite time, and
without any additional undertaking or instruction
a negotiable instrument must be either
an order instrument or bearer instrument
An order instrument is payable to
a specific person or her order
A bearer instrument is payable to
anyone in possession of the instrument
An instrument may also be a bearer instrument if
no payee is named
“I promise to pay Ned Naylor the sum of $18,000 . . ..”
This is neither a bearer instrument nor an order instrument
not a bearer instrument because it does not specify that the instrument is payable to
“bearer” or to “cash.”
instrument is not an order instrument because it was not payable to
“Ned Naylor or his order” or to “the order of Ned Naylor.”
if an instrument is not order or bearer paper, it is
not a negotiable instrument
Under Virginia’s adoption of the Uniform Commercial Code (“UCC”), an instrument is payable on demand if
(i) it states that it is payable “on demand,” or “at sight,” or is otherwise payable at the will of the holder, or
(ii) does not state a time for payment.
To become a holder in due course, an individual must
1) take the instrument as a holder,
2) for value,
3) in good faith, and
4) without notice of certain infirmities of the instrument or transactions out of which the instrument arose
An individual may become a holder in one of two ways:
through issuance or through negotiation.
When the negotiated instrument is payable to order, the instrument must be
transferred and indorsed by the holder in order to be negotiated.
note made out to “the order of George.”
note is order paper
original holder, indorsed the note and did not name a specific indorsee thereby creating
a blank indorsement
A blank indorsement of an order instrument creates
a bearer instrument
Negotiation of a bearer instrument occurs upon
the transfer of possession
transfer of possession/negotiation of a bearer instrument need not be
voluntary; therefore, a thief or finder of the bearer instrument becomes a holder even though transfer of possession was involuntary.
An instrument is paid to the extent
payment is made by or on behalf of a party obliged to pay the instrument and to a person entitled to enforce the instrument.
An indorser promises that
if an instrument is dishonored, he will pay the amount of the instrument according to its terms at the time of indorsement
An indorser may be liable to
the person entitled to enforce the instrument, or to any subsequent indorser who pays the instrument.
An obligor may only assert _______ defenses against a holder in due course to avoid payment of an instrument.
An obligor may only assert real defenses against a holder in due course to avoid payment of an instrument.
An obligor may raise the defense of fraud in the factum against a holder in due course if
the obligor was induced to sign the instrument without knowledge or reasonable opportunity to obtain knowledge of the instrument’s “character or essential terms.”
Under the UCC, good faith amounts to
1) honesty-in-fact and
2) the observance of reasonable commercial standards of fair dealing.
the court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is
adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument, adequate protection may be provided by any reasonable means, such as a security bond.
The law applicable to conversion of personal property applies to
instruments
An instrument is converted if
1) it is taken by a transfer, other than a negotiation,
2) from a person not entitled to enforce the instrument.
Generally, a person entitled to enforce an instrument may
bring a conversion action.
The measure of recovery, for a conversion action on an instrument is presumed to be
1) the amount payable on the instrument, but
2) recovery is limited to the amount of the plaintiff’s interest in the instrument.
