Commercial paper Flashcards
What is the bright line rule re: commercial paper?
Under UCC Art. 3, when a… 1)negotiable instrument is… 2) duly negotiated to… 3) a holder in due course→the holder in due course takes the instrument… 4) free of personal defenses and subject ONLY to real defenses
What are 2 types of negotiable instruments?
1) Promissory note: contains an AFFIRMATIVE promise (not a mere IOU) between a MAKER and a PAYEE “I promise to pay $50,000 to Mike Jones” /s/ Chris Oglesby 2) The Draft: an ORDER or COMMAND from a DRAWER (makes the order) to a DRAWEE (the one doing the paying; the bank) to make pmt to the PAYEE (the beneficiary) E.g. a check NOTE: BOTH promissory note and draft are signed by an INDORSER Signature could be ANY kind of authentication (initials, defining mark, nickname) found ANYWHERE on the paper (margins, etc)
What are the 7reqs of a negotiable instrument?
WOSSUPP 1) A Writing; 2) payable to the Order or Bearer; Payable to Order: must use the word “order” or the word “assigns” in connection with the PAYEE’S name Payable to Bearer: it is payable to ANYONE who has it (e.g. “Pay to bearer” or “Pay to cash”) “Pay to Andy Garcia” is NOT negotiable (it’s just a K) b/c it doesn’t use the magic words (“order”, “assigns”, or “bearer”) 3) Signed by the maker or drawer 4) reciting a Sum certain (i.e. a fixed sum) Must be able to calculate how much is to be paid either from (1) what the writing says; OR (2) referencing to an outside source (e.g. if it says “with interest”→OK b/c if none listed, this is set by statute; or by looking at a fin. index) 5) containing an Unconditional promise or order (and no additional promises or orders→”two’s a crowd”) If it’s conditional, then it’s a K (e.g. “I promise to pay IF the Mets win the World Series) CANNOT be “governed by” or “subject to” the terms of an outside writing BUT, merely referring to another writing does not make a promise/order conditional (e.g. referring to another writing for a stmt of rights wrt collateral, prepmt, acceleration, etc) An instrument IS conditional if it ltds pmt to a particular source or fund (e.g. “I promise to pay from the funds I realize from my next wheat crop”) 6) Payable on demand or at a definite time; AND On demand: An instrument is payable of demand when it specifically states that it is payable “at sight” or “on presentation” or “payable on demand” (default, IF silent) Definite time: an instrument is payable at a definite time IF, by its terms, it is payable ON or BEFORE a stated date, OR at a fixed pd AFTER a stated date Acceleration clauses are permissible and do NOT destroy negotiability (“On 1/1/13, but this becomes IMMEDIATELY DUE and payable IF prior to that time the Giants win the Super Bowl”) 7) Payable in currency Currencey means MONEY, not goods or property Money includes foreign currency
What are 2 types of commercial paper-based liability?
1) Contract (or “signature”) liability 2) Warranty (or “ transfer”) liability
What is contract (or “signature”) liability?
The MAKER, merely by signing his name to the instrument, enters into a K, whereby he agree to pay the instrument If he fails to pay, he can be sued W/ drafts, a DRAWEE (i.e. a bank) does NOT sign→ NOT liable “Without recourse”: used by indorsers and drawers, representing a DISCLAIMER of liability
What is due negotiation?
Means that there has been a PROPER TRANSFER of the instrument→the transferee is a HOLDER and MAY be eligible for Holder in Due Course status “Payable to Order”: when the instrument is payable to the order of a specific payee, it is DULY NEGOTIATED by delivery of the intrument to that payee Any FURTHER negotiation req’s that the payee INDORSE the instrument and DELIVER it to the transferee Any indorsement must be authorized and valid (can’t forge someone’s signature) “Payable to Bearer”: if instrument is payable to bearer, indorsement is NOT req’d
What is warranty (or “transfer”) liability?
Any TRANSFEROR who sells the negotiable instrument can be liable Liability does NOT attach if transferor is a DONOR If a ∆ indorsed the instrument (i.e. signed on the back), ANY π in possession of that instrument may sue When ∆ indorses, WARRANTY runs with the instrument If ∆ did NOT indorse the instrument, then only the ∆’s IMMEDIATE transferee may sue (i.e. warranty does not run w/ the instrument) 5 warranties made by the ∆… 1) Promises that π has good title to the instrument 2) All signatures are genuine and authorized (i.e. “forgery” = breach) 3) Promises that the instrument has not been materially altered 4) Promises that there is no defense or good claims against the ∆, meaning the instrument is enforceable 5) Promises that ∆ has no knowledge of any bankruptcy or insolvency actions against the maker or drawer
What are 3 kinds of indorsements?
1) Special: one that names a particular person as “indorsee”, who must SIGN the order for the instrument to be further negotiated 2) Blank: one that does NOT have a specific indorsee, and may be negotiated by delivery alone 3) Qualified: one with words “without recourse”is a qualified indorsement and limits the contract liability imposed on indorsers 4) Restrictive: one that contains a restriction that first transferee after the restricion must apply E.g. Bobby Donnell indorses his check, “for deposit only, Bobby Donnell”; Any bank must follow the instructions (i.e. NOT cash it)
How does a transferee qualify as a holder in due course?
A HOLDER who takes the instrument: 1) for VALUE; Value ≠ K consideration (a mere promise is NOT value) Old value is good value (moral consideration counts as value) 2) in GOOD FAITH; AND This is based on the holder’s subjective knowledge 3) w/o NOTICE that the instrument is overdue or has been dishonored, or of any defense against or claim to it on the part of any person (e.g. principal in arrears; marked with “void”; not stolen or lost) Know or have REASON to know of an issue (objective) NOTE: you CAN be a HDC w/ notice of interest in arrears
How does the Shelter Rule apply to a holder in due course?
A transferee acqs WHATEVER rights her transferor had, NO MATTER her INABILITY to become a HDC (i.e. she “takes shelter” in the transferor’s status)
What are the benefits of being a holder in due course?
A HDC (and subsequent transferees who take”shelter”) takes the instrument FREE from claims and personal defenses and subject ONLY to real defenses HDC can… AVOID Personal defenses = K defenses = (i) lack of consideration; (ii) unconscionability; (iii) waiver; (iv) estoppel; (v) fraud in the inducement (e.g. lying about circumstances to induce pmt) BUT NOT Real defenses = MAD FIFI4 Material Alteration: is a change in the terms of the instrument HOWEVER, if a maker was negligent, then he is estopped from raising material alteration defense (e.g. large spaces on checks) Duress Fraud In the Factum = a lie about the instrument itself (e.g. “you are signing an autograph”→actually signing a promissory note) Incapacity Illegality Infancy Insolvency
What are the duties of the DRAWEE (bank)?
1) Honor customer’s check if ther are suffiicent funds to cover A bank may CHOOSE to honor a check if there are insufficient funds (and the customer would be liable to the bank) 2) If a bank wrongfully dishonors a check, the customer can recover for proximately caused damages 3) The death of a customer does NOT revoke the bank’s authority to pay a check until the bank: Knows of the death; AND Has reasonable time to act on that knowledge 4) Bank can’t charge a customer’s account IF: the drawer’s signature is FORGED (as long as drawer was not negligent) for more money that the original order (in the case of alteration by 3d party) the bank pays the wrong person the check is post dated 5) Stop pmt orders: If bank pays in spite of stop pmt order, the customer has the burden of proving that a loss has occured (and the amt of the loss) Oral stop pmt order = binding on the bank for 14 days UNLESS renewed in writing within that period Written stop pmt order = binding for 6 MONTHS, renewable every 6 months in writing
When is a drawer negligent?
Negligence = 1) leaving blanks or spaces on the instrument; OR 2) failing to follow internal procedures designed to avoid forgeries 3) failing to examine one’s bank statment to discover errors 4) getting tricked into writing a check 5) not monitoring employees who are entrusted with responsibiliy for handling checks
