Commercial Paper

Question 1

What are the two types of commercial paper?

Answer 1

Note- a promise to pay involving 2 parties (e.g. certificate of deposit, promissory note)
Draft- order to pay involving 3 parties (a check)

Question 2

Who are the parties in a draft?

Answer 2

Drawer- person ordering payment
Drawee- party ordered to pay
Payee- party to be paid

Question 3

Who are the parties to a note?

Answer 3

Maker- person making the promise to pay
Payee- person to whom the instrument is payable

Question 4

What does it mean for a note to be negotiable?

Answer 4

It means that it can be transferred and, ultimately, exchanged for money

Question 5

What are the requirements for negotiability?

Answer 5

1) Signed by the maker/drawer
2) In writing
3) Unconditional promise to pay
4) Payment must be for a fixed amount of money (principle amount, the interest rate can be variable)
5) Payable to “order” or “bearer”
6) Payable at a definite time or on demand
7) No additional undertakings or obligations

Question 6

What if there are contradictory terms on an instrument?

Answer 6

Handwritten terms prevail over both typewritten and printed terms. Typewritten terms prevail over printed terms. Words prevail over numbers.

Question 7

Order instrument

Answer 7

An instrument payable to a specific person. Requires specific language or words of negotiability, such as “pay to the order of” or “pay A or his order”

Question 8

Bearer Instrument

Answer 8

Any instrument that does not attempt to pay a specific person. Payable to bearer, payable to the order of bearer, payable to cash, payable to [payee line left blank]

Question 9

Holder

Answer 9

Someone who has acquired possession of the instrument either through issuance or negotiation. A holder of an instrument is entitled to enforce the instrument.

Question 10

Issuance

Answer 10

The first delivery of an instrument

Question 11

Negotiation

Answer 11

A transfer of possession, whether voluntary or involuntary, by a person other than the issuer, to a person who becomes a holder.

Question 12

How do you negotiate a bearer instrument?

Answer 12

Transfer possession only

Question 13

How do you negotiate an order instrument?

Answer 13

Transfer of possession PLUS a proper indorsement

Question 14

Indorsement

Answer 14

A signature, other than that of the signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument

Question 15

Kinds of Indorsement

Answer 15

Special Indorsement- makes the instrument payable to someone else
Blank Indorsement- not made to a specific person
Qualified Indorsement- limits one’s liability
Restrictive Indorsement- limits what the holder can do with the instrument
Anomalous Indorsement- used by accommodation parties

Question 16

Requirements to Acquiring Status as a Holder in Due Course (HDC)

Answer 16

1) Acquire status as a holder
2) Pay value
3) Take the instrument in good faith; and
4) Without notice of any problems that might affect the obligor’s obligation to pay the instrument

Question 17

Value

Answer 17

The person gives something of values, does something of value, or forgives something a value (a gift is not value)

Question 18

Test for Taking the Instrument in Good Faith

Answer 18

1) Honesty-in-fact: what the person receiving the instrument actually knows; AND
2) The observance of reasonable commercial standards of fair dealing: what the person receiving the instrument should have surmised given the context in which the instrument was negotiated

Question 19

What constitutes notice?

Answer 19

Actual notice, receiving notice through the mail, reason to know there may be a problem

Question 20

What constitutes an infirmity?

Answer 20

1) Holder has notice of any claim and recoupment
2) Holder has notice of forged, altered, or otherwise irregular instrument
3) Holder has notice that instrument is overdue

Question 21

Special Limits on HDC Status

Answer 21

A person cannot claim HDC status when:
1) The maker/drawer is signing the note in a consumer transaction (for personal or family use)
2) The transaction is for the sale or lease of goods or services
3) The seller sells this item in the OCB

Question 22

Shelter Rule

Answer 22

Whatever rights the transferor had transfer to the transferee UNLESS the transferee commits fraud or engages in other illegal activity as it relates to the instrument.

Question 23

Transfer

Answer 23

Instrument’s movement other than by the maker or drawer for the purpose of giving the person receiving it the right to enforce it. The first movement is the issuance, subsequent movements are transfers.

Question 24

Right to Transferor’s Indorsement

Answer 24

When a transferee pays value for an instrument and the transferor fails to provide a necessary indorsement, the transferee has the legal right to have the transferor provide the necessary indorsement to complete the negotiation

Question 25

Transfer Warranties

Answer 25

Warranties from a transferor to a transferee:
1) The warrantor is entitled to enforce the instrument;
2) All signatures are authentic and authorized;
3) The instrument has not been altered;
4) There are no defenses/claims that can be asserted against the transferor;
5) Warrantor has no knowledge of any insolvency proceedings;
6) With respect to any remotely-created consumer check, the person on whose account the check is drawn has authorized the issuance of the item in the amount for which the item is drawn.

Question 26

How does a plaintiff enforce an instrument?

Answer 26

1) The plaintiff is entitled to enforce the instrument; and 2) The signatures on the instrument are valid

Question 27

Who is entitled to enforce?

Answer 27

1) A holder
2) A non-holder in possession of the instrument who has the rights of a holder
3) A person not in possession but who has the right to enforce

Question 28

What if the instrument was lost, stolen, or destroyed?

Answer 28

The plaintiff has the right to enforce still, as long as the loss of possession did not result from the holder transferring the instrument, and the holder cannot reasonably obtain possession of the instrument because the instrument is lost or destroyed

Question 29

Who cannot bring an issue for conversion?

Answer 29

1) Issuers and acceptors
2) Payees and indorsees who did not receive delivery of the instrument

Question 30

Who is a real defense good against?

Answer 30

Good against holders and HDCs

Question 31

Who is a personal defense good against?

Answer 31

Good against holders but NOT against HDCs

Question 32

Real Defenses

Answer 32

Infancy, incapacity, duress, illegality, fraud, discharge of insolvency proceedings (bankruptcy), alteration and forgery, statute of limitations

Question 33

Personal Defenses

Answer 33

Issuance, contact defenses, claims in recoupment

Question 34

Alteration of an Instrument

Answer 34

The unauthorized modification of an instrument. Obligor is discharged and the payor bank or draw who pays a fraudulently altered instrument may enforce rights with respect to the instrument according to its original terms before alteration. An HDC may enforce rights with respect to the instrument according to its original terms before alteration as well.

Question 35

Incomplete Instrument

Answer 35

A signed writing, whether or not issued by the signor, the contents which show that the signer intended the instrument to be complete by the addition of words or numbers. These are enforceable.

Question 36

Presentment

Answer 36

A demand for payment made to a maker or drawee by the person entitled to enforce the instrument. Presentment and dishonor serve as preconditions for liability for other parties who have potential liability on the instrument.

Question 37

When is presentment excused?

Answer 37

1) The presenter cannot locate the one liable to whom presentment must be made;
2) The maker or acceptor has repudiated the obligation to pay;
3) The instrument’s terms do not require presentment;
4) The drawer or indorser has waived the presentment requirements;
5) The drawer has instructed the drawee not to pay

Question 38

Presentment Warranties

Answer 38

When a person presents an item for payment, the presentment comes with all of the following warranties:
1) The warrantor is a person entitled to enforce the instrument;
2) The draft has not been altered;
3) The warrantor has no knowledge that the drawer’s signature is unauthorized;
4) With respect to any remotely created consumer item, the person on whose account the item is drawn has authorized the issuance of the item in the amount for which the item is drawn.

Question 39

Maker’s Liability

Answer 39

Maker has primary liability, so they must pay the instrument when it comes due.

Question 40

Drawer’s Liability

Answer 40

Drawer has secondary liability. Obligation to pay ripens only upon presentment and dishonor.

Question 41

Drawee’s Liability

Answer 41

A drawee is not legally obligated unless they sign the instrument for the purpose of accepting liability.

Question 42

Properly Payable Rule

Answer 42

The bank must honor a check that is properly payable if the customer has sufficient funds in his account, and has authorized payment. If the check has an alteration, the bank may charge the customer’s account for the amount authorized, not for the altered amount. A bank may properly pay a post-dated check unless the customer gives timely notice.

Question 43

Dishonor

Answer 43

Presentment is duly made and the note is not paid on the day of presentment.

Question 44

Acceptor’s Liability

Answer 44

The drawee’s signed agreement to pay a draft as presented.

Question 45

Indorser’s Liability

Answer 45

By endorsing an instrument, you agree to pay the instrument in the event that the one with primary liability does not pay. The endorser’s liability ripens when: 1) the note is dishonored and 2) the indorser receives notice of the dishonor