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WI Essay Section > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

What are the two types of commercial paper?

A

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

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2
Q

Who are the parties in a draft?

A

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

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3
Q

Who are the parties to a note?

A

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

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4
Q

What does it mean for a note to be negotiable?

A

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

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5
Q

What are the requirements for negotiability?

A

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

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6
Q

What if there are contradictory terms on an instrument?

A

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

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7
Q

Order instrument

A

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”

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8
Q

Bearer Instrument

A

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]

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9
Q

Holder

A

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

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10
Q

Issuance

A

The first delivery of an instrument

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11
Q

Negotiation

A

A transfer of possession, whether voluntary or involuntary, by a person other than the drawer, to a person who becomes a holder. If the instrument is payable to order, then the instrument must also be indorsed.

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12
Q

How do you negotiate a bearer instrument?

A

Transfer possession only

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13
Q

How do you negotiate an order instrument?

A

Transfer of possession PLUS a proper indorsement

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14
Q

Indorsement

A

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

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15
Q

Kinds of Indorsement

A

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

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16
Q

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

A

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

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17
Q

Value

A

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

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18
Q

Test for Taking the Instrument in Good Faith

A

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

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19
Q

What constitutes notice?

A

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

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20
Q

What constitutes an infirmity?

A

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

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21
Q

Special Limits on HDC Status

A

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

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22
Q

Shelter Rule

A

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.

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23
Q

Transfer

A

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.

24
Q

Right to Transferor’s Indorsement

A

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

25
Q

Transfer Warranties

A

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.

26
Q

What must a plaintiff prove to enforce an instrument?

A

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

27
Q

Who is entitled to enforce?

A

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

28
Q

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

A

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

29
Q

Who cannot bring an issue for conversion?

A

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

30
Q

Who is a real defense good against?

A

Good against holders and HDCs

31
Q

Who is a personal defense good against?

A

Good against holders but NOT against HDCs

32
Q

Real Defenses

A

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

33
Q

Personal Defenses

A

Issuance, contact defenses, claims in recoupment

34
Q

Who is held responsible when an issuer issues an instrument to an imposter?

A

The issuer

35
Q

Incomplete Instrument

A

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.

36
Q

Who can indorse an instrument to an imposter?

A

Anyone

37
Q

Who bears responsibility when an employee writes checks payable to real customers but instead indorses and deposits the money for himself?

A

The corporation

38
Q

Who bears responsibility when an employee writes checks to fictitious payees and writes checks to them but keeps them for himself?

A

The corporation

39
Q

Who bears responsibility when an employee is entrusted to write checks and then forges indorsement?

A

The employer

40
Q

Who is responsible when an instrument is modified and it’s unauthorized?

A

The obligor (person to pay/perform) is discharged on the instrument.

A payor bank/drawee who pays a fraudulently altered instrument OR a HDC may enforce rights with respect to the instrument according to the original terms.

41
Q

Is an forged indorsement valid?

A

No. And a transferee after a forgery cannot become a holder.

42
Q

Presentment

A

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.

43
Q

When is presentment excused?

A

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

44
Q

Presentment Warranties

A

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.

45
Q

Maker’s Liability

A

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

46
Q

Drawer’s Liability

A

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

47
Q

Drawee’s Liability

A

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

48
Q

Properly Payable Rule

A

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.

49
Q

Dishonor

A

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

50
Q

Acceptor’s Liability

A

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

51
Q

Indorser’s Liability

A

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. The indorser’s liability ripens when: 1) the note is dishonored and 2) the indorser receives notice of the dishonor.

52
Q

How can a non holder in possession acquire the rights of a holder?

A

The previous holder must transfer their rights

53
Q

What is a Presentment Warranty?

A

Presentment warranties are made by any person who obtains payment to any person who in good faith pays. If an instrument is presented for payment and payment is received, the one obtaining payment warrants that the warrantor is entitled to enforce the instrument.

54
Q

What happens when a party breaches the warranty of presentment?

A

The entity making payment may recover the amount paid plus expenses and loss of interest resulting from the breach, less any amount the drawee received or is entitled to receive from the drawer because of the payment.

55
Q

When does a transfer warranty apply?

A

The transferor must transfer the instrument to another with the purpose of giving the other person the right to enforce the instrument and the instrument must be transferred for consideration.

56
Q

Can a forged indorsement be valid

A

To effect a negotiation, the indorsement must be authorized and valid. Consequently, a forged or unauthorized indorsement is generally ineffective. No transferee after the forged or unauthorized indorsement can become a holder

WI Essay Section (9 decks)

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