Commercial Paper

Question 1

When is a principal liable for an instrument signed by an agent?

Answer 1

If the agent is authorized, the principal is liable whether the agent signed the principal’s name, the agent’s own name, or both.

If the agent is not authorized, the principal generally will not be liable.

Question 2

Even if an agent acts with no power to bind the principal, the principal can […] an act performed by another person, whether or not the person is an actual agent of the principal.

Answer 2

[ratify]

Ratification occurs when a principal affirms a prior act that was done or purported to be done on the principal’s behalf.

Question 3

An accommodation party is one who…

Answer 3

…guarantees the debt of an other (also called a surety).

In order to be an accommodation party, a person cannot have received a direct benefit from the instrument.

Question 4

An accommodation party is liable on the instrument in…

Answer 4

…whatever capacity he has signed.

Question 5

If a party’s obligation to pay an instrument is secured by an interest in collateral and the person entitled to enforce the instrument impairs the value of the interest in collateral, then…

Answer 5

…the obligations of an accommodation party are discharged to the extent of the impairment.

The burden of proving the collateral’s impairment is on the party asserting discharge.

Question 6

Impairing the value of an interest in collateral includes:

Answer 6

(i) failure to obtain or maintain perfection or recordation of the interest in collateral;
(ii) release of collateral without substitution of collateral of equal value;
(iii) failure to perform a duty to preserve the value of collateral owed to a debtor or surety or other person secondarily liable; OR
(iv) failure to comply with applicable law in disposing collateral.

Question 7

An accommodation party is liable on the instrument only if:

Answer 7

(i) the person entitled to enforce the instrument has reduced his claim to judgment against the other party and execution is returned unsatisfied,
(ii) the other party has become insolvent,
(iii) the other party cannot be served with process, OR
(iv) it appears useless to proceed against the other party.

Question 8

To be negotiable under the UCC, an instrument must be:

Answer 8

a writing,
signed by the maker,
containing an unconditional promise or order,
to pay a fixed amount of money,
to an order or bearer,
payable on demand or at a definite time,
and without stating any additional undertaking or instruction.

Question 9

An instrument is payable to order if…

Answer 9

it identifies a ** person** (e.g., “Pay to the order of Joe Smith”) or **order **(“Pay Joe Smith or his order”)

Question 10

To negotiate an order instrument, the holder must…

Answer 10

… transfer possession of the instrument and indorse it.

Question 11

Restrictive words such as “only” are generally [ineffective/effective] as a limitation on the subsequent transfer of the instrument.

Answer 11

ineffective

Question 12

An instrument [does/does not] automatically convey an interest payment

Answer 12

does not.

An interest payment must be explicitly

Question 13

If the instrument does not specify an interest rate, the rate is…

Answer 13

… the established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues.

Question 14

When conflicting or contradictory terms exist within an instrument…

Answer 14

…handwritten terms take precedence over typewritten terms, typewritten terms over printed terms, and words over numbers.

Question 15

The winning party [is/is not] entitled to attorney’s fees.

Answer 15

is not (unless the agreement specifically provides for it)

Question 16

A negotiable instrument must be payable in […].

Answer 16

a fixed amount of money

Question 17

An instrument is payable at a definite time if it is payable:

Answer 17

(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.

Question 18

Generally, a customer [may/may not] order his bank to stop payment of a check.

Answer 18

[may]

The bank is usually required to honor a valid stop payment order of its customer.

Question 19

The burden is on the customer to prove […] in the event of payment by the bank despite a valid stop-payment order.

Answer 19

loss

Question 20

Once the drawee-bank has paid a check, it is subrogated to the rights of any […], […], or other holder on a check against the drawer.

Answer 20

[holder in due course], [payee], or [other holder on a check against the drawer].

Consequently, 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.

Question 21

To become the HDC of a negotiable instrument such as a check, a person must:

Answer 21

(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.

Question 22

What is negotiation?

Answer 22

Negotiation is the delivery by a person other than the maker or drawer to any person who becomes the holder of the instrument.

Question 23

Against a mere holder, a party can assert […] defenses and […] defenses.

Answer 23

[personal]

[real]

Question 24

Against a holder in due course, a party can only assert […] defenses.

Answer 24

real

Question 25

Real defenses include:

Answer 25

infancy, incapacity, duress, illegality, fraud, alteration and forgery, statute of limitations, and discharge in insolvency proceedings.

Question 26

A check that contains a forged drawer’s signature or a forged indorsement (e.g., payee’s signature) is generally not […].

Answer 26

[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.

Question 27

What is presentment?

Answer 27

Presentment is a demand for payment by a person entitled to enforce the instrument.

Question 28

Presentment warranties are made by any person…

Answer 28

… who obtains payment and are made to any person who in good faith pays or accepts.

Question 29

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:

Answer 29

(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.

Question 30

What’s the difference between issuance and negotiation?

Answer 30

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.

Question 31

Under the shelter rule, a person to whom an HDC transfers an instrument usually acquires…

Answer 31

…the rights of the HDC, even if the transferee herself would not qualify as an HDC.

The exception to this rule is that a transferee who has engaged in fraud or illegality affecting the instrument cannot acquire the rights of an HDC through transfer.

However, a transferee who is merely aware of an earlier fraud perpetrated by another may enjoy the rights of a previous HDC.

Question 32

When an instrument is transferred for value and the transferor fails to provide a necessary indorsement, a transferee is entitled to […] to obtain the transferor’s endorsement.

Answer 32

[specific performance]

Question 33

What’s the difference between an order and a bearer instrument?

Answer 33

An order instrument is payable to a specific person or her order.

A bearer instrument is payable to anyone in possession of the instrument.

Question 34

An instrument is payable on demand if:

Answer 34

(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.

Question 35

A person can become an HDC through […] or […].

Answer 35

[issuance]

[negotiation]

Question 36

A blank indorsement of an order instrument creates a…

Answer 36

…bearer instrument.

Question 37

Negotiation of a bearer instrument occurs upon…

Answer 37

…the transfer of possession.

Question 38

An indorser promises that, if an instrument is dishonored, he will…

Answer 38

…pay the amount of the instrument according to its terms at the time of indorsement.

Question 39

An indorser may be liable to the person entitled to enforce the instrument, or to any…

Answer 39

…subsequent indorser who pays the instrument.

Question 40

True or false?

An instrument is converted if it is taken by a transfer, other than a negotiation, 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 is presumed to be the amount payable on the instrument, but recovery is limited to the amount of the plaintiff’s interest in the instrument.

Answer 40

True