Commercial Paper

Question 1

Negotiable instruments are divided in two basic categories:

Answer 1

1. Notes - a two party instrument in which the maker PROMISES to pay the payee a sum of money.
2. Drafts - a three party instrument in which one party (the drawer) ORDERS a second party (the drawee or payor) to pay a sum of money to a third party (the payee/holder of the note).

Question 2

Common type of draft

Answer 2

A check is a draft upon a bank and payable on demand. An ORDER. Types of checks include a money order, a cashiers check, and a tellers check.
A check suspends an underlying contractual promise to perform a job, vs cash = job done

Question 3

To be negotiable, an instrument must meet 6 requirements

Answer 3

1. Be an unconditional promise or order to pay
2. Be in signed writing (signed by maker of note/drawer of draft)
3. Definite amount obligation must be fixed (with or without (variable) interest)
4. Payable to order (specific individual that can present it for payment) or bearer (anyone who has possession of the instrument)
5. Payable on demand (presentment) or at a definite time
6. contain no further undertaking (the presenter cannot have to do anything else other than present the document for payment)

Question 4

A promise or order is conditional (and therefore not a negotiable instrument) if it…

Answer 4

(1) contains an express condition to payment
(2) states that it is subject to or governed by another writing; or
(3) states that rights or obligations with respect to it are stated in another writing

Question 5

Commercial Tort Claims - intangible intangible

Answer 5

An intangible intangible.
Intangibles such as monetary obligations or literary rights may be evidenced by writings but are still treated as intangibles. These include “commercial tort claims” which are claims arising in tort where the plaintiff is an organization, or where the plaintiff is an individual but the claim arose in the course of the plaintiffs business or profession, and does not include damages arising from personal injury or death.

Question 6

The defenses that an obligor on an instrument may raise depend on the status of the plaintiff. A holder in due course….

Answer 6

takes free of certain defenses known as personal defenses, but subject to real defenses. Personal defenses cannot be asserted against a holder in due course.

Question 7

Personal Defenses

Answer 7

NOT effective against a holder in due course.
-Issuance (not issued, conditionally issued, or issued for special purpose)
-Any contract defense (lack/failure of consideration, non-occurrence of condition,
mistake, impossibility, fraud, duress, incapacity, infancy, illegality)
-Claim in recoupment (offset against amount owed on the instrument)—claim must
arise from a transaction that gave rise to the instrument and is limited to the amount
owed at the time the action is brought
-Defenses and claims in recoupment of other persons—obligor may generally raise only
his own defenses
-Claims to the instrument

Question 8

Real defenses

Answer 8

Effective against all holders, including a HDC.
Infancy, incapacity, duress, illegality, fraud (in factum ONLY, not inducement), discharge of insolvency proceedings, alteration & forgery, SOL (generally 3 years), accommodation party

Question 9

Wrongful dishonor of an instrument

Answer 9

A bank is not free to dishonor all of a number of checks that are presented in one day because the total would create an overdraft. Rather, the bank pay pay the checks in any order it wishes, but must pay to the extent it can.

Question 10

To be a negotiable instrument…

Answer 10

an instrument must be payable in money and only in money, and the amount due must be ascertainable from the instrument. Thus, an instrument is rendered non-negotiable if the obligor agrees to pay in goods or services, even as an alternative option, such as “$100, or the equivalent in office supplies.”

Question 11

a negotiable instrument must be payable to bearer or to order. A payee may be identified…

Answer 11

in any way, including by name, identifying number, office, or account number.

Question 12

Delivery is not sufficent for…

Answer 12

negotiation of an order instrument

Question 13

negotiation of an order instrument, not a bearer instrument, requires….

Answer 13

indorsement

Question 14

negotiation is…

Answer 14

a voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder.

“When someone gives or receives a document or item from someone else who isn’t the original creator, the receiver becomes the new owner.”

Question 15

an indorsement in blank will…

Answer 15

convert an order instrument into a bearer instrument.

Question 16

presentment for payment is…

Answer 16

a demand made by or on behalf of a person entitled to enforce an instrument to the party who ought to pay the instrument.

Presentment must be made…. on time, which is on or after the date stated in the instrument, if date is stated.

Question 17

What is a note?

Answer 17

A note involves two parties:
unconditional promise by one party to pay the holder of the note at a specific time or upon presentment.

“unconditional” nothing else has to be done other than presenting the note for payment.

Question 18

maker

Answer 18

person who creates a note

Question 19

drawer

Answer 19

person who creates a draft

Question 20

drawee

Answer 20

person who is ordered to pay the draft

Question 21

holder: elements

Answer 21

(1) person in possession of the commercial paper
(2) entitled to enforce the instrument (present it for payment on demand or specific time)

Question 22

who is a Holder

Answer 22

paper written to a person, the person written on the paper.
If not written on the paper, but they possess it, is not a holder.

Question 23

if a paper is written to a single person

Answer 23

order paper

Question 24

bearer paper

Answer 24

commercial paper is NOT made out to anyone in particular — so anyone in POSSESSION of that commercial paper is entitled to enforce it to present it to payment.

SO - anyone who has possession of bearer paper is a holder.
EXCEPT if the instrument is forged!

Question 25

original recipients from the maker or drawer of the instrument are holders of the instrument, but if they subsequently transfer it to someone else…

Answer 25

those individuals can be a holder, as long as the paper is validly negotiated.

Question 26

negotiation is…

Answer 26

the transfer of negotiable paper from one holder to another.

Question 27

Non-negotiable commercial paper

Answer 27

commercial paper has the same rights, no more, no less, as the person who made the original contract.

Question 28

negotiable commercial paper -

Answer 28

a holder may acquire greater rights to enforce that instrument against the payor or maker if she qualifies as a holder in due course.

Question 29

holder in due course

Answer 29

holder of negotiable instrument (that does not bear upon reasonable inspection forgery, alteration, or other irregularity that calls the authenticity into question) who takes the instrument:
(1) for value
(2) in good faith
(3) without notice that the instrument is overdue, dishonored, bears an unauthorized signature or alteration, or of any defense or claim against the instrument.

Question 30

partial holder in due course

Answer 30

can enforce note only to the extent that transferee has in fact fulfilled promise to pay the transferor

Question 31

indorsement

Answer 31

a signature, other than that of a signer as a maker, drawer, or acceptor, that is made on an instrument to negotiate the instrument, to restrict payment of the instrument, or to incur the indorser’s liability on the instrument.

Question 32

If a minor negotiates an instrument, the negotiation is…

Answer 32

effective to transfer the instrument, but the person transferring the instrument may not undertake the contractual obligations of an indorser or be responsible for breach of warranty.

Question 33

liability of the maker is generally called primary liability, meaning…

Answer 33

unconditional requirement to pay.

> Indorsers have secondary liability (becomes liable IF upon demand, the maker/drawer does not pay and the indorser is given notice of the refusal to pay) and will be discharged of liability unless there is presentment, dishonor, and notice of dishonor.

Question 34

A nonholder of an instrument is entitled to enforce the instrument if….

Answer 34

(1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;
(2) the loss of possession was not the result of a voluntary transfer by the person or a lawful seizure; and
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person who cannot be found or is not amenable to service of process.

A person seeking enforcement of a lost or stolen instrument must prove the terms of the instrument and the person’s right to enforce it.

Question 35

A claim is discharged if the person against whom the claim is asserted proves that the instrument contained a conspicuous statement that the instrument was tendered as full satisfaction of the claim. In order to successfully assert the defense of discharge, the person against whom the claim is asserted must prove that:

Answer 35

1) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim;
2) the claim was unliquidated or the amount was subject to a bona fide dispute; and
3) the claimant obtained payment of the instrument.

Question 36

If the person identified as the payee on a check is not intended to have any interest in the instrument, or is a fictitious person, an indorsement of the instrument by any person in the name of the payee is

Answer 36

effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

Here, the check was made out to Emily’s fictitious company. Therefore, Emily’s indorsement for the bogus company will be an effective indorsement in favor of her creditor.

Question 37

A check, such as the one payable to SSI, is a type of draft. A draft is a three-party instrument whereby one party, the drawer, orders a second party, the drawee or payor bank, to pay a third party, the payee. Although the drawer occupies somewhat the same position as the maker of a note (and is often incorrectly called a maker), the drawer does not…

Answer 37

make any express promise to do anything; he is merely ordering the drawee to pay. For this reason, the drawer does not have primary liability, except that the law does impose liability on the drawer when the drawee fails to pay. Specifically, the liability of a drawer is secondary liability, which means the drawer becomes liable only if there has been: 1) presentment to the drawee; 2) dishonor by the drawee; and 3) notice of the dishonor to the drawer.

In this case, when the $5,000 check was initially issued to SSI, Central Bank, the drawee of the check to SSI (the payee), had primary liability on the instrument. Tom, as the drawer, had secondary liability, and would therefore be liable on the check only if Central Bank dishonored the check.

Question 38

Generally speaking, a person is not liable on an instrument unless the person signed it or is represented by an agent who signed it in such a manner as to bind the person. When a representative signs either her name or the represented person’s name on an instrument, the represented person…

Answer 38

bound to the extent she would be bound if the signature were on a simple contract. If a representative signs her name or the name of the represented person to an instrument, and it is an authorized signature of the represented person, then the represented person is liable on the instrument whether or not identified in it.