Commercial Paper Flashcards
For a note (instrument) to be negotiable, instrument must be
1) a writing
2) signed by maker
3) containing unconditional promise or order
4) to pay a fixed amount of money
5) to an order or bearer
6) payable on demand or at a definite time
7) without stating any additional undertaking or instruction
An instrument is payable to order if
it identifies a person
Ex. “pay to order of Joe Smith
“Pay to Joe smith or his order”
If you lose an instrument, you must prove
terms of instrument and person’s right to enforce instrument
How to negotiate order instrument
holder must transfer possession of instrument and indorse it to negotiate it
Special Indorsement
Names an identified person as indorsee in addition to the indorsement
(Pay to Nancy Next /s/ Peter)
To What degree is an Indorser Liabile on an Instrument
Secondarily liable
Does an instrument automatically convey an interest payment?
Not unless explicitly stated
Interest may be ___ or ___ rate and may be determined by reference to other ___ or ___
fixed or at a variable rate and may be determined by reference to other documents or information
If instrument specifies only that interest will be paid, rate of interest is based on
the established judgment rate in jx of place of payment of the instrument at the time interest first accrues
When conflicting or contradictory terms exist within an instrument, ___ terms take precedence over ___ terms, ___ terms over ___ terms and ___ over number
handwritten terms over typewritten terms, typewritten over printed and words over numbers
A holder in due course is one who takes item
for value, in good faith, and w/o notice that item was overdue or dishonored
Being a HDC protects you from
claims that might arise from previous owners of the instrument
HDC. For example, if someone sold you a check that they had previously bounced, as a holder in due course, you can still cash check if
if you did not know of its history.
HDC can endorse a check despite a ___ ___ ___ unless a ___ ___ is invoked
stop payment order unless a real defense is invoked
Is HDC status changed by subsequent notice?
No, defined when he accepts check in exchange for his work
Real defense
infancy, void check, bankruptcy, forgery, deception, discharge known to holder
Must prove real defense by
preponderance of the evidence
If party takes from HDC, they can still assert rights of HDC IF
if the party is not personally engaged in wrongdoing affecting the instrument
Does a stop payment on a check avoid an obligation?
No, merely delays payment
For liability to attach to negotibale note, note must
bear signature or authorized rep’s signature
A bank may charge its customer’s account only for
properly payable items
Forged Drawer’s signature makes check
not properly payable
Drawer and Bank’s Duties Upon discovery of forged drawer signature
promptly report its unauthorized signature to Bank and Bank must recredit drawer’s account
Presentment Warranty
Warranty as to drawer’s signature
Presentment Warranty is Breached only if
Warrantor has actual knowledge that signature of purported drawer is unauthorized
When first holder endorses check, he makes transfer warranties that:
1) he was a person entitled to enforce the check (title is clean)
2) signatures on check are authentic and authorized
3) check has not been altered
4) check is not subject to any claims or defenses that could be raised against him and
5) maker of this note is not insolvent
A principal’s liability on an instrument signed by agent turns, in part on whether
agent had either actual or apparent authority
If agent is authorized, P is liable regardless of whether
agent signed P’s name, agent’s name or both
If agent is not authorized
P is not liable
Even if agent acts w no power to bind P, P can
ratify an act performed by another person whether or not person is an actual agent of P
Ratification occurs when
P affirms prior act done or purported to be done on P’s behalf
P’s affirmation may be either
express or implied and consideration is not required
What is an accomodation party?
A type of surety who guarantees debt of another
To be an accomodation party, person cannot
have received a direct benefit from the instrument
Accommodation party is liable on instrument in whatever
capacity he has signed
A ____ is assumed to be an accomodation party
cosigner
Ex. “Guarantor of all amounts due”
Accommodation party’s defense
If party’s obligation to pay an instrument is secured by an interest in collateral and the person entitled to enforce instrument impairs the value of the interest in collateral, obligation of an accommodation party are discharged to extent of the impairment
Burden of proving collateral’s impairment is on
party asserting discharge
Impairing value of an interest in collateral includes
1) failure to maintain perfection or recordation of interest in collateral
2) failure to release collateral w/o substitution of collateral of equal value;
3) failure to perform a duty to preserve value of collateral owed to a debtor or surety or other person secondarily liable; or
4) failure to comply w applicable law in disposing collateral
An accommodation party is only liable on an instrument if
1) person entitled to enforce instrument has reduced his claim to judgment against the other party and execution is returned unsatisfied
2) party has become insolvent
4) party cannot be served w process
5) It appears useless to proceed against other party
A surety who makes payment on a loan on behalf of a P is entitled to
all rights and remedies of a creditor
An alteration is an
unauthorized change that purports to modify the obligation of a party
If an alteration is done fraudulently by holder, it
discharges liability of obligor
If alteration is Not done fraudulently, obligor
would remain liable but only on original terms of obligation
A bearer instrument is payable to
anyone who possesses the instrument
Once drawee bank has paid a check, its rights are subrogated to
the rights of any HDC, payee, or other holder on a check against drawer
So, when there is an HDC w respect to a check, customer cannot claim loss because
The HDC could have demanded payment from the customer-drawer even if the bank complied w the stop-payment order
If a check is dishonered, drawer has generally promised to pay Holder according to
terms of the check when it was issued
However, drawer may usually refuse to pay a holder of check if
drawer has a defense
If holder is an HDC, drawer is limited to real defenses, such as
infancy, incapacity, duress, illegality, fraud, alteration and forgery, statute of limitations and discharge in insolvency proceedings
