Commercial Paper

Question 1

What is a promissory note?

Answer 1

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

Question 2

What is a draft?

Answer 2

A commercial paper involving three parties- a drawer; a payee and a drawee

A drawer orders a sum to be paid to a payee by the drawee

May be payable on demand or in the future

Question 3

What is a check?

Answer 3

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer

Drawer - person writing the check

Payee - person being paid

Drawee - the bank

Question 4

What is the difference between a post-dated check and a negotiable time draft?

Answer 4

A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

Question 5

What is a trade acceptance?

Answer 5

Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability

Question 6

What is the purpose of the negotiation of commercial paper?

Answer 6

Transfers ownership to another party

Question 7

What makes a commercial paper negotiable?

Answer 7

1. Must be in writing
2. Signed by drawer/maker
3. Unconditional promise or order to pay
4. Be for a fixed amount of money (currency ONLY)
5. Be payable on demand or at a definite time
6. Be payable to order or bearer (exception for checks)
7. No additional undertaking is necessary

Question 8

What characteristics will cancel the negotiability of a commercial paper?

Answer 8

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

Question 9

What is required to negotiate Order Paper?

Answer 9

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

Question 10

What are the major types of endorsements on commercial paper?

Answer 10

Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

Question 11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 11

Within 7 days

Question 12

On a commercial paper; which value will supersede - words or numerical dollar amount?

Answer 12

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

Question 13

Define primary liability with respect to a contract.

Answer 13

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay

Question 14

Define secondary liability with respect to contract liability

Answer 14

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

Question 15

Define contract liability.

Answer 15

Guarantees payment of a liability

Question 16

When does warranty liability occur?

Answer 16

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

Question 17

What five warranties occur with every commercial paper transfer?

Answer 17

Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate

Question 18

What are the requirements for a holder to be a Holder in Due Course (HDC)?

Answer 18

Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC

Having no knowledge of defenses again instrument; i.e. problems with the instrument

Giving a present value for the instrument (a future value doesnt count)

Question 19

What are the personal defenses that will lose against holder in due course (HDC)?

Answer 19

Basically anything not FAIDS.

Examples: 
Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts

Question 20

What are the REAL defenses that can destroy a holder in due course (HDC)?

Answer 20

F.A.I.D.S.

F = Fraud in the execution; Forgery 
A = Adjudicated insanity; material Alteration of instrument 
I = Infancy (child making contract); Illegality
D = Duress; Discharge in bankruptcy 
S = Suretyship defenses (to the extent HDC party knew about it); Statue of limitation (generally 3 years)

Question 21

What is Article 3?

Answer 21

Article 3 governs negotiable instruments (commercial paper).

Question 22

What is Article 7?

Answer 22

Article 7 governs documents of title (bills of lading and warehouse receipts).

Question 23

What is the Shelter Doctrine?

Answer 23

The transferee (person receiving the commercial paper), who might not qualify as a HDC, can claim the rights of an HDC who held the commercial paper before him.

Question 24

Liability of Parties: who is primarily and secondarily liable?

Answer 24

Maker = primarily liable

Drawer = secondarily liable

Drawee = primarily liable after acceptance

Bank (making a certified check) = bank is primarily liable; all previous parties are discharged

Endorser = secondarily liable (unless endorsement is without recourse)

Question 25

Define:
Article 3

Article 7

Article 8

Article 9

Answer 25

Article 3 = commercial paper (negotiability)

Article 7 = documents of title (warehouse/bills of lading)

Article 8 = investment securities

Article 9 = secured transactions (perfection/collateral)

Question 26

How many parties are involved in a:

Note

Draft

Answer 26

Note = 2 parties

Draft = 3 parties