Commercial Paper Flashcards
What is commercial paper?
Commercial paper is a written instrument for the payment of money governed by Articles 3 and 4 of the UCC.
What are the 3 fundamental issues in commercial paper?
- The person with the instrument wants to get paid. 2. The person obligated on the instrument doesn’t want to pay. 3. The person who pays on the instrument wants to recover the money.
What are the steps to answer a commercial paper question?
- Identify the type of paper. 2. Identify the parties. 3. Determine whether the instrument is negotiable. 4. Determine whether the instrument was properly negotiated. 5. Determine whether the transferee is a holder in due course. 6. Determine who may be held liable. 7. Determine defenses. 8. If a party is held liable, determine if they can pass liability on to another.
What are the 2 basic instruments of commercial paper?
- Note (such as promissory notes) - a promise to pay money. 2. Draft (such as checks) - an order to pay.
What is a note?
A note is a 2-party instrument consisting of a maker and a payee.
What is a draft?
A draft is a 3-party instrument consisting of a drawer, drawee, and payee.
What qualifies a draft as a check?
A draft qualifies as a check if the bank is the drawee and the instrument is payable on demand.
Who are the parties to a note?
- Maker - person who promises to pay. 2. Payee - person entitled to payment.
Who are the parties to a draft?
- Drawer - person ordering payment. 2. Drawee - person to make the payment. 3. Payee - person to receive the payment.
What makes an instrument negotiable?
An instrument is negotiable if it satisfies 8 elements, including being written, signed, and containing an unconditional promise or order to pay.
What are the elements of negotiability?
- Written. 2. Signed by the maker or drawer. 3. Unconditional promise or order. 4. Fixed amount of money. 5. Payable to order or bearer. 6. Payable on demand or at a definite time. 7. No unauthorized undertaking or instruction.
What is a conditional promise?
A promise is conditional (and not negotiable) if it contains an express condition to payment or states it is ‘subject to’ another record.
What is required for a fixed amount of money?
The principal amount must be fixed, but interest rates can be fixed, variable, or referenced to an outside source.
What is the significance of words over figures in a check?
If a check provides a numerical amount that differs from the written amount, the written words prevail.
What is a bearer instrument?
Bearer instruments are negotiated by transferring possession of the instrument.
How is an order instrument negotiated?
An order instrument is negotiated by transferring possession and the identified person’s authorized and valid indorsement.
What is a blank indorsement?
A blank indorsement is a signature that isn’t accompanied by the naming of a specific indorsee, creating bearer paper.
What is a special indorsement?
A special indorsement includes the payee’s signature and a designation of a new person payable.
What is a qualified indorsement?
A qualified indorsement includes the words ‘without recourse,’ limiting the contract liability imposed on indorsers.
