Commercial Paper Flashcards
What happens when a payee transfers an instrument to a third party?
The third party becomes a holder, which is a person in possession of an instrument with a right to enforce it.
How is a bearer instrument negotiated?
A bearer instrument is 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 an indorsement?
An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor.
What is a blank indorsement?
A blank indorsement is a signature that isn’t accompanied by the naming of a specific indorsee.
It creates bearer paper, meaning anyone in possession of a check with a blank indorsement has the right to cash it.
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.
What is a holder in due course (HDC)?
An HDC is a holder who takes free of most defenses.
What are the requirements to determine HDC status?
To determine HDC status, ask if the person is a holder and if they hold in due course.
What does it mean to hold in due course?
Holding in due course requires the holder to take for value, in good faith, and without notice.
What is considered ‘value’ in the context of HDC?
Value given in exchange for an instrument doesn’t need to equal the face amount of the instrument.
What is the good faith requirement for HDC?
Good faith means honesty in fact and observance of reasonable commercial standards.
What constitutes notice for HDC?
Notice can include the instrument being overdue, dishonored, having an unauthorized signature or alteration, claims to the instrument, or defenses/claims in recoupment.
What is the shelter rule?
The shelter rule states that a transferee acquires whatever rights their transferor had.
Who may be held liable on an instrument?
Generally, no one may be held liable unless their signature (or the signature of an authorized representative) is on the instrument.
What is the liability of a principal when an agent signs an instrument?
The principal is liable if the agent was authorized to sign.
When may a drawer disclaim liability?
A drawer may disclaim liability on any instrument, except for checks.
What is required for an indorser to be liable?
Before a holder can look to an indorser for payment, they must fulfill presentment, dishonor, and notice of dishonor.
What is an accommodation party?
An accommodation party signs an instrument to lend credit to another party and receives no direct benefit.
What are transfer warranties?
Transfer warranties include being entitled to enforce, signatures being authentic and authorized, no alteration, no defenses, and no knowledge of insolvency proceedings.
What is the difference between transfer warranties and presentment warranties?
Transfer warranties are made when an instrument is transferred, while presentment warranties are made to drawees on unaccepted drafts and payors of other instruments.
What is joint and several liability?
Parties signing an instrument jointly have joint and several liability, meaning either one or both can be sued for the entire amount due.
