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ALL Virginia Bar Exam > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

What section of the UCC governs commercial paper?

A

UCC Article 3

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2
Q

What are the types of negotiable instruments?

A
  1. Promissory note
    • Affirmative promise to pay money (not just an IOU)
  2. Draft
    • Order to pay money
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3
Q

What is a note?

A

Two party negotiable instrument in which the maker promises to pay a sum of money to the payee

Maker = person promising to pay; Payee = person to whom instrument is payable

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4
Q

What is a draft?

A

Three party negotiable instrument in which the drawer orders the second party (drawee or payor) to pay a sum of money

Drawer= person ordering payment
Drawee = person being ordered to pay
Payee= person to whom instrument is payable

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5
Q

Contradictory Terms

A

Handwritten terms > typewritten terms
Typewritten > printed
Words > numbers

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6
Q

How do you determine whether a writing is a negotiable instrument?

A

Negotiable instrument requires
“Wild Squirrels Under Umbrellas Fear Downpours Outdoors”
1. (W) Written
2. (S) Signed by maker/drawer
3. Is an (U) unconditional promise or order to pay
4. With no (U) unauthorized undertaking
5. A (F) fixed amount in money
6. Payable on (D) demand or at a definite time
7. Payable to (O) order or bearer
—“Order” must appear on the instrument
Must be deliver and properly indorsed by a holder

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7
Q

Determining Negotiable Instrument - Requirement :

With no unauthorized undertaking = A fixed amount in money > Interest

A

Instrument may state interest to be paid; if the interest rate is not set in the agreement, the rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues

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8
Q

What meets the signature requirement for a negotiable instrument?

A

Any authentication - e.g., initials, defining mark, nickname, etc.

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9
Q

What is issuance?

A

instrument is delivered by the maker or drawer for the purpose of giving rights in the instrument to any other person

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10
Q

What does not meet the unconditional requirement for a negotiable instrument?

A
  • Express conditions
    • E.g., promise to pay if X occurs
    • But not merely limiting payment to a source
  • Governed by or subject to other agreements
    • E.g., instrument is actually governed by the terms of another agreement, rather than:
      • Merely referring to the agreement
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11
Q

Determining Negotiable Instrument - Requirement : Payable to order or bearer

A

Order Instrument – the term “order” must appear on the instrument
–Must be delivered AND properly indorsed by holder

b. Bearer instrument = payable to a person in possession
–Payable to “bearer” “order of bearer” or “cash” or “John Doe or Bearer”
—ONLY requires delivery - does not need to be indorsed by holder

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12
Q

Determining Negotiable Instrument - Requirement :
Payable on (D) demand or at a definite time > VA Distinction

A

VA: payable on demand if it expressly states payable “on demand” or “at sight”, or does not state a time for payment

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13
Q

What meets the sum certain requirement for a negotiable instrument?

A

You must be able to calculate amount to be paid, either from:

  • What writing says
  • Reference to outside source
    • E.g., for undefined interest rate, use rate on court judgment
    • E.g., reference to the prime rate
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14
Q

What meets the payable in currency requirement for a negotiable instrument?

A

Currency includes:

  • Money
  • Foreign currency

Currency excludes:

  • Goods
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15
Q

What does not meet the no additional promises requirement for a negotiable instrument?

A

Writing cannot include promises other than the promise to pay money

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16
Q

What meets the payable on demand requirement for a negotiable instrument?

A

Instrument must specifically state that it is payable:

  • On demand
  • At sight
  • On presentation
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17
Q

What if an instrument is silent as to the time of payment, is it still negotiable?

A

Yes. Payment is due on demand.

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18
Q

What meets the payable at a definite time requirement for a negotiable instrument?

A

Payment must be either:

  • On a specific date
  • Before a specific date
  • At a fixed period after a specific date
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19
Q

Does an acceleration clause impact the payable at a definite time requirement for a negotiable instrument?

A

No. This does not destroy negotiability

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20
Q

What meets the payable to order requirement for a negotiable instrument?

A

Instrument must use the word “order” or “assigns” in connection with the payee’s name

E.g., pay to the order of Mark Flinn

E.g., pay to the assigns of Mark Flinn

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21
Q

What meets the payable to bearer requirement for a negotiable instrument?

A

Instrument must be payable to anyone who has it

E.g., pay to Mark Flinn or bearer

E.g., pay to cash

E.g., pay to the order of bearer

E.g., pay to the order of cash

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22
Q

If an instrument says, “Pay to Mark Flinn,” is it negotiable?

A

Only if it is a check.

Otherwise, not negotiable - it is just a contract

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23
Q

How does a defendant get sued in the commercial paper context?

A
  1. Contract or signature liability
    • You signed the instrument, so you’re liable to pay
  2. Warranty or transfer liability
    • You sold the instrument, so you’re liable for warranty
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24
Q

Can the drawee be liable under contract or signature liability?

A

No. The drawee (e.g., bank) does not sign.

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25
Is it possible to disclaim contract or signature liability?
Yes, if your signature is accompanied by the words "without recourse"
26
Who can sue the defendant for breach of warranty?
* If defendant indorsed the instrument * Any plaintiff in possession * Warranty runs with the instrument * If defendant did not indorse the instrument * Only defendant's immediate transferee * Warranty does not run with the instrument
27
What will always preclude warranty or transfer liability?
If the defendant was merely a donor - i.e., did not actually sell the instrument in the transfer
28
What are the warranties that a seller of a negotiable instrument makes?
*To get warranty, must have transfer for **consideration** 1. Transferor is entitled to enforce the instrument 2. All signatures are authentic 3. Instrument has not been altered 4.There are no defenses or claims that can be asserted against transferor 5. Maker, acceptor, or drawer is not, to the transferors knowledge, subject to insolvency proceedings.
29
How is a negotiable instrument properly transferred?
When instrument is: * Payable to order * Payor delivers to payee * Payee indorses (must be valid and authorized) * Payee delivers to transferee * Payable to bearer * Mere possession (indorsement not required)
30
Negotiable Instruments - Damages for Breach
limited to amount of instrument + expenses + loss of interest
31
Enforcement of Instrument
1. Plaintiff must prove (i) entitled to enforce (ii) signatures are valid 2. Defendant may avoid by proving a defense in recoupment (basically that the P owes them money on the same transaction) 3. Plaintiff may re-establish the right by proving HDC status (not subject to defense or claim)
32
Enforcement - Lost, Destroyed, or Stolen Instrument
P must prove the terms and right to enforce the instrument at the time it was lost, destroyed or stolen Loss of possession of the instrument cannot have been the result of a transfer by the P or lawful seizure
33
Enforceability - Conversion
Occurs if taken by transfer, other than negotiation, from a person not entitled to enforce it; OR bank makes/takes payment for a person not entitled to enforce it or obtain payment.
34
What are the different types of indorsements?
1. Special indorsement * Names a identified indorsee * Indorsee must sign in order to negotiate * E.g., indorse check, "Pay to Kristin Holloway" - Note that special indorsement of a bearer instrument creates an order instrument 2. Blank indorsement * No specific indorsee * May be negotiated by delivery alone * E.g., indorse check with nothing else - Note that blank indorsement of an order instrument creates a bearer instrument 3. Restrictive indorsement * Indorser adds words seeking to impose a restriction or condition * E.g., indorse check, "For deposit only" - Note = generally ineffective 4. Unrestrictive indorsement * No condition * E.g., simply indorse check with nothing else 5. Anomalous indorsement *indorsement by a person who is not a holder, person signing becomes liable
35
What is a holder in due course?
A holder who takes the instrument: 1. For value 2. In good faith *Honesty in fact (subjective) AND commercially reasonable standards of fair dealing 3. Without notice of infirmities: * It is overdue * It has been dishonored * It is subject to any defense or claim * No apparent forgery * No apparent alteration
36
What meets the for value requirement to be a holder in due course?
Holder must actually give value, which is different than consideration because: * Mere promise is not value * Old value is good value
37
What meets the good faith requirement to be a holder in due course?
Good faith requires both: * Honesty in fact (subjective) * E.g., holder does not actually know of any reason why the obligor may have trouble paying * Observance of reasonable commercial standards of fair dealing (objective test) * E.g., a reasonable person in the business wouldn't know of any reason the obligor might have trouble paying
38
What meets the without notice requirement to be a holder in due course?
Holder must not know or have reason to know that the instrument was: * Overdue * Dishonored * Subject to any defense or claim
39
If on Jan. 5, someone buys an instrument that is payable on Jan. 1, is the buyer a holder in due course?
No. He reason to know that it was overdue
40
Can you be a holder in due course if you know or should know that an instrument is in arrears for a: * Principal payment? * Interest payment?
Principal payment * No, you cannot be a HDC Interest payment * Yes, you can be a HDC
41
Is there any situation in which the notice requirement for holder in due course status is actual notice, rather than constructive?
Yes, if a fiduciary negotiates an instrument in breach of his or her fiduciary duty
42
What is the shelter rule in the context of commercial paper?
A transferee acquires whatever rights her transferor had. So if the transferor was a holder in due course, the transferee steps in the transferor's, shoes, even if he had notice of a defense or otherwise wouldn't qualify.
43
What are the benefits of holder in due course status?
A holder in due course takes an instrument: * Free from: * Claims * Personal defenses * Subject only to: * Real defenses
44
What is a claim?
A right to a negotiable instrument becuase of superior ownership
45
What are personal defenses?
Any defense available in contract, including: * Lack of consideration * Unconscionability * Waiver * Estoppel * Fraud in the inducement !!ONLY effective AGAINST non-HDC!!
46
What are real defenses?
MAD FIFI4 * **M**aterial **A**lteration * **D**uress * **F**raud **I**n **F**actum * **I**ncapacity * **I**llegality * **I**nfancy * **I**nsolvency !!Effective against ALL - including HDC!!
47
How would a material alteration work as a real defense? How would it not work?
Valid real defense * Change in terms of the contract by payee Invalid real defense * Change in terms of contract by payee after maker was negligent - e.g., leaving blanks in check
48
What is fraud in the factum?
Payor doesn't know what he is signing
49
What is dishonor?
failure of the drawee or maker to pay within required time after presentment
50
Time of dishonor
If time instrument = on day it becomes payable or day of presentment, whichever is later. If demand instrument = on day of presentment
51
Notice of Dishonor
Indorser not liable (unless given timely notice) Notice must be given within 30 days after dishonor notice is excused if waived (either by instrument or person entitled to notice)
52
What happens if a bank wrongfully dishonors a check (i.e., there actually are sufficient funds)
Customer can recover damages for harm caused by dishonor
53
If a bank customer dies, should the bank still pay checks drawn on the customer's account?
The bank can still pay until both: * Bank knows of death * Has reasonable time to act on knowledge
54
When can a bank not draw on a customer's account for a check?
* Drawer's signature was forged * Bank is drawing for more than original order * Bank is paying wrong person * Check is postdated and customer gave bank notice
55
For how long is a stop payment order binding on a bank?
If oral - 14 days, unless renewed in writing during period If written - 6 months, unless renewed in writing during period
56
What is the properly payable rule?
Drawee that honors a forged or materially altered check must recredit the customer's account, as long as the drawer was not negligent
57
What are the drawee bank's remedies under the properly payable rule?
* Thief is always liable * Draw is liable if negligent
58
When is a drawer negligent?
1. Leaving blanks or spaces on the instrument 2. Failing to follow internal procedures designed to avoid forgeries * E.g., leaving signature stamp in same drawer as checks 3. Failing to examine bank statement for errors 4. Being induced to write a check
59
What is the fictitious payee rule?
If an imposter indueces the drawer to write a check, the drawer is negligent
60
What is the employee indorsement rule?
An employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks An employer must monitor employees
61
Define negotiation
The voluntary or involuntary transfer of an instrument by a person other than the maker/drawer, to a person who gains possession of the instrument and has the right to enforce it, i.e., to a holder.
62
When can a defense of infancy be asserted?
Against an HDC only if state law makes the contracts of an infant void or voidable. If state law does not make the contracts of an infant void or voidable, infancy is only a personal defense, which is not assertable against an HDC.
63
Define an alteration.
An unauthorized change or addition that purports to modify the obligation of any party in any respect. The effect of an alteration depends on whether the alterer’s intent was fraudulent or nonfraudulent. 1. A nonfraudulent alteration does not discharge any party, and the instrument may be enforced according to its original terms. 2. In contrast, a fraudulent alteration generally discharges every party obligated on the instrument, unless the party assents to or is precluded from asserting the alteration.
64
What is discharge?
-Elimination of a person's personal liability on an instrument (personal defense) -Instrument itself is not discharged - the underlying obligation is generally suspended until paid or dishonored (unless its a certified check, cashier's check, or teller's check)
65
What type of indorsement is the phrase “without recourse”?
The phrase “without recourse” does not create a restrictive indorsement. “Without recourse” creates a qualified indorsement --- indorser adds words disclaiming liability
66
When may a bank choose to honor a check according to its terms as presented?
A bank may choose to honor a check when there is insufficient funds. The customer is liable to the bank for the overdraft.
67
When is collateral impaired?
Collateral is impaired if either: * A security interest is not perfected or otherwise filed; * Collateral is released without obtaining substitute collateral; * There is failure to perform acts required to preserve the collateral’s value; or * There is failure to dispose of collateral as the law requires.
68
What is presentment?
demand for payment made to maker or drawee by someone entitled to enforce
69
When is presentment excused?
(i) Cannot be made by exercise of reasonable diligence; (ii) maker or acceptor has repudiated obligation (iii) Death/insolvent (iv) Drawer/indorser Waiver or Estoppel (v) drawer has instructed drawee not to pay (stop payment order)
70
Presentment warranties
Made by person obtaining payment/acceptance as well as any prior transferor -- person obtaining payment warrants the following: (i) person is entitled to enforce draft or authorized to obtain payment; (ii) draft has not been altered; and (iii) no knowledge that signature is unauthorized -Cannot be disclaimed if a check
71
What is the difference between a presentment and transfer warranty?
With a presentment warranty, the presenter warrants that he is not aware of any forged signatures. With a transfer warranty, the transferor warrants that all signatures are authorized.
72
Liability of parties Issuer, Drawer, Drawee, Acceptor, Indorser, Joint Signor
1. Issuer of Note/Cashiers Check --> primary liability 2. Drawer of unaccepted draft --> secondary liability; liable on dishonor, no notice req 3. Drawee --> no liability unless he accepts draft; drawee's bank obligation determined by agreement with customer 4. Acceptor --> (a drawee who agrees to pay a draft as presented) primary liability upon acceptance 5. Indorser --> secondary liability; requires BOTH dishonor and notice; if check, requires presentment within 30 days after indorsement; can be disclaimed by writing "without recourse" along with signature 6. Joint Signors --> joint + several (not abdicable to indorser; earlier indorser liable to later indorser)
73
Accommodation parties (surety, guarantor)
- Type of surety (one who guarantees debt of another) - Requires: (i) debtor must also sign the instrument; AND (ii) accommodation party cannot receive a direct benefit from the value given for the instrument -Limitation of Liability: "collection guaranteed" -right of reimbursement -accommodation party can raise accommodated party's defenses, except discharge in insolvency proceedings, infancy, or lack of capacity
74
Effect of signature by agent
1. Principal's Liability - if agent was authorized, P is liable. If agent was not authorized, principal is not liable unless ratification or estoppel applies. 2. Agent's Liability - if agent is not authorized or exceeds authority, the agent is liable to the one who pays for instrument in GF and takes it for value. 3. If Agent signs agent's name only or fails to indicate capacity - agent is liable to a HDC who takes without notice that the OG Parties never intended for the agent to be personally liable

ALL Virginia Bar Exam (23 decks)

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