Commercial Paper Flashcards
Types of Negotiable INstruments
Note and Draft (checks)
Six requirements for negotiability
(1) writing; (2) unconditional promise or order; (3) pay a fixed amount; (4) to order or bearer; (5) payable on demand or at a definite time; (6) and no additional undertaking or instructions
How to become a holder
By issuance - delivered by the maker or drawer for the purpose of giving rights in the instrument to any other person
By Negotiation - Delivery, regardless of voluntariness, by a person other than the maker or drawer to any person who, as a consequence, becomes holder of the instrument
Negotiating a bearer instrument
Requires only transfer of possession of instrument. Trasnfer does not need to be voluntary (e.g., thief or finder)
Negotiating an Order Instrument
Requires (1) transfer of possession and (2) Indorsement
Special Indorsement
Names an identified person as indorsee. Indorsee msut sign for further negotiation.
Special indorsement of bearer instrument creates an order instrument
Blank Indorsement
Not accompanied by the naming of a specific indorsee.
Blank indorsement of an order instrument creates a bearer instrument
Qualified Indorsement
Indorser includes words that disclaim liability (e.g., “without recourse”)
Holder in Due Course
Take the instrument (1) as a holder; (2) for value; (3) in good faith; (4) without notice of infirmities
Benefit of being a Holder in Due Course
Only subject to real defenses, not personal defenses
Transfer of Instrument
Delivery of an instrument by a person, other than the maker or drawer, for the purpose of giving the person receiving it the right to enforce the instrument.
Shelter Rule
A person to whom an HDC transfers an instrument usually acquires the rights of the HDC, even if the transferee herself does not qualify as an HDC
Exception to the Shelter Rule
Engaging in Fraud or illegality affecting the instrument.
Awareness of earlier fraud not enough
Six transfer warranties
1) Transferor is entitled to enforce instrument;
2) All signatures, including drawer’s signature, are authentic;
3) All signatures are authorized;
4) Instrument has not been altered;
5) There are no real defenses or claims that can be asserted against transferor;
6) Maker, acceptor, or drawer is not to transferor’s knowledge, subject to insolvency
Real Defenses
Infancy, incapacity, duress, illegality, fraud, discharge in insolvency proceedings, alteration and forgery, SOL, Accommodation Party
Personal Defenses
Issuance;
Any contract defense;
Claim in recoupment;
Defenses and claims in recoupment of other persons–obligor may generally raise only his own defenses;
Claims to the Instrument
What is a claim in recoupment?
An offset against an amount owed on an instrument, such as a warranty claim.
What is the general rule for unauthorized signatures?
An unauthorized signature is ineffective as the signature of the person whose name is signed.
It is, however, valid for the person who actually signed it in favor of a person who pays the instrument or takes it for value in good faith
When is an unauthorized signature treated as authorized?
The issuance of an instrument to an impostor of fictitious payee;
An employee’s violation of an employer’s trust;
Negligence that contributes to an alteration or forgery;
The failure of a bank customer to examine his bank statement and report an alteration or forgery
What is presentment?
A demand for payment by a person entitled to enforce the instrument
What are the presentment warranties?
Person seeking payment warrants in good faith that:
1) the warrantor is entitled to enforce the draft;
2) the draft has not been altered;
3) the warrantor has no knowledge that the signature of the drawer is unauthorized
How does a guarantor of a loan limit liability
Using “collection guaranteed” or similar words makes the guarantor secondarily liable only if the creditor cannot compel payment from the debtor
Impairment of collateral
If an obligation of the pricnipal obligor is secured by collateral, there is a secondary obligor, and the person entitled to enforce the instrument has impaired the value of the interest in the collateral, secondary obligor’s interest is discharged to the extent of the impairment
What does it mean to impair collateral?
Includes:
i) failure to obtain or maintain perfection;
ii) Release of collateral without substitution of collateral of equal value;
iii) Failure to perform a duty to preserve the value of collateral;
iv) failure to comply with applicable law in disposing collateral
