Commercial Paper

Question 1

Bearer paper

Answer 1

negotiable instrument that is payable to whomever possesses it

Question 2

Contract liability

Answer 2

when a party is responsible to pay the holder the face value of the instrument - regardless of how much they paid

Question 3

Draft

Answer 3

negotiable instrument containing an order to pay money. Three parties (1) drawer (2) drawee (3) payee

Question 4

Drawer

Answer 4

person who creates the draft and signs the draft on its face

Question 5

Drawee

Answer 5

party that the drawer has instructed to pay the payee (bank)

Question 6

Endorsement

Answer 6

signature necessary to further negotiate a paper instrument

Question 7

Face value

Answer 7

amount for which the instrument is payable

Question 8

Holder

Answer 8

A person who has possession of a negotiable instrument w/ all necessary endorsements

Question 9

Holder in due course (HDC)

Answer 9

a holder with enhanced rights in the negotiable instrument (best claim of ownership, etc)

Question 10

Maker

Answer 10

person who creates a note and has primary liability for its payment

Question 11

Negotiable

Answer 11

instrument is freely transferrable from one party to another (draft or note). must be:

1. written 2. signed (by drawer or maker) 3. unconditional promise to pay 4. fixed amount 5. payable on demand or at a definate time 6. payable to the order or bearer (unless a check)

Question 12

Negotiation

Answer 12

transfer of ownership of a negotiable instrument from one party to another.

Question 13

Note

Answer 13

two-party (maker and payee) negotiable instrument containing a promise to pay money

Question 14

Order paper

Answer 14

instrument that is payable to a particular payee

Question 15

Payee

Answer 15

party to whom negotiable instrument was originally payable

Question 16

Primary liability

Answer 16

party from whom the holder/HDC must first seek payment (maker of a not or acceptor of a draft)

Question 17

Secondary liability

Answer 17

parties who are liable to the holder/HDC if the primary party dishonors the instrument (endorsers and drawers)

Question 18

Warranty liability

Answer 18

responsibility to a holder/HDC to return the money actually paid (not face value) for the negotiable instrument

a. transfer warranties: (1) good title (2) genuine/authorized signatures (3) no material alteration (4) no defense of any party (5) no notice of insolvency
b. Presentment warranties: (1) good title - for all instruments (2) genuine/authorized signature - unaccepted drafts (3) no material alteration - unaccepted drafts

Question 19

Personal Defenses

Answer 19

HDCs still able to collect, despite personal defenses:

Breach of contract

Lack/failure of consideration

Prior payment

unauthorized completion

fraud in the inducement

nondelivery (loss or theft)

ordinary duress / undue influence

mental incapacity (if state law makes transaction voidable)

Illagality (if voidable)

Question 20

Real Defences

Answer 20

neither holder nor HDC can collect on instrument

forgery

bankruptcy

fraud in execution

minority

mental incapacity (if state law makes transaction void)

material alteration (HDC can still collect original dollar amount)

Question 21

Federal Trade Commission Rule

Answer 21

limits HDC status in consumer credit transactions

takes presedence over UCC when:

1. consumer signs installment agreement sales contract containing waiver of defenses
2. consumer signs sales contract containing promissory note
3. retailer arranges financing with third party for consumer financing