Commercial paper

Question 1

Basic idea and approach of commerical paper

Answer 1

A. BASIC IDEA

1. Written instruments for the payment of money.
2. Fundamental issues:
   
   1. Person with the instrument wants to get paid.
   2. Person obligated on instrument does not want to pay.
   3. Person who paid the instrument now wants to recover the money from the person paid or someone else.

B. APPROACH

1. Identify type of paper (representation of money)
2. Identify parties
3. Determine if instrument is **negotiable **
4. Determine if instrument was properly negotiated (transferred)
5. Determine if transferee is a HDC
6. Determine P’s **COA **such as contract, warranty, tort, or not
   properly payable
7. Determine D’s defenses
8. If D is held liable, may D pass liability on to another party?1

Question 2

Identify instrument and parties

Answer 2

The first step: identify the type of instrument involved and the parties. The rules are often different based on the type of paper and the parties involved so it is essential to make correct identifications.

A. NOTE

1. _Promise to pay _- **A promise to pay money a two-party instrument
2. Parties
   
   1. **Maker - ** the promisor (obligor) – Person who promises to pay
   2. Payee - the promisee – Person entitled to payment (the money)
3. Certificate of Deposit - note issued by a financial institution
   
   1. acknowledges **receipt **of money, and
   2. promises the payee/depositor to repay the money

B. DRAFT

1. Order to Pay: An order to pay money - a three-party instrument
2. Parties
   
   1. drawer - person ordering payment
   2. drawee - person to make the payment (In a check context, also called the **payor **bank)
   3. payee - person to receive the payment (The person to receive payment - money).
3. Check *- *Requirements:
   
   1. financial institution is the Drawee, and
   2. payable on demand
4. Types of Checks
   
   1. Ordinary Check
   2. **Certified Check - **Ordinary check which bank has accepted i.e., agreed to pay.
   3. **Cashier’s Check - **Drawer and drawee are **the same bank. **Person buying the check is the remittur
   4. **Teller’s Check - **Check drawn by one **bank **on another bank. Person buying the check is the remittur.
   5. **Traveler’s Check - **Demand instrument requiring **counter-signature **by a
      person whose specimen signature already appears on the instrument.

Question 3

Negotiability defined

Answer 3

To be negotiable, an instrument must be a written and signed:

1. unconditional
2. promise or order to pay
3. a fixed amount of money that:
   
   1. **is payable to order or bearer **
   2. on demand at a definite time
   3. contains no unauthorized promise or undertaking

Question 4

Unconditional promise or order to pay

Answer 4

Must be more than a mere acknowledgment of a debt such as an I.O.U.

1. Presumption of Unconditional Promise or Order

2. Items That Make Promise or Order Conditional (and thus not negotiable)

1. Express Condition to Payment
2. Promise or Order “Subject to” or “Governed by” Another Record
3. Incorporation by Reference - Rights or obligations with respect to the promise or order stated in another record

3. Items That Do Not Make Promise or Order Conditional

1. Statement of Consideration
2. Reference to Another Record (“as per” or “in accordance with”)
3. Incorporation by Reference of Items that Would Not Hurt Holder
   
   1. Rights regarding collateral
   2. Prepayment – Right of obligor to pay early
   3. Acceleration – Right of holder to get **paid **upon some event
4. Limitation of Payment to a Particular Fund or Source
5. coutersignature - eg. traveller’s check
6. consumer protection language

Question 5

Fixed amount

Answer 5

1. Determine Principal Amount Due - Must be able to look at instrument and determine the principal amount due.

2. Interest

1. Presumption = No Interest
   
   1. A silent instrument bears no interest. eg. an ordinary check
   2. Ways in which interest may be stated which do not violate the “fixed amount” requirement: (i) Amount of money. eg. ($20), (ii) Fixed or variable rate (2%), (iii) Reference to outside source
   3. Failure to State Interest Rate = Judgment Rate

Question 6

In money

Answer 6

1. Authorized Medium of Exchange - Medium of exchange authorized or adopted by a domestic or **foreign **government as part of its currency.
2. Includes Foreign Money - May be payable in foreign money. Unless limited to payment in foreign money, could also be paid with equivalent U.S. money.
3. Cannot be Payable in goods or services
4. Words vs. Figures = Words Prevail

Question 7

No other taking or instruction

Answer 7

1. _Instrument Not a Full Contract _-Negotiable instruments are just promises or orders to pay money. They are often
   called “couriers without luggage.”
2. Exceptions - Permitted Undertakings or Instructions
   
   1. Promises concerning collateral
   2. Confession of Judgment Clauses
   3. Waiver of law meant to benefit **the obligor **(maker/drawer)

Question 8

Payable on demand or At a definite time

Answer 8

1. On Demand

1. Express Statements
2. **Silent Instrument - **If the instrument does not state the date it is due, it is a demand instrument.

2. At a Definite Time

1. Express Statements
   
   1. Date Stated in the Instrument: eg. “August 1, 2011”
   2. Fixed Period After Sight or Acceptance: eg. “90 days after sight”
   3. Time Readily Ascertainable at the Time the Promise or Order Is Issued
2. Permitted date change matters that do not prevent instrument from being payable at a definite time
   
   1. **Prepayment of Instrument - **Right of obligor to pay earlier than stated date.
   2. Acceleration of Due Date -
      Right of holder to demand payment earlier than stated date upon certain
      named events.
   3. Provisions in Instrument Extending the Due Date -By holder = to **any **time. By obligor = to a later **definite **time stated in the instrument. Automatically upon condition stated in instrument = to a later **definite **time stated in the instrument

Question 9

Contains words of negotiabilty

Answer 9

1. Bearer language
   
   1. “payable to bearer”
   2. “payable to the order of bearer”
   3. indication that possessor entitled to payment
   4. no payee stated
   5. “to cash” or “to order of cash”
   6. not payable to identified person
2. Order language - eg “to the order of Frank Smith” = order paper
3. If both order and bearer language = *bearer controls*
4. Exception for checks - if the only missing element of negotiability >> order/bearer language requirement **waived **

Question 10

Negotiation

Answer 10

1. Negotiation - transfer of negotiable instrument so transferee is a holder
2. Holder status**: possession of negotiable instrument AND good title. good title depends on words of negotiabilty used:
   
   1. bearer = possession alone enough
   2. order = possession plus necessary indorsements

Question 11

Indorsements

Answer 11

_1. Indorsement generally**_

1. signature - indorsement = signature on negotiable instrument by someone other than maker, drawer, or accpetor normally on the back of the instrument

2. Blank indorsements

1. how done = payee signature only
2. effect = creates bearer paper (anyone in possession has right to cash it)

3. Special indorsements

1. how done = payee’s signature PLUS designation of new person to whom instrument payable
2. effect = creates order paper (further negotiations require indorsement of designated person)

4. For deposit of collection

1. restrictive indorsement limiting what may be done with the instrument. eg. “for deposit in my Bank of Texas account #1234”

5. Identification of person to whom instrument payable (payee)

1. intent of issuer determines initial payee
2. mutiple payees
   
   1. “and” separate names of payees - require all payees to indorse
   2. “or” or “and/or” - requires any one of the payees to indorse

6. Other indorsement issues

1. transferee’s right to transferor’s instrument - if instrument for value, transferee has specifically enforceable right to the transferor’s instrument
2. _depository bank becomes holder even wo transferee’s signature _
3. misspelled payee’s name - payee may indorse w incorrect/real name or both.
4. payee lacking capacity may effectively indorse - nego effective ever if payee is minor, incompetent, subject to duress

Question 12

Holder in Due Course****

Answer 12

Normally, being a mere holder = sufficient bc has right to enforce payment. HDC status becomes relevant when obligor raises a defense to payment.

Elements of HDC status:

1. Negotiable instrument
2. Holder
3. Authenticity not apparently questioned
   
   1. instrument NOT bear E of forgery or alteration or is not so irregular or incomplete
4. Holder must pay value**
   
   1. value difference OK (not too excessive)
   2. donee not HDC
   3. past consideration = value
5. Good faith
   
   1. honesty in fact AND
   2. observance of reasonable commercial standards of fair dealing
6. Without notice at time of instrument acquisition (later notice does not matter). Notice: (i) actual knowledge (ii)* **receipt of noticecoupled wreasonable time to acton notice (iii) from circumstancesknown to personin Q, person hasreason to knowthat is exists (mere filing* in pub record NOT notice)
   
   1. instrument overdue - for check 90 days after issue. overdue interest is not notice
   2. uncured default w respect to payment of another instrument issued as part of same series
   3. unauthorized signature
   4. alteration
   5. any claim by 3rd party to instrument
   6. any defense or claim in recoupment
7. BOP is on person claiming HDC status/right

Question 13

Shelter rule

Answer 13

1. Even if holder does not qualify as HDC, person may still have rights of HDC by shelter
2. transfer of an instrument vests in transferee the rights that the transferor had
3. warning: having HDC rights via shelter does not make you HDC
4. exception: person who was party to fraud or illegality affecting instrument cannot get HDC rights by shelter

Question 14

Rights of HDC - real defenses

Answer 14

1. HDC is subject to “real defenses”

1. infancy
2. duress which void obligation
3. lack of legal capacity making obligation void
4. illegality making obligation void
5. fraud in execution
   
   1. signer lacked knowedge of instrument’s character or essential terms AND
   2. signer lacked reasonable opportunity to learn of instrument (lack of intent)
   • ct will look at signer’s factors - intelligence, education, English, business exp.
6. discharge in insolvency
7. omission of required consumer protection language
8. statute of limitations
   
   1. note - 6 yrs from due date (not issue date)
   2. unaccepted draft - earlier of (1) 3 yrs after dishonor, or (2) 10 yrs after issue
9. payment to former holder
10. **alteration **
11. unauthorized signature & forgeries***

Question 15

Rights of HDC - personal defenses

Answer 15

_1. HDC protected from “personal defenses.” _

1. failure of consideration (eg. non-delivery of goods, non-performance)
2. breach of warranty
3. fraud in the inducement (eg. maker knows he is signing promissory note but is misled regarding quality of goods)

2. HDC is free from claims of others to the instrument.

no claimant can take an instrument from HDC; HDC = “perfect defendant”

Question 16

Contract liability

Answer 16

Basis of liability: primary basis of K liability on an instrument is a person’s signature.

1. Signature by agents
2. binding prinicpal - follow general agency law
3. binding agent - assume A signs A’s name ant that P is bound. KEY ISSUE: is A personally liable?
   
   1. A escapes liablity if: (i) P is identified in instrument AND (ii) siganture uambiguously show it made on behalf of P
   2. liability of A if above two elements not satisfied