Commercial Paper Flashcards
Commercial Paper - What is it?
“Money paper” - pieces of paper that direct money from one person to another.
Commercial Paper - Orders & Promises
Order = check. Bank account holder (“drawer”) orders the bank (“payor bank” or “drawee”) to pay out money from deposit account to a 3rd person (“payee”).
Promise = promissory note. “Maker” promises to pay someone else (“payee”) a sum of money in the future personally. “Certificate of deposit” = promise by bank to pay back $ on deposit
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument”
Article 3 of the UCC applies to N.I.’s
7 Part Test:
- Written and signed promise or order to pay;
- Unconditional;
- Transfer $, not a non-monetary thing like a car or wheat, or gold;
- Fixed amount, perhaps pursuant to a formula, even floating interest rate;
- Words of negotiability;
- Definite time for payment or upon demand (default);
- No extraneous undertakings;
- Must not state “conspicuously” that it is NOT NEGOTIABLE.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Written & Signed
Paper must be in a tangible medium.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Unconditional
No explicitly making payment subject to another document.
(i) Note can refer to an accompanying loan agreement or security agreement.
Exception - Note can limit payment to a particular source (e.g. proceeds of biz, prop sold). Must be fixed amount.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - $$$ Transfer
Must be a national currency, not a car, gold, wheat, etc.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Fixed Amount
Fixed amount of $$$.
Contradictory terms (words say two hundred, numeral say $250), words prevail over numbers, handwritten terms prevail over typed or printed words.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Words of Negotiability
Payment “to bearer” (bearer paper) or “to order” (order paper).
To Bearer:
- “Bearer” (any possessor); or
- blank payee line or pay to “cash.”
To Order:
- Pay “to the order of” a particular person; or
- Pay to a particular identified person “or order.”
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Definite Time
Definite time or upon demand (default).
D.T. = Readily calculable. Prepayment and acceleration are okay.
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - No Extraneous Undertakings
No promises or orders to do anything other than pay $$$.
Exceptions: Okay to add promises….
- To give, maintain, or protect collateral securing payment of the note,
- To allow the holder to confess judgment or dispose of collateral, or
- To waive protections for the maker/indorser (e.g. right to notice of dishonor)
Commercial Paper - Requirements for Qualification as a “Negotiable Instrument” - Conspicuous Statements
Must not state “conspicuously” that it is NOT NEGOTIABLE. This is why carbon copies behind checks say this.
Commercial Paper - Issuance and Negotiation of Negotiable Instruments
These inquiries are separate and distinct from who can enforce the instrument.
Commercial Paper - Issuance
A. Drawer of a check or maker of a note turns it over for the first time = “Issuance.” This is the initial payee.
Commercial Paper - Issuance - Effect of Issuance
Two Ways Tested:
1. Generally, payee accepts instrument, underlying obligation is suspended (payee can’t sue on U.O.) until instrument paid (debt discharge) or dishonored (debt reinstated). Payee accepts cashier’s check obligation is discharged immediately.
- Accord & Satisfaction - using a discounted “full payment” instrument works to finalize settlement of disputed obligations if three factors are present.
(i) drawer must act in good faith (legal colorable basis) to settle a bona fide dispute w/ respect to the existence or amount of debt.
(ii) the full payment legend appears conspicuously on the instrument (full payment or full satisfaction); and
(iii) the payee obtains payment and doesn’t refund that payment w/in 90 days. Can’t refuse settlement and take $.
Commercial Paper - Negotiation of Negotiable Instruments
Payee (and people after her) can “negotiate” the instrument to pass rights to collect payment to other people, like case. ONLY A HOLDER CAN DO THIS.
Commercial Paper - Negotiation of Negotiable Instruments - Holder
The holder MUST BE IN POSSESSION of the instrument and when it is FIRST ISSUED:
- For bearer paper (payable to bearer or to blank) anyone in POSSESSION of such an instrument is a holder and is entitle to enforce the instrument. NEED TO PRESENT PAPER.
- For order paper (payable to the order of a specific person), only the person identified as payee can be a holder (if that person is in possession) entitled to enforce the instrument.
Commercial Paper - Negotiation of Negotiable Instruments - How to Make Another a “Holder”
Payee or current holder must “negotiate” the instrument.
Bearer Paper - simply pass possession (perhaps involuntarily like a thief).
Order Paper - pass possession and indorse the instrument (sign on back). Multiple holders will all need to indorse.
Commercial Paper - Negotiation of Negotiable Instruments - Indorsements
Three varieties and some change the nature of the instrument.
- “Blank indorsement” - simple sig (Nick Porter). Makes order paper into bearer paper (anyone, including thief is next holder). Exam scenario.
- “Special indorsement” - sig under instruction directing payment to specific person (pay to John, signed Tim), instrument continues as order paper or becomes order paper (if bearer paper before).
- “Restrictive indorsement” - signature under a restriction “for deposit only.” $$$ from instrument must go into indorser’s deposit account.
Commercial Paper - Negotiation of Negotiable Instruments - Anomalous Indorsement
A.I’s introduces suretyship (guarantees). Indorse is NOT a holder. These are for strange/unexpected I’s.
Presumption = signed as surety (guarantor) of payment of the instrument to anyone who later becomes a holder.
Common Example:
1. One can also sign a note, seemingly as a co-maker, with the CLEARN AND KNOWN INTENTION of guaranteeing to lender that the note/loan will be repaid. Car loan parent co-signs.
BOTH of the “accommodation parties” are treated as GUARANTORS.
Commercial Paper - Negotiation of Negotiable Instruments - Protections for Accommodation Parties from Suretyship Law
- Release - In IL, note holder release of principal obligor (A.M. or indorser) doesn’t release secondary obligors (A.M.’s, anomalous indorsers).
- Extension of the principal obligor’s time to pay, MODIFICATION of the note, impairment of collateral securing the note DISCHARGES the secondary obligors who do not consent to such modification, but only to the extent that it causes them loss. Ex - Car loan scenario where A disappears after extending car loan w/o secondary obligor’s consent.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Enforcement
Enforcing against MAKER of a note (when due) or DRAWER of a check (only after dishonor by bank) when TWO COMMON things go wrong:
- Generally, holder must be in possession, but LOST/STOLEN instruments can be enforced:
(i) Must prove by other E the terms of the instrument and entitlement to enforce it, including that you were holder when instrument lost/stolen, and not negotiated/transferred.
(ii) Maker gets “adequate protection” against someone else coming forward. Offering a bond to protect.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Defenses to Payment of Underlying Obligation (debt)
Maker/Drawer can assert defenses to payment (based on underlying obligation, i.e. K is U.O. so K defenses become defenses of paying instrument.)
- Promised payment in exchange for consideration (goods or services) that was never delivered.
- Instrument issued as a result of fraud.
- Discharge by performance through payment to an earlier holder of the note already.
UNLESS….Holder in due course, then defense will fail.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Holder in Due Course (HIDC)
HIDC:
1. Can enforce instrument FREE of claims to the instrument and all but a few defenses (otherwise maker must pay HIDC and sue original payee for recovery).
Four Part Test:
- Must be a holder (proper negotiation, see above). No break in chain of title of holders via proper neg;
- Must acquire the instrument for “value” anything past or present. No future value. Past/present value doesn’t have to match face value of instrument;
- Must take instrument in good faith. GF = honesty in fact and observance of reasonable standards of commercial fair dealing; and
- Must have acquired instrument w/o notice of four problems.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Holder in Due Course (HIDC) - W/o Notice of Four Problems
Must have acquired instrument w/o notice of four problems….
- The instrument is overdue, dishonored, or is in principal payment default (payor can be late making interest payments, but not principal);
- The instrument contains an unauthorized signature (forged) or has been altered.
- Someone has a claim to the instrument (prop right to get it back from a thief, etc); or
- any drawer or maker of the instrument has a defense to payment or a claim in recoupment (like failure of consideration, payment, or other K defense).
Ex - Pg. 7 on h/o.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer- Holder in Due Course (HIDC) - Shelter Principle
Person can “inherit” rights of an HIDC if that person acquired instrument from HIDC. Gives purchaser of prop all of the transferor’s rights.
From Conviser - A transferee acquires whatever rights her transferor had and thus is said to take “shelter” in the status of her transferor. Purpose of the rule is to protect free negotiability of commercial paper.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Holder in Due Course (HIDC) - Real Defenses Against HIDC
- Infancy of maker/drawer.
- Illegality of the debt underlying the instrument. VOID on its face. Cocaine debt…no bueno.
- Fraud in fact (not fraud in inducement). Maker didn’t know or have any reasonable way of knowing that signed paper was an instrument.
- Discharge in bankruptcy of the debt. Federal law trumps State law.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Indorsers - Dishonor
Enforcing backwards, against indorsers. Secondarily liable.
- Dishonor by maker or drawee bank’s refusal to pay a note or check when due and presented (drawer on check becomes liable as well). If a maker of a note tries to pay and HOLDER REFUSES tender of payment, then secondary liability of indorsers/accommodation parties is discharged to the extent of the amount of the tender.
(i) Timely notice of dishonor has to be given to the indorser (any of the indorsers can be used to recover)
(ii) Unlike makers and drawers, indorsers can waive liability to pay dishonored instruments - signing “without recourse.
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Indorsers - Transfer Warranties
Indorsers/transferors also liable on transfer warranties. Any person who transfers an instrument in exchange for value warrants 5 things to their transferee, and if they indorse, to any subsequent transferee (facilitates transactions):
(i) Transferor is ENTITLED TO ENFORCE the instrument (proper neg. required);
(ii) All sigs on the instrument are AUTHENTIC AND AUTHORIZED;
(iii) Instrument has NOT BEEN ALTERED (to change or add numbers or names);
(iv) Instrument isn’t subject to any defense or claim that can be asserted against the transferor (like failure of consideration, duress, infancy, etc); and
(v) The transferor doesn’t know that the maker/drawer has initiated bankruptcy.
These warranties CANNOT be waived on checks, but on warranties.
Commercial Paper - Fraud & Forgery - Drawer’s or Maker’s Sigg
Only someone who SIGNS an instrument is liable, writing another person’s name counts at the writer’s sig, not name person’s. Payor bank (BCU in my case) can’t charge my account for forged checks, not properly payable.
Commercial Paper - Fraud & Forgery - Indorsement
Improper neg over forged indorsement = possessor NOT a holder and instrument not properly payable to that person. For checks, proper payee of stolen check has a cause of action for conversion against depositary bank or payor bank who gave payee’s $$$ to thief over forged instrument.
Commercial Paper - Fraud & Forgery - Negligence
Drawer’s/Maker’s sig and/or indorsement will work as a defense UNLESS…
Negligence:
- If maker’s, drawer’s, or payee’s failure of ordinary care substantially contributed to (facilitated) the forgery (or alteration, see below), the maker/drawer/payee will be PRECLUDED from asserting forgery or alteration against ANYONE who gave value for the instrument in good faith.
(i) If the person asserting preclusion also failed to exercise ord care in paying the item, the loss is distributed via comp. neg. rules.
Commercial Paper - Fraud & Forgery - Counter Defenses to Forged Instruments
Odd cases where forged instruments are presumed valid and effective:
- Fictitious payees - any indorsement in the fictitious name is effective. Fake corporations, businesses, etc.
- Impostors - Can effectively negotiate by indorsing in named payee’s name.
- Responsible Employee - employee charged w/ check processing duties fraudulently indorses employer’s instrument, either by indorsing the employer’s name on a stolen check payable to the employer, or by indorsing a supplier’s name on a stolen employer check payable to a supplier).
(i) Forged instrument is effective to negotiate the instrument. DOESNT APPLY TO FORGED DRAWER SIGS.
Commercial Paper - Fraud & Forgery - Fraudulent Alteration or Completion
Issued instrument fraudulently changed from its original terms can be enforced according to original terms, ONLY by someone who acquired the instrument for VALUE, in GOOD FAITH, and WITHOUT NOTICE OF THE ALTERATION (neg rule may preclude drawer from this arg.)
Ex - Parent gives $100 check made out to Sears for school clothes, son cleverly changes it to $900 and buys electronics instead, Bank pays check. Parent asserts fraud in alteration, demands re-credit. Result - Bank did 3 things. Bank gives $800 back to P’s but keeps $100
Commercial Paper - Fraud & Forgery - Fraudulent Completion
Signed but incomplete instrument (amount left blank) later fraudulently competed can be enforced according to its terms AS COMPLETED, but ONLY for VALUE, in GOOD FAITH, and WITHOUT NOTICE OF THE COMPLETION.
Ex - Same as above except kid fills in $900. Bank keeps $900, P’s neg for issuing blank check. Neg per se, DONT DO IT!
Commercial Paper - Negotiation of Negotiable Instruments - Enforcing Instruments when Something Goes Wrong - Against Maker/Drawer - Holder in Due Course (HIDC) - Payee as HDC’s
A payee might qualify as an HDC, but generally b/c payee is involved in transaction giving rise to the instrument and has dealt with the person he wishes to sue (maker or drawer) payee will be subject to that person’s PERSONAL DEFENSE. ASSUME PAYEE IS NOT AN HDC.
