Commercial Paper Flashcards
Commercial Paper
A holder in due course (HDC) is holder who takes: (FIN)
- For value
- In good faith
- Notice, without
Commercial Paper
HDC cannot have notice that: (5 things)
O A C D I
- Instrument is overdue or has been dishonored.
- The instrument contains an unauthorized signature or has been altered.
- There is a claim to the instrument; or
- Any party has a defense on the instrument; or
- The instrument is so irregular or incomplete as to call into question its authenticity.
Commercial Paper
Checks are stale ___ months after being drawn
6
Commercial Paper
If person seeing payment is HDC only real defenses can be asserted against him. What are they? FAIDS (11)
- Fraud in the factum AND forgery
- Alteration and Adjudicated Incapacity
- Infancy and Illegality
- Duress, Discharge through insolvency, Discharges known to HDC.
- Suretyship and SOL.
Commercial Paper
Personal defenses cannot be raised against:
an HDC.
Most prevalent personal defense is failure of consideration.
Commercial Paper
A maker:
‘makes’ a note.
Commercial Paper
A drawer:
‘draws’ a draft.
Commercial Paper
Forgery: If a forger steals a check and forges a person’s name, the drawer is:
generally not liable.
An unauthorized signature is ineffective as the signature of the person who’s name was signed and is effective only as the signature of the forger.
Commercial Paper
Fictitious Payee Rule: Forgery liability will be imputed on the drawer when: (2)
- Issue of instrument to an impostor
- Makes the instrument payable to someone who was not intended to have an interest in the money.
(Always look for intent)
Commercial Paper
Negligence rule: Applies in one of three situations where a drawer’s negligence contributes to a forgery or alteration.
Because of the negligence the forgery imputes liability on to the drawer. When a drawer:
- Leaves blanks in the instrument.
- Sends instrument to someone with the same name as the payee.
- Fails to follow internal procedures designed to avoid forgery.
or ANY form of slovenly business practices may be negligent.
Commercial Paper
Drawee liability general rule is that:
no one is liable on an instrument unless he signs it.
Commercial Paper
Endorser’s liability:
Can arise from 3 situations
- Contract liability
- Presentment warranties
- Transfer warranties
Commercial Paper
Transfer warranties:
A person who transfers an instrument for consideration warrants: (5 things)
Dak Me
Defenses or claims of any party are NOT good against warrantor.
Authentic and authorized signatures
no Knowledge of insolvency proceedings against maker, drawer or acceptor.
no Material alterations on the instrument
Entitled to enforce the instrument, warrantor is
Commercial Paper
Presentment warranties:
A person who presents an instrument for payment makes three warranties:
- Person is entitled to enforce the instrument;
- The instrument has not been altered, and
- He has no knowledge that the drawer’s signature has been altered or was unauthorized
Commercial Paper
Accommodation party:
Basically a surety.
Nine requirements of a negotiable instrument:
Sums of Now
Signed by maker or drawer
Unconditional
Money (not property, etc.)
Special language (‘to order’ or ‘to bearer’)
Order or promise to pay
Fixed amount
No other undertaking or instruction
On demand or at a definite time
Writing, it must be in
How to negotiate an order paper:
By transfer of possession plus indorsement by the holder.
Good faith: (2 types)
Honesty in fact (subjective) and
Observance of reasonable commercial standards of fair dealing (objective).
Fraud in the factum: (Real defense that may be used against HDC)
Deception w/ respect to writings character and terms plus excusable ignorance.
The Bank Statement Rule:
Customer must exercise reasonable promptness in examining the statement or items to determine whether any payment was not authorized because of an alteration or purported signature of the customer.
A note is:
a two party instrument.
- Maker (who is going to pay)
- Payee (who will be paid.)
Payee:
The person to whom a note or draft is payable.
A draft is:
A three party instrument
- Drawer: Person ordering payment
- Drawee: Person (or bank) ordered to actually make payment
- Payee: the person to be paid.
When the drawee is a bank and the draft is payable on demand, then the draft is:
a check.
Certificate of deposit:
An acknowledgement by a bank that a sum of money has been received, and a promise by the bank to repay the sum of money.
UCC Art. 3 specifically provides that a promise or order will not be deemed conditional merely because it: (3)
- Refers to another writing for a statement of right regarding collateral, prepayment, or acceleration
- Limits payment to a particular source or fund. (e.g. “I promise to pay out of the funds I receive from the sale of my next crop.”)
- Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise order. (e.g. Traveler’s checks.)
Generally a negotiable instrument must not be burdened with anything other than a simple, clean, unconditional promise or order. However, UCC Art. 3 does permit at least three extra undertakings or instructions. A promise or order may contain: (3) CAW
(What the three provisions have in common is that they strengthen the promise to pay but have no independent value.)
- An undertaking or power to give, maintain, or protect collateral to secure payment;
- An authorization or power to the holder to confess judgment or realize on or dispose of collateral;
- A waiver of the benefit of any law intended for the advantage or protection of the obligor. (e.g. waiver of homestead exemption, trial by jury, or right to notice of dishonor.)
“On demand at a definite time” trick hypo: A note is payable on July 15, 2020, but provides “If my Uncle dies prior to July 15, 2020, payment is due upon his death.” Is this a negotiable instrument?
Yes. Because there is a definite date. July 15, 2020.
What magic words must a negotiable instrument contain?
ORDER language or BEARER language.
Important exception is a CHECK. It need not contain words of negotiability.
Assignment:
A payee who has been issued a negotiable instrument can simply assign it to a 3d party.
The 3d party (now assignee) has no greater rights than the assignor does on the instrument. Any defenses that could have been raised against the original payee can also be raised against the assignee. (Basically, will NOT create an HDC)
Benefits of negotiation over assignment:
If the payee negotiates the instrument to the third party, then 3d party is not a mere assignee but a HOLDER.
If the holder gives value, in good faith, and w/ no notice then the holder is an HDC, who takes free of most of the defenses that could have been raised against the payee.
The customary way of transferring an instrument is:
negotiation.
Special indorsement:
Specifies the person to whom the instrument is payable.
Blank indorsement:
Does not specify the person to whom an instrument is payable; generally consists of a MERE SIGNATURE.
Order paper v. bearer paper: Different rule for banks. A depository bank (the bank in which the item is first deposited) that takes an unindorsed instrument for collection becomes:
a holder of the instrument if the customer was a holder at the time of delivery, EVEN IF the customer has not indorsed the instrument.
HDC: Value: Look for:
EXECUTED CONSIDERATION.
A party is an HDC to the extent that the agreed consideration has been performed.
A mere PROMISE to give value IS NOT ENOUGH.
HDC: Value: Bank deposits: A bank does not become a holder for value merely by:
crediting the depositor’s account.
Note: Bank does not need HDC protection b/c it can take back the credit from customer’s acct if the check is dishonored.
HDC: Value: Five things constituting ‘value’
Absolute memorization not important. More cards later in the deck.
- Performance of the agreed consideration
- Acquisition by the holder of a lien or security interest in the instrument (other than a judicial lien);
- Taking the instrument as payment of or security for an antecedent debt.
- Trading a negotiable instrument for another instrument; or
- Giving the instrument in exchange for an irrevocable obligation to a third person by taking the instrument.
NOTE: An executory promise is NOT VALUE.
HDC: Value: Bank deposits: The bank becomes a holder for value when: (and to the extent)
that it permits withdrawals of the amount credited to the depositor’s account - using first money in - first money out rule to determine whether the particular item has been credited.