Commercial Paper Flashcards
Commercial Paper
Money Paper = directs money btw. people
E.g., orders and primises
Order
E.g., Check
Drawer orders payor bank (or drawee) to pay money from deposit account to payee.
Cashier’s check: drawer and drawee are the same bank, customer who buys is remitter
Promise
E.g., promissory note
Maker promises to pay payee sum of money in the future
Certificate of Deposit = promise by bank to pay back money on deposit
Negotiable Instrument
If negotiable –> Article 3 of UCC applies
1) written (and signed) promise or order
2) unconditional
3) to transfer money
4) fixed amount
5) words of negotiability
- bearer paper = “bearer”; or blank payee line; or “pay to cash”
- order paper = “pay to the order of” a particular person; or “pay to a particular identified person ‘or order’”
6) definite time for payment or upon demand
7) no extraneous undertakings
Issuance
The first time a drawer of a check or maker of a note turns it over, usually to pay some underlying debt.
Underlying obligation is suspended until instrument is paid or dishonored
Accord and satisfaction (discounted payment)
1) Drawer must act in good faith to settle a bona fide dispute
2) full payment legend appears conspicuously
3) payee obtains payment and doesn’t refund within 90 days
Negotiation
Payee (and people later) can “negotiate” the instrument to others.
1) 1st holder must have been in possession
- Bearer: anyone in possession
- Order: only identified payee can be holder
2) Current holder negotiates
- Bearer: pass possession
- Order: pass possession and indorse
Types of Indorsements
Blank (i.e., simple signature) –> order paper becomes bearer paper
Special (i.e., signature under instruction directing payment to specific person) –> bearer paper becomes order paper
Restrictive (i.e., for deposit only) –> money can only go into indorser’s deposit account
Anomolous Indorsement
Indorser is not holder. Presumption = signed as surety; or could be intentional co-maker. –> “accommodation parties”
Release: In IL, note holder release of principal obligor does not release accommodation parties
Extension/Modification/Impairment: If it causes loss, discharges accommodation parties unless consent
Lost or Stole Instruments
Can still enforce against maker/drawer if:
1) Must prove by E the terms of the instrument, and entitlement to enforce it
2) Maker gets adequate protection against someone else coming forward
Holder in Due Course
Free of claims, and free of most defenses, if:
1) Holder of the instrument (proper negotiation)
2) Acquired instrument for (past or present) value
3) Taken instrument in good faith
4) Acquired instrument without notice of:
- overdue/payment default, etc.
- forgery or tampering
- someone has a claim to the instrument
- any drawer or maker has a defense to payment, or a claim in recoupment
Shelter Principle
Real Defenses
Can be asserted against an HDIC
1) Infancy of maker/drawer
2) Illegality of the debt underlying the instrument
3) Fraud in fact
4) Discharge in bankruptcy
Enforcing against indorsers
Secondarily Liable, with 2 elements
1) Dishonor
2) Timely notice of dishonor given to indorser
Can waive secondary liability
Transfer Warranties
1) Transferor is entitled to enforce (e.g., proper negotiation)
2) Signatures are authentic and authorized
3) Instrument not altered
4) Instrument not subject to any defense against transferor
5) Transferor doesn’t know about maker/drawer bankruptcy
Enforcing against maker/drawer
Can enforce note (when due) or check (after dishonor by bank).
Maker/Drawer has personal defenses (e.g., lack of consideration, fraud, discharge by past performance), unless HIDC.
If HIDC –> only real defenses
Forged Signature - Drawer/Maker
Only someone who signs an instrument is liable. Name doesn’t matter.
Forged Signature - Indorsement
Possessor is not a holder, and instrument not properly payable
Remember, these are okay:
- fictitious payees
- imposters
- responsible employees
