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Commercial Paper > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

Note

A

Two-party commercial paper where the MAKER promises to pay money to the PAYEE (specific person) or the BEARER (anyone in possession).

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2
Q

Check (aka Draft)

A

THREE-party commercial paper where the drawer orders the drawee to pay a payee. (drawee also called a payor bank).

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3
Q

Certified Check

A

Ordinary check which bank has accepted, i.e. agreed to pay.

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4
Q

Cashiers Check

A

Drawer and drawee are BOTH the bank. Person buying the check is the customer.

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5
Q

Remotely Created Item

A

A draft not signed by the drawer but created with drawer’s authorization, so that a 3rd party can get paid from drawer’s bank account.

3rd party usually a merchant in internet sales transaction, or when you pay bills over the phone by giving checking acct number.

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6
Q

ELEMENTS for an instrument to be NEGOTIABLE

A
  1. Writing
  2. Signed by Maker/Drawer (any symbol made w/ present intent to create wrtg, even a forgery - but FORGER liable for payment - generally, only liable if you signed it)
  3. Unconditional Promise or Order to Pay
  4. To Pay a FIXED AMOUNT (principal fixed; interest need not be)
  5. Of Money (must be issued by government)
  6. No Other Unauthorized Promises or Undertakings
  7. Payable On Demand or at a Definite Time
  8. (only NOTES) Magic Language (“to order” or “to bearer”)
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7
Q

Meaning of Negotiability

A

Legal status and form of the instrument.
Determined at creation.
Can expressly opt-out of note (NOT CHECK) by saying “non-negotiable”
CANNOT expressly opt-in - must meet requirements

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8
Q

Importance of Negotiability

A

Under normal K, transferee gets no better rights than transferor BUT if paper is NEGOTIABLE + Properly Negotiated, an HDC obtains superior rights than transferor because the maker’s personal defenses don’t transfer to an HDC.

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9
Q

Unconditional vs. Conditional promise to pay

A

Conditional If:

  1. Express condition
  2. Promise or order “subject to” or “governed by” another record

NOT Conditional if:

  1. statement of consideration included (just a reference to K, not a future condition)
  2. Reference to another record (as opposed to saying it’s “subject to” another record)
  3. Limitation of payment to a particular fund or source
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10
Q

Exceptions to negotiability requirement that writing contain no other promises

A

Generally, negotiable instrument may contain ONLY a promise to pay money - 3 exceptions for secured loans

  1. promise to protect collateral
  2. confession of judgment
  3. waiver of a law meant to benefit maker
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11
Q

Meaning of “On Demand or at a Definite Time”

A

On Demand - may be express statement OR if instrument is silent as to date due, it is payable on demand.

At Definite Time - Express date fixed, fixed period after sight or acceptance (90 days after sight), time readily ascertainable at the time the instrument is issued.

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12
Q

Permissible changes in time that do NOT prevent instrument from being “payable at a definite time”

A

Instrument is STILL NEGOTIABLE IF:

  1. Prepayment of Instrument
  2. Acceleration of Due Date (Right of holder to demand payment earlier)
  3. Extensions are permitted unless extension is infinite
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13
Q

If note says BOTH “to order” and “to bearer”

A

The words “bearer” always control!

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14
Q

Negotiation Defined

A

An instrument is negotiated when it is transferred to a subsequent party who becomes a “holder”

Must be properly negotiated to retain “good title.”

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15
Q

Holder

A

1) possesses a negotiable instrument 2) with Good Title

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16
Q

Good Title

A

Depends on type of paper (order or bearer) -

Look at the last indorsement (front for first transfer, back for subsequent) to determine the type of paper:

Order Paper - negotiation requires INDORSEMENT + DELIVERY
Bearer Paper - negotiation requires DELIVERY only

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17
Q

Indorsements Generally

A

= A signature on a negotiable instrument by someone other than the maker, drawer, or acceptor (normally on the back)

3 Kinds: Blank Indorsements, Special Indorsements, and Restrictive Indorsements

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18
Q

Blank Indorsement

A

How Done = payee’s signature only

Effect = creates bearer paper (future negotiation may be by transfer alone)

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19
Q

Special Indorsements

A

How Done = Payee’s Signature plus designation of NEW person to whom instrument payable

Effect = creates ORDER paper

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20
Q

Restrictive Indorsements

A

Only one type allowed: “For Deposit or collection” after indorsement

Creates a restrictive indorsement limiting what may be done with instrument - must go to bank.

21
Q

Holder in Due Course

A
  1. Possession
  2. Good Title (free of forgeries or missing signatures of payee/special indorsees; properly negotiated)
  3. For Value - gift recipients are NEVER HDC (but shelter rule!)
  4. In Good Faith (honesty in fact + observance of reasonable commercial standards of fair dealing)
  5. Without Knowledge or Notice at time instrument acquired of alteration, unauthorized signature, overdueness, dishonor, defenses
22
Q

Shelter Rule

A

A transferee acquires whatever rights her transferor enjoyed. Thus, “sheltered” transferor = acquires rights of HDC transferee.

BUT LIMIT: the shelter rule does NOT apply if transferee is a party to fraud/illegality affecting the instrument.

23
Q

Special Transactions that PRECLUDE HDC Status

A
  1. purchasing instrument at judicial sale (by auction)
  2. acquiring instrument by taking over an estate
  3. purchasing instrument as part of bulk transaction not in the regular course of business (selling entire business)
24
Q

HDC Status - effect on claims/defenses

A

An HDC takes instrument FREE from personal defenses and ownership claims but SUBJECT TO real defenses

25
Q

REAL Defenses (9)

A

FFAIIDDSS:
1. Forgery (but forgery of names necessary to title - payee and special indorsees - prohibits proper negotion, so can’t be later HDC)

  1. Fraud in the Factum (switched document)
  2. Alteration (Material)
  3. Incapacity
  4. Illegality (usury)
  5. Duress
  6. Discharge of insolvency; Discharge with Notice
  7. Suretyship with Notice (HDC knows a prior party signed instrument as surety)
  8. Statute of limitations (for note measured from due date, not issue date; for dishonored check earlier of 3 years after dishonor or 6 years after issue)
26
Q

Personal Claims or Defenses

A

usually relate to the underlying contract. e.g. failure of consideration, breach of K, Fraud in the inducement (knew making K but misled about substance of K)

27
Q

SECONDARY LIABILITY - who else can be liable on a dishonored negotiable instrument if drawer/maker refuses to pay?

A
  1. Indorser Liability

2. Transfer Warranty Liability

28
Q

Indorser Liability

A

Anyone who indorsed the note/check may be liable if meet certain requirements:

  1. Only liable for 30 days after indorsing
  2. Dishonor - if maker or bank pays check, can’t make claim of indorser liability.
  3. NOTICE - indorser must have notice of the dishonor.

Indorser may DISCLAIM liability with a Qualified Indorsement (indorse as “without recourse, Pat Payee”)

29
Q

Transfer Warranty Liability

A

Triggered by act of moving paper to someone else
Available against anyone who transfers for consideration BY immediate transferee (and all subsequent transferees if transfer is by indorsement)

Implied warranties that arise by transfer/operation of law.
Warranty liability survives the final payment of the instrument (unlike indorsement liability).

Five Transfer Promises:

  1. Good title
  2. Genuine Signatures (authentic and authorized)
  3. No Material Alteration
  4. Transferor promising there are no “Real” Defenses

Do NOT need knowledge of taint to be liable for breach.

30
Q

“Properly Payable Rule”

A

bank must pay checks that are properly payable; must NOT pay checks that are not properly payable.

properly payable = check was authorized by the drawer

31
Q

Wrongful Honor

A

Drawee pays but shouldn’t have.

Check Not Properly Payable When:

  1. Stop Payment Orders (if oral, valid for 14 days; if written, valud for 6 months and may be renewed)
  2. Stale Checks - Checks are payable only for 6 months from date of issue
  3. Properly Post-Dated Checks - presumption is STILL PAYABLE ON DEMAND UNLESS meets three requirements (notice, in timely manner, within effective period)
  4. Checks Paid after Drawer’s Death - bank may pay for 10 days after

Overdrafts ARE still properly payable!!

32
Q

Properly Post-Dated Check Requirements

A
  1. Customer provides notice of postdating to the bank describing the check with reasonable certainty
  2. Notice is received in time/manner that gives bank reasonable opportunity to act on it, AND
  3. Notice effective for 14 days if oral, 6 months if in writing
33
Q

Forgeries and Alterations making Check Not Properly Payable

A

General Rule: alleged drawer NOT liable (i.e. check not properly payable) if there’s a forgery or alteration (Drawee bank must recredit account)

BUT Banks Defenses: Negligence, Duty to Inspect Bank Statement, Imposter Rule, Ficticious Payee, Employee “responsible” for check-writing forges signatures.

34
Q

Effect of Drawer’s Negligence

A

Customer may be precluded from asserting that the bank violated Properly Payable Rule if their Drawer’s negligence SUBSTANTIALLY CONTRIBUTES to the forgery of the drawer’s name (negligently giving check to thief)

35
Q

Duty to Inspect Bank Statement

A

Customer has duty to inspect bank statement and canceled checks in timely manner (1 year) and report forgeries to bank. If fails to do so, and bank can prove the delay somehow increased the loss (e.g. made it impossible to catch forger), customer precluded from getting recredit to account.

36
Q

General Effect of Forgery of Payee’s Name (bearer paper vs. Order Paper)

A

On bearer paper, doesn’t matter because indorsement is not necessary for proper negotiation.

On Order paper, forgery breaks the chain of title, so the check is not properly payable.

37
Q

Imposter Rule

A

The maker/drawer will be precluded from denying validity of the forged indorsement where he is deemed to have acted negligently in issuing the check to an IMPOSTER and thus to have contributed to the forgery.

38
Q

Fictitious Payees Rule

A

If drawer cannot control employees who are using checks to make payments to ficticious payees, thereby stealing, drawer is held responsible (in whole or part) and cannot get recredit.

39
Q

Employees “responsible” for check writing who forges signatures

A

If an employer entrusts an employee with responsibility with respect to handling or processing instruments made out to the employer/payee and that employee forges, the employer/payee’s name to collect the $, the employer/Payee is estopped from asserting that the forgery made the check not properly payable.

40
Q

Presentment Warranty

A

EVERY PARTY that transfers a check makes a presentment warrant to the final payor bank. It is NOT just the last party who presents the check tot he payor bank.

mutually exclusive with transfer warranties - Plaintiff can only have one as a cause of action.

Presentment Warranties on Checks:

  1. Good Title (forged indorsement but not forged drawer’s signature breaches this)
  2. No Material Alteration
  3. No knowledge drawer’s signature is unauthorized
  4. If remotely created, that person IDed as drawer authorized the check

Presentment Warranty on Other Documents: Good Title

41
Q

Breach of Presentment Warranty =

Nature of Forgery?

A

If Drawer’s Signature is Forged = payment is usually final and BANK CANNOT RECOVER unless it can show that prior transferor had knowledge that signature was unauthorized

If Indorsement is Forged: there IS a breach of presentment warranty and bank may recover from party that presented the instrument OR from any prior transferor.

42
Q

Holder vs. Indorser/Transferor

A

If presenter loses to payor bank for breach of presentment warranty of good title, may sue entities further up the chain for breach of TRANSFER WARRANTIES (good title, all signatures authentic, no good/real defenses)

43
Q

Personal Liability of Agents

A

Pre-printed checks - agent-signer not personally liable if principal’s name is printed on the check.

Notes - must make clear that signer is agent to avoid personal liability. If NOT clear, agent must pay against HDC and against NON-hdc will be able to introduce evidence that original parties did intend agent to be liable.

44
Q

Accomodation Party/Surity

A

Liable in capacity in which signed instrument (usually indorser). Creditor may try to collect from surity before debtor unless says “collection guaranteed.”

Defenses Available to Surity

  1. All the Primary Debtor’s Defenses (duress, fraud, etc.)
  2. Creditor’s Extension of Debtor’s Time to Pay
  3. Other Material Modification b/w Debtor/Creditor
  4. Impairment of Collateral Securing K b/w Debtor/Creditor
45
Q

Effect of giving a negotiable instrument to satisfy an obligation

A

obligation is suspended until the instrument is paid or is dishonored.

The Maker is ONLY obligated to pay a HOLDER (one in possession of a negotiable instrument with good title) who demands payment.

46
Q

“Good Faith” to be HDC

A

Subjectively honest AND within the bounds of commercial reasonableness.

47
Q

Accord and Satisfaction via Negotiable Instrument

Requirements (4)

A
  1. Claim or obligation DISPUTED or unliquidated
  2. Person against whom claim asserted tenders instrument IN GOOD FAITH
  3. Instrument CONSPICUOUSLY states it is tendered in full payment of obligation
  4. Claimant obtains payment of the instrument
48
Q

Effect of Forged Check

A

Generally, only liable on an instrument signed.
If drawer’s name is forged, forger, not drawer, is liable.

BUT if a person’s failure to exercise ordinary care SUBSTANTIALLY CONTRIBUTES to a forged signature, she is precluded form asserting the forgery against someone who took the instrument for value in good faith (HDC).
(just being inattentive while person stolen NOT “substantially contributes”

Commercial Paper (1 decks)

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