Commercial Paper Flashcards
(125 cards)
1
Q
The analysis of a problem concerning a negotiable instrument involves these basic questions:
A
a. What is the nature of the instrument?(1) Is the instrument negotiable, and has it been negotiated?b. Who is the plaintiff, and what are the plaintiff’s rights?(1) Is the plaintiff a holder in due course?c. Who is the defendant, and what is the nature of the defendant’s liability?d. What is the defendant’s defense?(1) Is the defense raised one that is cut off?
2
Q
What is a note?
A
A note is a two-party instrument in which one party (the maker) promises to pay a second party (the payee a sum of money
3
Q
What is a draft?
A
A draft is a three-party instrument in which one party (the drawer) orders a second party (the drawee or payor) to pay a sum of money to a third party (the payee)
4
Q
What is a check?
A
A check is a draft drawn upon a bank and payable on demand, a cashier’s check or teller’s check, or a payee-initiated demand draftNote: An instrument may be a check even though it is described on its face by another term, such as money order
5
Q
What is a cashier’s check?
A
A draft on which the drawer and drawee are the same bank or branches of the same bank.
6
Q
What is a teller’s check?
A
A draft drawn by a bank on another bank or payable at or through a bank
7
Q
What is a traveler’s check?
A
A traveler’s check is an instrument that is payable on demand, drawn on or payable at or through a bank, and designated by the term ‘’traveler’s check’’ or by a substantially similar term.
8
Q
Requirements of a Negotiable Instrument?
A
**Must be addressed on any UCC 3 Question:1. Signed Writing2. Contain an unconditional promise or order3. To pay a fixed amount of money4. Payable to order or to bearer5. Payable on demand or at a definite time6. And contain no undertaking or instruction
9
Q
Whether an instrument is negotiable is a matter of form, and the determination must be made from:
A
The four corners of the instrument.
10
Q
Opt Out Provision?
A
A promise or order other than a check is not an instrument if it contains a conspicuous statement that it is not negotiable or not governed by Article 3
11
Q
Forging or signing without authority:
A
Is deemed to be your signature rather than the one you forged
12
Q
Difference between promise and order?
A
An order is a written instruction to pay money signed by the person giving the instruction A promise is a written undertaking to pay money signed by the person undertaking to pay
13
Q
A promise or order is conditional if it:
A
- Contains an express condition to payment;2. States that it is subject to, or governed by, another writing; or3. States that rights or obligations with respect to it are stated in another writing.**If there is a condition, negotiability is destroyed.
14
Q
Things that don’t defeat the unconditional requirement:
A
As long as the condition is not stated on the face of the negotiable instrument, it is okay. Implied conditions are okay.”Subject to…” - Not okay.
15
Q
Do interests violate fixed amount requirement?
A
An instrument is not payable with interest unless it specifies otherwise.Interest may be stated as a fixed or variable amount of money, or as a fixed or variable rate, must be ascertainable.
16
Q
If the interest amount is unascertainable…
A
Interest is payable at the rate payable on judgments at the place and time that interest first accrues
17
Q
How does the code define money?
A
Must be paid in money!Money means a medium of exchange currently authorized or adopted by a domestic or foreign government.An instrument is rendered nonnegotiable if the obligor agrees to pay in goods or services, even as an alternative option.
18
Q
A check that is not payable to bearer or order, but that otherwise satisfies all the requirements for negotiability…
A
is negotiable.
19
Q
An instrument is payable to bearer if it:
A
(a) states it is payable to bearer or order of bearer;(b) does not state a payee;(c) states it is payable to cash; or(d) indicates it is not payable to an identified person.
20
Q
An instrument is payable to order if:
A
It is payable to the order of an identified person or to an identified person or order
21
Q
If an instrument contains both order and bearer language…
A
the bearer language controls
22
Q
If an instrument is made payable to two or more persons jointly (e.g., “X and Y”):
A
It is payable to all of them; and it may be negotiated, discharged, or enforced only by all of them; neither, acting alone, can be the holder of the instrument.
23
Q
If an instrument is ambiguous as to whether it is payable to the persons alternatively or jointly, the instrument is payable to:
A
The persons alternatively (e.g., an instrument payable to “X and/or Y” is treated like an instrument payable to “X or Y”).
24
Q
An instrument is payable at a definite time if it is payable:
A
Certainty - Definiteness is KEY!(a) at the end of a definite period of time (e.g., in 90 days);(b) at a fixed date (e.g., December 31, 2029); or(c) at a time readily ascertainable at the time of issue
25
An instrument is payable at a definite time EVEN if it is subject to the rights of:
1) prepayment;2) acceleration;3) extension at the holder’s option; or4) extension to a further definite time at the maker’s option or automatically upon or after a specified act or event.
26
Undertakings that do not destroy negotiability:
(a) an undertaking or power to maintain or protect collateral to secure payment;(b) an authorization or power to confess judgment or realize on, or dispose of, collateral; or(c) a promise or provision waiving benefit of any law intended for the obligor’s protection.
27
Define Negotiation
A voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder
28
If an instrument is payable to an identified person (i.e., an order instrument), negotiation requires:
Transfer of possession of the instrument and indorsement by the holder.
29
If an instrument is payable to bearer, it may be negotiated by:
Transfer of possession alone
30
What is Issuance?
Issue means the first delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person, generally the payee.
31
What is transfer?
The transfer of an instrument occurs when it is delivered by a person other than its issuer for the purpose of giving the right to enforce the instrument to the person receiving delivery (i.e., with intent)
32
What is an Indorsement?
An indorsement is a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument to negotiate the instrument, restrict payment of the instrument, or incur the indorser’s liability on the instrument
33
What are Blank Indorsements and Significance?
A blank indorsement is simply the name of the transferor written on the back of the instrument.If the indorsement is blank, then the instrument becomes bearer paper and the transferee can further negotiate by delivery alone
34
What are Special Indorsements and Significance?
A special indorsement names the transferee and directs payment to him.If the indorsement is special, then the instrument becomes order paper and the transferee’s indorsement is necessary for further negotiation
35
When an order instrument is transferred by delivery without an indorsement:
This does not operate as a negotiation and the transferee has a specifically enforceable right to the unqualified indorsement of the transferor
36
The holder may convert a blank indorsement that consists only of a signature into a special indorsement by:
Writing above the signature of the indorser, with words identifying the person to whom the instrument is payable
37
What is an Anomalous indorsement?
An anomalous indorsement is one made by a person other than the holder. Such an indorsement is extraneous to the chain of title and has no effect on the manner in which the instrument may be negotiated.However, such indorsement may create liability on the instrument for the indorser.
38
What is the rule on restrictive indorsements?
An indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument will not prevent further transfer or negotiation of the instrument (Illegal restraint on alienation)
39
When the name stated on the instrument is different from the name of the holder:
He may indorse the instrument either as his name is stated on the instrument or as it really is.Signature in both names may be required by the bank just as a pragmatic matter
40
If a minor or incapacitated person negotiates an instrument:
The negotiation is effective (however, still voidable) to transfer the instrument even though the person may not undertake the contractual obligations of an indorser or be responsible for breach of warranty
41
A minor or incapacitated person may rescind in an appropriate case, but an attempted rescission is not good against:
A subsequent holder in due course or a person paying the instrument in good faith and without knowledge of facts that are a basis for rescission
42
What is Presentment?
To obtain payment of a negotiable instrument, demand is generally made upon the person expected to pay (the maker of a note or the drawee of a draft) and signed on the back.
43
Persons entitled to enforce a negotiable instrument include:
a. the holder or a holder in due course,b. a non-holder in possession of the instrument who has the rights of a holder, ANDc. a person not in possession who is nonetheless entitled to enforce the instrument.
44
Who is a holder?
A person who is in possession of an instrument drawn, issued or indorsed to him or to his order or to bearer or in blank.
45
What qualifies as possession?
A holder has both possession of and rights to the instrument.
46
Who is the first holder?
The first holder is the payee of the instrument.
47
Who are subsequent holders?
Persons to whom an instrument has been effectively negotiated.
48
Requirement for necessary indorsements?
Necessary indorsements are those of all parties who took the paper as order paper; for the possessor of the instrument to be a holder, all necessary indorsements must be valid.
49
What is the rule on forged indorsements?
The default rule is that a forgedindorsement prevents any future possessor of the instrument from being a holder.The forgery breaks the chain of title; once someone forges an indorsement, no one else can be a holder of the instrument
50
IF the payee is “fictitious,” THEN:
An indorsement of the instrument by anyone in the name of the payee is effective in favor ofa person who, in good faith, gives value for the instrument.**The fictitious payee rule is most often applied when an employee attempts to defraud his employer
51
When a person impersonates the payee and induces the drawer or maker to issue an instrument to the impostor payable to the name of the impersonated person...
An indorsement by anyone in the name of the payee is effective in favor of a person who, in good faith, pays the instrument or takes it for value or for collection
52
Who is a holder in due course?
A ‘holder in due course’ is a holder who is a good-faith purchaser.A holder of a negotiable instrument that does not bear apparent evidence of forgery, alteration, or other irregularity that calls its authenticity into question
53
Requirements for Holder in Due Course:
1. For Value2. In Good Faith3. Without notice that it is overdue, dishonored, or that defenses are available
54
What are two things that constitutes value?Holder in Due Course Requirements
Promise of performance:-- constitute value only to the extent the promise has been performed. Pre-existing debt:-- constitutes value
55
What are two things that do not constitute value?Holder in Due Course Requirements
Executory promises:-- do not constitute value.Gift:-- does not constitute value.
56
What is the good faith requirement for HDC?
Honesty in fact and the observance of reasonable commercial standards of fair dealing.
57
What is the notice requirement for HDC?
A person has “notice” of a fact when he:(a) actual knowledge of it;(b) has received a notice or notification of it;(c) has reason to know it exists based on all facts and circumstances known to him at the time.
58
The purchaser has notice that an instrument is overdue...(Demand instruments)
1) ... if it is a demand instrument taken after demand has been made OR2) ...if the demand instrument is taken more than a reasonable length of time after its issue and no demand has yet been made.
59
The purchaser has notice that an instrument is overdue...(Dated Instruments)
...if the instrument is a check AND more than 90 days have elapsed after its date;
60
The purchaser has notice that an instrument is overdue...(Installments)
...if the principal is payable in installments, and payment of an installment is overdue
61
The purchaser has notice that an instrument is overdue...(Payable on one date)
...if the principal is payable on a definite date and payment of the principal has not been made by that due date.
62
Without notice that it is overdue or has been dishonored
Notice of dishonor occurs when the holder, at the time of purchase, has notice that the drawee bank or the maker has refused to pay the instrument.
63
Without notice of an unauthorized signature or alteration
Notice occurs when the instrument bears such apparent evidence of forgery, alteration or other irregularity as to call into question its authenticity.
64
Without notice of any defense against or claim to it on the part of any person:
If transferor is a fiduciary, transferee’s notice that transferor breached its fiduciary duty when transferring instrument can prevent transferee from obtaining “HDC” status.
65
Even if the requirements for a holder in due course are met, a taker will not be a holder in due course:
a. by legal process or by purchase in an execution, bankruptcy, or creditor’s sale;b. by purchase as part of a bulk transaction not in the transferor’s ordinary course of business;c. as the successor in interest to an estate or other organization.
66
Holder In Due Course - The “Umbrella” or “Shelter” Doctrine:
A person may have the rights of a ‘HDC’ derivatively.As a contract matter, a transferee obtains any right of the transferor to enforce the instrument, including any right as a ‘HDC.’This applies to gifts as well.
67
Can a gift transferee become a holder in due course?
Even a gift transferee can take the rights of a ‘HDC’. If donor is a HDC, the donee becomes a HDC derivatively.
68
Holder In Due Course - What is an exception to the “Umbrella” or “Shelter” Doctrine:
Fraud or Illegality precludes a transferee from obtaining the rights of a ‘HDC’ from a transferor.
69
What is the rule regarding Non-Holders In Possession?
Non-holders in possession who acquire rights of a holder (for example, by subrogation) can enforce the instrument.
70
Persons not in possession are entitled to enforce the instrument when:
1. They had been in possession of the instrument and were entitled to enforce it when loss of possession occurred;2. Loss of possession was not due to a voluntary transfer or a lawful seizure; AND3. -the instrument was destroyed,-its whereabouts cannot be determined, OR-it is in the wrongful possession of an unknown person, a person who cannot be found, or a person not amenable to service of process.
71
Promisors Liability Generally
Promisors are generally liable on the promises they make.
72
No person is liable on an instrument UNLESS
The person signed it or the person’s agent signed it on the person’ s behalf.
73
Representative Liability:(Liability of the Maker of a Note)
If the agent signs and is authorized to do so:1) the represented person is liable even if unidentified in the instrument.
74
The best way for an agent to avoid liability:(Liability of the Maker of a Note)
(1) identify the principle;(2) specify acting in representative capacity; (3) sign.
75
Careless agent (ambigious authorization):(Liability of the Maker of a Note)
Is liable to a holder in due course who took the instrument without notice of agent’s status ... and is only liable to other persons if the original parties intended agent to be liable.
76
Exception to careless agent liability:(Liability of the Maker of a Note)
If an agent signs a check payable from an account of the agent’s principal and the check identifies this principal, the agent is not liable if her signature is an authorized signature of the represented person.
77
Unauthorized Signatures:(Liability of the Maker of a Note)
An unauthorized signature operates as the signature of the person signing.
78
Definition of a note:(Liability of the Maker of a Note)
Two-party instrument in which ‘the maker’ promises to pay ‘the payee.’
79
Primary Liability:(Liability of the Maker of a Note)
The maker has primary liability, which means there are no conditions to her liability.
80
Incomplete instrument:(Liability of the Maker of a Note)
If issuer signs an incomplete instrument, issuer is liable on it according to its terms when completed.
81
Definition of a draft:
Three-party instrument whereby ‘the drawer’ orders ‘the drawee’ (or payor bank) to pay the payee.
82
Secondary Liability:(Liability of the Drawer of a Draft)
The drawer is only liable if (1) there’s been presentment to the drawee; (2) dishonor by drawee; and (3) notice of dishonor to drawer.
83
Liability of the Drawee of a Draft/Acceptor:
Drawee has no liability to drawer or subsequent holder of the draft.
84
If the drawee accepts the draft
It becomes liable as an acceptor.
85
How to Accept Checks:
Certification of a check is most familiar type of acceptance.
86
When an instrument is transferred, the transferor makes certain warranties (known as transfer warranties) to the transferee:
a. transferor entitled to enforce the instrument;b. all signatures are authentic and authorized;c. instrument is unaltered;d. instrument is not subject to a defense or claim against the transferor;e. transferor has no knowledge of any insolvency proceeding commenced with respect to maker, acceptor, or drawer of an unaccepted draft.
87
If the transferor of an instrument indorses, whether or not the indorsement is necessary for negotiation, the indorser becomes liable to pay the instrument if...
Upon demand, the maker or drawer does not pay and the indorser is given notice of the refusal to pay
88
What is indorser liability?
Indorser is secondarily liable and will be discharged from his obligation unless there is presentment, dishonor, and notice of dishonor.
89
If transferor indorses instrument, then warranties run to:
All subsequent holders who take the instrument in good faith (otherwise, warranties run only to the immediate transferee).
90
How can an indorser protect himself against indorser liability?
Qualified indorsement: An indorser can disclaim liability by indorsing the instrument “without recourse.”If the indorsement is qualified, secondary liability is not imposed upon the transferor.
91
Who are Accommodation Parties?
They sign commercial paper simply to lend credit to some other party to the instrument; they do not directly receive any of the value given.
92
Liability of an accommodation party:
They are liable on the instrument in the capacity in which they sign (maker, drawer, acceptor, or indorser).
93
Are Accommodation parties liable for Transfer Warranties:
Accomodation parties are not usually transferring an instrument (they are usually outside the chain of title), so they are not usually liable for the transfer warranties.
94
Liability of an Accommodation party to an accommodated party:
An accommodation party is never liable to the party accommodated.
95
Definition of Presentment?
Is a demand on the party who ought to pay the instrument (the maker of a note or the drawee of a draft).
96
Timeliness of Presentment:
Presentment must be made on or after the date stated in the instrument, if a date is stated; if it is a demand instrument, presentment must be made within a reasonable time.
97
When the instrument is presented, the party to whom the presentment is made has the right to require:
a. That the instrument be exhibited;b. Identification of the party presenting (or authorization, if presentment is made on behalf of another)c. A signed receipt or surrender of the instrument upon full payment.(And if these demands are not met, there is no presentment.)
98
Demand for Payment is Effective When:
Received unless presentment is made after an established cutoff, in which case it is effective the next business day.
99
Presentment for payment or acceptance is excused:
a. when the person entitled to present the instrument cannot with reasonable diligence make presentment;b. when the maker or acceptor has repudiated an obligation to pay the instrument;c. when the drawer or indorser has waived presentment.
100
If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, the person who presented and obtained payment, as well as any previous transferor of the draft, warrants to the drawee that:
a. the warrantor is, or was at the time of transfer, a person entitled to enforce the draft;b. the draft is unaltered;c. he has no knowledge that the signature of the drawer of the draft is unauthorized.
101
Drawee mistakenly pays a check that had been forged:
Drawee may recover the funds paid or revoke acceptance regardless of its own negligence in paying.
102
What is Dishonor:
Occurs when a proper presentment for payment is made and payment is refused.
103
When must Notice of dishonor be given:
Must be given (1) by a collecting bank before midnight of the next banking day and (2) by any other person within 30 days.
104
(Actions to Enforce the Instrument)What is the Plaintiff's Burden of Proof?
Plaintiff must show that all necessary signatures arevalid AND that he is entitled to enforce the instrument.
105
After Plaintiff has met his Burden of Proof, then: (Actions to Enforce the Instrument)
The burden shifts to the defendant to prove anydefenses.
106
After Defendant proves defenses or claims, then:(Actions to Enforce the Instrument)
The party claiming to be a ‘’HDC’ has the burden of establishing ‘HDC’ status.
107
Significance of Adverse Claims in an action to enforce the instrument:
In general, a person taking an instrument is subject to claims of property or possessory rights in the instrument or its proceeds.But a holder in due course takes the instrument free from all claims to it by others.
108
If wrongfully deprived of possession, a person might have a claim against...
The maker of the instrument.
109
What is a Claim in recoupment?
This is a claim of the obligor against the original payee of the instrument that arises from the transaction giving rise to the instrument.
110
The defenses that an obligor on an instrument may raisedepend on...(Actions to Enforce the Instrument)
The status of the plaintiff.However, ‘HDC’ takes free of most ordinary contract defenses.
111
What types of defenses can a defendant raise?(Actions to Enforce the Instrument)
Article 3 defenses and contract defenses.
112
A holder in due course takes free of all defenses EXCEPT (Actions to Enforce the Instrument)
The so-called “real defenses”.InfancyDuressLack of Legal CapacityIllegalityFraud in the FactumDischarge in Insolvency Proceedings
113
Duress is a matter of degree, and must reach a certain level...(Actions to Enforce the Instrument)
When the threat of physical force is such that the person loses his capacity to contract—in order to constitute a real defense
114
Illegality and Lack of Legal Capacity is a real defense only ...(Actions to Enforce the Instrument)
When it can be said to render the contract a nullity under other law. If the obligation is merely voidable, the defense is cut off against a holder in due course and is only a personal defense
115
Fraud in the factum is...(Actions to Enforce the Instrument)
Fraud that induced the party to sign the instrument with neither knowledge of, nor reasonable opportunity to learn of, the instrument’s character or its essential terms
116
Fraud in the inducement is...(Actions to Enforce the Instrument)
NOT a real defense. This involves inducing asignature by a person who knows they are signing an instrumentThe distinction with fraud in the factum lies in whether the individual signing knew that he was signing a negotiable instrument.
117
Discharge is a real defense when...(Actions to Enforce the Instrument)
The holder has notice when takes the instrument
118
Significance of Alterations to an Instrument:(Actions to Enforce the Instrument)
Are unauthorized changes in an instrument that purport to modify (or add to) a party’s obligation.
119
Personal defenses are...(Actions to Enforce the Instrument)
Defenses other than real defenses. These cannot be asserted against a holder in due course
120
Fraudulent vs. Non- Fraudulent Alterations to an Instrument:(Actions to Enforce the Instrument)
Fraudulent Alteration: In general, a party whose obligation is affected by a fraudulent alteration is discharged unless they are estopped from raising it.Non-Fraudulent Alteration: No person is discharged; all holders may enforce the instrument to its original tenor.However, even when there is a fraudulent alteration, a HDC may enforce the instrument to its original tenor.
121
Significance of Unauthorized Completions to an Instrument:(Actions to Enforce the Instrument)
In this instance, a holder in due course may enforce instrument as completed.
122
A person whose negligence substantially contributed toan alteration/forgery is...
Precluded (estopped) from raising the alteration/forgery as a defense against a person who, in good faith, took the instrument for value (HDC)
123
Forgery is a defense even as against...
A person who in good faith pays the instrument or takes it for value (HDC).
124
Forger’s liability:
A forger or agent who signs without authority becomesliable just as though he had signed his own name.
125
Defenses of Accommodation Parties:
Derivative Defenses: An accommodation party may assert against the person entitled to enforce the instrument any defense that the accommodated party could assert against such person—except for the personal defenses of discharge in insolvency, infancy, and lack of legal capacity.Suretyship Defenses: If the due date of an instrument is extended, the instrument is modified, or the value of collateral is impaired by a person entitled to enforce the instrument, the accommodation party’s obligation is discharged to the extent of the loss suffered.
