Commercial Paper Flashcards
What is the bright line rule in commercial paper?
When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
What are the two main kinds of negotiable instruments?
1) Promissory notes: writing containing an affirmative promise to pay where promisor is the maker of the note and the promisee is the payee.
2) Draft (typically a check): writing that contains an order or command to pay. 3 parties: drawer gives the order to pay, drawee ordered to do the paying, and payee is the beneficiary.
What requirements must be satisfied for a writing to qualify as a negotiable instrument?
WOSSUPP!!!!!!! WRITING payable to ORDER or bearer SIGNED by maker or drawer reciting a SUM certain containing an UNCONDITIONAL promise or order and no additional promises or orders PAYABLE on demand or at a definite time PAYABLE in currency
What is required to constitute a “signing”?
Authentication, found anywhere on the instrument, qualifies as long as made by the maker or drawer. May be initials, some defining mark, or a nickname found in margins or anywhere else.
What is the unconditional requirement?
There must be an unconditional promise to qualify a writing as a note or draft. If there’s an express condition = contract. If instrument is governed by or subject to another agreement = contract. BUT merely referring to another writing as to a tangential matter doesn’t make an instrument conditional i.e. “rights and duties w/ respect to collateral listed in SA.”
Instrument isn’t conditional merely because it limits payment to particular source or fund.
What is the sum certain or fixed amount requirement?
Need a specifically ascertainable sum to calculate how much is to be paid either from what writing says or reference to outside source. Amount of principal must be fixed but interest doesn’t have to be. Need only to be able to determine interest rate from face of the instrument.
What is currency?
Money or foreign money. NOT GOODS.
What is the payable on demand or at a definite time requirement?
1) On Demand: instrument specifically states that it s payable on demand or at sight or at presentation.
2) Definite Time: By terms of instrument, payable on or before a state date or w/in a fixed period after the stated date. Acceleration clauses are permissible but the future event must be linked to a date that is certain.
What is the payable to order or bearer requirement?
Payable to order: note or draft must use the word “order” or “assigns” in connection w/ payee’s name.
Payable to bearer: if not payable to order, to be negotiable it must be payable to bearer, meaning payable to anyone who has it. EX: pay to bearer, pay to cash, pay to order of cash/ bearer.
EXCEPTION: if it’s a check and says “pay to B” then it’s still negotiable. If a writing not a check says “pay to B,” then it’s non-negotiable.
What are the two theories under which defendant may get sued in commercial paper hypos?
1) K or signature liability
2) Warranty or transfer liability
How can you be sued under K or signature liability?
D signed negotiable instrument, and signature was a promise to pay. Who may be sued under this theory:
1) Promisor of promissory note: Maker enters K whereby he agrees to pay the instrument, so he can be sued if he fails to pay.
2) Indorser signs his name on the back of instrument. If check bounces + signer is told = signer will pay.
3) Drawer who signs the check makes a promise that if the check bounces, he will pay.
BUT drawee (bank) that pays the draft doesn’t sign and isn’t liable.
What if the words “without recourse” accompany the signature?
“Without recourse” is a term of art used by endorsers and drawers. It represents a disclaimer of liability. Signer passes title but assumes no signature liability.
What is warranty/transfer liability?
Seller’s liability for selling a defective instrument. Any transferor who sells the negotiable instrument can be sued even if transferor is not a donor.
Who is entitled to sue D for breach of warranty?
If D indorsed the instrument, any P in possession may sue. Indorsement makes warranties run with the instrument.
If D didn’t indorse instrument, only D’s immediate transferee may sue. Warranties will not run with the instrument.
What are the 5 warranties that D makes w/ respect to a negotiable instrument?
1) He has good title to instrument
2) All signatures are good (no forgery)
3) Instrument hasn’t been materially altered (tampering makes instrument defective)
4) No defense or claim good against the defendant, so instrument is enforceable
5) No knowledge of any bankruptcy or insolvency against maker or drawer.
