Commercial Paper Flashcards
Negotiable Instruments (WOOPS FUN)
(1) Written promise or order to pay (tangible medium)
(2) On Demand or Definite Time (prepayment and acceleration are okay)
(3) Order or Bearer (to either)
(4) Promise to Order or Pay
(5) Signed
(6) Fixed Amount (words prevail over #s; handwritten over typed)
(7) Unconditional (no condition on payment)
(8) No unauthorized undertakings (pay + wash clothes)
Negotiable Instruments
An unconditional, promise or order to pay, a fixed amount of money, payable to order or bearer, on demand or at a definite time, with no unauthorized promise or undertaking
Becoming a Holder
(1) Bearer - transfer possession
2) Orders - transfer possession w/ ID’d person’s indorsement (must be authorized and valid
Types of Indorsements
(1) Blank - makes order paper into bearer paper
(2) Special - directing payment to specific person “pay to X”
(3) Restrictive - “for deposit only”
(4) Qualified - “without recourse” limits contract liability
(5) Anomalous Indorsement - not holder, but done for surety purposes - makes them liable
Accommodation Party Defenses
Discharge the extent of loss caused by:
(1) Extension of Due Date
(2) Material Modification of obligation
(3) Impairment of the collateral
IN ILLINOIS - release - note holder release of principal obligor does NOT release secondary obligors
May Raise any defense the accommodated party may raise (except infancy, incapacity, or bankruptcy)
Holders in Due Course (HDC)
(1) Holder (can’t become holder if forged indoresement
(2) Takes for value - past or present value (not future)
(3) In good faith
(4) without notice of (i) instrument overdue, (ii) unauthorized/forged signature, (iii) other party has claim to instrument; or (iv) defense to payment (infancy, duress)
* *Note Shelter rule - transferee acquires whatever rights transferor had
Real Defenses against HDC (FAIDS)
(1) Forgery
(2) Fraud in the Factum - obligor signs instrument w/out knowledge or chance to learn of
(3) Illegality of the debt
(4) Infancy of the maker/drawer
(5) Discharge in bankruptcy
Also, Alteration, Adjudicated, Duress SOL, Suretyship
Personal Defenses Not against HDC
contract defenses (lack of consideration, ,breach of warranty, fraud in the inducement)
Indorser Liability
If maker does not pay holder - look to indorser
(1) Payment presented and dishonored - must give timely notice of dishonor unless “without recourse”
Transferor Warranties - must be for value and liable to ANY subsequent transferee
If indorese and transfer FOR VALUE - 5 warranties
(1) Transferor entitled to enforce
(2) All signatures are authentic and Authorized
(3) Instrument not Altered
(4) Not subject to any Defense (HDC)
(5) Doesn’t know that maker/drawer is bankrupt
* *cannot be waived on checks, can be on notes
Presentment Warranty
When unaccepted check presented for payment, all prior transferors and person obtaining payment warrant:
(1) entitled to enforce it (“good title”)
(2) not altered and
(3) no knowledge drawer’s signature is unauthorized
forged indorser’s signature destroys good title but forged drawer’s signature does not
*If paid out and the later finds out they could not enforce, then they can be sued for breach of warranty.
Forged Signatures
(1) Drawer’s or Maker’s - only someone who signs is liable
(2) Indorsement - not holder if negotiation from forged indorsement
(3) Negligence - (1) if maker/drawer/payee failure of ordinary care facilitated forgery (2) precluded from forgery against anyone who gave value
Drawee Liability
Usually a bank, has no liability until signs or accepts
Drawer liability
Secondary liability
If check dishonored (by drawee/bank), drawer obligated to pay
“Responsible Employee” Indorsement
Check processing duties and fraudulently indorses employer’s instrument - effective to negotiate
*Inapplicable to drawer signatures
