Commercial Paper

Question 1

What is a note?

Answer 1

1 of 2 types of commercial paper
A promise to pay a specific amount. There are two parties involved - maker and a payee. Maker is primarily liable.
Example: Bank Certificate of Deposit (CD) ; Promissory Note

Question 2

What is a draft?

Answer 2

A commercial paper involving three parties- a drawer; a payee and a drawee - set up as an “order to pay”
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future
Example : Check (Drawee is a bank)

Question 3

What is a check?

Answer 3

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer
Drawer - person writing the check
Payee - person being paidDrawee - the bank

Question 4

What is the difference between a post-dated check and a negotiable time draft?

Answer 4

A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

Question 5

What is a trade acceptance?

Answer 5

Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability

Question 6

What is the purpose of the negotiation of commercial paper?

Answer 6

Transfers ownership to another party

Question 7

What is required to maintain the negotiability of a commercial paper?

Answer 7

“COUPONS”

• Certain sum of money payable to holder
• Order or Bearer - payable to a specified party
• Unconditional Promise to Pay- cannot be conditional
• Payment in Money - not in services/goods
• ON Demand or a Fixed Time
• Signed by creator (maker or drawer)

Question 8

The Transfer of a Non-Negotiable Instrument is called:

Answer 8

Assignment

Question 9

The Transfer of a Negotiable Instrument is called:

Answer 9

Negotiation

Question 10

What are the rights of the transferee when an assignment of right occurs?

Answer 10

Receives only the rights that the transferor previously had, and is subject to any defenses that would have been available against the transferor.

Question 11

When someone properly receives a negotiable instrument they are called:

Answer 11

Holder

Question 12

What are the rights of the transferee when a negotiation occurs?

Answer 12

Transferee has the same rights as transferor or superior rights

Question 13

How are “bearer paper” and “order paper” each negotiated?

Answer 13

Bearer paper - negotiated by deliver

Order paper - negotiated by endorsement and delivery

Question 14

Types Endorsements:

Answer 14

Special - endorser names next payee (requires signature in order to negotiate further) (order paper)
Blank- endorser signs but doesn’t specify next payee (bearer paper)
Qualified - endorser writes “w/o recourse” - eliminates signature and contract liability
Restrictive- Endorser writes conditions on transfer

Question 15

A Holder can be a Holder in Due Course if what 3 requirements are met?

Answer 15

Instrument taken for value
Taken in good faith
Without notice of defects

Question 16

Real Defenses against a Negotiable Instrument:

Answer 16

“FABLE” –> Defenses against all holders, including HDC

• Forgery (defendant didn’t sign, another party faked)
• Alteration (amount was changed w/o permission)
• Bankruptcy discharge
• Lack of Capacity (defendant was a minor or under extreme duress)
• Execution Fraud/Extreme Duress - was deceived

Question 17

Statute of Limitations on drafts and notes:

Answer 17

Draft - 3 years after dishonor or acceptance

Note - 6 years after demand or due date

Question 18

Personal Defenses against a Negotiable Instrument:

Answer 18

“BUILD” –> Defenses against a mere holder, excludes HDC

Breach of Contract
Unauthorized Completion
Inducement of Fraud
Lack of Consideration
Duress

Question 19

Who is primarily liable under Notes and Drafts?

Answer 19

Note - The maker ; anyone who signs the instrument will be secondarily liable unless endorsement is “w/o recourse”

Draft - The Drawee (acceptor) is primarily liable, but only once the draft is accepted by the drawee

Question 20

Documents of Title

Answer 20

Instruments (often negotiable) that represent ownership of goods and the contract with a warehouseman or common carrier

Documents of title are transferred (negotiated) by due negotiation

Example: Warehouse Receipts and Bill of Lading

Question 21

Investment Securities

Answer 21

Stocks and Bonds are negotiable instruments, may be payable to bearer or be registered to a specific owner

No restrictions can apply to their transfer unless they are clearly stated on the face of the instrument