Commercial Paper Flashcards
notes
two-party commercial paper
maker to payee/bearer
“promise to pay”
ex. CD (bank promissory note)
drafts
three-party commercial paper
drawer to drawee to payee
“order to pay”
ex. checks (drawee is bank)
may be payable at future date
“all checks are drafts but not all drafts are checks”
checks
draft drawn on drawee (bank) and payable on demand
trade acceptance
draft drawn by the payee on the drawee
negotiability
“transferability” of instrument
SUMWOO
- signed
- unconditional promise
- money (fixed amount, foreign is OK)
- writing
- on demand at definite time
- to order/bearer
writing (negotiability)
signed by maker or drawer
words control figures
unconditional promise (negotiability)
instrument is NOT negotiable if conditional
- subject to another agreement
- subject to express condition
permissible conditions (conditional terms)
- implied conditions (law)
- states consideration (in exchange for car)
- refers to transaction which instrument arose
- limits payment to particular source
definite time (negotiability)
- must reveal when obligation is due
- acceleration clauses (or sooner clause)
- extension clauses (or until)
- undated, postdated, antedated
- uncertainty of events like death (not negotiable)
to order/bearer (negotiability)
order - payable to specified person
bearer - payable to person in possession
authorized promises (negotiability)
- authorization to give, maintain, protect collateral
- term authorizing confession of judgement or disposition of collateral if instrument not paid when due
- term that waives benefit of laws intended for benefit of obligor
- promise to pay collection costs
if instrument is NOT negotiable
no holder in due course (HDC)
- treated as an ordinary contract
holder in due course (HDC)
persons UCC seeks to protect
person with good title to commercial paper
bearer paper requires mere delivery
order paper requires delivery AND endorsement (signature)
free from personal defenses and claims
subject only to real defenses
endorsements (BACK)
special or blank
restrictive or unrestrictive
qualified or unqualified
special endorsement
names particular person, turns instrument into “order”
FRONT is order to cash
BACK names payee
can only be negotiated if signed by named payee
blank endorsement
no special endorsee, makes instrument into “bearer”
FRONT is order to payee
BACK is blank and signed
can be negotiated if delivered and signed by payee
breaking chain of title
broken if no proper endorsement (missing/forged)
forged drawer/maker signature
does NOT constitute break in chain of title
transferees are holders of forger’s instrument
qualified endorsement
adds “without recourse”
“without recourse”
no guarantee of payment by endorser
- no contract liability but still has warranty liability
restrictive endorsement
does not prevent negotiation
ex. “only”, conditions, trust endorsements, further negotiation to check collection system
(commercial paper) in due course
commercial paper taken:
- has value (not a gift)
- in good faith (honesty in fact)
- without notice of any defenses
- negotiable (front only)
value (in due course)
- performance of agreed consideration
- acquisition of lien or security interest in instrument
- taking instrument as payment/security for antecedent debt
- giving negotiable instrument for instrument
- making irrevocable commitment to 3rd parties
executory promise
future promise to give value DOES NOT qualify as value
notice situations
purchaser has notice if:
- knowledge that principal is overdue, acceleration made, instrument is demand instrument
- irregular (visible evidence of forgery/alteration)
- knowledge that obligation is voidable
non-notice situations
- antedated or postdated
- purchase at discount
transactions precluding HDC
- judicial sale
- acquisition in taking over an estate
- purchased as part of bulk transaction
Shelter Doctrine
most subsequent transferees of and HDC can “succeed to” or “take shelter” in rights of HDC
- only protects innocent parties
real defenses
maker/drawer does not have to pay anyone
may be asserted against both HDC and non-HDC transferees
FAIDS
- fraud in execution or forgery
- adjudicated insane or material alteration
- infancy or illegality
- duress or discharge in bankruptcy
- suretyship defenses or statue of limitations expired
personal defenses
cannot be raised against an HDC
- NOT FAIDS
- unauthorized completion
- failure of consideration
- discharge
unauthorized completion
occurs when issuer leaves part of instrument blank and later holder fills in missing information
liability of parties
anyone whose signature appears on commercial paper potentially has liability on paper
notes liability
maker has primary liability
endorser has secondary liability
draft liability
drawee has primary liability (if they accept)
drawer/endorser has secondary liability
drawer/maker
person who owns funds
drawee
person who has drawer’s funds
- not liable until acceptance (signs)
- not liable to holder but may be liable to drawer
stop payment
oral is binding for 14 days
written is binding for 6 months
warranty liability
exists even “without recourse” writing
- transferor does not endorse instrument or is authorized to act for one who is entitled to enforce
- all signatures are genuine/authorized
- instrument has not been materially altered
- no defense of any party is good against transferor
- transferor has not knowledge of insolvency
accommodation party
one who signs instrument for purpose of lending name and credit to another party
a surety
forgery of drawer’s signature
if forger missing–
drawee liable upon acceptance (should know drawer’s signature)
forgery of payee’s name
if forger missing–
first person forger passed to is liable
impostor rule
if maker/drawer issues to an impostor, maker/drawer is liable (negligent, should have checked for ID)
fictitious payee rule
if maker/drawer issues to nonexistent/fake payee, maker/drawer liable (negligent, poor internal control for corp)
discharge (of obligation)
- payment, satisfaction, tender of payment
- cancellation or renunciation (holder intentionally destroys instrument/lining through signature)
- impairing recourse/collateral (releasing party)
- delay in presentment or failure to give notice of dishonor
- acceptance or certification of draft
