Commercial Paper

Question 1

What is a promissory note?

Answer 1

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

Question 2

What is a draft?

Answer 2

A commercial paper involving three parties- a drawer; a payee and a drawee A drawer orders a sum to be paid to a payee by the drawee May be payable on demand or in the future. This is not a check even though it may look like it.

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 paid Drawee - the bank. It must have a Bank at the top left corner

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

Must be in writing (POA - ok for signing)
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Fixed amount of money must be states; only
Payable on demand or definite time
Payable to order or bearer (except checks)

Question 8

What characteristics will cancel the negotiability of a commercial paper?

Answer 8

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
The promise to pay occurs after some action by another party or an event; it cancels negotiability
Cannot allow for an alternative such as payment or some other action by the maker
Note: a stated amount of payment plus a stated % of interest is OK

Question 9

What is required to negotiate Order Paper?

Answer 9

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

Question 10

What are the major types of endorsements on commercial paper?

Answer 10

Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

Question 11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 11

Within 7 days

Question 12

On a commercial paper; which value will supersede - words or numerical dollar amount?

Answer 12

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

Question 13

Define primary liability with respect to a contract.

Answer 13

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay

Question 14

Define secondary liability with respect to contract liability

Answer 14

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

Question 15

Define contract liability.

Answer 15

Guarantees payment of a liability

Question 16

When does warranty liability occur?

Answer 16

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

Question 17

What five warranties occur with every commercial paper transfer?

Answer 17

Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate

Question 18

What are the requirements for a holder to be a holder in due course?

Answer 18

Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrument
Giving a present value for the instrument (a future value doesnt count)

Question 19

What are the personal defenses against a holder in due course (HDC) which will LOSE?

Answer 19

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)
Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)Voidable contracts

Question 20

What are the REAL defenses against a holder in due course (HDC) and NonHDC; which will WIN?

Answer 20

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC). maker/drawer does not have to pay anyone. FAIDS
Fraud in the execution
Forgery
Adjudicated insanity
Material alterations to the instrument
Infancy
Illegality - Bankruptcy 
Duress
Discharge in bankruptcy
Suretyship defenses
Statute of Limitation

Question 21

What requirements are necessary to have a security interest attach?

Answer 21

1. Debtor has rights in the collateral
2. Proper filing of a security agreement
3. Value given by the creditor

Question 22

What happens if an instrument is not negotiable?

Answer 22

There can be no holder in due course

Question 23

Blank Endorsement

Answer 23

Blank = Mere Signature of Holder. Instrument is bearer paper and may be further negotiated by mere delivery without further endorsement.
_______________
/s/ John Blank

Question 24

Special Endorsement

Answer 24

Special = Pay to Specific Person. Words specifying the person to be paid precede signature. Endorsement need not contain words such as “order” or “bearer.” Instrument must be signed by the named person and delivered for further negotiation.
Pay J. Smith
/s/ Jerry Payee

Question 25

Restrictive Endorsement

Answer 25

Restrictive = Only, or “For Deposit” or “For Collection”. Specifies use of instrument (eg. For deposit only) or conditions use of instrument (eg pay J. Smith Only). Does not prevent further negotiations.
Pay J. Smith Only
/s/ J. Restrictive

Question 26

Qualified Endorsement

Answer 26

Qualified = “Without Recourse”. Skip me if “instrument” (eg. Promissory note) “bounces”. This negates the endorser’s contractual liability for payment (no guarantee of payment), but the endorse is still liable on warranties.
Without Recourse
/s/ P.L. Qualified

Question 27

To be Holder in Due Course (HDC)

Answer 27

A holder in due care will take the paper:

i) for value
ii) in good faith
iii) without notice of any defenses or claims of ownership
iv) negotiable

**if any of these missing, you gave the same rights as the transferor. You get paid if he gets paid.

Question 28

Shelter Doctrine

Answer 28

Shelter Doctrine(holder through HDC): even if the transferee himself is not qualified as an HDC, he can claim rights of an HDC who held the commercial paper before him.

Question 29

Liability of the parties

Answer 29

Note/CD - First Maker liable then second Endorser

Draft/Check - First Drawee, if they accept, then second Drawer and Endorsers