Commercial Paper Flashcards
What is a promissory note?
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)
What is a draft?
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.
What is a check?
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
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated.
A negotiable time draft is not payable until the date designated for payment.
What is a trade acceptance?
Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
What is required to maintain the negotiability of a commercial paper?
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)
What characteristics will cancel the negotiability of a commercial paper?
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
What is required to negotiate Order Paper?
Must have delivery and endorsement
If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
What are the major types of endorsements on commercial paper?
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
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
On a commercial paper; which value will supersede - words or numerical dollar amount?
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.
Define primary liability with respect to a contract.
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
Define secondary liability with respect to contract liability
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
Define contract liability.
Guarantees payment of a liability
When does warranty liability occur?
Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only
What five warranties occur with every commercial paper transfer?
Warranty of Title No defense will stand against it No material alteration No knowledge of bankruptcy proceedings All signatures are legitimate
What are the requirements for a holder to be a holder in due course?
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)
What are the personal defenses against a holder in due course (HDC) which will LOSE?
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
What are the REAL defenses against a holder in due course (HDC) and NonHDC; which will WIN?
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
What requirements are necessary to have a security interest attach?
- Debtor has rights in the collateral
- Proper filing of a security agreement
- Value given by the creditor
What happens if an instrument is not negotiable?
There can be no holder in due course
Blank Endorsement
Blank = Mere Signature of Holder. Instrument is bearer paper and may be further negotiated by mere delivery without further endorsement.
_______________
/s/ John Blank
Special Endorsement
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
Restrictive Endorsement
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
Qualified Endorsement
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
To be Holder in Due Course (HDC)
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.
Shelter Doctrine
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.
Liability of the parties
Note/CD - First Maker liable then second Endorser
Draft/Check - First Drawee, if they accept, then second Drawer and Endorsers
