Commercial Paper Flashcards
Rule for holder in due course
If an instrument is negotiable and transferred to a person who takes the instrument for value, in good faith, and without notice of any defenses to claims on the instrument a holder in due course will be able to force someone to pay the money under the instrument unless the person from whom payment is sought has available one of the real defenses.
A note
A note is a promise to pay.
Two basic parties involved are the person promising to pay (maker) and the party to whom payment is promised (payee or bearer).
Draft
Hey draft is in order to pay.
Three basic parties are involved the drawer orders another party the drawee to pay money to a third-party the payee or to bearer.
Requirements for an instrument to be negotiable
A) written & signed
B) unconditional
C) promise or order to pay
D) a fixed amount of money
E) payable to order or bearer when issued or first in possession of a holder
F) payable on demand at a definite time
G) states no unauthorized undertaking or instruction by the person promising or ordering payment
When an instrument is conditional
If it expressly states a condition for payment or it states that the promise or order is subject to or governed by another writing.
What is meant by fixed amount
The principal due under the instrument must be fixed.
A demand instrument
An instrument is payable on demand if it fails to state a time for payment or states that is payable on demand, at site etc.
Extensions of time for repayment
Extensions at the option of the maker and extensions that are automatic on the happening of an event are acceptable if extension is to a further definite time stated in the instrument.
Further undertakings allowed
A) undertaking or power to give, maintain, or collect to protect collateral
B) authorization or power given to the holder to confess judgment or to realize on or dispose of collateral
C) waiver of the benefit of a law that protects the obligor
Negotiating bearer instruments
Bearer instruments are negotiated by transferring possession of the instrument
Negotiating order instruments
An instrument payable to an identified person is negotiated by transferring possession along with the identified person’s endorsement.
Rule for a valid endorsement
Right to enforce will not pass unless the payee’s endorsement is authorized and valid.
Forging the payee’s name breaks the chain of title and generally no subsequent possessors of the instrument can qualify as holders.
Multiple payees
An instrument may be payable to more than one payee either jointly in which case each must must endorse or severally in which case anyone may endorse.
Special endorsement
Special endorsement names a particular person as an endorsee.
Endorsee must sign in order for the instrument to be further negotiated.
Blank endorsement
A signature that is not accompanied by the naming of a specific endorsee.
Blank endorsements create bearer paper which may then be negotiated by delivery alone.
Forgery of drawer’s name
Forgery of the drawer’s name does not break the chain of title and the subsequent transferees may qualify as holders.
What if there are multiple endorsements
If an instrument has been endorsed several times the last endorsement controls what is necessary for further negotiation
Qualified endorsements
An endorsement with the words without recourse is a qualified endorsement and limits the contract liability imposed on endorsers.
Restrictive endorsement
Restrictive endorsements generally are ineffective to limit transfer or negotiation.
An instrument with words requiring bank collection must be paid consistently with the endorsement by any person or the first bank into which the instrument is deposited.
Who is a holder
A holder is a person in possession of an instrument with the right to enforce the instrument.
Instrument must be payable to bearer or to the person in possession and free of forgery.
What is in due course
Requires the holder to take for value, in good faith, and without notice
Value requirement for due course
The following constitutes value:
A) performance of the agreed consideration
D) acquisition by the holder of a lien or a security interest in the instrument
C) taking instrument as payment of or security for an antecedent that
D) trading a negotiable instrument for another instrument
E) giving the instrument in exchange for incurring an irrevocable obligation to a third person by the person taking the instrument
Good faith requirement for due course
Good faith means honesty in fact and observance of reasonable commercial standards.
Notice requirement for due course
Notice includes both actual notice and reason to know from facts surrounding the transaction.
Shelter rule
Transferee acquires whatever rights her transferor had and thus is said to take shelter in the status of her transferor.
Exception to shelter rule
No holder in due course rights are given to persons who are parties to fraud or illegality affecting the instrument.
The real defenses
A)forgery
B) fraud in the factum
C) alteration of instrument
D) incapacity to contract
E) infancy
F) illegality
G) duress
H) discharge in insolvency proceedings
I) statute of limitations
Fraud in the factum
Fraud that causes the obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms is a real defense.
Forgery
If the signature of the payee or any special indorsee was forged generally no subsequent taker can be a holder in due course because no one can attain the right to enforce necessary to qualify as a holder.
Statute of limitations for a draft
Three-year statute of limitations applies.
Statute of limitations for a note
Six-year statute of limitations applies
Maker of a note’s liability
By signing her name the maker of a note makes a contract to pay the instrument according to its terms of the time it is issued.
Endorsers secondary liability
Endorser may be held liable on contract or warranty theories.
Three contract prerequisites to hold an endorser liable
A) presentment
B) dishonor
C) notice of dishonor
Presentment
Demand for payment made by a person entitled to enforce the instrument.
Maybe made by any commercially reasonable means.
Dishonor
Occurs when the maker or drawee does not pay within the allowed time after presentment.
Notice of dishonor
Endorser is not liable on an instrument unless she’s given timely notice that the instrument has been dishonored. (30 days).
Endorser warranties
A) endorser is entitled to an enforce the instrument
B) all signatures are authentic and authorized
C) Instrument has not been altered
D) No defense or claim of any party is good against her
E) She has no knowledge of any insolvency proceedings that have been instituted against the maker, acceptor, or drawer
Drawer liability
If a draft is dishonored the drawer is obligated to pay according to the draft’s terms when the drawer signed.
If the draft is accepted by bank the drawer is discharged and cannot be held liable if the bank fails to pay.
Drawee liability
Drawer of a draft cannot have any liability unless and until she signs the instrument. Thus a holder cannot force a drawee to payout on a draft.
Duties of drawee bank to customer
Thank maybe liable to its customers for failure to accept the draft.
Bank is obliged to honor its customer’s check is sufficient funds on deposit to cover the draft
Banks may refuse to pay checks over six months old.
death of customer
Customer’s death does not revoke the bank’s authority to pay check until the bank knows of death and has a reasonable time to act on the knowledge.
Even with such knowledge the bank may continue paying checks for 10 days after the date of death.
Stop payment orders
Oral stop payment order is effective for 14 days and then lapses unless confirmed in writing within that period.
Written stop payment order is binding for six months.
Bank must be given reasonable time to act.
Liability of a principal
If a representative signs her own name or the name of the principal the principle is bound if the agent had authority to sign or principal ratify the signature or is it stopped from denying the signature
Agents liability for signing
If an agent signed with the principal’s name and is authorized then they have no liability.
Effect of unauthorized signatures
Unauthorized signatures ineffective as the signature of the person whose name is signed but it’s effective as the signature of the signer.
Imposters
If a person pretends to be someone else and induces the drawer on maker to issue an instrument the forgery of the payee’s name will pass the right to enforce against drawer or maker.
Fraudulent endorsements by employees
If an employer entrusts an employee with responsibility for an instrument and the employee fraudulently endorses, the endorsement is effective.
Negligence rule
If a person fails to exercise ordinary care and such failure substantially contributes to an alteration or forged signature the person is precluded from raising the alteration or forgery against a person who paid the instrument in good faith or took it for value or for collection.
Presentment warranties of unaccepted draft
A) warrantor entitled to enforce the draft or his authorized by one who is
B) draft has not been altered
C) warrantor has no knowledge that the drawer’s signature is unauthorized
Who makes presentment warranties
Any person who obtains payment or acceptance and any prior transferor
Discharge
Discharge of the party is a personal defense which a holder in due course can cut off unless the holder in due course has notice of the defense when he takes the instrument.
