Commercial Paper

Question 1

Rule for holder in due course

Answer 1

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.

Question 2

A note

Answer 2

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).

Question 3

Draft

Answer 3

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.

Question 4

Requirements for an instrument to be negotiable

Answer 4

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

Question 5

When an instrument is conditional

Answer 5

If it expressly states a condition for payment or it states that the promise or order is subject to or governed by another writing.

Question 6

What is meant by fixed amount

Answer 6

The principal due under the instrument must be fixed.

Question 7

A demand instrument

Answer 7

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.

Question 8

Extensions of time for repayment

Answer 8

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.

Question 9

Further undertakings allowed

Answer 9

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

Question 10

Negotiating bearer instruments

Answer 10

Bearer instruments are negotiated by transferring possession of the instrument

Question 11

Negotiating order instruments

Answer 11

An instrument payable to an identified person is negotiated by transferring possession along with the identified person’s endorsement.

Question 12

Rule for a valid endorsement

Answer 12

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.

Question 13

Multiple payees

Answer 13

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.

Question 14

Special endorsement

Answer 14

Special endorsement names a particular person as an endorsee.

Endorsee must sign in order for the instrument to be further negotiated.

Question 15

Blank endorsement

Answer 15

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.

Question 16

Forgery of drawer’s name

Answer 16

Forgery of the drawer’s name does not break the chain of title and the subsequent transferees may qualify as holders.

Question 17

What if there are multiple endorsements

Answer 17

If an instrument has been endorsed several times the last endorsement controls what is necessary for further negotiation

Question 18

Qualified endorsements

Answer 18

An endorsement with the words without recourse is a qualified endorsement and limits the contract liability imposed on endorsers.

Question 19

Restrictive endorsement

Answer 19

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.

Question 20

Who is a holder

Answer 20

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.

Question 21

What is in due course

Answer 21

Requires the holder to take for value, in good faith, and without notice

Question 22

Value requirement for due course

Answer 22

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

Question 23

Good faith requirement for due course

Answer 23

Good faith means honesty in fact and observance of reasonable commercial standards.

Question 24

Notice requirement for due course

Answer 24

Notice includes both actual notice and reason to know from facts surrounding the transaction.

Question 25

Shelter rule

Answer 25

Transferee acquires whatever rights her transferor had and thus is said to take shelter in the status of her transferor.

Question 26

Exception to shelter rule

Answer 26

No holder in due course rights are given to persons who are parties to fraud or illegality affecting the instrument.

Question 27

The real defenses

Answer 27

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

Question 28

Fraud in the factum

Answer 28

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.

Question 29

Forgery

Answer 29

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.

Question 30

Statute of limitations for a draft

Answer 30

Three-year statute of limitations applies.

Question 31

Statute of limitations for a note

Answer 31

Six-year statute of limitations applies

Question 32

Maker of a note’s liability

Answer 32

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.

Question 33

Endorsers secondary liability

Answer 33

Endorser may be held liable on contract or warranty theories.

Question 34

Three contract prerequisites to hold an endorser liable

Answer 34

A) presentment

B) dishonor

C) notice of dishonor

Question 35

Presentment

Answer 35

Demand for payment made by a person entitled to enforce the instrument.

Maybe made by any commercially reasonable means.

Question 36

Dishonor

Answer 36

Occurs when the maker or drawee does not pay within the allowed time after presentment.

Question 37

Notice of dishonor

Answer 37

Endorser is not liable on an instrument unless she’s given timely notice that the instrument has been dishonored. (30 days).

Question 38

Endorser warranties

Answer 38

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

Question 39

Drawer liability

Answer 39

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.

Question 40

Drawee liability

Answer 40

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.

Question 41

Duties of drawee bank to customer

Answer 41

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.

Question 42

death of customer

Answer 42

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.

Question 43

Stop payment orders

Answer 43

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.

Question 44

Liability of a principal

Answer 44

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

Question 45

Agents liability for signing

Answer 45

If an agent signed with the principal’s name and is authorized then they have no liability.

Question 46

Effect of unauthorized signatures

Answer 46

Unauthorized signatures ineffective as the signature of the person whose name is signed but it’s effective as the signature of the signer.

Question 47

Imposters

Answer 47

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.

Question 48

Fraudulent endorsements by employees

Answer 48

If an employer entrusts an employee with responsibility for an instrument and the employee fraudulently endorses, the endorsement is effective.

Question 49

Negligence rule

Answer 49

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.

Question 50

Presentment warranties of unaccepted draft

Answer 50

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

Question 51

Who makes presentment warranties

Answer 51

Any person who obtains payment or acceptance and any prior transferor

Question 52

Discharge

Answer 52

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.