Commercial Paper Flashcards
What is the basic idea behind these types of problems?
1) Instrument’s holder wants to be paid;
2) Person obligated to pay doesn’t want to pay; and
3) The person who ultimately pays the instrument will want to recover from someone else.
What is the basic approach to these questions?
1) Determine if the instrument is a negotiable instrument;
2) Determine whether the instrument was PROPERLY negotiated;
3) Determine whether the instrument’s holder is a HOLDER IN DUE COURSE (HDC);
4) Determine whether the individual who is obligated to pay has any defenses against payment;
5) Determine whether those defenses are REAL OR PERSONAL DEFENSES; AND
6) Can the one who paid the instrument hold anyone else responsible?
What are the types of Commercial Paper and who are the parties involved?
NOTES AND DRAFTS - MAKERS MAKE NOTES AND DRAFTERS DRAW DRAFTS.
NOTES - these are characterized by a promise to pay and have two parties:
1) MAKER - the person making the promise to pay; AND
2) PAYEE - the person to whom the instrument is payable.
DRAFTS - these are orders to pay money and there are three parties involved:
1) DRAWER - the person ordering payment;
2) DRAWEE - the person being ordered to pay; and
3) PAYEE - the person to whom the instrument is payable.
What is a certificate of deposit?
This is a type of NOTE where:
1) Bank acknowledges receipt of money; AND
2) Bank promises the payee/depositor to repay the money.
What is a check? What are the different types of checks?
This is a type of DRAFT that requires the following:
1) The bank is the drawee; and
2) the instrument is ON DEMAND.
TYPES OF CHECKS:
1) Ordinary Checks;
2) Traveler’s Checks - another draft form which must be COUNTER-SIGNED by a person whose “specimen signature” appears on the traveler’s check;
3) Cashier’s Check - The drawer and the drawee are the same bank; and
4) Teller’s check - Check drawn by one bank on another bank.
What if an instrument contains contradictory terms?
1) HAND-WRITTEN terms PREVAIL OVER BOTH PRINT AND TYPEWRITTEN TERMS;
2) Typewritten terms prevail over printed terms;
3) Words prevail over numbers.
What if an instrument is not negotiable?
Then Article 3 of the UCC does NOT apply.
What are the formal requirements of negotiability?
PART 1:
1) The document must be in WRITING (CANNOT BE ORAL) and SIGNED by the MAKER OR DRAWER;
2) Thee promise or order to pay must be UNCONDITIONAL; AND
3) The payment obligation must be for a FIXED amount of money.
PART 2:
1) The writing must be payable to ORDER OR BEARER;
2) The writing must be payable on demand or at a definite time;
3) The writing must OBLIGATE the payor to do one thing, which is to PAY MONEY and nothing else (NO ADDITIONAL UNDERTAKINGS OR INSTRUCTIONS ALLOWED).
T/F - A negotiable instrument must be reduced to a tangible form.
True.
What does “signed” mean?
Includes using any symbol executed or adopted with the present intent to adopt or accept a writing.
Examples of acceptable signature forms:
1) Traditional signature;
2) Printed;
3) Stamped;
4) Written;
5) Thumbprint;
6) Trade or business name;
7) Computer generated.
Explain the “unconditional” requirement of a negotiable instrument.
The promise to order to pay must be unconditional (ex: I, Mary, promise to pay to the order of Paul $50,000).
Typical scenarios that make the promise or order conditional:
1) Express conditions to payment - CANNOT condition the payment on a condition precedent (I promise to pay to the order of Paul $50,000 if he mows my lawn).
2) Subject to another writing - CANNOT do this (I promise to pay to the order of Paul $50,000 subject to the written contract between him and me dated January 1, 2013).
Items that DO NOT make the promise or order to pay conditional:
1) References to other documents - Mere references to other documents do not make the promise to order to pay conditional (I promise to pay . . . in accordance with the written contract between . . . dated January 1, 2013). EXAM TIP: reference that is there for informational purposes only are not conditional.
2) Payment from a particular fund - A provision that payment must be from an identified fund does NOT render the promise conditional.
3) Counter-Signature - The requirement of a counter-signature, as in a traveler’s check, does not render an instrument non-negotiable.
4) Prepayments and collateral - References to other records regarding rights as to collateral, prepayment, or acceleration do NOT make the promise to pay conditional.
What does the requirement of a “fixed amount” mean?
The PRINCIPAL amount due on the instrument must be a FIXED AMOUNT of money.
INTEREST CAN BE VARIABLE.
EXAM TIP: Be aware of fact patterns in which the interest rate may not be fixed or readily ascertainable. The writing in question will still be negotiable as long as the principal amount is fixed.
A negotiable instrument must either be an __________ or ___________ instrument.
Order or bearer instrument.
What is an order instrument? What is a bearer instrument?
ORDER INSTRUMENT - payable to a specific person. Requires specific language or words of negotiability. The key phrases are:
1) Pay to the order of, or
2) Pay [name} or his order.
BEARER INSTRUMENT - Generally, anyone in possession has legal rights to the instrument. Any instrument that does not attempt to pay a specific person. Language that is acceptable:
1) Payable to bearer;
2) Payable to the order of bearer;
3) Payable to cash;
4) Payable to {blank line].
What if a negotiable instrument is payable to both bearer and order?
If the writing has characteristics of both an order instrument and a bearer instrument, then the writing will be TREATED AS BEARER PAPER.
T/F - Checks are an exception to the “words of negotiability” requirement for negotiable instruments.
True
Policy: Article 3 makes this exception simply because checks are prevalent. It would be cumbersome to distinguish between those checks that contained such language and those that did not.
What is payable on demand vs. at a definite time?
A writing must be clear as to when the one required to pay the instrument must do so.
An instrument is payable ON DEMAND when the instrument’s payee or holder can present the negotiable instrument IMMEDIATELY after being issued the instrument.
An instrument is payable at a DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is CLEAR OR READILY ASCERTAINABLE.
T/F - Checks (drafts) are typically payable on demand.
True
T/F - Notes are typically payable on demand.
False.
These are normally payable at a definite time.
What is the effect of acceleration and extension clauses?
Acceleration Clause - makes payment due immediately upon the happening of an event.
Extension Clause - Provision in the instrument that extends the due date. An instrument can contain provisions allowing for the obligor to extend the due date, provided the extension is to a DEFINITE TIME. The instrument can also contain automatic extensions upon a specified event as long as the date is extended to another definite time.
What does it mean to have a date that is readily ascertainable?
When you look at the instrument, you should be able to readily ascertain when the payment must occur.
What constitutes an additional undertaking?
REMEMBER: The writing must commit the obligor to one legal obligation and nothing else; the obligation to pay money.
Basically anything extra (requirement to bake a cake in addition to payment would be an additional undertaking).
EXCEPTIONS - Some additional undertakings are ALLOWED:
1) Promises or orders concerning collateral (“shall provide additional collateral if current collateral falls below FMV”);
2) Provision that allows holder to procure judgment (“holder is hereby granted the authority to confess judgment against maker in any appropriate court.”
What are the requirements for a negotiable instrument again?
1) Writing and signed;
2) Promise or order to pay is unconditional;
3) Principal amount must be fixed, but the interest rate can be variable;
4) Payable to order or bearer (words of negotiability must be used);
5) Writing must be payable on demand or at a definite time (if at a definite time, must be readily ascertainable); AND
6) No additional undertakings (obligor’s sole obligation is to pay money.
What is the basic idea behind acquiring “holder status?”
The person who takes the instrument via negotiation will want to acquire status as a HOLDER IN DUE COURSE (HDC) because this status gives him legal rights that are SUPERIOR to those of a MERE HOLDER.
