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Commercial Paper > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

Approach

A

(1) Identify the type of paper
(2) Identify the parties
(3) Determine if instrument is negotiable
(4) Determine if instrument was properly negotiated
(5) Determine if transferee is a HDC
(6) Determine P’s cause(s) of action (i.e., K, warranty, tort, or not properly payable)
(7) Determine D’s defenses
(8) if D is held liable, may D pass liability on to another party?

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2
Q

Note

A

A PROMISE to pay b/t 2 parties

Maker = promisor (obligor) who promises to pay

Payee = promisee entitled to payment

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3
Q

Certificate of Deposit

A

A note issued by a financial institution (i.e., a bank)

Bank acknowledges receipt of money and promises the payee/depositor to repay the money

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4
Q

Draft

A

An ORDER to pay among 3 parties

Drawer = person ordering payment

Drawee = person to make the payment (w/ a check, this is the payor bank)

Payee = person to receive the payment

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5
Q

Check

A

Most common type of draft

Requirements:

(1) Bank is the drawee, AND
(2) Payable ON DEMAND (whenever payee wants the money)

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6
Q

Types of Checks

A

(1) Ordinary check
(2) Certified check = an ordinary check which the bank has accepted (i.e., agreed to pay)
(3) Cashier’s check = rawer and drawee are the same bank, and person buying the check is the remitter
(4) Teller’s check = check drawn by one bank on another bank, and person buying the check is a remitter
(5) Traveler’s check = demand instrument requiring a counter-signature by a person whose specimen signature already appears on the instrument

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7
Q

Remotely-Created Item

A

A draft NOT SIGNED by the drawer but created with the drawer’s authority so that a third party can get paid from the drawer’s account at a bank

Usually TP is a seller in an internet transaction or when you pay bills over the phone by giving creditor your checking account #

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8
Q

Negotiability Basics

A

Refers to the form of the instrument

Determined at the time of issuance

Instrument can OPT OUT by saying that it’s non-negotiable (UNLESS it is a check)

Paper must be negotiable AND properly negotiated in order to reach the hands of a HDC

If paper isn’t negotiable, it’s just a regular K

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9
Q

Elements of Negotiability

A

(1) In writing
(2) Signed by maker (note) or drawer (draft)

(3) Unconditional promise or order to pay (more than mere acknowledgment of IOU)
- see more on flashcard

(4) Fixed amount (must be able to look at the instrument and determine the principal amount due)
- presumption = no interest (i.e., an ordinary check)
- OK if interest is stated as amount of money, a fixed or variable rate, or reference to outside source (i.e., “2% above the prime rate”)
- just stating “interest” = judgment rate

(5) In Money
- an authorized medium of exchange (foreign or domestic currency)
- CANNOT be payable in goods/services
- words prevail over figures (“five hundred dollars” will win over “$550” in same instrument)

(6) No Other Undertaking or Instruction

(7) Payable On Demand/”at sight” or At a Definite Time
- silent instrument = demand instrument (i.e., ordinary check)
- definite time can be fixed date, or fixed period after sight/acceptance, or time readily ascertainable at time promise/order is issued
- prepayment or acceleration that changes date are OK
- extending due date OK

(8) Contains Words of Negotiability (see more)

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10
Q

Unconditional Promise or Order to pay

A

Presumption of unconditional promise/order… unless made conditional by:

(i) express condition to payment (“I promise to pay $10k if I pass the bar”)
(ii) promise/order “subject to” or “governed by” another record/writing
(iii) incorporation by reference re: rights/obligations of another record

OK (still negotiable) if

  • there’s a statement of consideration
  • reference to another record “as per” or “in accordance with” language
  • Incorporation by reference re: (1) rights to collateral, (2) prepayment, or (3) acceleration
  • limitation of payment to a particular fund or source (i.e., “from the proceeds of my Summer 2014 wheat crop”)
  • counter-signature (i.e., a traveler’s check)
  • consumer protection language (but this WILL prevent holder from being a HDC!!!)
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11
Q

Words of Negotiability

A

Bearer Language

  • “payable to bearer” or “payable to the order of bearer”
  • indication that possessor is entitled to payment
  • no payee stated (i.e., check which drawer signs but does not fill in the name of a payee = bearer paper)
  • “to cash” or “to order of cash”
  • not payable to identified person

Order language

  • “payable to the order of Frank Smith” = order paper
  • typically pre-printed on checks

If both order and bearer language appear = bearer controls

If this is the only element missing for a check, the order or bearer language requirement is waved (i.e., check “payable to Frank Smith” is negotiable… but a NOTE or non-check draft would not be)

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12
Q

Negotiation

A

Transfer of negotiable instrument so that transferee is a HOLDER

Holder status:

(1) Possession of negotiable instrument, AND
(2) Good title
- bearer ONLY needs possession for good title
- order needs possession + INDORSEMENT

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13
Q

Indorsements: Blank v. Special

A

Indorsement = a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor (normally on the back of the instrument)

Blank indorsement = payee’s signature only

  • creates BEARER paper (further negotiations may be done by transfer of possession alone)
  • Example: check payable “to the order of Frank Smith” is signed by Frank = blank indorsement, now bearer paper so anyone in possession has right to cash the check

Special indorsement = payee’s signature + designation of new person to whom instrument is payable

  • creates ORDER paper (further negotiations require indorsement of that person)
  • Example: check payable “to the order of Frank Smith” is signed by Frank with “Pay to Susan Cortez” = order paper, further negotiations require Susan’s indorsement
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14
Q

Restrictive Indorsement

A

Limits what can be done with the instrument

Example: Check is made payable “to the order of Frank Smith” and Frank signs the back with “For deposit in my BoA account #123 only” = restrictive indorsement so depositary bank will be liable to Frank for conversion if not adhered to

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15
Q

Identification of Person to Whom Instrument Payable (the Payee)

A

Rule = intent of issuer determines initial payee

Multiple Payees

  • “and” = ALL payees must indorse
  • “or” or “and/or” = any 1 of payees can indorse
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16
Q

Indorsement Issues/Rights

A

If instrument is transferred for value, transferee has a specifically enforceable right to the transferor’s indorsement

Depositary bank becomes holder even if payee deposits check in her account without indorsing it

Misspelled payee’s name

  • Payee can indorse with incorrect or real name
  • a person giving value may require her to indorse with both names to make chain of title clear

Payee lacking capacity (i.e., a minor, an incompetent person) may effectively indorse

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17
Q

Rights of Mere Holder

A

Rights to:

  • possession and
  • to enforce the instrument, which must be free of forgeries of the names necessary to the chain of title
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18
Q

Elements of Holder in Due Course (HDC) Status

A

(1) Negotiable instrument
(2) Holder
(3) Authenticity not apparently questioned (no evidence of forgery, alternation, not otherwise irregular or incomplete)
(4) Holder Pays Value
- X agrees to pay Y $4k for a note payable for $5k, but X has only paid $2k at the time the maker refuses to pay; X qualifies as HDC for only $2,500 –> 1/2 of the agreed upon consideration = 1/2 of the face value of the note
- past consideration (paying a debt) = value
(5) Good faith (subjective honesty in fact + objective observance of reasonable commercial standards)
(6) Without notice at time of instrument acquisition

  • Burden of proof is on person claiming HDC status
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19
Q

HDC Status: Without Notice at Time of Acquisition

A
  • Cannot have actual knowledge (subjective test) or reason to know (objective test)
  • Constructive notice does NOT count (filing in public records)
    (1) instrument (principal) overdue
  • for a check = 90 days after issue
  • overdue interest is NOT notice
    (2) Instrument dishonored
  • instrument not paid upon proper demand such as check marked insufficient funds
    (3) Uncured default with respect to payment of another instrument issued as part of the same series
    (4) Unauthorized signature
    (5) Alteration
    (6) Any claim
    (7) Any defense or claim in recoupment (like a counterclaim)
20
Q

HDC: Shelter Rule

A

Person who does NOT qualify as HDC may still have rights of HDC

Example: Mary qualifies as HDC of promissory note, gives note as gift to Keith 1 month after the note is overdue –> Keith may assert Mary’s rights as a HDC against the maker even though Keith is NOT a HDC because he (1) did not pay value and (2) had notice the note was overdue

Person who was party to fraud or illegality affecting instrument CANNOT get HDC rights by shelter

21
Q

HDC Rights: Subject to Real Defenses

A

These REAL DEFENSES will DEFEAT HDC status:

(1) Infancy
(2) Duress with VOIDS Obligation
(3) Lack of Legal Capacity which VOIDS Obligation
(4) Illegality Making Obligation VOID
(5) Fraud in the Execution (Fraud in the Factum)
- signer lacked knowledge of instruments character or essential terms AND lacked reasonable opportunity to learn of instrument’s character or essential terms (thus lacked intent to sign a promise/order)
(6) Discharge in Insolvency (Bankruptcy)
(7) Omission of Required Consumer Protection Language
- if missing, instrument will be treated as if it actually contains the language, so issuer may assert against an HDC all claims and defense that would’ve been available)
(8) Statute of Limitations
- Note = 6 years from DUE DATE (not issue date)
- Unaccepted Draft (e.g., a check) = earlier of 3 years after dishonor (it bounces), or 10 years after issue
(9) Payment to Former Holder
- Notice to make payment to new holder/transferee is adequate only if it’s SIGNED by the transferor or transferee, reasonably identifies the transferred note, AND provides address for payments)
(10) ALTERATIONS
(11) UNAUTHORIZED SIGNATURES and FORGERIES

22
Q

HDC: Protected from Personal Defenses

A

HDC status is NOT impacted by:

(1) Failure of consideration (e.g., non-delivery of goods or non-performance of services)
(2) Breach of warranty
(3) Fraud in the inducement (maker is mislead about quality of goods or doesn’t read carefully when in a hurry)

23
Q

K Liability: Agents’ Liability

A

Basis of liability = a person’s signature on an instrument

Agent escapes personal liability if

(1) Principal is identified in the instrument, AND
(2) Signature unambiguously shows it was made on behalf of the principal

If not satisfied above, agent could be liable:

(1) to HDC, unless agent can prove holder had notice of representative nature of agent’s signature
(2) to non-HDC, unless agent can prove that original parties did not intend the agent to be liable

Special rule for checks = no liability for agent if principal’s name is on the check (even if agent did not indicate agency capacity)

If no authority, then it’s a forgery and agent is bound (but the purported principal is NOT)

24
Q

K Liability: Maker of Note

A

Primary liability (no conditions precedent) = must pay instrument when it’s due according to its terms at the time it was issued

Liable to holder or indorser who paid the instrument

Defenses can be raised by effectiveness depend son status of holder

25
Q

K Liability: Drawer of Draft

A

May NOT disclaim liability on a check (putting “without recourse” on the check won’t cut it!)… but MAY disclaim on other drafts

Secondary liability–only liable after 2 conditions are met:

(1) Presentment to drawee within 30 days
(2) Dishonor (drawee refuses to pay instrument upon proper presentment)

26
Q

K Liability: Indorser of Note or Draft

A

Liability disclaimer is allowed!

Order of liability: indorsers are liable to each other in order of their signatures

  • sue prior indorsers for payment
  • liable to later indorsers

Secondary liability = indorser only liable after 3 conditions are met:

(1) presentment to maker/drawee of check within 30 days of indorsement
(2) dishonor
(3) notice of dishonor to indorser within 30 days of dishonor

27
Q

K liability: Drawee

A

General rule = drawee makes no negotiable instruments K (e.g., Dan draws check on BoA for $300 payable to Paula; check bounces when Paula attempts to cash it… Paula MAY NOT sue BoA to collect $300 because BoA, the drawee, did not sign the check and has no K liability)

Acceptance or Certification

  • Drawee may agree to pay the draft by signing the draft
  • Certification (e.g., bank writes on check “Certified by BoA”) discharges the drawer AND all prior indorsers

Final Payment occurs when drawee bank (1) pays item in cash, or (2) does not revoke a provisional settlement by midnight of the next banking day after receipt
- Once drawee bank finally pays a check, K actions may no longer be pursued and bank may not recover on check from person it paid unless there is breach of presentment warranty

Conversion (tort) liability if drawee pays on forged instrument
- Person suing in conversion must have received delivery of the instrument (no go if check gets lost in the mail)

Payment of Checks After Drawer’s Death

  • May continue to pay checks until it knows drawer has died or has reasonable opportunity to act
  • Drawee bank may pay for no more than 10 days after death
  • But if someone claiming interest in account requests bank stop paying checks immediately, drawee must comply
28
Q

Accommodation Party

A

A person who signs an instrument to lend her credit to another party but does not receive any direct benefit (e.g., Co-signers, sureties, and guarantors)

Accommodated party = principle/debtor/obligor (person with bad credit)

Accommodation party = surety/co-signer (good credit)

Holder = creditor/obligee (wants payment assured)

Status can be demonstrated by

  • express language
  • anomalous indorsement (indorsement by person who was not the holder of instrument–e.g., outside the chain of title)
29
Q

Accommodation: Liabilities

A

Accommodated party is liable in capacity in which he signs

Presumption = guarantee of payment (meaning payee can collect from accommodation party before even trying to collect from person with bad credit)

Accommodation party can limit liability by including express language indicating “collection only” (so that payee has to attempt to collect from bad credit party first)

If accommodation party pays the instrument, he’s entitled to reimbursement from accommodated party (maker/indorser)

30
Q

Warranties: Generally

A

these are IMPLIED warranties that arise automatically off the instrument

Unlike K liability, possession of instrument is not needed to use warranty; and it survives the final payment of an instrument

31
Q

Transfer Warranties: Who?

A

TRANSFEROR who receives consideration makes transfer warranties (does NOT apply to gift!)

Warranties are made to

(1) Immediate transferee
(2) Subsequent transferees if transferor indorsed

Drawee and maker NEVER sue for breach of transfer warranties because instruments are PRESENTED to them, not transferred to them

32
Q

Transfer Warranties

A

(1) Warrantor is entitled to enforce the instrument (i.e., warranty of being a holder)
(2) All signatures authentic and authorized
(3) No alteration
(4) No good defenses against transferor (i.e., perfect P warranty)
(5) No knowledge of insolvency proceedings
(6) If remotely-created item, the person identified as the drawer actually authorized the item

33
Q

Disclaiming Transfer Warranties

A

Checks = CANNOT disclaim (ineffective)

Non-checks = CAN disclaim (“without warranties”)

34
Q

Presentment Warranties

A

Made on presentment by PRESENTER AND PREVIOUS TRANSFERORS

Made to the parties who pay in good faith (i.e., maker of note drawee or acceptor of draft)

Warranties when unaccepted draft presented to drawee (e.g., a normal check):

(1) Warrantor entitled to enforce draft or obtain payment
(2) No alteration
(3) No knowledge of unauthorized drawer’s signature
(4) If remotely-created item, that person identified as the drawer authorized the item

Warranty when other instruments presented (i.e., a note, a dishonored draft to indorser)
(1) Warrantor entitled to enforce draft or obtain payment

35
Q

Warranty v. Indorser’s K

A

if P is HOLDER
- if payor has not paid the instrument, then the holder will sue the indorser on the indorser’s K

if P is PAYOR
- if payor has paid and later discovers the payor should not have paid, the payor will attempt to sue the indorser for breach of warranty (to get the $ back)

36
Q

Discharge by Holder

A

Holder may discharge obligation by surrendering instrument to obligor, destroying it, canceling it (e.g., writing “void”) etc.

37
Q

Effect of Discharging Instrument on Underlying Obligation

A

Payment by certified check, cashier’s check or teller’s check = underlying obligation is discharged as if person paid in cash

Uncertified checks and notes = underlying obligation is merely suspended

  • If check or note is later paid, underlying obligation is THEN discharged
  • If check or note is dishonored, holder may sue on either instrument or underlying obligation
38
Q

Failure to Produce Original Instrument

A

E.g., original instrument is lost, inadvertently destroyed, or stolen

  • Enforcement by person not in possession
    (1) person was entitled to enforce when loss occurred,
    (2) loss was not due to transfer or lawful seizure, AND
    (3) person cannot reasonably obtain the original
  • Protection for payor required (e.g., security or bond)
39
Q

Overdrafts

A

Bank MAY charge customer’s account even if the charge creates an overdraft

40
Q

Post-dated “Check”

A

Bank MAY pay postdated check UNLESS customer gives bank a notice of the postdating which describes the check with reasonable certainty

41
Q

Stop Payment Orders

A

Drawer (bank’s customer), but no one else, may stop payment on a check… must:

(1) be in writing
(2) be dated
(3) signed
(4) described item with certainty (check #, account #, amount, etc.)

Valid for 6 mo.; can be renewed by drawer

Bank’s defenses if it pays over a stop payment order:

  • didn’t comply with above requirements
  • no loss = customer would have to pay the check even if payment had been stopped (i.e., check reached hands of HDC)

Cashier’s and Teller’s checks = remitter cannot stop payment; bank may stop it to be nice (but risks liabilities)

42
Q

Wrongful Dishonor

A

Drawee dishonoring (bounces) a properly payable check

DRAWER may bring action against drawee for bouncing a check it should have paid
- may recover all damages caused by wrongful dishonor (bounced check fee, expenses incurred defending prosecution for writing hot checks)

PAYEE may NOT sue the drawee bank, even if banks should’ve paid the check and drawer had sufficient funds

Drawee Bank’s Defenses

(1) Payment would overdraw the drawer’s account
(2) Check is more than 6 mo. old (bank MAY honor a “stale check” in good faith, but doesn’t have to)

43
Q

Payment in Full Check

A

A check (or accompanying communication) on which the drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bona fide dispute

Effect = operates as accord and satisfaction if payee cashes the check

Exceptions

  • Payee returns the money within 90 days (undoing the accord and satisfaction)
  • Payee is an organization and had previously notified the drawer of a particular person or address to send payment in full checks
44
Q

Forgery: Forged Maker’s Signature

A

Alleged maker is NOT liable because maker’s signature isn’t on the note!
- Maker’s conduct could ratify or cause alleged maker to be precluded from denying the forgery

Forger is liable because his signature appears on the note

45
Q

Forgery: Forged Drawer’s Signature

A

Alleged drawer is NOT liable

Drawee bank must re-credit alleged drawer’s account as check was not properly payable unless drawee bank has a defense

Bank unable to pass on loss unless breach of presentment warranty

  • normally NO presentment warranties will be breached
  • forger is the real drawer because he signed
  • drawee takes risk that drawer’s signature unauthorized unless presenter knew it was unauthorized
46
Q

Forgery: Bank’s Defenses to Re-crediting

A

Drawer’s negligence substantially contributes to the forgery of the drawer’s name

Bank Statement Rule: Duty to Inspect Statement

  • General rule = customer (drawer) has duty to inspect statement and canceled checks in timely manner and report forgeries to bank
  • Forged drawer’s signature MUST be reported to bank within 1 year regardless of banks or customer’s negligence
  • Repeat Offender Rule = if same person is forging series of checks, drawer must report forgeries within 30 days of when the statement was available (if not, bank will not re-credit the account for subsequent forgeries by the same person)
47
Q

Forged Indorsements

A

Forging Payee’s Name

  • Bearer paper = irrelevant!
  • Order paper = forgery breaks chain of title and check is not properly payable; drawer may demand that drawee bank re-credit the drawer’s account as the check was not properly payable

Imposter rule = drawer/maker estopped to deny validity of forged indorsement
- i.e., where maker/drawer is deemed to have acted carelessly/negligently in issuing the check and thus to have contributed to the forgery

If employer entrusts an employee (or independent contractor)nwith responsibility with respect to an instrument and the employee makes a fraudulent indorsement, the indorsement is effective

Commercial Paper (1 decks)

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