Commercial Paper Flashcards
What is a PROMISSORY NOTE?
- A Promise to pay a specific amount
- Two Parties
o Maker
o Payee - Example
o Bank Certificate of Deposit (CD) - Can reference other transactions without harming the instrument’s negotiability
What is a Commercial Paper DRAFT?
- Three Parties – Drawer, Payee, Drawee
- Checks
o A Check is a draft that is payable on demand
o Payable to order of drawer or bearer
o Drawer – YOU are writing the check
You keep your checkbook in the desk drawer
o Payee – is whom you are writing the check to
Pay to the order of…
o Drawee is your bank
o All checks are drafts, but not all drafts are checks
o Exam Trick: If it looks like a check, but says ’30 days after date pay to the order…*
Not a Check – they are Payable on Demand o Instead, it’s a Negotiable Time Draft o Not a Post-Dated Check, it’s a Draft o Three parties? Payable on Demand? Check o Three parties? Payable in the future? Draft
What is Trade Acceptance related to Commercial Papers?
o Seller extends credit to Buyer o Buyer agrees to pay Seller Buyer has Primary Liability o Seller is both Drawer and Payee Seller has Secondary Liability
NEGOTIATIONS OF COMMERICAL PAPER?
Transfers ownership to another party
What must happen to maintain negotiability of a Commercial Paper?
o In writing
o Signed by Drawer/Maker
o Be without conditions for payment
Limitations on payment sources allowed
o Amount of money must be stated
If an additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate), it cancels negotiability
If 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
Renders the paper non-negotiable
A stated amount of payment plus a stated % of interest is OK
o Payable
On Demand (Check)
At a definite time (Draft)
Can’t be based on an uncertain event like someone’s future death or at the date of closing on a property
To order or to bearer
Are notations on document for records purposes allowed on Commercial Papers?
o Writing in Memo section of a check
What is a Blank Endorsement?
Doesn’t name a new payee
Transforms into bearer paper
Think: Blank = Bearer
What is a Special Endorsement?
Names a new payee
Transforms into order paper
What is a Restrictive Endorsement?
Adds restrictions
Doesn’t stop negotiation
You endorse the back of your check For Deposit Only
Restrictive endorsements can’t stop someone from further negotiating an instrument
No Pay to the order of Steve Only
What is a Qualified Endorsement?
‘Without Recourse’ added to endorsement
Payment is not guaranteed
If endorsed, how soon must a check be presented?
A check must be presented for payment within 7 days to hold the endorser liable
If paper is exchanged for value, Transferor must?
Give an Unqualified Endorsement
To negotiate Bearer paper, must have?
Delivery only
To negotiate Commercial Paper?
The stated dollar amount in words supersedes the numerical dollar amount
A check states One Hundred Dollars
The check is written for $1000
One Hundred Dollars wins
What is Contract Liability?
o Guarantees payment
o Primary Liability
o First in line to pay on the note/draft
o Maker of a Promissory Note has primary liability and must pay according to terms of the note
o With a Check, no party has Primary Liability
o Exception: Drawee (your bank) is primarily liable to pay if they certify – i.e. promise to pay
o Secondary Liability
o Drawers are Secondarily Liable if Drawee fails to pay a Draft
o Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed ‘Without Recourse’
What is Warranty Liability?
o Occurs when you negotiate commercial paper o By signing You warrant to all future parties o By not signing You warrant to current party only
What are five Warrantees with every Commercial Paper transfer?
o Title o No Defense will stand against it o No Material Alteration o No knowledge of Bankruptcy proceedings o All Signatures are legitimate
What is holder in due course?
Upgrade from merely being a holder of an instrument
Requires
Holding a negotiable instrument
Taking instrument in Good Faith
o Even if you buy a stolen note and you don’t know that it’s stolen, you’re still a HDC
Having no knowledge of defenses against instrument
o i.e. problems with the instrument
Giving a present value for the instrument
o A future value doesn’t count for HIDC
What are Personal Defenses (will Lose vs. HDC) related to holder in due course?
o A Holder in Due Course takes an instrument free of Personal Defenses o Lack of consideration/value given o Breach of contract/warranty o Duplicate payments o Fraud (in the inducement only) They know they made a contract, but did so because of some misrepresentation HDC > Fraud in the Inducement claims o Voidable contracts If voidable due to illegality or insanity HDC wins Void contracts as adjudicated by state HDC loses
What are Real Defenses (Win vs. HDC)?
o HDC takes an instrument subject to Real Defenses o Material alterations to the instrument o Forgery o Bankruptcy If the maker declares Bankruptcy, HDC loses the right to collect on the note o Maker not Competent to Contract Insanity Illegal Infant o Fraud in the Execution Victim didn’t know contract was Executed Note – If victim knew a contract was made, but there were misrepresentations (i.e. Fraud in the Inducement), Holder in Due Course beats this defense
