Commercial Paper Flashcards
What is the bright line rule re: commercial paper?
Under UCC Art. 3, when a…
1)negotiable instrument is…
2) duly negotiated to…
3) a holder in due course
→the holder in due course takes the instrument…
4) free of personal defenses and subject ONLY to real defenses
What are the types of negotiable instruments?
1) Promissory note: contains an AFFIRMATIVE promise (not a mere IOU) between a MAKER and a PAYEE
2) The Draft: an ORDER or COMMAND from a DRAWER (makes the order) to a DRAWEE (the one doing the paying; the bank) to make payment to the PAYEE (the beneficiary)
E.g. a check
NOTE: BOTH promissory note and draft are signed by an ENDORSER. Signature could be ANY kind of authentication (initials, defining mark, nickname) found ANYWHERE on the paper (margins, etc)
What are the requirements of a negotiable instrument?
WOSSUPP
1) A Writing;
2) Payable to the Order or Bearer;
3) Signed by the maker or drawer
4) Reciting a sum certain
5) Containing an Unconditional promise or order
6) Payable on demand or at a definite time;
7) Payable in currency
Payable to the Order or Bearer
** Payable to Order: must use the word order or the word assigns in connection with the PAYEE’S name
** Payable to Bearer: it is payable to ANYONE who has it
** “Pay to Andy Garcia” is NOT negotiable (it’s just a contract) because it doesn’t use the magic words (order, assigns, or bearer)
Reciting a sum certain (fixed sum).
- You must be able to calculate how much is to be paid either from:
(1) what the writing says; OR
(2) referencing to an outside source
- You must be able to calculate how much is to be paid either from:
** If it says with interest→OK because if none listed, this is set by statute; or by looking at a financial index
Unconditional promise or order
** And no additional promises or orders→ two’s a crowd
** If it’s conditional, then it’s a contract
** CANNOT be governed by or subject to the terms of an outside writing
** BUT, merely referring to another writing does not make a promise/order conditional
** An instrument IS conditional if it limits payment to a particular source or fund
Payable on demand or at a definite time
** An instrument is payable of demand when it specifically states that it is payable at sight or on presentation or payable on demand (default, IF silent)
** Definite time: an instrument is payable at a definite time IF, by its terms, it is payable ON or BEFORE a stated date, OR at a fixed period AFTER a stated date
** Acceleration clauses are permissible and do NOT destroy negotiability
Payable in currency
** Currency means MONEY, not goods or property
** Money includes foreign currency
What are the types of commercial paper-based liability?
1) Contract (or signature) liability
2) Warranty (or transfer) liability
What is contract (or signature) liability?
The MAKER, merely by signing his name to the instrument, enters into a contract, whereby he agree to pay the instrument. If he fails to pay, he can be sued
With drafts, a DRAWEE (a bank) does NOT sign→ NOT liable
Without recourse: used by indorsers and drawers, representing a DISCLAIMER of liability
What is due negotiation?
Due Negotiation means that there has been a PROPER TRANSFER of the instrument→the transferee is a HOLDER and MAY be eligible for Holder in Due Course status
** Payable to Order: when the instrument is payable to the order of a specific payee, it is DULY NEGOTIATED by delivery of the intrument to that payee
Any FURTHER negotiation requires that the payee INDORSE the instrument and DELIVER it to the transferee
Any indorsement must be authorized and valid (can’t forge someone’s signature)
** Payable to Bearer: if instrument is payable to bearer, indorsement is NOT required
What is warranty (or transfer) liability?
Any TRANSFEROR who sells the negotiable instrument can be liable
Liability does NOT attach if transferor is a DONOR
If a ∆ indorsed the instrument (signed on the back), ANY π in possession of that instrument may sue
When ∆ indorses, WARRANTY runs with the instrument
If ∆ did NOT indorse the instrument, then only the ∆’s IMMEDIATE transferee may sue (warranty does not run with the instrument)
5 warranties made by the ∆…
1) Promises that π has good title to the instrument
2) All signatures are genuine and authorized (forgery = breach)
3) Promises that the instrument has not been materially altered
4) Promises that there is no defense or good claims against the ∆, meaning the instrument is enforceable
5) Promises that ∆ has no knowledge of any bankruptcy or insolvency actions against the maker or drawer
What are the kinds of indorsements?
1) Special: one that names a particular person as indorsee, who must SIGN the order for the instrument to be further negotiated
2) Blank: one that does NOT have a specific indorsee, and may be negotiated by delivery alone
3) Qualified: one with words without recourseis a qualified indorsement and limits the contract liability imposed on indorsers
4) Restrictive: one that contains a restriction that first transferee after the restricion must apply
(E.g. Bobby Donnell indorses his check, “for deposit only, Bobby Donnell”; Any bank must follow the instructions and NOT cash it)
How does a transferee qualify as a holder in due course?
A HOLDER who takes the instrument:
1) for VALUE;
2) in GOOD FAITH; AND
3) without NOTICE
Value ≠ consideration (a mere promise is NOT value)
Old value is good value (moral consideration counts as value)
Good faith is based on the holder’s subjective knowledge
Buyer must not have notice that the instrument is overdue or has been dishonored, or of any defense against or claim to it on the part of any person. Buyer must not know or have REASON to know of an issue (objective)
NOTE: you CAN be a HDC with notice of interest in arrears
How does the Shelter Rule apply to a holder in due course?
A transferee acquires WHATEVER rights her transferor had, NO MATTER her INABILITY to become a HDC
(The transferee takes shelter in the transferor’s status)
What are the benefits of being a holder in due course?
A HDC (and a subsequent transferee who take shelter) takes the instrument FREE from claims and personal defenses and subject ONLY to real defenses
HDC can avoid personal defenses (contract) defenses =
(i) lack of consideration;
(ii) unconscionability;
(iii) waiver;
(iv) estoppel;
(v) fraud in the inducement
A HDC cannot avoid real defenses = MAD FIFI4 Material Alteration: change in the terms of the instrument (unless the maker was negligent)
Duress
Fraud In the Factum = a lie about the instrument itself
Incapacity
Illegality
Infancy
Insolvency
What are the duties of the DRAWEE (bank)?
1) Honor customer’s check if there are suffiicent funds to cover
A bank may CHOOSE to honor a check if there are insufficient funds (and the customer would be liable to the bank)
2) If a bank wrongfully dishonors a check, the customer can recover for proximately caused damages
3) The death of a customer does NOT revoke the bank’s authority to pay a check until the bank:
Knows of the death; AND
Has reasonable time to act on that knowledge
4) Bank can’t charge a customer’s account IF:
drawer’s signature is FORGED (if drawer not negligent)
for more money than the original order (in the case of alteration by 3rd party)
the bank pays the wrong person
the check is post dated
5) Stop payment orders: If bank pays in spite of stop payment order, the customer has the burden of proving that a loss has occured (and the amount of the loss)
Oral stop payment order = binding on the bank for 14 days UNLESS renewed in writing within that period
Written stop payment order = binding for 6 MONTHS, renewable every 6 months in writing
When is a drawer negligent?
Negligence =
1) leaving blanks or spaces on the instrument; OR
2) failing to follow internal procedures designed to avoid forgeries
3) failing to examine a bank statement to discover errors
4) getting tricked into writing a check
5) not monitoring employees who are entrusted with responsibiliy for handling checks
