Commercial Paper Flashcards
Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a “without recourse” endorsement?
- Contract liability only.
- Warranty liability only.
- Both contract and warranty liability.
- Neither contract nor warranty liability.
Contract liability only. An endorsement “without recourse” is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, signatures are genuine, etc. to subsequent holders of the instrument. Thus, B, C, and D are incorrect because warranty liability to subsequent holders is not disclaimed, only contract liability.
What type of endorsement is this?
It is a blank, qualified and a restrictive endorsement. Restrictive endorsements limit the liability of the endorser to subsequent holders. “For collection only,” is equivalent to, “For deposit only,” written on the back of a personal check.
Train issued a note payable to Blake in payment of contracted services that Blake was to perform. Blake endorsed the note “pay to bearer” and delivered it to Reed in satisfaction of a debt owed Reed. Train refused to pay Reed on the note because Blake had not yet performed the services. Under the Negotiable Instruments Article of the UCC, must Train pay Reed?
- No, Train does not have to pay Reed until the services are performed.
- No, Train does not have to pay Reed because the note was converted into a bearer paper.
- Yes, train has to pay Reed because the note was converted into bearer paper.
- Yes, Train has to pay Reed because Reed was a holder in due course.
Yes, Train has to pay Reed because Reed was a holder in due course. To be a holder in due course the following elements are required:
- the holder must take the instrument for value (payment of an anteceded debt is value),
- take the instrument in good faith (usually, honesty in fact and thus, unless unusual circumstances, assumed),
- take the instrument without notice the instrument is overdue, or has been previously dishonored, or of any claim or defense.
Blake endorsed the note “pay to bearer,” which entitles any person to become a holder, including Reed. Reed gave value as satisfaction of a debt Blake owed Reed, and there are no facts indicating bad faith or notice that the note was overdue, had been previously dishonored, or had any knowledge of a claim or defense. Thus, Reed is a holder in due course and breach of contract or nonperformance is a personal defense and not available against a holder in due course.
Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the words “Lee Louis”?
- Blank, nonrestrictive, and unqualified.
- Blank, nonrestrictive, and qualified.
- Special, nonrestrictive, and unqualified.
- Special, nonrestrictive, and qualified.
Blank, nonrestrictive, and unqualified. Signing your name only as an indorsement turns order paper into bearer paper and can be transferred by anyone at anytime by delivery only without restrictions and without limitations on liability.
Under the Negotiable Instruments Article of the UCC, which of the following requirements must be met for a person to be a holder in due course of a promissory note?
- The note must be payable to bearer.
- The note must be negotiable.
- All prior holders must have been holders in due course.
- The holder must be the payee of the note.
The note must be negotiable. If a note is nonnegotiable, then by definition no transferee can become a holder in due course.
A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank endorsement for $4,000. King steals the note from Bane and sells it to Ott who promises to pay King $4,500.
After paying King $3,000, Ott learns that King stole the note. Ott makes no further payment to King.
Ott is
- A holder in due course to the extent of $5,000.
- An ordinary holder to the extent of $4,500.
- A holder in due course to the extent of $3,000.
- An ordinary holder to the extent of $0.
A holder in due course to the extent of $3,000. Bane was a holder in due course, because Bane took the note for value in good faith and without notice of the note being overdue, previously dishonored, or of claim or defense. Under the shelter principle, Ott has the rights of a holder in due course, because Ott can trace the note back to a holder in due course. However, since Ott did not pay the full value promised, Ott is only a holder in due course to the extent of $3,000, which is the amount actually paid.
Bart presented a negotiable demand note supposedly signed by Alice as maker to Alice for payment. Alice claimed the note was a forgery and refused to pay it. Which of the following is correct?
- Bart is out of luck and receives no payment.
- Bart can now turn to any indorsers of the note for payment.
- Bart gets paid by Alice even if there is a forged signature.
- There are no secondary parties on promissory notes.
Bart can now turn to any indorsers of the note for payment. The primary party has refused payment and Bart must turn to secondary parties – indorsers.
Janice owes Jake $120,000. Jake cashes the check 45 days after receiving it. Janice’s bank fails. The FDIC will cover $100,000. Janice
- Must pay the $20,000 difference.
- Is not liable for the $20,000 difference.
- Is liable for the $20,000 difference but can recover it from the FDIC.
- Must split the difference with Jake and pay $10,000 if he is an HDC.
Is not liable for the $20,000 difference. If the holder/HDC does not present the check within 30 days and there is a bank failure, the drawer is discharged from liability for the difference.
Non-bank parties have 30 Days to turn to secondary parties after primary party refuses to pay.
Under the Negotiable Instruments Article of the UCC, in a nonconsumer transaction, which of the following are real defenses available against a holder in due course?
- Material alteration
- Discharge in bankruptcy
- Breach of contract
Yes, Yes, NO
Real defenses are those that can be asserted universally. That is, they may be asserted against any holder of a negotiable instrument. A material alteration in the instrument and a discharge in bankruptcy may be asserted against any holder. Breach of contract may be asserted against only ordinary holders. A holder in due course is unaffected by this personal defense.
Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a stereo system. Dodsen negotiated the note for value to Mellon by delivery alone and without endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom’s demand for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave prompt notice of Robb’s default to Dodsen and Mellon. None of the holders of the note were aware of Robb’s minority. Which of the following parties will be liable to Bloom?
- Dodsen
- Mellon
No and YES.
The key to liability in this question is the presence or absence of signatures. When a transfer is made without a signature, as was the case with Dodsen’s transfer, transfer warranty applies only to the immediate transferee and there is no contract signature liability. Therefore, only Mellon has rights against Dodsen, and Dodsen is not liable to Bloom. Mellon, however, has signature liability to Bloom, and must pay the instrument if Robb does not.
To the extent that a holder of a negotiable promissory note is a holder in due course, the holder takes the note free of which of the following defenses?
- Minority of the maker where it is a defense to enforcement of a contract.
- Forgery of the maker’s signature.
- Discharge of the maker in bankruptcy.
- Nonperformance of a condition precedent.
Nonperformance of a condition precedent. A holder in due course takes a promissory note free from any personal defenses of the maker but not free from any universal defenses. Universal defenses may be asserted by the maker against any holder and include minority (voidable to a simple contract),forgery of the maker’s signature, and bankruptcy discharge of the maker. Nonperformance of a condition precedent is a personal defense, and may be asserted only against the person to whom the maker originally gave the note.
A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions except:
- Lack of consideration.
- Infancy.
- Forgery.
- Fraud in the execution.
- *Lack of consideration.** Only universal defenses may be asserted against a holder in due course. Personal defenses may be asserted against only ordinary holders. Universal defenses include infancy, forgery, and fraud in the execution.
- *Lack of consideration in the underlying contract upon which the note is based is a personal defense.**
Requirements of Negotiability
All of the following requirements must be on face of instrument for it to be a negotiable instrument (be sure to know these)
To be negotiable, the instrument must:
- Be written
- Be signed by maker or drawer
- Contain an unconditional promise or order to pay
- State a fixed amount in money
- Be payable on demand or at a definite time
- Be payable to order or to bearer, unless it is a check
Under the Negotiable Instruments Article of the UCC, which of the following statements is(are) correct regarding the requirements for an instrument to be negotiable?
- The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay.
- The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer.
2 Only…All of the items in statement II are required to make an instrument negotiable, although an exception is made for a check that need not be payable to order or to bearer.
Clarkson received a check from Shipley which was incomplete as to the amount. The check was given as payment in advance on the purchase of 100 CB radios. The amount was left blank because Clarkson had the right to substitute other CB models if available for those ordered, which would change the price. It was agreed that in no event would the purchase price exceed $1,800. Desperate for cash, Clarkson wrongfully substituted much more expensive CB radios thereby increasing the purchase price to $2,200. Clarkson then negotiated the check to Marshall, one of his suppliers. Clarkson filled in the $2,200 in Marshall’s presence showing him the shipping order and invoice applicable to the sale to Shipley. Marshall accepted the check in payment of $1,400 overdue debts and $800 in cash. Under the circumstances, Marshall is
- A holder in due course but only to the extent of the $800 in cash.
- A holder in due course and entitled to recover the full amount.
- Not a holder in due course because the amount filled in was greater than authorized.
- Not a holder in due course because the instrument was completed in his presence.
A holder in due course and entitled to recover the full amount. Completion of an incomplete instrument other than in accordance with the authority given is a personal defense. Since Marshall is a holder in due course, he takes the instrument free of this personal defense and may enforce the instrument as completed.
The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC
Personal defenses are assertable against ordinary holders and assignees of contract rights to avoid payment
Types of Personal Defenses against a Holder in Due Course (HDC)
- Breach of contract
- including breach of warranty
- Lack or failure of consideration
- Prior payment
- Unauthorized completion
- Fraud in the inducement
- Nondelivery (instrument lost or stolen)
- Ordinary duress or undue influence
- Mental incapacity
- Illegality
- Theft by holder or subsequent holder after theft
In order to negotiate bearer paper, one must
- Endorse the paper.
- Endorse and deliver the paper with consideration.
- Deliver the paper.
- Deliver and endorse the paper.
Deliver the paper. Negotiation is the transfer of an instrument by the proper means so that the transferee becomes a “holder.” Bearer paper may be negotiated by mere delivery of the instrument.
Negotiating bearer paper may be accomplished by delivery alone (endorsement not necessary),
- EXAMPLE: A check is made payable to the order of cash.
Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley’s receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check “without recourse.” Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?
- Blank.
- Special.
- Qualified.
- Restrictive.
Qualified. A qualified endorsement is one that limits the signer’s liability. By signing without recourse, Ashley has stated that she will not guarantee payment of the instrument.
Dilworth, an employee of Excelsior Super Markets, Inc., stole his payroll check from the cashier before it was completed. The check was properly made out to his order but the amount payable had not been filled in because Dilworth’s final time sheet had not yet been received. Dilworth filled in an amount which was $300 in excess of his proper pay and cashed it at the Good Luck Tavern. Good Luck took the check in good faith and without suspecting that the instrument had been improperly completed. Excelsior’s bank paid the instrument in due course. Excelsior is demanding that the bank credit its account for the $300 or that it be paid by Good Luck. Which of the following is correct?
- Good Luck has no liability for the return of the $300.
- Excelsior’s bank must credit Excelsior’s account for the $300.
- A theft defense would be good against all parties including Good Luck.
- Only in the event that negligence on Excelsior’s part can be shown will Excelsior bear the loss.
Good Luck has no liability for the return of the $300. Unauthorized completion of an incomplete instrument and lack of delivery are personal defenses. Thus, Good Luck, a holder in due course, takes the instrument free of these personal defenses and may enforce it as completed.
A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions except
- Lack of consideration.
- Infancy.
- Forgery.
- Fraud in the execution.
Lack of consideration. A maker of a note may use real defenses against a holder in due course but not personal defenses. Lack of consideration is a personal defense.
The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC
Types of Personal Defenses:
- Breach of contract (and warranty)
- Lack or failure of consideration
- Prior payment
- Unauthorized completion
- Fraud in the inducement
- Non-delivery
Which of the following is true of a stop payment order given by a drawer of a check to the drawee bank?
- The stop payment order may be oral but is effective for a shorter time than a written stop payment order.
- Stop payment orders must be in writing to be effective.
- If the drawee bank fails to follow a valid stop payment order, it is automatically liable to the drawer for the amount of the check.
- The drawer of a check can give a stop payment order only if s/he can prove a valid defense.
The stop payment order may be oral but is effective for a shorter time than a written stop payment order.
Stop payment orders may be oral and are valid for 14 days. Written stop payment orders are valid for 6 months and are renewable.
Jane Lane, a sole proprietor, has in her possession several checks which she received from her customers. Lane is concerned about the safety of the checks since she believes that many of them are bearer paper which may be cashed without endorsement. The checks in Lane’s possession will be considered order paper rather than bearer paper if they were made payable (in the drawer’s handwriting) to the order of
- Cash.
- Ted Tint, and endorsed by Ted Tint in blank.
- Bearer, and endorsed by Ken Kent making them payable to Jane Lane.
- Bearer, and endorsed by Sam Sole in blank.
Bearer, and endorsed by Ken Kent making them payable to Jane Lane.
If the last endorsement on a negotiable instrument is a special endorsement, the instrument is order paper. A special endorsement specifies the person to whom or to whose order it makes the instrument payable.
A Special Endorsement indicates specific person to whom endorsee wishes to negotiate instrument
EXAMPLE: On the back of a check payable to the order of M. Jordan he signs as follows: Pay to L. Smith, (signed) M. Jordan.
- (a)Note that words “pay to the order of” are not required on back as endorsements—instrument need be payable to order or to bearer on front only
- (b)Also, note that if instrument is not payable to order or to bearer on its face, it can not be turned into a negotiable instrument by using these words in an endorsement on the back
Balquist sold a negotiable instrument payable to her order to Farley. In transferring the instrument to Farley, she forgot to endorse it. Accordingly
- Farley qualifies as a holder in due course.
- Farley has a specifically enforceable right to obtain Balquist’s unqualified endorsement.
- Farley obtains a better right to payment of the instrument than Balquist had.
- Once the signature of Balquist is obtained, Farley’s rights as a holder in due course relate back to the time of transfer.
Farley has a specifically enforceable right to obtain Balquist’s unqualified endorsement.
When an order instrument is transferred for value without endorsement, the transferee has a specifically enforceable right to obtain the transferor’s unqualified endorsement.
Negotiation occurs only when the endorsement is given. Thus, Farley’s rights as a holder in due course relate to the time the endorsement is made and do not relate back to the time of transfer.
In connection with a check and a promissory note, which of the following is correct?
- A promissory note may only be made payable to the order of a named payee.
- A promissory note may only be payable at a stated time in order to meet the requirements for negotiability.
- A check may be made payable upon the happening of an event uncertain as to the time of occurrence without affecting its negotiability.
- A check may be made payable to the order of the drawer or to bearer.
A check may be made payable to the order of the drawer or to bearer.
A check may be made payable to the order of the drawer or to bearer, but a check need not be (unlike other negotiable instruments). For example, “Pay to A” on a check creates negotiable order paper. But “Pay to A” on other types of instruments make them notnegotiable.
An otherwise negotiable note has the amount payable as three hundred dollars in words. However, the amount stated in figures is $1,300.00. Which of the following is correct?
- The amount legally due on this note is $300 because the words control over the figures.
- The amount legally due on this note is $300 because it is the lesser of the two amounts.
- The amount legally due on this note is $1,300.
- This note is not negotiable.
The amount legally due on this note is $300 because the words control over the figures.
Since there is an ambiguity on the amount of this negotiable instrument, the words control over the figures.
Interpretation of Ambiguities in Negotiable Instruments
- Contradictory terms
- Words control over figures
- Handwritten terms control over typewritten and printed (typeset) terms
- Typewritten terms control over printed (typeset) terms
A client has in its possession the instrument below.
- I, Margaret Dunlop, hereby promise to pay to the order of Caldwell Motors five thousand dollars ($5,000) upon the receipt of the final distribution from the estate of my deceased uncle, Carlton Dunlop. This negotiable instrument is given by me as the down payment on my purchase of a 20Y2 Lincoln Continental to be delivered in 2 weeks.
- (signature)
- Margaret Dunlop
The instrument is
- Negotiable.
- Not negotiable as it is undated.
- Not negotiable in that it is subject to the 2-week delivery term regarding the purchase of the Lincoln Continental.
- Not negotiable because it is not payable at a definite time.
Not negotiable because it is not payable at a definite time.
One of the requirements for negotiability is that the instrument be payable on demand or at a definite time. An instrument which by its terms is otherwise payable only upon an act or event, uncertain as to time of occurrence, is not payable at a definite time.
Payable on Demand includes:
- Payable on sight
- Payable on presentation
- No time for payment stated
It is a definite time if payable:
- On a certain date, or
- A fixed period after sight, or
- Within a certain time, or
- On a certain date subject to acceleration
- On a certain date subject to an extension of time if