Commercial Paper Flashcards
What is a promissory note?
A promise to pay a specific amount. There are two parties involved - maker and a payee.
It can reference other transactions without harming the instruments negotiability.
Example: Bank Certificate of Deposit (CD)
What is a draft?
A commercial paper involving three parties- a drawer; a payee and a drawee
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future
What is a check?
A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer
Drawer - person writing the check
Payee - person being paid
Drawee - the bank
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated.
A negotiable time draft is not payable until the date designated for payment.
What is a trade acceptance?
Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
What is required to maintain the negotiability of a commercial paper?
Must be in writing
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Amount of money must be stated; fixed amount
Payable to order or bearer
payable on demand or at a definite time.
What characteristics will cancel the negotiability of a commercial paper?
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
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
Note: a stated amount of payment plus a stated % of interest is OK
if it states that payment is conditional.
What is required to negotiate Order Paper?
Must have delivery and endorsement
If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
What are the major types of endorsements on commercial paper?
Blank - Doesnt name a new payee; transforms into a bearer paper
Special - Names a new payee; transforms into an order paper
Restrictive - Adds restrictions; doesnt stop further negotiation
Qualified - Payment not guaranteed; without recourse added to endorsement
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount.
For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
Define primary liability with respect to a contract.
First in line to pay on the note/draft
Maker of a Promissory Note has primary liability and must pay according to terms of the note
With a Check; no party has Primary Liability
Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay
Define secondary liability with respect to contract liability
Drawers are Secondarily Liable if Drawee fails to pay a Draft
Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed Without Recourse
Define contract liability.
Guarantees payment of a liability
When does warranty liability occur?
Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only
What five warranties occur with every commercial paper transfer?
Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate
What are the requirements for a holder to be a holder in due course?
Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrumentGiving a present value for the instrument (a future value doesnt count)
If negotiated to a holder in due course, the HDC will take the intrument subject to very few defenses.
What are the personal defenses against a holder in due course (HDC) which will LOSE?
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)
Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution
Article 3, 7, 8
Article 3 - Governs commercial paper; Article 4 - governs documents of title; Article 8 - governs investment securities.
UCC
does not apply to money.
Negotiable Instrument
Has to be payable in money and only money. It is to negotiable if it is payable in “ money or goods”, “ money or stock”, or money or land
If an instrument is not negotiable, there can be no holder of due course and the holder of due course rules does not apply.
Time
An instrument is payable on demand if it specifically say on demand, at sight, on presentation, or nothing at all.
If at a definite time, it is negotiable if it can be determined when the obligation will come due.
Failure to date an instrument will not destroy negotiability. An undated instrument is payable on demand. Also negotiability is not destroyed if instrument is antedated or postdated.
To Order or To Bearer
An instrument must be payable to “order” or to “bearer” with the exception of checks.
It HAS to have one of those words, if not then it is not negotiable unless it is a check.
Ex - pay John Smith , not valid unless it has pay pay to the order of John smith.
The order vs bearer nature of can be changed through the use of certain types of endorsements ( signature)
But those words are not necessary for endorsement it just determines what type it is.
Bearer Paper
Is pyable to anyone who has possession of it.
Constructing a commercial paper
Typewritten terms control over printed terms. Handwritten terms control both. Words control figures, unless the words are ambiguous.
Negotiation
The process by which commercial paper is transferred and the personwhom the UCC seeks to protect are HDC and most transferees of HDC
Bearer paper is negotiated simply by delivering the instrument to a transferee.
Order paper requires delivery to that person and any subsequent transferrequires the specified payee’ endorsement plus delivery.
Steps in becoming a HDC
- Become a holder through proper negotiation. Holder has good title to the instrument.
- Instrument negotiability?
- Limits to rights and defenses - in due course
Endorsement
Each endorsement has three qualities: special or blank; restrictive or unrestrictive; qualified or unqualified.
The first quality determines whether the instrument will be order or bearer paper after endorsement.
The last endorsement determine what is necessary for negotiation.
Special endorsement names a specific party which is then an order paper.
Qualified Endorsement
An endorsement that adds the words without recourse is a qualified endorsement.
Without recourse means there is no guarantee of payment by the endorser - still have warranty liability.
Restrictive endorsement
Any other language added to an endorsement creates restrictive language- “ for deposit only”
Due course
A holder will take commercial paper in due course to the extent that he takes the paper for value, take in good faith, without notice of any defenses or claims on the instrument.
Shelter doctrine
Even though the transferee himself might not qualify as an HDC, he can claim the rights of an HDC who held the commercial paper before him. Non- HDC gets instrument from an HDC.
Only protects innocent parties.
To be an HDC
A) must be a holder of negotiable instrument. Must be a holder of bearer paper or order paper.
B) holder have to give value
c) holder take the instrument in good faith
d) holder take the instrument without notice of any defenses to or claims of ownership.
All four items must be there in order to be an HDC
Defenses against HDC and non- HDC
- Fraud - tricked; 2. Forgery; 3. Insanity, 4. Alteration of instrument, 5. Infancy, 6. Illegality, 7. Duress, 8. Discharge in bankruptcy, 9. Surety, 10. Statue of limitations has run.
These are called real defense
Personal defenses can’t be raised against an HDC - ex - leaving the amount blank and the holder completes it.
Liability
Makers of an instrument are primarily liable. Drawers are secondary liable. Drawers are primarily liable after acceptance.
Endorser Liability
An endorser is secondarily liable. By contract or warranty.
By contract - the holder presents to maker or drawee, the maker or drawee dishonors, the endorser is given notice of the dishonor.
Holder must present it in 30 days.
Warranty Liability
An endorser can be liable for transfer warranties
When an endorser transfers an instrument for consideration, they are making 5 warranties:
- The transfer or is entitled to enforce the instrument
- all the signatures are genuine
- the instrument has not been materially altered
- No defense of any party is good
- the transferor has no knowledge of any insolvency.
