Commercial Paper

Question 1

A holder in due course (HDC) is holder who takes: (FIN)

Answer 1

1. For value
2. In good faith
3. Notice, without

Question 2

HDC cannot have notice that: (4 things)

Answer 2

1. Instrument is overdue or has been dishonored.
2. The instrument contains an unauthorized signature or has been altered.
3. There is a claim to the instrument; or
4. Any party has a defense on the instrument.

Question 3

Checks are overdue ___ days after they are drawn.

Answer 3

90

Question 4

If person seeing payment is HDC only ‘real defenses can be asserted against him. What are they?
FAIDS

Answer 4

1. Fraud in the factum AND forgery
2. Alteration and Adjudicated Incapacity
3. Infancy and Illegality
4. Duress, Discharge through insolvency, Discharges known to HDC.
5. Suretyship and SOL.

Question 5

Personal defenses:

Answer 5

Cannot be raised against an HDC.

Most prevalent personal defense is failure of consideration.

Question 6

A maker:

Answer 6

‘makes’ a note.

Question 7

A drawer:

Answer 7

‘draws’ a draft.

Question 8

Forgery:

Answer 8

If a forger steals a check and forges a person’s name, the drawer is generally not liable.

An unauthorized signature (including a forgery) is ineffective as the signature of the person who’s name was signed and is effective only as the signature of the forger.

Question 9

Fictitious Payee Rule:

Answer 9

Exception imputing forgery liability on drawer.

1. Issue of instrument to an impostor
2. Makes the instrument payable to someone who was not intended to have an interest in the money.

Question 10

Negligence rule:

Answer 10

Exception imputing forgery liability on drawer.

1. Leaves blanks in the instrument.
2. Sends instrument to someone with the same name as the payee.
3. Fails to follow internal procedures designed to avoid forgery.

Question 11

Drawee liability:

Answer 11

General rule is that no one is liable on an instrument unless he signs it.

Question 12

Endorser’s liability:

Can arise from 3 situations

Answer 12

1. Contract liability
2. Presentment warranties
3. Transfer warranties

Question 13

Transfer warranties:

A person who transfers an instrument for consideration warrants: (5 things)

Answer 13

1. He is entitled to enforce the instrument
   (no breaks in the chain of title.)
2. Genuiness of signature
3. No material alterations on the instrument
4. Defenses are good against transferor, and
5. No knowledge of insolvency proceedings against the maker, drawer, or acceptor.

Question 14

Presentment warranties:

A person who presents an instrument for payment makes three warranties:

Answer 14

1. Person is entitled to enforce the instrument;
2. The instrument has not been altered, and
3. He has no knowledge that the drawee’s signature has been altered.

Question 15

Accommodation party:

Answer 15

Basically a surety.