Commercial Paper

Question 1

Order Instrument

Answer 1

Payable to a specific person with the key phrases of either “pay to the order of [ ]” or “pay to [ ] or his order”

Question 2

Note

Answer 2

Two-party instrument characterized by a promise to pay.

Question 3

Commercial Paper Question Approach

Answer 3

1) Is the instrument negotiable?
2) Was the instrument properly negotiated?
3) Is the holder a HDC?
4) Are there any defenses?
5) Are those real or personal?
6) Is anyone else responsible?

Question 4

Accommodation Party’s Liability

Answer 4

Depends on the capacity in which they sign (must sign the instrument):

1) Signing as a co-maker (primary liability)
2) Guaranteeing Collection (as opposed to payment) - liability after the maker
3) Indorser

Question 5

Priority of contradictory terms

Answer 5

1) Handwritten over typewritten
2) Typewritten over printed
3) Words over numbers

Question 6

Lost Instrument

Answer 6

Plaintiff may enforce if not lost due to the holder transferring the instrument and cannot reasonably obtain possession because it is either lost or destroyed.

Question 7

Check

Answer 7

Bank is the drawee and must be payable on demand.

Question 8

Indorser’s Liability

Answer 8

Ripens when (1) note is dishonored and (2) the indorser receives notice.

Question 9

Negotiation of a bearer instrument

Answer 9

Only requires transfer of possession

Question 10

Drawee

Answer 10

Payor of the draft

Question 11

Consumer Notes

Answer 11

FTC requires a particular notice that will allow the debtor (the consumer) to assert claims and defenses even against a HDC.

1) Maker/drawer is signing the note in a consumer transaction;
2) Transaction is for the sale or lease of goods or services
3) Seller is selling in the ordinary course of business

Question 12

Stop payment orders

Answer 12

Stop payment orders must be in writing, signed and dated, and describe with certainty the item upon which payment is to be stopped. A bank may choose to obey a verbal order, but is not required to honor it.

Question 13

Drawer

Answer 13

Person ordering payment of a draft.

Question 14

Negotiation

Answer 14

Transfer of possession, whether voluntary or involuntary by a person other than the issuer to a person who becomes the holder.

Question 15

Drawee’s Liability

Answer 15

Not liable to payee unless they sign for the purpose of accepting liability.

Question 16

Presentment warranties

Answer 16

• Warrantor is a person entitled to enforce the instrument (no unauthorized indorsements)
• Draft has not been altered
• WARRANTOR HAS NO KNOWLEDGE THAT THE DRAWER’S SIGNATURE IS UNAUTHORIZED.
• With respect to any remotely-created consumer item, the person on whose account the item is drawn has authorized the issuance of the item in the amount for which the item is drawn.

Question 17

Holder in due course

Answer 17

1) Holder
2) Gives value
3) Takes in good faith
4) Without notice (including constructive notice) of any problems

In addition, a person cannot become an HDC if the instrument is purchased in a bulk transaction, not in the regular course of the transferor’s business.

Question 18

Maker

Answer 18

Makes the note.

Question 19

Transfer Warranties

Answer 19

• Warrantor is entitled to enforce the instrument;
• All signatures are authentic and authorized;
• Instrument has not been altered;
• NO DEFENSES CAN BE ASSERTED AGAINST THE TRANSFEROR
• WARRANTOR HAS NO KNOWLEDGE OF ANY INSOLVENCY PROCEEDINGS
• With respect to any remotely-created consumer check, the person o whose account the check is drawn has authorized the issuance of the item in the amount for which the item is drawn.

Question 20

Overdue

Answer 20

• Checks are overdue 90 days after the date of issue.
• Instruments due on demand are overdue after demand for payment is made.
• Instruments due at a definite time are overdue the next day.

Question 21

Permitted additional undertaking

Answer 21

To provide collateral

Question 22

Negotiation of an order instrument

Answer 22

Requires transfer of possession and a proper indorsement.

Question 23

Real Defenses

Answer 23

• Infancy
• Incapacity (if State law renders contracts with these parties void)
• Duress (if void under Staet law)
• Illegality (such as for gambling)
• Fraud in the factum (not aware he is signing an instrument and no reasonable opportunity to become aware)
• Bankruptcy discharge
• Alteration and forgery apparent enough to cause a reasonable person to question its authenticity
• Statute of Limitations

Question 24

Forged Signatures

Answer 24

Person whose signature is forged is not liable, but the forger is.

Exception - a person whose failure to exercise ordinary care substantially contributes to the making of a forged signature is precluded from asserting the forgery against a person who, in good faith, pays the instrument.

Question 25

Theft of a bearer instrument

Answer 25

Constitutes a “transfer” and the thief is considered a “holder” able to enforce the instrument.

Question 26

Bank’s obligation to pay a check

Answer 26

No obligation to pay a check that is more than 6 months old.

No obligation to pay a check on an account that has insufficient funds.

Question 27

Partial performance of value

Answer 27

Gives partial HDC rights

Question 28

Imposter Rule

Answer 28

If an imposter induces a person to issue an instrument to the imposter by impersonating the payee of the instrument or an agent of the payee, an indorsement of the instrument by any person in the payee’s name may be effective as the indorsement of the payee.

Question 29

Unascertainable Interest Payable

Answer 29

If the amount of interest cannot be ascertained from the description, the rate is the established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues.

Question 30

Types of indorsements

Answer 30

Special - to a specific person
General
Qualified - limiting one’s liability on an instrument
Restrictive - restrict what the holder can do with the instrument

Question 31

Good faith

Answer 31

Requires honesty in fact and the observance of reasonable commercial standards of fair dealing.

Question 32

Enforcement of the Instrument

Answer 32

Must show (1) that plaintiff is a person entitled to enforce and (2) the signatures are valid (burden of proving validity if the signatures are specifically denied in the pleadings).

Question 33

Requirements of “negotiability”

Answer 33

1) Signed writing
2) Promise to pay must be unconditional
3) Payment obligation (the principal) is for a fixed amount
4) Writing is payable to the order of, or to bearer
5) Payable on demand or at a definite time
6) Writing obligates payor to pay money and nothing else

Question 34

Statute of Limitations

Answer 34

• For unaccepted drafts - the earlier of three years from the date of dishonor or 10 years from the date of the draft
• For certified, teller’s, cashier’s or traveler’s checks, 3 years from demand of payment.
• For notes, 6 years from payment due date or from demand for payment.

Question 35

Bearer Instrument

Answer 35

Payable to the bearer. If writing has characteristics of both order instrument and bearer instrument, will be treated as a bearer instrument.

Question 36

Maker’s Liability

Answer 36

Primary

Question 37

Draft

Answer 37

Three-party instrument (like a check) with the drawer (makes the draft), the drawee (pays) and the payee

Question 38

Personal Defenses

Answer 38

• Fraud in the inducement (induced into signing due to a misrepresentation)
• Lack of issuance
• Contract defenses
• Claims in recoupment arising from the transaction that gave rise to the instrument
• Remember: an indorsement by any person in the name of the payee is effective as against the drawer. Good employees gone bad also not a defense, unless the beneficiary did not take in good faith or failed to exercise ordinary care in taking the instrument.

Question 39

Drawer’s Liability

Answer 39

Secondary, as the drawee has primary liability.

Question 40

Conditioned Indorsements

Answer 40

An indorsement stating a condition to the right of the indorsee to receive payment does not affect the right of the indorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.

Question 41

Shelter Rule

Answer 41

The rights follow the instrument - whatever rights the transferor had transfer to the transferee, unless the transferee commits fraud or engaegs in illegal activity.

Question 42

Alterations

Answer 42

Obligor is discharged on the instrument, but may be liable on the original terms to a payor bank or drawee who pays on it or to a holder in due course.

Question 43

Incomplete

Answer 43

Unauthorized completions may be enforceable by a payor bank or holder in due course.