Commercial Paper Flashcards
Approach for Commercial Paper Problem
1) Identify type of instrument;
2) Identify parties;
3) Determine if instrument is negotiable;
4) Determine if instrument properly negotiated;
5) Determine if transferee is Holder in Due Course (“HDC”); Determine P’s cause(s) of action: whether K, warranty, tort, or not properly payable;
6) Determine D’s defenses;
7) If D liable, can liability be passed to another?
Promissory Note
Contains affirmative promise to pay between Maker and Payee. (TWO party instrument)
Maker
Promisor (obligor)
Payee
Promisee (person entitled to payment)
CD
Note issued by financial institution. Financial Institution acknowledges receipt of funds, and promises payee to repay the money.
Draft
Contains order for drawee to pay the payee. (ex. personal check) (THREE party instrument
Drawer
Person ordering payment
Drawee
Person to make payment (if re: checks –> drawee = bank)
Payee
Person to receive payment
Checks (characteristics; types)
1) Financial institution is drawee; and 2) payable on demand.
Types: Regular check, certified check (bank has agreed to pay), cashier’s check (drawer & drawee are same bank, person buying check = remitter), teller’s check (check drawn by one bank on another bank, person buying check = remitter), traveler’s check (demand instrument requiring counter sig by person whose specimen sig already on check).
Requirements to be Negotiable (WOS FU MAD)
1) Writing
2) Payable to Order or bearer: Payable to order → must use the word “order” or “assigns”. Payable to bearer → means payable to anyone who has it (e.g. payable to “cash”). CHECKS EXCEPTION: if this is only element of negotiability missing, “order” or “bearer” language req’t waived.
3) Signed by maker or drawer
4) Fixed amount: Must be able to tell principal amt due by looking at instrument.
5) Unconditional promise to pay: Note: unconditional promise. Draft: unconditional order. If conditional → K.
6) Payable in Money: domestic or foreign currency OK. May not be payable in goods or services. If words contradict figures → words prevail.
7) No Additional Undertaking or Instruction: EXCEPT: a) undertaking or power to give, maintain or protect collateral; b) confession of judgment clauses; c) waiver of laws meant to benefit obligor.
8) Payable on Demand or at Definite time: On Demand: if it specifically states payable “on demand,” “at sight,” or “on presentation”. Definite time: payable on or before given date, or at fixed period after given date. Acceleration clauses OK. If doesn’t state date it’s due → demand instrument.
Holder
Possession + Good Title
Payable to Order
if payable to specific payee, must be delivered to payee. Further negotiation requires payee sig
Payable to Bearer
Indorsement not required. Further negotiation OK by possession alone.
TYPES OF INDORSEMENTS:
Special Indorsement – names specific person as indorsee, who must sign;
Blank Indorsement – only has payee sig. No specific person named on instrument;
Restrictive Indorsement – contains condition (e.g. for deposit or collection only)
Identity of Payee
If exact payee unclear on face of instrument (e.g. “John Smith”), intent of issuer controls. Multiple payees – If separated by “and”, ALL payees must indorse. If separated by “or”, requires only one sig.
Misspelled Name
Payee may endorse with real or incorrect name
Payee Lacks Capacity
May still effectively indorse
“HDC” Status Benefit
When negotiable instrument is duly negotiated to a holder in due course (HDC), the HDC takes instrument free of all claims to it, free of personal defenses, and subject only to real defenses
HDC and subsequent transferees take instrument free from: Claims and Personal Defenses: (i) lack of consideration; (ii) unconscionability; (iii) waiver; (iv) estoppel; (v) fraud in the inducement.
HDC Subject to Real Defenses [MAD FIFI4 + SOUP]
(1) Material Alteration; (2) Duress; (3) Fraud In the Factum; (4) Incapacity; (5) Illegality; (6) Infancy; (7) Insolvency; (8) SoL; (9) Omission of required consumer protection language; (10) Unauthorized signatures & forgeries; (11) Payment to former holder
HDC Requirements (+ shelter rule)
1) NEGOTIABLE INSTRUMENT: Must meet all 8 requirements.
2) HOLDER: Must have possession of instrument + good title.
3) NO AUTHENTICITY QUESTIONS: No apparent forgery or alteration of instrument, not irregular or incomplete.
4) FOR VALUE: Must pay value for instrument. Promise is not enough. Old value is ok (e.g., payment for goods already received).
5) GOOD FAITH: Honest in Fact (subjective test) + Observance of reasonable standards of fair dealing (objective).
6) WITHOUT NOTICE: No actual knowledge (subjective) that instrument (i) is overdue (principal only); (ii) was dishonored; (iii) has unauthorized sig; (iv) has alteration(s); (v) there’s uncured default w/r/t payment of another instrument issued in same series; or (vi) is subject to any claims or defenses. Later notice is OK. Won’t lose HDC status.
SHELTER RULE: Transferee acquires rights of transferor. BUT, having rights of HDC does not make you HDC.
Basis of K Liability
D signed negotiable instrument
Signatures by Agents
If signed by binding agent for principal, principal bound. Agent NOT personally liable only IF (1) principal is ID’d in instrument; and (2) signature clearly shows it was made on behalf of principal.
Otherwise, agent liable:
—To HDC – agent liable UNLESS agent can prove HDC had notice that agent signed as principal’s rep.
—To non-HDC – agent liable UNLESS agent can prove original parties did not intend agent to be liable.
—Special Rule for Checks – agent for drawer not personally liable if principal’s name on check.
Liability for Maker of Note
enters into K to pay instrument. Must pay when it’s due according to terms at time issued. Liable to holder or indorser who paid instrument. Defenses: depends on holder status (e.g. whether HDC)
Endorser of Note or Draft
Indorser signs check, and if draft dishonored, promises to pay if notified. Indorsers liable to each other in order of sigs – liable to later indorsers. May disclaim liability with by accompanying sig with specific language (e.g. “without recourse, John Doe”).
Drawer of Draft
if signed, and draft dishonored, obliged to pay draft according to its terms.. May not disclaim liability on check, but may do so on other drafts.
Drawee (Bank)
no direct liability because generally doesn’t sign draft. May be liable if agrees to pay draft and signs it, but no obligation to do so.
Co-signers, Sureties & Guarantors
Signs instrument to lend credit to another, but receives no direct benefit. Liable in capacity in which they sign. Presumed guaranty of payment. May limit liability to collection only. If they pay instrument, entitled to reimbursement from accommodated party
Warranty Liability—Generally
Warranty liability based off of instrument. Implied warranties created by transfer or presentment, not indorsement. D liability for selling defective instrument
Transfer Warranties: Made By
Transferor who receives consideration. No warranty if transfer was a GIFT.
Transfer Warranties: Made To
immediate transferee; and subsequent transferees if transferor indorsed. Drawees and makers NOT allowed to sue for breach of transfer warranty
List of Transfer Warranties
(1) Entitled to enforce instrument;
(2) Sigs authentic and authorized;
(3) No material alteration;
(4) No defenses;
(5) No knowledge of insolvency proceedings against maker or drawer.
Presentment Warranties
Presentment and transfer warranties mutually exclusive.
Presentment Warranties: Made By
Presenter (person asking to be paid on check); and previous transferors.
Presentment Warranties: Made To
Parties who pay in good faith – makers, drawees and acceptors.
List of Presentment Warranties
(1) Entitled to enforce draft or obtain payment; (2) No material alteration; (3) No knowledge of unauthorized drawer’s sig; (4) if remotely-created instrument, person ID’d as drawer authorized it.
Sue on Warranty or K?
If P is HDC, sue indorser on indorser’s K.
If P is payor and P should not have paid, sue indorser for breach of warranty.
Forged Maker’s Sig
Alleged maker not liable. But, maker may ratify sig. Forger is liable.
Forged Drawer’s Sig (defenses)
Alleged drawer not liable. Drawee bank must credit alleged drawer’s acct unless defenses.
Defenses: (i) Drawer’s negligence; (ii) “Bank statement rule” - drawer has duty to inspect bank statements and canceled checks in timely manner, and must report forgeries to bank (w/n 1 year). If repeat offender, must report w/n 30 days of statement
Forged Indorsements (Most commonly tested)
Effect of Forged Payee’s name – if forged on bearer paper, forgery irrelevant. If on order paper, forgery breaks chain of title, and check not payable.
Liability of Drawee – Payee can sue payor bank and depositary bank for conversion. Drawer can sue payor/drawee bank since check not payable. BUT, drawee cannot be liable for conversion and drawer’s action.
Bank (Drawee) Defenses
(1) imposter rule; (2) fraudulent indorsement by employee entrusted with check; (3) drawer negligence; (4) failure to timely sue (w/n 3 yrs).
Liability of Presenter (Breach of Presentment Warranty)
If bank pays, it may sue presenter for breach of presentment warranty of being entitled to enforce
Liability of Transferor
If presenter loses, he may sue other transferors for breach of various transfer warranties: entitled to enforce; authentic & authorized sigs; and no good defenses
Alteration
Obligor won’t pay because instrument altered.
Fraudulent or Non-fraudulent Alteration
Non-fraudulent alterations don’t discharge any party, and instrument enforced according to original terms.
Fraudulent alterations discharge all obligated parties on instrument unless parties assent to or are precluded from asserting alteration.
Types of Alteration
Change in Obligation: unauthorized change in instrument modifying party’s obligation: (e.g. amount, date, names of payees, interest rate);
Unauthorized Completion: Party’s obligation affected because instrument completed in unauthorized manner.
Alteration’s Affect on HDC
Even if fraudulent, HDC is protected. If change in obligation, HDC may enforce orig amt. If unauthorized completion, HDC may enforce as completed.
