Commercial Paper

Question 1

What is commercial paper aka negotiable instrument?

Answer 1

non-cash forms of payment that have unique characteristics that convey rights from one party to another while creating legally enforceable obligations.

Question 2

What are the 2 types of commerical paper?

Answer 2

Notes

Drafts

Question 3

What is a note

Answer 3

<>A 2-party instrument in which the MAKER promises to pay a sum of money to the PAYEE. Generally used as evidence an extension of credit.
<> Contain promises like: “I, Mark, promise to pay to the order of Paula the sum of $1000.”

Question 4

What is a Certificate of Deposit (“CD”)

Answer 4

A type of “note” bcuz it’s a 2-party instrument, particular to banks, in which a bank

(i) acknowledges it has received $, and (ii)promises to repay that amount.
* A CD is an Art. 3 instrument only if it is negotiable; most CDs are not.

Question 5

What is a draft?

Answer 5

<> A draft (or “bill of exchange”) is a 3-party commercial paper in which the DRAWER orders the 2ND party (drawee or payor) to pay money to a 3P payee.

Drafts contain orders: “To National Bank, pay to the “order” of Paula the sum of $1000, signed, Mark.”

One type of draft is a check, which is drawn upon a bank and payable on demand. This is true even if the paper is described as something else (e.g., a money order).
*other type of draft is travelers check (must have counter signature), cashiers check, tellers check

Question 6

Whats a teller’s check

Answer 6

A draft drawn by a bank on another bank or payable at or through a bank

Question 7

What’s a cashiers check

Answer 7

Drawer and drawee are the same bank

Question 8

What priority are given to terms when there are contradicting terms on a instrument??

Answer 8

-handwritten terms prevail over typewritten terms,
-typewritten terms over printed terms,
and
-words over numbers.

Question 9

To be negotiable, an instrument must:

Answer 9

1) be a writing, signed by the maker/drawer;
2) Have an unconditional promise or order;
3) pay a fixed amount of money;
4) To: order or bearer;
5. ) Payable on demand or at definite time; and
6) W/o stating any addt’l undertaking or instruction.

Question 10

Makers make_________

Answer 10

Notes

Question 11

Drawers draw______

Answer 11

Drafts

Question 12

What qualifies as a “writing”

Answer 12

Anything in tangible form.

A negotiable instrument does not have to be written on paper.

Question 13

What is the requirements for signature?

Answer 13

The UCC is liberal.
<> Sign as any name, trade name or assumed name, however false/fictitious,
<> May include any mark or symbol (e.g., initials, thumbprint).
<> Doesnt have to be at the end
<> Signed by agent is OK
<> Needs present intent to authenticate instrument
<> Parol evidence is OK to identify the signer.

Question 14

An instrument must have a _____ amount of money to be paid

Answer 14

Fixed. Principal MUST be fixed.

But it may accrue interest, but doesnt automatically convey interest payment unless stated.

Question 15

A negotiable instrument can only be for payment in the form of ________

Answer 15

MONEY(includes currency and “currency funds”)
An instrument that calls for payment in any form other than money (e.g., gold) or allows for payment in the alternative (e.g., “money or gold”) its not a N.I.

Question 16

What is an ORDER instrument?

Answer 16

An instrument that’s s payable only to the person named or to his order. The term “order” must appear.

Question 17

What is a BEARER instrument?

Answer 17

It’s payable to anyone who possesses the instrument.

Question 18

To be negotiable order paper must be:

Answer 18

1. delivered (i.e., transfer of possession)
   and
2. properly indorsed by the holder.

Question 19

An instrument is payable to bearer (i.e., any person in possession of it) if:

Answer 19

i) It is payable to “bearer” or “order of bearer”;
ii) No payee is identified; or
iii) It is made “payable to cash.”

<> If an instrument names a specific person, but also includes “bearer” (e.g., “payable to the order of Joe Smith or bearer”), it is payable to bearer.
<> A bearer instrument only requires delivery (not indorsement) to be negotiated.

Question 20

Regarding timing, when must a negotiable instrument be payable?

Answer 20

Either on demand, or at a definite time.

An instrument that doesnt specify a time at which it is payable is deemed payable upon demand.

Question 21

An instrument is payable on demand if:

Answer 21

1. It states that it is payable “on demand,” or “at sight,” or is otherwise payable at the will of the holder, or
2. does not state a time for payment.

Question 22

An instrument is payable at a definite time if it is payable:

Answer 22

1. on a fixed date,
2. at the end of a definite period after sight or acceptance, or
3. at a time readily ascertainable when the instrument is issued.

• Acceleration clause=OK
• Extensions of definate time=OK
• Events that will undoubtedly occur, but are not ascertainable as to a specific time are not “readily ascertainable” enough to be definate (ex: payable when my dog dies. dog will die 1 day but we dont know when)

Question 23

An instrument that contains the words “not negotiable” is non-negotiable unless the instrument is _________

Answer 23

A Check

Question 24

Rule Statement: What is the purpose of Art. 3 ?

Answer 24

To establish a secure alternative to the use of cash in financial transactions.

Question 25

In order for a transferee to be fully protected by Article 3, one must obtain the status of a ______________

Answer 25

Holder in due course (HDC)

Question 26

To become the HDC of a N.I, one must:

Answer 26

1. Take the instrument as a holder;
2. For value;
3. In good faith; and
4. W/o notice (at the time of negotiation) of certain infirmities of the instrument or the transaction out of which the instrument arose
   * Notice= actual knowledge, receipt of notification, or a reason to know (ex: reasonable diligence would uncover infirmity)

Question 27

A holder cannot be a HDC is when the instrument was negotiated to the holder it:

Answer 27

(A) apparent evidence of forgery/alteration OR

(B) so incomplete or irregular it called its authenticity into question.

Question 28

A person can become a holder in 2 ways, which are:

Answer 28

1. Issuance

2. Negotiation.

Question 29

When is an instrument issued?

Answer 29

When it’s delivered by the maker or the drawer to either a holder or non-holder for the purpose of giving rights in the instrument to any other person.
“Delivery” means the transfer of possession.

Question 30

Negotiation means:

Answer 30

The delivery, regardless of voluntariness, by a person other than the maker or drawer to any other person who, as a consequence, becomes the holder of the instrument. As a holder of the instrument, a person is entitled to enforce it.

Question 31

If the instrument is payable to bearer, negotiation occurs upon _______

Answer 31

The transfer of possession.

• Doesnt have to be voluntary.
• Means that a thief or finder of the bearer instrument becomes a holder, even though transfer of possession was involuntary

Question 32

How is an instrument payable to “order” negotiated?

Answer 32

In addition to the transfer of possession, the instrument must be INDORSED by the holder in order to be negotiated.

Question 33

If a bank receives an instrument from a customer for deposit that the customer fails to indorse, what happens?

Answer 33

The bank is deemed a holder IF the customer was a holder at the time of deposit despite the lack of an indorsement.

Question 34

What is an indorsement?

Answer 34

A signature on the instrument by someone OTHER than the maker, drawer, or acceptor that is typically made for the purpose of negotiating the instrument.

*Since the signature of a maker or drawer on an instrument is not an indorsement, forgery of the maker or drawer’s signature doent prevent transferees of the instrument from being holders.

Question 35

To effort negotiation, the indorsement must be _______ and _______

Answer 35

Authorized and valid

• A forged or unauthorized indorsement is generally ineffective.
• No transferee after the forged or unauthorized indorsement can become a holder.

Question 36

What is a special indorsement and what effect does it have on bearer instruments?

Answer 36

It names an identified person as indorsee in addition to the indorsement (e.g., “Pay to Nancy Next” /s/ Peter Payee). The indorsee must sign in order for the instrument to be further negotiated.

A special indorsement of a bearer instrument creates an order instrument. Use of the word “order” is not required.

Question 37

What is a qualified indorsement?

Answer 37

An indorser may, in addition to signing the instrument, include words that disclaim liability (e.g., “without recourse”). By qualifying the indorsement, the indorser is not liable to pay the instrument if it is dishonored. This does not protect the indorser from breach of the transfer warranties.

Question 38

When there is an ambiguity as to whether the instrument is payable jointly or severally, How is it resolved?

Answer 38

it is payable severally.

Question 39

An order instrument that is payable jointly (e.g., “Pay to the order of James Smith and Joan Doe”) must be indorsed by who?

Answer 39

all payees.

Question 40

An order instrument that is payable severally (e.g. “Pay to the order of James Smith or Joan Doe) may be indorsed by who?

Answer 40

Any payee

Question 41

What effect does an attempt to split an instrument (transfer less than the entire instrument or its amount) have?
Example: A holder indorses a note “Pay B and C each one half.”

Answer 41

It does not constitute a negotiation and the transferee does not qualify as a holder.
*The transferee does not have Art 3 rights, but merely the K rights of a partial assignee.

Example: A holder indorses a note “Pay B and C each one half.” Neither B nor C becomes a holder of the note.

Question 42

What’s a remittur transaction?

Answer 42

A remitter is a person who purchases an instrument, usually a cashier’s check or a teller’s check, from its issuer in which the instrument is payable to an identified person other than the purchaser (e.g., a person selling goods to the remitter).
Transfer of the instrument by the remitter to the person named in the instrument constitutes a negotiation. (I think this is like money gram)

Question 43

What are the types of value under article 3?

Answer 43

1) Agreed performance is COMPLETED (a promise to complete it is not value);
* Contrast with K Law: Under Art 3, if the consideration is not yet completed, no value is given. In K law, however, B’s promise to do something is sufficient consideration to support a bilateral contract, not in Art 3.

2. The transferee acquires a valid lien or security interest (but not as the result of judicial action); (maybe like promissory note?)
   3) The instrument was acquired for payment or security for an priot debt;

Question 44

When does a bank give value?

Answer 44

Only when the customer withdraws the credited amount from her account.

• A bank does not give value by crediting a customer’s account for the amount of the instrument deposited.
• In determining when a credited amount is withdrawn, the first-in, first-out (“FIFO”) accounting method is used

Question 45

What constitutes taking an instrument in good faith?

Answer 45

1. honesty-in-fact (subjective as to what the holder actually believed)
2. the observance of reasonable commercial standards of fair dealing (objective standard)

Question 46

What are the types of infirmities that would not allow a person to get HDC status?

Answer 46

1. Claim of defense or recoupment.
2. Knowing theres a breach of fiduciary duty
3. Apparently forged, altered, irregular instrument.
4. Notice that instrument is overdue or was previously dishonored. (Check overdue in 90 days, other instruments are past due after day after demand)

Question 47

Certain holders are subject to special limits on HDC status. what are the excluded acquisitions that wont allow a person to become a HDC?

Answer 47

If the instrument is:

1. Acquired as a successor in interest to an estate or other organization;
2. Purchased in an execution, bankruptcy, or creditor’s sale, or under legal process; or
3. Purchased in a bulk transaction, not in the regular course of the transferor’s business.

However, such a person may have the rights of an HDC if the transferor or predecessor in interest held the instrument as an HDC

Question 48

What is the “Shelter Rule” under Article 3

Answer 48

A person to whom an HDC transfers an instrument usually acquires the rights of the HDC, even if the transferee herself does not qualify as an HDC. Since the transferee’s HDC rights are derivative, the transferee does take the instrument subject to the real defenses that may be asserted against the transferor by the obligor.

(Ex: I issue a check to Joel for repairing a car, which Joel discovers the next day was done improperly (i didnt sign). Joel negotiates (gives/delivers) the check to Leo who takes it as a HDC. Leo gives the check as a gift to Eneida. Even though Eneida is not an HDC because she did not give value, Eneida can use Leo’s rights as an HDC (bcuz he got it from Joel who was a HDC) and enforce the instrument, despite my personal defenses against Joel)

Question 49

What are the exceptions to the Shelter Rule

Answer 49

If the transferee engaged in fraud or illegality affecting the instrument he can’t acquire the rights of an HDC through transfer, directly or indirectly, from an HDC.
**BUT a transferee who is merely aware of an earlier fraud is OK.

Question 50

There are 6 transfer warranties associated with an instrument when it is transferred for consideration. The transferor warrants that, at time of transfer:

Answer 50

1. Transferor is entitled to enforce the instrument;
2. All signatures are authentic;
3. All signatures are authorized;
4. The instrument has not been altered;
5. There are no defenses or claims that can be asserted against the transferor; and
6. The maker, acceptor, or drawer is not, to the transferor’s knowledge, subject to insolvency proceedings
   (The first 3 only are for presentment)

Question 51

Who is a transferor

Answer 51

A transferor must transfer (i.e., deliver, rather than issue) the instrument to another person for the purpose of giving that person the right to enforce the instrument. A maker or drawer who issues the instrument, as well as the person who presents the instrument for payment, are not transferors.

Question 52

Who are the beneficiaries of transfer warranties?

Answer 52

A transferor who indorses the instrument makes the transfer warranties to ALL subsequent transferees.
<> One who does not indorse the instrument makes these warranties only to his immediate transferee.

Question 53

A beneficiary of the transfer warranties who took the instrument in good faith may recover damages for breach of warranty. What kind of damages?

Answer 53

<> Damages based on the loss suffered as a consequence of the breach
<> limited to the amount of the instrument + expenses and loss of interest due to breach.
<> Must give notice of breach w/i 30 days of having reason to know of breach
<>Loss to the warrantor caused by the beneficiary’s delay in giving notice of a breach cant be recovered

Question 54

How can transfer warranties be disclaimed?

Answer 54

<> By agreement b/w immediate parties.
<> For an indorser, words such as “without warranties” must be used in conjunction with the indorsement to disclaim these warranties
**Cant be a check.

Question 55

In cases involving disputes over N.I’s, a Plaintiff must prove:

Answer 55

1. Plaintiff is entitled to enforce instrument; and
2. the signatures are valid
   (Prima Facie case)

(Defendant’s defense=claim of recoupment)

Question 56

In order to enforce an instrument, a person must be:

Answer 56

1. Holder;
   - OR-
2. Non-holder in possession of the instrument who has the rights of a holder
   * ***(ex: rights through subrogation/substitution) or person takes possession of an order instrument through a valid transfer (ex: a gift) from a holder who fails to indorse the instrument;
   - OR-
3. Person not in possession of the instrument, but a person who has the right to enforce it (ex: instrument is lost, stolen, or destroyed.)

Question 57

Explain conversion for commercial paper/N.I purposes

Answer 57

<> conversion of personal prop applies to instruments.
<> A person converts the property of another when he wrongfully deprives the other of that property or its value.
<> a thief of a bearer instrument is liable for conversion.
<> an instrument is converted if it is taken by a transfer, other than a negotiation, from a person not entitled to enforce the instrument, or a depository or payor bank makes or obtains payment for the instrument for a person not entitled to enforce the instrument or obtain payment.
<> A collecting bank has no conversion liability beyond the amount of any proceeds that it has not paid out

Question 58

An action for conversion of an instrument may not be brought by:

Answer 58

1. the issuer or acceptor of the instrument, or 2. a payee or indorsee who did not receive delivery of the instrument, either directly or through delivery to an agent or a co-payee

Question 59

How can an obligor defend itself if it has grounds to deny payment

Answer 59

Not a HDC= obligor hasK law defenses.

HDC = can assert only the “real defenses” (another flash card explains what they are)

Question 60

What are “Real Defenses”

Answer 60

1. Infancy
2. ANY Incapacity: (guardianships, incompetence, ultra vires act of corp..)
3. Duress: (threats)
4. Illegality: but must make transaction void not voidable.
5. Fraud in the factum: obligor was induced to sign the instrument w/o knowledge or reasonable opportunity to obtain knowledge of the instrument’s character or terms.
   
   • *NOT fraud in inducement
6. Insolvency proceedings against HDC: (bankruptcy)
7. Alteration or forgery
8. SOF

Question 61

Personal Defenses

Answer 61

1. Issuance: non-HDC takes instrument subject to the defense that it was not issued, conditionally issued, or issued for special purpose.
2. Any K law defense: (lack of consideration, non-occurrence of a condition precedent, mistake, impossibility, fraud, duress, incapacity, infancy, illegality,)
3. Claims for recoupment

Question 62

What happens if an imposter convinces a maker or drawer that they are someone they are not in order to get them to issue them an instrument?

Answer 62

If an impostor induces a person to issue an instrument to the impostor or to a person acting in concert with the impostor by impersonating the payee of the instrument, an indorsement of the instrument by any person in the name of the payee may be effective as the indorsement of the payee.

Question 63

What is presentment

Answer 63

<> A demand for payment made to the maker of a note (obligor) or the drawee of a draft (bank) by a person entitled to enforce the instrument.
<> The person from whom payment is demanded may request that the person making presentment exhibit the instrument, provide ID, and surrender the instrument if full payment is made

Question 64

Presentment is excused when:

Answer 64

1. ) It cant be made by the exercise of reasonable diligence (ex: can’t locate party to whom presentment must be made);
2. ) The maker or acceptor has repudiated the obligation to pay, is dead, or is in insolvency proceedings;
3. ) The terms of the instrument make it unnecessary;
4. ) The drawer or indorser has waived it (usually for a note) or is estopped from requiring it; and
5. ) The drawer has instructed the drawee not to pay the instrument (e.g., a stop payment order on a check).

Question 65

If there is a breach of presentment warranties, what can the person making the payment recover?

Answer 65

The person making payment may recover from ANY warrantor for breach of warranty an amount equal to the amount paid, plus expenses and loss of interest resulting from the breach, minus any amount the drawee received or is entitled to receive from the drawer because of the payment

Question 66

What is an accommodation party?

Answer 66

<> A type of surety, or one who guarantees the debt of another.
<> cannot have received a direct benefit
<> Both debtor and accommodation party must sign
<> liable on the instrument in whatever capacity he has signed—indorser, maker, acceptor, or drawer.

Question 67

If the accommodation party pays the instrument, what rights does he have?

Answer 67

To be reimbursed by the accommodated party and may enforce that right

Question 68

What does it mean with an accommodation party signs “collection only” next to his signature?

Answer 68

It means that the accommodation party is liable on the instrument only if

1. the person entitled to enforce the instrument has reduced his claim to judgment against the other party and execution is returned unsatisfied,
2. the other party has become insolvent,
3. the other party cannot be served with process, or
4. it appears useless to proceed against the other party.

Question 69

What happens to this instrument: “A” issues what was originally an order instrument to “B”. Then, “B” writes only their name on the back of the note and transfers it to “C”?

Answer 69

Although the note was an order instrument when issued, B, by indorsing the note in “blank”, converted the note into a bearer instrument that could be transferred by delivery alone which made “C” a holder. (It was negotiable)

Question 70

What is an accord and satisfaction

Answer 70

A claim can be discharged if:
<> claim is unliquidated (disputed)
<> An instrument that contains a conspicuous statement that indicates that it was tendered as full satisfaction of the claim (ex: “Payment in full”)
<> The tender is in good faith
<> claimant obtains payment of the instrument (cashes check)
<> By cashing the check offered in full satisfaction of the claim, an accord and satisfaction has taken place
<> restrictive indorsement, such as “under protest,” does not serve to preserve the righ to seek further compensation.

Question 71

What effect does an unauthorized alteration of an instrument have on the party obligated to pay the instrument?

Answer 71

The alteration of N.I discharges the obligation of a party whose obligation is affected by the alteration.
UNLESS the party whose negligence substantially contributes to the alteration, ( (ex: leaving a blank when the interest rate should be specified) can’t assert the alteration as a defense against a person who takes the note for value, in GF, and w/o notice of alteration.

Question 72

If an employee forges a check and deposits it into her own account, can the corporation request that the bank who cashed the check credit its account for the amount of the check, asserting that the payee’s signature was a forgery?

Answer 72

When an employee is entrusted with responsibility with respect to a check, a fraudulent indorsement of that check by the employee is treated as an effective indorsement, as if the payee to whom the check is written had signed the check in the favor of a person who, in good faith, pays the check or takes it for value or for collection.

Question 73

Who is the payee?

Answer 73

The person to whom the check/instrument is made payable

Question 74

Can a transferee who receives a forged check be a HDC if he takes the check in GF, for value, and w/o knowledge of the forgery?

Answer 74

NO. If payee’s signature on the check was forged, he cannot be a holder because he did not receive the check via a valid negotiation.
*As a result, any subsequent transfer of the instrument would be a breach of warranty (bcuz not entitled to enforce instrument and signatures arent authentic)

Question 75

A person can enforce a lost, stolen, or destroyed instrument if_______

Answer 75

The person is able to prove the terms of the instrument

Question 76

If an authorized agent signs his own name as drawer of a check of the principal… who is liable?

Answer 76

Only the principal. The agent (or employee) not personally liable if the check is drawn on the principal’s account and identifies the principal.

Question 77

Can a payee who does not receive the check (bcuz someone forged the signature and deposited in their bank) be entitled to bring a conversion action.

Answer 77

No, because since payee didnt receive it the payee does not become a person who is entitled to enforce the check, and because the payee continues to have the right to enforce the underlying obligation owed by the drawer to the payee, the payee cannot pursue a conversion action.

Question 78

How can a payee become a transferor

Answer 78

When the payee sells the note after the original transaction, the payee now becomes a transferor.
<> An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person the right to enforce the instrument.
<> With the transfer or delivery of an instrument, all of the transferor’s rights vest in the transferee.

Question 79

What happens if an owner entrusts their goods to one who sells goods of that kind and that person later sells the goods he was entrusted with?

Answer 79

Entrustment of goods by the owner to one who sells goods of that kind gives the transferee the power to convey good title to a buyer in the ordinary course.
<> Entrusting includes any delivery and acquiescence in possession regardless of any condition expressed between the parties to the delivery of acquiescence, and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been larcenous