Commercial Paper Flashcards
What are the requirements for negotiability?
To be negotiable, a document must be in writing, singed by maker or drawer, be an unconditional promise to pay, a fixed amount in money, with no other undertaking, payable on demand or at a specific time & contain words of negotiability (bearer or order language)
How does a person become a holder?
A person becomes a holder through a transfer that qualifies as negotiation. The steps required to negotiate an instrument depend on whether it is payable to bearer or order. If it is payable to bearer, the instrument is negotiated by transfer of possession. If it is order, it must be properly indorsed and transferred. There is an exception for banks that take an unindorsed instrument if the customer was a holder at the time of delivery.
How does a person become a holder in due course?
A holder in due course is a holder who takes for value, in good faith, and w/o notice of any impropriety. The notice that can defeat HDC status would be notice that the instrument is overdue, fraudulent signature or alteration, claim to instrument, or defense to payment. If person that transferred the instrument is an HDC, then the recipient is also an HDC through the shelter rule, unless recipient was part of fraud/illegality w/ respect to instrument. Good faith/notice determined at time of payment
What are a Holder in Due Course’s Rights?
An HDC can enforce the instrument subject to only real defenses [alteration, unauthorized sigs, forgery, duress, infancy, lack of capacity, limitations, illegality, fraud in execution, bankruptcy discharge, omission of required consumer protection language, payment to former holder]. Also, HDC is free from claims of others on the instrument
What is a maker’s (person who promises to pay on a note) liability?
A maker of a note makes a contract to pay the instrument according to its terms at the time it is issued. The promise is unconditional, but proper defenses may be raised.
What is a drawer’s (person ordering payment) liability?
A drawer may not disclaim liability on checks but may do so on other instruments. Secondary liability only occurs after presentment and dishonor. If presentment to drawee (bank) is not made w/in 30 days and drawee later becomes insolvent, drawer is no longer liable.
What is indorser’s (person who signs instrument) liability?
The indorser’s liability arises from her signature and is the obligation to pay according to the terms of the instrument. An indorser can disclaim liability by placing the words w/out recourse in the indorsement. Before a holder can look to an indorser for payment, the holder must present the instrument, there must be dishonor, and there must be notice of the dishonor. Presentment must be w/in 30 days of indorsement and notice of dishonor must be given w/in 30 days after dishonor.
What is the drawee’s (bank) liability?
Generally a drawee is not liable because no contract. If a drawee signs or certifies a check, then the drawer is discharged and the drawee is liable. Once drawee finally pays the check, contract actions may no longer be pursued unless there is a breach of presentment warranty. Final payment occurs when drawee pays in cash or does not revoke provisional settlement by midnight the next day. Drawee may be liable for conversion if they pay an instrument not properly payable.
What is a transfer warranty and who makes them?
Any person who transfers a negotiable instrument for consideration makes transfer warranties. Warranties run to all subsequent holders if the transfer is by indorsement, but run only to the immediate transferee if the transfer is not by indorsement. In general, the transferor warrants that she is entitled to enforce the instrument, that all signatures are genuine or authroized, that the instrument has not been materially altered, no defense, no knowledge of insolvency proceedings; if the instrument is a demand draft that creation was authorized by drawer
What are presentment warranties and who makes them?
Presentment warranties are made by any person who obtains payment or acceptance and any prior transferor. They are made to any person who in good faith pays or accepts. Persons obtaining payment and previos transferors of drafts warrant that the warrantor is entitled to enforce, that the draft is not altered, that there is no knowledge that the drawer’s signature is unauthorized, and if the instrument is a demand draft, that creation was authorized by the person identified as drawer. On instruments other than drafts, that they are entitled to enforce.
When can a maker safely pay and avoid further liability?
A maker can safely pay any holder unless they know that the holder acquired instrument by theft unless a HDC
What is the general rule of forgery?
Forged signatures are only valid as the forger’s signature and are invalid as the signature of the named payee.
When is a forgery valid?
When the fictitious payee’s signature is forged, an entrusted employee forges signature, negligence contributes to forgery, bank statement rule is violated, or bank certifies
what is the effect of an alteration?
An HDC can enforce the original amount of the instrument when there is a change in obligation and can enforce as completed when there is an unauthorized completion. A non-HDC cannot enforce if they were the one who fraudulently made the alteration. If it wasn’t fraudulently made, the obligor is liable under the original terms.
