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Themis Texas Subjects > Commercial Paper > Flashcards

Commercial Paper Flashcards

1
Q

Bar exam approach

A
  1. Determine whether instrument is a negotiable instrument
  2. Determine whether instrument was property negotiated
  3. Determine whether instrument’s holder is a holder in due course
  4. Determine whether individual who is obligated to pay has any defenses against payment
  5. Determine whether those defenses are real or personal defenses
  6. Can the one who paid the instrument hold anyone else responsible?
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2
Q

Types of commercial paper and people involved

A

Two types: notes and drafts. Makers make notes and drawers draw drafts.

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3
Q

Note is ___ parties and draft is ___ parties.

A

two. three

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4
Q

Parties to a note

A

Maker - the person making the promise to pay

Payee - the person to whom the instrument is payable

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5
Q

What is a certificate of deposite

A

a specific type of note where the bank acknowledges receipt of money and promises the payee/depositor to repay the money

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6
Q

A draft is

A

an order to pay money

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7
Q

Parties to a draft

A

Drawer - dude ordering payment
Drawee - dude being ordered to pay
Payee - dude to whom the instrument is payable

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8
Q

Most common example of a draft

A

a check

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9
Q

With a check, the bank is the ___

A

drawee

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10
Q

checks are payable at specific date or on demand?

A

on demand

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11
Q

types of checks; defiinitions

A

ordinary check
travelor’s check - must be countersigned by a person whose “specimen signature” appears on the traveler’s check
cashier’s check - the drawer and drawee are the same bank
teller’s check - check drawn by one bank on another bank

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12
Q

if an instrument contains contradictory terms, then priority is

A

handwritten > typewritten
typewritten > printed
words > numbers

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13
Q

if item is not a NI, then article 3…

A

article 3 does not apply

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14
Q

requirements

A

formalities: in writing (not oral), signed by maker/drawer
payee’s duties: none, unconditional, cannot have conditions on payee
payor’s duties: must pay only fixed amuont money, nothing additional
timing: must be payable on demand or at definite time

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15
Q

def of writing

A

broad, just cannot be oral and must be reduced to tangible form

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16
Q

signed is

A

any symbol executed with the present intention to adopt/accept the writing

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17
Q

can a writing be subject to another agreement and still be considered unconditional?

A

no, it can refer to other writings, but cannot be subject to them. key to reference is it is only informational

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18
Q

a provision that payment must be from an identified fund does/does not make the instrument conditional

A

does not.

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19
Q

the requirment of a countersignature does/does not make the instrument conditional

A

does not.

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20
Q

if note is collatoralized, that does/does not make the instrument conditional

A

does not.

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21
Q

what does the requirmenet of being fixed amount of money mean?

A

just means the principal must be fixed. there can still be interest and that interest can be variable.

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22
Q

a NI must be either a ___ or ___ instrument; definitions

A

order or bearer
order instrument - payable to a specific person/entity
bearer instrument - generally payable to anyone in possesion

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23
Q

requirements of order instrument; examples

A

-specific formal words of negotiability

key phrases are “pay to the order of” or “pay x or his order”

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24
Q

big exception to requirement that order instrument have specific words of negotiatbility

A

checks; e.g. if a check says pay to the order of bo nugget but “to the order of” is crossed out, it is still a NI

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25
Q

is “i, ed, promise to pay francis 4k” a NI?

A

no, does not have key phrase

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26
Q

does a bearer instrument require words of negotiatbility?

A

no

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27
Q

examples of language to make bearer instrument

A
  • payable to bearer
  • payable to the order of bearer
  • payable to cash
  • payable to the payee (and line is left blank)
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28
Q

if a writing has characteristics of both an order and bearer instrument, then it will be treated as…

A

a bearer instrument

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29
Q

all NIs must be payable on demand or _______

A

at a definite time

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30
Q

definition of payable on demand

A

when the payee or holder can present the NI immediately after being issued the instrument

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31
Q

examples of typical NI that is payable on demand; example of typical NI payable at definite time

A

checks; notes

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32
Q

if NI is unclear about whether payable on demand or at definite time, then default is on demand (T/F)

A

F. To be considered a NI, must be clear about when $$$ due.

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33
Q

do acceleration clauses violate the requirement that NIs be due on demand or definite date?

A

Still a NI as long as the expiration date is still definite (not necessarily fixed, but unambiguously ascertainable. For example, you can have a conditional acceleration clause like “Andy owes Ted $50 on Dec 1, but if the Texas lose before Dec. 1, then Andy owes the $50 the day after they lose.

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34
Q

do extension options violate the requirement that NIs be due on demand or definite date?

A

Extension option to a definite date is always still NI. But open ended extension option is NI only if the extension option is only given to the holder, not the obligor.

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35
Q

Exceptions to rule that NI must obligate the obligor to pay money at a definite date and nothing else…. no other undertakings

A

Promises or undertakings concerning collateral will not affect status as NI; provisions that allow holder to procure judgement (e.g. “holder is hereby granted the authority to confess judgment against maker in court”)

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36
Q

what is issuance

A

the first delivery of an instrument

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37
Q

what is a negotiation

A

the transfer of possession, whether voluntarily or involuntarily, by a person other than the issuer to a person who becomes the holder

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38
Q

what is required to negotiate a bearer instrument

A

just change of possession

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39
Q

what is required to negotiate an order insturment

A

transfer of possession + indorsement of the instrument before transfer

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40
Q

what is a special indorsement vs blank indorsement.

A

special indorsement is when someone possesses a NI that is payable to them, and they indorse it as payable to someone else (e.g. promissory note says payable to Paul, and Paul signes the back with “pay to Harry /s/ Paul”), and then transfers to that person.
vs.
blank indorsement is when not made to specific person. just signs the back

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41
Q

what is a qualified indorsement

A

used to limit one’s liability on a NI (e.g. Paul is in possession of a NI that is payable to Paul. Paul takes note and indorses back with “Without recourse /s/ Paul”

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42
Q

what is a restrictive indorsement

A

used to limit what the holder can do with the instrument

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43
Q

invalid vs valid restrictive indorsement examples

A

e. g. of valid: “for deposit only /s/ Paul”

invalid: “for Harry if he mows my lawn /s/ Paul”

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44
Q

What happens if the indorsement is an invalid restrictive indorsement

A

Still a NI, but the restriction would be unenforceable (so would be payable even if condition is not met…bc rmr additional requirements are not allowed)

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45
Q

what is an anamolous indorsement

A

used by accomodation parties (discussed below)

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46
Q

what are indorsement requirements of order paper if there are multiple payees?

A

depends on whether payable jointly or severally. if jointly, all payees must indrose for valid negotiation. if severally, either pary can sign for negotiating

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47
Q

requriements for status as holder in due course

A
  1. must acquire holder status
  2. must pay value for the instrument
  3. good faith
  4. without notice of problems that might affect the obliger’s obligation to pay the instrument
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48
Q

what is def of paying value for the instrument (HDC requirement 2)

A

either give something of value, do something of value, or forgive something of value.

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49
Q

can person receiving gift NI be a HDC? (HDC requirement 2)

A

no, person receiving gift did not give anything of value, do anything of value, or forgive anything of value, so cannot be HDC

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50
Q

is a promise to perform something giving value for an instrument? (HDC requirement 2)

A

no, unexecuted promises to perform are not value but performed acts or performed promised acts are.

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51
Q

if you pay less than the note’s face value, is that still paying value for the instrument? (HDC requirement 2)

A

yes, value need not be full face value

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52
Q

what if you want to pay value for an instrument by paying x amount, but you have only partially performed? (e.g. you pay half on date of negotiation and half at a later date). can you have HDC rights? (HDC requirement 2)

A

for partial performance, you get partial HDC rights in proportion to amount paid.

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53
Q

two-part test for taking the instrument in good faith (HDC requirement 3); elaborate

A

honesty-in-fact + reasonable commercial standards of fair dealing.

honesty-in-fact = what the dude receiving actually knew (e.g. did the clerk cashing the check actually know that the dude giving him the check was a con man who had just induced an old couple into giving it to him?)

reasonable comm. standards of fair dealing = what the dude receiving should have surmised given the context in which the instrument was negotiated (e.g. should the clerk cashing the check have surmised that this dude eager to offload the check for half the face value is prob presenting a fraudulently induced check?…a reasonable person would likely ask why)

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54
Q

what does it mean that a HDC must acquire without notice? (HDC requirement 4.)

A

Cannot acquire status as a HDC if the holder is aware of any reason as to why the legal obligation to pay the note may be compromised

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55
Q

Examples of what constitutes notice in HDC requirement 4.

A

can be actual notice, receiving through mail, or having reason to know there may be a problem

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56
Q

Examples of what constitutes a problem/infirmity the notice of which would disallow status as HDC

A
  1. holder has notice of any claim in recoupment
  2. holder has notice of forged, altered, or otherwise irregular instrument
  3. holder has notice the isntrument is overdue
57
Q

checks are overdue ____ days after date of issue

A

90

58
Q

instruments that are due on demand are overdue when?

A

right after demand for payment is made

59
Q

insturments due at a definitie time are overdue when?

A

the day after the due date (or, if accelerated, the accelerated due date…or if installment, then the day after installment due)

*keep in mind: notice of overdue principal payments will prevent HDC status but not notice of overdue interest payments

60
Q

FTC/Consumer Notes limit to HDC status: what is it and when is it required?

A

FTC requires certain consumer notes to have a notice, so effectively waives HDC status. The notice is required when three criteria are met:

  1. the maker/drawer is signing the note in a consumer transaction (i.e. acquiring an item for personal or family use)
  2. the transaction in question must be for the sale or lease of goods or services
  3. the seller must be one who sells the item in question in his ordinary course of business
61
Q

what is a transfer

A

an instrument’s movement other than by the maker or drawer for the purpose of giving the person receiving it the right to enforce the instrument. the first movement from maker to payee is an issuance, not a transfer. subsequen movements prior to the payment are transfers

62
Q

what is the shelter rule

A

the rights follow the instrument. whatever rights the transferor had transfer to the transferee

63
Q

the transferee has legal right to have the transferor provide the necessary indorsement to complete the negotiation when…

A

the transferee pays value for an instrument

64
Q

exception to the shelter rule

A

a transferee who commits fraud or otherwise engages in some type of illegal activity as it relates to the instrument cannot acquire rights as a holder in due course.

65
Q

transfer warranties are often the remedy provided when money is paid to an _____ party

A

unauthorized

66
Q

what does a transfer warranty guarantee?

A
  1. the warrantor is a person entitled to enforce the instrument
  2. all signatures on the insturment are authentic and authorized
  3. the instrument has not been altered
  4. there are no defenses or claims that can be asserted against the transferor
  5. warrantor has no knowledge of any insolvency proceedings
  6. with respect to any remotely-created consumer check, the person on whose account the check is drawn has authorized the issuance of the item in the amount for which the item is drawn
67
Q

if drawer’s signature is forged, does that beach the warranty that the warrantor is the person entitled to enforce the instrument?

A

yes

68
Q

what are the two basic things that a plaintiff trying to enforce an instrument must prove?

A
  1. that the plaintiff is a person entitled to enforce the instrument; and
  2. that the signatures on the instrument are valid
69
Q

who are the people entitled to enforce an instrument?

A
  1. a holder
  2. a non-holder in possession of the insturment who has the rights of a holder (like someone who received under shelter rule)
  3. a person not in possession but who has the right to enforce (e.g. the instrument has been lost or stolen)
70
Q

what’s the deal with proving signatures are valid?

A

sigs are presumed authentic unless specifically denied in the pleadings. at that point, the party claiming validity generally has the burden of proving that the signatures are valid

71
Q

if a plaintiff is a HDC, then a defendant must have ____ defenses to prevail

A

real

72
Q

plaintiff has the right to enforce an instrument even if it was lost or stolen. as long as…

A

the loss of possession did not result from the holder transferring the instrument, and the holder cannot reasonably obtain possession of the instrument because it is lost or destroyed

73
Q

an instrument is converted if it is…

A
  1. stolen (so normal law of conversion applies to NIs.
  2. if it is taken by transfer other than a negotiation from a person not entitled to enforce the instrument or receive payment
  3. if a bank makes or obtains payment w/r/t the instrument for a person not entitled to enforce or receive payment
74
Q

an action of conversion may not be brought by:

A
  1. the issuer or acceptor of the instrument

2. a payee or indorsee who did not receive delivery of the instrument

75
Q

liability amount for conversion is

A

presumed to be face value of instrument but cannot exceed the plaintiff’s interest in the instrument

76
Q

difference between real defenses and personal defenses

A

real defenses can be used against holders and holers in due course. personal defenses can be used against holders but not holders in due course.

77
Q

list out real defenses and personal defenses

A
  1. Real defenses = infancy, incapacity, duress, illegality, fraud, discharge of insolvency proceedings, alteration & forgery
  2. Personal defenses = non-issuance, contract defenses (breach, failure of consideration, breach of warranty, etc), claims in recoupment
78
Q

list out personal defenses

A
  1. Real defenses = infancy, incapacity, duress, illegality, fraud, discharge of insolvency proceedings, alteration & forgery
  2. Personal defenses = non-issuance, contract defenses (breach, failure of consideration, breach of warranty, etc), claims in recoupment
79
Q

infancy defense to enforcement works whenever state law makes contracts with minors ____ or ____, but with resepct to incapacity, state law must render such contracts ____

A

void or voidable; void

80
Q

elaborate on the duress real defense

A

it is only a real defense when it is extreme, otherwise just a personal defense. mere threat of something bad happening is not extreme enough. also for the real defense to work, state law must make contracts made under durress void, not just voidable.

81
Q

elaborate on illegality defense

A

usually involving gambling. this defense is available when state law states taht notes drawn for purpsoe of reimbursing or repaying money lent for gaming are void

82
Q

fraud in the factum is a ___ defense while fraud in the inducement is a ___ defense

A

fraud in the factum –> real

fraud in the inducement –> personal

83
Q

what is fraud in the factum

A

signer is not aware that he is signign a negotiable instrument AND did not have reasonable opportunity to become aware. (so second requirement makes it a difficult defense to assert)

84
Q

what is fraud in the inducement

A

signer is aware that he is signing a NI but signer is induced into signing based on misrepresentation

85
Q

if an obliger has had his debt discharged through bankruptcy proceedings, that discharge is a ___ defense

A

real

86
Q

any type of alteration or forgery that is ________can be asserted as a real defense

A

apparent enough to cause a reasonable person to question its authenticity

87
Q

statute of limitations for drafts

A

for unaccepted drafts (i.e. bank checks) - 3 yrs from date of dishonor OR 10 yrs from the date of the draft (whicever is EARLIER)

for certified, teller’s, cashier’s, or traveler’s checks - if presenting, then 3 yrs after demand for payment

88
Q

statute of limitations for notes

A

for notes payable at certain time, must be brought within 6 yrs of note’s due date.
for notes payable on demand, the action must be brought within 6 yrs of demand for payment

89
Q

the defense that i dind’t even issue you the note is a ___ defense

A

personal

90
Q

examples of personal defenses

A

issuance, K defenses, claims in recoupment

91
Q

what is a claim in recoupment

A

an offset against an amount owed on an instrument

92
Q

claims in recoupment must…

A

arise from the transaction that gave rise to the instrument

93
Q

an obliger can/cannot assert recoupment claims of others

A

cannot; can only assert his own recoupment claims

94
Q

issuer can still be liable on instrument even if duped into issuing an instrument to an imposter. T/F

A

T

95
Q

if an imposter induces someone to issue an instrument to him, an indorsement of the instrument by any person (so e.g. if imposter used a fake name) in the name of the payee may be effective as the payee’s indorsement. so for example if dude finds out he got duped and tries to get bank to reverse the check, bank may not. the rationale here is…

A

that the issuer is in the best position to control to whom he issues an instrument

96
Q

if a payor does not intend for the payee to have any interest in the instrument or the payee is just totally fictitious, then…; most common example of this.

A

any person in possesssion of the instrument is the instrument’s holder, and an indorsement by any person in the name of the stated payee may be effective as the payee’s indorsement.

most common example is when a treasurer or someone else with check-writing privileges at a company either writes checks payable to real customers but instead indorses the checkes himself and deposits $ or creates fictitious payees and writes checks to them but keeps the checks for himself. rationale for rule is that the corproation should bear the loss bc they are in best position to prevent these acts from happening.

97
Q

if an employee is entrusted with check-writing privileges and forges an indorsement, the employer will not bear the responsibility for the loss. T/F

A

F. The employer will bear the loss.

98
Q

what is the standard to hold benefitted parties/holders in due course liable for loss from forgery/fraud?

A

if these parties failed to excercise ordinary care in taking the instrument, and that failure substantially contributes to loss resulting from the payment of the instrument

99
Q

what is the legal effect of an altered instrument

A

the obliger is discharged on the instrument

100
Q

a payor bank or drawee who pays a fraudulently altered instrument may enforce rights with respect to the instrument according to its ____

A

original terms before alteration

101
Q

a HDC may enforce rights with respect to an altered instrument according to its ___

A

original terms before the alteration

102
Q

what is an incomplete instrument

A

a SIGNED writing, whether or not signed by the issuer, the contents of which show that the singer intended the instrument to be completed by the addition of words or numbers

103
Q

in the context of an incomplete instrument, are authorized completions ok to create an enforceable instrument?

A

yes

104
Q

what happens if an incomplete instrument is completed by an unauthorized person?

A

the obliger is generally discharged on the instrument, but not totally because a payor bank or a HDC can enforce the instrument as completed against the obliger

105
Q

when you own a bank account, you have ___ after the statement or report is available to claim alteration or unauthorized signature–otherwise assertion is precluded

A

one year

106
Q

a demand for payment made to a maker or drawee by the person entitled to enforce the instrument is called a…

A

presentment

107
Q

a presentment and ____ are preconditions for liability for other parties who have potential liability on the instrument

A

dishonor

108
Q

presentment is excused when:

A
  1. it cannot be made with reasonable diligence (e.g., the presenter cannot locate the party to whom presentment must be made)
  2. the maker or the acceptor has repudiated the obligation to pay
  3. the instrument’s terms do not require presentment
  4. the drawer or indorser has waived the presentment requirement
  5. the drawer has instructed drawee not to pay
109
Q

when a theif or forger enters the chain, the breach of presentment warranty allows a ____ to sue upstream/downstream, i.e. sue those through whose hands the check has passed

A

payor bank; upstream

110
Q

when a “person” presents an item for payment, the presentment itself comes with these warranties: (called presentment warranties)

A
  1. the warranter is a person entitled to enforce the instrument (a warrant that there are no unauthorized or missing indorsements)
  2. the draft has not been altered
  3. the warrantor has no knowledge that the drawer’s signature is unauthorized
  4. 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
111
Q

Overall approach to determining parties and liability

A
  1. determine in what capacity the person signed…you can’t be liable on a NI unless you signed and you’re liable according to the capacity in which you signed
  2. determine the type of liability the person has incurred on the instrument
  3. understand when and under what circumstances that person’s liability on the instrument will ripen
112
Q

maker has ___ liability, which means…

A

primary…the maker must pay the instrument when it comes due

113
Q

drawer has ___ liability, which means…

A

secondary…the drawer’s oblivation to pay ripens only upon presentment and dishonor

114
Q

a drawee is not legally obligated on the instrument unless the drawee _________. drawees generally do not sign instruments, so their liability is generally not on the instrument itself but….

A

signs the instrument for the purpose of accepting liability; to the bank customer who has funds deposited at the bank

115
Q

what is acceptance?

A

the drawee’s signed agreement to pay a draft as presented

116
Q

acceptance usually happen with these instruments (_____), because…

A

certified, teller’s, and cashier’s checks; because they are paid for in advance

117
Q

by indorsing a NI, you agree to…

A

pay the instrument in the event that the one who has primary liability does not pay

118
Q

the indorser’s liability ripens when:

A
  1. the note is dishonored and

2. the indorser receives notice of dishonor

119
Q

joint signers of an instrument have ______ liability

A

joint and several

120
Q

what makes someone an accomodation party? what’s the point?

A
  1. they sign the instrument as well
  2. they get no DIRECT benefit for the value given for the NI)
  3. point is to help a brotha with bad credit out
121
Q

with accomodation party, the maker gets the accomdotation party to act as a

A

surety

122
Q

if an anomolous indorser just signs check, then how does liability work? what if signs and writes “guarantees collection” vs “guarantees payment”?

A

if just signature, then the anomolous indorser has secondary liability. if writes “guarantees collection,” then liability if they’ve tried to maker and failed to collect from him/her. if writes “guarantees payment” then they can go straight to the accomodation party

123
Q

if an anomolous indorser has to pay, what can they do?

A
  1. they can get reimbursement from the maker (full repayment)
  2. if there are co-accomodation parties, can get contribution from them
124
Q

an accomodation party has the same defenses against payment as…

A

the accomodated party

125
Q

the general law of agency does/does not apply to NIs

A

does

126
Q

if an agent did not have the authority to sign on a principal’s behalf, is principal still liable?

A

no

127
Q

how does a principal ratify an agent’s unauthorized sig

A

by adopting the sig or failing to deny the sig’s validity

128
Q

if a principal negligenctly contributed to an agent’s unauthorized sig, then…

A

principal may be estopped from denying liability but only if it is a holder in due course

129
Q

will agent who signs be held liable if unauthorized sig?

A

yes, duh

130
Q

if agent signs in his name, and the sig is authorized, can ppl go after him for payment? explain

A

if the NI clearly indicates that the agent is signing in his capacity as an agent, then no. if it is not clearly indicated, then the agent will have personal liability to a HDC who takes the NI without notice of agency. if it is a non-HDC, then agent can avoid liability IF he can show that the parties never intended for the agent to be personally liable.

checks are sort of an exception to this..an agent is not liable for signing his own name as drawer on a check if the check is drawn on the principal’s account

131
Q

with forged sigs, whether it is a forged maker sig, forged drawer sig, or forged indorser sig, the forger is liable. T/F

A

T

132
Q

what are the two common cases in which the UCC allows a drawee to seek retribution for a mistaken payment?

A
  1. the drawee pays a check on the mistaken belief that the drawer’s signature was an authorized signature
  2. the drawee pays a check on the mistaken belief that a stop payment order had not been issued
133
Q

restitution by drawee is not allowed when…

A
  1. payment was made to a HDC; or
  2. when the one entitled to enforce the instrument is a good faith purchaser for value; or
  3. when the one entitled to enforce the NI in good faith changed position in reliance on the payment
134
Q

in most NI transactions, there are two obligations: the underlying obligation (i.e. the underlying transaction or purpose of the NI) and the obligations on the NI itself. when does an NI discharge the underlying obligation? when does it not?

A
  1. if a certified, cahier’s, or teller’s check is taken for an obligation, the underlying obligaton is discharged. it is discharged the moment the counterparty takes the NI.
  2. if an uncertified check or note is taken for obligation, the underlying obligation is merely suspended until actually paid (e.g. a check does not discharge the underlying obligation until it clears).
135
Q

if a check or note is dishonored, the check’s holder can sue on the instrument but not on the underlying obligation. T/F

A

F. Can sue on either

136
Q

can someone entitled to enforce an instrument sue on the instrument even if he lost it? can he sue on the underlying obligation?

A

yes, but cannot sue on the underlying obligaiton.

137
Q

If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is…

A

discharged

138
Q

when a person tenders payment and is refused, what happens to the indorsers and accomodation parties?

A

they are discharged

Themis Texas Subjects (7 decks)

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