Commercial Paper Flashcards
Two Types of Commercial PAper
Notes and Drafts - Makers make notes ; drawers draw drafts
Elements of a Note
Two Party Instrument with Two Elements 1 - Promise to pay 2 - Parties Maker - person making promise to pay Payee - person to whom the instrument is payable
Elements of a Draft
Three Party Instrument with Two Elements 1 - Order to Pay 2 - Parties Drawer - person ordering payment Drawee - person being ordered to pay Payee - person to whom the instrument is payable
Requirements of a Check
Check is a type of Draft and requires:
1 - bank is the drawee and
2- instrument is payable on demand
Formal Req’s of Negotiability (7 Elements)
- Document must be in writing
- Must be signed by maker or drawer
- Unconditional order or promise to pay
- Payment obligation of a fixed amount
- Payable to order or bearer
- Payable on demand or at definite time
- No additional undertakings other than pay money
Req of Nego Element 1 : Writing
- Nego instrument cannot be oral
- Must be reduced to tangible form
Req of Nego Element 2 : Signed by Maker or Drawer
-Must be signed with present intent to adopt or accept a writing
If an instrument contains contradictory terms:
- HANDWRITTEN terms prevail over both typewritten and printed terms.
- Typewritten terms prevail over printed terms.
- WORDS prevail over numbers.
Typical scenarios that make the promise or order conditional:
- Express conditions to PAYMENT
- words like “if, provided that, conditioned upon etc” - Subject to another WRITING
Items that do not make the promise or order to pay conditional
- References to other documents
» Mere references to other documents do not make the promise or order to pay conditional. - Payment from a particular fund
»A provision that payment must be from an identified fund does not render the promise conditional. - Countersignature
»The requirement of a countersignature, as in a traveler’s check, does not render an
instrument non-negotiable. - Prepayments and collateral
»References to other records regarding rights as to collateral, prepayment, or acceleration DO NOT make the promise to pay conditional.
A negotiable instrument must be either an ORDER or a BEARER instrument.
- Order instrument – payable to a SPECIFIC person
* Bearer instrument – generally, anyone in possession has legal rights to the instrument
Order Instrument - Req Language
An instrument payable to a specific person requires specific language or words of NEGOTIABILITY.
The key phrases are either
“pay TO THE ORDER OF”
or
“pay [Paul] or his ORDER.”
Bearer Instrument - Req Language
A Bearer Instrument requires language that does not attempt to pay a specific person
EXAMPLES: • Payable to BEARER • Payable to the order of bearer • Payable to CASH • Payable to [the payee line left BLANK]
Req4Nego - Payable to both bearer and order
If a writing has characteristics of both an order instrument and a bearer instrument, then the writing will be treated as BEARER paper.
Req4Nego - Payable “On Demand” or at a “Definite Time”
• The writing must be clear as to when the one required to pay the instrument must do so.
• An instrument is payable ON DEMAND when the instrument’s payee or holder can present the negotiable instrument IMMEDIATELY after being issued the instrument.
» CHECKS (drafts) are typically payable on demand.
• An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.
» NOTES (orders) are typically payable at a definite time.
Req4Nego - At a Definite Time
- The instrument cannot contain a provision that permits the obligor to extend the payment date at his discretion without any restriction.
- The instrument can also contain automatic extensions upon a specified event as long as the date is extended to another DEFINITE TIME.
- Payment date must be readily ascertainable.
- The instrument can contain provisions allowing for the OBLIGOR (the one obligated to pay) to extend the due date, provided the extension is to a DEFINITE TIME.
Req4Nego - No additional undertakings or instructions
The writing must commit the obligor to one legal obligation and nothing else: The obligation to PAY MONEY.
Req4Nego - Exceptions – additional undertakings that are allowed:
Promises or orders concerning COLLATERAL
Provisions that allow holder to procure JUDGMENT
The Requisites of a Negotiable Instrument :
7 Key Things to Remember
- The document must be in WRITING and signed.
- The promise or order to pay must be unconditional.
- The PRINCIPAL amount must be fixed
the interest rate can be variable.
- Payable to order or bearer (remember “words of negotiability” for order paper).
- The writing must be payable ON DEMAND or at a definite time (payment time must be readily ascertainable).
- No additional undertakings (i.e., the obligor’s sole obligation is to pay money)
A person can become a holder in two ways:
ISSUANCE – the first TRANSFER of an instrument
OR
NEGOTIATION - A transfer of possession, whether voluntary or involuntary, by a person other than the ISSUER to a person who becomes the HOLDER
NEGOTIATION DEFINED
A transfer of possession, whether voluntary or involuntary, by a person other than the ISSUER to a person who becomes the HOLDER
To negotiate a bearer instrument – Requires
To negotiate a BEARER instrument –
Requires transfer of POSSESSION only
To negotiate an order instrument – Requires
To negotiate an ORDER instrument –
Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.
Types of Indorsements
SPECIAL indorsement :
»Paul takes the note and writes on the back “Pay to Harry /s/ Paul.” Paul then transfers the note to Harry.
BLANK indorsement:
»Indorsement NOT made to a SPECIFIC person
QUALIFIED indorsement:
»Used to limit one’s liability on an instrument
RESTRICTIVE indorsement:
»Used to limit what the holder can do with the instrument
Acquiring Status as HDC - 4 Elements
- Must first acquire status as a HOLDER
- Must pay VALUE for the instrument (what constitutes value?)
- Must take the instrument in GOOD FAITH;
and
• Without NOTICE that there are any problems that might affect the obligor’s obligation to pay the instrument
Acquiring Status as HDC - VALUE
The person must 1) GIVE something of value, 2) DO something of value, OR 3) FORGIVE something of value.
o A gift is not value.
o Unexecuted promises to perform are not value.
o Paying less than the note’s full face value is okay.
o Partial performance = partial HDC rights
o Forgiving a preexisting obligation constitutes value.
Acquiring Status as HDC - Taking the Instrument in Good Faith (two-part assessment)
• Honesty-in-fact: What the person receiving the instrument ACTUALLY KNEW;
AND
• The observance of reasonable commercial standards of fair dealing: What the person receiving the instrument should have surmised given the context in which the instrument was negotiated.
Acquiring Status as HDC -Taking the Instrument Without Notice
- What constitutes notice? (3)
- What constitutes an infirmity? (3)
- 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.
- What constitutes notice?
o ACTUAL
o Receives notice through the mail
o Has reason to know there may be a problem
• What constitutes an infirmity?
o Holder has notice of any CLAIM OR RECOUPMENT
o Holder has notice of forged, altered, or otherwise irregular instrument
o Holder has notice the instrument is overdue
Holder has notice the instrument is overdue
-CHECKS
-DEMAND INSTRUMENT
-DEFINITE TIME INSTRUMENT
>ACCELERATED
>INSTALLMENT
Checks are overdue 90 days after date of issue.
Any instrument that is DEMAND is overdue after demand for payment is made.
Instruments due at a definite time are overdue the day AFTER the due date.
>• If the due date is ACCELERATED, then the note is overdue the day after the accelerated due date. >• When payments are due in INSTALLMENTS, the instrument is overdue the day after the installment due date.
OVERDUE NOTICE
Be careful to distinguish between overdue interest payments and overdue principal payments.
Notice of an overdue interest payment will NOT compromise the holder’s ability to claim holder in due course status,
BUT notice of overdue principal payments WILL compromise the holder’s ability to claim holder in due course status.
FTC NOTICE REQUIREMENT (3 ELEMENTS)
- The Maker/Drawer is signing the note in a CONSUMER transaction (i.e., acquiring an item for personal or family use).
- The transaction in question must be for the sale or lease of goods or services (e.g., buying a car or boat).
- The seller must be one who sells the item in question in his ORDINARY COURSE OF BUSINESS.
