Commercial Paper

Question 1

Two Types of Commercial PAper

Answer 1

Notes and Drafts - Makers make notes ; drawers draw drafts

Question 2

Elements of a Note

Answer 2

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

Question 3

Elements of a Draft

Answer 3

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

Question 4

Requirements of a Check

Answer 4

Check is a type of Draft and requires:
1 - bank is the drawee and
2- instrument is payable on demand

Question 5

Formal Req’s of Negotiability (7 Elements)

Answer 5

1. Document must be in writing
2. Must be signed by maker or drawer
3. Unconditional order or promise to pay
4. Payment obligation of a fixed amount
5. Payable to order or bearer
6. Payable on demand or at definite time
7. No additional undertakings other than pay money

Question 6

Req of Nego Element 1 : Writing

Answer 6

• Nego instrument cannot be oral

- Must be reduced to tangible form

Question 7

Req of Nego Element 2 : Signed by Maker or Drawer

Answer 7

-Must be signed with present intent to adopt or accept a writing

Question 8

If an instrument contains contradictory terms:

Answer 8

• HANDWRITTEN terms prevail over both typewritten and printed terms.
• Typewritten terms prevail over printed terms.
• WORDS prevail over numbers.

Question 9

Typical scenarios that make the promise or order conditional:

Answer 9

1. Express conditions to PAYMENT
   - words like “if, provided that, conditioned upon etc”
2. Subject to another WRITING

Question 10

Items that do not make the promise or order to pay conditional

Answer 10

1. References to other documents
   » Mere references to other documents do not make the promise or order to pay conditional.
2. Payment from a particular fund
   »A provision that payment must be from an identified fund does not render the promise conditional.
3. Countersignature
   »The requirement of a countersignature, as in a traveler’s check, does not render an
   instrument non-negotiable.
4. Prepayments and collateral
   »References to other records regarding rights as to collateral, prepayment, or acceleration DO NOT make the promise to pay conditional.

Question 11

A negotiable instrument must be either an ORDER or a BEARER instrument.

Answer 11

• Order instrument – payable to a SPECIFIC person

* Bearer instrument – generally, anyone in possession has legal rights to the instrument

Question 12

Order Instrument - Req Language

Answer 12

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.”

Question 13

Bearer Instrument - Req Language

Answer 13

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]

Question 14

Req4Nego - Payable to both bearer and order

Answer 14

If a writing has characteristics of both an order instrument and a bearer instrument, then the writing will be treated as BEARER paper.

Question 15

Req4Nego - Payable “On Demand” or at a “Definite Time”

Answer 15

• 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.

Question 16

Req4Nego - At a Definite Time

Answer 16

• 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.

Question 17

Req4Nego - No additional undertakings or instructions

Answer 17

The writing must commit the obligor to one legal obligation and nothing else: The obligation to PAY MONEY.

Question 18

Req4Nego - Exceptions – additional undertakings that are allowed:

Answer 18

Promises or orders concerning COLLATERAL

Provisions that allow holder to procure JUDGMENT

Question 19

The Requisites of a Negotiable Instrument :

7 Key Things to Remember

Answer 19

• 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)

Question 20

A person can become a holder in two ways:

Answer 20

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

Question 21

NEGOTIATION DEFINED

Answer 21

A transfer of possession, whether voluntary or involuntary, by a person other than the ISSUER to a person who becomes the HOLDER

Question 22

To negotiate a bearer instrument – Requires

Answer 22

To negotiate a BEARER instrument –

Requires transfer of POSSESSION only

Question 23

To negotiate an order instrument – Requires

Answer 23

To negotiate an ORDER instrument –

Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

Question 24

Types of Indorsements

Answer 24

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

Question 25

Acquiring Status as HDC - 4 Elements

Answer 25

• 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

Question 26

Acquiring Status as HDC - VALUE

Answer 26

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.

Question 27

Acquiring Status as HDC - Taking the Instrument in Good Faith (two-part assessment)

Answer 27

• 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.

Question 28

Acquiring Status as HDC -Taking the Instrument Without Notice

• What constitutes notice? (3)
• What constitutes an infirmity? (3)

Answer 28

• 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

Question 29

Holder has notice the instrument is overdue
-CHECKS

-DEMAND INSTRUMENT

-DEFINITE TIME INSTRUMENT
>ACCELERATED
>INSTALLMENT

Answer 29

 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.

Question 30

OVERDUE NOTICE

Answer 30

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.

Question 31

FTC NOTICE REQUIREMENT (3 ELEMENTS)

Answer 31

• 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.