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
