Commercial Paper Flashcards
Negotiable Instrument
A signed writing that orders or promises payment of money.
Note
Two party instrument in which one party promises to pay a second part a sum of money
Draft
Three party instrument in which one party orders a second party to pay a sum of money to a third party
Check
A drat drawn upon a bank and payable on demand.
Both Note and Draft
Can be enforced as either
To Be Negotiable
- signed writing
- contain an unconditional promise or order
- to pay a fixed amount of money
- payable to order or to bearer
- payable on demand or at a definite time
- contain no undertaking or instruction
Lacking Authority
Writing the name of another person constitutes the signature of the writer if the writer lacks authority.
Conditional Promise Order
Conditional if:
- contains an express condition to payment
- states that it is subject to or governed by another writing OR
- states that rights or obligations with respect to ir are stated in another writing
Interest
An instrument is not payable with interest unless it specifies otherwise
Payable to Bearer
It is payable to bearer if:
- states it is payable to bearer or order of bearer
- does not state a payee
- state it is payable to cash OR
- indicates it is not payable to an identified person
If contains both order and bearer language, the bearer language controls.
Payable to Two or More Persons
It is payable to any of them and it may be negotiated, discharged, or enforced by any or all of them in possession of instrument. Default rule.
Payable Jointly
It is payable to all of them and it may be negotiated, discharged or enforced only by all of them. Neither, acting alone, can be the holder of the instrument.
Payable at a Definite Period of Time
- at the end of a definite period of time
- fixed date OR
- time readily ascertainable, even if subject to rights of prepayment, acceleration, extension at the holder’s option, or extension to a further definite time at the maker’s option or automatically upon or after a specified act or event.
Negotiation
A voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder
Order Instrument
If an instrument is payable to an identified person negotiation requires transfer of possession of the instrument and indorsement by the holder.
Bearer Instrument
If an instrument is payable to bearer, it may be negotiated by transfer of possession alone
Transfer
Occurs when it is delivered by a person other than its issuer for the purpose of giving the right to enforce the instrument to the person receiving delivery. If transferor transfers less than the entire instrument, negotiation of the instrument doesn’t’ occur.
Blank Indorsement
The name of the transferor written on the back of the instrument. It becomes bearer paper and the transferee can further negotiate by delivery alone.
Special Indorsement
The transferee is named and directs payment to him. Instrument becomes order paper and the transferee’s indorsement is necessary for further negotiation.
Presentment
To obtain payment of a negotiable instrument, demand is generally made upon the person expected to pay. A party paying the instrument upon presentment, doesn’t take by negotiation and cannot become a holder in due course.
Holder
A person who is in possession of an instrument if:
- the instrument is payable to bearer OR
- the instrument is payable to an identified person and the identified person is in possession of the instrument
Holder in Due Course
Instrument doesn’t bear apparent evidence of forgery, alteration, or other irregularity, who takes the instrument:
- for value
- in good faith AND
- without notice that the instrument is overdue, has been dishonored, bears an unauthorized signature or alteration, or of any defense or claim against it
Overdue Payable on Demand
An instrument payable on demand becomes overdue at the earliest of the following:
- on the day after the day demand for payment is made
- 90 days after the instrument’s date, if it is a check, OR
- if it isn’t a check, when it has been outstanding for an unreasonably long period after its date, based on the nature of the instrument and usage of the trade.
Overdue Payable at a Definite Time
- if the principal is payable in installments, upon default under the instrument for nonpayment of an installment
- if the principal is not payable in installments, the day after the due date OR
- if a due date for principal has been accelerated, on the day after the accelerated due date
Test for Notice
- He has actual knowledge
- he has received a notice or notification of it OR
- based on all the facts and circumstances known to him at the time in question, he has reason to know it exists
Effective notice must be received at a time and in a manner that gives a reasonable opportunity to act.
Not a Holder in Due Course
- by legal process or by purchase in an execution, bankruptcy, or creditor’s sale
- by purchase as part of a bulk transaction not in the transferor’s ordinary course of business OR
- as the successor in interest to an estate or other organization.
Umbrella or Shelter Doctrine
A transferee of an instrument obtains any right of the transferor to enforce it, including any right as a holder in due course. A transferee who engaged in fraud or illegality affect the instrument can’t obtain the rights of a holder in due course from his transferor.
Lost or Stolen Instrument
Entitled to enforce the instrument if:
- the person was in possession and entitled to enforce it when lost
- the loss of possession was not the result of a voluntary transfer by the person or a lawful seizure AND
- the person can’t reasonably obtain possession of the instrument because the instrument was destroyed, its lost, or its in wrongful possession.
Signature
A person is not liable on an instrument unless the person signed it or is represented by an agent who signed it in a way to bind the person.
Liability of Drawer
Secondary liable when the drawee fails to pay.
- presentment to drawee
- dishonor by the drawee AND
- notice of the dishonor to the drawer
Transferor Warranties
- transforer is entitled to enforce the instrument
- signatures are authentic and authorized
instrument hasn’t been altered - instrument is not subject to a defense or claim in recoupment of any party against the transferor AND
- transferor has no knowledge of any insolvency proceeding commenced with respect to the maker, acceptor, or drawer of an unaccepted draft
If the tranferor doesn’t indorse the instrument, then the warranties run only to the immediate transferee.
Indorsers
If the transferor indorses, the indorser becomes liable to pay the instrument if upon demand the maker or drawer doesn’t pay and the indorser is given notice of the refusal to pay.
Can disclaim liability by indorsing the instrument “without recourse”
Dishonor
Occurs when a proper presentment for payment is made and payment is refused or when a required or optional presentment for acceptance is made and acceptance is refused.
Real Defenses
- infancy
- duress, capacity, illegality
- fraud
- discharge in insolvency proceeding
- discharges of which debtor has no notice
