Commercial Paper

Question 1

Two types of negotiable instruments

Answer 1

Note (IOU, two parties)

Draft (you pay him for me, three parties)

Question 2

Note

Answer 2

From the maker (obligor) to the payee

Question 3

Draft

Answer 3

From the drawer to the drawee/payor to the payee

Question 4

7 requirements for negotiability

Answer 4

Signed writing

Unconditional promise/order to pay

For a fixed sum of money (can include interest rate)

Payable to order or to bearer

Payable on demand or at a definite time

No other instructions from drawer/maker

Question 5

Holder

Answer 5

Holder can transfer (negotiate) instrument to someone else

If instrument payable to bearer - possessor is holder

If payable to order - person who it named must possess it to be a holder

Question 6

Holder in due course

Answer 6

If holder sells instrument to someone else, that person is an HDC as long as they took the instrument:

for value

in good faith

without notice of defect (note overdue, already dishonored, uncured underlying default of payment, unauthorized signature, defense against/claim to note)

Question 7

Exceptions to HDC status

Answer 7

If took instrument by legal process

If purchase instrument in execution or bankruptcy

If purchase in bulk transaction not in transferor’s ordinary course of business

If they’re a successor in interest to an estate or other organization

Question 8

HDC and shelter doctrine

Answer 8

HDC can shelter transferee down the line

FIRST holder CAN NEVER be an HDC (so can’t shelter anyone)

Question 9

Signer’s Liability

Answer 9

Note - maker/obligor liable for payment

Draft - drawer only secondarily liable

Question 10

Drawer’s Liability

Answer 10

Drawer only liable if:

Holder presented draft to drawee (like the bank),

Drawee dishonored the draft, AND

Drawer got notice of the dishonor. Drawer not liable if draft has been forged

Question 11

Liability of Drawer’s Agent

Answer 11

Drawer’s agent personally liable on an instrument unless he’s obviously acting as an agent (being previously known as agent or writing “without recourse” on signed instrument.

Question 12

Liability of Indorser

Answer 12

Indorser makes transfer warranties when they sign the instrument over to another party, liable on those warranties

Question 13

Liability of Drawee (Bank)

Answer 13

Comes up when bank erroneously transferred money.

Forged draft: if bank cashes forged check anyway, it should recredit $ back to drawer or assert defenses (drawer’s negligence or that it has not breached its duty of care). Bank does not have a duty to compare signatures to determine if fraudulent signature.

Stop order - bank should not pay check if drawer has issued written stop order (oral stop orders not enforceable)

Old check: check generally must be cashed w/in 6 months, but bank can cash older checks using its discretion

Overdrawn account: bank can refuse to pay if paying would overdraw account

Question 14

Enforcing instrument

Answer 14

HDC wants to sue maker/drawer/obligor for nonpayment.

Obligor can raise real defenses but not personal defenses.

Real defenses: infancy, duress, lack of capacity, illegality of transaction, fraud in the factum, discharge in insolvency proceedings, discharges that holder has notice of

Personal defenses (don’t work against HDC): K defenses, non-issuance, ocond

Question 15

Real Defenses

Answer 15

infancy

duress

lack of capacity

the illegality of transaction

fraud in the factum

discharge in insolvency proceedings

discharges that holder has notice of

Question 16

Personal defenses (don’t work against HDC)

Answer 16

K defenses

Non-issuance

Conditional issuance

Issuance for a special purpose

Failure of consideration

No title

Lost or stolen instrument

Discharge