Commercial Paper Flashcards
8 step approach of commercial paper
- Identify type of paper (representation of money)
- Identify the Parties
- Determine if instrument is negotiable
- Determine if instrument was properly negotiated
- Determine if transferee is a holder in due course
- Determine plaintiffs causes of action(s) such as contract, warranty, tort or not properly payable
- Determine defendants defenses
- If defendant is held liable may defendant pass liability on to another party?
Note
Promise to Pay
- A promise to pay money: a two party instrument
Parties
A. The maker - The promisor (obligor)- Person who promises to pay
B. The payee- The promisee- person entitled to payment (the money)
Parties to a Note
A. The maker - The promisor (obligor)- Person who promises to pay
B. The payee- The promisee- person entitled to payment (the money)
Certificate of Deposit
Certificate of Deposit (CD)- note issued by a financial institution
Financial institution acknowledge receipt of money
Financial institution is promising the payee/depository to repay the money
Draft
An order to pay money- a three party instrument
Example: Check
Parties
The drawer- person ordering payment
The drawee- person to make the payment
- In a check context, also called the payor bank
The payee- person to receive the payment (person to receive payment, money)
Parties to a Draft
The drawer- person ordering payment
The drawee- person to make the payment
- In a check context, also called the payor bank
The payee- person to receive the payment (person to receive payment, money)
Check’s additional requirements
- A financial institution is the drawee and
2. Payable on demand (payable whenever the payee wants the money)
Types of Checks
- Ordinary Checks
- Certified Check
- Ordinary check which bank has accepted it ie agreed to pay (become liable) - Cashiers Check
- Drawer and Drawee are same bank
- Person buying the check is the remitter - Tellers Check
- Check drawn by one bank on another bank
- Person buying the check is the remitter - Travelers Check
- Demand instrument requiring the countersignature by a person who specimen signature already appears on the instrument
Remotely-Created Item (Formerly Demand Draft)
A draft is not signed by the drawer but created with the drawers authority so that a third party can get paid from the drawers bank account
- The third party is usually a seller in an internet transaction or when you pay bills over the telephone by giving creditor your checking account number
Meaning of Negotiability
- Refers to the form of the instrument
- Determined at time of issuance, cannot later change it
Opting out: If instrument says it is non-negotiable, it is non-negotiable (unless it is a check cannot expressly opt out of checks
Importance of Negotiability
- In a normal contract law, a transferee gets no better rights than the transferor.
Thus the obligor may raise all of the defenses (ie failure of consideration, fraud) it had against the transferor against the transferee - If the paper is negotiable (form) and properly negotiated (transferred) it may reach the hand of a special good faith purchaser called a holder in due course
- Holder in due course obtains better rights then transferor and thus can get paid from obligor even though the obligor (maker or drawer) has defenses (good reasons not to pay under normal contract law)
- If instrument is not negotiable it is not invalid or unenforceable it is just a regular contract
Elements of Negotiability
- In Writing
- Signed by maker or drawer
- Unconditional Promise or Order to Pay
- Fixed Amount
- In Money
- No other undertaking or instructions
- Payable on Demand or At a Definite Time
- Contains words of Negotiability
In writing requirement of Negotiability
- No requirement what it is to be written with or written on
Signed by maker or drawer requirement of Negotiability
- Any symbol executed or adopted by a party with present intent to authenticate a writing
Ex: Traditional signature, trade or assumed name, mark x, initials, someone writing someone else’s name with that persons permission, typewritten, signature stamp, thumb print, computer generated - If someone forgers your name that’s the real signature of the forger
Unconditional Promise or Order to Pay requirement of Negotiability
- Must be more than a mere acknowledgment of a debt such as I.O.U
Presumption of unconditional promise or order
Items that make promise or order conditional (and thus not negotiable):
- Express Condition to Payment: ex: I will pay if I make the highest score on the bar, payment conditioned and not negotiable
- Promise or order “Subject to” or “Governed by” another record
- Incorporation by Reference: rights or obligations with respect to the promise or order are state in another record
Items that do not make promise or order conditional:
- Statement of Consideration: can state consideration of monetary payment as long as it’s not conditional on paying the note
- Reference to another record “ as per“ or “in accordance with”
- Incorporation by reference of items that would not hurt holder
1. Rights Regarding collateral
2. Pre-payment- Right of obligor to pay early
3. Acceleration- Right of holder to get paid early upon some event - Limitation of payment to a particular fund or source: stating the account money is to come from is ok
- Countersignature: if you need countersignature its ok, Ex: travelers check
- Consumer Protection Language: Language only there because its required, This language will however prevent holder from being a holder in due course
Items that make promise or order conditional (so not negotiable)
- Express Condition to Payment: ex: I will pay if I make the highest score on the bar, payment conditioned and not negotiable
- Promise or order “Subject to” or “Governed by” another record
- Incorporation by Reference: rights or obligations with respect to the promise or order are state in another record
Items that do not make promise or order conditional (negotiable)
- Statement of Consideration: can state consideration of monetary payment as long as it’s not conditional on paying the note
- Reference to another record “ as per“ or “in accordance with”
- Incorporation by reference of items that would not hurt holder
1. Rights Regarding collateral
2. Pre-payment- Right of obligor to pay early
3. Acceleration- Right of holder to get paid early upon some event - Limitation of payment to a particular fund or source: stating the account money is to come from is ok
- Countersignature: if you need countersignature its ok, Ex: travelers check
- Consumer Protection Language: Language only there because its required, This language will however prevent holder from being a holder in due course
Fixed Amount element of Negotiability
Determine principal amount due Must be able to look at instrument and determine the principal amount due Ex: $450 Interest Presumption= no interest A silent instrument bears no interest Ex: an ordinary check
Ways in which interest may be state which do not violate the fixed amount requirement
1. Amount of money: $20 a month
2. Fixed or variable rate: 2% this year
3. Reference to outside source: A note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Failure to state interest rate (say there is interest but don’t state rate)= judgment rule
Ex: a note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Interest on an obligation
Presumption= no interest
A silent instrument bears no interest
Ex: an ordinary check
Ways in which interest may be stated which do not violate the fixed amount requirement
1. Amount of money: $20 a month
2. Fixed or variable rate: 2% this year
3. Reference to outside source: A note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Failure to state interest rate (say there is interest but don’t state rate)= judgment rule
Ex: a note which provides that interest is 2% above the prime rate is negotiable even though an outside source must be consulted to determine the rate of interest
Payable in Money element of Negotiability
Authorized medium of exchange
Medium of exchange authorized or adopted by a domestic or foreign government as part of its currency
Includes Foreign money
- May be payable in foreign money. Unless limited to payment in foreign money, could also be paid with equivalent US money
-Cannot be payable in goods or services
Words v. Figures=Words Prevail
Ex: a check provides that it is payable for 550.00 in numerals but five hundred dollars is in words. Check is payable for $ 500
No other undertaking or instruction element of negotiability
- Instrument not a full contract
- Negotiable instruments are just promises or orders to pay money. They are often called “couriers without luggage”
Exceptions: Permitted Undertakings or Instructions
- Promises Concerning Collateral
Ex: a note which provides that “the maker will provide additional collateral” under circumstances stated in the note is a permissible additional promise
- Confession of judgment Clauses
Note that confession of judgment clauses are unenforceable under Texas law
- Waiver of Law meant to benefit the obligor (maker/drawer)
Payable on Demand or At Definite Time
Express Statement: A note is payable on demand if an express statement is used providing for payment on demand or at sight
Silent instrument
If the instrument does not state the date it is due, it is a demand instrument
Ex: An ordinary check is a demand instrument because it does not state a due date, it merely states the date it was issued
At a definite time
Express: Date stated on instrument, Fixed period after right or acceptance, time readily ascertainable at time promise or order is used
Ex: note that says it is due the first day of fall 2011 is payable at definite time
Ex: Note payable when someone dies is not payable at definite time
Permitted date change matters that do no prevent instrument from being payable at a definite time
- Prepayment of instrument: right of obligor to pay earlier then stated date
- Acceleration of due date: right of holder to demand payment earlier then stated date upon named events
Provisions in instrument extending the due date
By holder = to any time
By obligor= to a later definite time stated in the instrument
Automatically upon condition stated in instrument= to a later definite time stated in the instrument
Contains Words of Negotiability
Bearer Language
- Payable to bearer, payable to the order of bearer, indication that possessor entitle to payment, no payee stated, to cash or to order of cash, not payable to identified person
Ex: A check which the drawer signs but does not fill in the name of a payee is bearer paper
Ex: a check payable to good luck on the bar exam is bearer paper because it does not identify a person as the payee
Order language
Ex: a check payable to the order of Frank Smith is order paper. Order language is typically pre-printed on checks
If both order and bearer language= bearer controls
Ex: A check payable to the order of Frank Smith or bearer is barer paper
Exception of Checks
If this is the only element of negotiability missing for a check, the order or bearer language requirement is waived
- Only for checks
Ex: note payable to Maria is not negotiable because it lacks bearer language (a person is named) and does not contain order language
Ex: check payable to Frank Smith is negotiable despite lacking order or beaer language
-Nonnegotiable = regular contract law
Bearer Language
- Payable to bearer, payable to the order of bearer, indication that possessor entitle to payment, no payee stated, to cash or to order of cash, not payable to identified person
Ex: A check which the drawer signs but does not fill in the name of a payee is bearer paper
Ex: a check payable to good luck on the bar exam is bearer paper because it does not identify a person as the payee
Order Language
Ex: a check payable to the order of Frank Smith is order paper. Order language is typically pre-printed on checks
If both order and bearer language= bearer controls
Ex: A check payable to the order of Frank Smith or bearer is barer paper
Check Exception of Bearer or Order Language
If this is the only element of negotiability missing for a check, the order or bearer language requirement is waived
- Only for checks
Ex: note payable to Maria is not negotiable because it lacks bearer language (a person is named) and does not contain order language
Ex: check payable to Frank Smith is negotiable despite lacking order or beaer language
What happens if something is nonnegotiable?
Regular contract law applies
Negotiation
Negotiation: Transfer of negotiable instrument so transferee is a holder
The payee transfers the instrument to a third party rather than just getting the money ie as payment for a sale, to donee as a gift, to bank to deposit in payees account, etc
Holder Status
- Possession of negotiable instrument and
- Good title
The method of obtaining good title depends on the words of negotiability used
Bearer= possession alone gives you good title (possession=holder)
Order= possession plus necessary indorsements
What gives a holder good title for bearer paper?
possession alone gives you good title (possession=holder)
What gives a holder good title for order?
possession plus necessary indorsements
Indorsement
An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument
Blank indorsements
Blank Indorements
- Payees Signature only
Simplest type of indorsement consisting merely of payees signature ie no particular person is named to whom instrument is now payable
Effect = Creates Bearer paper
Thus further negotiations may be by transfer of possession alone
Special Indorsements
- Payees signature plus designation of new person to whom instrument payable
- New owner of instrument
Ex: check payable to frank smith, frank writes on the back payable to Susan Cortez and signs his name immediately below. Frank has made a special endorsement and the check is order paper. Further negotiation of the check will need Susan’s indorsement
Effect= Creates Order Paper
Thus, further negotiations will require the indorsement of the person to whom it was made payable
For Deposit or Collection/ Restrictive Collection
For Deposit or Collection
A restrictive indorsement limiting what may be done with instrument
Ex: check payable to frank, frank writes on back for deposit in my bank account #343 only and then signs his name immediately below it. Frank has made deposit indorsement
- If depositary bank does not comply with the indorsement that depositary bank will be liable to frank for conversion
What determines the initial payee?
Intent of Issuer Determines Initial payee
Multiple Payess
“and” separated the names of the payees. Requires all payees to indorse
“or” or “and/or” separates the names of the payees. Requires any one of the payees
Transferees Right to Transferors Indorsement
If instrument is transferred for value transferee has specifically enforceable right to the transferors indorsement
Depositary bank becomes holder even without transferees signature
Depositary bank becomes a holder even if payee deposits check in payees account without indorsing it
Misspelled Payees Name
payee may indorse with incorrect or real name
- A person giving value for the check may require person to indorse both names to make the chain of title clear (real and misspelled name)
Payee Lacking Capacity May Still Effectively Indorse
Negotiation is effective even if the payee was a minor (incompetent)
Rights of Mere Holder
Being a mere holder is normally all that one needs because a holder has lots of rights, such as the right to enforce payment
When is holder in due course status relevant?
Holder in due course status is important when the obligor raise a defense to payment
Ex: assume that maker of note does not want to pay because the produce purchased was defective
- A mere holder, holder would lose to this defense, if it is valid under basic contract law
- If holder is holder in due course, holder can obtain better rights than the transferor and take free of this and most other defenses
Elements of Holder in Due Course
- Negotiable Instrument
- Holder
- Authenticity not apparently questioned
- Holder Must pay Value
- Good Faith
- Without notice at time of instrument acquisition
