Commercial Paper Flashcards
The types of commercial paper governed by Article 3 of the UCC can be divided into two basic categories: _____ and _____.
notes and drafts
A note is a _____ party instrument and a draft is a _____ party instrument.
Two
Three
I, Max Maker, promised to pay to the order of Peter Payee the sum of One Hundred Dollars ($100)
Max Maker
Is an example of a _____.
Note.
TO: DRAWEE NATIONAL BANK
PAY TO THE ORDER OF Patricia Payee One-Hundred Dollars ($100)
Donna Drawer___
Is an example of a _____.
Draft.
_____ is the person who signs or is identified in a note as the
person undertaking to pay.
Maker
_____ is the person to whom the note is payable.
Payee
What parties are involved in making a note?
Maker and Payee
_____ the person who signs or is identified in a draft as the person ordering payment
_____ the person ordered in a draft to make payment
_____ the person to whom the draft is payable
Drawer
Drawee
Payee
Parties involved in draft . . .
Drawer
Drawee
Payee
When the drawee is a bank, and it is payable on demand, then the draft is a _____.
check
When the drawee is a _____, and _____, then the draft is a check.
bank
it is payable on demand
Also included in the general definition of commercial paper is a certificate of deposit. It is an acknowledgment by a bank that _____, and a _____.
a sum of money has been received
promise by the bank to repay the sum of money
- Seller and Buyer sign a contract. Seller delivers goods to Buyer, with Buyer agreeing
to pay within 60 days. Can Seller assign this right to receive payment to X?
a. If the goods turn out to be defective, must Buyer pay X?
2. Now assume that when Seller delivers goods to Buyer, Buyer issues to Seller a negotiable instrument (check or promissory note). Seller then negotiates the negotiable instrument to X, a holder in due course (HDC) who gives value, in good faith, with no notice that it is overdue or has been dishonored or of any defenses or claims. Here, X _____.
But note: certain defenses (real defenses) can be raised even as against a HDC [will discuss later].
If commercial paper is non-negotiable, then _____– the _____ stands in the shoes of the _____.
- Yes. Seller assignor and x is the assignee.
a. No. Generally, any defense that can be raised against the assignor, can be raised against the assignee. - takes free of most defenses (personal defenses) that Buyer could raise against Seller (including the defense that the goods are defective)
general principles of contract law apply
assignee
assignor
What are the requirements for a negotiable instrument?
- Writing
- Signed By Maker or Drawer
- Unconditional
- Promise To Pay or Order To Pay
- Fixed Amount
- In Money
- No Other Undertaking or Instruction
- On Demand or at a Definite Time
- To Order or To Bearer
Requirements of the writing element for negotiable instrument . . .
There is no such thing as an oral negotiable instrument. It must be something tangible. Almost always a piece of paper, but need not be (a t-shirt, a cow, a tamale, etc. – all technically O.K.)
How does the code define signed, for purposes of the signed by maker or drawer element for a negotiable instrument and what is the key to this element . . .
Signed by Maker (if note) or Drawer (if check):
Code defines “signed” as including “any symbol executed or adopted by a party with a present intention to authenticate a writing.”
a. Can be printed, stamped, written
Can be initials or thumbprint
Can be a trade name or assumed name Can appear in the body of the instrument
b. Key: Whether the party intended for that symbol to operate as her signature
Unconditional: Conditional promises are O.K. under contract law, but they _____ negotiability. (unconditional element of negotiable instrument)
destroy
Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series. Is this negotiable?
No.
Unconditional: Conditional promises are O.K. under contract law, but they destroy negotiability.
I promise to pay $100 to the order of Payee “in accordance with” (or “as per”) the contract we signed today. Is this negotiable?
This is negotiable. It is okay to mention the underlying contract without destroying negotiability so long as payment of the instrument is not made “subject to” or “conditioned upon” performance of the underlying contract.
It is okay to mention the underlying contract without destroying negotiability so long as _____.
payment of the instrument is not made “subject to” or “conditioned upon” performance of the underlying contract
Assume the promise to pay is “subject to” a contract. Upon examining the contract, it is clear that it puts no conditions on the promise to pay. Is this negotiable?
This is not negotiable. The negotiability of an instrument must be clear on the face of the instrument itself. The terms of the incorporated document are irrelevant. The fact of incorporation destroys negotiability.
Article 3 specifically provides that a promise or order will not be deemed conditional merely because it:
(1) Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration;
(2) Limits payment to a particular source or fund (e.g., AI promise to pay out of the funds received from the sale of my next wheat crop);
(3) Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (such conditions are common on traveler’s checks).
Article 3 specifically provides that a promise or order will not be deemed conditional merely because it:
(1) Refers to another writing for _____;
(2) Limits payment to a particular _____;
(3) Requires as a condition to payment a _____ by a person whose _____ appears on the _____ (such conditions are common on traveler’s checks).
a statement of rights regarding collateral, prepayment, or acceleration
source or fund (e.g., AI promise to pay out of the funds received from the sale of my next wheat crop);
countersignature
specimen signature
promise or order
Is an IOU negotiable? (Promise To Pay or Order To Pay element of negotiable instrument)
An IOU is not negotiable. It is not a promise to pay.
Is “I wish you would pay” an order to pay? Is it negotiable?
(Promise To Pay or Order To Pay element of negotiable instrument)
No.
Not negotiable.
When the instrument is payable, the holder must be able to determine from _____ the _____. The requirement of a fixed amount applies ONL Y to _____; it does not apply to _____ (or to _____).
(A Fixed Amount element of negotiable instrument)
the instrument itself
principal amount due
principal
interest
other charges that are often included in an instrument, such as collection costs and attorneys fees
Is a note providing for variable interest rates (e.g., 3% over prime, adjusted each six months based on then prevailing bank rates in New York City”) negotiable?
If the instrument states that it is payable with interest but does not state how much interest, the _____.
(A Fixed Amount element of negotiable instrument)
Yes.
A Fixed Amount: When the instrument is payable, the holder must be able to determine from the instrument itself the principal amount due. The requirement of a fixed amount applies ONL Y to principal; it does not apply to interest (or to other charges that are often included in an instrument, such as collection costs and attorneys fees).
judgment rate (the rate on a court judgment) will be implied
Is a promise to pay 100 bales of cotton a negotiable promise?
No.
For purposes of the “in money” element of a negotiable instrument, is Foreign money O.K.?
Yes. (as long as the U.S. recognizes the currency).
A negotiable instrument must be a “courier _____” – it must not be burdened with anything other than _____. If a note contains additional undertakings or instructions, the holder is _____.
NOTE: The UCC does permit a number of extra undertakings or instructions.
without luggage
a simple, clean unconditional promise or order
given notice that the note is or may be conditioned on the performance of those additional undertakings or instructions
The UCC does permit a number of extra undertakings or instructions. A promise or order may contain:
(1) An undertaking or power to give, maintain, or protect collateral to secure payment;
(2) An authorization or power to the holder to confess judgment or realize on or dispose of collateral;
(3) A waiver of the benefit of any law intended for the advantage or protection of the obligor (e.g., waiver of a homestead exemption, or trial by jury, or right to notice of dishonor).
Note: Also O.K. to promise to pay costs of collection and attorneys’ fees.
No Other Undertaking or Instruction:
a. A negotiable instrument must be a “courier without luggage” – it must not be burdened with anything other than a simple, clean unconditional promise or order.
If a note contains additional undertakings or instructions, the holder is given notice that the note is or may be conditioned on the performance of those additional undertakings or instructions.
b. The UCC does permit a number of extra undertakings or instructions. A promise or order may contain:
(1) An undertaking or _____ to give, _____, or _____ collateral to secure payment;
(2) An authorization or power to the holder to _____ or _____;
(3) A waiver of the benefit of any law intended for the advantage or protection of the _____ (e.g.,_____).
Note: Also O.K. to promise to _____.:
power
maintain
protect
confess judgment
realize on or dispose of collateral
obligor
waiver of a homestead exemption, or trial by jury, or right to notice of dishonor
pay costs of collection and attorneys’ fees
If a holder of an instrument can’t tell when it comes due then the instrument _____. This doesn’t mean that the instrument must be _____. An undated instrument which specifies no time for payment is treated as _____.
(On Demand or at a Definite Time element of negotiable instrument)
is non-negotiable
dated
an instrument payable on demand by the holder
Do the following meet the on demand or at a definite time element of negotiable instrument?
a. A post-dated check?
b. A note containing an acceleration clause.
1) A note is payable on July 15, 2015, but provides that “the holder may demand payment any time prior thereto if she deems herself insecure.”
c. A note containing an extension clause.
d. Events certain to happen but uncertain as to time
a. yes
b. yes
c. A clause that permits the instrument to be extended at the option of the maker is still negotiable so long as the extension is to a further definite time stated in the instrument (e.g., “This instrument can be extended for one month after the original due date”). If it simply provides that it can be extended at the option of the maker, it is not negotiable
A clause that permits the instrument to be extended at the option of the holder is negotiable, since the holder always has the option of giving extra time for payment.
d. If an instrument is payable on or after a stated time or event certain to happen but uncertain as to time (e.g., “payable on my Uncle Buck’s death”), it is not negotiable because there is no definite time for payment.
A clause that permits the instrument to be extended at the option of the maker is still negotiable so long as _____.
Is it negotiable if it simply provides that it can be extended at the option of the maker?
A clause that permits the instrument to be extended at the option of the _____ is negotiable, since _____.
the extension is to a further definite time stated in the instrument (e.g., “This instrument can be extended for one month after the original due date”)
No.
holder
the holder always has the option of giving extra time for payment
If an instrument is payable on or after a stated time or event certain to happen but uncertain as to time (e.g., “payable on my Uncle Buck’s death”), it is not negotiable because _____.
there is no definite time for payment
A note is payable on July 15, 2015, but provides “if my Uncle Buck dies prior to July 15, 2015, payment is due immediately upon his death.” Is this a negotiable instrument?
Yes. Trick question. Different than If an instrument is payable on or after a stated time or event certain to happen but uncertain as to time (e.g., “payable on my Uncle Buck’s death”), it is not negotiable because there is no definite time for payment.
A negotiable instrument must contain certain magic words –either _____ language or _____ language. A writing lacking these magic words is not negotiable and is not governed by Article _____.
order
bearer
3
To Order or To Bearer: A negotiable instrument must contain certain magic words –either order language or bearer language. A writing lacking these magic words is not negotiable and is not governed by Article 3. Are the following proper language?
a. I promise to pay Paul.
b. I promise to pay to the order of Paul (or “to Paul or his order”).
c. I promise to pay bearer (or “to the order of bearer” or “to Paul or bearer”).
d. Pay to the order of cash.
e. Pay to the order of a bowl of soup (or a keg of nails or a Happy Birthday).
f. What’s the exception?
a. not negotiable
b. yes.
c. yes, bearer paper
d. yes, bearer paper
e. yes, its bearer paper when it otherwise indicates
its not payable to an identified person (like payable to cash)
f. NOTE THIS IMPORTANT EXCEPTION: A check need not contain words of negotiability. A check payable Pay John Doe is fully negotiable, is covered by Article 3, and a transferee of it can become a holder in due course.
NOTE THIS IMPORTANT EXCEPTION: A _____ need not contain words of negotiability.
check.
A check payable Pay John Doe is fully negotiable, is covered by Article 3, and a transferee of it can become a holder in due course.
