Commercial Paper

Question 1

The types of commercial paper governed by Article 3 of the UCC can be divided into two basic categories:

Answer 1

notes and drafts

Question 2

A note is:

Answer 2

two party instrument with a maker and payee

1) Maker: the person who signs or is identified in a note as the
person undertaking to pay (here, Max Maker)
2) Payee: the person to whom the note is payable (here, Peter Payee)

I, Max Maker, promised to pay to the order of Peter Payee the sum of One Hundred Dollars ($100)
Max Maker

Question 3

A draft is:

Answer 3

a. A draft is a three party instrument.
1) Drawer: the person who signs or is identified in a draft as the person ordering payment (here, Donna Drawer)
2) Drawee: the person ordered in a draft to make payment (here, Drawee National Bank)
3) Payee: the person to whom the draft is payable (here, Patricia Payee)

Question 4

When the drawee is _____, and it is _____, then the draft is a check.

Answer 4

a bank

payable on demand

Question 5

A certificate of deposit is:

Answer 5

It is an acknowledgment by a bank that a sum of money has been received, and a promise by the bank to repay the sum of money.

Question 6

Requirements for a negotiable instrument:

Answer 6

1. Writing
2. Signed By Maker of Drawer
3. Unconditional
4. Promise To Pay or Order To Pay
5. Fixed Amount
6. In Money
7. No Other Undertaking or Instruction
8. On Demand or at a Definite Time
9. To Order or To Bearer

Question 7

Discuss the writing requirement of a negotiable instrument . . .

Answer 7

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.)

Question 8

Discuss the signed by maker requirement of a negotiable instrument . . .

Answer 8

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

Question 9

T/F. The following is a negotiable instrument. Why/Why not? Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series.

Answer 9

F

Unconditional: Conditional promises are O.K. under contract law, but they destroy negotiability.
a. Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series. This is not negotiable.

Question 10

T/F. The following is a negotiable instrument. Why/Why not? I promise to pay $100 to the order of Payee “in accordance with” (or “as per”) the contract we signed today.

Answer 10

T
It does not destroy negotiability if the instrument simply refers to another agreement.
1) Illustration: I promise to pay $100 to the order of Payee “in accordance with” (or “as per”) the contract we signed today. 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.

Question 11

T/F. The following is a negotiable instrument. Why/Why not? 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.

Answer 11

F

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.

Question 12

Article 3 specifically provides that a promise or order will not be deemed conditional merely because it:

Answer 12

(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).

Question 13

Promise to Pay (if _____) or Order to Pay (if _____)

Answer 13

note

check

Question 14

T/F. An IOU is not negotiable.

Answer 14

T - It is not a promise to pay.

Question 15

T/F. “I wish you would pay” is negotiable.

Answer 15

F

Question 16

When the instrument is _____, the _____ must be able to determine _____. The requirement of a fixed amount applies ONL Y to _____; it does not apply to (or to other charges that are often included in an instrument, such as collection costs and attorneys fees).

Answer 16

payable

holder

from the instrument itself the principal amount due

principal

interest

Question 17

T/F. 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”) is not negotiable.

Answer 17

F

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).

Question 18

Discuss the “in money” requirement:

Answer 18

a. A promise to pay 100 bales of cotton is a non-negotiable promise.
b. Foreign money is O.K. (as long as the U.S. recognizes the currency).

Question 19

No Other Undertaking or Instruction
a. A negotiable instrument must be a “_____” – it must not be burdened with anything other than a _____. If a note contains additional undertakings or instructions, the holder is _____.

Answer 19

courier without luggage

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

(note, there are some undertaking and instructions that the UCC allows - see other card)

Question 20

The UCC does permit a number of extra undertakings or instructions. A promise or order may contain:

Answer 20

(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.

Question 21

On Demand or at a Definite Time: A holder of an instrument must be able to tell when it comes due or the instrument is non-negotiable. This doesn’t mean that the instrument must be _____.

Answer 21

dated

Question 22

An undated instrument which specifies no time for payment is treated as _____.

Answer 22

an instrument payable on demand by the holder

Question 23

T/F. A post dated check is not ok for purposes of the on demand or a definite time element.

Answer 23

F.

Question 24

T/F. This is negotiable. 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.”

Answer 24

T

Acceleration clause ok for On Demand or at a Definite Time element

Question 25

A clause that permits the instrument to be extended at the option of the maker is still negotiable so long as _____. If it simply provides that it can be extended _____, it is not negotiable.

A clause that permits the instrument to be extended at the option of the _____ is negotiable, since _____.

Answer 25

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”)

at the option of the maker

holder

the holder always has the option of giving extra time for payment

Question 26

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 _____ because _____.

Answer 26

not negotiable

there is no definite time for payment

Question 27

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?

Answer 27

This is ok. This is different than ON Uncle Buck’s death.

Question 28

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.

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).

Exception _____

Answer 28

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)

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.

Question 29

If a writing contains a conditional promise, a statement that This Note is Negotiable would not be effective to make this writing a negotiable instrument b/c . . .

b. Parties can use a form that is a negotiable instrument and avoid negotiability by declaring, on the instrument, that it is _____ except for a _____. A declaration on a check that it is not negotiable is _____.

Answer 29

A writing cannot be made a negotiable instrument within Article 3 by contract or
conduct of the parties.

NOT NEGOTIABLE

check

ineffective

Question 30

Difference b/w assignment and negotiation . . .

Answer 30

Assignment: A payee who has been issued a negotiable instrument can simply assign it to a third party. The third party is then an assignee, and has no greater rights than the assignor does on the instrument. Any defenses that could be raised against the payee also could be raised against the assignee.

b. Negotiation: But if the payee negotiates the instrument to a third party, then that third party is not a mere assignee, but is a holder. If the holder gives value, in good faith, with no notice, then the holder is a holder in due course, who takes free of most defenses that could have been raised against the payee.
c. Negotiation is the customary way of transferring an instrument.

Question 31

If the holder _____ then the holder is a holder in due course, who takes free of most defenses that could have been raised against the payee.

Answer 31

gives value, in good faith, with no notice,

Question 32

Order paper is negotiated by _____.

Answer 32

transfer of possession plus indorsement by the holder

Question 33

Transfer of possession for purposes of negotiating an instrument may be _____.

Answer 33

voluntary or involuntary

Question 34

Special indorsement vs. blank indorsement

Answer 34

Special Indorsement: Specifies the person to whom the instrument is payable.
b) Blank Indorsement: Does not specify the person to whom the instrument is payable; generally consists of a mere signature.

Question 35

Bearer paper is negotiated by _____.

Answer 35

can be negotiated by a transfer of

possession alone, and that this transfer can be voluntary or involuntary

Question 36

Don Drawer issues a check (order paper) to Peter Payee. Payee wants to negotiate the check to Publix. Payee must deliver the check to Publix, but must first indorse it. Assume that Payee signs “Pay to Publix, Peter Payee” on the back of the check.
1) What type of indorsement is this?
2) After this indorsement, is the check order paper or bearer paper?
d. If Publix wishes to further negotiate the check to Heinz, what must Publix do?
e. Assume that Publix simply signs the check “Publix” beneath the previous
indorsement.
1) What type of indorsement is this?
2) After this indorsement, is the check order paper or bearer paper?
f. If Heinz wishes to further negotiate this check to Ken Ketchup, what must Heinz do?
COMMERCIAL PAPER 9.
g. Assume that Heinz signs the check “Pay to Ken Ketchup, Heinz” beneath the previous indorsements. After this indorsement, is the check order paper or bearer paper?

Answer 36

c1. special indorsement
c2. order paper
d. since order paper, transfer possession, but first have to indorse it
e1. blank indorsment
e2. bearer paper
f. could just hand it to him (doesn’t like b/c unless you sign, you are not L on it) . . . he wants them to sign it. so even with bearer paper, a lot of time the transfee demands signature
g. special indorsment, converts it backs to order paper

Question 37

Thief steals the paycheck that had been issued to Peter Payee by his employer. Peter had indorsed the check “Peter Payee” before it was stolen.

a) Was the check order paper or bearer paper when it was stolen?
b) Is Thief a “holder” of this check?
c) Can Thief negotiate this check?

Answer 37

a. b/c of the blank endorsement it was bearer paper
b. yes. even though involuntary transfer (not a holder in due course)

c. yes. he might transfer to a holder in due course in good faith and that’s the danger
if bank pays a holder, you’re out.

Question 38

Order Paper: Order paper can be negotiated only by transfer of possession plus an indorsement by the holder. To be a holder of order paper, it must be _____.

Answer 38

issued to him, or properly indorsed to him

Question 39

Thief steals a paycheck that had been issued to Paul Payee by his

employer. The check had not been indorsed when it was stolen.
a) Was the check order paper or bearer paper when it was stolen?
b) Is Thief a holder of this check?
c) Can Thief negotiate this check?
(2) Assume that Thief forges Payee’s name and delivers the check to Publix. Has the check been “negotiated” to Publix so as to make Publix a “holder” and possibly a HDC?

Answer 39

a. ordinarily check starts out as order paper; it was order paper
b. no. it hasn’t been negotiated to you. missing endorsement to holder.

c. with bearer he could, but he can’t negotiate order paper b/c need endorsement
by the holder

2. Can’t do that. Endorsement wasn’t made by a holder.

Question 40

Bottom Line: Once parties start indorsing, you need to look at _____ to determine whether the instrument is order paper or bearer paper.

Answer 40

the last indorsement

Question 41

When order paper contains a forged indorsement, _____ are holders–meaning _____. In fact, they all have _____ the check. The drawee cannot _____. The drawee can only pay _____.

Answer 41

none of the parties from the forger on

none have good title–none are entitled to the money

converted

properly pay any one of them

a holder–someone with good title to the check

Question 42

While most indorsements are unqualified, a party can indorse an instrument “_____.” This is irrelevant to _____, though it does _____.

Answer 42

without recourse

negotiation

negate contractual liability

Question 43

Different Rule for Banks:
Ordinarily, order paper must be _____ in order to make the transferee a holder. But a depositary bank (a bank in which _____) that takes an unindorsed instrument for collection becomes a holder of the instrument if _____, even if _____.

Answer 43

transferred and indorsed

an item is first deposited

the customer was a holder at the time of delivery

the customer has not indorsed the instrument

Question 44

Payee receives a check from Drawer and deposits the check in his checking account at Bank. Payee forgets to indorse the check, but Bank takes it for deposit anyway. Is the Bank a holder?

Answer 44

Yes.

Different Rule for Banks: Ordinarily, order paper must be transferred and indorsed in order to make the transferee a holder. But a depositary bank (a bank in which an item is first deposited) that takes an unindorsed instrument for collection becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not indorsed the instrument.