Commercial Paper Flashcards
(134 cards)
1
Q
What article governs commercial paper?
A
Art. 3
2
Q
What does the “paper” call for?
A
For a party to pay money rather than deliver goods or perform a service.
3
Q
2 types of commercial paper
A
- notes
2. draft
4
Q
What parties are there in a NOTE?
A
- maker: person undertaking to pay
2. payee: person to whom the note is payable
5
Q
What parties are there in a DRAFT?
A
- drawer: the person who is ordering payment
- drawee: the person ordered to make payment (bank)
- payee: the person to whom the draft is payable
6
Q
When is it considered a check?
A
When the draft has:
- bank as a drawee AND
- it is payable on demand
7
Q
What if commercial paper is non-negotiable, what principles apply?
A
General contract law principles
- the assignee stands in the shoes of the assignor
8
Q
How does something become a negotiable instrument? (Requirements)
A
- writing
- signed by maker (note) OR signed by drawer (draft)
- 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
9
Q
Can an instrument be negotiable if oral?
A
NO.
10
Q
What is the key to figure out whether an instrument has been “signed?”
A
Whether maker/drawer intended for it to be his signature
- includes stamps, initials, thumbprint
- can appear in the middle of the document as long as intent was there
11
Q
What does it mean to have to be “unconditional” to be negotiable?
A
Instrument can’t make payment conditional on something happening.
Can refer to another document as long as payment is NOT conditioned on that document.
Negotiability must be CLEAR on the FACE of the instrument.
12
Q
What will NOT destroy “unconditional status?”
A
- if the instrument refers to another writing that describes rights regarding collateral, repayment, etc
- if the instrument limits payment to a particular source
- if the instrument requires a countersignature later on (traveler’s checks)
13
Q
Is an IOU a promise to pay (note)?
A
No. Use normal contract law for this b/c it is simply an acknowledgment that money is owed.
14
Q
Fixed amount requirement to be negotiable
A
Holder must be able to determine from the instrument ITSELF the principal amount due.
*This does not apply to interest or collection fees or attorneys fees
15
Q
Is it okay for an instrument to refer to outside sources for interest rates?
A
Yes.
If no interest is specified, it will be the judgment rate (rate on a court judgment)
16
Q
Payable in money requirement to be negotiable
A
Your promise to pay must be for money NOT goods
17
Q
“NO other undertaking or instruction” requirement to be negotiable
A
Instrument can’t be burdened with anything else.
Note CANNOT contain additional undertakings. (a few exceptions)
18
Q
Exceptions to the “No other undertaking or instruction requirement”
A
Instrument may contain:
1. undertaking to give, maintain, or protect collateral to secure payment
- an authorization to the holder to confess judgment or dispose of collateral
- a waiver of a benefit intended to be a benefit to the obligor (jury trial, right to notice of dishonor)
19
Q
What do all of the exceptions to the “no other undertaking or instruction requirement” have in common?
A
Each of these strengthens the promise to pay but has no independent value.
20
Q
“On demand or at a definite time” requirement to be a negotiable instrument
A
Holder of the instrument must be able to figure out what when it is due.
21
Q
What if there is no date on the instrument?
A
Treated as an instrument payable on demand
22
Q
What if a check is post-dated?
A
Still negotiable. For this to be effective you must notify your bank of postdating or else you won’t have recourse if it is accidentally deposited before the post-date.
23
Q
What is an acceleration clause?
A
Allows holder of the instrument to demand payment earlier than when it is due if she deems herself “insecure”
24
Q
To accelerate, what must the holder have?
A
Good faith reason
25
What if the note contains an extension clause? Is this still a definite time?
Yes, still negotiable if the extension is to a further definite time.
26
What if the instrument provides that the holder can extend at his option, is this negotiable?
Yes. The holder always has the option to extend and give person extra time for payment.
27
What if the instrument mentions a specific event certain to happen but uncertain as to when it will happen?
Not negotiable b/c no definite time for payment
Ex: Payable on Uncle Buck's death
28
"Order" or "Bearer" language: required to be negotiable
must contain these magic words to be negotiable
Ex: I promise to pay to the order of Paul
I promise to pay bearer
29
What is "pay to the order of cash"
Negotiable - bearer paper
30
What if the instrument indicates that it is NOT payable to an identified person?
It is bearer paper.
"Pay to the order of Happy Birthday"
31
Do words of "negotiability" have to be included?
NO
32
Can you make something negotiable just by stating/stamping that it is is negotiable on the instrument?
No. If it is not negotiable, no words will save it.
33
Can you take something that is negotiable and make in not negotiable by declaring on the instrument "Not Negotiable"
Yes. You can do this for everything EXCEPT checks.
Ex: Stamping "not negotiable" on a promissory note makes it non negotiable.
34
What if you just assign your negotiable instrument?
Assignee has no greater rights than assignor.
Any defenses that could be raised against the assignor (payee) can be raised against assignee
35
What if you negotiate the instrument to a third party? What does this person become?
A HOLDER
36
What if you negotiate the instrument to a third party and that third party gives value, in good faith, and with no notice?
A HOLDER in DUE COURSE
37
What are the 4 elements to be a holder in due course.
1. a holder
2. pay value
3. no notice
4. good faith
38
What is the benefit of being a holder in due course?
Takes free of most defenses that could have been raised by the payee (person who negotiated it to the third party)
39
What should be the first thing you ask when figuring out how an instrument is negotiated?
Figure out whether it is ORDER paper or BEARER paper because there are different rules
40
How is order paper negotiated?
transfer of possession + plus endorsement by the holder (person to whom the instrument is payable)
Ex: A check payed to the order or Kristi.
I would have to transfer possession and endorse it.
41
How can transfer of possession for order paper be done?
voluntarily or involuntarily
42
What are the 2 types of endorsements?
1. specific endorsement
| 2. blank endorsement
43
What is a specific endorsement? Does it create order or bearer paper?
Specifies the person to whom the instrument is payable
Creates order paper
Ex: If I endorse a check to me by writing "pay to Publix, signed Kristi."
44
What is a blank endorsement? Does it create order or bearer paper?
Doesn't specify to whom the instrument is payable
Creates bearer paper
MERE signature
45
How do you transfer bearer paper?
Transfer of possession
NO endorsement needed
46
Bearer paper: what types of transfers of possession are ok?
Voluntary or involuntary
Ex: thief who steals a blank endorsed check
47
Who can endorse order paper?
Holder: issued to him OR properly endorsed to him
48
What if a thief steals your paycheck and forges your signature to give to Publix. Is Publix a holder?
No. To negotiate order paper you must transfer possession and have an endorsement by the holder.
An endorsement by the thief doesn't work.
49
What happens if a forged check gets passed around?
No one from thief onward is a holder. None have good title.
50
What if you endorse + add the words "without recourse"
Still an endorsement but allows endorser to avoid contractual liability if it bounces.
51
What happens if a person deposits a check at a bank but forgets to endorse? Will bank still be a holder?
Yes. Even though there is no endorsement (usually required for order paper), bank is a holder.
Exception b/c of business reasons
52
Who is a holder?
1. person who is possession of BEARER PAPER
OR
2. person who is in possession of ORDER PAPER + order paper is addressed to him or properly endorsed to him
53
Holder in due course: what does "value" mean?
Look for executed consideration. A party is a HDC to the extent that the agreed consideration has been performed.
54
What if Holder pays payee $9000 now for the note and promises to pay $9000 later?
Holder is a HDC as to the $9000
55
What if Holder pays payee $9000 now and gives a promissory note for the other $9000?
Holder is a HDC as to the whole amount since value has been given for the whole thing
56
Holder in due course: what does "good faith" mean?
1. honesty in fact (subjective)
| 2. fair dealing (objective)
57
What does fair dealing mean?
Fairness of conduct
| Reasonable commercial standards (ask for ID before cashing a check, etc)
58
Holder in due course: actual knowledge
No knowledge or reason to know that:
- instrument is so irregular or incomplete
- instrument is overdue or has been dishonored
- instrument contains an unauthorized signature of has been altered
- there has been a claim to the instrument
- someone has a claim to reduce the amount payable on the instrument
59
What if there is an irregularity but it has nothing to do with the underlying claim or defense?
It doesn't matter. The rule is that any extreme irregularity should put you on notice that something is fishy -- so you're ON NOTICE for everything
60
What if the holder has knowledge of a default in an interest payment? In a principal amount being overdue?
Interest payment: harmless
| Knowledge of principal amount overdue: No HDC status
61
What if you take a check that is more than 90 days old? Are you a HDC?
No.
62
What if a note is hugely discounted, is the person who takes the note subject to the huge discount a HDC?
No. Huge discount makes it difficult to argue good faith and that holder didn't have notice.
63
Close-connectedness doctrine and its effect on good faith and notice claims
The more that the holder KNOWS about the underlying transaction the less it fits the role of a good faith purchaser without notice.
64
What if a fiduciary (secretary, CEO, etc) of a corporation takes a check made out to the corporation and endorses it and then uses it to pay her own debt?
The holder would be ON NOTICE of a claim and would NOT be a HDC.
65
Shelter rule: when is it used
When a person who does not take as a HDC can use the status of the person who negotiated the instrument to him.
Ex: Joe is a HDC and GIFTS a note to Bob. Bob takes on status of HDC (Bob can't be a HDC automatically because no value given)
66
FTC rule: what is its effect?
It does away with HDC in consumer contracts.
This means the consumer will be able to assert defenses against the holder why consumer shouldn't have to pay.
67
What defenses does a HDC take free of? What defenses is a HDC still subject to?
HDC takes free of personal defenses.
HDC takes subject to real defenses.
68
What are the real defenses that can be brought against a HDC?
1. infancy
2. incapacity, duress, illegality of the transaction
3. misrepresentation: person didn't understand nature of the document he was signing
4. discharge in insolvency proceedings
5. discharge that the holder had notice of when he took the instrument
69
Can fraud in the inducement be used as a defense against a HDC?
No. It is a personal defense. Person knew he was signing a promissory note.
70
Can fraud in the factum (fraud in the execution) be used as a defense against a HDC?
Yes. It is a real defense.
Must show:
1. excusable ignorance
2. induced to sign through deception w/ respect to the writing's character or terms
71
Is discharge by payment a defense against a HDC?
No. Discharge by payment is a personal defense.
Ex: You pay off your note but Betty doesn't give you back the note and instead sells it to Edgar. Edgar demands payment from you. You have no discharged by payment defense against Edgar.
72
When does the holder in due course doctrine not apply? (how many parties must there be)
The doctrine applies only to cases where more than 2 parties are involved.
73
What if a buyer pays for goods with a cashier's check bought from the bank. Is seller a HDC? (cashier's check obtained through bad check)
Yes, because the bank was the remitter and it issued the check to the seller as payee. Payee will take free of Bank's defense.
74
What if there is an underlying obligation/debt and the debtor gives a note to cover the obligation? What happens to the underlying obligation? What happens when note becomes due and debtor pays it in full?
What if the note becomes due and debtor fails to pay?
It is suspended until note becomes due.
Once note becomes due and is paid off, the underlying obligation is discharged.
If note becomes due and debtor fails to pay, person can sue on the underlying obligation or the note.
(reminds me of an accord agreement)
75
What if there is more than one maker? Who is liable?
All makers are jointly and severally liable.
76
What liability does an endorser have?
Obligated to pay according to the terms of the instrument. ***Even if HDC
77
What is the rule for endorser reimbursement?
Those signing later in time can get complete reimbursement from those signing prior in time.
Ex: Drawer issued a $900 check to A, who then endorsed it to B, who then endorsed it to C. C presented it to the drawee bank, which dishonored it. C demands payment from B. B can recover from A. A can recover from drawer.
(recover from people who signed ahead of you)
78
What happens if sureties sign along with the maker? Are they liable?
Yes, the sureties are jointly and severally liable (doesn't matter who signed first)
79
What if an instrument is made payable to joint payees and they both endorse? Who is liable?
Both are jointly and severally liable.
80
When can an endorser be liable for his endorsement?
1. instrument was presented to maker/drawee and that party dishonored the instrument AND
2. notice of dishonor has been given to the endorser
81
When must notice be given to endorser?
Reasonable time - determined by the instrument
82
What if presentment and notice of dishonor are either NOT MADE or delayed?
What is the exception?
Endorser is excused from contractual liability.
*there is an exception to this rule: the discharge is not effective against a HDC
83
Can a note waive presentment and notice of dishonor?
Yes. This is permissible.
84
When may presentment and notice of honor be delayed or entirely excused?
Certain circumstances
- maker is dead
- maker is insolvent
- maker cannot be found with reasonable diligence
85
What does "without recourse" do when you endorse?
It is a qualified endorsement. It allows endorser to negate liability.
86
When is a drawer liable?
Drawer is liable after presentment and dishonor.
87
When the drawer executes a check, how soon after must it be presented to the bank for drawer to be liable?
Must be w/in 30 days after the date of the instrument
88
What if there is delay in presentment, will the drawer be excused from liability.
Drawer will ALMOST never get off the hook. Only if bank became insolvent during the delay and there is no insurance to cover the loss.
89
Is a drawer entitled to notice of dishonor?
Generally no.
90
What is a fancy name for an accommodation party?
Cosigner
91
What is the accommodation party liable for?
Liable in the capacity in which he signed
92
What if an accommodation party pays when the accommodated party defaults? What can he get back from him?
He can seek full reimbursement (not just contribution like an ordinary co-maker)
93
Can the accommodated party seek contribution from the accommodation party?
No. Accommodation party (cosigner) is not liable to the accommodated party.
94
What if the accommodated party gets an extension for making payments, what happens to the accommodation party? What if accommodated party obtains consent to sell off some collateral?
Extension w/o consent: discharges accommodation party to the extent that it can prove extension caused it some loss
Release of collateral w/o consent: discharges accommodation party to the extent that it can prove extension caused it some loss
95
What defenses can the accommodation party raise?
Any defenses the accommodated party can raise except insolvency, infancy, and lack of legal capacity
96
What does the term "collection guaranteed" mean?
- delays ability to get the money from the accommodation party
- only get money from accommodation party after judgment, apparent that payment can't be obtained from other party, other party is insolvent
97
What if you sign on behalf of a principal?
Principal is liable and agent is not - assuming agent had authority
98
What if she signs her name and doesn't mention the principal at all?
Ex: Person signs a promissory note "Jane Doe."
Principal and agent are liable
99
Properly Payable Rule
Bank may put out the customer's money only if it follows the customer's orders exactly.
If it doesn't, it must credit the account.
100
If a person forges a check in your name, is it properly payable?
No. Unauthorized seller. Customer never ordered bank to pay anyone.
101
If a person endorses a check and then it is stolen, can bank properly pay it?
Yes. Thief was in possession of bearer paper. He was a holder.
102
What if there is a material alteration: what is properly payable by the bank?
Only the original amount. Must recredit as to the altered part (except if there was negligence by drawer)
Ex: Bob issued a $50 check to Sam. Sam altered it and made it a $500.
Bank can properly charge Bob's account only $50.
103
What happens if a check is stale? Must the bank pay? When is a check stale?
Stale after 6 months
| Bank MAY pay in good faith but doesn't have to pay (even if it creates an overdraft)
104
Is a postdated check properly payable before that date?
Not properly payable before the postdate if the customer gives notice to the bank of postdating.
*must describe check w/ reasonable certainty
105
What happens if a bank dishonors something wrongly? (makes a mistake)
Liability to customer?
Liable to customer for damages (may include damages for arrest or prosecution)
106
When will the death of a customer revoke the bank's authority to pay a check?
Only when bank knows of death or incompetence AND has reasonable opportunity to act on it.
Even with notice, bank may keep cashing checks from decedent for 10 days after death.
107
When is stop payment effective?
- stop payment order must describe the item with reasonable certainty AND
- stop payment order must be received at a time and in a manner that affords the bank a REASONABLE OPPORTUNITY to act on it
108
How long is a stop payment order effective?
6 months
| lapses after 14 days if oral w/ no confirmed writing
109
What if a bank messes up and cashes a check when there has been a stop payment order?
1. check to see if bank would have had to pay anyway (was the holder a HDC)
2. if not, customer must establish the loss that resulted from the payment
110
Statute of limitations for a check?
within 3 years after date of dishonor OR 10 years after the date of the draft - whichever expires first
111
Actions for breach of warranty, conversion of an instrument: statute of limitations?
3 years
112
Statute of limitations for a note?
Note payable at a definite time: within 6 years of the due date
Demand note: 6 years after demand
113
Sealed instruments: statute of limitations
20 years
114
What happens if someone forges a check and the instrument is paid?
1. payee can make the drawer right another check (drawer can then demand that the drawee recredit his account as to the first check)
2. payee can sue the drawee bank or anyone who takes the check after forgery in CONVERSION
115
General rule: can a drawee bank recover from the party it paid the money to when it cashed the forged instrument?
No. (can recover from other parties under presentment warranty theory though)
Exceptions:
1. if the party paid did NOT take for value OR in good faith
OR
2. the party paid breached a transfer or presentment warranty
116
When there is payment over a forged endorsement, who can Drawee bank recover from?
1. depository bank
2. thief
3. person thief gave the check to (even if HDC!)
Why? Presentment warranty
117
What is a presentment warranty?
warrant that:
1. they are entitled to enforce the instrument
AND
2. the instrument is not altered
AND
3. they have no knowledge that the drawer's signature is unauthorized
118
What is a transfer warranty?
Each party that transfers an instrument and receives consideration warrants that:
1. they are entitled to enforce the instrument
AND
2. all signatures on the instrument are authentic and authorized
AND
3. the instrument has not been altered
AND
4. no defense or claim of any party is good against the warrantor
AND
5. the warrantor has no knowledge of any insolvency proceeding
119
Who should the loss generally pass to?
Earliest solvent person after the forger (or the forger if you can actually find him)
120
What is "for deposit only"
restrictive endorsement
121
What if a depository bank disregards the restrictive endorsement that says "for deposit only" and cashes it?
Payee should sue all people who acted inconsistently including the depository bank.
EXCEPT drawee bank. Drawee bank is free to disregard the restrictive endorsement.
122
What happens if a person forges the maker's name, not the payee's name?
Drawee bank takes the risk that the drawer's signature is unauthorized. Drawee bank must recredit maker's account.
123
What is ratification of the forgery?
When a party, with FULL KNOWLEDGE of the forgery, accepts the benefits.
124
What happens if a person makes out a check to a person who doesn't exist (duped!) and a person endorses it and then signs his real name?
Maker must bear the loss. Exception from the general rule that forged endorsement is not payable.
125
What happens if, when an instrument is issued, the maker/drawer did not intend for the payee to ever get the money?
Ex: Treasurer of company writes 2 checks to fictitious companies and then forges them and then signs her own name after.
Forged endorsements are payable here. Company bears the risk of embezzlement.
126
What if an employer entrusts an employee with responsibility with respect to an instrument and that employee makes a fraudulent endorsement?
The forged endorsement is effective.
Must be someone with control over the instruments.
127
What will preclude a person from recovering when a material alteration occurs or the making of an unauthorized signature?
1. negligence
2. negligence must substantially contribute to the material alteration or signature
Ex: signing blank checks, leaving your stamp pad lying around
128
When will loss be allocated b/w the drawer and the bank?
When drawee bank fails to exercise ordinary care
129
Bank Statement Rule
A customer must exercise reasonable promptness examining his statement
130
When will you be estopped from demanding recredit for forged items?
When the same wrongdoer showed up on your bank statement and you didn't do anything
131
How long does a customer have to assert that there was an unauthorized signature or alteration on the FACE of the instrument?
60 days
132
How long does a customer have to assert any unauthorized endorsement or alteration on the BACK of an instrument?
1 year
133
What happens if a person materially alters an instrument and then tries to demand payment from the maker? What if it was sold to a HDC, how much can HDC recover from maker?
Maker doesn't have to pay anything to the person who materially altered (duties discharged)
Maker only has to pay original amount.
134
What does a person have to do to make out a claim to payment?
Prima face case for payment:
- signatures are genuine
- holder of the instrument (show endorsement + transfer if order paper)
If other side starts making a personal claim, holder can argue he is a holder in due course.
