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commercial paper Flashcards

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1
Q

forms of commercial paper

A
  1. article 3 of the UCC governs the rights and liabilities of parties to commercial paper
  2. paper calls for a party to pay money rather than to deliver goods or perform a service
  3. governs both notes and drafts
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2
Q

note

A
  1. 2 parties: the maker and the payee
  2. maker: the person who signs or is identified in a note as the person undertaking to pay
  3. payee: the person to whom the note is payable
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3
Q

check/draft

A

there are three party instrument

  1. the drawer:the person who signs or is identified as the person ordering the payment
  2. the drawee: the person ordered to make the payment
  3. payee: the person to whom the draft is payable
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4
Q

drawee is a bank

A

payable on demand then the draft is a check

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5
Q

certificate of deposit

A

it is an acknowledgement by a bank that a sum of money has been received and a promise by a bank to repay the sum of money

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6
Q

negotiable instrument

A
  1. special attribute: if a buyer issues a seller a negotiable instrument and then seller gives the instrument to X, seller has negotiated the instrument to X who is now the holder in due course (the HDC)
  2. the HDC takes free of most defensed (personal defenses) that buyer could raise against seller (including defective goods)
  3. BUT certain defenses (real defenses) can still be raised)
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7
Q

issue in commercial paper

A

the first giving of an instrument

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8
Q

if commercial paper is non-negotiable

A

contract law applies and the assignee stands in the shoes of the assignor

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9
Q

requirements of a negotiable instrument

A
  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
  7. on demand or at a definite time
  8. to order or to bearer
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10
Q

writing in commercial paper

A
  1. there is no such thing as an oral negotiable instrument

2. it must be something tangible

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11
Q

signed by maker or drawer

A
  1. signed includes any symbol executed or adopted by a party with present intention to authenticate a writing
  2. can be printed, stamped or written
  3. can be initial or thumbprint, trade name or assumed name
  4. can appear in the body of the instrument
  5. the key is whether the party intended for that symbol to operate as her signature
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12
Q

unconditional: commercial paper

A
  1. conditional promises are ok under contract law but they destroy negotiability
  2. it does not destroy negotiability if it simply refers to another document, can mention the other contract as long as payment is not made subject to or conditioned upon the performance of the contract
  3. the negotiability of an instrument has to be clear on the face of the instrument, if it says subject to the agreement, it is ambiguous and it is non-negotiable
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13
Q

article 3: a promise will not be deemed conditional merely because

A
  1. refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration
  2. limits payment to a particular source or fund
  3. requires as a condition to payment a counter signature by a person whose specimen signature appears on the promise or order (such as traveler check)
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14
Q

IOU

A
  1. not negotiable, it is not a promise to pay
  2. it is evidence that they have to pay
  3. it is assignable
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15
Q

“i wish you would pay”

A
  1. is not negotiable instrument becuase not an order to pay
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16
Q

fixed amount/ sum certain

A
  1. when the instrument is payable, the holder must be able to determine from the paper the principal amount due
  2. doesnt have to be able to determine interest rate, collection costs or atty fees)
  3. a note providing variable interest rates is negotiable
  4. if the instrument states that it is payable with interest but does not state how must interest, the judgement rate will be implied
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17
Q

in money: commercial paper

A
  1. foreign money ok as long as the US recognizes the currency
  2. a promise to pay in bales of cotton is non-negotiable
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18
Q

no other undertaking or instruction: commercial paper

A
  1. a negotiable instrument must not be burdened by anything other than a simple clean and unconditional promise or order.
  2. if it has other undertakings or instructions the holder is given notice that the note is may be conditioned on the performance of those additional undertakings
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19
Q

the UCC does permit a number of extra undertakings or instructions

A
  1. an undertaking or order to give, maintains, or protect collateral to secure payment
  2. an authorization or power to the holder to confess judgement 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
  4. each of these strengthens the promise to pay but has no independent value of its own
  5. ok to promise to pay collection costs and attorney fees
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20
Q

on demand or at a definite time

A
  1. a holder of an instrument must be able to tell when it comes due otherwise not negotiable
  2. that doesn’t mean that the instrument is non-negotiable
  3. an undated instrument is payable on demand by the holder
  4. a post dated checks: they are negotiable now, but the bank can pay before the date unless you notify the bank of the post dated check or they can pay before the date
  5. acceleration clause: this is ok because you know a definite time beyond which the paper cant run
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21
Q

note containing an extension clause: demand on or at a definite time

A
  1. a clause that permits the instrument to be extended at the option of the maker
  2. ok as long as the extension is to a further definite time states in the instrument
  3. if it simply says it can be extended at the option of the maker, then it is not negotiable
  4. if at the option of the HOLDER, is negotiable, the holder can always extend the time
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22
Q

events certain to happen but uncertain as to time: definite time

A
  1. ex. payable on someone’s death
  2. this is not negotiable
  3. but if there is a date and then a clause that says if this person dies before that date, then payment due then…still definite time
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23
Q

to order or to bearer

A
  1. a negotiable instrument must contain certain magic words wither order language or bearer language, otherwise it is non-negotiable and is not governed by art 3
  2. i promise to the order of paul
  3. I promise to pay bearer
  4. pay to the order of cash: bearer paper
  5. pay to the order of happy birthday: bearer paper when it otherwise indicates that it not payable to an identified person
  6. a check need not contain words of negotiability: if you cross out the words, still negotiable
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24
Q

negotiable by declaration

A
  1. a writing cannot be made a negotiable instrument within article 3 by contract or conduct of parties
  2. if a writing contains a conditional promise, a statement that this not is negotiable will not be effective to make the writing negotiable
  3. but parties can use a form that is a negotiable instrument and avoid negotiability by declaring on the instrument that it is not negotiable except for a check
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25
Q

assignment of negotiable instrument

A
  1. assignment: a payee who has been issued a negotiable instrument can simply assign it to a third party.
  2. the assignee has no greater rights than the assignor does on the instrument
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26
Q

negotiation of negotiable instrument

A
  1. if the payee negotiates the instruments to a third party, then the third party is not a mere assignee but is a holder
  2. 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
  3. negotiation is the customary way to transfer an instrument
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27
Q

how do you negotiate order paper?

A
  1. order paper is negotiated by transfer of possession plus endorsement by the holder (the identified person to whom the instrument is payable)
  2. transfer of possession may be voluntary ot involuntary
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28
Q

endorsement

A
  1. special endorsement: specifies that the person to whom the instrument is payable
  2. blank endorsement: does not specify the person to whom it is payable, generally consists og a mere signature
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29
Q

bearer paper negotiation

A

once parties start endorsing, look at the last endorsement: if it is a blank endorsement, bearer paper, special it is order paper

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30
Q

bearer paper

A
  1. can be negotiate be transfer of possession alone

2. can be voluntary or involuntary

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31
Q

order paper

A
  1. can be negotiated only by transfer of possession plus an endorsement by the holder
  2. to be a holder of order paper, it must be issued to him or properly endorsed to him
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32
Q

what happens when order paper contains a forged instrument

A
  1. none of the parties from the forger on are holders, none have good title
  2. they have all converted the check
  3. while most endorsements are unqualified, a party can indorse an instrument without recourse. this is irrelevant to negotiation through it does negate contractual liability
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33
Q

different rule for banks order paper and bearer paper

A
  1. order paper must be transferred and endorsed to make the transferee a holder, but a depository bank becomes a holder of the instrument if the customer was a holder at the time of delivery even if the customer has not endorsed the instrument
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34
Q

holder in due course

A
  1. a holder
  2. who gives value
  3. in good faith
  4. without notice
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35
Q

holder

A

a holder is in possession of bearer paper or in possession of order paper that has been issued ot properly endorsed to him

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36
Q

value: commercial paper

A
  1. look for executed consideration
  2. a party is HDC to the extent that the agreed consideration has been performed
  3. a mere promise to give value is not enough, a party that hasn’t actually given value for not need HDC protection
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37
Q

discount a note

A
  1. endorse for less than face value
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38
Q

bank deposit

A
  1. a bank doe not become a holder for value merely by crediting a depositor’s account
  2. the bank does give value when they cash the check
  3. in tracing deposits to withdraws, the first in first out method is used
39
Q

Good faith in commercial paper

A
  1. honesty in fact and the observance of reasonable commercial standards of fair dealing
  2. the honesty in fact component of good faith is subjective (white heart, empty head test)
  3. fair dealing is objective: it is concerned with the fairness of conduct not with the care with which an act is performed
  4. a business person engaged in a commercial transaction, to be an hdc must show that his actions meet generally accepted standards current in the business trade or profession
40
Q

no notice to take the instrument

A

without notice includes actual knowledge and reason to know that:

  1. the instrument is so irregular or incomplete this to call onto question its authenticity
  2. the instrument is overdue or has been dishonored
  3. the instrument contains an unauthorized signature or has been altered
  4. there is a claim to the instrument
  5. any party has a defense or claim in recoupment on the instrument
41
Q

minor erasure on a check

A

this is ok usually, someone can still be a holder in due course

42
Q

what is someone changes the amount on the check, but parties agree to it?

A
  1. if the check looks fishy, the bank is put on notice of everything so if there is something else going on the bank is not a holder in due course
  2. the claim of defense need not be related to the irregularity
43
Q

knowledge of default in an interest payment

A
  1. harmless
  2. knowledge of any part of the principal amount being overdue deprives one of HDC
  3. can be overdue in interest
44
Q

what happens if you sit on the check for months?

A
  1. a check becomes overdue 90 days after its date

2. a party taking an instrument over 90 days old is not a HDC just a holder

45
Q

when there is a huge discount on a note

A
  1. difficulty to argue good faith

2. puts you on notice that something isn’t right, so generally not a hdc

46
Q

close connectedness doctrine

A
  1. the more that the holder knows about the underlying transactions and particularly when it controls or becomes involved in it, the less likely it is a goof faith purchaser without notice
  2. close connection between the parties can deprive holder of HDC status
47
Q

holder has knowledge that fiducuary has negotiated the instrument in payment of own debt

A

holder has notice of claim

2. payment of debt or security for fiduciary own benefit

48
Q

transaction precluding HDC status

A

a holder does not become an HDC of an instrument taken by

  1. legal process or by purchase in an execution, bankruptcy ot creditor sale or similar proceeding
  2. purchase as part of bulk transaction not in the ordinary course of business of the transferor or
  3. as the successor in interest to an estate or other organization
49
Q

the shelter rule

A
  1. maker is fraudulently induced to issue a note to payee. payee negoitates the note to harold, a hdc.
  2. harold then endorses and gives to his sone Carl
  3. when carl demands payment from the maker, maker raises the defense of fraud.
  4. the HDC takes free of defense of fraud in the inducement, does carl take free of fraud?
  5. even though not a HDC because he didnt give value, under the shelter rule, he takes shelter in harold’s rights and has the rights of a holder in due course
  6. if you take from a HDC, you take shelter in their rights, so you take free of the fraud defense here
  7. the court will not apply the shelter rule if the holder actually participated in the fraud
50
Q

the FTC Rule:

A
  1. the rule basically provides that every consumer credit contract contain a notice that any holder or assignee is subject to all claims and defenses that the debtor could assert against the seller of the goods or services covered by the contract
  2. the rule also applies to direct lender loans made to a consumer where the creditor is affiliated with the seller or where the creditor has had consumers referred to it by the seller on a regular basis
  3. any consumer contract covered by such purchase money loans must contain the FTC notice provision
51
Q

Pay off the note but the instrument still around

A
  1. discharge by payment is a personal defense
  2. it is not effective if it gets into a HDC
  3. if you pay off the not, get possession or have it stamped paid or discharged
52
Q

payee as holder in due course

A
  1. meets the requirements
  2. where the issuer and the payee are the only parties, the HDC doctrine is irrelevant
  3. there has to be more than two parties involved
  4. the HDC may be relevant where the payee does not deal directly with the issuer but instead deals through a remitter. the payee is a HDC and takes free of any defense based on the remitter’s wrongdoing
53
Q

the underlying obligation: nature of the liability

A
  1. generally once an instrument is offered and accepted in the satisfaction of an underlying obligation, the obligation merges with the instrument, and the underlying obligation is suspended
  2. payment of the instrument discharges the instrument and the underlying obligation
  3. if the instrument is dishonored the party issuing the instrument is liable on the instrument and on the underlying obligation, but only one recovery
54
Q

contract liability: maker’s contract liability

A
  1. the maker is obligated to pay the instrument according to its terms at the times it was issued
  2. if there is more than 1 maker, they are jointly and severaly liable on the instrument
55
Q

endorser’s contract liability

A
  1. obligates to pay according to the terms of the instrument at the time of the endorsement
  2. those signing later in time can get complete reimbursement from those signing prior in time but you cannot recover from anyone signing after you
  3. note: a party signing an instrument as an endorser incurs this contractual liability even if that party took the instrument as a holder in dues course
  4. exception: where the parties have made an anomalous endorsement (usually made by a non holder) the endorsers are jointly and severally liable
    ex. usually, officers are signing to help a corporation get a loan, then it doesnt matter which signs first they are all jointly and severally liable
56
Q

if an instrument is made payable to joint payees

A
  1. if both payees endorse, they are jointly and severally liable
57
Q

endorser is secondarily liable

A
  1. an endorser is only liable after the instrument has been presented to the maker or the drawee, that party has dishonor the instrument and a notice of dishonor has been given to the endorser
  2. with respect to the liability of the endorser, presentment is due within a reasonable time after such party becomes liable thereon.
  3. a reasonable time is determined by the nature of the instrument any usage of banking or trade and the fact of the particular case
  4. note: if it is a check, the endorser is discharged unless the check is presented for payment or given to a depository bank for collection within 30 days after the day of endorsement
58
Q

notice of dishonor

A
  1. with respect to a check must be given by a bank before its midnight deadline:midnight of the next banking day following the banking day on which the bank received notice
  2. anyone else has to give notice in 30 days
  3. if presentment and notice of dishonor are either not made or are delayed beyond the time when due, an endorser is excused from contractual liability
  4. NOTE: discharge because of failure to make timely presentment is not effective against HDC because endorsers rarely date the endorsement
59
Q

most promissory notes have a clause waiving presentment and notice

A
  1. this is permissible
  2. presentment and notice of dishonor may be delayed or even entirely excused under certain circumstances (like death or illness)
60
Q

qualified endorsement

A
  1. endorsed without recourse

2. if the check is dishonored and appropriate notice is given, the payee is not liable as an endorser

61
Q

drawer contract liability

A
  1. the drawer is obligates to pay the draft according to its terms when the drawer signed the instrument
  2. this is secondary liability so liable after presentment and dishonor
  3. a check must be presented or given to a depository bank within 30 days for liability to incur
  4. BUT: a drawer is excused from contractual liability on the instrument due to delay in presentment only in the unlikely event that the drawee bank has become insolvent during the delay and there is no insurance to cover the loss
  5. a drawer generally is not entitled to notice of dishonor. a drawer will or should know of the dishonor on her own because of her relationship with the drawee
62
Q

accomodation party

A
  1. basically a co-signor
  2. one who signs the instrument in any capacity for the purpose of lending his name to another party to it
  3. the accomodation party is liable in the capacity in which he signed
  4. accomdation party can get complete reimbursement from the other party
  5. the accomodation party is not liable to the party that is accomodated
  6. any extension granted or release of collateral to the accomodated party does not discharge the accomodation party unless the accomodation party can prove that is hurts him in some way
  7. the accomodation party can raise almost any defense that the accomodated party could unless it is the reason that there is an accomodation party to begin with
63
Q

collection guaranteed for accomodation party

A
  1. means that the signer agrees that she will be liable on the instrument only if:
  2. the execution of judgement against the other party has been returned unsatisfied
  3. the other party is insolvent or in insolvency proceedings
  4. the other party cannot be served with process
  5. it is otherwise apparent that payment cannot be obtained from the other party
64
Q

signature by an agent: signing on behalf of the company

A
  1. as long as the agent has authority, the corporation is liable
  2. the agent is not personally liable
  3. want the agent to sign making it clear that they are the agent ex. sign with president or VP so that it doesn’t get confusing down the line
65
Q

properly payable rule

A

the bank must pay out the customer’s money only if it follows the customer’s exact orders
if it does not do so, it must re-credit the account

66
Q

forged drawer’s signature

A
  1. an authorized signature operates as the signature of the unauthoized person
  2. they have no right to take money out of your account
67
Q

forged endorsement or missing endorsement

A
  1. this is not payable,
  2. this is order paper and it was stolen and someone forged the endorsement…once there is a forged endorsement, no one from the forger on is a holder, the bank should not pay them
  3. but if there is a blank endorsement, a thief can be a holder and the bank can properly pay them
  4. if issued to two or more people, need to have both people to endorse
68
Q

material alteration of a check

A
  1. only properly payable to the original amount
  2. as long as you weren’t not negligent, the bank has to re-credit the account
  3. what if blank check and the person is authorized to a certain amount and then they exceed it…bank does not have to re-credit the account
69
Q

stale check

A
  1. stale after 6 months old, the bank does not have to honor it
  2. if the bank does honor it, just has to be in good faith
70
Q

overdraft

A
  1. bank can dishonor it, or pay it
71
Q

post dated checks payable by the bank?

A
  1. not if the customer had given notice to the bank of postdating describing the check with reasonable certainty
72
Q

wrongful dishonor

A
  1. the bank is liable to you if they wrongfully dishonor your account
  2. usually limited to actual damages but sometimes can get more if there was damage to reputation or a arrest made because of it
73
Q

death or incompetence of the customer: does bank honor checks?

A
  1. until notice, properly payable

2. when they have notice, for 10 days, they can keep paying unless someone comes in and says that they will not

74
Q

customer right to stop payment

A
  1. the stop payment must describe the item with reasonable certainty. a reasonably prudent banker with that information should be able to find the check
  2. the stop payment order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it
75
Q

stop payment effectiveness

A
  1. oral: effective 14 days

2. written: effective 6 months

76
Q

bank liability for failing to stop payment

A
  1. cannot contract out of the liability
  2. the burden of establishing the fact and amount of the loss resulting from the payment over a valid stop payment is on the customer
  3. if they pay a holder in due course even if a stop payment order because they would have had to pay them anyway
77
Q

forged endorsement

A
  1. the forgery of the payee;s name or of a special indorsee’s name, means that no one taking the instrument after can be a holder
  2. the payee has several recourses whenever a check that has been delivered to him is stolen, his name is forged thereon and the instrument is paid by the drawee or payor bank
78
Q

payee’s options for recourse when check stoled

A
  1. payee goes to the drawer and ask for another check (drawer tells bank to re-credit the account)
  2. can sue anyone who had the check after it was stolen…sue for conversion (can sue the drawer bank)
79
Q

who can the drawee recover from?

A
  1. cannot recover from a prior party on its contractual liability as an endorser or a drawer becuase the check was not dishonored and becuase the drawee is not a holder or someone with the rights of a holder who has the right to enforce the instrument
  2. drawee cannot recover from a party simply by claiming that the payment was made by mistake: the payment to a HDC or to anyone who in good faith changed her position in reliance on the payment is final
80
Q

two exceptions to the rule that payee cannot recover from a party simply by claiming mistake

A

the payor can recover from the party paid if:

  1. the party neither took for value in good faith nor detrimentally relied on the payment
  2. the party breached a transfer or presentment warranty
81
Q

presentment warranty

A

the party obtaining payment and previous transfors warrant that 1. they are entitled to enforce the instrument (a warranty of good title) and that

  1. the instrument is not altered and that
  2. they have no knowledge that the drawers signature is unauthorized

a drawee can recover for breach of presentment warranties even from a HDC or one who detrimentally relied on the payment

82
Q

transfer warranty

A

each party that transfers an instrument and receive consideration warrants that

  1. they are enetiled to enforce the instrument and
  2. all signatures are genuine and authorized and
  3. the instrument has not been altered and
  4. that no defense or claim of any party is good against the warrantor
  5. that the warrantor has no knowledge of any insolvency proceeding that has been instituted against the maker, accepter, or in the case of an unaccepted draft, the drawer

this is how everyone recovers, it just goes down the line until you get to the thief, usually the thief is insolvant so the party dealing with the theif is the one that takes the hit

83
Q

drawee bank suing on warranty

A
  1. can only sue for presentment, everyone else can sue for presentment and transfer warranty
  2. the warranties cause the loss to work down to the last person to deal with the thief
84
Q

restrictive endorsement

A
  1. payee puts “for deposit only”
  2. the drawee bank and any intermediary ank can disregard the restrictive endorsement
  3. but the payee can sue the theif and the store and the depository bank who did not act consistently with the restrictive endorsement
85
Q

forged drawer’s signature

A
  1. forged customer signature: the bank has to re-credit the account
  2. drawee bank probably cannot recover because all of these people actually have good title
  3. as long as no forged endorsement, there is good title
  4. the drawee bank cannot pass the loss back down
86
Q

validation of the forgery: ratification

A
  1. ratification occurs when a party with full knowledge of the forgery accepts the benefits thereof or actively assents to the wrongful activity
87
Q

the imposter rule: validation of the forgery

A
  1. the rule validates the forged endorsement of the payee’s name where the maker or drawer has been duped by an imposter to issue the instrument
88
Q

validation of the forgery: fictitious payee rule

A
  1. if the drawer, maker, or other person whose intent determines to whom an instrument is payable does not intend at the time that the instrument was issued for the person identified to have any interest in the instrument or if the person identified in the instrument as the payee is fictitious, then an endorsement in the name if the payee is effective
  2. Note: if the signature is given by a check writing machine….the relevant intent is that of the person who supplied the name to the check
89
Q

fraudulent endorsement by employees:

A
  1. if an employer entrusts an ee including an independent contractor with the responsibility with respect to an instrument and the employee makes a fraudulent endorsement on the instrument the endorsement is effective
  2. authoirty to sign or endorse, to process instruments received, prepare of process instruments instruments for issue in the name of the employer and to control the disposition of intrument issued in the name of the er
90
Q

the negligence rule: commercial paper

A
  1. if a person by his negligence substantially contributes to a material alteration or to the making of an unauthorized signature, he is precluded from asserting that the alteration or lack of authority against a HDC or the drawee or other payor who pays in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business
  2. not just any negligence effects preclusion. the negligence must actually contribute to the forgery or altercation, it must afford an opportunity of which is taken advantage
91
Q

comparative negligence

A

if the drawee bank or other person paying the instrument of taking if for value or for the collection fails to exercise ordinary care, the person bearing the loss may recover from the drawee bank or other person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss

92
Q

the bank statement rule

A
  1. a customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized
  2. prompt notice must be given to the bank by the customer
  3. if the customer fails to do this, and the bank can show that is suffered a loss by reason of this failure the bank need not recredit
  4. where the statement has been available to the customers for more than 30 days, you are estopped from demanding recredit on any items forged or altered by the same wrongdoer
  5. 1 year to report anything wrong on the face of the check and 3 to report anything on the back
93
Q

altered note

A

ex. changed the amount from 2K to 20K
1. a holder who fraudulently alters an instrument discharges the parties to that instrument as against the holder
2. a holder in due course can enforce it as to the original amount
3. a holder in due course can get the rest of the money from the person who altered.
a party transferring an instrument warrants there is no material alteration
3 years SOL

94
Q

altered check

A
  1. only property payable as to the original amount
  2. the bank has to recredit the rest
  3. if bank has to re-credit, a party presenting a check for payment warrants no material representation therefore drawee bank could revocer from local bank
    SOL 6 years

Bar Exam (15 decks)

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