Commercial Paper and Banking Flashcards
What Article governs negotiable instruments?
Article 3 of the UCC
Article 3 does NOT apply to money, payment orders, or securities
What is a negotiable instrument?
a signed writing that orders or promises payment of money
Negotiability
rights and obligations of parties involved with commercial paper
Analysis of Negotiable Instrument Problems
1) What is the NATURE OF THE INSTRUMENT?
- —–>is it negotiable and has it been negotiated?
2) Who is PLAINTIFF and what are their RIGHTS?
- —–>is P a holder in due course?
3) Who is the DEFENDANT and what is their LIABILITY?
4) What is the D DEFENSE?
- ——>is the defense raised one that is cut off?
Types of Negotiable Instruments
- -Note
- -Draft
What is a Note?
a 2P instrument which one party (maker) promises to pay a second party (payee) a sum of money. Generally an extension of credit.
-“I promise to pay…”
- -underlying obligation is suspended until note is paid or dishonored
- -payment of the note results in discharge
- -certificate of deposit is an instrument where bank acknowledges that they received a sum of money and promises to repay that sum
What is a Draft?
a 3P instrument which one party (drawer) orders a second party (drawee or payor) to pay a sum of money to a third party (payee). Generally used to pay a debt (checks)
What is a check?
A draft drawn upon a bank and payable on demand
- cashiers check-draft where drawer and drawee are the same bank)
- teller’s check-draft drawn on a bank by another bank or payable at or through another bank
- —–>these checks discharge the underlying obligation same as if money were taken in payment of the obligation.
- travelers check-instrument that is payable on demand, drawn on or payable at or through a bank. Must be countersigned by person whose specimen signature appears on the instrument.
-uncertified check-underlying obligation is suspended until check is dishonored or paid or certified.
What is a negotiable instrument?
- determination must be made from the four corners of the instrument
- not an instrument if contains conspicuous statement that is not negotiable or not governed by Art 3.
Requirements of instrument to be negotiable
1) instrument must be a promise or order, in writing and signed.
2) contain an unconditional promise or order-must be payable in all events
3) pay a fixed amount of money with or without interest or other charges
4) be payable to order or to bearer at the time it is either issued or first comes into possession of a holder.
5) be payable on demand or at a definite time
6) contain no undertaking or instruction given by the maker or drawer except as authorized by the UCC
What is an order?
A order is a written instruction to pay money signed by the person giving the instruction.
What is a promise?
A promise is a written undertaking to pay money signed by the person undertaking to pay.
- –>signature may be manual or mechanical and may be use of any name, including a trade or assumed name, or by a word, mark, symbol executed or adopted by a party with present intent to authenticate.
- –>writing the name of another person constitutes the writer if the writer lacks authority to use the other person’s name as long as person who pays instrument acts in good faith.
- —->writing includes any reduction to tangible form
When is a promise or order conditional?
- -contains and express condition to payment
- -states that it is subject or governed by another writing
- -states that rights or obligations are stated in another writing.
When is a promise or order unconditional?
- -the reference to another writing does not of itself make a promise or order conditional
- -writing that states rights with respect to collateral, prepayment, or acceleration does not make a promise or order conditional.
- -may use another writing to modify, supplement, or nullify a party’s obligation to pay an instrument, subject to parol evidence rule.
- -not conditional if payment to be made from particular fund
- -if requires a countersignature from someone who ha already signed the instrument (travelers check)
- -contains a statement that is required by law.(in this case there can be no holder in due course)
Negotiable instruments and interest
An instrument is not payable with interest unless it specifies otherwise.
if provides for interest, interest is:
- —>payable from the date of the instrument
- —>may be stated as a fixed or variable amount of money or as a fixed or variable rate.
- —-> if amount of interest cannot be ascertained from the description, interest is payable at the rate payable on judgments at the place and time interest first accrues.
Reference to information not contained in the instrument is acceptable.
Instruments must be payable in money
Money and only money.
Amount due must be ascertainable from the instrument.
Money means medium of exchange authorized or adopted by a domestic or foreign govt as part of its currency.
instrument is rendered non negotiable if the obligor agrees to pay in goods or services, even as an alternative option.
Payable to Bearer:
An instrument is payable to bearer if:
1) states it is payable to bearer or order of bearer
2) does not state a payee
3) states it is payable to cash
4) indicates that it is not payable to an identified person
Payable to Order:
An instrument is payable to order if it is payable to the order of an identified person or to an identified person or order.
If instrument contains order and bearer language, the bearer language controls.
Identity of the Payee
determined by the intent of the person signing as the issuer of the instrument.
if more than one issuer and all do not intend the same payee, it is payable to any person intended by one or more of the signers.
Issuer signature by automated means, intent of the person who supplied the name or identification of the payee, whether or not authorized to do so.
Identification of a payee
may be identified in any way, including by name, number, office, or account number
if by account number: person to whom account belongs
if name and account number: payable to named person even if not owner of the account
payable to agent: payable to represented person
Payable to trust/estate: payable to trustee or representative
Multiple Payees
2+ persons ALTERNATIVELY (or): payable to any and may be negotiated, discharged, or enforced by any or all in possession.
2+ persons JOINTLY (and): payable to all of them and enforced only by all of them, neither alone can be the holder.
Ambiguous: payable to persons alternatively (or)
Payable on demand
POD if states that it is POD or at sight or otherwise indicates that it is payable at the will of the holder or does not state any time for a payment
Payable at a definite time
Payable:
- at the end of a definite period
- at a fixed date
- a time ascertainable at the time of issue, even if subject to rights of prepayment, acceleration, extension at holder’s option, extension to a further definite time at the makers option or automatically upon or after specified event.
Payable on demand or at a definite time
if fixed date and on demand: POD until fixed date
contradictory dates/terms:
- –>type over printed
- –>handwritten over type or print
- –>words over numbers
Nonnegotiable if payable only upon happening of event, even if sure to happen (death)
Undertaking and instructions
may not state any other undertaking or instruction by the person promising or ordering payment to do anything besides pay money
Undertakings that do not destroy negotiability:
- –>undertaking or power to maintain/protect collateral to secure payment
- –>authorization or power to confess judgment or realize on or dispose of collateral and
- —>promise or provision waiving benefit of any law intended for the obligor’s protection.
What is negotiation?
A voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder.
What is an order instrument?
An instrument that is payable to an identified person, where negotiation requires transfer of possession of the instrument and indorsement by the holder.
