Commercial Paper & Documents of Title Flashcards
What are the 2 types of Commercial Paper?
Promissory Notes
Drafts
A promissory note has two parties: the ___ and the ____
Maker & Payee
This is when a bank acknowledges receipt of money & promises to repay with interest
a Certificate of Deposit
A Certificate of Deposit (CD) is a form of what?
a) Promissory Note
b) Draft
A
A Check is a form of what?
a) Promissory Note
b) Draft
B
Drafts and Checks are an order to a 3rd party to pay. What are the 3 parties?
Drawer - writes the draft/check
Payee - person the 3rd party must pay
Drawee - third party who is ordered to pay
T/F
A check must be payable on demand
TRUE
T/F
A check’s drawee can be any individual
FALSE
A check’s drawee must be a bank
A Trade Acceptance is a form of what?
a) Promissory Note
b) Draft
B
How is a trade acceptance different from a check and/or unique from other drafts?
A trade acceptance is a draft drawn by a seller ordering a buyer to pay. The seller is usually both the drawer (writes the draft) and the payee (person who receives the payment). The drawee (third party ordered to pay) is the buyer.
T/F
Investment Securities (Stocks/Bonds) and Documents of Title (warehouse receipts & bills of lading) are commercial paper
FALSE
They are not commercial paper, but they usually follow the same rules in that they can be negotiated
A negotiable instrument is a written order or unconditional promise to pay a fixed sum of money on demand or at a certain time. What does negotiable mean as it applies to negotiable instruments?
A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument
What are the 5 elements of negotiability? (SUMBOD)
S - must be Signed
U - must be an Unconditional promise or order
M - must be Money and nothing else but money
B, O - must be payable to Bearer or payable to Order
D - Must be payable on Demand or payable at a Definite time
T/F
As described in the 5 elements of negotiability, B & O state that to be negotiable the instrument must be payable to bearer or payable to order. This means that on the front of the check it must either say “Pay to Bearer” or “Pay to the Order of…”
FALSE
Checks are the exception. Checks do not need to be payable to bearer or to order
T/F
Once an instrument is negotiable on its front, it’s always negotiable
TRUE
T/F
A promise or order must be unconditional (sUmbod) for it to be negotiable. This means it is not negotiable if it is “subject to” or “contingent upon” another agreement. Therefore there must be no references to another agreement.
FALSE
Simple references to another agreement will not prevent negotiability.
T/F
References to collateral or security prevent negotiability
FALSE
T/F
Provisions as to consideration prevent negotiability
FALSE
T/F
Commercial paper must be payable in a fixed sum of money
TRUE
T/F
Since commercial paper must be payable in a fixed sum of money, interest and collection costs (attorney fees) are not allowed, because those may not be fully estimable
FALSE
Interest and collection costs (attorney fees) are okay
T/F
If words and numbers differ (for example, on a check) then the instrument cannot be negotiable
FALSE
Still negotiable - if words and numbers differ the words control
This is the act of transferring commercial paper to a third party
Negotiation
How does one negotiate bearer paper?
Mere delivery
How does one negotiate order paper?
Delivery plus a proper endorsement
A blank endorsement doesn’t name a new payee and therefore makes commercial paper _____
Bearer Paper
A special endorsement names a new payee and therefore makes commercial paper _____
Order Paper
T/F
A restricted endorsement adds a restriction and therefore prevents further negotiation
FALSE
The further restriction (example, “for deposit only” or “for collection only”) does not prevent further negotiation
A _____ endorsement is a signature which adds the words “without recourse”
Qualified
This phrase means there is no guarantee of payment (no contract liability)
Without Recourse
_____ is a guarantee of payment
Contract Liability
Primarily liable parties are the parties first expected to pay on the instrument. Who is primarily liable for a promissory note? For a draft/check?
Promissory Note - Maker of the Note
Draft/Check - Drawees only after they accept, but there is no obligation for them to accept
T/F
Drawers of drafts/checks are generally secondarily liable, but can be primarily liable in some cases
FALSE
They can NEVER be primarily liable
T/F
Endorsers are always secondarily liable
FALSE
They are generally secondarily liable, except for the qualified endorser who writes “without recourse”
Since drawers and endorsers are secondarily liable, how soon must a check be presented to hold them liable?
Within 30 days to hold drawers liable
Within 7 days to hold endorsers liable
This is a liability from transferring commercial paper
Warranty Liability
If you transfer commercial paper by signing you are making warranties to ____
All subsequent parties
If you transfer commercial paper without signing you are making warranties to ____
Only to the immediate transferee
What are the 5 warranties from transferring commercial paper?
Good Title Signatures are Genuine Instrument has not been materially altered No insolvency proceeding against issuer No defense is good against them
What 4 requirements that you must meet to be a holder in due course? (HIDC)
Holder of a negotiable instrument
Give present value
Have good faith
Be without notice of any problems or defenses
HIDC takes free of ______ but loses to ______
Personal Defenses
Real Defenses
What are real defenses that beat an HIDC? (I’M BIFF)
1) Infancy (maker/drawer is a minor)
2) Material Alterations
3) Bankruptcy
4) adjudicated Insanity or Illegality
5) Fraud in the execution (maker/drawer had no idea what they were signing)
6) Forgery
T/F
Sometimes duress is a real defense, but only to the extent it makes an instrument void
TRUE
T/F
Along with fraud in the execution, fraud in the inducement is a real defense that will beat an HIDC
FALSE
Fraud in the Inducement can be beat by the HIDC
What are examples of personal defenses?
Breach of contract
Fraud in the inducement (misunderstanding in the contract)
If there was a material alteration and the drawer was negligent, the drawer is liable for ____
The full amount
If there was a material alteration and the drawer was not negligent, the drawer is liable for ___
only for the unaltered amount
T/F
A forger is always liable
TRUE
T/F
If a forger forges a drawer’s name (one writing the draft/check), the drawee (one ordered to pay) is liable if they accept a pay
TRUE
T/F
If a forger forges a payee’s name, this does not pass good title and therefore the first person the forger passed the instrument to is liable
TRUE
T/F
If a holder accidentally destroys an instrument, this discharges the parties because the instrument is no longer in tact
FALSE
Accidental destruction does not discharge parties, only intentional destruction does.
T/F
A renunciation to discharge a party can be either written or oral
FALSE
It must be written to be effective
T/F
Unexcused delay in presentment discharges all prior endorsers
TRUE
These are documents covering goods being transported or stored
Documents of Title
What are the two types of documents of title?
Warehouse Receipts
Bills of Lading
T/F
A warehouse employee must be bonded and licensed to issue a warehouse receipt that acknowledges receipt and storage of goods specified
FALSE
The employee need not be bonded or licensed
What must a warehouse receipt state?
1) The location of the warehouse
2) If the goods are to be delivered to bearer, to a specified party, or to the order of a specified party
What is the difference between a warehouse receipt and a bill of lading?
A bill of lading is issued by a CARRIER (not the warehouse employee) acknowledging receipt of goods and a contract for transportation (not storage)
This person is very similar to a holder in due course in commercial paper and acquires essentially the same rights as a holder in due course does
A holder in due negotiation
What are the 4 requirements to be a holder in due negotiation?
Must give Present Value for the document of title
Must take in good faith
Must take without any notice of an adverse claim or defense
The purchaser must obtain it in the regular course of business or financing
What are the 3 warranties made by transferors of negotiable documents of title?
Document is genuine
Transfer is effective and rightful
Transferor had no knowledge of facts that would impair validity of the document
T/F
In transfers of a document of title, there is no warranty that the warehousemen will honor the document
TRUE
When does title and risk of loss pass for a document of title?
When a buyer gets the document
T/F
Warehousers and carriers may limit their liability by contract
TRUE
T/F
Warehousers and carriers are always liable for negligence (lack of due care)
TRUE
T/F
Warehousers and carriers are liable for misdelivery of goods to a good faith purchaser
TRUE
T/F
Warehousers and carriers are strictly liable
FALSE
Warehousers are NOT strictly liable, but Common Carriers ARE
How is strict liability unique?
Under strict liability there is no requirement to prove fault, negligence, or intention.
What is the difference between contract liability and warranty liability?
Contract liability is a guarantee of payment, which you only have if you signed the commercial paper.
Warranty Liability is for any transferor
T/F
A Draft is an order to pay
TRUE
Drafts and Checks are three-party instruments in which the drawer orders the drawee to pay the payee
T/F
A Certificate of Deposit is an order to pay
FALSE
Notes and CDs are two-party instruments in which the maker promises to pay the payee
T/F
Under the negotiable instruments article of the UCC, for a note to be negotiable it must contain necessary conditions of payment
FALSE
In fact, such conditions can destroy negotiability
This is an endorsement that does not specify any endorsee
A Blank Endorsement
This is an endorsement in which the endorser disclaims liability to pay the holder or any subsequent endorsers for the instrument if it is later dishonored
A Qualified Endorsement
This is an endorsement where the endorser indicates a specific person who needs to subsequently endorse it
A Special Endorsement
This is an endorsement where it says “for deposit only”
This is a common example of a Restrictive Endorsement
T/F
In order to be a HIDC the holder, among other requirements, must give value. An antecedent debt will satisfy this value requirement
TRUE
Even though the antecedent debt would not be valid for the consideration requirement under contract law, it is valid for the value requirement under negotiable instruments law
T/F
In order to be a HIDC the holder, among other requirements, must give value. A promise to perform services at a future date will satisfy this value requirement
FALSE
This has no value until actually performed
T/F
If an instrument is payable in money or by the delivery of goods, it is a nonnegotiable instrument
TRUE
T/F
If a check is postdated, it is still payable on demand before the post date
FALSE
T/F
If a check is postdated, it ceases to be demand paper and is payable when post dated
TRUE
T/F
If a check is postdated, this destroys negotiability
FALSE
T/F
If a check is postdated, a bank that pays the check is automatically liable for early payment
FALSE
The bank is only liable if the drawer provides notice to the bank of the postdated check
T/F
Under the Negotiable Instruments Article of the UCC, a person endorsing a check “without recourse” makes no promise or guarantee of payment on dishonor
TRUE
T/F
Under the Negotiable Instruments Article of the UCC, a person endorsing a check “without recourse” gives no warranty protection to later transferees
FALSE
They still give some warranties, just not a promise or guarantee of payment
T/F
A party who found an instrument payable to bearer can become a HIDC
FALSE
They will not be able to satisfy all of the necessary requirements to be a HIDC
T/F
A party who receives an instrument from a HIDC will become a holder through the HIDC, even if the receiving party may not have been a HIDC individually
TRUE
