Commercial Paper - Introduction and Type of Negotiable Instruments Flashcards
What is the bright line rule for commercial paper and article 3 of the UCC?
When a NEGOTIABLE INSTRUMENT is DULY NEGOTIATED to a HOLDER IN DUE COURSE, the holder in due course takes the instrument free of all claims to it free of PERSONAL DEFENSES and subject only to REAL DEFENSES.
What are the two types of negotiable instruments?
(A) The Promissory Note
(B) The Draft
What is a promissory note?
An affirmative promise to pay, not just a mere IOU.
Promissor - Promise maker
Promisee - Payee
What is a draft?
An order for command payment.
Drawer gives the order.
Drawee is order to do the paying
Payee is the beneficiary of the order.
How does a writing qualify a negotiate instrument as opposed to a mere contract?
To Qualify as a negotiable instrument, we need WOSSUP:
(i) a Writing
(ii) payable to Order or to bearer
(iii) Signed by the maker or drawer; [any authentication on the instrument qualifies]
(iv) reciting a Sum certain
(v) containing an Unconditional promise and no additional promises or orders.
- No condition on, governed by, subject to.
- Limiting payment to a specific source is not a condition.
(vi) Payable on demand or at a definite time;
(vii) Payable in currency.
When is an instrument payable on demand?
When it specifically states that its payable “at site” or “on presentation” or “on demand”
Silent on time of payment is still negotiable - payable on demand.
When is a writing payable to order or bearer?
Payable to order - note must use the word “order” or the word “assigns” in connection with the payee’s name.
Payable to bearer - Must be payable to anyone who has the instrument. [Must say order, assigns, or bearer] [Pay to cash or Pay to order of cash are acceptable]
What are the two theories of liability for breach of CP?
(1) Contract or signature liability
* Breached promise to pay -
(2) Warranty or Transfer Liability
* Breach warranty - Selling a defective instrument
Who can be a defendant under contract theory?
Signature liability.
(1) The promise maker in a promissory note - enter contract by signing note,
(2) Indorser - who signs his name on the back of the instrument.
(3) Drawer - the party who signs a check.
**Drawee (i.e. the bank) is not liable b/c they do not guarantee - they do not sign
What is the affect of signing “without recourse?
“Without recourse” is a term of art used by an indorser or drawer. It represents a disclaimer of liability. Passes title, but does not assume signature liability.
Who can be a defendant under warranty liability?
Any transferor who sells the negotiable instrument so long as the transferor is not a donor.
Who is entitled to sue for breach of warranty?
If D indorsed the instrument, any P in possession may sue. warranties run with the instrument when indorsed.]
If D did not indorse the instrument, then only the D’s immediate transferee may sue. The warranties will not run with the instrument.
What are the five warranties made by the defendant?
(1) P has good title to the instrument
(2) All signatures are geniune and authorized (no forgery)
(3) Promises that instrument has not been materially altered. [If tampered, its defective]
(4) Promises that there is no defense or claim good against the defendant (aka the instrument is enforceable)
(5) Promises that she has no knowledge of any bankruptcy or insolvency action against the maker or drawer.
