Commercial_Paper Flashcards
What is a Note?
- A promise to pay a specific amount
- There are two parties involved:
- Maker: the party making the promise to pay
- Payee: the party to whom that promise is being given
- **Maker is primarily liable **
- Example: Certificate of Deposit by Bank (CD), promissory note
What is a Draft?
- Order to pay
- A commercial paper involving three parties:
- drawer
- payee
- drawee
- A drawer orders a sum to be paid to a payee by the drawee
- Drawee is primarily liable ONLY AFTER accepting the draft
- Drawer secondarily
- May be payable on demand or in the future
- Example: check - demande , trade acceptance - future
What is a check?
- A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer
- Drawer - person writing the check
- Payee - person being paid
- Drawee - the bank
What is the difference between a post-dated check and a negotiable time draft?
- A check is payable on demand; even if post-dated
- A negotiable time draft is not payable until the date designated for payment
What is a trade acceptance?
- Seller extends credit to Buyer
- Buyer agrees to pay Seller a specific fixed amount of money at specified date
- Buyer has primary liability after acceptance
- Seller is both Drawer and Payee
- Seller has Secondary Liability
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
What is required to maintain the negotiability of a commercial paper?
FAMOUS
FAMOUS written instrument are negotiable instrument - ON the FRONT
- Payable at a Fixed time or on demand
- _Amount of Money must be stated and __fixed _ (words over number, foreing currency, ok interest rate)
- Payable t_o Order of a specific party OR to bearer_ (not required for check) “pay to the order of “ or “bearer”
- Unconditional promise or order to pay
- _Signed by drawer/maker _
Note: once an instrument is negotiable and remained unaltered - it is negotiable for all parties - Condition on the FRONT, any change on the back does not distroy the negociability
What characteristics will cancel the negotiability of a commercial paper?
- An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
- The promise to pay occurs after some action by another party or an event; it cancels negotiability
- Cannot allow for an alternative such as payment or some other action by the maker
- Note: a stated amount of payment plus a stated % of interest is OK
What is required to negotiate commercial paper ?
- Order Paper- ** →**negoticate **by delivery **AND endorsement
- If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
- Bearer Paper → negoticate by delivery ALONE
- When an order instrument is transferred for value without endorsement, the transferee has a specifically enforceable right to obtain the transferor’s unqualified endorsement.
What are the major types of endorsements on commercial paper?
(4)
- Blank - signed but do not specify new payee; transforms into a bearer paper
- Special - Names a new payee; transforms into an order paper
- Restrictive - endorser write a condition to the transfer such as “for deposit/collection only”; d_oesnt stop further negotiation_
- Qualified - Payment not guaranteed; eliminate signature and contract liability; “without recourse” added to endorsement
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount.
For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
Define primary liability with respect to a contract liability.
- First in line to pay on the Note is the Maker
- First in line to pay on the Draft is the Drawee but only once the draft is accepted by drawee -
- if the drawee dishonors/refuse to make the payment → no party is primary has primary liability
Define secondary liability with respect to contract liability
- **Drawers of a draft **are Secondarily
- **Endorsers of any instrument **are secondarily liable
- Holder in due course can hold prior Endorser liable
- Exception: Endorsed Without Recourse
Define contract liability
- this is a liability for **payment of the instrument face value **
- Apply to any party who signs the negotiable instrument
When does warranty liability occur?
- Occurs when you negotiate commercial paper
- By signing; you warrant to all future parties
- By not signing; you warrant to current party only
What five warranties occur with every commercial paper transfer?
- Warranty of Title
- No defense will stand against it
- No material alteration
- No knowledge of bankruptcy proceedings
- All signatures are legitimate
What are the requirements for a holder to be a holder in due course?
- Be an holder of a properly negotiable instrument
- Give value for the instrument - payment, service, or taking payment for a previous existing debt - NOT promise or futur consideration
- Take instrument in good faith - Even if you buy a stolen note and you don’t know that its stolen; you’re still an HDC
- Without notice of defect in the instrument: overdue, defense or claim, dishonored
What are the personal defenses against a holder in due course (HDC) which will LOSE?
BUILD
Personal Defenses - good against all holder except HDC -
BUILD
- Breach of contract/warranty
- Unauthorized completion
- Fraud in the Inducement
- Lack of consideration
- Simple Duress
What are the REAL defenses against a holder in due course (HDC); which will WIN?
FABLE
Real Defenses - good against everyone including the HDC
FABLE
- Forgery
- Material Alterations to the instrument
- Bankruptcy discharge
- Lack of capacity - Minor
- Fraud in the Execution/Extrem duress
What are the right for a holder to be a holder in due course?
- Personal defenses cannot be use against HDC
- Real defense can be used against the HDC
Shelter Doctrine
- Holder who does not qualify as a HDC (no value, no good faith, has notice of the defect) BUT receives the instrument form a HDC⇒ gets same right as the HDC
- exception: if a previous holder you cannot improve yourself
Name the 2 general types of warranties on negotiable instruments
- Contractual Liability
- Warranty Liability
Discharge of parties
- Once primary party pays, all endorsers are discharged from liability
- Cancellation of prior party’s endorsement dicharges that party from liability - oral renunciation is NOT effective
- Intentional destruction of instrument by holder
- Holder produce a certification of a check
- Materially altering the instrument
- Singing “without recourse” - no contract liability
stop payment order
- Oral stop payment order is good for 14 days; written stop payment order is good for 6 months and is renewable
- Stop payment order must be given so as to give bank reasonable opportunity to act on it
- Bank is liable to drawer if it pays after effective stop payment order only when drawer can prove that the bank’s failure to obey the order caused drawer’s loss. If drawer has no valid defense to justify dishonoring instrument, then bank has no liability for failure to obey stop payment order.
- If drawer stops payment on the check, s/he is still liable to holder of check unless s/he has a valid defense (e.g., if holder qualifies as a holder in due course then drawer must be able to assert a real defense to free him/herself of liability)
