FL Commercial Paper

Question 1

Basic Requirements for a Negotiable Instrument?

Answer 1

“Words of Negotiability include writers who Sign, In Writing, Unconditional, Fixed, amounts to be paid ON DEMAND w/ no Additional Undertakings”

• The document must be in WRITING and SIGNED
• The promise or order to pay must be UNCONDITIONAL
• The PRINCIPAL amount must be fixed, but the interest rate can be
  variable
• Payable to order or bearer (remember “WORDS OF NEGOTIABILITY” for ORDER paper)
• The writing must be payable ON DEMAND or at a DEFINITE TIME (payment
  time must be readily ascertainable)
• No additional undertakings (i.e., the obligor’s sole obligation is to pay money)

Question 2

COMMERICAL PAPER

Partial performance =

Answer 2

partial HDC rights

Formula: (the actual performance/divided by the promised performance x the face value of the note)

Example 40: In exchange for a negotiable promissory note with a face value of $50,000, Harry agrees to pay Paul $40,000; $20,000 the day Paul negotiates the note, and an additional $20,000 five months from that date. The note will mature 12 months from the negotiation date.

On the date Paul negotiates the note, Harry has rights as an HDC for $25,000 ($20,000/$40,000 x $50,000) as Harry has paid half of the agreed-upon consideration.

Question 3

HDC cannot have notice that the note is overdue as to

Answer 3

PRINCIPAL payments, not interest payments

Question 4

A note is overdue when

Answer 4

1) Checks are overdue 90 days after date of issue

2) Any instrument that is payable on DEMAND is overdue after demand for payment is made

3) Instruments due at a definite time are overdue the day AFTER the due date
– (a) If the due date is ACCELERATED, then the note is overdue the day AFTER the ACCELERATED due date
– (b) When payments are due in INSTALLMENTS, the instrument is overdue the day AFTER the INSTALLMENT due date.

Question 5

The FTC Notice is required on a N/I when

Answer 5

“FTC likes to protect OB (odell beck) for N/I when he PERSONALLY CONSUMES his purchases of Goods or Services”

WHEN THREE CRITERIA ARE MET:

1) The Maker/Drawer is signing the note in a CONSUMER
transaction (i.e., acquiring an item for personal or family use)

2) The transaction must be for SALE/LEASE of goods or SERVICES (e.g.,
buying a car or boat)

3) The seller must be one who sells the item in question in his ORDINARY COURSE OF BUSINESS

Question 6

Taking an instrument in good faith requires both honesty in fact and observance of reasonable commercial standards of fair dealing.

Honesty-in-fact is judged by a(n) ______________ standard,

and the reasonable commercial standards of fair dealing are judged by a(n) _____________ standard

Answer 6

Subjective; Objective

Question 7

Shelter Rule:

Answer 7

Anytime an instrument is transferred, the rights follow the transfer… the Transferor’s rights get transferred to the Transfeee

Whatever rights the Transferor had transfer to the Transferee.

Question 8

What is a Issuance vs. a Transfer?

Answer 8

“Makers ISSUE to Payees,
Payees become Holders,
Holders transfer to TRANSFEES”

“M to the P, P to the T”

The first movement from Maker to Payee is an issuance (not a transfer)
Maker—>Payee(Holder or HDC)

Subsequent movements prior to the payment are transfers.
Payee/Holder/HDC—>Transferee

Question 9

When a transferee pays value for an instrument and the transferor fails to provide a necessary Indorsement, the transferee has the legal right to

Answer 9

have the transferor provide the necessary indorsement to complete the negotiation

Question 10

An exception to the Shelter Rule is

Answer 10

A transferee who commits FRAUD or otherwise engages in some type of ILLEGAL activity as it relates to the instrument cannot acquire rights as a holder in due course

When HDC Transferee who takes from a Transferor that commits fraud/illegal activity, subsequently transfers to another Transferee, that Transferee will still enjoy rights as HDC even if they know of the fraud b/c the Transferor’s rights transfer to the Transferee (Shelter Rule)

Example 50: A fraudulently induces Maker to issue a note to A. A negotiates
the note to C, who takes the note as a HDC. C sells the note back to A.

A does not enjoy C’s right as a HDC due to A’s prior
fraud with respect to the note.

Example 51: Assume that same facts as above, except that C instead transfers
the note to D. D is aware of A’s fraud because A told him about it after the
fact.

D enjoys C’s rights as a HDC and is not subject to A’s fraud in the inducement defense, even though D was aware of A’s fraud at
the time he took the note

Question 11

The difference between REAL defenses vs. PERSONAL defenses is

Answer 11

Real defenses can be asserted against a HDC and a Personal defense cannot

Both can be asserted against a Holder

Question 12

Fraud in the factum is a ______ defense
Fraud in the inducement is a ____ defense

Answer 12

REAL; Personal

Question 13

Fraud in the factum =

Fraud in the inducement =

Answer 13

Fraud in the factum =

(1) Signer is NOT AWARE that he is signing a negotiable instrument AND

(2) he must not have had a reasonable OPPORTUNITY to become aware

Fraud in the inducement =

(1) Signer is AWARE that he is signing a negotiable instrument BUT signer is induced into signing based on MISREPRESENTATION

Question 14

Statute of Limitations for Drafts vs. Notes

Answer 14

– Drafts

 For drafts (e.g., bank checks) – 3 years from date of dishonor OR 10 years from the date of the draft, whichever is earlier
 For certified, teller’s, cashier’s, or traveler’s checks, - If presenting, 3 years after demand for payment

– Notes

 For notes payable at a definite time, the action must be brought within 6 years of the note’s due date.
 For notes payable on demand, the action must be brought within 6 years after demand for payment.

Question 15

Matters you should ALWAYS be aware of:

Answer 15

o Is the instrument a negotiable instrument?
o Was there a proper negotiation?
o Are we dealing with a holder or a holder in due course?
o What defenses can the obligor assert?
o Who else can be held responsible?

Question 16

General contract defenses, such as breach of contract, are __________________ and cannot be successfully asserted against

Answer 16

PERSONAL defenses;

a Holder in Due Course (HDC)

Question 17

If there is ambiguity as to whether an instrument is payable jointly or severally, it is payable

Answer 17

severally

Question 18

The “Real” defenses are:

Answer 18

• Infancy
• Incapacity
• Duress
• Illegality
• Fraud
• Discharge in insolvency proceedings (Bankruptcy)
• Alteration and forgery
• Statute of limitations or
• Accommodation party

Question 19

Is “in no later than six months” a definite date of payment?

Answer 19

Yes. While it is not a fixed date, it is readily ascertainable, and is therefore considered definite.

Question 20

Order paper is negotiated by

Answer 20

1) Voluntary OR Involuntary transfer of possession
AND
2) proper indorsement

Question 21

Is an instrument containing a promise to pay “the first installment on the land subject to our sales contract” non-negotiable?

Answer 21

Yes.

While mere references to other records regarding rights as to collateral, prepayment, or acceleration do not make the promise to pay conditional, a promise to pay that is subject to another writing is conditional.

This renders the instrument non-negotiable.

Question 22

What types of defenses may an obligor (e.g., a bank) have against a HDC who presents an instrument for payment?

Answer 22

An obligor may assert real defenses AND personal defenses

Question 23

In what limited circumstances may an UNauthorized signature be treated as though it was authorized?

Answer 23

• An instrument is issued to an imposter OR a fictitious payee
  OR
• An employee violates an employer’s trust

Question 24

Define “indorsement” in the context of order or bearer paper

Answer 24

An indorsement is a signature on the instrument by someone other than the maker, drawer, or acceptor that is typically made for the purpose of negotiating the instrument

Question 25

What SIX transfer warranties are made by a transferor of an instrument?

Answer 25

1. Transferor is entitled to ENFORCE instrument
2. All signatures are AUTHENTIC
3. All signatures are AUTHORIZED
4. Instrument has NOT been ALTERED
5. NO DEFENSES/or CLAIMS can be asserted against TRANSFEROR
   AND
6. To transferor’s knowledge, the maker, acceptor, and drawer are NOT subject to INSOLVENCY proceedings

Question 26

A ______ is a three-party negotiable instrument between a ________ , a ________and a ________.

Answer 26

DRAFT;

Drawer; Drawee; Payee

Question 27

If an instrument has been lost, destroyed, or stolen, a person is entitled to

Answer 27

ENFORCE the instrument if the person was

1) in POSSESSION of the instrument and entitled to ENFORCE the instrument @ the time the loss occurred

Note: Loss cannot have been the result of a transfer by such person or of a lawful seizure.

Question 28

Does a note taken for the amount of an obligation discharges the obligation?

Answer 28

No.

Unless otherwise agreed, a note taken for an obligation SUSPENDS the obligation until the note is dishonored or paid

Question 29

Does liability on an instrument always requires a signature of the person to be bound?

Answer 29

No.

When an instrument is signed by a person’s representative (e.g., agent), the represented person (i.e., principal) may be bound despite not signing the instrument.

Question 30

What personal defenses does an obligor (e.g., a bank) have against a holder (non-HDC) who presents an instrument for payment?

Answer 30

Personal defenses:
* Instrument not issued, conditionally issued, issued for special purpose
* Contract defense (e.g., no consideration, mistake)
* Claims in recoupment
* Wrongful possession

Question 31

What are the personal defenses?

Answer 31

Personal defenses:
* Instrument not issued, conditionally issued, issued for special purpose
* Contract defense (e.g., no consideration, mistake)
* Claims in recoupment
* Wrongful possession

Question 32

A holder cannot be a HDC if she has notice of infirmities in the _________ or the ___________.

Answer 32

instrument;

underlying transaction

Question 33

What presentment warranties are made by a person who presents a draft to the drawee for payment?

Answer 33

1. Person is ENTITLED to obtain payment
2. Draft has NOT been ALTERED
   AND
3. Person has NO knowledge that drawer’s SIGNATURE is UNAUTHORIZED

Question 34

True or False: A bank can refuse to re-credit customer’s account for unauthorized payments if the customer fails to promptly review the bank statement and notify the bank of such a payment.

Answer 34

TRUE

Question 35

True or False: Discharge is the elimination of a party’s personal obligation to pay the instrument, but the instrument itself is not discharged.

Answer 35

TRUE

Question 36

True or False: If the bank dishonors a check that is properly payable, the customer may sue for damages proximately caused by the wrongful dishonor including consequential damages.

Answer 36

TRUE

Question 37

True or False: HDC status is not conferred if that specific holder could determine that the negotiated instrument has apparent evidence of forgery or alteration or is otherwise so irregular or incomplete as to call into question its validity.

Answer 37

FALSE

The standard is OBJECTIVE whether a reasonable person could determine the forgery)

Not SUBJECTIVE (whether the holder in question could determine forgery)

Question 38

Fill in the blanks. A person becomes a holder in two ways: __________ or __________.

Answer 38

Issuance;

Negotiation

Question 39

A writing that has characteristics of both an order instrument and a bearer instrument will be treated as

Answer 39

BEARER paper

Question 40

What is required for a holder to become a HDC?

Answer 40

To become a HDC of a negotiable instrument one must:

• Take the instrument as a holder;
• For value;
• In good faith;
  AND
• W/o notice of certain “infirmities” of the instrument or the transaction out of which the instrument arose

Question 41

With respect to taking an instrument as a HDC, good faith amounts to honesty-in-fact and the observance of reasonable commercial standards of fair dealing.

Honesty-in-fact is judged by a(n) ________ standard

and fair dealing is judged by a(n) _______ standard.

Answer 41

Subjective;

Objective

Note:
subjective standard = the holder’s actual belief

objective standard = reasonable commercial standard

Question 42

A ______ is a two-party negotiable instrument between a ________ and a ________.

Answer 42

NOTE; maker; payee

Question 43

May a transferee who took the instrument in good faith recover damages for breach of warranty?

Answer 43

Yes

up to amount of the instrument + expenses + loss of interest due to breach

Question 44

True or False: An unauthorized signature on the instrument is effective as the signature of the unauthorized signer in favor of a person who, in good faith, pays the instrument or takes it for value or collection.

Answer 44

TRUE

Question 45

When can an agent be held liable on an instrument that the agent was authorized to sign on behalf of the principal?

Answer 45

– AUTHORIZED agent who signs his OWN name but does NOT UNAMBIGUOUSLY indicate that the signature is made in a REPRESENTATIVE CAPACITY,

OR

who does NOT IDENTIFY the PRINCIPAL in the INSTRUMENT

–> PERSONALLY liable to HDC who takes w/o notice that the OG parties never intended for the agent to be personally liable

Question 46

An INDORSER is generally required to pay an instrument that has been __________ upon receiving notice of that fact

Answer 46

Dishonored

Question 47

What TWO things must a plaintiff who seeks to enforce an instrument prove?

Answer 47

(1) Plaintiff is entitled to ENFORCE the instrument,

and

(2) SIGNATURES on the instrument are VALID

Question 48

What is the statute of limitations for a holder/HDC to bring an action on an unaccepted draft?

Answer 48

within 3 years of date of dishonor

OR

within 10 years of date of the draft

whichever is EARLIER

Question 49

What real defenses does an obligor (e.g., a bank) have against a holder (non-HDC) who presents an instrument for payment?

Answer 49

REAL Defenses:

“IF SAD IF ID”

Infancy
Fraud

Statute of Limitations
Alteration
Discharge (in insolvency proceedings)

Incapacity
Forgery

Illegality
Duress

Question 50

What are the formal requirements for an instrument to be negotiable?

Answer 50

Must be

1) written + signed by the maker or drawer
2) UNCONDITIONAL promise/order to pay a FIXED amount
3) Payable “to the order of” a payee or “to bearer”
4) Payable “on demand” or at a definite time
AND
5) without stating any additional undertaking or instruction

Question 51

Even if the transfer of possession is involuntary, the finder of a bearer instrument becomes what?

Answer 51

A Holder

Question 52

When is presentment excused?

Answer 52

1. It cannot be made by exercise of reasonable diligence;
2. Maker/acceptor repudiated the obligation to pay, died, or is in insolvency proceedings;
3. Terms of the instrument make it unnecessary;
4. Drawer or indorser has waived it (as with a note) or is estopped from requiring it; and
5. Drawer has instructed drawee not to pay instrument

Question 53

Fill in the blanks. A written stop payment order is binding on the bank for _____.

An oral stop payment order is valid for _______unless confirmed in writing during that period.

Answer 53

6 months;

14 days

Question 54

True or False: A note taken for the amount of an obligation discharges the obligation.

Answer 54

Unless otherwise agreed, a note taken for an obligation SUSPENDS the obligation until the note is DISHONORED or PAID

Question 55

Regarding a principal’s liability for an agent’s signature, which of the following is FALSE?

The principal may be estopped from denying liability against a holder if the principal negligently contributed to the agent’s unauthorized signature.

The principal is not bound if the agent did not have authority to sign on the principal’s behalf.

The principal may ratify the agent’s unauthorized signature if the principal adopts the signature.

The principal may ratify the agent’s unauthorized signature if the principal fails to deny the signature’s validity.

Answer 55

The principal may be estopped from denying liability against a holder if the principal negligently contributed to the agent’s unauthorized signature.

Question 56

Regarding the liability of an agent who signs an instrument, which of the following statements is FALSE?

An agent who does not clearly indicate the agency relationship upon signing an instrument may be held liable to a holder in due course.

An unauthorized agent is not liable on an instrument that the agent signs in the principal’s name only.

An agent may be liable regardless of whether her signature was authorized.

An authorized agent is not liable for signing his own name as drawer on a check if the check is drawn on the principal’s account.

Answer 56

An unauthorized agent is not liable on an instrument that the agent signs in the principal’s name only.

Question 57

FILL IN THE BLANK. A holder in due course is subject to any ___________________.

Personal defense

Contract defense

Fraud-based defense

Real defense

Answer 57

Real defense

Question 58

Which of the following is NOT an example of presentment?

A demand made to a bank by its customer for payment of a check drawn on another bank.

A demand made to a maker by a holder in due course for payment of a note.

A demand made to a drawee by a holder for payment of a draft.

A demand made to a bank by a person entitled to enforce a check drawn on that bank.

Answer 58

A demand made to a bank by its customer for payment of a check drawn on another bank.

Question 59

In order to be an accommodation party under Article 3, a person must do which of the following?

Sign the instrument.

Be a direct beneficiary of the value given for the instrument.

Promise in separate document to act as surety of the accommodated party’s promise.

Be related to the accommodated party.

Answer 59

Sign the instrument.

Question 60

Palmer received an undated check from his aunt as a gift. He signed his name on the back of the check and transferred it to Xuan in exchange for a computer. Before Xuan could cash the check, her roommate, Tula, stole the check.

Is Tula a holder of the check?

Answers:

Yes, because Xuan received the check in exchange for a computer.
Yes, because Palmer signed the check.
No, because she is a thief.
You Selected: No, because the check was not dated.

Answer 60

Yes, because Palmer signed the check.

Even if a N/I is blank (i.e. the Holder of the check only signs his name and leaves it undated), the N/I becomes BEARER instrument

BEARER instrument can be negotiated by the transfer of possession of the instrument, even if that transfer is involuntary—e.g., theft

*Can still be a regular HOLDER here

– While you can be Holder IN DUE COURSE if there is VALUE GIVEN–if other requirements are met–can still be a regular HOLDER