FL Commercial Paper Flashcards

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1
Q

Basic Requirements for a Negotiable Instrument?

A

“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)
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2
Q

COMMERICAL PAPER

Partial performance =

A

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.

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3
Q

HDC cannot have notice that the note is overdue as to

A

PRINCIPAL payments, not interest payments

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4
Q

A note is overdue when

A

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.

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5
Q

The FTC Notice is required on a N/I when

A

“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

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6
Q

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

A

Subjective; Objective

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7
Q

Shelter Rule:

A

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.

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8
Q

What is a Issuance vs. a Transfer?

A

“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

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9
Q

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

A

have the transferor provide the necessary indorsement to complete the negotiation

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10
Q

An exception to the Shelter Rule is

A

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

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11
Q

The difference between REAL defenses vs. PERSONAL defenses is

A

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

Both can be asserted against a Holder

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12
Q

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

A

REAL; Personal

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13
Q

Fraud in the factum =

Fraud in the inducement =

A

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

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14
Q

Statute of Limitations for Drafts vs. Notes

A

– 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.

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15
Q

Matters you should ALWAYS be aware of:

A

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?

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16
Q

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

A

PERSONAL defenses;

a Holder in Due Course (HDC)

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17
Q

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

A

severally

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18
Q

The “Real” defenses are:

A
  • Infancy
  • Incapacity
  • Duress
  • Illegality
  • Fraud
  • Discharge in insolvency proceedings (Bankruptcy)
  • Alteration and forgery
  • Statute of limitations or
  • Accommodation party
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19
Q

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

A

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

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20
Q

Order paper is negotiated by

A

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

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21
Q

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

A

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.

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22
Q

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

A

An obligor may assert real defenses AND personal defenses

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23
Q

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

A
  • An instrument is issued to an imposter OR a fictitious payee
    OR
  • An employee violates an employer’s trust
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24
Q

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

A

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

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25
Q

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

A
  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
26
Q

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

A

DRAFT;

Drawer; Drawee; Payee

27
Q

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

A

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.

28
Q

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

A

No.

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

29
Q

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

A

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.

30
Q

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

A

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

31
Q

What are the personal defenses?

A

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

32
Q

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

A

instrument;

underlying transaction

33
Q

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

A
  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
34
Q

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.

A

TRUE

35
Q

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

A

TRUE

36
Q

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.

A

TRUE

37
Q

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.

A

FALSE

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

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

38
Q

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

A

Issuance;

Negotiation

39
Q

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

A

BEARER paper

40
Q

What is required for a holder to become a HDC?

A

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
41
Q

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.

A

Subjective;

Objective

Note:
subjective standard = the holder’s actual belief

objective standard = reasonable commercial standard

42
Q

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

A

NOTE; maker; payee

43
Q

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

A

Yes

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

44
Q

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.

A

TRUE

45
Q

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

A

– 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

46
Q

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

A

Dishonored

47
Q

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

A

(1) Plaintiff is entitled to ENFORCE the instrument,

and

(2) SIGNATURES on the instrument are VALID

48
Q

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

A

within 3 years of date of dishonor

OR

within 10 years of date of the draft

whichever is EARLIER

49
Q

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

A

REAL Defenses:

“IF SAD IF ID”

Infancy
Fraud

Statute of Limitations
Alteration
Discharge (in insolvency proceedings)

Incapacity
Forgery

Illegality
Duress

50
Q

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

A

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

51
Q

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

A

A Holder

52
Q

When is presentment excused?

A
  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
53
Q

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.

A

6 months;

14 days

54
Q

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

A

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

55
Q

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.

A

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

56
Q

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.

A

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

57
Q

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

Personal defense

Contract defense

Fraud-based defense

Real defense

A

Real defense

58
Q

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.

A

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

59
Q

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.

A

Sign the instrument.

60
Q

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.

A

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