In General

Question 1

Controlling Body of Law for Commercial Paper

Answer 1

UCC Article 3

Question 2

2 Types of Commercial Paper

Answer 2

1. Notes

2. Drafts

Question 3

Notes

Answer 3

A written and signed promise by one party (the maker) to pay money to another party (the “payee” or bearer).

Question 4

Drafts

Answer 4

A written and signed instruction by one person (drawer) to another person (drawee) demanding payment to a third party (payee).

Also known as “bill of exchange”

Question 5

Certificates of Deposit

Answer 5

• Also included in the general definition of commercial paper.
• Acknowledgement by a bank that a sum of many has been received, and a promise by the bank to repay the sum of money

Question 6

Negotiable Interest Must Contain

(MEMORIZE THIS)!

Answer 6

1. Written and signed
2. Unconditional Promise or order to pay A fixed amount of money
3. Is payable to order or to bearer On demand or at a definite time; and
4. Does not state any unauthorized undertaking or instruction

Question 7

Writing Requirement for Negotiable Instrument

Answer 7

• No such thing as an oral negotiable instrument
• Must be something tangible
• Almost always on a piece of paper, bud does not have to be (ex. a t-shirt, a cow, a tamale, etc. - all OK

Question 8

Signing Requirement for Negotiable Instrument

Answer 8

-Signed by maker if note
-Signed by drawer if a check
-Signed includes any symbol executed or adopted by a party with a present intention to authenticate a writing.
Key question: Whether the party intended for that symbol to operate as their signature

Question 9

Unconditional Requirement for Negotiable Instrument

Answer 9

Conditional promises destroy negotiability - Must have definite time due

Question 10

Promise or to Pay Requirement for Negotiable Instrument

Answer 10

• IOU is not a promise to pay

- “I wish you would pay” is not an order to pay`

Question 11

Fixed Amount of Money Requirement for Negotiable Instrument

Answer 11

When the instrument is payable, the holder must be able to determine from the instrument itself the PRINCIPAL amount due (does not apply to interest)

-Has to be US dollars or a foreign currency recognized by the US

Question 12

No other Undertaking or Instruction Requirement for Negotiable Instrument

Answer 12

• Must be a “courier without luggage”
• To be negotiable cannot contain any unauthorized undertaking or promises
• However UCC explicitly permits 3 undertaking or instructions that may be included:
  1. An undertaking or power to give, maintain, or protect collateral
  2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; and
  3. A waiver of the benefit of any law intended for the advantage or protection of the obligor (e.g., waiver of a homestead exemption, or trial by jury, or right to notice dishonor.
  4. OK to promise to pay costs of collection and attorneys fees

Question 13

On Demand or at a Definite Time Requirement for Negotiable Instrument

Answer 13

• Holder must be able to tell when it comes due or the instrument is non-negotiable
• Though doesn’t have to have a date. An undated instrument which specifies no time for payment is treated as an instrument payable on demand by the holder.

Question 14

Note containing an extension clause

Answer 14

-Ok if permits the instrument to be extended at the option of the maker so long as as the extension is to further a definite time stated in the instrument (“One month after original due date”)

• If it simply provides it can be extended at option of maker - not negotiable
• If it gives option for holder to extend - still negotiable. Holder always has the option of giving extra time for payment

Question 15

To Order or To Bearer Requirement for Negotiable Instrument

Answer 15

NI must contain certain magic words either
-Order Langauge
or
-Bearer Langauge
`

Question 16

Order Paper

Answer 16

Payable only to an identifies person:
-“Pay to order of John Smith” or
To an identified person or order
-“Pay John Smith or his order”

Question 17

Bearer Paper

Answer 17

A promise or oder is payable to bearer if it

1. States that is payable to bearer, to order of bearer, to order or bearer, to order and bearer, or otherwise indicates that the person in possession is entitled to payment
2. Does not state a payee
3. States that it is payable to cash or otherwise indicates that it is not payable to an identified person (“Pay to the order of Merry Christmas”)

Question 18

Assignment of Instrument

Answer 18

• Assignable to 3rd Party by payee(assignor)
• 3rd party assignee has no greater rights than assignor does on instrument
• Any defenses that could be raised against the payee also could be raised against the assignee

Question 19

Negotiation of Instrument

Answer 19

• If payee negotiates the instrument then becomes holder.
• If the holder give value, in good faith, with no notice, then the holder is a holder in due course, who takes free of most defenses that could have been raised against the payee
• This is the customary way of transferring an instrument

Question 20

Holder in Due Course

Answer 20

A holder that:

1. Gives value;
2. In good faith;
3. And without notice that the instrument:
   - Is so irregular or incomplete as to call into question its authenticity
   - is overdue or dishonored,
   - contains an unauthorized signature,
   - has a claim on it,
   - is subject to another party’s claim in recoupment or defense

Question 21

Negotiation

Answer 21

Bearer Paper - Only transfer necessary

Order Paper - Transfer AND indorsement necessary

Question 22

Special Endorsement

Answer 22

One that names a particular person as “endorsee.” endorsee must then sign in order to negotiate the instrument.

• Words of negotiability not necessary (i.e., order/bearer)
• After special endorsement becomes order paper

Question 23

Blank Endorsement

Answer 23

A signature that is not accompanied by the naming of a specific endorsee. They create bearer paper.

Question 24

Transactions Precluding HDC Status

Answer 24

Holder does not become HDC of instrument taken by:

1. Legal process or by purchase in an execution, bankruptcy or creditor’s sale or similar proceeding
2. Purchasing instrument as part of bulk transaction not in the OCB of the transferor, or
3. As the successor in interest to an estate or other organization

Question 25

Shelter Rule

Answer 25

Where HDC acquires the rights of the transferor. The transferee is said to take “shelter” in the status of her transferor.

Exception: Shelter Rule never grants HDC rights to a holder who actually participated in fraud or illegality affecting the instrument. (If they just new about it then it does not matter - Shelter Rule applies)