lesson 16

Question 1

commercial paper

Answer 1

a contract to pay money

Question 2

commercial paper can be used in 2 ways:

Answer 2

1. as a substitute for money (check)
2. as a loan of money (promissory note)

Question 3

instrument

Answer 3

written document

Question 4

negotiable

Answer 4

means the instrument is freely transferable in the marketplace

Question 5

maker

Answer 5

the person or entity that makes the promise to pay by instrument

Question 6

payee

Answer 6

the person or entity that the promise to pay is made

Question 7

promissory note

Answer 7

an instrument that has a maker and payee

Question 8

due date

Answer 8

date the payment is due and legally required to be paid

Question 9

payable on demand

Answer 9

instrument without a specific due date but that must be paid upon demand of the payee

Question 10

certificate of deposit (CD)

Answer 10

note made by a bank to an investor with a due date in the future, different than a customer depositing

Question 11

draft

Answer 11

an order directing someone else (a bank) to pay money (ex: check)

Question 12

drawer

Answer 12

the person that orders the payment

Question 13

drawee

Answer 13

the person or entity that is ordered to pay

Question 14

payee (CD)

Answer 14

the entity that is paid by drawee on behalf of drawer

Question 15

Jason goes to a bookstore and writes a check on his bank account to pay for books. who are the actors?

Answer 15

drawer - jason
drawee - bank
payee - bookstore
draft - check itself

Question 16

check

Answer 16

draft that is an order to a bank to pay money to another

Question 17

cashier’s check

Answer 17

draft that is drawn on a bank by the bank itself, but at the direction of the account holder

Question 18

if James wants to buy a car for $30,000, the dealership may not take his check b/c they are not convinced he has $30,000. what should he do?

Answer 18

ask his bank for a cashier’s check. the dealership accepts this b/c it guarantees the funds are present

Question 19

with a cashier’s check, the bank is both

Answer 19

the drawer and drawee

Question 20

the possessor of a piece of commercial paper has an unconditional right to be paid so long as

Answer 20

1. the paper is negotiated
2. the paper has been negotiated to the possessor
3. the possessor is a holder in due course
4. the issuer cannot claim a limited number of “real” defenses

Question 21

requirements for an instrument to be negotiable?

Answer 21

1. instrument must be in writing
2. instrument must be signed by a maker or drawer
3. instrument must contain an unconditional promise to pay
4. instrument must state a definite amount of money
5. instrument must be payable on demand or at a definite time
6. instrument must be payable to order or to bearer

Question 22

instrument must be in writing

Answer 22

does not have to be fancy or formal

Question 23

instrument must contain unconditional promise

Answer 23

may not contain any conditions. must be an order to pay (“I owe Lucy” is wrong, “I will pay Lucy” is an order)

Question 24

instrument must state definite amount of money

Answer 24

amount must be located in four corners of the instrument

Question 25

exception to definiteness

Answer 25

interest rates

Question 26

instrument must be payable "on demand" or at a definite time

Answer 26

must have a due date or must state that it is payable on demand (whenever payee requests)

Question 27

instrument must be payable to order or to bearer

Answer 27

must say "pay to the order of" and not just "pay to" b/c that means the person is the only person who can receive the payment, making it not negotiable

Question 28

if the instrument says "pay to bearer"

Answer 28

that means to pay to whoever possesses or bears the note

Question 29

examples relating to "bearer" instruments

Answer 29

"to bearer" "pay to order of cash" "pay to order of happy birthday" "pay to order of ____"

Question 30

how do courts interpret ambiguous terms

Answer 30

1. words win over numbers (fifteen vs 15) 2. handwritten terms win over printed/typed 3. typed terms win over printed

Question 31

what if interest rate is left blank?

Answer 31

courts will apply legal rate (6% in VA)

Question 32

to be negotiated, the instrument has to

Answer 32

be transferred to the holder by someone other than the issuer

Question 33

Mike writes a check that says "pay to the order of Susan", Susan then signs the back of the check and gives it to John

Answer 33

this is a negotiated instrument b/c it was transferred to the holder by someone other than Mike

Question 34

"pay to the order of X" instruments must be

Answer 34

signed and delivered

Question 35

bearer instruments are good to _______. thus, the only requirement for negotiation of bearer instruments is ______.

Answer 35

whoever possesses/bears, delivery

Question 36

Mike writes a promissory note "to bearer" and gives it to Susan. Susan owes Edward and simply delivers the note to him.

Answer 36

this has been properly negotiated and Mike must now pay Edward

Question 37

what is a holder in due course?

Answer 37

1. must be a holder (possess the instrument) 2. must have given value for the instrument 3. in good faith 4. without notice

Question 38

for order instruments, the holder is

Answer 38

anyone that is in possession of the document if it is made out to them

Question 39

value for a holder means

Answer 39

the holder has already done something for the instrument. if the note requires a future act, then the holder has not given value

Question 40

two tests for determining good faith, must meet both:

Answer 40

subjective test - did the holder believe the transaction was honest in fact objective test - did the transaction appear to be commercially reasonable

Question 41

without notice

Answer 41

person in possession must take the note without notice of any defects

Question 42

four common defects that would establish notice of a defect

Answer 42

a. instrument is overdue b. instrument has been dishonored - to dishonor a note is to refuse to pay. if the possessor is aware the issuer has refused to pay, this is an obvious defect c. instrument is altered, forged, or incomplete d. possessor has notice of claims and disputes - if the holder knows that the issuer has been sued by a previous holder or there is a dispute, this is notice

Question 43

James offered to sell Steven 100 bottles of Miracle Gro that would allow bald men to grow hair. the price was $100 per bottle, Steven gave James a note for $10,000. James then sold the $10,000 note to Reggie for $2,000. James never delivered the bottles, and Reggie asks for payment from Steven. Steven declines payment bc he claims that Reggie was not a holder in due course bc he did not meet the test of purchasing the note in good faith. what happens?

Answer 43

the courts would likely side with Steven and not require that he pays Reggie. fails the subjective test bc it's not reasonable to believe the transaction of miracle hair growth for $100/bottle. fails the objective test b/c it does not appear commercially reasonable to have 80% discounted note.