MD Commercial Paper

Question 1

Note

Answer 1

2-party instrument where maker promises to pay the payee a sum of money. Promisory obligation.

Question 2

Draft

Answer 2

3-party instrument where drawer orders drawee (bank) to pay the payee a sum of money (ie a check)

Question 3

A negotiable instrument must be:

Answer 3

(1) promise or order in writing and signed (2) unconditional/enforceable in all events (3) must be stated to payable in money in a fixed amount w/ or w/o interest (4) payable to order or bearer at time issued or when first comes into possession of the holder (5) payable on demand or at a definite time (or a check) (6) no undertakings or instruction made by issuer

Question 4

An instrument is NOT unconditional/ enforceable in all events if:

Answer 4

(1) express condition (2) says subject to or governed by other writing (3) states that rights or obligations are stated in another writing

Question 5

An instrument is payable at a definite time if:

Answer 5

(1) at end of a definite period (e.g. w/in 90 days) (2) a fixed date (3) at a time readily ascertainable at the time of issue (Thanksgiving 2015)

Question 6

Undertakings that do not destroy negotiability:

Answer 6

(1) to give, maintain or protect collateral to ensure payment (2) authentication or power to confess judgement or realize on or dispose of collateral (3) promise waiving benefit of any law intended for obligor’s protection

Question 7

Negotiation

Answer 7

in/voluntary transfer of possession by someone other than the issuer to someone who thereby becomes the holder of the instrument

Question 8

Payable to bearer

Answer 8

may be negotiated (transferred) by delivery alone

Question 9

Payable to an identified person/Payable to order

Answer 9

Negotiation requires transfer and indorsement by holder. If indorsement is blank (name of transferor only) becomes bearer paper. If special (name of transferee also) becomes order paper.

Question 10

Presentment

Answer 10

demand on maker or drawee.

Question 11

Holder

Answer 11

(1) in possession AND (2) payable to bearer (bearer paper0 OR (3) payable to ID’ed person and that person is in possession (order paper properly indorsed). OJO! Could have obtained illegally. a depository bank may become the holder of a check deposited to the account of a customer if the customer was a holder, whether or not the customer endorses the check.

Question 12

Fictitious payee

Answer 12

If payee (1) not intended to have any interest or (2) is a fictitous person, THEN indorsement by the payee in favor of one who takes in good faith and pays value is effective (negligent company)

Question 13

Imposter

Answer 13

Where someone impersonates the payee and induces drawer or maker to issue the instrument payable in name of impersonated person, indorsement in name of payee in favor of one who takes in good faith and pays value is effective (negligent company)

Question 14

Holder in Due Course: Requirements

Answer 14

(1) instrument bears no evidence of forgery, alteration, other irregularity (2) takes (a) for value (b) in good faith (c) without notice of problems such as (i) overdue, doshonored, or defaulted (ii) unauthorized signature (iii) any defense against or claim to the instrument by someone else

Question 15

Derivative HDC rights

Answer 15

HDC rights transfer to subsequent holder EXCEPT to a transferee who was part of fraud or as a prior holder knew of defense/defect

Question 16

Liability of representative signatory

Answer 16

NOT liable if unambiguously shows that it’s made on behalf of a disclosed P. Otherwise liable unless can show that the original parties did not so intend.

Question 17

Effect of unauthorized signatures (not forgeries)

Answer 17

Effective as against the actual signer

Question 18

Maker v. drawer liability

Answer 18

Maker is primarily liable on the note, Drawer is secondarily liable on the draft after the drawee (bank) if: 1) there has been presentment of the check to the drawee; 2) the check was dishonored by the bank; and 3) there was notice of the dishonor to the drawer.

Question 19

Drawee liability

Answer 19

Bank only liable if accepts the draft, ie certifies it, and becomes an acceptor. Acceptance is a signed promise written on the draft.

Question 20

Warranties made by transferor of an instrument

Answer 20

(1) entitled to enforce the instrument (2) all signatures authentic and authorized (3) has not been altered (4) not subject to defenses (5) no knowledge of insolvency of the maker, drawer, acceptor

Question 21

Indorser liability

Answer 21

Secondarily liable after maker/drawer. Makes warranties to immediate and all other transferees. UNLESS endorsement says “without recourse”

Question 22

Accommodation party

Answer 22

one who signs an instrument in order to lend credit and does not get any benefit. still fully liable.

Question 23

Presentment warranties (for a draft)

Answer 23

(1) person is entitled to enforce the draft (2) draft hasn’t been altered (3) no knowledge that signature of the drawer is forged or unauthorized

Question 24

Real defenses

Answer 24

Even HDC takes subject to. (1) infancy (2) duress - must be physical (3) fraud in the factum - signed w/o knowledge or reasonable opp to find out was a note (4) discharge in insolvency proceedings (5) forgery (kind of)

Question 25

Personal defenses

Answer 25

Can’t use against HDC. (1) contract defenses e.g. no consideration (2) fraudulent alteration substantial negligent contribution thereto (3) negligent in allowing forgery

Question 26

Alterations

Answer 26

unauth change that modifies obligations. IF fraudulent -> defense against all but drawee (bank) and HDC. HDC may enforce original terms OR, if instrument was incomplete w/o alteration, completed terms. IF not fraudulent –> can be enforced. IF D negligently contributed substantially to the alteration, estopped from raising defense against HDC.

Question 27

Forgery as a defense

Answer 27

Operates as a real defense but forger is liable, and one whose negligence substantially contributes to forgery is estopped from using forgery against a BFP

Question 28

Bank liability in forgery

Answer 28

Liable to customer BUT customer must discover within one year after shows in statement. If not reasonably prompt but within one year, bank liable if forgery was obvious.

Question 29

Stop order

Answer 29

IF oral: good for 14 days. IF confirmed in writing, good for 6 months.

Question 30

Conversion of an instrument

Answer 30

taken by transfer, other than negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. SoL 3 years. Applies downstream and to depositor bank if disregards “for deposit” or “for collection.”

Question 31

Warranties from depositor to payor bank

Answer 31

That the stated amount was either paid to payee or deposited in payee’s bank account.

Question 32

Partial holder in due course

Answer 32

Where the holder of an instrument pays only a portion of the agreed-upon value, the holder may assert rights as a partial holder of the instrument in due course

Question 33

Basic questions

Answer 33

 is the instrument negotiable?
 is there a holder in due course?
 are there defenses?