R6 Commercial Paper

Question 1

What are the attributes of a draft under Article 3?

Answer 1

A draft is a 3-party commercial paper, order to pay by one person (drawer at the bottom) to another person (drawee on top usually a merchant or bank) demanding that the drawee pay money to a third person (payee)

Trade acceptance is a draft (order to pay) drawn by the payee (seller) on the drawee (buyer) and accepted by drawee (buyer) to make a payment

Question 2

What distinguishes a check from other drafts under Article 3?

Answer 2

A check is draft (negotiable 3-party) drawn on a bank and payable on demand

Question 3

What are the attributes of a note?

Answer 3

A note is a 3-party commercial paper, promise to pay made by one party (the maker) to pay money to another party (payee) it includes a CD which is a promise from a bank to pay

Question 4

How does a UCC define a negotiable instrument?

Answer 4

An instrument:

1. In writing
2. Signed by the maker (note) or drawer ( draft)
3. Containing an unconditional promise (note) or order to pay (draft)
4. A fixed amount of money
5. On demand or at a definite time
6. Containing no other promise or undertaking not authorized by the UCC and
7. Payable to order or bearer; with the exception of checks

Question 5

If bearer paper is negotiated by delivery alone, how is order paper negotiated?

Answer 5

By delivery and proper endorsement

Question 6

Once signed (endorsed) in blank, the negotiable instrument turns into?

Answer 6

Bearer paper, negotiable by delivery alone

Question 7

Once an instrument is issued as bearer paper, will it always remain bearer paper?

Answer 7

NO, the last endorsement controls, if the last endorsement is blank, the instrument is bearer paper, if the last endorsement names a new payee (special endorsement) the instrument becomes an order paper

Question 8

What is a qualified endorsement?

Answer 8

Includes the words “without recourse” it releases the endorser from CONTRACT liability (no guaranteed of payment) but the endorser may still be liable for warranty liability if the endorser breaches any warranties

Question 9

How does the UCC define a holder in due course?

Answer 9

A holder in due course is a holder (person in possession of instrument with good title to it) who takes the negotiable instrument:

1. For value
2. In good faith and
3. Without notice that is overdue or has been dishonored or of any defenses against or claim to it on the part of any person

Question 10

Describe the shelter doctrine

Answer 10

A transferee takes whatever rights his transferor had, as a consequence, most subsequent transferees of an HDC can “succeed to” or “take shelter” in the rights of the HDC

Question 11

What defenses may be asserted against a holder in due course (as well as non-holder in due course transferee)?

Answer 11

F - Fraud in the execution
F - Forgery
A - Alteration (material) of instrument
A - Adjudicated insanity
I - Illegality
I - Incapacity to contract (infancy)
D - Discharge in bankruptcy
D - Duress
S - Statue of Limitations
S - Surety-ship and other discharges known to HDC

Question 12

Nome some defenses that cannot successfully be asserted against a holder in due course

Answer 12

• Lack of consideration
• Failure of consideration
• Theft of an instrument after it was signed by the maker or drawer
• Breach of warranty or breach of contract
• Failure of a condition precedent
• Mistake
• Unconscionability
• Impossibility
• Unauthorized completion
• Fraud in the inducement