R6- Commercial Paper Flashcards
What is a Promissory Notes?
- A promise to pay a specific amount
- 2 Parties: Maker & Payee
- Eg: Bank Certificate of Deposit
- Can reference other transactions without harming negotiability
What is a Draft?
- Order for a 3rd party to pay
- 3 Parties- Drawer, Drawee, and Payee
What is a Cheque?
-Check is a draft that is payable on demand
- Payable to order of Drawer or bearer
-Drawer- You are writing the check
-Drawee- Your Bank
-Payee- is whom you are writing check to
-All Checks are drafts, all drafts are not checks
-
What is difference between the check and the draft?
3 Parties in both
Check- Payable on Demand
Draft- Payable in future
If it says “30 days after date pay to the order”
What is it?
It is not a cheque- checks payable on demand
It is not a post dated check, it’s a draft
It is Negotiable Time Draft
What is a Trade Acceptance?
Seller extends credit to Buyer Buyer agrees to pay seller Buyer has primary liability Seller is both drawer and payee -Seller has secondary liability
What is Negotiation of Commercial Paper
Transfers ownership to another part
What are the requirement for Negotiability?
- In writing
- signed by drawer/maker
- Be without conditions for payment
- limitation on payment sources allowed
- Amount of money must be stated, with % interest ok
- if additional promise in addition to pay money cancels negotiability
- if promise to pay occurs after some action by another party it cancels negotiability
- cannot allow for an alternative such as payment or some other action
- payable on demand for check, draft at definite time
- to order or to bearer
to negotiate an order paper is writing the purpose allowed?
Yes,
In the memo section of a check
To negotiate a paper which 2 things do you need?
Must have delivery+endoresement
What is a blank endorsement?
- doesn’t name a new payee
- Transforms into bearer paper
- Think Blank=Bearer
What is Special Endorsement?
- Names a new payee
- Transforms into order paper
What is Restrictive Endorsement?
- Adds restrictions
- Doesn’t stop negotiation
- You endorse the back of your check “For Deposit Only”
- Restrictive Endorsements can’t stop someone from further negotiating an instrument
- No “Pay to the order of Steve Only”
What is a Qualified Endorsement?
- Without Recourse added to endorsement
- Payment is not guaranteed
Within what time should a check be presented for payment if endorsed?
If endorsed
a check must be presented for payment within 7 days
to hold the endorser liable
If a paper is exchanged for value, Transferor must give an?
Unqualified Endorsement
To negotiate bearer paper you must have-
Delivery only
What supersedes on
writing i.e. one hundred dollars
supersedes
$100
What is Contract liability ?
- Guarantees payment
- Primary Liability- first in line to pay on the note/draft
- maker of promissory notes has primary liability
- with check, no party has primary liability
- Except- Certified Check, Bank has
- Secondary Liability- Drawers, if drawee fails to pay
- Endorsers (the payee) are secondarily liable
- HDC can hold endorser liable
- Except- Endorsed without recourse
Warranty Liability
- Occurs when you negotiate commercial paper
- By Signing- you warrant to all future parties
- By not signing- you warrant to current party only
- 5 Warranties with every Commercial paper
1. Title
2. No defense will stand against it
3. No material alteration
4. No Knowledge of bankruptcy proceedings
5. All signatures are legitimate
Holder in due course
Upgrade from merely holder of an instrument
Requires
-Holding a negotiable instrument
-Taking instrument in good faith
-Even if you buy stolen note, you can be HDC
-Having no knowledge of defenses against instrume
-i.e. problems with the instrument
-giving a present value
-future value doesn’t count
What are the real defenses
FAIDS F- Fraud in inducement and Forgery A-Altercation I- Insanity, illegality, Infant D-Duress, Discharge in bankruptcy S- Suretyship and Statute of limitations
What are the personal defenses?
An HDC takes an instrument free of personal defenses Lack of consideration/value given breach of contract/warranty duplicate payments Fraud in the inducement only
Voidable contracts
if Illegality or insanity- HDC Wins
Void contracts as adjudicated by state- HDC loses
What is a Shelter doctrine-
Holder through HDC
the transferee himself might not qualify as an HDC
he can claim the rights of an HDC who held the paper before him
Thus transferee of HDCs generally will not be subject to most defenses against payment of the
instrument
