R6- Commercial Paper

Question 1

What is a Promissory Notes?

Answer 1

• A promise to pay a specific amount
• 2 Parties: Maker & Payee
• Eg: Bank Certificate of Deposit
• Can reference other transactions without harming negotiability

Question 2

What is a Draft?

Answer 2

• Order for a 3rd party to pay

- 3 Parties- Drawer, Drawee, and Payee

Question 3

What is a Cheque?

Answer 3

-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
-

Question 4

What is difference between the check and the draft?

Answer 4

3 Parties in both
Check- Payable on Demand
Draft- Payable in future

Question 5

If it says “30 days after date pay to the order”

What is it?

Answer 5

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

Question 6

What is a Trade Acceptance?

Answer 6

Seller extends credit to Buyer
Buyer agrees to pay seller
Buyer has primary liability
Seller is both drawer and payee
-Seller has secondary liability

Question 7

What is Negotiation of Commercial Paper

Answer 7

Transfers ownership to another part

Question 8

What are the requirement for Negotiability?

Answer 8

• 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

Question 9

to negotiate an order paper is writing the purpose allowed?

Answer 9

Yes,

In the memo section of a check

Question 10

To negotiate a paper which 2 things do you need?

Answer 10

Must have delivery+endoresement

Question 11

What is a blank endorsement?

Answer 11

• doesn’t name a new payee
• Transforms into bearer paper
• Think Blank=Bearer

Question 12

What is Special Endorsement?

Answer 12

• Names a new payee

- Transforms into order paper

Question 13

What is Restrictive Endorsement?

Answer 13

• 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”

Question 14

What is a Qualified Endorsement?

Answer 14

• Without Recourse added to endorsement

- Payment is not guaranteed

Question 15

Within what time should a check be presented for payment if endorsed?

Answer 15

If endorsed
a check must be presented for payment within 7 days
to hold the endorser liable

Question 16

If a paper is exchanged for value, Transferor must give an?

Answer 16

Unqualified Endorsement

Question 17

To negotiate bearer paper you must have-

Answer 17

Delivery only

Question 18

What supersedes on

Answer 18

writing i.e. one hundred dollars
supersedes
$100

Question 19

What is Contract liability ?

Answer 19

• 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

Question 20

Warranty Liability

Answer 20

• 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

Question 21

Holder in due course

Answer 21

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

Question 22

What are the real defenses

Answer 22

FAIDS
F- Fraud in inducement and Forgery
A-Altercation
I- Insanity, illegality, Infant
D-Duress, Discharge in bankruptcy
S- Suretyship and Statute of limitations

Question 23

What are the personal defenses?

Answer 23

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

Question 24

What is a Shelter doctrine-

Answer 24

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