R7 Commercial Paper

Question 1

What are the attributes of a draft under Article 3?

Answer 1

A draft is three-party commercial paper. It is an order by one person (the drawer) to another person (the drawee - usually a merchant or a bank) demanding the drawee pay money to a third person.

Question 2

What distinguishes a check from other drafts under Article 3?

Answer 2

A check is a draft (i.e. negotiable three-party) drawn on a bank and payable on demand.

Question 3

How does the UCC define a negotiable instrument?

Answer 3

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 4

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

Answer 4

By delivery and proper endorsement

Question 5

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

Answer 5

Bearer paper, negotiable by delivery alone.

Question 6

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

Answer 6

Not necessarily. The last endorsement controls. If the last endorsement is blank, the instrument is bearer paper. If the last endorsement name is new payee (a “special” endorsement), the instrument is an order instrument.

Question 7

What is a qualified endorsement??

Answer 7

A qualified endorsement includes the words “without recourse.” This relates the endorser from contracted liability (no guarantee of payment), but the endorser may still be liable if the endorser breaches any warranties.

Question 8

How does the UCC define a Holder in Due Course?

Answer 8

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

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

Question 9

Describe the shelter doctrine.

Answer 9

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

Question 10

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

Answer 10

HDC:
Forgery
Adjudicated insanity
Incapacity to contract (infancy)
Duress
Statue of limitation

Non-HDC
Fraud in the execution
Alteration (material) of instrument
Illegality
Discharge in bankruptcy
Suretyship and other discharges known to HDC

Question 11

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

Answer 11

1. Lack of consideration
2. Failure of consideration
3. Theft of an instrument after it was signed by the maker or drawer
4. Breach of warranty or breach of contract
5. Failure of a condition precedent
6. Mistake
7. Unconscionability
8. Impossibility
9. Unauthorized completion
10. Fraud in the inducement