REG 18 - Commercial Paper/Negotiable Instruments Flashcards
Commercial Paper
UCC Article 3
Commercial paper is a particular type of negotiable instrument which consists of documents or instruments that are set up to provide for the future payment of money. Article 3 of the UCC governs commercial paper (paper that is used as a substitue for money). There are two types of commercial paper, notes & drafts.
What are the two types of Commercial Paper?
1.) Notes - a two-party instrument set up as a “promise to pay.” A promise by the make of the note to make a monetary payment.
- Maker/Payee
- Maker is primarily liable
- Examples: Promissory note, CDs
2.) Draft - a three-party instrument set up as an “order to pay.” An order by the drawer of the draft to a different drawee to make monetary payment.
-
Drawer - party creating the instrument & ordering to pay
- Is secondarily liable (never a primarily liable)
-
Drawee - party that is being ordered to make a pmt (bank)
- Is only primarily liable only after accepting the draft
- Payee - party to whom the drawee is being directed to make payment
- Example: A check, or trade acceptance.
What are the requirements for Commercial Paper to become a Negotiable Instrument?
(COUNTS)
TESTED
When commercial paper meets certain requirements (COUNTS) it becomes a negotiable instrument, which facilitates its transfer from one party to another. These requirements (COUNTS) must be on the FACE of the document:
-
Certain amount of money, plus interest if appropriate
- NOTE: Words over numbers if different; still negotiable even if the two differ.
- Is payable to “Order” or to “Bearer”
- Unconditional promise to pay
- No Nonmonetary form of payment
- Payment must be in money only; can’t be goods or services
- Time of payment is definite
- Signed by the maker or drawer
Order Paper
vs.
Bearer Paper
Order Paper - refers to an instrument that requires an endorsement as well as delivery in order to transfer the right of collection.
Bearer Paper - refers to an instrument that does not require a signature by the payee to transfer it to another party. Such instruments are made payable to bearer, holder, or cash & only need to be delivered by the payee to another person with the intent to transfer the right ot collection.
- Example: A check endorsed by the Payee.
Who may you transfer an instrument to? (3)
- Holder
- Holder in Due Course
- Holder through a Holder in Due Course (Shelter Provision)
Assignee
A person becomes an Assignee instrument when:
- Improper transfer of a negotiable instrument or
- Proper transfer of a non-negotiable instrument
Holder
Holder - When a person properly receives a negotiable instrument they are called a holder.
- To properly negotiate an instrument:
- Bearer paper is negotiated by Delivery
- Order paper is negotiated by Endorsement & Delivery
Types of Endorsements for Order Paper (4)
The signature of someone other than the maker placed on an instrument with the intention of negotiating the instrument, restricting the payment on it or making the endorser liable on the instrument. The endorsement include:
- Special - endorser names next payee “pay to ___” (order)
- Blank - endorser signs but doesn’t specify nex payee (bearer)
-
Qualified - endorser signs & writes “without recorse” - eliminates signature & contract liability
- It indicates the endorser’s refusal to guarantee payment of the instrument.
- Restrictive - endorser writes conditions on transfer “for deposit only”
Holder in Due Course (HDC)
A person that received a negotiable instrument for value, in good faith, without notice of defect, protecting the holder from personal defenses against the instrument, although not against real defenses.
-
Value (paid for the instrument)
- Payment, services or taking payment for a preexisting debt
- Must actually give the value, a promise isn’t value
- Need not be of equal value
-
In Good Faith
- Honesty in fact in the conduct or transaction in hand
-
Withough notice of defect in the insturment. Has notice if
- Overdue
- Dishonored
- Notice of a claim or defense against it
- Altered or unauthorized signatures
Holder through a Holder in Due Course
(Shelter Provision)
A holder who doesn’t qualify as an HDC (no value, no good faith or has notice of a defect), but receives the instrument from an HDC< gets the protection of an HDC.
- Knowledge of defect is okay
- Participation in the fraud is NOT ok
- If previous holder, can’t improve yourself
Personal Defenses
(BUILD)
Reasons a Maker/Drawer may decide to dishonor a promise to pay. These defenses are good against a holder, but not a HDC. They include (BUILD):
- Breach of contract by the original payee
- Unauthorized completion of an incomplete or partially complete instrument
- Fraud in the Inducement
- Lack of consideration
- Duress
Real Defenses
(FABLEE)
Reasons that a negotiable instrument is NOT valid, (FABLE):
- Forgery
- Alteration, changing in the amount
- Bankruptcy
- Lack of capacity
- Fraud in the Execution
- Extreme Duress
Documents of Title
(UCC 7)
Different types of Documents of Title:
-
Warehouse reciepts
- Represents goods stored in a warehouse
- Warehouseman has a duty of reasonable care
-
To be valid, warehouse receipts must contain:
- Location of the warehouse
- Date receipt was issued
- Description of the goods
- Signature of the warehouseman
- A statement regarding to whom the goods will be delivered
-
Bill of Lading
- Represents goods that are being transported by a common carrier
- A carrier has strict liability (liable without fault)
Investment Securities
(UCC Article 8)
Investment securities such as stocks & bonds are negotiable instruments, & may be payable to bearer or be registered to a specific owner. No restrictions can apply to their transfer unless they are clearly stated on the face of the instument.
