REG 7

Question 1

To be negotiable, the instrument must meet ALL of the following:

Answer 1

“Front only” determines whether its negotiable, nothing on the back can create or destroy negotiability:

1) be in writing
2) be signed by the maker(note) or drawer (draft)
3) contain an unconditional promise(note) or order (draft) to pay
4) be for a fixed amount of money only
5) be payable on demand or at a definite time
6) be payable to order or to bearer, with the exception of checks (automatically considered negotiable, checks are payable on demand and drawee must be a bank)
7) contain no additional undertaking/instruction not authorized by the UCC

Memorize first 6 items

Question 2

Become a holder in due course (HDC)

Answer 2

A holder will take commercial paper in due course to the extent that he takes the paper (HDC has superior rights overall):

(i) for value;
(ii) in good faith; and
(iii) without notice of any defenses to or claims of ownership on the instrument
(iv) negotiable (front only)

Question 3

Real defenses (to constitute maker/drawer does not have to pay anymore)

(for both HDC and non-HDC transferees)

“FAIDS” mnemonic

Answer 3

F-1) Fraud in the execution
2)Forgery

A-1) Adjudicated insanity
2) material Alteration

I-1) Infancy
2) Illegality

D-1) Duress
2) Discharge in bankruptcy

S-1) Suretyship defenses
2) Statute of limitations

Question 4

Notes-Promises to pay

vs.

Drafts

Answer 4

Notes: two-party commercial paper. Simply a promise by one party (the “maker”) to pay money to another party (the “payee” or “bearer”) (i.e. certificates of deposit-bank promissory note)

Drafts: Order for a third party to pay. Generally, three-party paper. It is an order by one person (the drawer) to another person (the drawee) demanding that the drawee pay money to a third person (the payee).

(i) Checks: drawee must be a bank and payable on demand
(ii) Trade acceptances

Question 5

Last endorsement (on back) controls Order vs. Bearer

Answer 5

Each endorsement has 3 qualities:
(i) special or blank: special endorsement names a specific party and becomes order paper; if blank, thus blank endorsement does not name a new endorsee and becomes bearer paper.

(ii) restrictive or unrestrictive: any language as “pay Paula Payee only if she mowed the lawn” creates a “restrictive endorsement” however, it generally has no effect on negotiability
(iii) qualified or unqualified: adding words like “without recourse” is a qualified endorsement, means there is no guarantee of payment by the endorser (no contract liability), however, warranty liability still exists

Question 6

Liability of the Parties

Answer 6

Notes/CD:
First, Maker is liable
Second, Endorsers are liable

Draft/check:
First, drawee if they accept (i.e. bank)
Second, drawer and endorsers

Question 7

For a security interest to attach

Answer 7

(i) there must be an agreement to create the security interest evidenced by either an authenticated security agreement or the creditor’s taking possession or control of the collateral
(ii) the creditor must give value,
(iii) the debtor must have rights in the collateral

Question 8

Chapters

Answer 8

Chapter 7 Liquidation: provided for liquidation of debtor’s estate. Debtor is an individual or business. A trustee is appointed.

Chapter 11: debt reorganization, trustee not required (usually used by businesses)

Chapter 13: adjustment of debts of individuals with regular income. A trustee is appointed. (individual)

Question 9

Chapter 7

Answer 9

-If a person has fewer than 12 creditors, any one or more of them with unsecured and undisputed claims that aggregate at least $15,325 more than the value of any collateral securing the claim may file the petition.