REG - Commercial Paper Flashcards
What happens in the case where a thief A steals a bearer negotiable instrument from B’s office and negotiated it to someone else C?
A thief can pass good title of a negotiable bearer instrument to a holder in due course. C is in good faith and did not have any notice that any person had an adverse claim against it. C is a holder in due course and will prevail in legal action.
A 20% discount by itself is not sufficiently excessive to prevent the purchaser from qualifying as a holder in due course.
A gave a check to B for a debt owed. B negotiated the check by blank endorsement to C who deposited but the bank refused due to NSF. A is insolvent. What happens?
When B negotiated the check with an unqualified endorsement, B extended contractual liability. Under the concept of contractual liability, the endorser guarantees pmt of the instrument if the appropriate party for pmt dishonours the instrument. Consequently, if there was proper presentment and notice given, C may recover from B when the bank dishonored the check.
What happens if A, an employee of B steals a payroll check and fills it in with the amount which was in excess of $300. A cashed it at C. C took it in good faith. B’s bank paid the instrument. B is demanding that the bank credit its account for the $300 or that it be paid by C.
C has no liability for the return of the $300 as C is a holder in due course, and took the instrument free of personal defenses (unauthorized completion of an incomplete instrument, lack of delivery) and may enforce it as completed.
B’s bank which pays an instrument completed in an unauthorized manner may charge the drawer’s account for the face value of the instrument, except where the bank knows that the completion was improper.
B will bear the loss regardless of their negligence. The loss should fall upon the party who issued the incomplete instrument and made the unauthorized completion possible.
What are the requirements needed for an instrument to be a negotiable instrument?
It is a two party instrument containing an unconditional promise to pay a stated sum and consequently, it is a negotiable promissory note. It is a bearer note because it is payable to the order of cash.
A negotiable instrument is negotiable immediately after it has been issued.
The negotiable aspect of an instrument is not affected by a provision on the face of the instrument that states security is given for the instrument.
Two party instrument is a note, draft is three party.
What is a stop payment order given by a drawer of a check to the drawee bank?
Stop payment orders may be oral and are valid fro 14 days. Written stop pmt orders are valid for 6 months and are renewable.
The bank is liable only if its failure ultimately causes its customer a loss. If the drawer has no valid defense to refuse pmt, the drawer has suffered no loss. The bank must also be given a reasonable time to act on the stop pmt order.
What will make a negotiable promissory note nonnegotiable?
A negotiable instrument must among other requirements contain an unconditional promise or order to pay a fixed amount in money. If the maker has the option of delivering goods rather than paying money, this would make the note nonnegotiable.
If the maker is obligated to pay a prepmt penalty of 10% or collection fees, the note is still considered to have a fixed amount and is negotiable.
What is negotiation? How do you negotiate bearer and order paper?
Negotiation is the transfer of an instrument by the proper means so that the transferee becomes a holder. Bearer paper may be negotiated by mere delivery of the instrument.
Order paper on the other hand needs to be delivered and endorsed to be negotiated. When order is transferred without endorsement, the transferee has a specifically enforceable right to obtain the transferor’s unqualified endorsement.
Who has primary or secondary liability on an instrument?
Issuer of a cashier’s check has primary liability for the check.
The maker of a note has primary liability for the note.
The drawer of a draft has secondary liability on the draft.
What is a special endorsement?
A special endorsement specifies the person to whom or to whose order it makes the instrument payable.
If the last endorsement on a negotiable instrument is a special instrument, the instrument is order paper.
What is bearer paper?
A check endorsed in blank is bearer paper. A check made payable to the order of cash is bearer paper.
Who is liable for a certified check?
Certification of a check constitutes acceptance, therefore the bank becomes primarily liable as an acceptor and engages that it will pay the instrument according to its tenor at the time of its acceptance.
The bank is not liable until acceptance. No person is liable on an instrument unless his signature appears on it.
The bank has no obligation to certify a check.
A issues a note payable to B in pmt for contracted services that B was to perform. B endorsed the note pay to bearer and delivered it to C for a debt owed to C. C presented the note for pmt to A. Does A have to pay C?
Yes as C is a holder in due course as note can be transferred to C.
Whether the note is bearer or order paper has no bearing on A’s liability in this case.
What happens when there is an ambiguity on the amount of a negotiable instrument? Ex: when the amount payable has three hundred in words and $1300 in figures.
The words control over the figures so the amount legally due is from the words.
It is not whether it is a lesser amount.
Ambiguity does not destroy negotiability.
What are the requirements to be a negotiable instrument? Ex: note was payable within 10 days of when painting is sold
1 - be written
2- be signed by the maker or drawer
3- contain an unconditional promise to pay
4 - state a fixed amount of money
5- be payable on demand or at a definite time
6- be payable to order or to bearer
If the note was payable within 10 days of when painting is sold, it is not negotiable as it is not a definite time.
What are personal vs real defenses? Examples
A holder in due course takes an instrument free of personal defenses but is subject to real defenses.
Personal defenses include nonperformance of a condition precedent, fraudulent misrepresentation, breach of a contractual obligation, unauthorized completion of an incomplete instrument.
Real defenses include bankruptcy, minor’s ability to disaffirm a contract, forgery of a maker/drawer’s signature. Real defenses can be successfully asserted against a holder in due course, thereby destroying the holder’s right to collect on the instrument.
