Requirements for Commercial Paper Flashcards
What are the two general types of commercial paper?
Notes
Drafts
What governs the law of commercial paper?
The UCC Article 3
What is a note?
Two party instrument
- Maker–person who signs or is identified in a note as the person undertaking to pay
- Payee–person to whom the note is payable
Calls for a party to pay money
What is a draft?
Three party instrument
- Drawer–the person who signs or is identified in a draft as the person ordering payment
- Drawee–the person ordered in a draft to make a payment
- Payee–the person to whom the draft is payable
NOTE: when the drawee** is a **bank**, and the draft is **payable** **on demand**, then it is a **check
NOTE: CD’s are also recognized as drafts
What core attribute does commercial paper possess?
Commercial paper is negotiable
- protects subsequent holders who give value, in good faith, with no notice of previous holders
NOTE: if a document is not negotiable, then it has the regular attributes of contract law**–**assignments
What are the requirements for a negotiable instrument?
Writing
Signed by the maker or drawer
Unconditional
Promise to pay or order to pay
A fixed amount
In money
No other undertaking or instruction
On deman or at a definite time
To the order or to the bearer
What constitutes a writing?
Some tangible medium
What constitutes a signature?
Any symbol executed or adopted by a party** with a **present intention to authenticate the writing.
NOTE: the key is what the party intended for the symbol
How is unconditionality evaluated?
On the face of the instrument
- must not be subject to another instrument
A promise or order will not be conditional simply because:
- refers to another writing for rights regarding collateral, prepayment, or acceleration
- limits payment to a particular source or fund
- requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (traveler’s checks)
What is allowed for the “fixed amount” element?
THe holder must be able to determine from the instrument** itself the **principal amount due
Examine only principal
- variable interest ok
- if interest is mentioned but not set, then judgment rate
What are the exceptions to “no other undertaking or instruction”?
Undertaking or power to give, maintain, or protect collateral to secure payment
Authorization or power to the holder to confess judgment or realize on or dispose of collateral
Waiver** of the benefit of **any law intended** for the **advantage or protection of the obligor
What is a definite time for commercial paper?
Post-dated check
- on demand unless notify and reasonably identify the check to the bank
Acceleration clauses are ok
- know a definite time beyond which the obligation will not run
Extension clauses permitted so long as
- the extension is to a further definite time stated in the instrument
Events certain to happen but uncertain to time are not permitted
NOTE: No date** specified is **on demand
What does the “to order or to bearer” requirement entail?
MAGIC WORDS
- must be “to order of” or “to bearer”
NOTE: a check need not contain words of negotiability
- e.g., check payable to “Pay John Doe” is fully negotiable
Can words affirming or disaffirming negotiability make an instrument negotiable or not?
A writing cannot be made negotiable** within Article 3 by **contract or conduct of the parties
Parties can avoid** neogitability by declaring on the instrument that the **instrument is “NOT NEGOTIABLE”
- EXCEPT** for **checks
Compare and contrast assignment and negotiation.
An asignee** has **no greater rights** than the **assignor has on the instrument
- basic contracts
- any defenses that could be raised against the payee could also be raised against the assignee
Negotiation** to a third party makes the third party a **holder.
- if in due course, then the holder takes free of most defenses that could have been raised against the payee
