UCC Article 3-Negotiable Instruments Flashcards
Business Law
What is a draft?
A commercial paper involving three parties- a drawer; a payee and a drawee
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated.
A negotiable time draft is not payable until the date designated for payment.
What is a trade acceptance?
Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
What is required to maintain the negotiability of a commercial paper?
Must be in writing
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Amount of money must be stated
Payable to order or bearer
What characteristics will cancel the negotiability of a commercial paper?
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
The promise to pay occurs after some action by another party or an event; it cancels negotiability
Cannot allow for an alternative such as payment or some other action by the maker
Note: a stated amount of payment plus a stated % of interest is OK
What is required to negotiate Order Paper?
Must have delivery and endorsement
If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
What are the major types of endorsements on commercial paper?
Blank -
Special - signs over check
Restrictive - Adds restrictions; doesnt stop further negotiation
Qualified - Payment not guaranteed; without recourse added to endorsement
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount.
For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
Define primary liability with respect to a contract.
First in line to pay on the note/draft
Maker of a Promissory Note has primary liability and must pay according to terms of the note
With a Check; no party has Primary Liability
Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay
Define secondary liability with respect to contract liability
Drawers are Secondarily Liable if Drawee fails to pay a Draft
Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed Without Recourse
Define contract liability.
Guarantees payment of a liability
When does warranty liability occur?
Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only
What five warranties occur with every commercial paper transfer?
Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate
What are the requirements for a holder to be a holder in due course?
Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrument
Giving a present value for the instrument (a future value doesnt count)
What are the personal defenses against a holder in due course (HDC) which will LOSE?
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)
Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Forgery Bankruptcy Maker not competent to Contract Fraud in the execution
List the types of drafts that can be used to pay money.
Sight Draft (on demand)
Time draft
Trade acceptance
List the two types of negotiable instruments
Orders to Pay (checks and drafts);
Promises to Pay (notes and CDs)
List some examples of nonnegotiable instruments
Letters of Credit;
Warehouse Receipts;
Bills of Lading;
Stocks and Bonds;
Contracts.True or False: A Warehouse Receipt or a Letter of Credit is considered a negotiable instrument
False
List the requirements of a negotiable instrument.
In writing;
Signed by Maker or Drawer;
Contain an unconditional promise or order to pay;
State a sum Certain in Money;
Be payable on demand or at a definite time;
Be payable to order or bearer (words of negotiability)
List the parties who draft negotiable instruments.
Drawers - for checks or drafts;
Makers - for notes and Certificates of Deposits
Is a bank a drawee or a drawer
Drawee
True or False: To be negotiable a draft doesn’t not have to have be payable to order or to bearer
False. Only checks can be blank
What negotiable instruments must be made payable to order or bearer in order to be payable?
Drafts, Promissory Notes, CDs
If an instrument does not name any payee, it is considered to be payable to bearer or order?
Bearer
True or False: If a person writes a post dated check and notifies the bank of such fact, the bank will be liable for cashing it before the posted date
True. The bank is not liable unless the drawer has given the bank prior notice of the postdating.
How would someone sign a a qualified endorsement?
“without recourse”, waives warranty
How would someone sign a restricted endorsement?
For deposit only
How would someone sign a special endorsement?
Pay to the order of:
