Commercial Paper

Front 1

Negotiability

Back 1

determines the rights and obligations of the various parties involved with commercial paper

Front 2

Negotiable Instruments

Back 2

a signed writing that orders or promises payment of money

Note - two-party instrument in which maker promises to pay payee a sum of money

Note maker - makes the promise

Note Payee - to whom promise is made

Draft - 3 party instrument in which drawer orders drawee to pay a certain sum of money to the payee (like a check)

Draft Drawer - orders payment

Draft Drawee - pays money

Draft Payee - gets money

Front 3

Analysis

Back 3

What is the nature of the instrument (is it negotiable and has it been negotiated?)

Who is the plaintiff, and what are his rights (is P a holder in due course)?

Who is the D and what is the nature of D's liability?

What is D's defense (is the defense that is raised one that is cut off)?

Front 4

Cashier's check and Traveler's check

Back 4

Cashier's Check - craft on which the drawer and drawee are the same bank or branches of the same bank

Traveler's check - instrument that is payable on demand, drawn on or payable at or through a bank, and designated by the term "traveler's check" or substantially similar terms

Front 5

Requirements for Negotiable Instruments - Signed Writing

Back 5

Signed Writing - signature can be manual, mechanical, use any name, mark, or symbol. Writing name of a person without authority is a forgery, but DOES constitute signature of the forger

Front 6

Requirements for Negotiable Instruments - Must contain unconditional promise or order

Back 6

The instrument must be payable in ALL events!

It's conditional if instrument states that it 1) contains an express condition to payment 2) states that it is subject to or governed by another writing, or 3) states that rights or obligations with respect to it are stated in another writing
- this is NOT negotiable -

BUT reference to another writing that states rights with respect to collateral, prepayment, or acceleration can still be negotiable

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RNI - Must contain no undertaking or instruction given by the maker/drawer

Back 7

Must state no undertaking or instruction ordering him to do anything except pay money (no I will pay $1000 and mow your lawn)

Exceptions: undertaking or power to maintain/protect collateral is okay!
Authorization/power to confess judgment is okay
A promise/provision waiving benefit of any law intended for obligor's protection is okay

Front 8

RNI - Fixed amount of money

Back 8

Instrument must be to pay a fixed amount of money with or without interest or other charges!
- no interest unless instrument specifies otherwise (fixed or variable okay)

Must be payable in money and only money (medium of exchange adopted by a government as part of its currency) - if you agree to pay in goods/services, even as an alternative option, the instrument is NON NEGOTIABLE

Front 9

RNI - Payable to order or bearer at the time issued or first comes into possession of holder

Back 9

Instrument is payable to bearer IF any of these apply:
1) instrument states it is payable to bearer or order of bearer or otherwise indicates that the person in possession of the instrument is entitled to payment
2) instrument does not state a payee OR
3) instrument states it is payable to cash or otherwise indicates it is not payable to an identified person

Payable to order IF it's payable to the order of an identified person (needs to specify both person AND order)

If instrument contains both order and bearer language, bearer language controls!

Multiple Payees - can make it payable to the people alternatively (me OR you - negotiable by any or all in possession); jointly (AND - payable to all and can be negotiated only by all). If it's ambiguous, pick alternative over jointly!

Front 10

RNI - On Demand or at a definite time

Back 10

Instrument must be payable on demand: must state that it's payable on demand, or on sight, or does not specify any time for payment

Definite time - has a fixed date/s - or at end of definite period of time, or readily ascertainable at time of issue, even if subject to prepayment (you can get paid at this date or earlier), acceleration, extension at holder's option (holder gets more time), or extension to a further definite time at the maker's option or automatically upon or after a specified act or event
(BUT if the time of this event is uncertain (like death) even if it's certain to happen, that's nonnegotiable!)

Front 11

Negotiation def; Bearer Instruments and Order Instruments

Back 11

Voluntary or involuntary transfer of possession of an instrument by a person other than the issuer to a person who thereby becomes its holder

Bearer instrument: if an intrustment is payable to bearer, it may be negotiated by delivery alone (check made out to "cash" is negotiated by handing check to another person)

Order Instrument: If an instrument is payable to an identified person (order instrument!), negotiation requires transfer of possession of the instrument and indorsement by the holder

Front 12

Transfer

Back 12

An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving the right to enforce the instrument to the person receiving delivery

Transfer alone = negotiation of bearer instrument, BUT negotiation of an order instrument requires proper indorsement too

If transferor purports to transfer less than entire instrument, negotiation of the instrument does NOT occur! transferee obtains only rights of partial assignee

Front 13

Indorsement definition; Blank and Special Indorsements

Back 13

Indorsement - signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument to negotiate the instrument, restrict payment of the instrument, or incur the indorser's liability on the instrument

Transferor of instrument controls method by which transferee can further negotiate instrument by his indorsement:

Blank indorsement - signature of endorser on back of paper - becomes bearer paper - negotiated by delivery alone

Special indorsement - names transferee and directs payment to him - instrument becomes order paper and the transferee's indorsement is necessary for further negotiation

Front 14

Anomalous Indorsements

Back 14

Indorsement made by person other than a holder- extraneous to chain of title and has no effect on the manner in which the instrument may be negotiated

BUT such indorsement may create liability on the instrument for the indorser

Front 15

Restrictive Indorsements

Back 15

Indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument will NOT prevent further transfer or negotiation of the instrument

You can say "for deposit" or "for collection" - the person/bank who purchases the instrument or takes it for collection must apply it consistently with the indorsement or else they will be deemed to have converted it - payor or intermediary banks may disregard

Front 16

Partial Indorsements

Back 16

attempts to convey less than entire instrument - NOT effective, negotiation will not occur

When name stated on instrument is different from name of holder, he may indorse the instrument either as his name is stated on the instrument or as it really is - signature in both names may be required by person paying or taking the instrument for value or collection

Front 17

Rescission for Illegality or Incapacity

Back 17

If minor/incapacitated person negotiates and instrument, negiotaition is effective to transfer the instrument, even though the person may not undertake the contracutal obligations of an indorser or be responsible for breach of warranty

Same thing if it's a corporation exceeding its powers, obtained by fraud, duress, or mistake; part of an illegal transaction; or made in breach of duty

She can rescind this until it's been passed on in the market to a subsequent pruchaser

Front 18

Presentment

Back 18

to obtain payment of a negotiable instrument, demand is generally made upon a person expected to pay (maker of note OR drawee of draft)

Not a Negotiation - party paying the instrument upon presentment, such as a bank, does NOT take by negotiation and cannot become a holder in due course!!

This is the final step in check-collection process

Front 19

Holder and Forged Indorsement (Exceptions: Fictitious Payee or Impostor)

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Holder: a person who is in possession of an instrument IF the instrument is payable to bearer, OR to an identified person and identified person is in possession

For possessor of instrument to be a holder, all necessary indorsements (those of all parties who took the paper as order paper) must be valid

Forged Indorsement - a forged necessary indorsement prevents the possessor of an instrument from being a holder - forged indorsement by someone is NOT necessary will not prevent later possessors from being holders

Fictitious Payee - if person identified as a payee is not intended to have any interest in the instrument, or is a fictitious person, an indorsement of the instrument by any person in the name of the payee IS effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection - most often applied when employee attempts to defraud his employer by drawing checks supposedly for purpose of paying employer's bills, while actually cashing checks himself

Impostor - when person impersonates the payee and induces the drawer or maker to issue an instrument to the impostor payable to name of impersonated person, an indorsement by anyone in the name of the payee IS effective in favor of person who, in good faith, pays instrument or takes it for value or collection

Duty of Ordinary Care - person taking the instrument despite a fictitious payee or impostor, who fails to exercise ordinary care in paying or taking the instrument, where that negligence substantially contributes to loss resulting from payment, is liable to the extent of his negligence!

Front 20

Holder in Due Course

Back 20

Value, good faith, without notice overdue or dishonored, without notice of unauthorized isgnature or alteration, without notice of defense or claim

Front 21

Holder in Due course definition

Back 21

holder who is a good-faith purchaser - holder of negotiable instrument that does not bear apparent evidence of forgery, alteration, or other irregularity that calls its authenticity into question, and who takes the instrument for VALUE, in GOOD FAITH, WITHOUT NOTICE OVERDUE OR DISHONORED, WITHOUT NOTICE OF UNAUTHORIZED SIGNATURE OR ALTERATION, and WITHOUT NOTICE OF DEFENSE OR CLAIM

Front 22

Value

Back 22

value is given for instrument when instrument is issued or transferred:

when they actually pay - promise is not enough!

as payment of, or as security for, an existing claim against any person, whether or not the claim is due

in exchange for a negotiable instrument

in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument

Unexecuted promises do NOT constitute value!

Negotiation of instrument as a gift gives no value

Front 23

Good Faith and Close Connectedness

Back 23

honesty in fact and the observance of reasonable commercial standard of fair dealing

Holder must take without actual knowledge or reason to know of some defect

Close Connectedness Doctrine - transferee does not take an isntrument in good faith when the transferee is so closely connected with payee-transferor that the transferee may be charged with knowledge of infirmity in the underlying transaction

Front 24

Take without Notice of...

Back 24

that instrument is overdue or has been dishonored or that there is uncured default of payment on another instrument in the same series

Instrument on its face has a due date in the past? you have notice

Demand instrument - you take one day or more after demand has been made or more than a 90 days if it's a check, or if not a check, reasonable amount of time

Unauthorized signature/alteration - you have notice of these if instrument bears such apparent evidence of forgery or alteration, or is otherwise so irregular or incomplete as to call into question its authenticity

Any defense against or claim to it on the part of any person - Claim to an instrument is a claim of property or possessory rights in the instrument or its proceeds, including claim to rescind the negotiation and to recover instrument or proceeds

Knowing about a discharge of a party doesn't mean you have notice

Front 25

Test for Notice

Back 25

A person has notice of a fact when: he has actual knowledge of it; he has received a notice or notification of it; or based on all facts and circumstances known to him at the time in question, he has reason to know it exists

In order to be effective, notice MUST be received at a time and in a manner that gives reasonable opportunity to act

Front 26

No Holder in Due Course Status

Back 26

even if you meet the requirements to be a holder in due course, except to the extent a transferor or predecessor has rights as a holder in due course, a person does NOT acquire rights of a holder in due course of an instrument taken:

by legal process or by purchase in an execution, bankruptcy, or creditor's sale;

by purchase as part of a bulk transaction not in the transferor's ordinary course of business OR

as successor in interest to estate or other org

Front 27

Umbrella or Shelter Doctrine

Back 27

where a person fails to meet one of the requirements for being a holder in due course (e.g. transferee takes after maturity, with notice of defense, or as a donee), that person may still have rights of a holder in due course DERIVATIVELY

transferee of an instrument obtains any right of the transferor to enforce it, including any right as a holder in due course

BUT a transferee who engaged in fraud or illegality affecting the instrument CANNOT obtain rights of a holder in due course from his transferor

Front 28

Non-Holders in Possession and Person Not in possession

Back 28

Non-Holders in Possession - have right to enforce if it's a person who acquired rights of holder by subrogation or through transfer (shelter doctrine!)

A person not in possession has the right to enforce IF (lost/stolen instrument):

person was in possession and entitled to enforce when loss of possession occurred;

loss not from voluntary transfer or lawful seizure; AND

person cannot reasonably obtain possession of the instrument (destroyed, lost, in possession of unknown person)

Lost, Destroyed, Stolen Cashier's, Teller's, or Certified Check: claimant may assert claim to check by communicating with obligated bank by describing check with reasonable certainty and requesting payment of amount of check

Front 29

Bank Deposits

Back 29

Bank has given value (in order to be a holder in due course) if it has a security interest in an item

First-in, first-out rule - credits first given are first withdrawn

Front 30

Liability on Commercial Paper

Back 30

promisors are liable on the promises they make

these promises and liabilities are often implied in law from the way in which the promisor signs the instrument - maker of note, drawer of draft, acceptor of draft, etc.

Front 31

Signature and liability of principal

Back 31

you're not liable on something unless you sign it or your agent signed it in such a manner as to bind you

Also, if your negligence substantially contributed to the unauthorized signature by your agent,you may be estopped from raising the unauthorized signature as a defense against a holder in due course or person who pays the instrument in good faith

Front 32

Liability of representative

Back 32

if a rep signs her name or authorized signature of represented person, then represented person is bound just like if he signed it himself

Careless rep rule - you can be liable if you sign your own name unless something clearly identifies that you're an agent for an identified person - needs to be unambiguous!(unless signing a check payable from account of represented person identified on check)

Front 33

Unauthorized Signatures

Back 33

If you sign someone's name without authority, does not operate as signature of name signed, but of the person who signed it as long as the person who pays the instrument or takes it for value acts in good faith!

Front 34

Liability of Maker of Note

Back 34

primary liability - there are no conditions on liability

Where note payable on a particular date, payee's cause of action does not accrue until day AFTER due date

Where words/numbers are added without authority, alteration has occurred (a defense)

Front 35

Liability of Drawer of Draft

Back 35

Secondary liability - drawer becomes liable only if there has been presentment to drawee, dishonor by drawee AND notice of dishonor to drawer

Front 36

Liability of Drawee or Acceptor of Draft (Bank)

Back 36

initially, drawee on draft (usually the bank) has NO liability to payee or subsequent holder - only becomes liable when they choose to accept (signed promise by drawee to pay instrument when it becomes due and payment is demanded) or certify the check

Front 37

Bank's Liability (Death/Incompetence, Stop Payment Order)

Back 37

Neither death nor incompetence of customer revokes authority to accept, pay, collect, or account until: bank knows about death/incompetence and has reasonable opportunity to act on it

Even with knowledge, bank may, for 10 days after death, pay or certify checks drawn on or before that date unless ordered to stop payment by person claiming an interest in the account

Stop-Payment Order - customer may stop payment of any item drawn on customer's account or close the account by order to bank describing item or account with reasonable certainty received at a time and in a manner than affords bank reasonable opportunity to act - effective for 6 months if in writing

Front 38

Stop Payment Order

Back 38

FILL IN

Front 39

Postdated Checks

Back 39

bank may charge against customer's account a check otherwise properly payable even though payment was made before date of check, UNLESS customer has given notice to bank of postdating describing check with reasonable certainty

Front 40

Transfer Warranties

Back 40

Transferor of negotiable instrument who receives consideration warrants to his immediate transferree that:
1) transferor entitled to enforce the instrument (no forgery or missing indorsements) 2) all signatures are authentic and authorized 3) instrument has not been altered 4) instrument is not subject to a defense or claim in recoupment of any party against the transferor 5) transferor has no knowledge of any insolvency proceeding commenced with respect to maker or acceptor or drawer of unaccepted draft

Transferor indorses? Warranties run to all subsequent holders who take in good faith. Doesn't indorse? Warranties only run to immediate transferee.

Front 41

Indorsers

Back 41

Secondarily liable if maker or bank doesn't pay on demand and indorser given notice of refusal to pay!

Will be discharged from his obligation UNLESS there is presentment, dishonor, and notice of dishonor

Can disclaim liability by saying this is a qualified endorsement (saying indorsement is made without recourse)

Front 42

Accommodation Parties

Back 42

party to an isntrument other than the accomodated party - party to an instrument for whose benefit the isntrument is issued for value (signs commercial paper that is issued for value simply to lend his credit to some other party to the instrument and who does not directly receive any value given)

Liable on instrument in the capacity in which he signs

NEVER liable to the party he accommodates!

If party signs instrument along with words indicating unambiguously that the party is guaranteeing COLLECTION rather than PAYMENT, signor obliged to pay amount due only if: execution of judgment against other party returned unsatisfied; other party is insolvent or in an insolvency proceedings; other party cannot be served with process OR otherwise apparent that payment cannot be obtained from either party

Front 43

Joint and Several Liability

Back 43

FILL IN

Front 44

Presentment

Back 44

demand made by or on behalf of a person entitled to enforce an instrument to the party who ought to pay the instrument:

on or after due date stated in instrument;

within a reasonable time after person to be charged becomes liable on instrument;

made at a place of payment of the instrument and at such place if the instrument is payable at a bank;

when instrument is presented, party to whom presentment made has right to demand that instrument be exhibited, id of party presenting and, if presentment made on behalf of another person, authorization to do so, and signed receipt on instrument or surrender of the instrument upon full payment - if these demands aren't met, no presentment!

Demand for payment effective when received (unless there's a 2:00pm cutoff - then next business day)

Front 45

When Presentment is Excused

Back 45

When presentment cannot be made with reasonable diligence

maker has repudiated or is dead or insolvent

Presentment not required by terms of instrument

Drawer or indorser has waived presentment (also a waiver of dishonor)

Drawer has instructed drawee not to pay

Front 46

Presentment Warranties

Back 46

warrantor is or was at time of transfer a person entitled to enforce draft (this is the only one you need for notes)

draft has not been altered and

he has no knowledge that the signature of the drawer is unauthorized (forged)

Front 47

Dishonor def and characteristics

Back 47

Dishonor occurs when proper presentment for payment is made and payment is refused! (but not if payment is refused because instrument lacks a necessary indorsement). We need to notify everyone

Checks, demand instruments other than checks, instruments payable at a definite time, notice of dishonor

Front 48

Overdrafts

Back 48

payor bank may intentionally or unintentionally pay an item for which customer has insufficient funds in his account - result is an overdraft for which the customer is obligated to reimburse the bank UNLESS customer neither signed the item nor benefited from proceeds of it

Front 49

Dishonor and Checks

Back 49

Checks - a check that is duly presented for payment to payor bank, other than for immediate payment over the counter (a deposit) is dishonored IF the payor bank - makes timely return of the check (check must be returned before bank has made final payment and before the midnight deadline (midnight on next banking day following the day on which instrument is received)

sends timely notice of dishonor or nonpayment (also before midnight deadline and final payment)

becomes accountable for amount of the check (bank does not pay/return item until after midnight deadline OR for non-depositary banks, receives item and retains it after midnight)

Front 50

Demand instruments other than checks

Back 50

A note payable on demand is dishonored if presentment is duly made to the maker and the note is not paid on the day of presentment

A draft payable on demand (check presented for immediate payment or demand draft other than a check) is dishonored if presentment is duly made to drawee and draft is not paid on day of presentment

Front 51

Instruments payable at a definite time (dishonor)

Back 51

Presentment for Payment - a note not payable on demand that IS payable at or through a bank is dishonored if presentment is duly made and the note is not paid on the day it becomes payable OR day of presentment, whichever is later

Note not payable on demand OR at a bank is dishonored if not paid on day it becomes payable

draft payable on date stated in draft dishonored if presentment for payment is duly made to drawee and payment is not made on day draft becomes payable OR day of presentment (whichever is later)

Presentment for Acceptance - draft payable on a date stated in draft is dishonored if presentment for acceptance is duly made before the day the draft becomes payable and draft is NOT accepted on day of presentment

Draft payable on elapse of period of time after sight or acceptance is dishonored if presentment for acceptance is duly made and draft not accepted on day of presentment

Front 52

Burdens of Proof for actions to enforce the instrument

Back 52

validity of signatures - don't litigate this unless specifically denied in pleadings

P entitled to enforce instrument - if P proves this THEN

Burden shifts to D to prove a defense or claim in recoupment

Holder-in-due-course status - P's trump card - doesn't have to worry about almost anything, but P has the burden of establishing he is one

Front 53

Adverse claims

Back 53

person taking an instrument is subject to claims of property or possessory rights in the instrument or its proceeds, including a claim to rescind the negotation and to recover the instrument or its proceeds (person wrongfully deprived of possession by thief might have claim against maker of instrument!)

holder in due course takes free from claims (if instrument is stolen while it is bearer paper, the rightful owner cannot recover it from holder in due course)

notice of claims in recoupment (claim of obligor against original payee of the instrument if the claim arose from the transaction that gave rise to instrument) prevents status as holder in due course (like a breach of warranty claim by a buyer against a seller!)

holder in due course is not subject to claims in recoupment against persons other than holder

Front 54

Conversion

Back 54

An instrument is converted if it is taken by transfer, other than negotiation, from a person not entitled to enforce the instrument, or if a bank makes or obtains payment with respect to instrument for person not entititled to enforce instrument or receive payment

Action may NOT be brought by - issuer/acceptor of instrument, or payee/indorsee who did not receive delivery directly or through an agent

Front 55

Defenses (real)

Back 55

Even if you're a holder in due course, you're subject to these defenses

Real Defenses:

infancy - are you a minor?

duress (gun to your head to make you sign a note - mere economic threat isn't a real defense)

lack of legal capacity,

illegality,

fraud in the factum (fraud that induced party to sign instrument with neither knowledge of or reasonable opportunity to learn of the instrument's character or its essential terms - didn't know it was a negotiable instrument!)

discharge in insolvency proceedings (bankruptcy)

other discharge of which holder has notice when he takes the instrument

Front 56

Personal Defenses

Back 56

Cannot be used against a holder in due course:

contract defenses (any defense available under a simple contract)

non-issuance (instrument lost before issued and someone found it)

failure of consideration (instrument issued without consideration to support a simple contract)

no title or lost or stolen instrument (P cannot trace his title back to the obligor, or obligor proves instrument is lost or stolen)

discharge

Front 57

Discharge

Back 57

party's obligation on a negotiable instrument may be discharged by:
act/agreement that would discharge obligation to pay under a simple contract; payment by or on behalf of party obliged to pay to a person entitled to enforce; by tender of instrument in satisfaction of a claim; by tender of payment if tender of payment is refused; by cancellation or renunciation; by impairment, extension, or modification; by reacquisition; by delay in presentment; by acceptance varying terms of a draft; by failure to give notice of dishonor; by acceptance of a draft by a bank; by alteration

Front 58

Alteration

Back 58

unauthorized change or addition to instrument modifying party's obligation as to amount payable or dates of payment or addition or deletion of a name, or unauthorized completion of incomplete instrument

if it's fraudulent? discharge (except to HDC and drawee)! Not fraudulent? No discharge, and instrument may be enforced even by non HDC

Holder in due course can enforce the original, and if an unauthorized completion has occurred, right of holder in due course are even greater 0 he can enforce it as completed (transfer warranties)

person whose negligence substantially contributed to alteration is precluded from raising alteration as a defense against person who pay instrument or takes it for value or collection in good faith

Front 59

Forgery

Back 59

did not sign? forger is liable

agent signed without authority? agent is liable

forger or agent becomes liable!

but if your negligence substantially contributed to unauthorized signature, you can't raise this defense against HDC

Front 60

Bank's Liability

Back 60

customer must aid bank by discovering his forged signature with reasonable promptness - not over one year! if you don't, you can't use this against the bank!

UNLESS forgery is so obvious that bank should have discovered it by use of ordinary care

there's a three year statute of limitations for unauthorized indorsements, though - can seek to have bank recredit account

Front 61

Statute of Limitations

Back 61

SOL is a valid defense to an action to enforce an instrument, INCLUDING an action brought by a HDC

SOL is three years for: actions on certified checks, teller's checks, cashier's checks, traveler's checks, unaccepted drafts, conversion of instrument, breach of warranty, or to enforce obligations, duties, or rights arising under Article 3

SOL is six years for: action to enforce note payable at a definite time, note payable on demand, certificates of deposit, and accepted drafts

Front 62

Defenses of Accommodation Parties (derivative defenses)

Back 62

Derivative Defenses: In an action to enforce the obligation of an accommodation party may assert against person entitled to enforce the instrument any defense or claim in recoupment that accommodated party could assert against such person, EXCEPT defenses of discharge in insolvency, infancy, and lack of legal capacity

Front 63

Defenses of Accommodation Parties (Suretyship Defenses)

Back 63

Suretyship Defenses - If the due date of an instrument is extended, the instrument modified, or the value of collateral is impaired by a person entitled to enforce the instrument and, as a result, an accommodation party suffers a loss with respect to its right of recourse against an accommodated party, the accommodation party's obligation is discharged to the extent of the loss