Commercial Paper

Front 1

What are the elements of negotiability?

Back 1

Whether an instrument is negotiable depnds on its form. To be negotiable, an instrument must be a written and signed:
1. Unconditional
2. Promise or order
3. To pay a fixed amount of money (w/ or w/out interest) That:
a. Is payable to order or bearer when issued or first in possession of a holder
b. Is payable on demand or at a definite time, and
c. States no unauthorized undertaking or instruction by the person promising or ordering payment.

Front 2

When is an instrument conditional (and not negotiable)?

Back 2

An instrument is conditional (and not negotiable) if: (i) it expressly state a condition for payment, or (ii) it states that the promise or order is subject to or governed by another writing. A promise or order is not conditional merely because it: (i) refers to another writing regarding collateral prepayment or acceleration (ii) Limits pmt to a particuclar source of fund, or (iii) requires a countersignature of a specimen signature

Front 3

What are the 3 circumstances article 3 specifically provides that a promise or order will not be deemed "conditional"?

Back 3

Art. 3 proivdes that a promise or order will not be deemed conditional merely because it:
1. Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration.
2. Limits payment to a particular source or fund.
3. requires as a condition to payment a countersignatue by a person whose specimen signature appears on hte promise or order.

Front 4

What is the exception to the "to order or to bearer" language required for a negotiable instrument?

Back 4

A check need not contain words of negotiability. A check payable "Pay John Doe" is fully negotiable, and is covered by art. 3, and a transferee of it can become a holder in due course.

Front 5

How is order paper negotiated?

Back 5

Order paper is negotiated by the transfer of possession plus endorsement by the holder (the identified person to whom the instrument is payable, or to whom the instrument is properly endorsed) A check is order paper.

Front 6

How is bearer paper negotiated?

Back 6

Bearer paper may be negotiated by transfer of possession alone.

Front 7

What are the types of endorsement?

Back 7

1. Special endorsement -- Specifies the person to whom the instrument is payable.
2. Blank endorsement: Does not specify the person to whom the instrument is payable; usually just a signature.

Front 8

What kinds of endorsements create what type of paper?

Back 8

special endorsement -- order paper

Blank endorsement -- bearer paper.
** remember, bearer paper can be negotiated by a transfer of possession alone, and that this transfer can be voluntary or involuntary.

Front 9

What is the rule for order paper and forgery?

Back 9

When order paper contains a forged indorsement, none of the parties from the forger on are holders-- none have good title-- none are entitled to the money. They have converted the check, and the drawee cannot properly pay any one of them. The drawee can only pay a holder--someone w/ good title to the check.

Front 10

What is the effect of qualifying an endorsement with "without recourse"?

Back 10

This negates contractual liability.

Front 11

What is the special rule for order paper that is not endorsed?

Back 11

Ordinarily, order paper must be transferred and endorsed in order to make the transferee a "holder." But a depositary bank (a bank in which an item is first deposited) that takes an unendorsed instrument for collection becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not endorsed the instrument.

Front 12

What is a holder in due course?

Back 12

1. A holder (person in possession of bearer paper, or in possession of order paper that has been issued or properly indorsed to him.
2. Who gives value - executed consideration
3. In good faith -- honest in fact and the observance of reasonable commercial standards of fair dealing.
4. without notice that:
a. The instrument is so irregular or incomplete as to call into question its authenticity
b. The instrument is overdue/dishonored
c. The insturument contains an unauthorized signature or has been altered;
d. There is a claim ot the instrument
e. Any party has a defense or claim in recoupment on the instrument.

Front 13

What is the close-connectedness doctrine?

Back 13

The more that the holder knows about the underlying transaction, and particularly when it controls or bcomes involved in it, the less likely it is a good faith purchaser w/out notice.

Front 14

What is the rule for "notice of claim" and fiduciaries?

Back 14

IF the holder has knowledge that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary's own debt, or in any transaction for the fiduciary's own benefit or has otherwise breached his duty, the holder has notice of a claim, and is not a HDC

Front 15

What is the "shelter rule?"

Back 15

Under the "shelter rule", Where the transferor was a HDC, the transferee of an instrument takes "shelter" in the rights of the transferor.

Front 16

What are the "real defenses" that can be raised against a HDC?

Back 16

While an HDC takes free of personal defenses and claims, she takes subject to "real defenses", as follow:
1. infancy
2. incapacity, duress, illegaility, as renders the obligation of the party a nullity
3. misrepresentaiton (Fraud in the factum) -- misrepresentation a has induced the party to sign the instrument w/ neither knowledge nor reasonable opportunity ot obtain knowledge of its character or its essential terms
d. discharge in insolvency proceedings
e. any other discharge of which the holder has notice when he takes the instrument.

Front 17

What is someone pays on an instrument, but the instrument is negotiated to a HDC?

Back 17

Discharge by payment is a personal defense, so it does not apply to a HDC

Front 18

What happens when an instrument offered and accepted in satisfaction of an underlying obligation is dishonored?

Back 18

Generally, once an instrument is offered and accepted in satsifaction of an underlying obligation, the obligation merges with the instrument, and the underlying obligation is suspended. Payment of the instrument discharges the instrument and the underlying obligation. IF the instrument is dishonored, the party issuing the instrument is liable on the instrument and on the underlying obligation, but the payee may only recover once. A certfied, teller's, or cashier's check are instruments that discharge the underlying obligation, but a right of recourse on the instrument against the party is preserved.

Front 19

What is a maker's K liability (maker = person who promises to pay on a note)?

Back 19

THe maker is obligated to pay the instrument according to its terms at the time it was issued. If there is more than 1 maker, the makers are jointly and severally liable.

Front 20

What is an endorser's contract liability?

Back 20

An endorser is obligated to pay according to the terms of the instrument at the time of the endorsement. Those signing later in time can get complete reimbursement from those signing prior in time. However, where the parties have made an "anomalous" endorsement, the endorsers are jointly and severally liable, also when there are joint payees endorsing the instrument (instrument payable to H AND W, both must endorse, and are both J and S liable.)

Front 21

What is the process for endorser liability?

Back 21

An endorser is "secondarily liable. An endorser is liable only after the instrument has been presented to the maker (if a note) or the drawee (if a check), that party has dishonored the instrument , and a notice of dishonor has been given to the endorser, w/in 30 days following the day on which the dishonor occurs (unless an exception applies). If presentment and dishhonor are either not made or are delayed beyond the time when due, an endorser is excused from K'al liablity on the instrument.

Front 22

Is presentment and notice of dishonor waivable in a note?

Back 22

Most promissory notes contain a clause providing that all parties to the instrument waive presentment and notice of dishonor. Such waiver is permissible.

Front 23

When may presentment and notice of dishonor be delayed or entirely excused?

Back 23

Presentment will be excused where the maker has repudiated the obligation or is dead or insolvent, or cannot be found with reasoanble diligence, or the drawer has instructed the drawee not pay; delay in giving notice of dishoonor is excused if the delay was caused by circumstances beyond the control of the person giving notice, and the party exercised reasonable diligence after the cause of the delay ceased to exist.

Front 24

What is a drawer's (check writer) contractual liability?

Back 24

The drawer is obligated to pay the draft according to its terms when the drawer signed the instrument. LIke the indorser, a drawer is "secondarily" liable. The drawer is liable after presentment and dishonor. WRT the liability of a drawer, a check must be presented to the drawee for pmt, or be given to a depositary bank for collection w/in 30 days after the date of the instrument. BUT NOTE: unlike the endorser, a drawer is excused from K'al liability on the instrument due to delay in presentment only in the unlikely event that the drawee bank has become insolvent during the delay and there is no insurance to cover the loss. A drawer generally is not entitled to notice of dishoner; a drawer will or should know of the dishonor on her own b/c of her relationship w/ the drawee.

Front 25

What is a drawee's (bank) K liability?

Back 25

Generally not liable, unless a certified check.

Front 26

What is an accomodation party's contractual liability?

Back 26

An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it. The accommodation party is liable in the capacity in which he signed. (co-signor)

Front 27

When can an agent with aauthority not be held liable for signing her name to a principal's check?

Back 27

An agent with authority who signs her name to a principal's check cannot be held liable on the check if it is drawn on the principal's account and indicates the identity of the principal. It does not matter whether the agent indicates her representative capacity.

Front 28

What is the "properly payable" rule?

Back 28

A bank may pay out the customer's money only if it follows the customer's orders exactly. IF it does not do so, it must recredit the account. Examples of not properly payable instruments (checks):
a. Forged Drawer's signature
b. forged/missing endorsements
c. material alteration of check (see page 23 of the lecture handout)

Front 29

What happens when a customer/drawer tenders a check with the "amount" blank for payment?

Back 29

The Drawer is liable for the amount filled in the blank amount slot.

Front 30

When/ what happens with a stale check?

Back 30

A check is stale after 6 months. The bank is not obligated to pay, but it may, as long as the payment is made in good faith."

Front 31

To what extent is a bank liable for wrongful dishonor?

Back 31

A bank is liable to its customer for actual proven damages caused by the wrongful dishonor of an item. May include damages for arrest or prosecution or other consequential damages.

Front 32

What is the rule for post-dated checks?

Back 32

A post-dated check paid to payee too early is not properly payable if the customer gives bank notice of post-dated check, decribing the check with reasonable certainty

Front 33

What is a customer's right to stop payment?

Back 33

1. The stop payment order must describe the item "with reasonable certainty" a reasaonbly prudent banker with that information should be albe to find the check.
2. The stop payment order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it.
3. The burden of establishing the fact and amount of loss resulting from the payment over a valid stop payment order is on the customer.

Front 34

What is the "presentment warranty"?

Back 34

The party presenting a check for payment to the drawee bank and each of the earlier transferors of the check warrants to the drawee bank that they are "a person entitled to enforce the draft" If this is not the case (due to a forged endorsement), the drawee bank can recover the money it paid to the party presenting the check for payment, from any of the transferors.

Front 35

What is the transfer warranty, and how does it work?

Back 35

Each party that transfers an instrument and receives consideration warrants that they are "a person entitled to enforce the instrument" and that "all signatures on the instrument are authentic and genuine." The depository bank can recover for breach of the transfer warranty. The drawee bank does not receive transfer warranties because the instrument is presented to the drawee bank for payment, not transferred to it.

Front 36

How may a forgery be ratified?

Back 36

Ratification occurs when a party, with full knowledge of the forgery (or alteration) accepts the benefits thereof or activley assents to the wrongful activity.