Commercial Paper

Front 1

COMMERCIAL PAPER
(Types)

Back 1

1. Notes
2. Checks

Front 2

COMMERCIAL PAPER
(Note)

Back 2

1. A note is a two-party instrument
2. "Maker": the person who signs or is identified in a note as the person undertaking to pay
3. "Payee": the person to whom the note is payable.

"I., Max Maker, promised to pay to the order of Peter Payee the sum of $10,000 due on demand.
Signed: Max Maker"

Front 3

COMMERCIAL PAPER
(Check)

Back 3

1. A check is a three party instrument
2. "Drawer": the person who signs or is identified in the check as the person ordering payment.
3. "Drawee" the person ordered any check to make payment.
4. "Payee": the person to whom the check is payable

Front 4

COMMERCIAL PAPER
(Bank Check)

Back 4

a cashier's check is a check with respect to which the drawer and drawee are the same bank. A teller's check is a check where the drawer is a bank and a different bank is the drawee. A certified check is one drawn by the drawee bank's customer and "accepted" by the drawee bank (typically by stamping/signing it "certified")

Front 5

COMMERCIAL PAPER
(Negotiability)

Back 5

MOST TESTED AREA:
if a particular piece of commercial paper is a negotiable instrument, then article 3 governance; and the person holding the instrument may be able to claim a special status: "holder in due course."

Front 6

COMMERCIAL PAPER
(HYPOTHETICAL)
"Used throughout These Cards"

Back 6

Max Maker buy a car from Peter Payee for $10,000. Article 2 of the UCC and contract law governs the underlying transaction in goods.
Max Pays Peter by issuing Peter a negotiable "promissory note" for $10,000 payable upon demand. This commercial paper transaction is governed by Article 3 of the UCC. Max is "liable on the instrument" (the note). Peter is the "holder" of the note and is "entitled to enforce the instrument" against Max for the $10,000 would do (up on demand).

Front 7

"Holder in Due Course"

Back 7

HDC: takes the note free of any defense to payment. In other words, the HDC strips the defendant and the defendant must pay on the note.

Front 8

ARTICLE 3's REQUIREMENTS FOR NEGOTIABLE INSTRUMENT

Back 8

1. Writing
2. Signed By Maker (note) or Drawer (check)
3. Promise to Pay (note) or Order To Pay (check)
4. Unconditional
5. Fixed Amount
6. Money
7. No Other Undertaking
8. Payable On Demand or at the Definite Time
9. Payable To Order or To Bearer

Front 9

"WRITING"

Back 9

there is no such thing as an oral negotiable instrument. It must be something tangible. Almost always a piece of paper, but need not be (e.g. a T-shirt)

Front 10

"Signed"

Back 10

By Maker (if no) or Drawer (if check): "sign" includes "any symbol executed or adopted by a party with the present intention to authenticate a writing." It can be:
printed, stamped, written
initials or thumbprint
a trade name or assumed name
appear in the body of the instrument.
KEY: whether the party intended for that simple to operate as her signature.

Front 11

"Promise To Pay"

Back 11

a note must have a promise by the maker to pay money. "I promise to pay John $500"
An IOU or other acknowledgment of the debt is not a promise to pay. Not negotiable.
"I wish you would pay" is not in order to pay. Not negotiable.

Front 12

"Unconditional"

Back 12

1. A note must contain an unconditional promise to pay money.
2. A check must contain the unconditional order pay money.

Conditional promises or orders to pay are okay under contract law, but they destroyed negotiability.

Rule: a mere reference to the negotiable instruments to the underlying contract accompanying the instrument does not render the instrument's promised to pay conditional.

Front 13

"Unconditional"
Words that are Not Negotiable

Back 13

"subject to" or "governed by" the terms of another agreement.

A note where Maker "promises to pay $200,000 to the order of Payee subject to the terms of the mortgage agreement." This is not negotiable.
EXCEPTION: an instrument that says that rights concerning collateral, prepayment, or acceleration are stated in another writing (e.g., a security agreement) is negotiable.

FINAL NOTE: a writing is negotiable even though it limits payment to a particular source or funds (e.g., "I promise to pay $5000 of the proceeds from the sale of my house").

Front 14

"A Fixed Amount" of money.

Back 14

When the instrument is payable, the holder must be able to determine from the instrument itself the principal amount due. Requirement of a fixed amount applies ONLY to principal;it does not apply to interest (or to other charges that are often included in instruments, such as collection costs and attorneys fees).
AMBIGUITY: "Pay Five Thousand Dollars ($500) to Paul Payee" -- unambiguous written words control over numbers.

Front 15

"Money"

Back 15

1. A promise to pay 100 pounds of flour is a nonnegotiable promise.
2. Foreign money is permissible

Front 16

"No Other Undertaking"

Back 16

1. A negotiable instrument must not have anything other than a simple, clean unconditional promise or ordered to pay a fixed amount of money. For example, a maker's promise to pay $400 "and deliver a TV" to the payee makes the note nonnegotiable.
2. The UCC does not permit a number of extra undertakings:
a. A provision by the maker or drawer to give or maintain collateral securing payment
b. A provision authorizing the holder to confess judgment or realize on any collateral;
c. A provision by the maker or the drawer waiting legal protections. Example: makers waiver of trial by jury, or write to notice of dishonor, or suretyship defenses.

ALWAYS okay for maker or drawer to promise to pay costs of collection and attorney's fees.

Front 17

"On Demand or at a Definite Time"

Back 17

the holder of an instrument must be able to tell when it comes due or the instrument is nonnegotiable.
an undated instrument which specifies no time for payment is treated as "on-demand".
Post dated checks are also okay!
A note containing an acceleration clause is also okay!
BUT: "available only upon the death of..." not a negotiable instrument

Front 18

"Payable To Order or To Bearer"

Back 18

VERY IMPORTANT!!
A promissory note or a check must be EITHER "order paper" OR "bearer paper". If not the instrument is not negotiable and is not governed by article 3.

Front 19

"Order Paper"

Back 19

a promissory note or a check made payable 1) "to the order of" or 2) and "identifiable person" is called order paper.
1. Promissory note order paper: I promise to pay "to the order of Paul Payee" (or "to Paul Payee or his order")
2. Check order paper: Pay "to the order of Paul Payee" (or " to Paul Payee or is order")

Front 20

"Bearer Paper"

Back 20

a promissory note or a check made payable to the bearer of the instrument is called bearer paper.
1. Promissory note bearer paper: I promise to pay "bearer" (or "to the order of bearer" or "to the order of cash" or "to cash"
2. Check Bearer Paper: Pay "to the order of cash" (or "to the order of bearer" or "to bearer")

Front 21

Mnemonic: SWUPFONO

Back 21

Signed
Written
Unconditional
Promise or Order
Fixed Amount of Money
On Demand or at a Definite Time
No Unauthorized Undertaking
Order or Bearer Paper language (check exception)

Front 22

WOSSUPP

Back 22

W: writing
O: payable to order / bearer
S: signed by maker / drawer
S: sum certain recited
U: an unconditional promise or order AND no additional promises or orders
P: payable on demand or at a definite time
P: payable in currency

Front 23

Remember, two's a crowd.

Back 23

For example, if the writing recites "I promise to pay $5,000 and give you my vintage Beatles album collection" it is "conditional" and "nonnegotiable"

Front 24

Payable to Order

Back 24

"Pay to the order of Andy Garcia."

"Pay to the assigns of Andy Garcia."

"Pay to Andy Garcia or his order."

Front 25

Payable to Bearer

Back 25

If the instrument is not payable to order, then to be negotiable it must be payable to bearer, meaning that it is payable to anyone who has it.

All of the following satisfy the standard:

"Pay to bearer."

"Pay to the order of bearer."

"Pay to Andy Garcia or bearer."

"Pay to cash." (an art 3 term of art that is sufficient by statute)

Front 26

Negotiation

Back 26

is a transfer of an instrument in a way that makes the transferee a holder.

Front 27

HOLDER

Back 27

1. A person in possession of bearer paper
2. A person in possession of order paper that has been properly issued or properly endorsed to her.

Front 28

how does one negotiate a negotiable instrument (E.G., Note or Check)?

Back 28

1. Order Paper (two steps)
Endorsement by the holder AND Transfer of Possession.

Front 29

ENDORSEMENT

Back 29

an endorsement is a signature on an instrument for the purpose of negotiating it and/or making the endorser liable under endorser liability.

Front 30

how is bearer paper negotiated?

Back 30

Transfer of possession alone.

Front 31

What is the effect of a blank endorsement?

Back 31

It does not specify the person to whom the instrument was next payable, and thus converts the order paper check to bearer paper.

Front 32

"without recourse"

Back 32

this negates the endorsers liability.

Front 33

Effect of Forgeries on Status of Holder

Back 33

General rule: a person cannot be a holder if any necessary endorsement was forged. The reason is because an unauthorized signature as ineffective as the signature of the person whose name assigned.

Front 34

basic rule regarding forgery

Back 34

when "order paper" (e.g., a note or a check) contains a forged signature or endorsement, none of the parties from the forger on are holders. In the case of a note, the maker does not need to pay any one of the parties. In the case of a check, the drawee bank cannot properly pay any one of them. The only thing can only pay the holder of the check.

Front 35

what about a stolen "bearer paper"?

Back 35

Remember, mere possession of the note (voluntary or involuntary) makes that person a holder.

Front 36

Lost, Stolen, or Destroyed Instruments. What happens if the instrument is stolen from the holder, and us he is no longer in possession? Can he still enforce the instrument?

Back 36

Rule: generally, a person who is not in possession of a negotiable instrument can pursue an action to collect on it if 1) he was entitled to enforce the instrument and 2) it was lost, stolen or destroyed.

To recover, they must explain its terms, and what prevents its production.

Front 37

and endorsers liability is conditioned upon?

Back 37

1) timely presentation (a formal demand for payment). With a check, the endorser is discharged if the check is not presented for payment or given to a depository bank for collection within 30 days after the day the endorsement was made.
2)Dishonor of the instrument. With a check the drawee bank must dishonor the check by returning the check (or sending notice of dishonor that the check is not available) by its midnight deadline. Otherwise, the endorsers liability is not triggered.
3) Timely notice of dishonor must be given to the endorser or else the endorser is discharged.

Front 38

Presentation and Notice of dishonor may be...

Back 38

waived or excused

Front 39

what happens if a bank pays a thief? Does this discharge the underlying obligation or liability on the check?

Back 39

NEITHER DISCHARGED because the bank paid the wrong person.

Front 40

After Accrued Interest?

Back 40

A tender of the amount due discharges any duty to pay interest accrued after the due date.

Front 41

what else may at any person who is entitled to enforce the instrument do?

Back 41

Cancellation & Renunciation*

*Any person entitled to enforce the instrument may discharge any party by a signed writing agreement not to sue or otherwise renouncing rights against the party to be discharged. No consideration is required for renunciation.

Front 42

what is an HDC?

Back 42

A holder in due course is a holder who gives value for the instrument, in good faith, without notice of certain things. They strip be obligated party from their "personal defenses" but does not apply to "real defenses".

Front 43

"Good Faith"?

Back 43

Honesty in fact in the conduct or transaction concerned. This is a subjective inquiry, sometimes called the "pure heart/empty head test". A HDC must take the instrument without notice (actual and reason to know)

Front 44

when does a check become overdue?

Back 44

90 days after its date

Front 45

Personal Defenses

Back 45

Notice the Failure of Consideration

Notice of Breach of Warranty

Notice of Breach of Fiduciary Duty

Front 46

"the Shelter Rule"

Back 46

and instruments transferee acquires whatever rights her transferor had.

Front 47

REAL DEFENSES

Back 47

1. Infancy
2. Incapacity, duress or illegality of the transaction
3. Fraud in the execution of the instrument (fraud in a factum)
4. Any other discharge of which the holder has notice when she takes the instrument
5. Statute of Limitations -- for a check (three years) for a note (10 years).

On a demand transaction or instrument, the statutory period begins to run when demand for payment is made. On a time transaction or instrument, the statutory period begins to run when payment is due.

Front 48

THE THREE PRESENTATION WARRANTIES

Back 48

1. They are a person entitled to enforce the check (e.g., they are the holder)
2. The check has not been altered
3. They have no ACTUAL KNOWLEDGE that the drawers signature was forged.

Front 49

general idea of a forged endorsement

Back 49

Generally, a loss for a forged endorsement should pass to the earliest solvent person after the forger, (or the forger himself in the unusual case in which she is solvent and locatable).

Front 50

Restrictive Covenant

Back 50

"for deposit only"