Commercial Paper

Front 1

A note is a two-party instrument consisting of:

Back 1

A Maker

and

A Payee

Front 2

Maker

Back 2

the person who signs or is identified in a note as the person undertaking to pay

Front 3

Payee

Back 3

The person to whom the note is payable

Front 4

A check is a three-party instrument, consisting of:

Back 4

A Drawer,

A Drawee, and

A Payee

Front 5

Drawer

Back 5

is the person who signs or is identified in a check as the person ordering payment

Front 6

Drawee

Back 6

the person ordered in a check to make payment (like a bank)

Front 7

Payee

Back 7

the person to whom the check is payable

Front 8

A certified check is:

Back 8

one drawn by the drawee bank's customer and "accepted" by the drawee bank (typically by stamping it "certified")

Front 9

If a piece of commercial paper is a negotiable instrument, what law governs?

Back 9

Article 3 of the UCC

Front 10

If commercial paper is non-negotiable and thus Article 3 does not apply, then what law governs?

Back 10

General principals of contract law apply

Front 11

Requirements of Negotiability

Back 11

1. A Writing
2. Signed by the maker or drawer
3. Promise to Pay or Order to Pay
4. Unconditional
5. Fixed Amount
6. Money
7. No other undertaking or instruction
8. Payable at a Definite Time or On Demand
9. Payable to Bearer or To the Order of

Front 12

Would an IOU count as a "promise to pay?"

Back 12

NO

Front 13

A check is:

Back 13

an order from the drawer to the drawee to pay money (to the payee)

Front 14

"I promise to pay $100 to the order of Payee in accordance with the contract we signed today."

Can this be negotiable?

Back 14

Yes.

A mere reference in the negotiable instrument to the underlying contract accompanying the instrument does not render the instrument's promise to pay conditional.

Front 15

A note where Maker "promises to pay $100,000 to the order of Payee only if Payee conveys title to the house to Maker."

Can this be negotiable?

Back 15

No, because payment is expressly conditioned.

Front 16

"Maker promises to pay $200,000 to the order of Payee subject to the terms of the mortgage agreement."

Is this negotiable?

Back 16

No.

Front 17

Is an undated instrument which specifies no time for payment negotiable?

Back 17

Yes, it is negotiable because it is treated as "payable on demand."

Front 18

Is a note made payable "only upon the death of Maker's father" negotiable?

Back 18

No. It is not negotiable because we don't know when the event is going to occur, so there is no definite time for payment.

Front 19

Order Paper

Back 19

A promissory note or check made payable:
1. "to the order of,"
2. an identified person

Front 20

Check Exception to Order Paper

Back 20

A check need not contain the "to the order of words of negotiability." A check stating "Pay Payee" is fully negotiable and covered by Article 3.

Front 21

Payee-Initiated Demand Draft

Back 21

A check that is not signed by a customer and that is created by a 3rd party under the purported authority of the customer to charge the customer's bank account.

Example: used by a telemarketer to charge a customer's bank account for goods purchased over the phone.

Front 22

Negotiation:

Back 22

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

Front 23

How does one become a holder of bearer paper?

Back 23

A person in possession of bearer paper is the holder.

Front 24

How does one become a holder of order paper?

Back 24

A person in possession of order paper that has been properly issued or properly endorsed to her is the holder.

Front 25

Order Paper is negotiated by a two-step process:

Back 25

1. an endorsement by the holder, and

2. transfer of possession

Front 26

Special Endorsement

Back 26

An endorsement by the holder which also names a particular person as endorsee (the person to whom the instrument is next payable).

Front 27

Anomalous endorsement

Back 27

an endorsement by a person who is not the holder

Front 28

Is an anomalous endorsement effective for negotiation?

Back 28

No.

Front 29

Bearer paper may be negotiated by:

Back 29

transfer of possession alone.

Front 30

If order paper is endorsed in blank, it becomes:

Back 30

bearer paper

Front 31

If a paper is specially endorsed, it becomes:

Back 31

order paper

Front 32

What happens if an instrument is stolen from its holder? Can he still enforce the instrument (get payment)?

Back 32

Generally, a person who is not in possession of a negotiable instrument can pursue action to collect on it if:
a. he was entitled to enforce the instrument, and
b. it was lost, stolen, or destroyed

Front 33

To recover, the owner not in possession of the lost or stolen instrument must prove:

Back 33

1. its right to enforce the instrument
2. the instrument's terms, and
3. explain what prevents its production

Front 34

If an agent signs her own name and the principal has given her authority to sign on its behalf, the agent is not bound if:

Back 34

a. the form of the signature shows unambiguously that it was made on behalf of the principal, and
b. the principal is identified in the instrument

Front 35

A maker's liability on a note is owed to:

Back 35

1. a person entitled to enforce the note (the holder)
2. an endorser who has paid the note due to his endorser's liability

Front 36

Unless otherwise agreed, a party having joint and several liability is entitled to __________ from his joint and several co-makers.

Back 36

contribution

Front 37

A drawer is liable to pay a check only after:

Back 37

presentment to and dishonor (nonpayment) by the drawee bank.

Front 38

A drawer's liability is owed to:

Back 38

1. a person entitled to enforce the check (the holder)

2. an endorser who has paid the check due to his endorser liability

Front 39

Drawee bank's liability on a check:

Back 39

Not obligated to pay the check unless the drawee bank "accepted" the check

Front 40

An endorser's liability on an instrument:

Back 40

Obligated to pay according to the terms of the instrument at the time of the endorsement.

Front 41

An endorser's liability is owed to:

Back 41

1. a person entitled to enforce the instrument (the holder)

2. a person endorsing later in time who has paid the instrument due to his endorser liability

Front 42

An endorser's liability is conditioned upon/triggered by:

Back 42

1. Timely presentment (for payment)

2. Dishonor of the instrument

3. Timely notice of the dishonor to the endorser.

Front 43

With a check, an endorser is discharged if the check is not presented for payment or given to a depositary bank for collection within:

Back 43

30 days after the day the endorsement was made

Front 44

5 Transfer Warranties:

Back 44

1. The transferor is a person entitled to enforce the instrument (he is the holder)

2. all signatures are authentic and authorized

3. the instrument has not been altered

4. no defense or claim of any party is good against the transferor

5. in the case of a payee-initiated draft, that the creation of the instrument according to the terms of its face was authorized by the person on whose bank account the instrument is drawn

Front 45

To whom does the transferor make the transfer warranties?

Back 45

a. If the transfer is by endorsement, the transfer warranties run to all subsequent transferees.

2. If the transfer is other than by endorsement, the warranties run only to the transferor's immediate transferee.

Front 46

A holder in due course is:

Back 46

- a holder,
- who gives value for the instrument,
- in good faith,
- without notice

Front 47

A check becomes overdue:

Back 47

90 days after its date

Front 48

The Shelter Rule

Back 48

An instrument's transferee acquires whatever rights the transferor had.

Front 49

While a holder in due course takes free of the obligated party's personal defenses, a holder in due course takes subject to:

Back 49

real defenses

Front 50

5 Real Defenses

Back 50

1. Infancy of the maker or drawer
2. incapacity, duress, or illegality of the transaction
3. fraud in the execution of the instrument
4. any other discharge of which the holder has notice when he takes the instrument
5. statute of limitations

Front 51

Statute of limitations on a check

Back 51

3 years

Front 52

Statute of limitations on a note

Back 52

6 years

Front 53

Fraud in the execution

Back 53

fraudulent behavior designed to get someone's signature on a negotiable instrument without them knowing or having a reasonable opportunity to discover that it is a negotiable instrument

Front 54

Fraud in the execution

Back 54

fraudulent behavior designed to get someone's signature on a negotiable instrument without them knowing or having a reasonable opportunity to discover that it is a negotiable instrument

Front 55

The Properly Payable Rule

Back 55

The payor 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 customer's account.

Front 56

Is a check with a forged drawer's signature properly payable?

Back 56

no

Front 57

Is a check with a forged endorsement properly payable?

Back 57

No

Front 58

When a check has been altered, the customer/drawer's account can be charged:

Back 58

only the original amount of the check

Front 59

Is payment over a customer's valid stop-payment order properly payable?

Back 59

No

Front 60

A stop payment order is effective for:

Back 60

6 months, but it lapses after 14 days if the original was oral and not confirmed in writing

Front 61

Overdraft rule:

Back 61

A drawee bank may honor a check even it if creates an overdraft. But, a drawee bank does not have to honor a check that creates an overdraft, unless it has agreed to do so w/ its customer.

Front 62

Stale Check Rule

Back 62

A bank is under no obligation to pay a check more than 6 months old, but it may charge the account thereafter in good faith.

Front 63

Postdate rule:

Back 63

A drawee bank may charge a customer's account for an otherwise properly payable check that is postdated unless the customer has given the bank notice of the postdating, describing the check with reasonable certainty and allowing the bank a reasonable time to act on this notice.

Front 64

Is a payor bank liable to its customer for damages cause by a wrongful dishonor of a check?

Back 64

Yes.

Liability is limited to actual damages proved, but can include damages for arrest or prosecution, or other consequential damages

Front 65

A party presenting a check for payment makes three presentment warranties:

Back 65

1. she is a person entitled to enforce the check
2. the check has not been altered
3. she has no actual knowledge that the drawer's signature was forged

Front 66

Ratification of a forged or otherwise unauthorized endorsement or a forged or otherwise unauthorized drawer's or maker's signature occurs when:

Back 66

a party, with full knowledge of the forgery or lack or authorization, accepts the benefits therof or actively assents to the wrongful activity.

Front 67

The Imposter Rule

Back 67

Validates the forged endorsement of a the payee's name where the maker or drawer has been duped by an impostor to issue the instrument.

Front 68

Validation of Forgery: Fraudulent Endorsement by an Employee Entrusted with Responsibility

Back 68

If an employer entrusts an employee (including an independent contractor) with responsibility with respect to an instrument, and the employee makes a fraudulent endorsement on the instrument, the endorsement is effective.

Front 69

The Negligence Rule

Back 69

If a person, by his negligence, substantially contributes to a material alteration or to the making of an unauthorized signature, he is precluded from asserting the alteration or lack of authority against a HIDC, the drawee, or other payor who pays in good faith.

Front 70

Accommodation party:

Back 70

one who signs the instrument in any capacity for the purpose of lending his name and credit for the benefit of another party to the same instrument. (Usually as a co-maker or endorser)