Commercial Paper

Front 1

Negotiable Instruments: Article 3

Back 1

Applies to two kinds of instruments:
1) Notes
2) Drafts

Front 2

Note: Generally

Back 2

Two party commercial paper: a written and signed promise by one party (maker) to pay money to another party (payee or bearer).

Front 3

Note: Certificate of Deposit:

Back 3

CD is like a note in that two parties are involved. Code specifically defines CD as an instrument made by a bank, containing: 1) Acknowledgment that a sum of money has been received by a bank; and 2) Promise by the bank to repay.

Front 4

Drafts: Generally

Back 4

A 3 party commercial paper. A written and signed instruction by one (drawer) to a second person (drawee) demanding that drawee pay money to a THIRD person (payee or bearer) .
AKA Bill of Exchange.

Front 5

Drafts: Checks

Back 5

Specific type of draft: drawn on bank and payable on demand. Instrument will be deemed a check, even if it's called on its face by another term (e.g. money order)

Front 6

NOTE AND DRAFT:

Back 6

IF a paper qualifies as both a note and a draft, a person entitled to enforce the instrument may enforce it as either.

Front 7

Other kinds of instruments:
-Investments securities (UCC 8)
-Documents of title (UCC 7)

Back 7

Stocks, bonds, warehouse receipts, bills of lading: All are negotiable, but not governed under UCC 3.
Analogize if you encounter one.

Front 8

Issue:

Back 8

First delivery of an instrument by the maker or drawer for the purpose of giving rights on the instrument to any person.
Maker or Drawer is the "Issuer"

Front 9

Formal Requisitites of Negotiability:

Back 9

1) Written and signed
2) UNCONDITIONAL
3) Promise or order
4) to pay a fixed amount of money as described in the promise or order--e..g interest, other charges) THAT:
a) Is payable to order or to bearer
b) Is payable on demand or at a definite time.
c) Does not state any unauthorized undertaking or instruction by the person promising or ordering payment.

Front 10

Unconditional: When is it Conditional

Back 10

1) when it expressly states a condition to payment (If the Pats win the Superbowl, I will pay you $100.) ; or
2) States that the promise or order (or rights and obligations subject thereto) is subject to or governed by another writing. ("This note is subject to the sales agreement between the parties dated August 15.)

Front 11

When Promise or Order NOT Conditional:

Back 11

1) Mere reference to another writing ("This instrument is a down payment on the K to rent a building.") does not make it conditional
2) Limits payment to a particular source or funds: ("I promise to pay you out of the funds from my next wheat crop.") OR
3) Requires as a condition to payment a countersignature from the person whose specimen signature appears on the promise or order (e.g Traveler's Checks)

Front 12

Effect of Reference to Separate Writing:

Back 12

A negotiable instrument cannot be subject to another writing, but it may REFER to another writing. Mere reference is irrelevant to negotiability and rights of Holders in Due Course are not limited by the terms of the separate writing (unless HDC knows of the terms of the writing). However, as between the two parties, the terms of the negotiable instrument may be modified and controlled by the separate writing. Watch out for parol evidence rule issues!

Front 13

Promise or Order to Pay:

Back 13

Note must contain promise to pay. Draft must contain order to pay.
A promise is a written undertaking to pay money signed by the person undertaking to pay. (e.g. "I promise to pay") An order is a written instruction to pay money signed by the person giving the order (e.g. "Pay to the order of John Q. Public)

Front 14

Promise or Order to Pay must be in writing

Back 14

"Writing" very liberally construed--may be print, typing or any other "intentional reduction to tangible form."

Front 15

Promise or Order to Pay must be signed

Back 15

Any mark intended to identify, whether real or assumed name.

Front 16

Fixed Amount of Money

Back 16

Still negotiable if it calls for foreign currency, or any other government authorized medium of exchange.
Non-negotiable if it calls for payment with something other than gov't authorized currency, or a combination of currency and/or non-currency.

Front 17

What is "Fixed"

Back 17

Principal must be fixed.
Interest need NOT be fixed UNLESS the instrument calls for payment of interest

Front 18

Payable to Order or to Bearer

Back 18

Order paper is payable to person named.
Bearer paper is payable to anyone legitimately possessing instrument.

Front 19

Payable to Order:

Back 19

Payable to order of an identified person

Front 20

Payable to Bearer

Back 20

Payable if:
1) states that it is payable to bearer, order of bearer, order and bearer, etc.
OR
2) Does not state payee
3) States that it is payable to cash, or otherwise indicates not payable to identified person.

Front 21

ID of Payee:

Back 21

The payee is governed by the intent of the maker or drawer. If more than one person issues the instrument (agent signs for maker/drawer) then any person intended by the signer may properly be paid.

Front 22

Means of ID'ing Payee

Back 22

Any: name, office, account number, etc.
Checks missing the magic words NOT payable to order or bearer, still negotiable.

Front 23

Payable on Demand or at a Definite Time

Back 23

On demand: states "on demand" or "on sight" or does NOT state time for payment.
At a definite time: States either a date or an ascertainable time OR on elapse of a specified period of time after sight or acceptance.
Time stated may be subject to rights of prepayment, acceleration, extension at the option of the holder, or extension to a further definite time either automatically or at option of maker or acceptor.

Front 24

Payable at Definite Time:
Events certain to happen but uncertain as to time:

Back 24

"Payable at Uncle Sam's death" or "30 days after Sam's death" non-negotiable.

Uncertain as to time

Front 25

Payable at Definite Time:
Acceleration clause

Back 25

"Payable 100 years from date, but if Sam should die, payable on his death." is negotiable

Certain. Acceleration clause does not destroy negotiability or certainty.

Front 26

Payable at Definite Time:
Extension clause: 3 Types

Back 26

1) Extension at option of maker
2) Extension on occurrence of event
3) Extension at option of holder

Front 27

Payable at Definite Time: Extension Clauses Effect
Extension at option of maker / Extension on occurrence of event

Back 27

MAY be included without affecting negotiability IF: extension is to further definite time stated in instrument.
"this instrument can be extended at the option of the maker"--no good: not definite.
"this instrument can be extended 30 days after the original due date at the option of the maker." Definite, therefore negotiable.

At option of holder ALWAYS negotiable. However, holder may not exercise this option if maker or drawer objects and tenders payment.

Front 28

No Unauthorized Undertaking or Instructions:
Three undertakings or instructions MAY be included

Back 28

1) Undertaking or power to give, maintain or protect collateral
2) Authorization or power to holder to confess judgment or realize on or dispose of collateral; and
3) Waiver of the benefit of any law intended for the advantage or protection of the obligor (waiver of presentment, notice of dishonor, homestead exemption, trial by jury, etc.)
ANY OTHER PROMISE OR UNDERTAKING WILL DESTROY NEGOTIABILITY

Front 29

Rules of Construction:

Back 29

If terms are contradictory: typewritten controls over printed, handwritten controls over typewritten.
Words control figures UNLESS words are ambiguous or uncertain (illegible).

Front 30

Opting Out

Back 30

Promise or order that otherwise appears to be negotiable will NOT be negotiable if it contains conspicuous statement that it is NON-NEGOTIABLE. Rule does not apply to checks.

Front 31

Two or More Signers in Single Capacity

Back 31

Unless instrument specifies otherwise, two or more persons who have the same liability on an instrument (makers, acceptors, drawers or indorsers who indorse as joint payees or anomalous indorsers are jointly and severally liable in the capacity in which they sign.
E.g. if two people sign as makers of a note, either one can be held fully liable for the value of the note.

Front 32

Negotiation: Process

Back 32

Think of holder as person in possession of the instrument with a right to enforce it.

Front 33

Negotiation: Holder Status
Bearer Paper

Back 33

Negotiable instrument issued as bearer paper is negotiated simply by transferring possession of the instrument. Once transferee has possession, she technically qualifies as "holder."
E.g. Drawer writes a check to "Cash" which makes check bearer paper. If Drawer transfers check to Grocer, Grocer becomes a holder.

Front 34

Negotiation: Holder Status
Order Paper: Specific Payee

Back 34

Instrument payable to identified person is transferred by transfer of possession with indorsement of ID'ed person.
EX: Drawer writes a check payable to Payee. On receiving her check, Payee qualifies as the holder. If Payee subsequently wishes to negotiate the check, she must indorse it and deliver possession to her transferee who will then also qualify as a holder.

Front 35

Negotiation: Holder Status
Order Paper: Specific Payee
Valid Indorsement:

Back 35

Forgery breaks the chain of title and no subsequent holder can qualify as holder.
Genuine signature from infant or by fraud IS effective.
All necessary signatures must be included

Front 36

Negotiation: Multiple Payees Indorsement

Back 36

"George AND Martha Washington" requires indorsement by both.
"George OR Martha Washington" or "George AND /OR Martha" can be negotiated by signature of EITHER payee.

Front 37

Negotiation: Location of Indorsement

Back 37

ON the instrument. Typically on the rear but may also be placed on the front OR on a paper affixed to the instrument.

Front 38

Negotiation: Effect of Transfer without Indorsement

Back 38

Delivery may be effective to transfer possession, but not a negotiation without indorsement.

Front 39

Negotiation:Transfer without Indorsement: Right of Transferee

Back 39

Unless and until he obtains the indorsement, transferee does NOT qualify as a holder or have HDC status.
CAN: Sue to compel indorsement if transferee paid value
Sue to enforce instrument w/o indorsement. Would have to prove his ownerships

Front 40

Negotiation:Transfer without Indorsement: Different Rules for Banks

Back 40

Depositary bank that takes an unindorsed instrument for collection becomes a holder of the instrument if the CUSTOMER was a holder at time of delivery, even if customer has not indorsed the instrument.
Rule applies ONLY to instruments taken for collection. If bank held an instrument as collateral for a loan to a customer--no way to supply customer's indorsement.
Does NOT insulate bank from mishandling funds represented by the instrument.
(EX: Check drawn payable jointly to A and B cashes on A's signature only and forwards for collection. Bank liable to B for conversion of her interest in the check.

Front 41

Negotiation:Transfer without Indorsement : Indorsement Later Obtained

Back 41

Transferee becomes holder, may qualify as HDC if other requirements for due course are met.
Notice of Adverse Claim or Defense: for the purpose of determining whether transferee lacked notice of any adverse claim or defense to the instrument (essential element for HDC) her knowledge is measured at the time she obtained the missing indorsement. Knowledge of claim or defense arising between receipt of transfer and indorsement prevents HDC.

Front 42

Negotiation: Indorsement of Partial Interests NOT a Negotiation

Back 42

If indorsement attempts to convey less than the full amount of the instrument, transferee does not qualify as holder.
EX: D draws check payable to P, who indorses it "Pay 2/3 to George Washington, 1/3 to Martha Washington." Fuhgeddaboudit. Neither G nor M qualifies as a holder.
Indorsement "Pay to George and Martha Washington /s/ Paula" IS valid.

IF partial payment has been made on an instrument, indorsement of all that remains will be an effective negotiation.

Front 43

Types of Indorsement:
Special or Blank
Qualified or Unqualified
Restrictive and Unrestrictive.

Back 43

Special or Blank
Qualified or Unqualified
Restrictive and Unrestrictive.

Front 44

Types of Indorsement:
Special or Blank

Back 44

Special: Names a particular person as indorsee (e.g. "pay John Smith") Indorsee must sign for instrument to be negotiated further.
Blank: Becomes payable to the bearer, may be negotiated by delivery alone. (e.g. D writes check to P, who indorses "/s/ P" The check blows away and is picked up by F who takes it to G grocery store and indorses it "Mark Money" for groceries. G is a holder because the instrument was bearer paper at the time of F's forgery, and COULD have been negotiated by delivery alone. Forgery of names not necessary to chain of title will not prevent later takers from being "holders."
HOWEVER: Forgery of signature breaks the title if it's of someone necessary.

Front 45

Multiple Indorsements:

Back 45

Last Indorsement controls.

Front 46

Qualified Indorsement:

Back 46

Indorsement that adds the words "without recourse" qualifies the indorsement and limits legal liability otherwise imposed on indorsers under UCC.

Front 47

Restrictive Indorsements:

Back 47

Limit Transfer or Negotiation: Limiting payment to a particular person or otherwise preventing further transfer or negotiation not effective to prevent further transfer or negotiation.
Conditional indorsement stating a condition to pay: No-go.
"For Deposit" or "For Collection" indicate the intent of having the instrument collected by a bank for the indorser, then person or depositary bank must pay the instrument consistently with indorsement or will be deemed to have converted the instrument.

Front 48

Anomalous Indorsement:

Back 48

Indorsement made by person who is not a holder of the instrument. Anomalous indorsement does not affect manner in which instrument may be negotiated, but does make the signer liable on the instrument.

Front 49

HOLDERS IN DUE COURSE:
Requirements

Back 49

1) Holder
2) Authenticity Not Questionable
3) Gave Value
4) Good Faith
5) Without Notice

Front 50

Shelter Rule

Back 50

If transferee takes from an HDC, then they derivatively take HDC rights, even if they do not meet HDC requirements.
EXCEPT: where transferee engaged in some fraud or illegality affecting the instrument

Front 51

Rights of HDC

Back 51

Subject to Real Defense (work against HDC)
-obligor is a minor and can't enter Ks
-Duress
-Lack of legal capacity
-Illegality making obligation void
-Fraud in fact
-Discharge of obligor in bankruptcy
-Alterations
-Forgeries
-Suretyship
-SOL
Protected from Personal Defenses
Free From Claims to Instrument

Front 52

HDC: Real Defenses: Forgery

Back 52

Names necessary to title
Name of payee or any special indorsee forged. NO subsequent taker can be HDC
However, if person whose name was forged ratifies, or is estopped from denying the signature, subsequent takers can be HDC.

Front 53

HDC: Real Defense: Real Fraud

Back 53

Fraud that induced the obligor to sign with neither knowledge nor reasonable opportunity to learn of its character or its essential terms. Any OTHER type of fraud is most likely personal.
E.g. J, a non-English speaker, signs a promissory note after her accountant assures her it's credit application. REAL fraud.
E.g. H tells C that the car he's selling was driven only by a little old lady to church. C finds out that it was a demolition derby car. She stops payment on the check, if HDC now holds check, then C's defense can't be asserted--fraud defense is personal only.

Front 54

HDC: Real Defense: Alteration of Instrument

Back 54

Change in terms of the instrument--e.g. thief alters check amount from $10 to $1000 by removing decimal point. HDC may be able to collect only the real amount, however, in other situations, HDC may be able to collect on the instrument as altered.

Front 55

HDC: Real Defense:Incapacity to K

Back 55

Incompetents
Corporations failing take steps to transact business in the J.
However, K must be void from inception rather than merely voidable.

Front 56

HDC: Real Defense: Infancy

Back 56

If infancy would be a defense under state law in a simple K action, it is a real defense. If state law does not make K by infant void or voidable, infancy is only a personal defense and not assertable against HDC.

Front 57

HDC: Real Defense: Duress

Back 57

Instrument signed at gunpoint void, even in hands of HDC. However, one signed under threat to prosecute the son of the maker for theft may merely be voidable and that defense therefore not available against HDC.

Front 58

HDC: Real Defense: Discharge in Insolvency Proceedings

Back 58

Including assignment for benefit of creditors (state liquidation proceeding) and any other proceeding intending to liquidate or rehabilitate estate.

Front 59

SOL

Back 59

If SOL has run, even a HDC can't enforce.
Actions on unaccepted drafts must be brought within 3 years after date of dishonor or 10 years after date of draft (whichever is earlier)
Certified checks, traveler's checks, cashier's checks: 3 years from demand for payment to acceptor or issuer.
Conversion actions, etc. 3 years.

6 years: Actions on notes payable at a definite time, or on demand must generally be commenced within 6 years of demand is made, but SOL does not begin to run until stated due date.

Front 60

HDC: Real Defense: Accommodation (Suretyship) Defenses:

Back 60

Accomodation party is one who signs an instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the instrument.. Accomodation party is a surety. If HDC knows of accommodation when he takes the instrument, he takes subject to accommodation party's suretyship defenses (i.e. discharge to the extent of loss caused by extension of due date, material modification of obligation or impairment of collateral.)

Front 61

HDC: Real Defense: Discharges Known to HDC

Back 61

Takes subject to any discharge he's aware of (usu. personal defenses: e.g. P finally pays off mortgage on his house. He asks the mortgagee, Bank for his promissory note and is upset to learn that Bank sold it long ago but failed to tell P. If note is later presented to Peter by HDC for payment, he must pay again--since DC by payment is only a personal defense, however, he should be able to pass his additional liability to Bank in quasi K action fro money had and received.