Commercial Paper

Front 1

Note

Back 1

Instrument where maker promises to pay payee.

The two parties are: MAKER and PAYEE

Front 2

Liability of Maker

Back 2

Primary (or unconditional)

Front 3

Liability of Co-Makers

Back 3

Joint and Several

Front 4

Liability of Co-Makers to each other

Back 4

Contractual Liability

Front 5

Draft

Back 5

Instrument where drawer orders drawee to pay payee

The three parties are: DRAWER, DRAWEE, and PAYEE

Front 6

Liability of drawer

Back 6

Secondary (or conditional)

Front 7

Inconsistent words and figures?

Back 7

Words prevail over figures

Front 8

Indorsement

Back 8

Signature other than that of maker, drawer, or acceptor (acceptor is drawee who has agreed to pay the instrument)

Front 9

Qualities of Indorsement

Back 9

Special or Blank
Unrestrictive or Restrictive
Unqualified or Qualified
Nonanomalous or Anomalous

Front 10

Special Indorsement

Back 10

Special indorsement identifies the person to whom payable (i.e., pay payee); blank indorsement does not (i.e., indorsement only)

Front 11

Restrictive Indorsement

Back 11

Restrictive indorsement (i.e., for deposit only); unrestricitive doesn't

Front 12

Qualified Indorsement

Back 12

Qualified indorsement (i.e., "without recourse") negates secondary liability; unqualified doesn't

Front 13

Anomalous Indorsement

Back 13

Anomalous indicates accommodation (i.e., "out of chain")
(i) Accommodation parties are liable in the capacity in which they sign
(ii) Surety has right of recourse against accommodated party

Front 14

Liability of indorser

Back 14

Secondary (or conditional)

Front 15

Holder v. Maker (or Drawer)
[aka HDC rule]

Back 15

1. Negotiable Instrument
2. Negotiated
3. Holder in Due Course
4. Takes free of personal defenses and claims--subject only to real defenses

Front 16

Negotiable Instrument

Back 16

1. Writing
2. Signed by Maker (note) or Drawer (draft)
3. Unconditional Promise (note) or Order (draft)
4. To Pay a Fixed Amount of Money
5. No other unauthorized promise
6. On demand or at a definite time
7. To bearer or order at time of issue (unless check)

Front 17

[2. Signed by the Maker (or Drawer)]
Agency?

Back 17

Principal liable if agent authorized
Agent liable only if signed without showing represented party (i.e., undisclosed principal)

Front 18

[2. Signed by the Maker (or Drawer)]
Forgery?

Back 18

Operative as to forger; not party whose name was forged

Front 19

[3. Unconditional Promise or Order]

Back 19

A. No Express Conditions
B. Not Subject to Another writing ["secured by" okay though]
C. Limitations of funds are okay (i.e., where the money comes from)

Front 20

Conditions

Back 20

1. No express conditions (i.e., conditions written in the contract language)
2. Implied (conduct) or Constructivbe (law) conditions are permissible

Front 21

[4. To pay a fixed amount of money]

Back 21

1. With or without interest and a fixed or variable rate okay
2. Foreign currencies okay if from a recognized government
3. If the amount is left blank and is later completed as authorized, the instrument is enforceable. If there is an unauthorized completion, an HDC can enforce the instrument as completed, but a non-HDC can only enforce the instrument to the extent that the completion was authorized

Front 22

[6. No other unauthorized promise]

Back 22

A. No $500 + a Cow language
B. Other unauthorized promises are prohibited unless they concern:
(i) collateral (security; "secured by") OR
(ii) Attorneys' Fees OR
(iii) an instruction to confess a judgment in case of default

Front 23

[7. On demand or at definite time]

Back 23

A. If note is silent, it's demand paper
B. Acceleration clauses are okay

Front 24

[8. To bearer or to order at time of issue (unless check)]

Back 24

A. Two types of negotiable instruments: ORDER (to a specific person) and BEARER (to cash, or blank)

Front 25

Negotiated

Back 25

[negotiation is a specific type of transfer]
1. Effective even if impediment (even if an infant)
2. Must transfer entire instrument (no splitting)
3. Rules:
A. Order
B. Bearer
C. Last Indorsement Rule

Front 26

Negotiated: ORDER

Back 26

Proper indorsement plus delivery

Front 27

Negotiated: BEARER

Back 27

Mere delivery alone

Front 28

Negotiated: LAST INDORSEMENT RULE

Back 28

1. The last indorsement determines the rules for negotiation.
2. A special indorsement makes the instrument ORDER paper (indorsement + delivery required to be negotiated)
3. A blank indorsement makes the instrument BEARER paper (delivery required to be negotiated)

Front 29

Holder in Due Course (HDC)

Back 29

1. For Value
2. In Good Faith
3. Without knowledge or notice of overdueness (check over 90 days), dishonor, defense, forgery, irregularity (i.e., stamped, crinkled, or torn), or incompleteness which questions authenticity
4. Non-holders in due course

Front 30

HDC: For Value

Back 30

A. Executed consideration (performed consideration)
B. Antecedent Claims (old debts)
C. Partial HDC Rule (proportion) [if a person gives part of the agreed value and then obtains notice of a defense]
D. Your depository bank is typically not an HDC, unless it gives value (i.e., cashes the check)

Front 31

HDC: In Good Faith

Back 31

A. Honesty-in-fact AND
B. Observance of reasonable commercial standards of fair dealing (merchants test)

Front 32

HDC: Without knowledge or notice of:

Back 32

1. Overdueness
2. Dishonor
3. Claim
4. Defense
5. Forgery
6. Irregularity (stamped, crinkled, or torn)
7. Incompleteness
[these factors question authenticity]
SELLING AT A REASONABLE DISCOUNT DOES NOT CONSTITUTE NOTICE

Front 33

HDC: Non-holders in due course

Back 33

A. Bulk (i.e., buy a store with checks in the registers)
B. Estate
C. Judicial Sale
[But Shelter Rule can apply and give the rights of a HDC]

Front 34

Free From Personal Defense and Claims, but Subject to Real Defenses

Back 34

FAIDS
1. Forgery, Fraud in Factum (switch-document fraud)
2. Alteration, Adjudicated Insanity
3. Infancy, Illegality (void illegality)
4. Duress, Discharge in Insolvency (void duress)
5. Suretyship defenses (if notice of suretyship), State of Limitations (Drafts: 3 years; Notes: 6 years, unless no demand, then 10 years)

Front 35

FTC Ameloioration

Back 35

1. Human buys
2. Consumer goods (not farm, equipment, or inventory)
3. or Services
4. on Credit (more than 4 installments)
THEN no HDC Rules

Front 36

Shelter Rule

Back 36

Anyone who takes after HDC gets rights of HDC, except participant

Front 37

Holder v. Indorser

Back 37

Contract of Secondary Liability (at time of indorsement)
[indorser liable only up to original amount, not altered amount]

Front 38

Conditions precedent to a contract of Secondary Liability (at time of indorsement)

Back 38

1. Presentment (Holder goes to Primary Party/Maker and demands payment)
2. Dishonor (Primary Party refuses)
3. Notice of Dishonor (Holder tells Secondary Party/Indorser)

Front 39

If a Qualified Indorsement (i.e., "without recourse"), then discuss:

Back 39

Warranty Liability

Front 40

Warranty Liability

Back 40

"off instrument"
1. Right to enforce (title)
2. Signature genuine
3. No alteration
4. No defense
5. No knowledge of insolvency

Front 41

Stages in life of a note/draft

Back 41

1. Issuance: no warranties
2. Transfer: warranty liability
3. Presentment: presentment liability

Front 42

Personal defenses

Back 42

failure of consideration, shoddy work, failure to deliver goods, defective goods, etc.

Front 43

If an instrument is non-negotiable, then ...

Back 43

apply regular contract law (i.e., you can use a personal defense)

Front 44

Holder v. Drawee

Back 44

No drawee liability unless acceptance (certification)
1. If certification, drawee liable for consequential damages
2. If certification, drawer discharged

Front 45

Drawer v. Drawee

Back 45

Drawee liable under Contractual Relationship

Front 46

Properly Payable Rule

Back 46

Drawer puts money in drawee (drawee acts as agent for collection), and drawee pays out according to drawer's order.
Bank can pay these out:
A. Overdraft
B. Dateless checks
C. Not over stop payment
D. Drawer Dead (bank can payout even if you're dead)

Front 47

Where drawee doesn't pay, but should have ...

Back 47

Drawee is liable to drawer for wrongful dishonor

Front 48

Where drawee does pay, but shouldn't ...

Back 48

Drawee is liable to drawer for breach of contract
EXCEPTIONS:
1. Fictitious indorsements are effective
2. Drawer negligent in the drafting
3. Drawer negligent in the notifying

Front 49

Fictitious indorsements are effective. Fictitious payees include:

Back 49

1. Imposter
2. Corporate Comptroller (accounting negligence)
3. Payroll Padding (negligence in hiring)

Front 50

Examples of Drawer negligence in drafting

Back 50

1. Leaving amount line blank or lots of space following the word one
2. Leaving spaces and saying "I trust you to put in the right amount"
USING a pencil or leaving blank checks on the top of a table in a restaurant is not negligent

Front 51

Exception to Drawer negligent in notifying exception

Back 51

where drawee is negligent and pays out without asking for ID. But there are limits. Drawee must notify timely.
1. Forged drawer: 1 year
2. Forged indorsement: 3 years
3. Multiple forgeries by the same wrongdoer: 30 days

Front 52

Bank Recovery (payment by mistake)

Back 52

1. Where the bamk pays on a forged drawer's signature or other mistake (e.g., insufficient funds), payment is final, and no recovery is permitted from the innocent party whom the bank paid
2. But, where the bank pays on a forged indorsement, payment is not final and the bank can recover from the innocent party whom it paid (because of breach of warranty of presentment--right to enforce /title)

Front 53

Accord & Satisfaction

Back 53

1. Where there is an unliquidated or disputed claim
2. An instrument tendered as full satisfaction (conspicuously)
3. Collection of the instrument is discharge of the debtor's obligation (an accord and satisfaction)

Front 54

Exceptions to Accord & Satisfaction

Back 54

1. Where there is an organization designated as the agent (conspicuosuly), no a&s unless sent to the agent
2. Claimant tenders repayment within 90 days (to avoid inadvertent a&s)

Front 55

Lost, Destroyed or Stolen Instruments

Back 55

May still enforce if she can prover her ownership and the facts that prevent production of the instrument. But, the maker or drawer can be forced to pay again if a later person becomes an HDC of the instrument. Thus, court can require a bond or other adequate protection for the person paying

Front 56

If a certified or cashiers' check is given on an obligation ...

Back 56

the underlying obligation is discharged to the same extent as if cash were given

Front 57

If an instrument other than a certified or cashers' check is given to satisfy an obligation, ...

Back 57

the instrument suspends the party's duty to perform on the underlying obligation until the instrument is paid or dishonored

Front 58

An accommodation party is never liable to ...

Back 58

the party accommodated

Front 59

A person entitled to enforce an instrument may, even without consideration, discharge

Back 59

any party from the instrument by voluntary act, such as lining through the party's name

Front 60

Presentment Warranties

Back 60

1. Entitled to enforce
2. instrument has not been altered
3. no knowledge that the drawer's signature is unauthorized

Front 61

An accommodation party can raise impairment of remedy as a defense against anyone who ...

Back 61

impaired a remedy of the accommodation party with knowledge of the accommodation party's status

Front 62

If an instrument is payable to more than one person (e.g., pay to the order of Alex and Becky), ...

Back 62

negotiation requires the indorsement of all specified persons

Front 63

Contract Liability

Back 63

By singing his name on the back of an instrument, an indorser enters into a contract with subsequent holders of the instrument, promising to pay on the instrument according to its terms when indorsed if the instrument is presented for payment, is dishonored, and the indorser is given notice of the dishonor.

Front 64

A transferor who indorses an instrument

Back 64

makes the transfer warranties to all subsequent holders; a transferor who does not indorse makes the warranties only to the immediate transferee