Commercial Paper

Front 1

NOTE

Back 1

1. Promise to Pay: a promise to pay money-- a 2 party instrument

2. Parties:
a. Maker-- the promiseor (obligor)--person who promises to pay

b. payee-- the pomisee--person entitled to payment (the money)

3. Certificate of Deposit-- note issued by a financial institution
a. financial institution acknowledges receipt of money, and
b. financial institution promises the payee/depositor to repay the money

Front 2

DRAFT

Back 2

1. Order to Pay: an order to pay money-- a 3 party instruments

2. Parties:
a. drawer-- person ordering payment
b. drawee--person to make the payment (in a check context, also called the payor bank)
c. payee--person to receive the payment

3. Check
a. Requirements
(1) financial institution is the Drawee; and
(2) payable on demand

4. Remotely-Created Item: a draft not signed by the drawer but created with the drawer's authority so that a third party can get paid from the drawer's account at a bank

Front 3

Types of Checks

Back 3

types of checks
(1) ordinary check
(2) certified check-- ordinary check which bank has accepted (i.e. agreed to pay)
(3) cashier's check: drawer and drawee are the same bank, person buying the check is the remitter
(4) Teller's Check: check drawn by one bank on another bank. Person buying the check is the remitter
(5) Traveler's Check: demand instrument requiring a countersignature by a person whose specimen signature already appears on the instruments

Front 4

Elements of Negotiability

Back 4

1. In writing
2. Signed by Maker or Drawer
3. Unconditional Promise or Order to Pay
4. Fixed Amount
5. In Money
6. No Other Undertaking or Instruction
7. Payable on Demand or at a Definite Time
8. Contains Words of Negotiability

Front 5

Bearer Language

Back 5

a. "Payable to Bearer"
b. "Payable to the order of Bearer"
c. Indication that possessor entitled to payment
d. no payee stated
e. "to cash" or "to the order of cash"
f. not payable to identified person

Front 6

Contract Liability

Back 6

-Drawer may not disclaim liability on a check but may on other drafts (w/out recourse)

-Secondary liability: drawer liable only after (1) presentment and (2) dishonor

-If draft dishonored -> drawer obligated to pay according to terms when drawer signed

-But if accepted by bank -> drawer discharged, can't be liable if bank fails to pay

Front 7

Real Defenses

Back 7

may be raised against an HDC

mneumonic device: FAIDS

F: Fraud in the factum
F: Forgery

A: Alteration
A: Adjudicated Incompetency

I: Infancy
I: Illegality

D: Duress
D: Discharge in Insolvency
D: Discharges known to HDC

S: Suretyship defenses
S: Statute of limitations

Front 8

Forged Indorsement-- Bank's Defense

Back 8

(1) Imposter rule
(2) Fraudulent indorsement by employee entrusted with check
(3) Drawer's negligence
(4) Failure to timely sue drawer must sue within 3 years

bank will then pass on liability and sue presenter for breach of presentment warranties

presenter can sue entitities further up the chain for breach of transfer warranties

Front 9

Imposter Rule

Back 9

Indorsement Effective

Drawer/Maker estopped to deny validity of forged indorsement

situations where the drawer/maker is deemed to have acted carelessly, thus contributing to the forgery (fictitious payee or imposter)

fraudulent indorsement by employee -> payee estopped

Front 10

Forged Indorsements

Back 10

Effect of forgery of payee's name:

bearer paper: irrelevant
order paper: forgery breaks chain of title, check not properly payable

payee can sue payor bankfor conversion

drawer can sue payor/drawee bank since check not properly payable (but drawee bank protected from double liability)

Front 11

Agent Signature- Is agent personally liable?

Back 11

Agent escapes personal liability if:

(1) principal identified in instrument; AND
(2) signature unambiguously shows it's made on behalf of the principal

agent liable to HDC unless holder had notice

agent liable to nonHDC unless agent can prove original partices did not intend agent to be liable

special rules for checks: agent for drawer is not personally liable if principal's name is on check

agent not authorized -> forgery (agent bound no principal)

Front 12

Transfer Warranties:
made by any person who
(i) transfers
(ii) for consideration

warranties frun to all subsequent holders if transfer is by indorsement. Run only to immediate transferee if not by indorsement

Back 12

(1) entitled to enforce
(2) signatures are genuine
(3) no material alteration
(4) no defenses are good against the indorser
(5) no knowledge of insolvency proceedings
(6) for a remotely created instrument, creation must be authorized by the drawer

Front 13

warranties

Back 13

- implied, arise automatically
- created by transfer or presentment (not the indorsement)
- (possession of the instrument is not necessary
- warranty liability survives final payment of an instrument

Front 14

Acceptance or Certification

Back 14

Acceptance: acceptor (drawee bank) signs a draft and becomes primarily bound to pay the instrument

Certification: the acceptance of a check by the bank on which it was drawn. Discharges the drawer and all prior indorsers

Front 15

Contract liability of indorser

Back 15

Liability disclaimer allowed (qualified indorsement)

Indorsers are liable to each other in the order of their signatures

secondary liability-- indorser liable after:
(1) presentment
(2) dishonor, and
(3) notice of dishonor to indorser (within 30 days)

Front 16

Contract Liability of Maker

Back 16

Primary Liability--

Maker must pay instrument when it is due, according to its terms at the time it was issued

liable to holder or indorser who paid instrument

make may raise defenses
-- depends on status of holder

Front 17

Presentment Warranties:

Plaintiff: parties who in good faith pay or accept (maker, drawee, acceptor)

Defendant: presenter and previous transferors

Back 17

unaccepted draft:
(1) entitled to enforce
(2) no alteration
(3) no knowledge of unauthorized drawer's signature
(4) if remotely created, authorized by drawer

other instruments:
(1) entitled to enforce

Front 18

warranty v. indorser's contract

Back 18

If Plaintiff is holder: payor has not paid, holder will sue indorser on indorser's contract to get the $

If the Plaintiff is payor: payor has paid, later discover it shouldn't have paid, payor will sue indorser for breach of warranty to get the $ back (either transfer or presentment warranty)

Front 19

stop payment orders

Back 19

- drawer may stop payment on a check
- must be in writing: dated, signed, describes items with certainty
- valid for 6 months, can be renewed

Bank's defenses if it pays over a stop:
-payment order: doesn't comply with requirements, customer would have to pay even if payment had been stopped (HDC)

Front 20

stale check

Back 20

more than 6 months old

Front 21

payment in full checks

Back 21

- drawer conspicuously indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bona fide dispute

- operates as an accord and satisfaction if payee cashes the check

-exceptions: payee returns $ within 90 days, payee is an organization that previously notified drawer of specific location to send payment in full checks

Front 22

forged maker's signature

Back 22

- alleged maker not liable because maker's signature is not on the note

- the forger is liable because his signature appears on the note

Front 23

forged drawer's signature

Back 23

- alleged drawer is not liable
- drawee bank must recredit alleged drawer's account as check was not properly payable (unless drawee bank has a defense)
- usually no presentment warranties will be breached (bank unable to pass on loss)
- forger is the real drawer
-risk on drawee unless presenter kew signature was unauthorized

Front 24

Bank's defenses to alleged drawer's not properly payable action (forged drawer's signature)

Back 24

-drawer's negligence
-bank statement rule-- duty to inspect (forged drawer's signature must be reported within 1 year)
-repeat offender rule: same person forging a series of checks, drawer must report within 30 days of statment availability

Front 25

Alteration

Back 25

Change in obligation -> HDC may enforce for original amount

unauthorized completion -> HDC may enforce as completed

fraudulent alteration made by holder -> TOTAL discharge of obligor

nonfraudulent alteration -> obligor liable under original terms

altered check is not properly payable

Front 26

Elements of Negotiability

Back 26

(1) in writing
(2) signed by maker or drawer
(3) unconditional promise or order to pay
(4) fixed amount
(5) in money
(6) no other undertaking or instruction
(7) payable on demand or at a definite time
(8) contains words of negotiability

Front 27

Elements of HDC Status

Back 27

(1) negotiable instrument
(2) holder (possession + good title)
(3) authenticity not apparently questioned
(4) for value
(5) good faith (honesty in fact + compliance with reasonable commercial standards)
(6) without notice of any claims or defenses (@ time of acquisition)

Front 28

proper negotiation--> becoming a holder

bearer rule
order rule

Back 28

bearer= possession alone gives good title

order= possession plus necessary indorsements

Front 29

Blank Indorsements

Back 29

- payee signature only
- creates bearer paper
- can be negotiated by delivery alone

Front 30

special indorsements

Back 30

- payee's signature plus designation of new person to whom instrument payable

- creates order paper (further negotiation requires signatures of indorsee)

Front 31

restrictive indorsement

Back 31

- limiting what may be done with the instrument

"for deposit"
:for collection"

- if not paid consistently with indorsement, depositary bank liable for conversion

Front 32

indorsements when multiple payees

Back 32

jointly -> "and" separates the names of the payees: requires all payees to indorse

severally -> "or" "and/or" separates the names of the payees: requires only 1 indorsement

Front 33

Shelter Rule

Back 33

Transferee has rights of transferor

-even if a person does not qualify as HDC, may still have rights of HDC by shelter

- transfer of instrument vests in transferee

- the rights that transferor had

- having HDC rights via shelter does not make you an HDC

- EXCEPTION: no HDC rights if party to fraud or illegality