Commercial Paper For Texas Bar Exam

Front 1

8 step approach to Commercial Paper essay:
i) identify type of __.
ii) identify the __.
iii) determine if instrument is __.
iv) determine if instrument was properly __.
v) determine if transferee is a __.
vi) determine P's __.
vii) determine ∆'s __.
viii) if ∆ is held liable, may ∆ __ __ on to another party.

Back 1

Paper;
parties;
negotiable;
negotiated;
HDC;
cause of action;
defenses;
pass liability

Front 2

a NOTE is a __ to pay money.

Back 2

promise

Front 3

a DRAFT is an __ to pay money.

Back 3

order

Front 4

a __ is a two party instrument.

a __ is a three party instrument.

Back 4

Note; Draft

Front 5

who is the promisor/obligor on a note?

Back 5

Maker

Front 6

who is the "promisee" on a note?

Back 6

Payee or bearer

Front 7

a "certificate of deposit" is what type of paper?

Back 7

note

Front 8

who is the maker (obligor) on a certificate of deposit (CD)?

Back 8

a financial institution (bank)

Front 9

CD:

Financial institution acknowledges __ of money, and the financial institution __ the payee/depositor to repay the money.

Back 9

receipt; promises

* a CD is like a note. it is made by a bank containing: (i) an acknowledgment of money received; and (ii) a promise to repay.

Front 10

What type of instrument is this:

The drawer orders the drawee to pay money to the payee (or bearer).

Back 10

Draft

Front 11

a __ is any draft drawn on a bank and payable on demand.

Back 11

check

Front 12

DRAFT:

the person ordering payment is the __.

Back 12

Drawer

Front 13

DRAFT:

the person ordered to make payment is the __.

- in a check context, also called the __ bank.

Back 13

Drawee; payor

Front 14

DRAFT:

the person to receive the payment is the __.

Back 14

payee

Front 15

What are the two requirements of a "Check"?

Back 15

1) the drawee must be a financial institution (bank), and
2) must be payable on demand

Front 16

the two requirements of a check are:
1) the drawee must be a __ __, and
2) the draft must be payable __ __.

Back 16

financial institution; on DEMAND

Front 17

What are the five types of checks?

Back 17

i) ORDINARY;
ii) CERTIFIED;
iii) CASHIER'S;
iv) TELLER'S;
v) TRAVELER'S

Front 18

what type of check is this:

an ordinary check which bank has "accepted", i.e., agreed to pay.

Back 18

certified check

Front 19

what type of check is this:

drawer and drawee are same bank.

Back 19

Cashier's check

*person buying the check is the remitter.

Front 20

on a cashier's check and a teller's check, the person buying the check from the bank is called the __.

Back 20

remitter

Front 21

what type of check is this:

check drawn by one bank on another bank.

Back 21

teller's check

*person buying the check is the remitter

Front 22

what type of check is this:

a demand instrument requiring "counter signature" by person whose specimen signature already appears on the instrument.

Back 22

Traveler's check

Front 23

"Negotiability" refers to the __ of the instrument, and is determined at __ of __.

Back 23

form; time of issuance

Front 24

if the instrument says it is non-negotiable, it is non-negotiable UNLESS it is a __.

Back 24

check

Front 25

What rules apply to non-negotiable instruments?

Back 25

normal contract law.

-the rules of commercial paper (UCC) does not apply to non-negotiable instruments.

Front 26

if the paper is __ (form) and properly __ (transferred), it may reach the hands of a special good faith purchaser called a holder in due course.

Back 26

negotiable; negotiated

Front 27

Elements of NEGOTIABILITY:
1) in __,
2) __ by the maker or drawer,
3) __ promise or order to pay,
4) fixed __,
5) in __,
6) no other undertaking or instruction,
7) payable on __ or at a __ time,
8) contains words of __.

Back 27

writing;
signed;
unconditional;
amount;
money;
demand/definite;
negotiability

Front 28

one "MUST SOW" in order to be a negotiable instrument.

Back 28

The 7 elements of negotiable instrument are “MUST SOW”
o (1) M – must be paid in MONEY only (US/foreign currency)
o (2) U – promise to pay must be UNCONDITIONAL
o (3) S – the instrument must be payable in a SUM certain (so that by looking holder can determine the amount owed).
 The instrument can contain an interest rate that can’t be calculated by looking at the instrument (i.e. prime interest rate, variable interest rate) provided the interest rate is readily accessible by quick check at index or a rate set by a financial institution.
 Post-default interest or a cost providing for reasonable attorneys fees in the event of litigation does not render the amount uncertain.
o (4) T – must be payable on demand or at fixed TIME or payable after some fixed future event

Front 29

to be negotiable, the maker or drawer must "sign" the writing with present __ to __ the writing.

Back 29

intent; authenticate

Front 30

the maker/drawer signature can be any symbol __ or __ by a party with present intent to authenticate a writing.

Back 30

executed; adopted

Front 31

UNCONDITIONAL promise or ORDER to pay:
- must be more than a mere acknowledgment of a debt such as an I.O.U.

• there is a __ of unconditional promise or order.

Back 31

presumption

Front 32

items that make promise or order conditional (and thus not negotiable):

a) Express Condition to Payment;

b) promise or order "Subject to" or "Governed by" another record;

c) Incorporation by Reference

Back 32

items that make promise or order conditional (and thus not negotiable):

a) Express Condition to Payment;

b) promise or order "Subject to" or "Governed by" another record;

c) Incorporation by Reference

Front 33

[negotiable] or [non-negotiable]?

note provides, "I promise to pay to the order of Frank Smith $10,000 if i make the highest score on the next bar exam."

Back 33

non-negotiable

-b/c there is an express condition to the maker's obligation to pay.

Front 34

[negotiable] or [non-negotiable]?

note provides, "this note is subject to the contract that the parties signed on Jan 2, 2011."

Back 34

non negotiable

-b/c it is conditional on the terms of the contract.

Front 35

[negotiable] or [non-negotiable]?

note provides, "I promise to pay to the order of Best Buy $3,000 for a 70" HDTV."

Back 35

negotiable

-even though the note states the consideration for the monetary payment

Front 36

[negotiable] or [non-negotiable]?

the instrument is silent as to the principle amount due

Back 36

non-negotiable

* to be negotiable, must be able to look at the instrument and determine the principle amount due. (fixed amount element)

Front 37

[negotiable] or [non-negotiable]?

note provides: payment must be from "the proceeds of my Summer 2011 crop"

Back 37

negotiable
- even though payment is limited to a particular source

• limitation to a particular fund or source is ok.

Front 38

[negotiable] or [non-negotiable]?

note provides, "this note is in accordance with the contract that the parties signed on Jan 2, 2011"

Back 38

negotiable

-b/c it is not conditioned on the terms of the contract referenced.

Front 39

interest?

Rule: presumed NO interest.

- a silent instrument bears __ interest.

Back 39

NO

Front 40

Interest may be stated in a way that does not violate the FIXED AMOUNT requirement.

i) amount of money,
ii) fixed or variable rate
iii) reference to outside source

Back 40

Interest may be stated in a way that does not violate the FIXED AMOUNT requirement.

i) amount of money,
ii) fixed or variable rate
iii) reference to outside source

Front 41

[negotiable] or [non-negotiable]?

note provides that interest is "2% above the prime rate"

Back 41

negotiable
-even though must reference an outside source to determine the interest rate.

Front 42

if the instrument says "interest" but is silent as to the rate is negotiable.

How is the rate determined?

Back 42

Judgment rate

Front 43

[negotiable] or [non-negotiable]?

note provides: this note "is only payable in bags of rice."

Back 43

non-negotiable

- a negotiable instrument cannot be payable in goods or services.

*authorized medium of exchange only ($).

Front 44

check provides that it is payable for "$550.00" in numerals but "five hundred dollars" in words.
-the check is payable for $__.

Back 44

$500.00

*words prevail over numerals

Front 45

[negotiable] or [non-negotiable]?

the instrument does not state the date payment is due.

Back 45

negotiable

• silent instrument is a demand instrument

Front 46

[negotiable] or [non-negotiable]?

note provides for payment "when uncle Fred dies."

Back 46

non-negotiable

-b/c payment must be at a definite time or be readily ascertainable at the time the promise or order is issued.

Front 47

[negotiable] or [non-negotiable]?

note provides for payment "on the first day of Fall 2011."

Back 47

negotiable

-b/c payment at a definite ascertainable time

Front 48

[negotiable] or [non-negotiable]?

a check which drawer signs but does not fill in the name of the payee?

Back 48

negotiable

-check is "bearer" paper

Front 49

to be negotiable, the writing signed by the drawer/maker must contain "words of negotiability."

This means it contains __ language, or __ language.

Back 49

bearer; order

Front 50

[bearer language] or [order language]

a) "payable to the order of bearer"

b) check "payable to the order of Frank Smith"

c) check "payable to the order of Frank Smith or bearer"

d) check "payable to Good Luck on the Bar Exam"

e) payable "to cash" or "to order of cash"

Back 50

a) bearer

b) order

c) bearer

d) bearer

e) bearer

Front 51

[negotiable] or [non-negotiable]?

an ordinary check is missing the order or bearer language which is a requirement of negotiability.

Back 51

negotiable

- if this is the only element of negotiability missing for a check, the order or bearer language requirement is WAIVED.

Front 52

[negotiable] or [non-negotiable]?

check "payable to Frank Smith."

Back 52

negotiable

Front 53

[negotiable] or [non-negotiable]?

note or non-check draft "payable to Maria Gomez"

Back 53

non-negotiable

- the exception only applies to checks.

Front 54

the NEGOTIATION requirement ask whether the instrument was __.

Back 54

negotiated

Front 55

Whether an instrument was negotiated determines whether the person in possession is a __.

Back 55

Holder

Front 56

a "holder" is a person in __ of an instrument with a right to __ it.

Back 56

possession; enforce

Front 57

A person becomes a "holder" through a __ that qualifies as a __.

Back 57

transfer; negotiation

Front 58

HOLDER status requires:
1) __ of a negotiable instrument, &
2) __ __.

Back 58

possession; good title

note: whether one has "good title" depends on whether the instrument is payable to bearer or to order.

Front 59

Holder Status:

The method of good title depends on the words of negotiability used.

• BEARER = __.
• ORDER = __ plus necessary __.

Back 59

Good title?

Bearer = "possession" (anyone in possession of bearer paper is a holder and has good title)

Order = "possession" plus "necessary INDORSEMENTS"

Front 60

an indorsement is a __ on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the __ of the instrument.

Back 60

signature; back

Front 61

What are the three types of indorsements?

Back 61

BLANK;
SPECIAL;
RESTRICTIVE

Front 62

What type of indorsement is this?

check payable "to the order of Frank Smith." Frank signs his name on the back of the check.

Back 62

BLANK indorsement

note: when a blank indorsement is made the check is now "bearer" paper so anyone in possession of the check has the right to cash it.

Front 63

What type of indorsement is this?

check payable "to the order of Frank Smith." Frank writes on the back, "Pay to Susan Cortez," and the signs his name immediately below.

Back 63

SPECIAL indoresement

- a special indorsement = payee's signature plus designation of new person to whom instrument is payable. The addition of the new person to whom instrument is now payable creates "order" paper.

Front 64

if the depository bank does not comply with a "restrictive" indorsement (for deposit or collection), the depository bank will be liable to payee for __.

Back 64

conversion

Front 65

Transferee's Right to Transferor's Indorsement:

If instrument is transferred for VALUE, transferee has a specifically enforceable __ to the transferor's indorsement.

Back 65

right

Front 66

whether or not payee indorses the check when he deposits it in his account, the depository bank becomes the __.

Back 66

holder

Front 67

[negotiable] or [non-negotiable]?

payee indorses the instrument as a minor, incompetent, under duress, or was unduly influenced.

Back 67

negotiable

- negotiation is effective even though payee lacks capacity to contract

Front 68

elements of HDC status:
i) negotiable instrument
ii) Holder
iii) authenticity not apparently questioned
iv) holder paid value
v) good faith
vi) w/out notice at time of instrument acquisition

Back 68

elements of HDC status:
i) negotiable instrument
ii) Holder
iii) authenticity not apparently questioned
iv) holder paid value
v) good faith
vi) w/out notice at time of instrument acquisition

Front 69

to be a HDC, cannot have notice at time of acquisition that the instrument's principle is overdue.

a check is deemed overdue __ days after issuance.

Back 69

90

Front 70

HDC?

when instrument is transferred, the check is marked as having insufficient funds.

Back 70

Not an HDC

-to be an HDC, must not have notice that the instrument was dishonored when holder acquired it.

Front 71

HDCs are subject to __ defenses

Back 71

REAL

-"Real" Defenses defeat HDC status, personal defenses do not.

Front 72

Forgeries and Alterations are examples of __ defenses.

Back 72

Real

Front 73

failure of consideration; breach of warranty; and fraud in the inducement are examples of __ defenses.

Back 73

personal

-HDCs prevail over personal defenses.

•HDC prevails over all other defenses of the obligor, either under UCC or common law, that are not real defenses.

Front 74

Dan issues a check for $500 to Paul who promptly indorses the check in blank and places it in the front seat of his car. The check blows out of the car and into the hands of Evans. Evans then sells the check to Heather who qualifies as a HDC. Paul finds out that Heather has the check and demands she give it to him.
Assuming no real defenses, can Paul get the check from Heather?

Back 74

NO,

-no claimant can take an instrument form HDC; HDC is a perfect ∆.

Front 75

what is the effect of the forgery of payee's name on bearer paper?

Back 75

non, it's irrelevant.

-indorsement is not necessary to negotiate bearer paper

Front 76

what is the effect of forgery on order paper?

Back 76

the check is "not properly payable"

-forgery of payee's signature on order paper breaks chain of title, the drawer may demand the drawee bank recredit the drawer's account.