Commercial Paper Mee 2013

Front 1

Note

Back 1

Two-party instrument to pay money.

Maker (The promisor/obligor/debtor: person who promises to pay)

Payee (promissee; person entitled to payment).

Front 2

Draft

Back 2

Three-party instrument. An order to pay money.

Drawer (person ordering payment)

Drawee (person making payment)

Payee (person receiving payment).

Front 3

Why is negotiability of an instrument better?

Back 3

If the paper is negotiable and properly negotiated, it may reach the hands of a special good faith purchaser called a holder in due course (HDC). HDC obtains better rights than transferor and thus can get paid from an obligor even though the obligor has defenses not to pay under normal contract law.

Like a maker of a note that doesn’t want to pay the obligation bc the product purchased was defective. Valid under contract law, but a HDC obtains better rights, and takes free of this and other K defenses.

Front 4

Negotiability

Back 4

Determined at time of issuance.
1. A writing
2. Signed by the maker or drawer (present intent to authenticate).
3. That is an unconditional promise or order to pay
4. A fixed amount
5. Of money
6. With no other undertaking or instruction
7. On demand or at a definite time (if silent = demand)
8. Using words of negotiability

Front 5

Bearer Paper

Back 5

A check signed by the payee with no special instructions creates a blank endorsement, now anyone in possession has the right to cash it.

Front 6

Order Paper

Back 6

A check signed with special instructions or new payee. Further negotiations will require new payee’s signature.

Front 7

Holder In Due Course

Back 7

A (i) holder (possession and right to enforce) is in due course if the instrument held is (ii) negotiable, (iii) the authenticity is not apparently questioned (iv) paid value for the instrument (v) in good faith (vi) without notice of bad facts at time of the instrument acquisition.

Front 8

Real Defenses to HDC Status

Back 8

F: Fraud in factum, Forgery
A: Alteration, Adjudicated Incomp.
I: Infancy Illegality
D: Duress, Discharge through bankruptcy, Discharge known by HDC
S: Suretyship defenses, Statute of Lim.

Hint 8

NOTE: personal defenses, such as simple contract defenses (lack of consideration, breach of warranty, fraud in the inducement, etc), may not be raised against a HDC.

Front 9

Structure of a Check Question

Back 9

By signing her name, the drawer of a check is liable to pay the holder of the instrument according to its terms at the time it was issued, after the holder presents the check for payment and it is dishonored. If a defense or claim is raised, the plaintiff can cut off the defenses by establishing HDC status.

Front 10

Transferor Warranties

Back 10

A transferor for consideration warrants:

1. She is entitled to enforce
2. Instrument has not been altered
3. All signatures are authentic and authorized
4. No defense or claim is good against her
5. No knowledge of insolvency proceedings (for maker, drawer, or acceptor)

Front 11

Presentment Warranties

Back 11

A person who obtains payment and all prior transferors warrant that (i) they are entitled to enforce the check (ii) it was not altered (iii) they have no knowledge that drawer’s signature is unauthorized.

Front 12

Indorser Liability

Back 12

Arises to indorser when she signs the check, it is presented, dishonored, and the indorser is given notice of dishonor.

Hint 12

ie breach of indorser's contract

Front 13

Forgery

Back 13

1. Effect of forged payee name:
Bearer = NONE
Order = breaks the chain of title & is not properly payable (NPP)

2. Effect of forged drawer signature:
Maker not liable, the forger will be liable

Forged Drawer's Sig. - Drawee must recredit as NPP unless bank has defense

Front 14

Bank Defenses when wrongfully paid on a forged check

Back 14

1. Drawer's Negligence significantly contributed to the forgery
-- Imposter
-- blanks, mailed to wrong person, kept checks w/sig. stamp,

2. Entrusted Employee forged indorsement

3. Bank Statement Rule - Forgery reported w/in 1 year / forger w/in 30 days of available statement

Hint 14

Drawer or Maker is estopped from denying validity of the instrument

Front 15

Alterations

Back 15

Change In Obligation or Unauthorized Completion

Effects:
On HDC - Obligation-may enforce ORIGINAL amt. / Completion-may enforce AS COMPLETED

On ~HDC - Holder makes alteration-total discharge / holder didn't make alteration-gets ORIGINAL amt.

Front 16

Commercial paper

Back 16

Written instruments for the payment of money

Front 17

Commercial paper approach

Back 17

(1) Type of paper
(2) Parties
(3) Instrument is negotiable
(4) Instrument was properly negotiated (transfer)
(5) Transferee is a holder in due course ("HDC")
(6) P's cause(s) of action
(7) D's defenses
(9) D may pass liability to another party

Front 18

Note

Back 18

Two-party instrument to pay money.

Maker (The promisor/obligor/debtor: person who promises to pay)

Payee (promissee; person entitled to payment).

Front 19

Draft

Back 19

Three-party instrument. An order to pay money.

Drawer (person ordering payment)

Drawee (person making payment)

Payee (person receiving payment).

Front 20

Check

Back 20

(1) Financial institution is the drawee and (2) payable on demand.

Example of draft.

Types: ordinary, certified, cashier's, teller's, traveler's.

Front 21

Remotely-created item ("demand draft")

Back 21

Draft not signed by drawer but created with drawer's authority so that third party can get paid from drawer's bank account.

Third party is usually a seller in a phone or internet transaction.

Front 22

Negotiability

Back 22

To be negotiable, an instrument must be a: (1) written; (2) signed by maker or drawer; (3) unconditional promise or order to pay; (4) a fixed amount ; (5) money; (6) payable to order or bearer (7) on demand or at a definite time and (8) states no unauthorized undertaking or instruction.

Significance: if negotiable and properly negotiated, receiver may be HDC, which obtains better rights. Absent negotiability, merely regular contract.

Front 23

Signed by maker or drawer

Back 23

Any symbol executed or adopted by party with present intent to authenticate a writing

Front 24

Unconditional promise or order to pay

Back 24

Unconditionality is presumed.

Not conditional: statement of consideration; reference to another record with "as per" or "in accordance with"; reference to items that wouldn't hurt holder (collateral rights, prepayment, acceleration); limitation of payment to particular source; countersignature; consumer protection language.

Conditional: express condition to payment; "subject to" or "governed by" another record; incorporation of right or obligations by reference.

Front 25

Fixed amount

Back 25

1. Principal Amt Due:
Principal must be FIXED and be be able to be determine from the face of the instrument

2. Interest
(a) Presumption of no interest (if instrument silent)

(b) Ways of stating interest that satisfy include: amount of money, fixed or variable rate, reference to outside source (e.g. prime rate)

(c) Failure to state interest rate (but the word "interest" is w/in the instrument) then interest = judgment rate

Front 26

Money

Back 26

Payable in foreign money.

Cannot be payable in goods or services.

Words prevail over figures.

Front 27

No other undertaking or instruction

Back 27

Instruments are just promises/orders to pay money.

Exceptions: Only 3 undertakings or instructions are authorized by the UCC; any others will destroy negotiability.

1. promises re collateral
2. confession of judgment clauses
3. waiver of law meant to benefit/protect obligor.

Front 28

Payable on demand or at a definite time

Back 28

Date change matters that do not prevent instrument from being payable at definite time are allowed (prepayment, acceleration, extending due date).

Front 29

Words of negotiability

Back 29

Bearer language: payable to bearer; payable to order of bearer; no payee stated; to cash.

Order Language: "payable to the order of..."

If both order and bearer language, bearer controls.

Order/bearer language requirement is WAIVED for checks.

Front 30

Negotiation

Back 30

Transfer of negotiable instrument so transferee is a holder.

Front 31

HDC

Back 31

(1) physical possession of negotiable instrument

AND

(2) good title.

Front 32

Good title

Back 32

bearer = possession alone gives good title

order = possession + necessary, authorized, and valid indorsements gives good title

Note: in most cases a forged indorsement breaks the chain of title so NOT good title.

Front 33

Blank indorsements

Back 33

Payee signature only => bearer paper created

Front 34

Special indorsements

Back 34

Payee's signature + designation of new person to whom instrument made payable => order paper.

Front 35

Identification of person to whom payable

Back 35

Intent determines initial payee.

Multiple payees with "and" => all must sign.

Multiple payee with "or" or "and/or" => either/any may sign.

Front 36

Misspelled payee's name

Back 36

Payee may indorse with incorrect or real name.

Front 37

Payee lacking capacity

Back 37

May effectively indorse

Negotiation effective even if payee was a minor, incompetent, or unduly influenced

Front 38

HDC

Back 38

(1) negotiable instrument; (2) holder; (3) authenticity no apparently questioned; (4) holder must pay value; (5) good faith; (6) without notice at time of instrument acquisition.

Front 39

Good faith

Back 39

(1) Honesty in fact (subjective) + (2) observance of reasonable commercial standards of fair dealing (objective).

Front 40

Notice

Back 40

Actual knowledge, receipt of notice coupled with reasonable time to act on notice

Front 41

Shelter rule

Back 41

If a Holder does not qualify as a holder in due course but was a transferee of a HDC, the holder will have the rights of a HDC UNLESS
-- the holder was a party to a fraud or illegality affecting the instrument


Warning: HDC status in this case doesn't actually make the transferee a HDC.

Hint 41

Transferee has rights of transferor. Transfer of an instrument vests in transferee the rights that the transferor had.

Front 42

Real defenses

Back 42

Infancy
Duress
Lack of legal capacity
Illegality
Fraud in execution (fraud in factum: signer lacked knowledge of instrument's character or essential terms + lacked reasonable opportunity to learn of instruments character/terms)
Discharge in insolvency (BK)
Omission of required consumer protection language
Statute of limitations (Note: 6 years from due date; draft: earlier of 3 years after dishonor or 10 years after issue)
Payment to former holder
Alteration
Unauthorized signatures and forgeries

Front 43

An Accord and Satisfaction when commercial paper involved

Back 43

An accord and satisfaction is the acceptance of a proposed settlement of a debt.

Under the UCC when a claim is subject to dispute, the claim can be discharged in full if the person against whom the claim is asserted, IN GOOD FAITH, tenders an instrument that CONSPICUOUSLY states that it is tendered in full satisfaction of the claims and the claimant obtains payment of the instrument.

Hint 43

A&S = settlement of a debt

Claim can be discharged IF
1. debtor tenders
2. in good faith
3. instrument conspicuously stating "in full satisfaction"
4. claimant obtains pmt from instrument

Front 44

Issue: whether an accord and satisfaction can be avoided if obtained by an employee.

Back 44

Under some circumstances the UCC provides that A&S can be avoided if it was obtained INADVERTENTLY (didn't realize pmt was supposed to fully satisfy the claim).

NOT inadvertent if obtained by the claimant,
or
by an agent of the claiming with DIRECT RESPONSIBILITY for the disputed claim, with knowledge that the instrument was tendered in full satisfaction.

Hint 44

1. Can be avoided if inadvertent

2. Not inadvertent if:
(a) obtained by claimant
or
(b) obtained by agent who has direct responsibility for the claim AND knew that it was in satisfaction of claim

Front 45

Fraudulent indorsement

Back 45

Bearer paper - Not relevant because indorsement is not necessary to negotiate.

Order Paper - General rule is that a fraudulent indorsement by someone other than the named payee breaks the chain of title and a check is NOT PROPERLY PAYABLE. The drawer may demand that the drawee bank recredits the drawer's account if the bank already paid.

Consequences: no one can be a holder in due course after the forgery

EXCEPTIONS:
The maker/drawer/issuer will be estopped from denying the validity of the forged document IF:
1. Impostor rule - maker/drawer acted carelessly in issuing the check and thus has CONTRIBUTED to the forgery.

2. Fraudulent indorsements by employees - IF er entrusts an ee (or IC) w/responsibility w/respect to an instrument, then fraudulent indorsement IS EFFECTIVE. (only as to attempts to recover from persons other than the ee)

Hint 45

GENERAL RULES:
- breaks chain of title
- not properly payable
- bank has to recredit acct
- no one after fraud can be HDC

EXCEPTIONS:
Estopped from denying validity IF:
1. Imposter Rule - contributed to the forgery by carelessness
(NOTE: putting check in purse that has examples of signature is NOT negligent)

2. Fraudulent indorsements by employees - EE entrusted w/responsibility then indorsement IS effective.

Front 46

Alteration
vs
Unauthorized Completion of an instrument

Back 46

Alteration - changed the terms that the maker or drawer inserted in the instrument. Generally, maker NOT LIABLE

Unauthorized Completion - filling in blanks left by the maker/drawer. Generally maker WILL BE LIABLE for the full amount of the unauthorized completion.

Front 47

Issue:
What is the result if a holder tries to recover from a Drawer on a draft
(usually the instrument is a check)

Back 47

A drawer has secondary liability for payment under a contract when payment was made via drawer's instrument negotiated to the holder by a payee.

As a general rule, if a check is dishonored, the drawer is obligated to pay the holder, the person w/possession w/a right to enforce it, according to the check's terms when the drawer signed.

No one can enforce order paper other than the payee unless further negotiated. Negotiation of an instrument payable to an identified person is accomplished by transferring possession of the instrument along with the identified person's indorsement.

NOTE: if the holder is not a HDC, then the holder is not entitled to enforce the instrument.

Front 48

Unauthorized Signatures

Back 48

General Rule: forged signatures are valid only as the signature of the FORGER and are invalid as the signature of the named payee. (see exceptions)

Note: forged indorser's signature destroys "good title" but a forged drawer's signature DOESN"T.

Front 49

Unauthorized signatures are effective when...

Back 49

1. Imposter - when a fictitous payee's signature is forged
2. Entrusted Employee - responsible for instruments & signs
3. Maker's Negligence - blank spaces, mailed to wrong person w/same name, violated internal anti-forgery procedures
4. Bank Statement Rule violated - failure to discover w/in "reasonable time" (30 days)
5. Bank Certifies - estoppel by certification

NOTE: if taker fails to exercise ordinary care the loss is shared proportionally to negligence

Front 50

Statute of Limitations
on Commercial Paper Actions

Back 50

Three (3) year SoL applies to:
1. Unaccepted drafts (after date of dishonor)
2. Against issuers/acceptors of cashier's checks, certified checks
3. Conversion
4. Breach of Warranty
5. To enforce other Article 3 Rights (after accrual)

Six (6) Year SoL applies to:
1. Notes payable at a definite time or on demand (after due date or demand for pmt made)
2. Certificate of deposit (after demand for pmt, but after stated due date)

Hint 50

3 Years: drafts, cashiers/cert. checks, conversion, breach of warranty, other Art. 3 rights

6 Years: Notes payable on demand/definite time and Certificates of Deposit

Front 51

Issue:
Whether a holder is subject to the ownership claim of the payee on an instrument

Back 51

Rule: If a party is a holder in due course then they will take free of a named payee on a check even though the payee has possessory & property rights in the check

6 Elements of HDC: (i) Holder (possession and good title) (ii) of a negotiable instrument (iii) where authenticity is not apparently questioned (free from forgeries to preserve chain of title) (iv) paid value (v) in good faith and (vi) without notice at the time of acquisition.

Hint 51

Rule - takes free of named payee if HDC

6 Elements of HDC

Front 52

6 Elements of an HDC

Back 52

1. Negotiable instrument (8 element test)
2. Holder (possession + good title)
3. Authenticity not apparently questioned
4. paid value (not the same as consideration)
5. in good faith (subjectively and objectively)
6. without notice at the time of acquisition (of the 7 things, any one of which will disqualify the holder from HDC statuts)

Hint 52

holder of a negotiable instrument free from forgeries to preserve chain of title who paid value in good faith and without notice of real defenses at the time of acquisition.

Front 53

Issue:
What rights does a HDC have against the indorser if seeking to enforce an instrument?

Back 53

1. Contract of secondary liability (indorser's liablity)

2. Warranty Liability (by transferring, indorser warrants to all subsequent transferees that:
(a) she is entitled to enforce the instrument
(b) the signatures are genuine
(c) no material alteration
(d) no defenses
(e) no knowledge of insolvency proceedings

NOTE: if transferee doesn't indorse then the transferee's warrants only to the immediate transferee, not to subsequent ones

Hint 53

Indorser's Contract
Warranty Liability

Front 54

Breach of Indorser's Contract

Back 54

Before a holder can look to an indorser for payment, the holder must fulfill 3 prerequisites:
1. Presentment
(made by commercially reasonable means - checks = 30 days of indorsement)

2. Dishonor (when the maker/drawee does not pay w/in allowable time after presentment)

3. Notice of Dishonor (by any commercially reasonable means, generally w/in 30 days of dishonor)

NOTE: if multiple indorsers, then any one indorser is liable to ANY holder or later indorser for the FULL AMOUNT on the instrument (even if the agreement was for exchange less than)

Front 55

VALUE requirement
for HDC status

Back 55

Any one of the following constitutes VALUE:
1. performance of the agreed consideration
2. Acquisition by the holder of a lien or security interest in the instrument (other than a judicial lien)
3. Taking the instrument as payment for an anticedent debt
4. Trading a negotiable instrument for another instrument
5. Giving the instrument in exchange for the incurring of an irrevocable obligation to a 3rd person by the person taking the instrument.

NOTE: if the exchange hasn't occurred and only promises to exchange, then NOT for value

Front 56

Shelter Rule
intro

Back 56

A transferee acquires the transferor's rights.

A transferee is said to take "shelter" in the status of the transferor, which allows the transferee to "step into the shoes" of the HDC who formerly held the instrument and to obtain the rights of a HDC even though she fails to meet the requirements for a HDC.

Exception: a party to fraud or illegality affecting the instrument cannot obtain HDC rights by shelter.

Front 57

"NOTICE" with regard to the "without notice" requirement for HDC status means

Back 57

1. Actual knowledge (subjective)
2. Receipt of notice coupled with a reasonable time to act on the notice
3. The person has reason to know (objective) that it (any 1 of the 7 things) exists, based on all the facts and circumstances known to the person at the time in question (subjective)

NOTE: merely filing in the public records does NOT put a person on notice for purposes of HDC status

Front 58

Certificate Of Deposit

Back 58

Is a note issued by a financial institution and contains:

1. an acknowledgement that money has been received by the financial institution

AND

2. A promise by the financial institution to repay the sum of money

Front 59

Indorsement Types

Back 59

Special Indorsement: names a particular person as indorsee. The effect is that the indorsee must sign in order to be further negotiated.

Blank indorsement: a signature that is not accompanied by naming a specific indorsee. The effect is that it creates bearer paper which may be negotiated by delivery alone.

Front 60

UNCONDITIONAL PROMISE
requirement for negotiability

Back 60

Must be more than a mere acknowledgement of a debt.

1. Presumption of unconditional promise or order
2. Items that make a promise/order CONDITIONAL:
(a) Express condition to pay (eg "i promise x IF y"
(b) Promise/order is "subject to" or "governed by" another record
(c) Incorporation of rights or obligations by reference

3. Items that do NOT make promise/order conditional:
(a) Stmt of Consideration
(b) Ref. to record "as per..."
(c) Incorp'ng rts re: collateral, prepayment, acceleration
(d) lmt'ng pmt from particular source
(e) counter signature
(f) Consumer protection language

Front 61

Facts constituting notice that will disqualify a holder from HDC status

Back 61

1. The instrument's principal is overdue (eg >90 days for checks)
2. Instrument has been dishonored (eg. check bounced)
3. Uncured default w/respect to pmt of another instrument issued as part of the same series (?? no clue what this means)
4. Unauthorized signature(s)
5. Alteration
6. Any Claim (ie someone else is asserting superior rights)
7. Any defense (obligor doesn't want to pay b/c of fraud, minority, lack of capacity, etc) OR claim in recoupment (obligor's claim against payee arising out of the transaction giving rise to the paper)

Hint 61

1. Principal overdue
2. dishonored
3. Uncured - in a series
4. Unauthorized Sig.
5. Alteration
6. Claims
7. Defenses or recoupment claims

Front 62

First things to mention in any commercial paper answer

Back 62

1. Is a negotiable instrument so governed by Art. 3 of UCC

2. Under UCC, holder generally has the right to enforce against the maker/drawer according to its terms

3. Holder is subject to contract defenses the maker might have against enforcement unless holder is an HDC

4. HDC takes free of most personal defenses and only subject to the so-called "real" defenses in Art. 3.

Front 63

Effective ("real") defenses to a HDC
long list (11)

Back 63

1. infancy
2. duress which VOIDS obligation (not merely voidable)
3. Lack of legal capacity making obligation void (ie adjudicated incompetent)
4. Illegality making obligation void
5. Fraud in the execution (aka fraud in the factum, or "real fraud")
6. Discharge in insolvency (bankruptcy)
7. Omission of required consumer protection language
8. Statute of Limitations
9. Payment to former holder
10. Alteration
11. Unauthorized Signatures & forgeries

Hint 63

Can use the FAIDS mnemonic but it doesn't include:
consumer protection and FAIDS includes "suretyship defenses"

F: fraud in the factum, forgeries
A: alteration, adjudicated incompetent
I: infancy, illegality
D: duress, discharge (bankruptcy or by pmt to former holder)
S: statute of limitations, suretyship defenses

Front 64

Theft of a negotiable instrument: Order Paper

Back 64

If there is a theft of order paper then usually a fraudulent indorsement follows.

Forgery is a real defense and may be asserted against both HDC and non-HDCs.

General Rule: a person is not liable on an instrument unless that person or her agent signed the instrument, and therefore an unauthorized signature is wholly ineffective.

Exception: A person whose failure to exercise reasonable care substantially contributes to a forged signature on an instrument is precluded from asserting forgery as a defense to avoid liability.

Front 65

Discharge of an instrument

Back 65

General Rule: An instrument itself never dies by discharge b/c discharge of a party is apersonal defense which an HDC can cut off

No discharge of any party is effective against a subsequent HDC unless the HDC has notice of the defense when he takes the instrument.

Front 66

Issue:
to what extent is a guarantor on a note liable to the holder of the note?

Back 66

A guarantor or accommodation party is one who signs an instrument for the purpose of lending her name & credit to another party to the instrument and will be liable in the capacity in which she signs (eg as co-maker or as an indorser)

Guarantor is NEVER liable to the accommodated party

If the Guarantor ends up paying then they gain rights to the collateral

DISCHARGE if there is:
(i) impairment of the collateral
(ii) extension of the due date
(iii) or other material modification

Note: the guarantor Is only discharged to the extent of the impairment or loss caused by the modification