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88 Cards in this Set

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  • Back
What are the steps to answer an essay question involving commercial paper?
(1) Identify the type of instrument
(2) Identify the parties
(3) Determine if the instrument is negotiable
(4) Determine if the instrument was properly negotiated
(5) Determine if the transferee is a holder in due course
(6) Determine plaintiff's cause of action such as contract, warranty, tort, or not properly payable
(7) Determine defendant's defenses
(8) If defendant is held liable, may defendant pass liability to another party?
What are the two instruments of commercial paper?
Notes and Drafts
What is a note?
A promise to pay

Two party instrument
Who are the two parties involved in a note?
maker (person promising to pay)

payee (person to whom payment is promised)
What is a certificate of deposit?
A note issued by a financial institution that includes:
(a) an acknowledgment by bank of money received AND
(b) a promise by bank to repay the payee/depositor
What is a draft?
An order to pay

Three party instrument
Who are the three parties involved in a draft?
Drawer (person ordering another person, the drawee, to make payment)

Drawee (person ordered to make the payment; in a check context called payor bank)

Payee (person to receive the payment)
What is a check?
any draft drawn on a bank and payable on demand

Note: All checks are drafts plus the two extra requirements of bank as drawee and payable on demand
What are the 5 types of checks?
(1) Ordinary Check
(2) Certified Check
(3) Cashier's Check
(4) Teller's Check
(5) Traveler's Check
What is a certified check?
ordinary check which bank has accepted (agreed to pay)
What is a cashier's check?
drawer and drawee are the same bank

person buying the check is the remitter
What is a teller's check?
check drawn by one bank on another bank

person buying the check is the remitter
What is a traveler's check?
demand instrument requiring a countersignature by a person whose specimen signature already appears on the instrument
What is a 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

Note: third party is usually a seller in an internet transaction or when you pay bills over the phone by giving creditor your checking account number
What is the meaning of negotiability?
whether an instrument is negotiable depends on the form (refers to the form of the instrument)

determined at the time of issuance (time that the maker or drawer issues)
Can an instrument opt out of negotiability?
Yes, if it says it is non-negotiable then it is non-negotiable UNLESS its a check

Note: cannot expressly opt in
What is the effect of a non-negotiable instrument?
it is not invalid or unenforceable

it is just a regular contract
What are the eight elements of negotiability?
(1) a writing
(2) signed by the maker or drawer
(3) unconditional promise or order to pay
(4) a fixed amount
(5) of money
(6) no other undertaking or instruction
(7) payable to order or bearer on demand or at a definite time
(8) contains words of negotiability
What is required to meet the first element of negotiability: "In writing"?
no requirement what it is to be written with or written on
What is required to meet the second element of negotiability: "Signed by Maker or Drawer"?
Any symbol executed or adopted by a party with present intent to authenticate a writing

examples: traditional signature, trade or assumed name, mark "X", initials, forgery, typewritten, signature stamp, thumb print, computer generated
What is required to meet the third element of negotiability: "Unconditional promise or order to pay"?
there is a presumption of an unconditional promse or order
What items make a promise or order conditional (and thus not negotiable)?
(1) Express condition to payment
(2) Promise or order "subject to" or "governed by" another writing or record
(3) Incorporation by reference (rights or obligations with respect to promise or order are stated in another record -writing or electronic)
What items do not make a promise or order conditional?
(1) Statement of consideration
(2) Reference to another record/writing ("as per" or "in accordance with")
(3) Incorporation by reference of items that would not hurt holder (rights regarding collateral, prepayment- right of obligor to pay early, acceleration- right of holder to get paid early upon some event)
(4) Limitation of payment to a particular fund or source
(5) Countersignature
(6) Consumer Protection Language (but this will prevent a holder from being a HDC)
What is required to meet the fourth element of negotiability: "Fixed Amount"?
Must be able to look at instrument and determine the principle amount due
What is required to meet the fifth element of negotiability: "In Money"?
authorized medium of exchange used by domestic or foreign govt as part of its currency (unless limited to payment in foreign $, could also be paid with equivalent US $)

Cannot be payable in goods or services

words vs. figures = words prevail
What is required to meet the sixth element of negotiability: "No Other Undertaking or Instruction"?
Couriers without luggage- Not a full contract
Is interest permitted under the "Fixed Amount" requirement?
Yes, interest may be stated as an amount of money, fixed or variable rate, or reference to outside source

failure to state interest rate= judgment rate

presumption of no interest - thus, silent instrument bears no interest
What are the permitted exceptions to the "No Other Undertaking or Instruction" requirement?
promises concerning collateral

confession of judgment clauses (unenforceable under TX law but wont hurt negotiability

waiver of law meant to benefit maker/drawer
What is required to meet the seventh element of negotiability: "Payable on Demand or at a Definite Time"?
payable on demand if provided for expressly ("on demand" or "at sight") OR if instrument is silent as to the date it is due

payable at a definite time if expressly states the date in the instrument, a fixed period after sight or acceptance, OR time readily ascertainable at the time the promise or order is issued
What are the permitted date change matters that do not prevent an instrument from being payable at a definite time?
(1) Prepayment of Instrument (right of obligor to pay earlier than stated date)
(2) Acceleration of Due Date (right of holder to demand payment earlier than stated date upon certain named events)
(3) Provisions Extending Due Date
By Holder - to any time
By Obligor - to a later definite time stated in the instrument
Automatically upon condition stated in instrument - to a later definite time stated in instrument
What is required to meet the eighth element of negotiability: "Contains Words of Negotiability"?
Bearer language or Order language

If both order and bearer language-bearer controls

If check - this requirement waived if only one not met
What is bearer language?
- payable to bearer
- payable to the order or bearer
- no payee stated
- indication that possessor entitled to payment
- to cash
- to order of cash
- not payable to identified person
What is order language?
to the order of ...
What is negotiation?
transfer of negotiable instrument so transferee is a holder
What is required to have holder status?
(1) Possession of negotiable instrument
(2) Good title
How is good title obtained?
method of obtaining good title depends on words of negotiability:

If Bearer - possession alone is enough

If Order - possession plus necessary
What is required to meet the fourth element of negotiability: "Fixed Amount"?
must be able to look at the instrument and determine the principal amount due (see a particular sum of money)
For the "Fixed Amount" requirement, what are the rules regarding interest?
presumption of no interest
RULE: A silent instrument bears no interest (ex: an ordinary check)

If interest is stated, must be
(1) amount of money
(2) some fixed or variable rate
(3) reference to outside source

RULE: Failure to state interest rate = judgment rate
What is required to meet the fifth element of negotiability: "In Money"?
must be authorized medium of exchange
(one that is authorized or adopted by a domestic or foreign govt as part of its currency

may be payable in foreign money but unless limited to this, could also be paid with equivalent US money

NOT payable in goods or services

words v. figures - WORDS prevail
What is required to meet the sixth element of negotiability: "No Other Undertaking Or Instruction"?
Instrument is not a full contract (negotiable instruments are just promises or orders to pay money"
What undertakings or instructions are permitted (exceptions to sixth element of negotiability)?
(1) promises concerning collateral
(2) confession of judgment clauses (these are unenforceable in TX but won't hurt negotiability
(3) waiver of law meant to benefit obligor (maker/drawer)
What is an indorsement?
An indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument
What are the three types of indorsements?
(1) Blank Indorsements
(2) Special Indorsements
(3) Restrictive Indorsements
What is a blank indorsement?
consists of the payee's signature only

effect is to create bearer paper and further negotiations may be by transfer of possession alone
What is a special indorsement?
consists of payee's signature plus designation of new person to whom the instrument is payable

effect is to create order paper and further negotiations will require the indorsement of the person to whom it was made payable
What is a restrictive indorsement?
ex: "For Deposit or Collection Only"

limits what may be done with the instrument
What is the first thing to do when dealing with forgery and why?
essential to determine whose signature was forged because different rules apply based on the identity/status of the person whose name is forged
What are the rules if there is a forged maker's signature?
alleged maker is not liable because maker's signature does not appear on the note

alleged maker's conduct may ratify the forgery or cause alleged maker to be precluded from denying the forgery

Forger is liable on the note because forger's name appears thereon
What are the rules if there is a forged drawer's signature?
alleged drawer is NOT liable because he did not sign

drawee bank must recredit alleged drawer's account as check was NOT properly payable unless drawee bank has a defense
For a forged drawer signature, is the bank able to pass on the loss?
No unless there is a breach of presentment warranty

normally, no presentment warranties (entitled to enforce, no alteration, no knowledge of forged drawer's signature) will be breached; parties had right to enforce forger's obligation

forger is the real drawer because forger signed

drawee takes risk that drawer's signature unauthorized unless presenter knew it was unauthorized
What are the bank's defenses to recrediting (defenses to alleged drawer's not properly payable action)?
(1) Drawer's negligence

(2) Bank Statement Rule - Duty to Inspect Statement
Describe the bank's defense to recrediting of Drawer's Negligence.
- if the drawer substantially contributes to the forgery of the drawer's name, the drawer may not raise the forgery
Describe the bank's defense to recrediting of the Bank Statement Rule - Duty to Inspect Statement
- customer (drawer) has duty to inspect bank statement and canceled checks in timely manner and report forgeries to bank otherwise if bank can prove loss beyond original mistaken payment, the customer is precluded
What is the repeat offender's rule?
if the same person is forging a series of checks, drawer must report the forgeries within 30 days of when the statement was available otherwise, bank will not recredit the account for the subsequent forgeries by the same person
What is the effect of forgery of payee's name?
Bearer Paper:
- Since indorsement is not necessary to negotiate bearer paper, forgery of an indorsement is irrelevant

Order Paper:
- forgery breaks chain of title and check is not properly payable so drawer may demand that drawee bank recredit the drawer's account as the check was not properly payable
What are the situations in which a party is precluded from asserting forgery of payee's name?
(1) Imposter Rule - drawer/maker is estopped to deny validity of forged indorsement (where maker deemed to have acted carelessly in issuing the check and thus contributed to the forgery)
(2) Fraudulent Indorsements by Employees - payee estopped (if entrusted by employer with responsibility with respect to instrument, indorsement is effective)
What is the liability of the drawee for a forged indorsement?
(1) Conversion Liability to Payee
Payee can sue payor bank (as well as depositary bank and non-bank converters) for conversion
(2) Not Properly Payable Liability to Drawer
drawer of check can sue the payor/drawee bank since a check with a forged payee's name is not properly payable
NOTE: drawee protected from double liability (cant get both)
What are the bank's defenses to conversion and not properly payable actions?
(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)
If the bank pays an action against it, what will it then want to do?
pass on the liability
What is the liability of the presenter?
drawee bank can sue presenter and those prior to presenter for breaching the presentment warranty of entitled to enforce (forged indorsement broke the chain of title so no one could become a holder)
What is the liability of the transferor?
presenter who loses to payor for breach of presentment warranty of good title may sue entities further up the chain for breach of the various transfer warranties of:
(1) entitled to enforce
(2) all signatures authentic or authorized and
(3) no good defenses
What is the problem caused by alteration?
Obligor does not want to pay because the instrument was altered
What are the types of alteration?
(1) Change in obligation- any unauthorized change in an instrument that purports to modify the obligation of a party such as the amount, date, names of payees, or interest rate
(2) Unauthorized completion- instrument is completed in an unauthorized manner which affects the party's obligation
What is the effect of alteration on a holder in due course?
If "Change in Obligation" then HDC may enforce for original amount

If "Unauthorized Completion" then HDC may enforce as completed
What is the effect of alteration on a non-holder in due course?
If fraudulently made by holder - total discharge of obligor

If not fraudulently made - obligor liable under original terms
What is the general rule regarding an altered check?
an altered check is not properly payable
What are the bank's defenses if there is an alteration?
(1) Negligence - if drawer's negligence substantially contributes to the alteration, drawer will be precluded from asserting the alteration
(2) Bank Statement Rule- Drawer must report alterations to the drawee bank within one year
After paying on a claim for alteration, what may a bank due to recover its losses (pass on liability)?
bank may sue up the chain of banks for breach of the presentment warranty of no alteration and then presenting bank may sue up the chain for breach of the transfer warranty of no alteration
How do you identify to whom the instrument is payable?
Intent of issuer determines initial payee

For multiple payees,
If "And" separates names of payees
-requires all payees to indorse
If "Or" or "And/Or" separates names,
-requires any one of payees to indorse
What is the rule regarding transferee's right to transferor's indorsement?
If instrument is transferred for value, transferee has specifically enforceable right to the transferor's indorsement
What is the rule regarding depositary bank becoming a holder if transferee hasn't signed?
Depositary bank becomes a holder even if payee deposits check in payee's account without indorsing it
How may a payee indorse if the payee's name is misspelled?
payee may indorse with incorrect or real name
Can a payee lacking capacity effectively indorse?
negotiation is effective even if the payee was a minor or incompetent or unduly influenced (under duress)
What are the rights of a mere holder?
being a mere holder is normally all that one needs because a holder as lots of rights such as the right to enforce payment to get the money
When is Holder in Due Course status relevant?
important when the obligor raises a defense to payment
What are the six elements of HDC status?
(1) Negotiable Instrument
(2) Holder
(3) Authenticity Not Apparently Questioned (no forgery, alteration; not irregular or incomplete)
(4) Holder Must Pay Value (thus holder deserves special protection)
(5) Good Faith
(6) Without Notice At Time Of Instrument Acquisition
What is the two part test for good faith?
(1) Honesty in fact (subjective)
(2) Observance of reasonable commercial standards of fair dealing (objective)
Does later notice affect HDC status?
No, once you get HDC status, it cannot be taken away
What does it mean to have notice thereby precluding HDC status?
- Actual Knowledge (subjective test)

- Receipt of a notice coupled with a reasonable time to act on the notice

- From all the facts and circumstances known to the person at the time in question (subjective element), the person has reason to know that it exists (objective element)
Does merely filing in the public records sufficiently put a person on notice?
What are the seven things a holder must be without notice of to have HDC status?
(1) Instrument (principal) overdue
(2) Instrument dishonored
(3) Uncured default with respect to payment of another instrument issued as part of the same series
(4) Unauthorized signature
(5) Alteration
(6) Any claim (someone asserting other rights to ownership
(7) Any defense or claim in recoupment
When is an instrument (principal) considered overdue?
due date has passed

- for a check, 90 days after issue

NOTE: overdue interest is NOT notice (only principal)
When is an instrument considered dishonored?
when it is not paid upon proper demand such as a check marked insufficient funds
What is a claim in recoupment?
like a counterclaim, obligor's claim against payee arising out of the transaction giving rise to the paper
What is the shelter rule regarding HDC status?
transferee has rights of transferor

Even if a holder doesn't qualify as HDC, they may still have rights of HDC through shelter which vests the rights of the transferor in the transferee at transfer of the instrument
Does having HDC rights via shelter make a holder an HDC?
NO, just get to use HDC rights
What is the exception to the shelter rule?
A person who was a party to fraud or illegality affecting the instrument cannot get HDC rights by shelter
Who has the burden of proof regarding HDC status?
burden is on person claiming HDC status