Il Commercial Paper (Tc)

Front 1

What is Commercial Paper?

Back 1

"Money Paper" - pieces of paper that direct money from one person to another.

Front 2

Commercial Paper can be either: Order or Promise

ORDER

Back 2

Order = "Draft" (i.e. Check). The bank account holder (DRAWER) orders the bank (DRAWEE) to pay out money from deposit account to a third person (PAYEE).

Front 3

Commercial Paper can be either: Order or Promise

PROMISE

Back 3

Promise = "Note" (i.e. promissory note, certificate of deposit). CD is a promise by bank (MAKER) to pay back money (to the PAYEE) on deposit.

Front 4

Cashier's Check

Back 4

Order / Draft: Drawer and drawee are the same bank (e.g., the bank orders itself to pay). Customer who buys a cashier's check is called a REMITTER.

Front 5

"Negotiable Instrument" -- 7 PART TEST.

For commercial paper to be a negotiable instrument, it must be:

Back 5

1. WRITTEN and SIGNED promise or order to pay
2. UNCONDITIONAL - no explicitly making payment subject to the terms of another referenced document.
--Note can refer to an accompnying loan agreement or security agreement
--Note can limit payment to a particular source (proceeds of a sale)
3. transfer MONEY, not a non-monetary thing (wheat, car, gold).
4. FIXED AMOUNT - can reference a formula, or a floating interest rate. But you must be able to determine the price (cannot be for "the sale of the house", must be "$1,000 from the sale of the house")
--Contradictory terms: Words prevail over numbers, and handwritten terms prevail over type or printed words.)
5. Must be a payment "TO BEARER" (bearer paper) or "TO ORDER" (order paper).
--"to bearer": (1) pay "bearer" (any possessor) or (2) blank payee line or pay to "cash"
--"to order": (1) pay "to the order of" a particular identified person [personal check], or (2) pay to a particular identified person "or order"
6. DEFINITE TIME FOR PAYMENT or upon demand--by default, if no time is stated, payment is due upon demand.
--Prepayment and acceleration are okay.
7. No EXTRANEOUS UNDERTAKINGS: no promises or orders to do anything other than paying money.
--O.K. to add the following 3 promises:
-- -- to give maintain, or protect collateral securing payment of the note.
-- -- to allow the holder to confess judgment or dispose of collateral, or
-- -- to waive protections for the maker/indorser (right to notice of dishonor)

Front 6

Statement of Non-negotiable on paper?

Back 6

Must be stated "conspicuously". If it is, end analysis. Article 3 doesn't apply.

Front 7

What happens the first time a "drawer" of a check or "maker" or a note turns it over?

Back 7

"Issuance"

* If a check isn't signed by the drawer, it is never issued, and is never effective.

Front 8

2 effects that issuance of paper has on the underlying obligation:

Back 8

"Suspended": When the payee accepts the instrument, the underlying obligation is suspended until instrument is PAID (discharged) or DISHONORED (reinstatement).

"Accord and Satisfaction": Using a discounted "full payment" instrument works to finalize settlement of disputed obligations (requires 3 FACTORS)

Front 9

[Effect of issuance of commercial paper] 1

Obligation is Suspended

Back 9

"Suspended": When the payee accepts the instrument, the underlying obligation is suspended until instrument is PAID (discharged) or DISHONORED (reinstatement).
-- Payee accepts a "cashier's check" - obligation is discharged immediately

Front 10

[Effect of issuance of commercial paper] 2

Accord and Satisfaction: What are the 3 factors necessary?

Back 10

"Accord and Satisfaction": Using a discounted "full payment" instrument works to finalize settlement of disputed obligations if 3 factors are present--
1) A drawer must act in "good faith" to settle a "bona fide dispute" with repsect to the existence or amount of debt;
2) the "full payment" legend appears conspicuously on the instrument; and
-- -- full payment legend indicates that it is being paid to satisfy / settle the debt
3) the payee obtains payment and doesn't refund that payment w/in 90 days.
-- -- crossing off the "full payment" legend, "reserving rights," accepting money "under protest" will have NO EFFECT -- can't refuse the settlement but still accept the money.

Front 11

Who can "negotiate" the instrument?

Back 11

the PAYEE and the people after her can "negotiate" the instrument.

Front 12

Only a "HOLDER" can "negotiate" an instrument. So who is a "holder"?

What are the requirements to be considered a holder--
-- of "bearer paper"?
-- of "order paper"?

Back 12

The "holder" must have POSSESSION of the instrument, and when the instrument is first issued:

-- for "bearer paper" (payable "to bearer" or to blank) anyone in possession of the instrument is considered a "holder" and entitled to enforce it.

-- for "order paper" (payable "to the order of Tom") ONLY the PERSON IDENTIFIED as PAYEE can be a "holder" entitled to enforce it.

Front 13

Holder of bearer paper: requirements to be considered as such

Back 13

1) Possession
2) Possession

Front 14

Holder of order paper: requirements to be considered as such

Back 14

1) Possession
2) Must be identified as the payee on the instrument

Front 15

To pass the title of "holder" (and the ability to enforce the instrument), what must the "payee" or current "holder" do?

Back 15

They must "NEGOTIATE" the instrument.

How one negotiates the instrument is dependent upon whether it is "bearer paper" or "order paper"

Front 16

How does a holder negotiate "bearer paper" (to pass the right to enforce the instrument)?

Back 16

Simply pass possession (can be involuntary, a thief can rightfully enforce stolen bearer paper)

Front 17

How does a holder negotiate "order paper" (to pass the right to enforce the instrument)?

Back 17

1) Pass possession, and
2) INDORSE the instrument (sign on the back)

Front 18

3 main types of indorsement

(so another may become a "holder" entitled to enforce an instrument)

Back 18

1) "Blank Indorsement": Simple signature (/s/ Tom Cross), makes order paper into bearer paper (i.e. anyone, a thief, can be the next holder)

2) "Special Indorsement": Signature under instruction directing payment to specific person ("pay to John Smith" /s/ Tom Cross), instrument continues as order paper (payable only to new person) or becomes order paper (if originally bearer paper)

3) "Restrictive Indorsement": Signature under a restriction "for deposit only," which requires money from payment for the instrument to go into the indorser's deposit account.

Front 19

What is an "Anomalous Indorsement"?

What does it do / what is it's effect?

Back 19

An anomalous indorsement is an indorsement made by a person who is not a holder, but is signing as a SURETY ("guarantor") of payment of the instrument to anyone who later becomes a holder.

MORE COMMON: One can sign a note, seemingly as a co-maker, with the CLEAR AND KNOWN INTENTION simply of guaranteeing to lender that the note/loan will be repaid.

Front 20

Effect of being an "accommodation party" (i.e. one who makes an "anomalous indorsement")

Back 20

Treated as a guarantor of payment.
-- i.e. The guarantor promises to pay as soon as the primary obliger (primary indorser or primary maker) defaults (no need to pursue collection against the primary obliger first).

Front 21

Release of principal obligor

Back 21

In IL, "note holder release" of principal obligor (the accommodated maker or indorser) does NOT release secondary obligors (accommodation makers, anomalous indorsers).

Front 22

Effect on secondary obligor when there is an (1) EXTENSION of the principal obligor's time to pay, (2) MODIFICATION of the note, or (3) IMPAIRMENT of collateral securing the note.

Back 22

The occurrance of these event discharges the secondary obligors who DO NOT CONSENT to such modification, BUT . . .

only to the extent that any modification / impairment causes them loss. (e.g. by making it impossible later to find and collect contribution from the principal or by reducing the value of the collateral so much that the secondary's contribution can't be fully covered by recourse to the collateral)

Front 23

When can you enforce a negotiable instrument against the "maker" of a note?

Back 23

When it is due, includes upon demand.

Front 24

When can you enforce a negotiable instrument against the "drawer" of a check / order?

Back 24

Only after the bank (drawee) dishonors the instrument.

Front 25

When can a holder enforce a LOST or STOLEN instrument?

[remember 2 things]

Back 25

1) Must prove by other evidence the terms of the instrument and entitlement to enforce it, including that s/he was a holder when instrument was lost/stolen, and was not negotiated/transferred
-- -- photocopy of the instrument would work

2) Marker must get "adequate protection" against someone else coming forward and demanding payment, also.
-- -- post a bond.

Front 26

Holder in Due Course (HDC)

4-part Test:

Back 26

(1) Must be the HOLDER of the instrument (check to make sure there is proper negotiation of the instrument)
(2) Must have acquired the instrument for VALUE, anything of past or present value
-- future promises are not value until performed
-- Values don't have to be equal.
(3) Must have taken the instrument in GOOD FAITH (requires honesty in fact and the observance of reasonable standards of commercial fair dealing)
(4) Must have acquired the instrument with NO NOTICE of any of the 4 problems.

Front 27

What's so special about being a HDC?

Back 27

HDC can enforce the instrument FREE of claims to the instrument and all but a few defenses.

Front 28

Normal defenses that a maker or drawer can assert to avoid payment (3)

Back 28

(1) Promise payment in exchange for consideration that was never delivered
(2) Instrument issued as a result of fraud
(3) Discharge by performance through payment to an earlier holder of the note already

Front 29

4 problems that can prevent a holder from becoming a HDC if the holder has "notice" of them at the time she acquires the instrument:

Back 29

(1) The instrument is overdue, dishonored or is in principle payment default (the payor can be late making interest payments, but not principal)
(2) The instrument contains an unauthorized signature (forged) or has been altered (instrument must have no obvious singes of tampering or forgery)
(3) Somone has a claim to the instrument (a property right to get the instrument back [from a theif])
(4) Any drawer or maker of the instrument has a defense to payment or a claim in recoupment (failure of consideration, payment, or other contract defense.)

Front 30

4 problems that can prevent a holder from becoming a HDC if the holder has "notice" of them at the time she acquires the instrument:

Back 30

(1) The instrument is overdue, dishonored or is in principle payment default (the payor can be late making interest payments, but not principal)
(2) The instrument contains an unauthorized signature (forged) or has been altered (instrument must have no obvious singes of tampering or forgery)
(3) Somone has a claim to the instrument (a property right to get the instrument back [from a theif])
(4) Any drawer or maker of the instrument has a defense to payment or a claim in recoupment (failure of consideration, payment, or other contract defense.)

Front 31

"Real Defenses": Only 4 defenses can be asserted against payment to an HDC--

Back 31

(1) Infancy of the maker/drawer
(2) Illegality of the debt underlying the instrument (only if the defense renders the contract void [not voidable])
(3) Fraud in the factum: maker didn't know or have any reasonable way of knowning that the signed paper was even an instrument, let alone what it said. (very rare).
-- -- not a good defense, fraud in the inducement: maker was trucking into signing an instrument to a fraudulent person or scheme
(4) Discharge in bankruptcy of the debt: federal law is supreme.

Front 32

Enforcing an instrument against indorsers (who are secondarily liable): HOW--2 additional elements

Back 32

(1) Dishonor: the maker's or drawee bank's refusal to pay a note or check when due and presented (drawer on the check becomes liable, also)
(2) Timely notice of dishonor must be given to the indorser

Front 33

What if the maker on a note tries to pay, and the holder refuses "tender" of payment?

Back 33

The secondary liability of indorsers / accommodation parties is discharged to the extent of the amount of the tender.

Front 34

How can an indorser waive liability to pay dishonored instruments?

Back 34

Sign the instrument "without recourse"

* Makers and Drawers cannot do this. They always remain liable for a dishonored instrument.

Front 35

What's so special about being a HDC?

Back 35

HDC can enforce the instrument FREE of claims to the instrument and all but a few defenses.

Front 36

Normal defenses that a maker or drawer can assert to avoid payment (3)

Back 36

(1) Promise payment in exchange for consideration that was never delivered
(2) Instrument issued as a result of fraud
(3) Discharge by performance through payment to an earlier holder of the note already

Front 37

"Real Defenses": Only 4 defenses can be asserted against payment to an HDC--

Back 37

(1) Infancy of the maker/drawer
(2) Illegality of the debt underlying the instrument (only if the defense renders the contract void [not voidable])
(3) Fraud in the factum: maker didn't know or have any reasonable way of knowning that the signed paper was even an instrument, let alone what it said. (very rare).
-- -- not a good defense, fraud in the inducement: maker was trucking into signing an instrument to a fraudulent person or scheme
(4) Discharge in bankruptcy of the debt: federal law is supreme.

Front 38

Enforcing an instrument against indorsers (who are secondarily liable): HOW--2 additional elements

Back 38

(1) Dishonor: the maker's or drawee bank's refusal to pay a note or check when due and presented (drawer on the check becomes liable, also)
(2) Timely notice of dishonor must be given to the indorser

Front 39

How can an indorser waive their liability to pay dishonored instruments?

Back 39

Sign "without recourse"

* Makers and drawers cannot do this.

Front 40

Forged Drawer's or Maker's signature. Effect.

Back 40

Not "properly payable" by the bank. Only someone who signs an instrument is liable; writing another person's name counts as the writer's signature, not the named person's.

Front 41

Forged Indorsement signature. Effect.

Back 41

If the indorsement was forged then there was improper negotiation, so the possessor is NOT a "holder," and the instrument is not properly payable to that person.

-- -- For checks, proper payee of stolen check has a cause of action for conversion against depository bank or payor bank who gave payee's money to thief over forged indorsement.

Front 42

Negligence leading to a forgery. Effect

Back 42

If the maker's/drawer's/payee's "failure of ordinary care" "substantially contributed" to (facilitated) the forgery/alteration, the maker/drawer/payee will be precluded from asserting the forgery or alteration against anyone who GAVE VALUE for the instrument in GOOD FAITH. (doesn't have to be a HDC)

Front 43

Comparative negligence leading to a forgery. Effect.

Back 43

If the person asserting preclusion based on the maker's/drawer's/payee's negligence also failed to exercise ordinary care in paying the item, the loss is distributed per each party's negligence.

Front 44

Odd cases where FORGED indorsements are VALID and EFFECTIVE

Back 44

(1) Fictitious payees: any indorsement in the fictitious name is effective
(2) Impostors: an impostor can effectively negotiate by indorsing in the named payee's name.
(3) "Responsible Employee": EE charged with check processing duties fraudulently *indorses* ER's instrument; forged indorsement is effective to negotiate the instrument.
-- -- NOTE: this rule does NOT apply to forged drawer signatures.

Front 45

Fraudulent Alteration or Completion--General Rule

Back 45

Alteration discharges maker/drawer liability

Front 46

Requirements necessary for a fraudulently changed instrument to be enforced:

Back 46

Will be enforced according to its ORIGINAL terms, but only by one:
(1) Who got the instrument for VALUE
(2) in GOOD FAITH, and
(3) with NO NOTICE of the alteration
* Negligence rule might preclude the drawer from asserting an alteration defense to paying the instrument as altered.

Front 47

Requirements necessary for a signed by incomplete instrument, later fraudulently completed, to be enforced:

Back 47

Can be enforced according to its terms AS COMPLETED, but only by one:
(1) Who got the instrument for VALUE
(2) in GOOD FAITH, and
(3) with NO NOTICE of the completion
* NOTE: this applies when the amount is left blank.
if the signature is blank, it's simply not actually "issued"
if the "payee" is blank, its simply a "bearer note"