Ny Bar Exam Review - Commercial Paper

Front 1

What is the bright line rule for commercial paper?

Back 1

When a negotiable instrument is DULY NEGOTIATED to a HOLDER IN DUE COURSE, the holder in due course takes the instrument free of all claims to it, free of personal defenses, and subject only to real defenses.

Front 2

What are the types of negotiable instruments?

Back 2

1) The Promissory Note (or "Note);
2) The Draft

Front 3

What is the promissory note?

Back 3

A promise-maker. It contains an affimative promise to pay, and not just a mere IOU.

Front 4

Who are the parties to a promissory note?

Back 4

1) The promisor is called the maker;
2) The promisee is called the payee.

Front 5

What is the draft?

Back 5

The commander. It contains an order or command. A check is a draft b/c it contains a command or order.

Front 6

Whoh are the parties to a draft?

Back 6

1) The DRAWER give the order;
2) The DRAWEE is ordered to do the paying;
3) The PAYEE is the beneficiary of the order, meaning the entity who collects.

Front 7

Where does an indorser sign?

Back 7

On the back.

Front 8

How can you tell whether a writing is a negotiable instrument or just a contract?

Back 8

To qualfy as a negotiable instrument, we need:
1) A writing;
2) payable to order or to bearer;
3) signed by the maker or drawer;
4) reciting a sum certin;
5) containing an unconditional promise or order, and no additional promises or orders;
6) payable on demand or at a definite time; and
7) payable in currency.

Front 9

How can you remember the requirements for a writing to qualify as a negotiable instrument?

Back 9

WOSSUP
W - Writing
O - payable to the Order or bearer
S - Signed by teh maker or drawer
S - for a Sum certain
u - Unconditional promise and no additional promises
P - Payale on demand or at a definite time
P - Payable in currency.

Front 10

Who must sign the instrument?

Back 10

Must be signed by the maker if it is a promissory note, or by the drawer if it is a draft.

Front 11

What is required for signature?

Back 11

Any authentication, found anywhere on the instrument, qualifies. (Could be initials, some defining mark, or a nickname, found in margins or anywhere else on hte paper) - NOT a formal standard.

Front 12

What if a promise is in some way conditional?

Back 12

A conditional promise involves a contract, not a negotiable instrument.
The instrument must contain an UNCONDITIONAL PROMISE to qualify as a promissory note or an UNCONDITIONAL ORDER to qualify as a draft.

Front 13

What is the rule wiht respect to express conditions?

Back 13

These create a contract, not a negotiable instrument.

Front 14

What if the instrument endeavors to be "governed by" or "subject to" the terms of some other agreement?

Back 14

If so, or if the instrument states thhat rights or obligations with respect to the promise or order are contained in another writing, it is non-negotiable. This is b/c the holder of a negotiable instrument should not be required to examine another document to determine rights with resepect to payment.

Front 15

What is the rule where the instrument refers to another writing?

Back 15

merely referring to another writing doesn't of itself make the promise or order conditional. Further, a promise or order is not conditional simply becuase it refers to another writing for a statement of rights wiht respect to collateral, prepayment, or acceleration.

Front 16

When will the instrument be deemed conditional?

Back 16

If it limits payment to a particular source or fund.

Front 17

What does the sum certain or fixed amount requirement mean?

Back 17

A specifically ascertainable sum. In other words, you must be able to calculate how much is to be paid, either from what the writing says or from reference to an outside source.

Front 18

What if the instrument states that it is payable wiht interest, but does not state how much interest?

Back 18

That's still negotiable. Here, the judgment rate (the rate on a court judgment), which is set by state statute and therefore fixed, will be applied.

Front 19

Must the interest rate be calculated by looking only to the instrument itself?

Back 19

No. Calculation of the interest rate may be ascertained by a reference in the instrument to a generally accepted commercial or financial index, compendium of interest rates, or announced rate of named financial institution.

Front 20

What does currency mean?

Back 20

Money.

Front 21

What does money include?

Back 21

Foreign currency.

Front 22

What does money NOT mean?

Back 22

Goods

Front 23

What if the writing contains a promise to pay and some other promise?

Back 23

Non-negotiable.

Front 24

When is an instrument payable on demand?

Back 24

When it specifically states that it is payable "on demand" or "at sight" or "on presentation."

Front 25

What if the instrument is silent as to the time of payment?

Back 25

It is still negotiable and deemed payable on demand.

Front 26

When is an instrument payable at a definite time?

Back 26

If, by its terms, it is payable ON OR BEFORE A STATED DATE, or AT A FIXED PERIOD AFTER A STATED DATE.

Front 27

What is the rule with respect to acceleration clauses?

Back 27

They are permissible and do not destroy negotiability.
BUT, future event must be linked to a date certain.

Front 28

How is an instrument payable to order?

Back 28

To be negotiable, the note or draft must use the word "order" or the word "assigns" in connection with the payee's name.

Front 29

How is an instrument payable to bearer?

Back 29

If an instrument is not payable to order, then to be negotiable, it must be payable to bearer, meaning that it is payable to anyone who has it. Examples which satisfy the standard:
1) Pay to bearer;
2) Pay to the order of bearer;
3) Pay to Andy Garcia or bearer;
4) Pay to cash;
5) Pay to the order of cash.

Front 30

Is a writing that states "Pay to Andy Garcia" negotiable?

Back 30

No. It is non-negotiable. It is just a contract. Becuase it does not contain the word order or assigns or bearer.

Front 31

On what theories may the D be sued in a commercial paper hypo?

Back 31

1) Contract or Signature Liability;
2) Warranty or Transfer Liability

Front 32

What is the context of contract or signature liability?

Back 32

D signed the negotiable instrument. Signing it is a promise to pay it.

Front 33

Who signs the negotiable instrument? (Who is D?)

Back 33

1) The maker - the promisor in the promissory note;
2) The indorser - signs on the back of the instrument;
3) The drawer - the party who signs the check

Front 34

Who typically does NOT sign the instrument?

Back 34

The drawee - the party who pays the draft (typically the bank). No signature and therefore no liability.

Front 35

What is the effect of the maker or promisor's signature?

Back 35

By signing his name to the instrument, he enters into a K, whereby he agrees to pay the instrument. If he fails to pay, he can be sued.

Front 36

What is the effect of hte indorsor's signature?

Back 36

The indorsor promises that if the check bounces, and he is given notice of that fact, he will pay.

Front 37

What is the effect of the drawer's signature?

Back 37

The drawee promises that if it bounces, and he is notified, he will pay.

Front 38

What is the result when the words "without recourse" accompany the signature?

Back 38

Without recourse is a term of art used by indorsers and drawers. It represents a disclaimer of liability. Without recourse passes title, but NOT signature liability.

Front 39

What is warranty or transfer liability?

Back 39

Seller's liability for selling a defective instrument.

Front 40

Who is the D? Who may be sued for breach of warranty?

Back 40

Any transferor who SELLS the negotiable instrument. Thus, if transferor is not a donor, he can be sued.

Front 41

Who is entitled to sue the D for breach of warranty?

Back 41

1) If D indorsed the instrument (i.e., signed on the back), any P in possession of the instrument may sue).
2) If D did not indorse the instrument, then only the D's immediate transferee may sue. The warranties will not run with the instrument

Front 42

What warranties are made by D?

Back 42

1) D promises that P has good title to the instrument;
2) D promises that all signatures are genuine and authorized (forgery is a breach of warranty);
3) D promises that the instrument has not been materially altered. (if facts tell you that the instrument has been tampered with, it's defective);
4) D promises that there is no defense or claim good against the D, meaning that the instrument is enforceable;
5) D promises that she has no knowledge of any bankruptcy or insolvency proceeding against the maker or drawer.

Front 43

What does due negotiation or "duly negotiated" mean?

Back 43

That there has been a proper transfer of the instrument.

Front 44

If the instrument has been properly transferred, what is the transferee?

Back 44

A holder, and may be eligble to be a holder in due course.

Front 45

If the instrument has been improperly transferred, what is the transferree?

Back 45

Not a holder and cannot qualify as a holdr in due course.

Front 46

How is an instrument negotiated when it is payable to order?

Back 46

When the instrument is payable to the order of a specific payee, it is negotiated by delivery of the instrument to that payee. Any further negotiation requires that the payee indorse the instrument and deliver it to the transferree. The indorsement must be authorized and valid.

Front 47

How is an instrument negotiated if it is payable to bearer?

Back 47

If the instrument is payable to bearer, indorsement is not required.

Front 48

What types of indoresement are there?

Back 48

1) The special indorsement;
2) The blank indorsement;
3) The restrictive indorsement

Front 49

What is the special indorsement?

Back 49

One that names a particular person as "indorsee." The indorsee must sign in order for the instrument to be further negotiated.

Front 50

What is the blank indorsement?

Back 50

The blank indorsement is one that does not name a specific indorsee. It may be negotiated by delivery alone.

Front 51

What is the restrictive indorsement?

Back 51

The restrictive indorsement contains a condition. e.g., for deposit only.

Front 52

Where a check is indorsed "for deposit only" and stolen and thief cashes it at bank, is bank a holder?

Back 52

No. Bank blew it by not paying attention to the restriciton.

Front 53

What are the origianl owner's rights?

Back 53

Recover from bank in conversion.

Front 54

Who is a holder in due course (HDC)?

Back 54

A holder in due course (HDC) is a holder who takes the instrument:
1) for value; and
2) in good faith; and
3) without notice that it is overdue or has been dishonored or is subject to any defense or claim.

Front 55

What is the "for value" requirement?

Back 55

The holder must give value for the instrument. Note that giving value does NOT mean giving consideration, which is a contract principle.

Front 56

How do consideration and value differ?

Back 56

1) A mere promise is not value;
2) Old value is good value.

Front 57

What is the "in good faith" requirement?

Back 57

Good faith means honesty in fact (this is a subjective test, sometimes referred to as the rule of the pure heart and empty head).

Front 58

What is the "without notice" requiement?

Back 58

The holder must acquire the instrument without notice that it is overdue, has been dishonored, or is subject to any defense or claim. The notice requirement imposes an OBJECTIVE test. It asks, did the holder KNOw or HAVE REASON TO KNOW of the problem?

Front 59

What are the rules with respect to notice that the instrument is overdue?

Back 59

1) Where it is payable at a definite time and the time is past when the holder buys the instrument;
2) Where holder had notice that a payment or more of PRINCIPAL is in arrears, cannot qualify as HDC;
3) Where hodler takes with notice that one or more payments of INTEREST are in arrears, he can nonetheless qualify as a HDC.

Front 60

What are the rules with respect to notice of any defense or claim agaisnt the negotiable instrument's enforcement?

Back 60

1) When the appearance of the instrument gives notice (e.g., stamped "PAID" or "VOID"), holder can't be an HDC;
2) When the obligation of any party is voidable, the holder can still be an HDC unless they had notice or reason to know of the voidability;
3) Notice of competing claim to negotiable instrument: If the instrument is lost by or stolen from teh true owner, the transferee could still qualify as a HDC if the instrument has been properly transferred and the transferee did not have notice or reason to know of the theft or loss;
4) Notice that fiduciary has negotiated instrument in breach of his fiduciary duty: Transferee will still qualify as HDC UNLESS he actually knew of the breach (*Only place where standard is one ofactual knowledge).

Front 61

How does the shelter rule apply to HDC?

Back 61

A transferee acquires whatever rights her transferor had. In other words, the transferee takes shelter in the status of her transferor. Transferee "steps into the shoes" of the HDC, even t hough she otherwise clearly fails to meet the requirements of due course holding. So, transferee can have all the rights of a HDC even though she is a mere donee or otherwise fails to meet the requirements of due course holding.

Front 62

What is the rule where a transferee is an HDC?

Back 62

A HDC (and subsequent transferees who take "shelter" in thaht status) takes the instrument free from claims, free from personal defenses and subject ONLY to real defenses.

Front 63

What does it mean that the HDC takes free from claims?

Back 63

A claim is a right to a negotiable instrument because of superior ownership. If a negotiable instrument is duly negotiated to a holder in due course, the HDC defesats the superior owner.

Front 64

What are personal defenses?

Back 64

Personal defenses include every defense available in ordinary contract actions, such as:
1) lack of consideration;
2) unconscionability;
3) waiver;
4) estoppel;
5) fraud in the inducement.

Front 65

What are the real defenses?

Back 65

MAD FIFI^4

MA - Material Alteration (change in terms of instrument)
D - Duress;
FIF - Fraud In the Factum
I - Incapacity
I - Infancy
I - Insolvency
I - Illegality

Front 66

What is a material alteration?

Back 66

A change in the terms that hte maker or drawer inserted in the instrument

Front 67

Where there is a material alteration, what is maker liable for?

Back 67

Only the original amount filled in by him, not the altered amount.

Front 68

What if maker was negligent?

Back 68

If maker was negligent, he is estopped from raising material alteration as a defense.

Front 69

What does negligence include?

Back 69

Leaving blanks or leaving wide spaces on the check.

Front 70

What is the difference b/t real fraud and personal fraud?

Back 70

1) Real fraud, known as fraud in teh factum, is assertable against an HDC. Real fraud means that there has been a misrepresentation about the instrument. (about what it is)
2) Personal fraud, meaning fraud in the inducement, is a personal defense. It is ineffective against an HDC.

As long as the maker KNEW she was signing a negoitable instrument, she has no defense against a subsequent HDC, even if she was fradulently induced in to signing. BUT, if she did not know that what she was signing was a negotiable instrument, she will have a defense agaisnt the HDC.