Commercial Paper - Vocab & Main Concepts

Front 1

Two types of commercial paper

Back 1

note and draft

Front 2

What is the mnemonic for commercial paper?

Back 2

Makers make notes, drawers draw drafts.

Front 3

What is a note? Who are the parties for a note?

Back 3

A note is a two-party instrument characterized by a promise to pay.

Maker - person making the promise to pay

Payee - the person to whom the instrument is payable

Front 4

What is a draft? Who are the parties for a draft?

Back 4

A draft is a three-party instrument and order to pay money.

Drawer - person ordering payment

Drawee - person being ordered to pay

Payee - person to whom the instrument is payable

Front 5

What are the two requirements for a check?

Back 5

The bank is the drawee and the instrument is payable on demand.

Front 6

If an instrument contains contradictory terms, what are the rules re: priority?

Back 6

Handwritten terms prevail over typewritten terms

Typewritten terms prevail over printed terms

Words prevail over numbers

Front 7

If the writing is a negotiable instrument, what body of law applies?

Back 7

Article 3

Front 8

What are the six formal requirements for negotiability?

Back 8

Document must be in writing and signed.

Promise or order to pay must be unconditional.

Payment obligation must be for a fixed amount of money (interest rate can be variable)

Writing must be payable to the order or bearer.

Writing must be payable on demand or at definite ascertainable time.

Writing must obligate the payor to do just one thing - pay money.

Front 9

A negotiable instrument must be either an order or a bearer instrument. What is an order instrument? What is a bearer instrument?

Back 9

An order instrument is payable to a specific person.

A bearer instrument one which, generally, anyone in possession has legal rights to

Front 10

What are the key words for an order instrument?

Back 10

Pay to the order of

Pay [Paul] or his order

Front 11

What are words used on a bearer instrument?

Back 11

Payable to bearer

Payable to the order of bearer

Payable to cash

Payable to the payee line left blank

Note: for bearer instruments, it need not say "to the order of"

Front 12

If the writing has characteristics of both an order and bearer instrument, it will be treated as what?

Back 12

a bearer instrument

Front 13

When are notes and checks (drafts) typically payable?

Back 13

Notes: at a definite time

Checks (drafts): payable on demand

Front 14

In what two circumstances are additional undertakings permissible?

Back 14

Promises or orders concerning collateral

Provisions that allow holder to procure judgment

Front 15

Why would one want to acquire status as a holder in due course?

Back 15

It gives them legal rights that are superior to those of a mere holder.

Front 16

Describe how to obtain holder status - two ways

Back 16

The maker/drawer makes an issuance (first delivery of instrument) to payee/creditor (who becomes a holder).

The payee/creditor can then make a negotiation (a transfer of possession by a person other than the issuer who then becomes a holder) to a third party who becomes a holder.

Front 17

What does negotiation require for a bearer instrument? (to pretty much anyone with possession)

What does negotiation require for an order instrument? (to specific person)

Back 17

For bearer instrument:

just transfer of possession

For order instrument:

Transfer of possession and proper endorsement of the instrument before transfer

Front 18

How to acquire status as a holder in due course? (4 steps)

Back 18

1.) First acquire status as a holder

2.) Pay value for the instrument

3.) Take instrument in good faith, and

4.) Without notice that there are any problems that might affect the obligor's obligation to pay the instrument (can have notice of overdue interest payments)

Front 19

When are checks overdue?

Back 19

90 days after date of issuance

Front 20

When is a consumer note required to have the FTC notice placed on the negotiable instrument before the consumer signs the negotiable instrument?

Back 20

the maker/drawer is signing the note in a consumer transaction

the transaction in question must be for the sale or lease of goods or services

the seller must be one who sells the item in question in his ordinary course of business

Front 21

To fulfill the value requirement of a holder in due course, a holder must do what?

Back 21

give, do, or forgive something of value

(promises to perform in future are inadequate)

Front 22

What is the Shelter Rule?

Back 22

whatever rights the transferor had transfer to the transferee

Front 23

What is a transfer warranty? In what fact pattern might an issue re: a transfer warranty arise? What two types of warranties might you then want to discuss?

Back 23

warranty that a transferor makes to a transferee

fact patterns involving thieves. consider transfer and presentment warranties

Front 24

Breach of presentment warranty

Back 24

when a person is not entitled to enforce a instrument because the instrument is faulty (ie. contains a forged indorsement)

bank that "presents" the instrument to the payor

Front 25

Breach of transfer warranty

Back 25

when a person/bank is not entitled to enforce an instrument because the instrument is faulty (ie. forged indorsement)

bank that "transfers" the instrument to another bank who then "presents" the instrument to the payor

Front 26

In court, what two things must be proven for prima facie case that negotiable instrument is enforceable?

Back 26

plaintiff seeking enforcement must prove they are a person entitled to enforce the instrument, and the signatures on the instrument are valid

Front 27

Conversion - definition

Back 27

A person converts the property of another when he wrongfully deprives the other of that property or its value.

Front 28

What is the measure of liability for conversion of an instrument?

Back 28

The amount payable on the instrument

Front 29

What are eight real defenses?

Back 29

1.) Infancy (voidable)

2.) Incapacity (void)

3.) Duress (void)

4.) Illegality (void)

5.) Fraud in the factum (not aware that he is signing a NI and must not have had reasonable opportunity to become aware)

6.) Bankruptcy discharge

7.) Alteration & forgery

8.) SofL

Front 30

Statute of Limitations for drafts and notes

Back 30

drafts:

For unaccepted drafts - 3 years from date of dishonor or 10 years from date of draft, whichever earlier

For certified, tellers, cashier's, or traveler's checks: if presenting, 3 years after demand for payment

notes: 6 years from due date for notes payable at a definite time; 6 years from demand for payment if payable on demand

Front 31

4 Personal defenses & whom can they be asserted against?

Back 31

1.) nonissuance (when the NI was never issued)

2.) contract defenses (only against a holder, not a HIDC)

3.) Claims in recoupment

4.) fraud in the inducement (signer is aware he is signing a NI but is induced into signing based on misrepresentations - not available against a HIDC)

Asserted against only those with holder status

Front 32

An employer will bear responsbility for his employee's actions, when the employee:

Back 32

was entrusted with check-writing privileges and forges indorsements

Front 33

What is an alteration and what is the legal effect?

Back 33

An alteration is the unauthorized modification of an instrument; the obligor will be discharged on the instrument when an alteration has been made

Front 34

Which parties are liable on an instrument?

Back 34

1.) A maker has primary liability (must pay instrument when it becomes due)

2.) A drawer has secondary liability (obligation to pay ripens only upon dishonor)

3.) A drawee is not legally obligated on the instrument unless the drawee signs the instrument for the purpose of accepting liability on the instrument

Front 35

joint signers of an instrument have what type of liability?

Back 35

joint and several liabilty

Front 36

What is an accommodation party?

Back 36

Basically, Art. 3's version of a surety.

Front 37

What are the three requirements to act as an accomodation party? (If these three requirements are not met, consider under surety principles)

Back 37

1.) accomodation party must sign the instrument

2.) accomodation party must not be a direct beneficiary of the value given for the instrument

3.) the accomodation party's liability on the instrument depends on the capacity in which they sign

Front 38

Accomodation parties are entitled to what legal rights?

Back 38

reimbursement from the maker for full repayment

contribution from co-accommodatoin parties

same defenses against payment that an accomodated party would have

Front 39

Who will be personally liable when an agent signs a NI? (three situations)

Back 39

If agent signs just principal's name, principal liable.

If agent signs his name but indicates he is signing as an agent, agent will not be personally liable.

If agent just signs his name and nothing else, agent liable to HDC but not liable to non-HDC if he can establish that parties never intended for him to be liable.

Front 40

Five questions to ask when encountering commercial paper exam question?

Back 40

Is the instrument a negotiable instrument?

Was there a proper negotiation?

Are we dealing with a holder or holder in due course?

What defenses can obligor assert?

Who else can be held responsible?