Commercial Paper

Question 1

Who is an accomodating party?

Answer 1

One that signs an instrument (e.g., a note) to lend credit to another party without being a direct beneficiary of the value given

Feb 2019

Question 2

When is an accommodating party discharged from liability?

Answer 2

To the extent that the person entitled to enforce the obligation impairs the collateral securing the obligation (i.e., failing to perfect a security interest)
* Person entitled to enforce instrument must know of accommodation or have notice that the instrument was signed for accommodation
* Must not waive discharge by consent to holder’s actions or express agreement

Feb 2019

Question 3

An accomodating party is obliged to pay the instrument in the capacity in which he signed even if:

Answer 3

He receives no consideration

Feb 2019

Question 4

What are the elements that make an instrument negotiable?

Answer 4

(1) A written and signed instrument (2) providing an unconditional (3) promise or order to pay (4) to order or bearer (5) a fixed amount of money (with or without interest) (6) payable on demand or at a definite time that (7) does not state any other undertaking or instruction by the person promising or ordering payment

February 2020

Question 5

With respect to the requirement that an instrument, to be negotiable, “does not state any other undertaking or instruction by the person promising or ordering payment,” what is an exception?

Answer 5

The instrument may contain a promise to give, aintain, or protect collateral (e.g., rents)

Feb 2019

Question 6

When is an instrument payable to bearer?

Answer 6

(1) States “payable to bearer” (or to “order of bearer”–bearer language wins)
(2) Does not name a payee
(3) Is payable to “cash” or otherwise indicates that it isn’t payable to an identified person

Watch for “payable to _______” – acceptable for ONLY checks

Question 7

When is an instrument payable to “order?”

Answer 7

(1) If it is payable to the order of an identified person (e.g., “pay to the order of Frank Smith”)
(2) If it is payable to an identified person or order (e.g., “pay to Becky or her order”)

Question 8

What types of instruments need not include order or bearer language to be negotiable?

Answer 8

CHECKS

Feb 2020

Question 9

If a person does not sign a negotiable instrument, are they liable on it?

Answer 9

No–a person is not liable on an instrument unless (1) the person signed the instrument, or (2) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person

Feb 2021

Question 10

What is required to show you are a holder in due course?

Answer 10

Must take possession: (1) for value (2) in good faith (3) without notice that the instrument is overdue, dishonored, or subject to any claims (4) with no signs of irregularity

July 2021

Question 11

When is holder in due course status determined?

Answer 11

When the party acquires the instrument–subsequent notice will not defeat HIDC status

July 2021

Question 12

What types of defenses can defeat HIDC statuts?

Answer 12

REAL defenses, not personal
* Must be proved by preponderance of evidence

July 2021

Question 13

What is the shelter rule?

Answer 13

A rule that dictates a transferee take whatever rights their transferor had and takes “shelter” in the status of their transferor
* If an HDIC transfers an instrument, their transferee and subsequent transferes get HDIC rights

July 2021

Question 14

What arises at the time a person signs the check?

Answer 14

Contract liability–by signing their name, maker makes K to pay instrument according to its terms at the time it is issued
* If HDIC, can only assert real defenses
* If ordinary holder, can assert personal (e.g., breach of K) and real defenses

July 2021

Question 15

What are the presentment warranties?

Answer 15

(1) Warrantor entitled to enforce the draft or authorized by one who is (i.e., “good title”)
(2) Draft has not been altered and
(3) Warrantor has no knowledge that the drawer’s signature is unauthorized

July 2016

Question 16

What warranties are made to transferees?

Answer 16

(1) The transferor is entitled to enforce the check
(2) All signatures on the check, including his, are authentic and authorized (no forgery)
(3) The check has not been altered
(4) The check is not subject to any claims or defenses that could be raised against him; and
(5) The maker of this note is not insolvent

Question 17

What is the remedy if a party fails to properly endorse a check?

Answer 17

The transferee has an unqualified right to obtain and endorsement–check not negotiable until then (unless bearer paper)

July 2023

Question 18

Must a bank credit a checking account when it pays money out of that account on a forged check?

Answer 18

YES–bank may only charge cusotmer’s account for “properly payable” items
* Forged signatures make a check not properly payable
* Party whose account was charged must promptly report unauthorized signature to bank

July 2016

Question 19

What presentment warranties are breached if a holder (warrantor) presents a check to the bank?

Answer 19

None–drawee bank takes the risk that the drawer’s signature is unauthorized unless the presenter knew it was unauthorized
* Bank should argue drawer’s negligence substantially contributed to forged signature

July 2016