Commercial Paper

Question 1

What is a promissory note?

Answer 1

A two party instrument set up as a “promise to pay” a specific amount.

There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

Maker is primarily liable.

Question 2

What is a draft?

Answer 2

A commercial paper involving three parties- a drawer; a payee and a drawee.

A drawer orders a sum to be paid to a payee by the drawee.

May be payable on demand or in the future.

Question 3

What is a check?

Answer 3

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer Drawer - person writing the check; Payee - person being paid; Drawee - the bank

Question 4

What is the difference between a post-dated check and a negotiable time draft?

Answer 4

A check is payable on demand; even if post-dated. (a demand instrument; sight)

A negotiable time draft is not payable until the date designated for payment. (a time instrument)

Question 5

What is a trade acceptance?

Answer 5

Seller extends credit to Buyer. 
Buyer agrees to pay Seller
Buyer has primary liability
Seller is both Drawer and Payee
Seller has Secondary Liability

Trade acceptance is a draft drawn by the seller (drawer) on the buyer (drawee) that is payable to the seller at some future date. Usually relates to the delivery of goods.

Question 6

What is the purpose of the negotiation of commercial paper?

Answer 6

Transfers ownership to another party.

Question 7

What is required to maintain the negotiability of a commercial paper?

Answer 7

C: Certain sum of money

• variable interest allowed
• Ok to purchase at a discount
• attorney’s fees or collection fees ok
• foreign currency ok
• words over numbers if different

O: Order or bearer

• Bearer paper refers to an instrument that does not require a signature by the payee to transfer it to another party. Only needs to be delivered by the payee to another person with intent to transfer
• Order paper refers to an instrument that requires an endorsement as well as delivery in order to transfer the right of collection.

U: Unconditional promise to pay

P: Payment in money
- the instrument must state a fixed sum of money and cannot offer payment in the form of services or any property other than money, even as an option.

ON: ON demand or a specific time
- instrument must have a definite date by which the holder knows payment can be expected.

S: Signed by the creator of the instrument
- the instrument must be in writing and signed, usually by the maker of the note or drawer of the draft.

Question 8

What characteristics will cancel the negotiability of a commercial paper?

Answer 8

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

Question 9

What is required to negotiate Order Paper?

Answer 9

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

Question 10

What are the major types of endorsements on commercial paper?

Answer 10

Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

Question 11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 11

Within 7 days

Question 12

On a commercial paper; which value will supersede - words or numerical dollar amount?

Answer 12

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

Question 13

Define primary liability with respect to a contract.

Answer 13

First in line to pay on the note/draftMaker of a Promissory Note has primary liability and must pay according to terms of the noteWith a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise topay

Question 14

Define secondary liability with respect to contract liability

Answer 14

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

Question 15

Define contract liability.

Answer 15

Guarantees payment of a liability

Question 16

When does warranty liability occur?

Answer 16

Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only

Question 17

What five warranties occur with every commercial paper transfer?

Answer 17

Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate

Question 18

What are the requirements for a holder to be a holder in due course (HDC)?

Answer 18

Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you don’t know that its stolen; you’re still an HDC

Having no knowledge of defenses again instrument; i.e. problems with the instrument

Giving a present value for the instrument (a future value doesnt count)

Question 19

What are the personal defenses against a holder in due course (HDC) which will LOSE?

Answer 19

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

B:  Breach of Contract
U:  Unauthorized completion
I:  Inducement of Fraud
L:  Lack of Consideration
D:  Duress

Question 20

What are the REAL defenses against a holder in due course (HDC); which will WIN?

Answer 20

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)

F: Forgery - the defendant didn’t sign the instrument at all. Another party faked the defendants’s signature (but not imposter or fictitious name)

A: Alteration - the amount on the instrument has been changed without the defendant’s permission (the defendant must still pay an HDC the amount promised prior to alteration)

B: Bankruptcy Discharge - the court has formally released the defendant from their obligation under the note (but not personal discharge by payee)

L: Lack of Capacity - the defendant was a minor or acted under extreme duress, so that they didn’t have the power under law to make legal commitments.

E: Execution Fraud - Inducement Fraud - the defendant is made certain false promises to encourage them to sign the paper, but they also know they are creating a negotiable instrument