Commercial paper

Question 1

Requirements of negotiability

Answer 1

(1) writing, signed by maker or drawer
(2) unconditional promise
(3) sum certain in money
(4) to order (delivered + indorsed) or to bearer (delivered)
(5) on demand or at definite time (by its terms)
(6) no other promise or obligation

Question 1

Requirements for “holder in good faith”

Answer 1

(1) take the instrument as holder
(2) for value
(3) in good faith
(4) without notice of any infirmities (actual or implied, BUT NOT record notice)

Question 1

Ways to become holder

Answer 1

(1) issuance
(2) negotiation
- for bearer instrument = on transfer of possession
- for order instrument = possession + indorsement

Question 1

Forgery of signature

Answer 1

Forged indorsement = invalid

forged maker or drawer signature = still valid

Question 1

Types of indorsement

Answer 1

special indorsement

blank indorsement

qualified indorser (“without recourse”)

restrictive endorsement (“for deposit” or “for collection”)

Question 1

What constitutes value for a holder in due course?

Answer 1

(1) completed performance
(2) valid lien or security interest
(3) payment or security for debt
(4) exchange for another instrument
(5) exchange for irrevocable debt

equivalent value NOT required

Question 1

Notice that an instrument is overdue

Answer 1

(1) any part of principal amount overdue (in NY, 30 days for check)
(2) uncured default in same series
(3) acceleration
(4) demand already made

Question 1

limits on holder-in-due course

Answer 1

(1) instrument acquired as sucessor in interest
(2) purchased in execution, bankruptcy, creditor’s sale, etc.
(3) purchased in bulk transaction outside regular course of business

Question 1

shelter rule

Answer 1

Despite limits, party may still be holder in due course if transferor or predecessor helt the instrument as holder in due course.

Note: applies to both transfers for value and to gifts

Question 1

availability of defenses

Answer 1

against holder in due course: ONLY real defenses

against all others: both real and personal defenses.

Question 1

real defenses

Answer 1

infancy
incapacity
duress
illegality
fraud in factum (BUT NOT fraud in inducement)
insolvency
statute of frauds: 6 years after cause of action accrued

Question 1

personal defenses

Answer 1

(1) existing claims against instrument
(2) contract defenses
(3) nondelivery
(4) theft or violation of restrictive indorsement

Question 1

when does cause of action accrue?

Answer 1

against maker or acceptor:
for time instrument, the day after maturity
for demand instrument, upon its date OR upon the date of issue.

against indorser:
upon demand following dishonor.

Question 1

warranties of an accommodation party

Answer 1

(1) signatures are genuine
(2) no material alteration
(3) all parties have capacity to contract
(4) no knowledge of insolvency proceeding against maker or drawer.

Question 1

types of guarantess

Answer 1

payment guarantee: unconditional

collection guarantee: first need due diligence

Question 1

warranties on presentment

Answer 1

(1) good title
(2) no knowledge that signature by maker or drawer is unauthorized (BUT NOT by holder in due course)
(3) instrument has not been materially altered (BUT NOT by holder in due course)

Question 1

transfer warranties

Answer 1

(1) good title
(2) signature are genuine and authorized
(3) instrument not materially altered
(4) not subject to defense by any party (EXCEPT for transfer without recourse)
(5) no knowledge of maker insolvency

Question 1

unauthorized signature by agent

Answer 1

agent is personally liable, UNLESS signature clearly indicates it is in capacity as agent

Question 1

when are unauthorized signature effective?

Answer 1

(1) fraudulent payees and employees / imposters
(2) negligence substantially contributes to an alteration of the instrument or the making of a forged signature (personal asserting preclusion must prove negligence)