Commercial Paper 2

Question 1

Two-Party Paper (Notes)

Answer 1

A promise by the “maker” to pay money to the “payee” or “bearer”.
IE. Certificate of Deposit - issued by a bank acknowledging receipt of money.

Question 2

Three-Party Paper (drafts)

Answer 2

The “drawer” orders the “drawee” to pay third-party.

IE. Checks - Always payable “on demand” and the “drawee” must be a bank.
Trade Acceptance - A special type of “draft” that is drawn by a seller ordering the buyer to pay. The buyer is typically the drawee & accepts the instrument for payment.

Question 3

Demand vs. Time Instrument

Answer 3

An instrument payable on “demand” is a demand note or draft. An instrument payable at a future date is a time note or draft.

Question 4

Negotiation is?

Answer 4

The instrument must be transferred in a proper way.

The UCC protects certain transferees - “Holder in Due Course” (HDCs)

Question 5

Steps in becoming an HDC

Answer 5

Through proper negotiation.

1. Bearer paper requires mere delivery. Order paper requires delivery & endorsement.
2. Last endorsement on the back of the instrument controls whether it is order or bearer paper.
3. A special endorsement names a specific party who must endorse for further transfer. A blank endorsement does not name a new endorsee. A qualified endorsement contains the words “without recourse” and disclaims contract liability of the endorser. Restrictive endorsements contain conditions
4. “Breaking the Chain of Title”—If a necessary endorsement is missing or forged, there is a break in the chain of title and no subsequent transferee can become a holder.

Question 6

Becoming an HDC. A holder will be an HDC to the extent he takes the paper:

Answer 6

1. for value
2. in good faith
3. without notice of any defense to or claims of ownership on the instrument.

Question 7

The Shelter Doctrine

Answer 7

To assure free transferability of commercial paper the UCC provides that most subsequent transferees of an HDC “take shelter in” the rights of the HDC. A transferee takes whatever rights his or her transferor has. Therefore, even if the transferee does not qualify as an HDC in h

Question 8

Real Defenses

Answer 8

The following defenses can be successfully raised by a maker or drawer (so the maker/drawer does not have to pay), even against an HDC. (FAIDS)

Question 9

FAIDS

Answer 9

a. Fraud in the execution; forgery of a necessary signature.
b. Adjudicated insanity; material alteration of the instrument.
c. Infancy; illegality.
d. Duress; discharge in bankruptcy.
e. Suretyship defenses; statute of limitations.

Question 10

Personal Defenses

Answer 10

Anyone with rights of an HDC gets paid. HDC wins. Any defense on the CPA exam that is not a “real” defense.

Question 11

Liability of the Parties

Answer 11

1. Maker = primarily liable
2. Drawer = secondarily liable
3. Drawee = primarily liable after acceptance
4. Endorsers
5. Discharge

Question 12

Discharge

Answer 12

Parties can be discharged from their liabilities.

a. By payment, satisfaction or tender of payment to a holder.
b. By cancellation or renunciation.
c. By impairing recourse or collateral.
d. By delay in presentment.
e. By acceptance of a draft by a bank.