Commercial Paper

Question 1

Approach for Commercial Paper Problem

Answer 1

1) Identify type of instrument;
2) Identify parties;
3) Determine if instrument is negotiable;
4) Determine if instrument properly negotiated;
5) Determine if transferee is Holder in Due Course (“HDC”); Determine P’s cause(s) of action: whether K, warranty, tort, or not properly payable;
6) Determine D’s defenses;
7) If D liable, can liability be passed to another?

Question 2

Promissory Note

Answer 2

Contains affirmative promise to pay between Maker and Payee. (TWO party instrument)

Question 3

Maker

Answer 3

Promisor (obligor)

Question 4

Payee

Answer 4

Promisee (person entitled to payment)

Question 5

CD

Answer 5

Note issued by financial institution. Financial Institution acknowledges receipt of funds, and promises payee to repay the money.

Question 6

Draft

Answer 6

Contains order for drawee to pay the payee. (ex. personal check) (THREE party instrument

Question 7

Drawer

Answer 7

Person ordering payment

Question 8

Drawee

Answer 8

Person to make payment (if re: checks –> drawee = bank)

Question 9

Payee

Answer 9

Person to receive payment

Question 10

Checks (characteristics; types)

Answer 10

1) Financial institution is drawee; and 2) payable on demand.

Types: Regular check, certified check (bank has agreed to pay), cashier’s check (drawer & drawee are same bank, person buying check = remitter), teller’s check (check drawn by one bank on another bank, person buying check = remitter), traveler’s check (demand instrument requiring counter sig by person whose specimen sig already on check).

Question 11

Requirements to be Negotiable (WOS FU MAD)

Answer 11

1) Writing
2) Payable to Order or bearer: Payable to order → must use the word “order” or “assigns”. Payable to bearer → means payable to anyone who has it (e.g. payable to “cash”). CHECKS EXCEPTION: if this is only element of negotiability missing, “order” or “bearer” language req’t waived.
3) Signed by maker or drawer
4) Fixed amount: Must be able to tell principal amt due by looking at instrument.
5) Unconditional promise to pay: Note: unconditional promise. Draft: unconditional order. If conditional → K.
6) Payable in Money: domestic or foreign currency OK. May not be payable in goods or services. If words contradict figures → words prevail.
7) No Additional Undertaking or Instruction: EXCEPT: a) undertaking or power to give, maintain or protect collateral; b) confession of judgment clauses; c) waiver of laws meant to benefit obligor.
8) Payable on Demand or at Definite time: On Demand: if it specifically states payable “on demand,” “at sight,” or “on presentation”. Definite time: payable on or before given date, or at fixed period after given date. Acceleration clauses OK. If doesn’t state date it’s due → demand instrument.

Question 12

Holder

Answer 12

Possession + Good Title

Question 13

Payable to Order

Answer 13

if payable to specific payee, must be delivered to payee. Further negotiation requires payee sig

Question 14

Payable to Bearer

Answer 14

Indorsement not required. Further negotiation OK by possession alone.

Question 15

TYPES OF INDORSEMENTS:

Answer 15

Special Indorsement – names specific person as indorsee, who must sign;

Blank Indorsement – only has payee sig. No specific person named on instrument;

Restrictive Indorsement – contains condition (e.g. for deposit or collection only)

Question 16

Identity of Payee

Answer 16

If exact payee unclear on face of instrument (e.g. “John Smith”), intent of issuer controls. Multiple payees – If separated by “and”, ALL payees must indorse. If separated by “or”, requires only one sig.

Question 17

Misspelled Name

Answer 17

Payee may endorse with real or incorrect name

Question 18

Payee Lacks Capacity

Answer 18

May still effectively indorse

Question 19

“HDC” Status Benefit

Answer 19

When negotiable instrument is duly negotiated to a holder in due course (HDC), the HDC takes instrument free of all claims to it, free of personal defenses, and subject only to real defenses

HDC and subsequent transferees take instrument free from: Claims and Personal Defenses: (i) lack of consideration; (ii) unconscionability; (iii) waiver; (iv) estoppel; (v) fraud in the inducement.

Question 20

HDC Subject to Real Defenses [MAD FIFI4 + SOUP]

Answer 20

(1) Material Alteration; (2) Duress; (3) Fraud In the Factum; (4) Incapacity; (5) Illegality; (6) Infancy; (7) Insolvency; (8) SoL; (9) Omission of required consumer protection language; (10) Unauthorized signatures & forgeries; (11) Payment to former holder

Question 21

HDC Requirements (+ shelter rule)

Answer 21

1) NEGOTIABLE INSTRUMENT: Must meet all 8 requirements.
2) HOLDER: Must have possession of instrument + good title.
3) NO AUTHENTICITY QUESTIONS: No apparent forgery or alteration of instrument, not irregular or incomplete.
4) FOR VALUE: Must pay value for instrument. Promise is not enough. Old value is ok (e.g., payment for goods already received).
5) GOOD FAITH: Honest in Fact (subjective test) + Observance of reasonable standards of fair dealing (objective).
6) WITHOUT NOTICE: No actual knowledge (subjective) that instrument (i) is overdue (principal only); (ii) was dishonored; (iii) has unauthorized sig; (iv) has alteration(s); (v) there’s uncured default w/r/t payment of another instrument issued in same series; or (vi) is subject to any claims or defenses. Later notice is OK. Won’t lose HDC status.

SHELTER RULE: Transferee acquires rights of transferor. BUT, having rights of HDC does not make you HDC.

Question 22

Basis of K Liability

Answer 22

D signed negotiable instrument

Question 23

Signatures by Agents

Answer 23

If signed by binding agent for principal, principal bound. Agent NOT personally liable only IF (1) principal is ID’d in instrument; and (2) signature clearly shows it was made on behalf of principal.

Otherwise, agent liable:

—To HDC – agent liable UNLESS agent can prove HDC had notice that agent signed as principal’s rep.

—To non-HDC – agent liable UNLESS agent can prove original parties did not intend agent to be liable.

—Special Rule for Checks – agent for drawer not personally liable if principal’s name on check.

Question 24

Liability for Maker of Note

Answer 24

enters into K to pay instrument. Must pay when it’s due according to terms at time issued. Liable to holder or indorser who paid instrument. Defenses: depends on holder status (e.g. whether HDC)

Question 25

Endorser of Note or Draft

Answer 25

Indorser signs check, and if draft dishonored, promises to pay if notified. Indorsers liable to each other in order of sigs – liable to later indorsers. May disclaim liability with by accompanying sig with specific language (e.g. “without recourse, John Doe”).

Question 26

Drawer of Draft

Answer 26

if signed, and draft dishonored, obliged to pay draft according to its terms.. May not disclaim liability on check, but may do so on other drafts.

Question 27

Drawee (Bank)

Answer 27

no direct liability because generally doesn’t sign draft. May be liable if agrees to pay draft and signs it, but no obligation to do so.

Question 28

Co-signers, Sureties & Guarantors

Answer 28

Signs instrument to lend credit to another, but receives no direct benefit. Liable in capacity in which they sign. Presumed guaranty of payment. May limit liability to collection only. If they pay instrument, entitled to reimbursement from accommodated party

Question 29

Warranty Liability—Generally

Answer 29

Warranty liability based off of instrument. Implied warranties created by transfer or presentment, not indorsement. D liability for selling defective instrument

Question 30

Transfer Warranties: Made By

Answer 30

Transferor who receives consideration. No warranty if transfer was a GIFT.

Question 31

Transfer Warranties: Made To

Answer 31

immediate transferee; and subsequent transferees if transferor indorsed. Drawees and makers NOT allowed to sue for breach of transfer warranty

Question 32

List of Transfer Warranties

Answer 32

(1) Entitled to enforce instrument;

(2) Sigs authentic and authorized;
(3) No material alteration;
(4) No defenses;
(5) No knowledge of insolvency proceedings against maker or drawer.

Question 33

Presentment Warranties

Answer 33

Presentment and transfer warranties mutually exclusive.

Question 34

Presentment Warranties: Made By

Answer 34

Presenter (person asking to be paid on check); and previous transferors.

Question 35

Presentment Warranties: Made To

Answer 35

Parties who pay in good faith – makers, drawees and acceptors.

Question 36

List of Presentment Warranties

Answer 36

(1) Entitled to enforce draft or obtain payment; (2) No material alteration; (3) No knowledge of unauthorized drawer’s sig; (4) if remotely-created instrument, person ID’d as drawer authorized it.

Question 37

Sue on Warranty or K?

Answer 37

If P is HDC, sue indorser on indorser’s K.

If P is payor and P should not have paid, sue indorser for breach of warranty.

Question 38

Forged Maker’s Sig

Answer 38

Alleged maker not liable. But, maker may ratify sig. Forger is liable.

Question 39

Forged Drawer’s Sig (defenses)

Answer 39

Alleged drawer not liable. Drawee bank must credit alleged drawer’s acct unless defenses.

Defenses: (i) Drawer’s negligence; (ii) “Bank statement rule” - drawer has duty to inspect bank statements and canceled checks in timely manner, and must report forgeries to bank (w/n 1 year). If repeat offender, must report w/n 30 days of statement

Question 40

Forged Indorsements (Most commonly tested)

Answer 40

Effect of Forged Payee’s name – if forged on bearer paper, forgery irrelevant. If on order paper, forgery breaks chain of title, and check not payable.

Liability of Drawee – Payee can sue payor bank and depositary bank for conversion. Drawer can sue payor/drawee bank since check not payable. BUT, drawee cannot be liable for conversion and drawer’s action.

Question 41

Bank (Drawee) Defenses

Answer 41

(1) imposter rule; (2) fraudulent indorsement by employee entrusted with check; (3) drawer negligence; (4) failure to timely sue (w/n 3 yrs).

Question 42

Liability of Presenter (Breach of Presentment Warranty)

Answer 42

If bank pays, it may sue presenter for breach of presentment warranty of being entitled to enforce

Question 43

Liability of Transferor

Answer 43

If presenter loses, he may sue other transferors for breach of various transfer warranties: entitled to enforce; authentic & authorized sigs; and no good defenses

Question 44

Alteration

Answer 44

Obligor won’t pay because instrument altered.

Question 45

Fraudulent or Non-fraudulent Alteration

Answer 45

Non-fraudulent alterations don’t discharge any party, and instrument enforced according to original terms.

Fraudulent alterations discharge all obligated parties on instrument unless parties assent to or are precluded from asserting alteration.

Question 46

Types of Alteration

Answer 46

Change in Obligation: unauthorized change in instrument modifying party’s obligation: (e.g. amount, date, names of payees, interest rate);

Unauthorized Completion: Party’s obligation affected because instrument completed in unauthorized manner.

Question 47

Alteration’s Affect on HDC

Answer 47

Even if fraudulent, HDC is protected. If change in obligation, HDC may enforce orig amt. If unauthorized completion, HDC may enforce as completed.