Commercial Paper

Question 1

Negotiable Instrument Definition

Answer 1

A writing signed by a maker/drawer containing an unconditional promise or order to pay a fixed amount of money on demand or at a definite time.

Question 2

Difference Between Note and Draft

Answer 2

Note - 2 party promise to pay
Maker (promisor) – Payee

Draft - 3 party order to pay
Drawer (payer) – Drawee (bank) – Payee

Question 3

Check Definition

Answer 3

Financial instrument making a promise to pay

Payable on demand

Question 4

Unconditional Attributes

Answer 4

• Required for negotiability
• Presumption of unconditionality
• Any statement that does not hurt the rights of the holder to payment
• “per” or “in accordance with”

Question 5

Conditional Attributes

Answer 5

• Express conditions limiting the holder’s rights to payment
• “subject to” or “governed by”
• Incorporation by reference that affects holder’s right to payment

Question 6

If interest is not stated on the instrument…

Answer 6

Presumption of no interest

If interest stated but the rate is not given or discernible, court will apply the judgment rate.

Question 7

What is meant by “no further undertaking or instruction?”

Answer 7

Can only concern the payment of money, or

• Promises of collateral
• Waiver of law to benefit of maker/drawer
• Confession of judgment

Question 8

Rules for Words of Negotiability

Answer 8

1. If blank, “to bearer,” or “to cash” it is BEARER PAPER
2. If “to order of [payee]” or “[payee] or his order” it is ORDER PAPER
3. If language of both, or neither, then the instrument is BEARER PAPER.

Question 9

What is required to be a “Holder?”

Answer 9

1. Physical possession of the instrument, &
2. Good title
   - Bearer: possession
   - Order: possession + indorsements

Question 10

Holder in Due Course (HDC) Elements

Answer 10

1. Negotiable instrument
2. Holder status
3. Authenticity not apparently questioned
4. Any value paid
5. Good faith
6. W/o notice of claims

Question 11

What is considered adequate notice for a holder?

Answer 11

1. Actual notice - Information in fact and a reasonable time to act
2. Apparent notice - Person had reason to know based on the facts and circumstances

Question 12

Examples of Notice

Answer 12

• Check more than 90 days past due date
• Instrument dishonored
• Uncured default on another instrument of the same series
• Unauthorized signature
• Alterations
• Claims by 3Ps
• Defense or claim of recoupment

Question 13

What defenses is an HDC subject to?

“DIS IS FUBAR”

Answer 13

D - duress
I - incapacity
S - statute of limitations (5 years)
I - infancy
S - signatures are unauthorized 
F - fraud in execution
U - unlawful/illegality
B - bankruptcy
A - alteration
R - REAL DEFENSES

Question 14

Fraud in the Execution

Answer 14

Signer was without knowledge of the essential terms or character of the instrument, and was without a reasonable opportunity to learn of them.

Question 15

When is an agent bound under the contract theory of liability?

Answer 15

1. Agent signed without Principal’s authority,
2. Principal not identified in instrument, and either
3. HDC w/o notice of representative nature, or
4. Non-HDC w/ intent to bind Agent specifically

Question 16

When is a drawee (bank) bound under the contract theory of liability?

Answer 16

No signature = No liability

1. Acceptance - agreement to pay by signing
2. Certification - discharges drawer and prior indorsers
3. Conversion - payee received delivery of forged instrument
4. Death of drawer - may continue to pay drawer’s checks until
   - Knowledge of death w/ reasonable time to act
   - ≤ 10 days from death
   - Must stop immed. if req. by person w/ interest in account

Question 17

Who has primary liability on a note?

Answer 17

The maker of a note is primarily liable for payment upon presentment by a holder/indorser who paid value for it.

Question 18

Who has primary/secondary liability on a draft?

Answer 18

The DRAWER of a draft is liable if dishonored by drawee upon presentment within 30 days. 
May disclaim (except for checks).

The INDORSER is liable to later indorsers if presentment occurs within 30 days, the draft is dishonored by drawee, and the indorser receives notice within 30 days of such dishonor.
May disclaim liability.

Question 19

What is an accommodation?

Answer 19

An arrangement where the person signing a note is not receiving the benefit.

Accommodated party - principal
Accommodating party - surety
Holder - creditor

ACCOMMODATING PARTY IS LIABLE FOR PAYMENT (or collection, if so limited) and is entitled to reimbursement from accommodated party.

Question 20

What is a Transfer Warranty?

Answer 20

Guaranty of payment made by transferor (∆) who received payment, to immediate transferee, and subsequent transferees if ∆ indorsed.

Question 21

What is covered by Transfer Warranty?

Answer 21

1. Transferor has good title
2. All signatures are authentic & authorized
3. No alterations
4. No defenses against transferor
5. No knowledge of insolvency

Cannot be disclaimed for checks

Question 22

What is a Presentment Warranty?

Answer 22

Guaranty of drawee payment by the presenter and previous transferors to party who pays in good faith.

Question 23

What is covered by Presentment Warranty?

Answer 23

Presentment to Drawee:

1. Presenter has good title
2. No alterations
3. No knowledge of forgery

Presentment to Others:
1. Presenter has good title

Cannot be disclaimed for checks

Question 24

Effect of instrument marked “Payment In Full”

Answer 24

If CONSPICUOUSLY INDICATED on payment of EXISTING OBLIGATION or obligation subject to BONA FIDE DISPUTE, operates as ACCORD AND SATISFACTION if not returned within 90 days.