Commercial Paper

Question 1

What is a note? (MAKERS MAKE NOTES)

Answer 1

A note is a two-party negotiable instrument. A note is a promise to pay.

Maker – the person making the promise to pay

Payee – the person to whom the instrument is payable

Question 2

Who is a party to both a note and a draft?

Answer 2

Payee

Question 3

What is a draft? (DRAWERS DRAW DRAFTS)

Answer 3

A draft is an order to pay.

The drawer– the person ordering payment

The drawee– the person being ordered to pay

The payee– the person to whom the instrument is payable

Question 4

What is payable to order and to bearer?

Answer 4

A negotiable instrument must be either an order or a bearer instruments.

Order instrument – payable to a specific person (to the order of, or his order)

Bearer instrument – generally, anyone in possession has legal rights to the instrument (payable to cash, payable to [blank], payable to bearer)

Question 5

What if a writing has characteristics as both an order instrument and a bearer instrument?

Answer 5

In the face of ambiguity Article 3 takes the path of least resistance. The instrument will be a bearer instrument.

Question 6

What is negotiation?

Answer 6

A transfer of possession, whether voluntary or involuntary by a person other than the issuer to a person who becomes the holder.

Question 7

What is required for negotiation of a bearer instrument?

Answer 7

Transfer of possession only

Question 8

What is required for negotiation of a order instrument?

Answer 8

To negotiate an order instrument there must be transfer of possession plus a proper indorsement of the instrument before transfer.

Special indorsement – Indorsement is made to a specific person

Blank endorsement – Indorsed by simply signing not to a specific person

Qualified indorsement– used to limit one’s liability on an instrument (without recourse)

Restrictive indorsement– Used to restrict what the holder can do with the instrument

Question 9

How does one become a holder in due course?

Answer 9

• Must first acquire status as a holder
• Must pay value for the instrument
• Must take the instrument in good faith
• Without notice that there are any problems that might affect the obligor’s obligation to pay the instrument

Question 10

What is value?

Answer 10

The person must give something of value**, **do something of value**, or **forgive something of value.

Paying less than the notes full face value is okay.

What is not value? A gift and an unexecuted promise

Question 11

What is the two part assessment for taking the instrument in good faith (HDC)?

Answer 11

• Honesty in fact – What the person receiving the instrument was aware of AND
• The observance of reasonable commercial standards of fair dealing: What the person receiving the instrument should have surmised given the context in which the instrument was negotiated.

Question 12

What is the shelter rule?

Answer 12

Whatever rights the transferor had transfer to the transferee.

Exception: Fraud/illegal activity

Question 13

What are transfer warranties?

Answer 13

Transfer warranties are often the remedy provided when money is paid to an unauthorized party (thief).
Includes the warrantor is a person entitled to enforce the instrument;

all signatures on the instrument are authentic and authorized;

the instrument has not been forged;

there are no claims that can be asserted against the transferor;

warrantor has no knowledge of any insolvency proceedings.

Question 14

What is the difference between real defenses and personal defenses?

Answer 14

Real defenses include Infancy, incapacity, duress, illegality, fraud in the factum, bankruptcy, alteration and forgery, and statute of limitations.

Personal defenses include issuance, contract defenses (fraud in the inducement), and claims in recoupment.

REAL DEFENSES ARE GOOD AGAINST A HOLDER IN DUE COURSE PERSONAL DEFENSES ARE NOT ONLY THOSE WHO HAVE HOLDER STATUS

Question 15

What is fraud in the factum?

Answer 15

Can be asserted against HDC.

The signer must not be aware that he is signing a negotiable instrument** and **he must not have had a reasonable opportunity to become aware.

Question 16

What is fraud in the inducement?

Answer 16

Personal defense thus may not be asserted against HDC only a holder.

Signer is aware that he is signing a negotiable instrument but signer is induced into signing based on misrepresentations.

Question 17

What is the statute of limitations for drafts?

(bank checks)

Answer 17

3 years of date of dishonor or 10 years from date of draft, whichever is earlier.

Question 18

What is the statute of limitations for notes?

Answer 18

For notes payable at a definite time, the action must be brought within 6 years of the notes due date.

For notes payable on demand, the action must be brought within 6 years after demand for payment.

Question 19

What us a claim in recoupment?

Answer 19

An offset against an amount owed on an instrument.

Claims in recoupment must arise from the transaction that gave rise to the instrument.

THESE ARE NOT ENFORCABLE AGAINST A HDC.

Question 20

What is an alteration?

Answer 20

An alteration is the unauthorized modification of an instrument.

Question 21

What is the legal effect of an altered instrument?

Answer 21

Obligor is discharged on the instrument.

A payor bank or drawee who pays a fraudulently altered instrument may enforce rights under original terms

A HDC may enforce rights with respect to the instrument under original terms.

Question 22

Are incomplete instruments enforceable?

Answer 22

Yes. Recall an incomplete instrument is just a bearer instrument. However, when an incomplete instrument is completed with an unauthorized amount the obligor will be discharged.

Question 23

What is a presentment warranty?

Answer 23

Presentment warranties come in to play when a thief or forger enters into a chain. The breach of presentment warranty allows a payor bank to sue upstream those through whose hands the check has been passed for breach of one of the warranties.

Question 24

What is an accomodation party?

Answer 24

Acts as a surety or guarantor.

The accommodation party must sign the instrument**, _must not be a direct beneficiary of the value given for the instrumen_t, and **the accommodation party’s liability depends on the capacity in which they sign.

Question 25

What if accommodation party signs with words “Guarantees Collection”?

Answer 25

That party is stating seek payment from maker first and I will pay if in collection.

Question 26

What if an accommodation party just signs on the back of the note?

Answer 26

Anomalous indorsement. As an indorser the accommodation party will have secondary liability.

Question 27

What are the legal rights of an accommodation party?

Answer 27

Reimbursement from the maker

Contribution from co0accomodation parties; and the same defenses against payment that an accommodated party would have

Question 28

When will an agent be liable for signing an instrument?

Answer 28

When an agent signs his own name and does not clearly indicate that he is signing in a representative capacity or who does not identify the principal in the instrument will have personal liability to a HDC who takes the instrument without notice of the agency.

NOTE: The agent will not be liable to a non-HDC if he can establish the parties never intended for the agent to be personally liable.

Question 29

What makes a negotiable instrument?

Answer 29

To be negotiable under the Uniform Commercial Code (“UCC”) as adopted by Virginia, an instrument must be a writing, signed by the maker, containing an unconditional promise or order, to pay a fixed amount of money, to an order or bearer, payable on demand or at a definite time, and without stating any additional undertaking or instruction.

Question 30

What is the effect of “only” as a restrictive word on a note?

Answer 30

restrictive words such as “only” are generally ineffective as a limitation on the subsequent transfer of the instrument.

Question 31

What if a note does not specify the rate upon interest will be paid or amount?

Answer 31

If the instrument specifies only that interest will be paid, the rate is the established judgment rate in the jurisdiction of the place of payment of the instrument at the time interest first accrues.

Question 32

Conflicting or contradictory terms?

Answer 32

When conflicting or contradictory terms exist within an instrument, handwritten terms take precedence over typewritten terms, typewritten terms over printed terms, and words over numbers.