Commercial Paper Flashcards
(32 cards)
What is a note? (MAKERS MAKE NOTES)
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
Who is a party to both a note and a draft?
Payee
What is a draft? (DRAWERS DRAW DRAFTS)
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
What is payable to order and to bearer?
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)
What if a writing has characteristics as both an order instrument and a bearer instrument?
In the face of ambiguity Article 3 takes the path of least resistance. The instrument will be a bearer instrument.
What is negotiation?
A transfer of possession, whether voluntary or involuntary by a person other than the issuer to a person who becomes the holder.
What is required for negotiation of a bearer instrument?
Transfer of possession only
What is required for negotiation of a order instrument?
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
How does one become a holder in due course?
- 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
What is value?
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
What is the two part assessment for taking the instrument in good faith (HDC)?
- 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.
What is the shelter rule?
Whatever rights the transferor had transfer to the transferee.
Exception: Fraud/illegal activity
What are transfer warranties?
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.
What is the difference between real defenses and personal defenses?
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
What is fraud in the factum?
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.
What is fraud in the inducement?
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.
What is the statute of limitations for drafts?
(bank checks)
3 years of date of dishonor or 10 years from date of draft, whichever is earlier.
What is the statute of limitations for notes?
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.
What us a claim in recoupment?
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.
What is an alteration?
An alteration is the unauthorized modification of an instrument.
What is the legal effect of an altered instrument?
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.
Are incomplete instruments enforceable?
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.
What is a presentment warranty?
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.
What is an accomodation party?
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.
