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Flashcards in Commercial Paper Deck (20):
1

What is a promissory note?

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

2

What is a draft?

A commercial paper involving three parties- a drawer; a payee and a drawee

A drawer orders a sum to be paid to a payee by the drawee

May be payable on demand or in the future

3

What is a check?

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer

Drawer - person writing the check

Payee - person being paid

Drawee - the bank

4

What is the difference between a post-dated check and a negotiable time draft?

A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

5

What is a trade acceptance?

Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability

6

What is the purpose of the negotiation of commercial paper?

Transfers ownership to another party

7

What is required to maintain the negotiability of a commercial paper?

Must be in writing

Signed by drawer/maker

Be without conditions for payment (other than limitations on payment sources)

Amount of money must be stated

Payable to order or bearer

8

What characteristics will cancel the negotiability of a commercial paper?

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

9

What is required to negotiate Order Paper?

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

10

What are the major types of endorsements on commercial paper?

Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement

11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Within 7 days

12

On a commercial paper; which value will supersede - words or numerical dollar amount?

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

13

Define primary liability with respect to a contract.

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay

14

Define secondary liability with respect to contract liability

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

15

Define contract liability.

Guarantees payment of a liability

16

When does warranty liability occur?

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

17

What five warranties occur with every commercial paper transfer?

Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate

18

What are the requirements for a holder to be a holder in due course?

Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC

Having no knowledge of defenses again instrument; i.e. problems with the instrument

Giving a *present value* for the instrument (a future value doesnt count)

19

What are the personal defenses against a holder in due course (HDC) which will LOSE?

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts

20

What are the REAL defenses against a holder in due course (HDC); which will WIN?

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)

Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution