Commercial Paper

Question 1

What is the bright line rule in commercial paper?

Answer 1

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

Question 2

What are the two main kinds of negotiable instruments?

Answer 2

1) Promissory notes: writing containing an affirmative promise to pay where promisor is the maker of the note and the promisee is the payee.
2) Draft (typically a check): writing that contains an order or command to pay. 3 parties: drawer gives the order to pay, drawee ordered to do the paying, and payee is the beneficiary.

Question 3

What requirements must be satisfied for a writing to qualify as a negotiable instrument?

Answer 3

WOSSUPP!!!!!!!
WRITING
payable to ORDER or bearer
SIGNED by maker or drawer
reciting a SUM certain
containing an UNCONDITIONAL promise or order and no additional promises or orders
PAYABLE on demand or at a definite time
PAYABLE in currency

Question 4

What is required to constitute a “signing”?

Answer 4

Authentication, found anywhere on the instrument, qualifies as long as made by the maker or drawer. May be initials, some defining mark, or a nickname found in margins or anywhere else.

Question 5

What is the unconditional requirement?

Answer 5

There must be an unconditional promise to qualify a writing as a note or draft. If there’s an express condition = contract. If instrument is governed by or subject to another agreement = contract. BUT merely referring to another writing as to a tangential matter doesn’t make an instrument conditional i.e. “rights and duties w/ respect to collateral listed in SA.”
Instrument isn’t conditional merely because it limits payment to particular source or fund.

Question 6

What is the sum certain or fixed amount requirement?

Answer 6

Need a specifically ascertainable sum to calculate how much is to be paid either from what writing says or reference to outside source. Amount of principal must be fixed but interest doesn’t have to be. Need only to be able to determine interest rate from face of the instrument.

Question 7

What is currency?

Answer 7

Money or foreign money. NOT GOODS.

Question 8

What is the payable on demand or at a definite time requirement?

Answer 8

1) On Demand: instrument specifically states that it s payable on demand or at sight or at presentation.
2) Definite Time: By terms of instrument, payable on or before a state date or w/in a fixed period after the stated date. Acceleration clauses are permissible but the future event must be linked to a date that is certain.

Question 9

What is the payable to order or bearer requirement?

Answer 9

Payable to order: note or draft must use the word “order” or “assigns” in connection w/ payee’s name.
Payable to bearer: if not payable to order, to be negotiable it must be payable to bearer, meaning payable to anyone who has it. EX: pay to bearer, pay to cash, pay to order of cash/ bearer.
EXCEPTION: if it’s a check and says “pay to B” then it’s still negotiable. If a writing not a check says “pay to B,” then it’s non-negotiable.

Question 10

What are the two theories under which defendant may get sued in commercial paper hypos?

Answer 10

1) K or signature liability

2) Warranty or transfer liability

Question 11

How can you be sued under K or signature liability?

Answer 11

D signed negotiable instrument, and signature was a promise to pay. Who may be sued under this theory:
1) Promisor of promissory note: Maker enters K whereby he agrees to pay the instrument, so he can be sued if he fails to pay.
2) Indorser signs his name on the back of instrument. If check bounces + signer is told = signer will pay.
3) Drawer who signs the check makes a promise that if the check bounces, he will pay.
BUT drawee (bank) that pays the draft doesn’t sign and isn’t liable.

Question 12

What if the words “without recourse” accompany the signature?

Answer 12

“Without recourse” is a term of art used by endorsers and drawers. It represents a disclaimer of liability. Signer passes title but assumes no signature liability.

Question 13

What is warranty/transfer liability?

Answer 13

Seller’s liability for selling a defective instrument. Any transferor who sells the negotiable instrument can be sued even if transferor is not a donor.

Question 14

Who is entitled to sue D for breach of warranty?

Answer 14

If D indorsed the instrument, any P in possession may sue. Indorsement makes warranties run with the instrument.
If D didn’t indorse instrument, only D’s immediate transferee may sue. Warranties will not run with the instrument.

Question 15

What are the 5 warranties that D makes w/ respect to a negotiable instrument?

Answer 15

1) He has good title to instrument
2) All signatures are good (no forgery)
3) Instrument hasn’t been materially altered (tampering makes instrument defective)
4) No defense or claim good against the defendant, so instrument is enforceable
5) No knowledge of any bankruptcy or insolvency against maker or drawer.

Question 16

What is “due negotiation”?

Answer 16

There has been a proper transfer of the instrument. If instrument has been properly transferred, transferee is a holder and may be eligible to be a holder in due course.

Question 17

How may a negotiable instrument be properly transferred?

Answer 17

1) Payable to order: negotiated by delivery to that payee. Any further negotiation requires payee to indorse the instrument and deliver to transferee.
2) Payable to bearer: indorsement not required.

Question 18

What are the types of indorsement?

Answer 18

Special indorsement: names a particular person as indorsee. Indorsee must sign in order for instrument to be further negotiated.
Blank indorsement: does not name specific indorsee. It may be negotiated by delivery.
Restrictive indorsement: contains a condition saying how the instrument may be used. If misused, may recover from whoever took the instrument in conversion.

Question 19

How does one become a holder in due course?

Answer 19

Holder takes the instrument:

1) for value–a mere promise is not value but old value is good value
2) in good faith–honesty in fact (subjective) and observance of reasonable commercial standards of fair dealing (obj)
3) w/o notice that it is overdue or has been dishonored or is subject to any defense or claim (objective test).

Question 20

What constitutes notice that note is overdue?

Answer 20

1) Note is payable at definite time that has passed
2) A payment or more of principal is in arrears (overdue)
BUT* A payment or more of interest that is in arrears does not matter.

Question 21

What constitutes notice of any defense or claim against the negotiable instrument’s enforcement?

Answer 21

1) appearance of instrument gives notice i.e. face of instrument tells you something’s wrong
2) notice that obligation of any party is voidable
3) notice of a competing claim to negotiable instrument
4) notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty–this requires ACTUAL KNOWLEDGE.

Question 22

What is the shelter rule for holders in due course?

Answer 22

A transferee acquires whatever rights her transferor had. Transferee has shelter in status of transferor even if transferee is a donee or fails to qualify on his own.

Question 23

What is the benefit of being a holder in due course?

Answer 23

Holder takes free from claims, free form personal defenses, and subject only to real defenses.

Question 24

What is a claim?

Answer 24

Right to a negotiable instrument because of superior ownership. If negotiable instrument is duly negotiated to a holder in due course, HDC defeats the superior owner.

Question 25

What are personal defenses that HDC takes free of?

Answer 25

Any defense available in breach of K: lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement.

Question 26

What are the real defenses that HDC takes subject to?

Answer 26

``` MAD FIFI4 MATERIAL ALTERATION-change in terms of instrument, but if maker was negligent (leaves blanks, etc.), he is estopped from asserting this defense. DURESS FRAUD IN THE FACTUM--there has been a lie about the instrument itself that makes the instrument not enforceable. Personal fraud in the inducement of the signing is ineffective against HDC. INCAPACITY ILLEGALITY INFANCY INSOLVENCY ```

Question 27

What are the 6 duties of the drawee?

Answer 27

1) Honor customer's check if sufficient funds to cover check. 2) If bank honors check though insufficient funds, customer liable to bank for overdraft. 3) If the bank wrongfully dishonors a check, customer can recover damages for harm proximately caused. 4) Death of customer doesn't revoke bank's authority to pay check until bank knows of death AND has reasonable time to act on the knowledge. 5) Bank must honor check as drawn. It can't charge account if signature forged, for more money than original order, if bank pays wrong person, or if check is post dated and customer gives notice 6) Oral stop payment order is binding on bank for 14 days unless renewed in writing w/in that period. Written stop payment order binding for 6 mos. If bank pays in spite of stop payment order, customer has burden of proving loss occurred and amount of loss.

Question 28

What is the properly payable rule?

Answer 28

The drawee bank that honors a forged or materially altered check must recredit the drawer's account, as long as drawer was not negligent.

Question 29

What are the drawee bank's remedy's for honoring a forged or materially altered check?

Answer 29

1) Thief is always liable. | 2) Drawer is liable if negligent.

Question 30

When is the drawer negligent (in context of material alteration or forgery)?

Answer 30

1) leaving blanks or spaces on instrument 2) failing to follow internal procedures designed to avoid forgeries 3) failure to examine bank statement and report forgery or alteration w/in a reasonable time 4) if imposter induces drawer to write a check, drawer is negligent 5) an employer is liable for forgeries by an employee who was entrusted w/ responsibility for handling checks