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CPA REGULATION > Commercial Paper > Flashcards

Flashcards in Commercial Paper Deck (29):

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)


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. This is not a check even though it may look like it.


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. It must have a Bank at the top left corner


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.


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


What is the purpose of the negotiation of commercial paper?

Transfers ownership to another party


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

Must be in writing (POA - ok for signing)
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Fixed amount of money must be states; only
Payable on demand or definite time
Payable to order or bearer (except checks)


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


What is required to negotiate Order Paper?

Must have delivery and endorsement

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


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


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

Within 7 days


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.


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


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


Define contract liability.

Guarantees payment of a liability


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


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


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)


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


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

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC). maker/drawer does not have to pay anyone. FAIDS
Fraud in the execution
Adjudicated insanity
Material alterations to the instrument
Illegality - Bankruptcy
Discharge in bankruptcy
Suretyship defenses
Statute of Limitation


What requirements are necessary to have a security interest attach?

1. Debtor has rights in the collateral
2. Proper filing of a security agreement
3. Value given by the creditor


What happens if an instrument is not negotiable?

There can be no holder in due course


Blank Endorsement

Blank = Mere Signature of Holder. Instrument is bearer paper and may be further negotiated by mere delivery without further endorsement.
/s/ John Blank


Special Endorsement

Special = Pay to Specific Person. Words specifying the person to be paid precede signature. Endorsement need not contain words such as “order” or “bearer.” Instrument must be signed by the named person and delivered for further negotiation.
Pay J. Smith
/s/ Jerry Payee


Restrictive Endorsement

Restrictive = Only, or “For Deposit” or “For Collection”. Specifies use of instrument (eg. For deposit only) or conditions use of instrument (eg pay J. Smith Only). Does not prevent further negotiations.
Pay J. Smith Only
/s/ J. Restrictive


Qualified Endorsement

Qualified = “Without Recourse”. Skip me if “instrument” (eg. Promissory note) “bounces”. This negates the endorser’s contractual liability for payment (no guarantee of payment), but the endorse is still liable on warranties.
Without Recourse
/s/ P.L. Qualified


To be Holder in Due Course (HDC)

A holder in due care will take the paper:
i)for value
ii)in good faith
iii)without notice of any defenses or claims of ownership

**if any of these missing, you gave the same rights as the transferor. You get paid if he gets paid.


Shelter Doctrine

Shelter Doctrine(holder through HDC): even if the transferee himself is not qualified as an HDC, he can claim rights of an HDC who held the commercial paper before him.


Liability of the parties

Note/CD - First Maker liable then second Endorser
Draft/Check - First Drawee, if they accept, then second Drawer and Endorsers