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Commercial Paper Flashcards

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0
Q

Article 7 governs

A

Documents of title

eg, bills of lading, warehouse receipts

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1
Q

Article 3 governs

A

Commercial Paper, a type of negotiable instrument

Any type of note or draft (eg, check, installment note, etc) is within Article 3

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2
Q

Article 8 governs

A

Investment securities (govt stocks and bonds)

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3
Q

Two types of Commercial Paper

A
  • Note/ CD

- Draft/ check

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4
Q

To be a negotiable instrument within Article 3, an instrument must:

A
  • be in writing
  • signed by maker (note) or drawer (draft)
  • contain an unconditional promise (note) or order (draft) to pay
  • fixed amount of money (only)
  • on demand or at a definite time
  • payable “to order” or “to bearer” (with the exception of checks)
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5
Q

If payment is conditional

A

The instrument is generally not negotiable

(If conditions to payment were allowed, it would not be freely transferable)

Conditions spotted by words such as “subject to” and “contingent upon”

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6
Q

Purpose of commercial paper

A

To provide a freely transferable substitute for cash

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7
Q

If instrument states that it is “subject to” or “governed by” another agreement

A

It is not negotiable

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8
Q

Express conditions

A

Destroys negotiability

Ex: “I will pay if the Patriots win the Super Bowl”

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9
Q

Implied conditions

A

Do not destroy negotiability

Ex: an implied promise to obey the laws of the state

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10
Q

Only time you can wave out the words “order” or “bearer” (and instead say “Pay to John Smith”

A

If the questions specifically tells us it’s a check

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11
Q

Holder

A

Person with good title to the commercial paper

One becomes a holder through proper negotiation of the paper

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12
Q

To be a holder of bearer paper:

To be a holder of order paper:

A

Bearer paper requires delivery
Order paper requires signature and delivery

For you to have good legal title

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13
Q

Order paper

A

Commercial paper payable to a specific person

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14
Q

Writing a check payable to “cash” makes it:

A

A Bearer instrument

the check can negotiated by delivery alone

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15
Q

When a missing signature (endorsement) on the back of an instrument is missing or forged:

A

There is no holder in due course (“HDC”).

Therefore, he’s subject to any and all defenses

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16
Q

Special endorsement

A

Pay to a specific person

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17
Q

Qualified endorsement

A

“Without recourse”

(Skip me if instrument bounces. This negates the endorser’s contractual liability for payment (no guarantee of payment), but the endorser is still liable on warranties**)

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18
Q

Personal defenses

A

Cannot be raised against an HDC
**or their assignees

(Assignees have the rights of the person above them, so an assigned of an HDC still has the rights of an HDC and is not subject to personal defenses, only real defenses (just like an HDC)).

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19
Q

Examples of personal defenses

A

Anything not in FAIDS
Personal defenses include every defense avail in ordinary contact actions:

  • fraud in the inducement
  • failure of consideration
  • theft of an instrument after it was signed
  • breach of contract
  • mistake (mutual mistake, etc)
  • impossibility
    Etc…
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20
Q

Liability of the parties in a Note/ CD

A

1) Maker (primarily liable)

2) Endorsers (secondarily liable)

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21
Q

Liability of the parties on a draft/ check:

A

1) Drawee (primarily liable)
2) Drawer and Endorsers (secondarily liable)

*drawees primarily liable after they accept (not liable unless they sign it)

Drawer agrees to pay if the draft is presented to the drawer (bank) for payment and the drawer (bank) refuses to lay (dishonors the draft)

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22
Q

Certified check

A

Drawee bank has already signed it and accepted it for payment, even before the payee has presented it.

Certification of check = discharges all prior parties

*if the drawee signs a draft, the drawee becomes an acceptor and is primarily liable (acceptance discharges all prior endorsers)

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23
Q

The 5 Transfer Warranties:

A

(You reasonably believe it’s good paper)

1) good title
2) all signatures are genuine
3) instrument has not been materially altered
4) no defense of any party
5) no knowledge of any insolvency

*cannot knowingly pass bad paper

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24
Endorsing "without recourse"
Not guarantor of payment, but you're still making the 5 Transfer Warranties (implied -- good title, signatures genuine, not materially altered, no defenses, no insolvency)
25
Restrictive endorsement
Ex: pay Sharp "only if Sharp delivers ..."
26
Which of the endorser's liabilities are disclaimed by a "without recourse" endorsement?
Contract liability only (no guarantee of payment if endorse "without recourse") Not disclaimed: warranty liabilities (transfer liability) --> must pass good instrument
27
Instrument is payable at a definite time if
It can be established from the face of the instrument when the obligation will become due Ex: if instrument is dated and payable "15 days after sight" it as a definite time --> payable 15 days after it's presented for payment
28
Endorser makes:
Contract of guarantee (Payment of the instrument is guaranteed) - if instrument is presented for payment and is dishonored: the endorser agrees to pay on the instrument according to its terms when it was endorsed
29
To be a check, it must be:
- payable on demand (undated / no maturity date) | - drawee must be a bank
30
Does not destroy negotiability
- extension clause that allows the maker to elect to extend time for payment to a date SPECIFIED in the note - if the latest date for pmt can be determined from the face of a demand instrument, it is considered to be payable at a definite time even if it includes an acceleration clause - an agent, such as a person having a power of attorney, can sign a negotiable instrument on behalf of a principal
31
A dishonor is:
A refusal to pay
32
Contract liability (under the UCC Negotiable Instruments article) is:
The promise to pay upon dishonor
33
Endorser is liable to
Subsequent parties on an instrument (not prior parties)
34
Warranty liabilities
- all signatures genuine - good title - no defenses or dishonor - no material alteration - no insolvency
35
Striking a prior endorser
(Crossing out prior endorser's name) Discharges the endorser's liability to all persons who take the instrument after the signature is stricken It has no effect on a prior or subsequent endorser's own liability
36
Trade acceptance
Three-party paper that contains an order to pay | like draft / check
37
Reference to a transaction in the instrument
Mere reference to the transaction without making the instrument subject to the transaction does not destroy negotiability
38
If holder did not endorse the instrument, but instead negotiated for value by delivery alone and without endorsement
They can't be held liable on an endorser's contract because they did not endorse. If the person suing was not the immediate transferee after this holder, the plaintiff could not hold them liable for breach of transfer warranties since warranties are only made to immediate transferees when one did not endorse. ***
39
When a holder releases collateral of the maker:
When a person entitled to enforce an instrument impairs the value of collateral securing the instrument, the obligations of the endorser's are discharged to the extent of the impairment. --if the security (collateral) was completely released, the endorser's will be released from their obligation (assuming the note was fully collateralized)
40
UCC Commercial Paper Article
Article 3 Includes installment notes (Ex: installment it's payable on the first day of each month)
41
Commercial paper article excludes
Documents of title ( bills of lading and warehouse receipts - covered by Article 7) Investment securities (corporate bonds - covered by Article 8)
42
Does an Acceleration clause destroy negotiability?
No, it's considered payable at a definite time because only the latest date for payment needs to be know
43
Destroy negotiability if contains promise to maintain collateral?
No. Negotiable instruments may not be subject to any unauthorized promises, but the UCC authorizes promises to maintain collateral
44
If endorsement contains the words "for collection (only)"
It's a Restrictive Endorsement
45
If endorsement contains the words "Without Recourse"
It's a qualified endorsement
46
If a note was endorsed and gifted to a person
The donee is not an HDC because the donee has not given value. (Note: under the "shelter doctrine" a donee will have the rights of an HDC if the donor was an HDC).
47
What type of defense is lack of consideration?
Personal defense
48
An instrument will be precluded from being negotiable if the instrument is made subject to another agreement. True or false?
True. Not negotiable if it states that it is "subject to" or "contingent upon" another agreement
49
An instrument will be precluded from being negotiable if the instrument fails to state the underlying consideration. True or false?
False. Consideration is not required for an instrument to be negotiable. We frequently make gifts by check. The check can be negotiable even though no consideration is given for the gift. ***
50
Failure to date an instrument will destroy negotiability. True or false?
False. Failure to date an instrument will not destroy negotiability. An undated instrument is counted as being payable on demand.
51
An instrument is payable on demand if:
It says it is payable on demand, or is silent regarding the time for payment*
52
If an instrument is silent with regard to the time for payment
It's payable on demand.
53
Liability of the Parties
Note: 1) Maker. (Primarily liable) 2) Endorser (secondarily liable) Draft: 1) Drawee 2) Drawer or Endorser
54
When is the drawer liable on a draft?
Secondarily liable. Liable only after the draft is presented to the drawee (bank), the draft is dishonored (refused for payment), and the drawer is given notice of dishonor
55
Cashier's check
Bank is both the drawer and drawee - as the issuer, the bank would be primarily liable
56
Acceptor's liability
Primarily liable. | When a drawee signs a draft, the drawee becomes an acceptor and is primarily liable
57
Does old debt constitute value?
Yes. Receiving from the transferor a note as payment for transferor' sold debt owed to transferee constitutes value.
58
Is minority of the maker a real defense?
Yes. Under "Infancy"
59
The proper party to whom a check is presented for payment is:
The drawee
60
The check writer is the:
Drawer
61
A note is presented to whom for payment:
The maker
62
Holder is:
Someone in legal possession of a check; the holder may be the payee or some subsequent transferor of the payee
63
Does an executory promise (one that has not yet been fulfilled) constitute value for purposes of ascertaining if a holder is an HDC?
No, a holder cannot be an HDC until he has performed all that he promised to perform. (future value is NOT value for HDC)***
64
Which party is not affected by another party's perfection of a security interest?
Buyer in the ordinary course of business (perfection has little effect on them because a buyer takes subject to a perfected interest ONLY if the buyer knows that the sale violates the security interest)
65
When is a buyer in the ordinary course of business affected by a prior perfected security interest?
When the buyer knows that the sale violates the security interest

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