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Flashcards in Commercial Paper Deck (53)

What section of the UCC governs commercial paper?

UCC Article 3


What are the types of negotiable instruments?

  1. Promissory note
    • Affirmative promise to pay money (not just an IOU)
  2. Draft
    • Order to pay money


How do you determine whether a writing is a negotiable instrument?

Negotiable instrument requires ("WOSSUP")

  • - writing
  • O - payable to order or bearer
  • S - signed by maker or drawer
  • S - sum certain
  • U - unconditional promise and no additional promises
  • P - payable on demand or at definite time
  • P - payable in currency


What meets the signature requirement for a negotiable instrument?

Any authentication - e.g., initials, defining mark, nickname, etc.


What does not meet the unconditional requirement for a negotiable instrument?

  • Express conditions
    • E.g., promise to pay if X occurs
    • But not merely limiting payment to a source
  • Governed by or subject to other agreements
    • E.g., instrument is actually governed by the terms of another agreement, rather than:
      • Merely referring to the agreement


What meets the sum certain requirement for a negotiable instrument?

You must be able to calculate amount to be paid, either from:

  • What writing says
  • Reference to outside source
    • E.g., for undefined interest rate, use rate on court judgment
    • E.g., reference to the prime rate


What meets the payable in currency requirement for a negotiable instrument?

Currency includes:

  • Money
  • Foreign currency

Currency excludes:

  • Goods


What does not meet the no additional promises requirement for a negotiable instrument?

Writing cannot include promises other than the promise to pay money


What meets the payable on demand requirement for a negotiable instrument?

Instrument must specifically state that it is payable:

  • On demand
  • At sight
  • On presentation


What if an instrument is silent as to the time of payment, is it still negotiable?

Yes. Payment is due on demand.


What meets the payable at a definite time requirement for a negotiable instrument?

Payment must be either:

  • On a specific date
  • Before a specific date
  • At a fixed period after a specific date


Does an acceleration clause impact the payable at a definite time requirement for a negotiable instrument?

No. This does not destroy negotiability


What meets the payable to order requirement for a negotiable instrument?

Instrument must use the word "order" or "assigns" in connection with the payee's name

E.g., pay to the order of Mark Flinn

E.g., pay to the assigns of Mark Flinn


What meets the payable to bearer requirement for a negotiable instrument?

Instrument must be payable to anyone who has it

E.g., pay to Mark Flinn or bearer

E.g., pay to cash

E.g., pay to the order of bearer

E.g., pay to the order of cash


If an instrument says, "Pay to Mark Flinn," is it negotiable?

Only if it is a check.

Otherwise, not negotiable - it is just a contract


How does a defendant get sued in the commercial paper context?

  1. Contract or signature liability
    • You signed the instrument, so you're liable to pay
  2. Warranty or transfer liability
    • You sold the instrument, so you're liable for warranty


Can the drawee be liable under contract or signature liability?

No. The drawee (e.g., bank) does not sign.


Is it possible to disclaim contract or signature liability?

Yes, if your signature is accompanied by the words "without recourse"


Who can sue the defendant for breach of warranty?

  • If defendant indorsed the instrument
    • Any plaintiff in possession
      • Warranty runs with the instrument
  • If defendant did not indorse the instrument
    • Only defendant's immediate transferee
      • Warranty does not run with the instrument


What will always preclude warranty or transfer liability?

If the defendant was merely a donor - i.e., did not actually sell the instrument in the transfer


What are the warranties that a seller of a negotiable instrument makes?

  1. P has good title
  2. All signatures are genuine and authorized (no forgery)
  3. Instrument has not been materially altered
  4. There are no defenses or claims against D (instrument is enforceable)
  5. D has no knowledge of any bankruptcy or insolvency action against maker or drawer


How is a negotiable instrument properly transferred?

When instrument is:

  • Payable to order
    • Payor delivers to payee
    • Payee indorses (must be valid and authorized)
    • Payee delivers to transferee
  • Payable to bearer
    • Mere possession (indorsement not required)


What are the different types of indorsements?

  1. Special indorsement
    • Names a specific indorsee
    • Indorsee must sign in order to negotiate
      • E.g., indorse check, "Pay to Kristin Holloway"
  2. Blank indorsement
    • No specific indorsee
    • May be negotiated by delivery alone
      • E.g., indorse check with nothing else
  3. Restrictive indorsement
    • Contains a condition
      • E.g., indorse check, "For deposit only"
  4. Unrestrictive indorsement
    • No condition
      • E.g., simply indorse check with nothing else


What is a holder in due course?

A holder who takes the instrument:

  1. For value
  2. In good faith
  3. Without notice that either:
    • It is overdue
    • It has been dishonored
    • It is subject to any defense or claim


What meets the for value requirement to be a holder in due course?

Holder must actually give value, which is different than consideration because:

  • Mere promise is not value
  • Old value is good value


What meets the good faith requirement to be a holder in due course?

Good faith requires both:

  • Honesty in fact (subjective)
    • E.g., holder does not actually know of any reason why the obligor may have trouble paying
  • Observance of reasonable commercial standards of fair dealing (objective test)
    • E.g., a reasonable person in the business wouldn't know of any reason the obligor might have trouble paying


What meets the without notice requirement to be a holder in due course?

Holder must not know or have reason to know that the instrument was:

  • Overdue
  • Dishonored
  • Subject to any defense or claim



If on Jan. 5, someone buys an instrument that is payable on Jan. 1, is the buyer a holder in due course?

No. He reason to know that it was overdue


Can you be a holder in due course if you know or should know that an instrument is in arrears for a:

  • Principal payment?
  • Interest payment?

Principal payment

  • No, you cannot be a HDC

Interest payment

  • Yes, you can be a HDC


Is there any situation in which the notice requirement for holder in due course status is actual notice, rather than constructive?

Yes, if a fiduciary negotiates an instrument in breach of his or her fiduciary duty


What is the shelter rule in the context of commercial paper?

A transferee acquires whatever rights her transferor had. So if the transferor was a holder in due course, the transferee steps in the transferor's, shoes, even if he had notice of a defense or otherwise wouldn't qualify.


What are the benefits of holder in due course status?

A holder in due course takes an instrument:

  • Free from:
    • Claims
    • Personal defenses
  • Subject only to:
    • Real defenses




What is a claim?

A right to a negotiable instrument becuase of superior ownership



What are personal defenses?

Any defense availalbe in contract, including:

  • Lack of consideration
  • Unconscionability
  • Waiver
  • Estoppel
  • Fraud in the inducement



What are real defenses?


  • Material Alteration
  • Duress
  • Fraud IFactum
  • Incapacity
  • Illegality
  • Infancy
  • Insolvency


How would a material alteration work as a real defense?

How would it not work?

Valid real defense

  • Change in terms of the contract by payee

Invalid real defense

  • Change in terms of contract by payee after maker was negligent - e.g., leaving blanks in check


What is fraud in the factum?

Payor doesn't know what he is signing


What happens if a bank wrongfully dishonors a check (i.e., there actually are sufficient funds)

Customer can recover damages for harm caused by dishonor


If a bank customer dies, should the bank still pay checks drawn on the customer's account?

The bank can still pay until both:

  • Bank knows of death
  • Has reasonable time to act on knowledge



When can a bank not draw on a customer's account for a check?

  • Drawer's signature was forged
  • Bank is drawing for more than original order
  • Bank is paying wrong person
  • Check is postdated and customer gave bank notice


For how long is a stop payment order binding on a bank?

If oral - 14 days, unless renewed in writing during period

If written - 6 months, unless renewed in writing during period


What is the properly payable rule?

Drawee that honors a forged or materially altered check must recredit the customer's account, as long as the drawer was not negligent


What are the drawee bank's remedies under the properly payable rule?

  • Thief is always liable
  • Draw is liable if negligent


When is a drawer negligent?

  1. Leaving blanks or spaces on the instrument
  2. Failing to follow internal procedures designed to avoid forgeries
    • E.g., leaving signature stamp in same drawer as checks
  3. Failing to examine bank statement for errors
  4. Being induced to write a check


What is the fictitious payee rule?

If an imposter indueces the drawer to write a check, the drawer is negligent


What is the employee indorsement rule?

An employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks

An employer must monitor employees


Define negotiation

The voluntary or involuntary transfer of an instrument by a person other than the issuer to a person who gains possession of the instrument and has the right to enforce it, i.e., to a holder.


When can a defense of infancy be asserted?

Against an HDC only if state law makes the contracts of an infant void or voidable. If state law does not make the contracts of an infant void or voidable, infancy is only a personal defense, which is not assertable against an HDC.


Define an alteration.

An unauthorized change or addition that purports to modify the obligation of any party in any respect. The effect of an alteration depends on whether the alterer’s intent was fraudulent or nonfraudulent. A nonfraudulent alteration does not discharge any party, and the instrument may be enforced according to its original terms. In contrast, a fraudulent alteration generally discharges every party obligated on the instrument, unless the party assents to or is precluded from asserting the alteration.


What type of indorsement is the phrase “without recourse”?          

The phrase “without recourse” does not create a restrictive indorsement. “Without recourse” creates a qualified indorsement.


When may a bank choose to honor a check according to its terms as presented?

A bank may choose to honor a check when there is insufficient funds. The customer is liable to the bank for the overdraft.


When is collateral impaired?

Collateral is impaired if either:

  • A security interest is not perfected or otherwise filed;
  • Collateral is released without obtaining substitute collateral;
  • There is failure to perform acts required to preserve the collateral’s value; or
  • There is failure to dispose of collateral as the law requires.


What is the difference between a presentment and transfer warranty?

With a presentment warranty, the presenter warrants that he is not aware of any forged signatures. With a transfer warranty, the transferor warrants that all signatures are authorized.