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Flashcards in Commercial Paper Deck (45):

Is a draft conditional because it limits payment to a particular source or fund?

No, it is unconditional and negotiable.


To qualify as a negotiable instrument, what is needed?

A writing payable to order or to bearer, signed by maker or drawer reciting a sum certain, containing an unconditional promise or order and no additional promise, payable on a demand or definite time and payable in currency
(otherwise it is a contract)


What is a draft and who are the parties?

A command or order to pay money
Three parties: drawer, drawee, and payee


What is a promissory note and who are the parties?

affirmative promise to pay, not a mere IOU
Two parties: promisor or promisee


In a commercial paper, what theories might make the defendant liable

1. contract or signature liability
2. warranty or transfer liability


Commercial paper statement

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 all personal defenses and subject only to real defenses


If a note or draft states "$75,000 principal plus interest from date at 5%", is it negotiable?

Yes, even if it does not state how much interest - use judgment rate.


What is contract liability on negotiable instrument?

defendant has liability by signing the negotiable instrument
- promisor of a note (maker)
- indorser sign name on back of instrument
- drawer of a draft (checker)


Does a drawee have contract liability for a negotiable instrument?

No - no signature liability


If the words "without recourse," on a negotiable paper, what is the effect?

passes title but assumed no contract liability


What warranties are made by person on a negotiable instrument?

1. plaintiff has good title
2. all signatures are genuine and authorized (forgery is breach)
3. no material alterations of instrument
4. no defense or claim against the defendant - meaning that instrument is enforceable
5. promises that no knowledge of bankruptcy or insolvency against maker or drawer


Under a warranty theory, who may be sued?

any indorser, unless they are a donor, and plaintiff is in possesion


If a note states "Pay to Andy," is it negotiable?

No, unless it is check.
Must use the words "order" or "assigns"
Must use the word "bearer" - anyone use has possession


When negotiable instrument is payable to order of payee, it is negotiated by ____?

Delivery to payee


When negotiable instrument is payable to order of bearer, it is negotiated by ____?

- no indorsement required to transfer


Holder in due course is?

Holder who takes the instrument for value, in good faith, and without notice that it is overdue or has been dishonored or is subject to any defense or claim


Can a holder become a holder in due course by giving old value?

Yes. old value is good value


Instrument recites that it payable on Jan. 1. Holder buys instrument on Jan. 5. Is the holder a holder in due course?

No; had notice that is overdue.


What are personal defenses that a holder in due course takes free from?

ordinary contract actions (lack of consideration, unconsciousability, waiver, estoppel, fraud in the inducement)


What are real defenses that a holder in due course does not takes free from?

1) material alteration
2) duress
3) fraud in factum
4) incapacity, illegality, infancy, and insolvency


Makes write a check for $100. Payee changes the amount to $2,100 and then sells it to a HDC. Make is liable only for?

$100, unless negligence that opens up to estoppel and a personal defense


Difference between fraud in factum and fraud in the inducement?

Fraud in factum - lie about instrument (real defense)
Fraud in inducement - knew about the instrument, but underlying contract involved fraud


What are the duties of the drawee bank?

Honor check is there are sufficient funds to cover check.


How long is an oral stop payment binding on the bank?

14 days unless renewed in writing during those 14 days.


In VA, what is the statute of limitations for actions notes payable at a definite time or on demand?

6 years


An instrument to be negotiable must be payable to _____ or to____.

bearer; order


Can a defense of duress or illegality be raised against a holder in due course?



Can a defense of a lack of consideration be raised against a holder in due course?



Fraud in the factum is defined as ____.

fraud that induced the obligor to sign the instrument with neither the knowledge nor reasonable opportunity to learn of its character or its essential terms.


What type of fraud is fraud that induced the obligor to sign the instrument with neither the knowledge nor reasonable opportunity to learn of its character or its essential terms?

Fraud in the factum (rule fraud)
This is real defense that may be asserted against a holder in due course


Is a check that is postdated into the future a valid obligation on payee?

No - does not represent current demand to pay.

Bank can allow payment, and protected from liability unless drawer notified payee of postdating


When there is a dispute between written words and numbers on a check, what controls?

Written words.


If payee is presented with check that is altered, what can the payee pay?

Original amount
Could pay altered amount if in good faith and without knowledge of alteration


When is a drawer liable on a check that is subsequently altered by a third party?

When drawer failed to exercise ordinary care and thereby substantially contributed to an alternation of the instrument
- then precluded from asserting the alternation against a person who in good faith pays the instrument


If the drawer leaves the amount blank and delivers the check to drawee who then fills in the amount. How much is the drawer liable for?

If not fraudulent, even if unauthorized, then it is ok


Is antecedent debt proper value to entitled an person who negotiates an instrument?

Yes, would entitled to a holder in due course


Who does the bank have an obligation to?

obligation runs only to customer and that obligation is to pay drafts that are properly payable.


Does a bank have any obligation to holder of a draft instrument drawn on the bank?

No. Obligation runs to customer not holder.


Can an indorsor sign a check over to a holder if the person does not have actual authority?

Yes, may have apparent authority


Is infancy a good defense even against a holder in due course?

Yes. Infancy is a real defense.

Exception is when the contract is for necessities.


If a note contains ambiguous language on when payment will be made is the note negotiable?

No. Must be payable at definite time that is readily ascertainable.


If a principal who made a check dies before the check is presented, what is the effect?

Terminates the authority of the bank to make the payment.
Exception is bank may honor check if presented within 10 days after it learns of customer's death.


A stop payment order is binding for how long?

in writing - 6 months
oral - 14 days


Is a bank required to stop payment on a cashier check?

No obligation.


Who has burden of proving loss in spite of a stop payment order?

Customer (maker) has burden.

If there is a holder in due course, then customer cannot recover