Flashcards in Commercial Paper Deck (38):
What is a promissory note?
A promise to pay a specific amount
Two parties involved - maker and a payee
Can reference other transactions without harming the instrument's 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
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
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
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Amount of money must be stated
Payable to order or bearer
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 - Doesn't name a new payee; transforms into a bearer paper
Special - Names a new payee; transforms into an order paper
Restrictive - Adds restrictions; doesn't 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 don’t know that it’s stolen; you’re 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 doesn't 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
Fraud (in the inducement only)
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Maker not competent to Contract
Fraud in the execution
What should you think when you see commercial paper?
What is a note?
2 party promise to pay
- maker and payee/bearer
What is a CD?
Special promissory note
- 2 party; 1 party is the bank
What is a draft?
3 party ORDER to pay
- order by drawer
- to the drawee (has drawers money)
- to pay money to payee
What is a check?
Special type of draft
- drawee is bank
- payable on demand
Requirements for negotiability
Can I negotiate my SOUP NOW?
1. Signed by maker/drawee
2. On demand (payable)
3. Unconditional promise or order to pay
4. Payable to order/bearer
5. No addtl undertaking
6. On demand or at definite time (payable)
7. In Writinf
What are the magic words for negotiability?
NOT: pay John Smith
YES: pay to the order of John Smith
How to be HDC with bearer paper
How to be HDC with order paper
Delivery and endorsement
What is a special endorsement?
- order paper
- names particular person as endorsee
What is a blank endorsement?
- bearer paper
- does not name specific endorsee
What happens to the title if a necessary signature is missing or forged?
Chain of title is broken and no subsequent transferee can become holder
Can't get good title, thus, subject to any defense
What is a qualified endorsement?
Words "without recourse"
No guarantee of pmt by endorser
- no contract liab, still have warranty liab
What is a restrictive endorsement?
Any other language on the back (e.g. For deposit only)
Generally, no effect on negotiability
Requirements to be HDC
1. Give value
2. Good faith
*3. Without notice of defenses or claims
4. Negotiable (look at front only)
What are the real defenses (HDC)
(Maker/drawee does not have to pay anyone)
1. Fraud in execution
2. Adjudicated insane
2. Alteration (material) of instrument
4. Discharge in BK
5. Surety ship defenses
5. Statute of limitations
Liability of parties - note/CD