Commercial Paper Flashcards
(47 cards)
Approach for Commercial Paper Problem
1) Identify type of instrument;
2) Identify parties;
3) Determine if instrument is negotiable;
4) Determine if instrument properly negotiated;
5) Determine if transferee is Holder in Due Course (“HDC”); Determine P’s cause(s) of action: whether K, warranty, tort, or not properly payable;
6) Determine D’s defenses;
7) If D liable, can liability be passed to another?
Promissory Note
Contains affirmative promise to pay between Maker and Payee. (TWO party instrument)
Maker
Promisor (obligor)
Payee
Promisee (person entitled to payment)
CD
Note issued by financial institution. Financial Institution acknowledges receipt of funds, and promises payee to repay the money.
Draft
Contains order for drawee to pay the payee. (ex. personal check) (THREE party instrument
Drawer
Person ordering payment
Drawee
Person to make payment (if re: checks –> drawee = bank)
Payee
Person to receive payment
Checks (characteristics; types)
1) Financial institution is drawee; and 2) payable on demand.
Types: Regular check, certified check (bank has agreed to pay), cashier’s check (drawer & drawee are same bank, person buying check = remitter), teller’s check (check drawn by one bank on another bank, person buying check = remitter), traveler’s check (demand instrument requiring counter sig by person whose specimen sig already on check).
Requirements to be Negotiable (WOS FU MAD)
1) Writing
2) Payable to Order or bearer: Payable to order → must use the word “order” or “assigns”. Payable to bearer → means payable to anyone who has it (e.g. payable to “cash”). CHECKS EXCEPTION: if this is only element of negotiability missing, “order” or “bearer” language req’t waived.
3) Signed by maker or drawer
4) Fixed amount: Must be able to tell principal amt due by looking at instrument.
5) Unconditional promise to pay: Note: unconditional promise. Draft: unconditional order. If conditional → K.
6) Payable in Money: domestic or foreign currency OK. May not be payable in goods or services. If words contradict figures → words prevail.
7) No Additional Undertaking or Instruction: EXCEPT: a) undertaking or power to give, maintain or protect collateral; b) confession of judgment clauses; c) waiver of laws meant to benefit obligor.
8) Payable on Demand or at Definite time: On Demand: if it specifically states payable “on demand,” “at sight,” or “on presentation”. Definite time: payable on or before given date, or at fixed period after given date. Acceleration clauses OK. If doesn’t state date it’s due → demand instrument.
Holder
Possession + Good Title
Payable to Order
if payable to specific payee, must be delivered to payee. Further negotiation requires payee sig
Payable to Bearer
Indorsement not required. Further negotiation OK by possession alone.
TYPES OF INDORSEMENTS:
Special Indorsement – names specific person as indorsee, who must sign;
Blank Indorsement – only has payee sig. No specific person named on instrument;
Restrictive Indorsement – contains condition (e.g. for deposit or collection only)
Identity of Payee
If exact payee unclear on face of instrument (e.g. “John Smith”), intent of issuer controls. Multiple payees – If separated by “and”, ALL payees must indorse. If separated by “or”, requires only one sig.
Misspelled Name
Payee may endorse with real or incorrect name
Payee Lacks Capacity
May still effectively indorse
“HDC” Status Benefit
When negotiable instrument is duly negotiated to a holder in due course (HDC), the HDC takes instrument free of all claims to it, free of personal defenses, and subject only to real defenses
HDC and subsequent transferees take instrument free from: Claims and Personal Defenses: (i) lack of consideration; (ii) unconscionability; (iii) waiver; (iv) estoppel; (v) fraud in the inducement.
HDC Subject to Real Defenses [MAD FIFI4 + SOUP]
(1) Material Alteration; (2) Duress; (3) Fraud In the Factum; (4) Incapacity; (5) Illegality; (6) Infancy; (7) Insolvency; (8) SoL; (9) Omission of required consumer protection language; (10) Unauthorized signatures & forgeries; (11) Payment to former holder
HDC Requirements (+ shelter rule)
1) NEGOTIABLE INSTRUMENT: Must meet all 8 requirements.
2) HOLDER: Must have possession of instrument + good title.
3) NO AUTHENTICITY QUESTIONS: No apparent forgery or alteration of instrument, not irregular or incomplete.
4) FOR VALUE: Must pay value for instrument. Promise is not enough. Old value is ok (e.g., payment for goods already received).
5) GOOD FAITH: Honest in Fact (subjective test) + Observance of reasonable standards of fair dealing (objective).
6) WITHOUT NOTICE: No actual knowledge (subjective) that instrument (i) is overdue (principal only); (ii) was dishonored; (iii) has unauthorized sig; (iv) has alteration(s); (v) there’s uncured default w/r/t payment of another instrument issued in same series; or (vi) is subject to any claims or defenses. Later notice is OK. Won’t lose HDC status.
SHELTER RULE: Transferee acquires rights of transferor. BUT, having rights of HDC does not make you HDC.
Basis of K Liability
D signed negotiable instrument
Signatures by Agents
If signed by binding agent for principal, principal bound. Agent NOT personally liable only IF (1) principal is ID’d in instrument; and (2) signature clearly shows it was made on behalf of principal.
Otherwise, agent liable:
—To HDC – agent liable UNLESS agent can prove HDC had notice that agent signed as principal’s rep.
—To non-HDC – agent liable UNLESS agent can prove original parties did not intend agent to be liable.
—Special Rule for Checks – agent for drawer not personally liable if principal’s name on check.
Liability for Maker of Note
enters into K to pay instrument. Must pay when it’s due according to terms at time issued. Liable to holder or indorser who paid instrument. Defenses: depends on holder status (e.g. whether HDC)
