Commercial Paper & Documents of Title

Question 1

What are the 2 types of Commercial Paper?

Answer 1

Promissory Notes

Drafts

Question 2

A promissory note has two parties: the ___ and the ____

Answer 2

Maker & Payee

Question 3

This is when a bank acknowledges receipt of money & promises to repay with interest

Answer 3

a Certificate of Deposit

Question 4

A Certificate of Deposit (CD) is a form of what?

a) Promissory Note
b) Draft

Answer 4

A

Question 5

A Check is a form of what?

a) Promissory Note
b) Draft

Answer 5

B

Question 6

Drafts and Checks are an order to a 3rd party to pay. What are the 3 parties?

Answer 6

Drawer - writes the draft/check
Payee - person the 3rd party must pay
Drawee - third party who is ordered to pay

Question 7

T/F

A check must be payable on demand

Answer 7

TRUE

Question 8

T/F

A check’s drawee can be any individual

Answer 8

FALSE

A check’s drawee must be a bank

Question 9

A Trade Acceptance is a form of what?

a) Promissory Note
b) Draft

Answer 9

B

Question 10

How is a trade acceptance different from a check and/or unique from other drafts?

Answer 10

A trade acceptance is a draft drawn by a seller ordering a buyer to pay. The seller is usually both the drawer (writes the draft) and the payee (person who receives the payment). The drawee (third party ordered to pay) is the buyer.

Question 11

T/F

Investment Securities (Stocks/Bonds) and Documents of Title (warehouse receipts & bills of lading) are commercial paper

Answer 11

FALSE

They are not commercial paper, but they usually follow the same rules in that they can be negotiated

Question 12

A negotiable instrument is a written order or unconditional promise to pay a fixed sum of money on demand or at a certain time. What does negotiable mean as it applies to negotiable instruments?

Answer 12

A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument

Question 13

What are the 5 elements of negotiability? (SUMBOD)

Answer 13

S - must be Signed
U - must be an Unconditional promise or order
M - must be Money and nothing else but money
B, O - must be payable to Bearer or payable to Order
D - Must be payable on Demand or payable at a Definite time

Question 14

T/F

As described in the 5 elements of negotiability, B & O state that to be negotiable the instrument must be payable to bearer or payable to order. This means that on the front of the check it must either say “Pay to Bearer” or “Pay to the Order of…”

Answer 14

FALSE

Checks are the exception. Checks do not need to be payable to bearer or to order

Question 15

T/F

Once an instrument is negotiable on its front, it’s always negotiable

Answer 15

TRUE

Question 16

T/F

A promise or order must be unconditional (sUmbod) for it to be negotiable. This means it is not negotiable if it is “subject to” or “contingent upon” another agreement. Therefore there must be no references to another agreement.

Answer 16

FALSE

Simple references to another agreement will not prevent negotiability.

Question 17

T/F

References to collateral or security prevent negotiability

Answer 17

FALSE

Question 18

T/F

Provisions as to consideration prevent negotiability

Answer 18

FALSE

Question 19

T/F

Commercial paper must be payable in a fixed sum of money

Answer 19

TRUE

Question 20

T/F

Since commercial paper must be payable in a fixed sum of money, interest and collection costs (attorney fees) are not allowed, because those may not be fully estimable

Answer 20

FALSE

Interest and collection costs (attorney fees) are okay

Question 21

T/F

If words and numbers differ (for example, on a check) then the instrument cannot be negotiable

Answer 21

FALSE

Still negotiable - if words and numbers differ the words control

Question 22

This is the act of transferring commercial paper to a third party

Answer 22

Negotiation

Question 23

How does one negotiate bearer paper?

Answer 23

Mere delivery

Question 24

How does one negotiate order paper?

Answer 24

Delivery plus a proper endorsement

Question 25

A blank endorsement doesn't name a new payee and therefore makes commercial paper _____

Answer 25

Bearer Paper

Question 26

A special endorsement names a new payee and therefore makes commercial paper _____

Answer 26

Order Paper

Question 27

T/F A restricted endorsement adds a restriction and therefore prevents further negotiation

Answer 27

FALSE The further restriction (example, "for deposit only" or "for collection only") does not prevent further negotiation

Question 28

A _____ endorsement is a signature which adds the words "without recourse"

Answer 28

Qualified

Question 29

This phrase means there is no guarantee of payment (no contract liability)

Answer 29

Without Recourse

Question 30

_____ is a guarantee of payment

Answer 30

Contract Liability

Question 31

Primarily liable parties are the parties first expected to pay on the instrument. Who is primarily liable for a promissory note? For a draft/check?

Answer 31

Promissory Note - Maker of the Note | Draft/Check - Drawees only after they accept, but there is no obligation for them to accept

Question 32

T/F Drawers of drafts/checks are generally secondarily liable, but can be primarily liable in some cases

Answer 32

FALSE They can NEVER be primarily liable

Question 33

T/F Endorsers are always secondarily liable

Answer 33

FALSE They are generally secondarily liable, except for the qualified endorser who writes "without recourse"

Question 34

Since drawers and endorsers are secondarily liable, how soon must a check be presented to hold them liable?

Answer 34

Within 30 days to hold drawers liable | Within 7 days to hold endorsers liable

Question 35

This is a liability from transferring commercial paper

Answer 35

Warranty Liability

Question 36

If you transfer commercial paper by signing you are making warranties to ____

Answer 36

All subsequent parties

Question 37

If you transfer commercial paper without signing you are making warranties to ____

Answer 37

Only to the immediate transferee

Question 38

What are the 5 warranties from transferring commercial paper?

Answer 38

``` Good Title Signatures are Genuine Instrument has not been materially altered No insolvency proceeding against issuer No defense is good against them ```

Question 39

What 4 requirements that you must meet to be a holder in due course? (HIDC)

Answer 39

Holder of a negotiable instrument Give present value Have good faith Be without notice of any problems or defenses

Question 40

HIDC takes free of ______ but loses to ______

Answer 40

Personal Defenses | Real Defenses

Question 41

What are real defenses that beat an HIDC? (I'M BIFF)

Answer 41

1) Infancy (maker/drawer is a minor) 2) Material Alterations 3) Bankruptcy 4) adjudicated Insanity or Illegality 5) Fraud in the execution (maker/drawer had no idea what they were signing) 6) Forgery

Question 42

T/F Sometimes duress is a real defense, but only to the extent it makes an instrument void

Answer 42

TRUE

Question 43

T/F Along with fraud in the execution, fraud in the inducement is a real defense that will beat an HIDC

Answer 43

FALSE Fraud in the Inducement can be beat by the HIDC

Question 44

What are examples of personal defenses?

Answer 44

Breach of contract | Fraud in the inducement (misunderstanding in the contract)

Question 45

If there was a material alteration and the drawer was negligent, the drawer is liable for ____

Answer 45

The full amount

Question 46

If there was a material alteration and the drawer was not negligent, the drawer is liable for ___

Answer 46

only for the unaltered amount

Question 47

T/F A forger is always liable

Answer 47

TRUE

Question 48

T/F If a forger forges a drawer's name (one writing the draft/check), the drawee (one ordered to pay) is liable if they accept a pay

Answer 48

TRUE

Question 49

T/F If a forger forges a payee's name, this does not pass good title and therefore the first person the forger passed the instrument to is liable

Answer 49

TRUE

Question 50

T/F If a holder accidentally destroys an instrument, this discharges the parties because the instrument is no longer in tact

Answer 50

FALSE Accidental destruction does not discharge parties, only intentional destruction does.

Question 51

T/F A renunciation to discharge a party can be either written or oral

Answer 51

FALSE It must be written to be effective

Question 52

T/F Unexcused delay in presentment discharges all prior endorsers

Answer 52

TRUE

Question 53

These are documents covering goods being transported or stored

Answer 53

Documents of Title

Question 54

What are the two types of documents of title?

Answer 54

Warehouse Receipts | Bills of Lading

Question 55

T/F A warehouse employee must be bonded and licensed to issue a warehouse receipt that acknowledges receipt and storage of goods specified

Answer 55

FALSE The employee need not be bonded or licensed

Question 56

What must a warehouse receipt state?

Answer 56

1) The location of the warehouse | 2) If the goods are to be delivered to bearer, to a specified party, or to the order of a specified party

Question 57

What is the difference between a warehouse receipt and a bill of lading?

Answer 57

A bill of lading is issued by a CARRIER (not the warehouse employee) acknowledging receipt of goods and a contract for transportation (not storage)

Question 58

This person is very similar to a holder in due course in commercial paper and acquires essentially the same rights as a holder in due course does

Answer 58

A holder in due negotiation

Question 59

What are the 4 requirements to be a holder in due negotiation?

Answer 59

Must give Present Value for the document of title Must take in good faith Must take without any notice of an adverse claim or defense The purchaser must obtain it in the regular course of business or financing

Question 60

What are the 3 warranties made by transferors of negotiable documents of title?

Answer 60

Document is genuine Transfer is effective and rightful Transferor had no knowledge of facts that would impair validity of the document

Question 61

T/F In transfers of a document of title, there is no warranty that the warehousemen will honor the document

Answer 61

TRUE

Question 62

When does title and risk of loss pass for a document of title?

Answer 62

When a buyer gets the document

Question 63

T/F Warehousers and carriers may limit their liability by contract

Answer 63

TRUE

Question 64

T/F Warehousers and carriers are always liable for negligence (lack of due care)

Answer 64

TRUE

Question 65

T/F Warehousers and carriers are liable for misdelivery of goods to a good faith purchaser

Answer 65

TRUE

Question 66

T/F Warehousers and carriers are strictly liable

Answer 66

FALSE Warehousers are NOT strictly liable, but Common Carriers ARE

Question 67

How is strict liability unique?

Answer 67

Under strict liability there is no requirement to prove fault, negligence, or intention.

Question 68

What is the difference between contract liability and warranty liability?

Answer 68

Contract liability is a guarantee of payment, which you only have if you signed the commercial paper. Warranty Liability is for any transferor

Question 69

T/F A Draft is an order to pay

Answer 69

TRUE Drafts and Checks are three-party instruments in which the drawer orders the drawee to pay the payee

Question 70

T/F A Certificate of Deposit is an order to pay

Answer 70

FALSE Notes and CDs are two-party instruments in which the maker promises to pay the payee

Question 71

T/F Under the negotiable instruments article of the UCC, for a note to be negotiable it must contain necessary conditions of payment

Answer 71

FALSE In fact, such conditions can destroy negotiability

Question 72

This is an endorsement that does not specify any endorsee

Answer 72

A Blank Endorsement

Question 73

This is an endorsement in which the endorser disclaims liability to pay the holder or any subsequent endorsers for the instrument if it is later dishonored

Answer 73

A Qualified Endorsement

Question 74

This is an endorsement where the endorser indicates a specific person who needs to subsequently endorse it

Answer 74

A Special Endorsement

Question 75

This is an endorsement where it says "for deposit only"

Answer 75

This is a common example of a Restrictive Endorsement

Question 76

T/F In order to be a HIDC the holder, among other requirements, must give value. An antecedent debt will satisfy this value requirement

Answer 76

TRUE Even though the antecedent debt would not be valid for the consideration requirement under contract law, it is valid for the value requirement under negotiable instruments law

Question 77

T/F In order to be a HIDC the holder, among other requirements, must give value. A promise to perform services at a future date will satisfy this value requirement

Answer 77

FALSE This has no value until actually performed

Question 78

T/F If an instrument is payable in money or by the delivery of goods, it is a nonnegotiable instrument

Answer 78

TRUE

Question 79

T/F If a check is postdated, it is still payable on demand before the post date

Answer 79

FALSE

Question 80

T/F If a check is postdated, it ceases to be demand paper and is payable when post dated

Answer 80

TRUE

Question 81

T/F If a check is postdated, this destroys negotiability

Answer 81

FALSE

Question 82

T/F If a check is postdated, a bank that pays the check is automatically liable for early payment

Answer 82

FALSE The bank is only liable if the drawer provides notice to the bank of the postdated check

Question 83

T/F Under the Negotiable Instruments Article of the UCC, a person endorsing a check "without recourse" makes no promise or guarantee of payment on dishonor

Answer 83

TRUE

Question 84

T/F Under the Negotiable Instruments Article of the UCC, a person endorsing a check "without recourse" gives no warranty protection to later transferees

Answer 84

FALSE They still give some warranties, just not a promise or guarantee of payment

Question 85

T/F A party who found an instrument payable to bearer can become a HIDC

Answer 85

FALSE They will not be able to satisfy all of the necessary requirements to be a HIDC

Question 86

T/F A party who receives an instrument from a HIDC will become a holder through the HIDC, even if the receiving party may not have been a HIDC individually

Answer 86

TRUE