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Flashcards in Commercial Paper Essays Deck (14)
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1

8 Requirements for Negotiability:

  1. In Writing
  2. Signed by the Maker or Drawer
  3. Unconditional
  4. Promise or Order to pay..
  5. MONEY (not goods, gold, personal property, or services)
  6. For a Fixed Amount (or ascertainable from related source)
  7. Payable On Demand or at a Definite Time
  8. Payable to Bearer or Order

Note: 2- person interaction, a promisor or maker issues a  Promise to pay (promissory note) to a payee

Draft: 3- Person transaction (usually one of whom is a bank)  A Drawer issues an Order (draft on bank= check) to the Drawee  paya Payee

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§ 3-106. UNCONDITIONAL PROMISE OR ORDER.

(a) a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another record, or (iii) that rights or obligations with respect to the promise or order are stated in another record. A reference to another record does not of itself make the promise or order conditional.

(b) A promise or order is not made conditional (i) by a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source.

(c) If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional.

(d) If a promise or order at the time it is issued or first comes into possession of a holder contains a statement, required by applicable statutory or administrative law, to the effect that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, the promise or order is not thereby made conditional ; but if the promise or order is an instrument, there cannot be a holder in due course of the instrument.

  • Whether a note is conditional is judged on the face of the instrument, 
  • A note does not contain any unauthorized undertakings {despite a promise to pay atttorney fees should collection action be necessary (Article 3 authorizes such promises}
  • Can reference collateral documents but cannot be "subject to"
  • Payment can be out of a specific fund or source ("From sale of my stock")
  •  If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument.

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3-108. PAYABLE ON DEMAND OR AT DEFINITE TIME.

(a) A promise or order is "payable on demand" if it (i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment.

(b) A promise or order is "payable at a definite time" if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, or (iv) extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.

(c) If an instrument, payable at a fixed date, is also payable upon demand made before the fixed date, the instrument is payable on demand until the fixed date and, if demand for payment is not made before that date, becomes payable at a definite time on the fixed date.

Acceleration  clause for missed interest or principle payments would not negate negotiabillity, specifically allowed by UCC 3-108.

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Promissory Note: Promissory notes used for business loans come in two basic types, unsecured and secured.

  • An unsecured promissory note means that the lender did not require collateral for the loan. If you default, the lender's only recourse is to file a lawsuit to enforce the terms of the note.
  • A secured promissory note is used when the lender requires collateral for the loan, such as a pledge of business equipment, inventory or accounts receivable. When a default occurs on a secured note, the lender has the option of using the collateral to satisfy the note, often without the need to file a lawsuit.

Security Agreement

A security agreement is used in conjunction with a secured promissory note. The terms of the secured promissory note typically includes a reference to the security agreement and a brief description of the related collateral. The security agreement will specify in greater detail the business property given as collateral. If the borrower defaults on repaying the note, the agreement will specify what action the lender can take to seize the collateral, such as demand a turnover of possession of the collateral.

UCC Filings

Although not legally required for a valid promissory note and security agreement, lenders typically take an additional step when business property is given as collateral for a loan. This step is called "perfecting a security interest" and is accomplished by filing a National Financing Statement with the secretary of state where the collateral is located. This is a standardized form used in all states and is commonly referred by the designation "UCC-1." Filing this document is similar in effect on the collateral as recording a mortgage or deed of trust against real estate -- it provides notice to the public that the property has been pledged as collateral and to whom.

 

Other Considerations

Using a promissory note and security agreements can restrict your ability to obtain additional financing for your business, especially if the lender files a UCC-1. New lenders may be unwilling to lend funds with another lender having a prior security interest in your business property. A better approach, if possible, is to make a credit agreement with your lender rather than a one-time loan. Such an agreement also includes the use of a promissory note and security agreement, but has the added advantage of obligating your lender to make future advances so long as you meet certain repayment conditions.

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§ 3-302. HOLDER IN DUE COURSE.

Primary tabs

(a) Subject to subsection (c) and Section 3-106(d), "holder in due course" means the holder of an instrument if:

(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

(b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.

(c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding, (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (iii) as the successor in interest to an estate or other organization.

(d) If, under Section 3-303(a)(1), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.

(e) If (i) the person entitled to enforce an instrument has only a security interest in the instrument and (ii) the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

(f) To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.(g) This section is subject to any law limiting status as a holder in due course in particular classes of transactions.

THEREFORE: 

If a person obtains notes within a bulk sale or judicial sale, or such as when buying other assets of a  business, the person is not a HDC with respect to a note that is incidentally within the group of assets.

However, the seller of bulk or group  assets can be an HDC if he received a note in payment for the purchase or sale.

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§ 3-501. PRESENTMENT.

(a) "Presentment" means a demand made by or on behalf of a person entitled to enforce an instrument (i) to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank, or (ii) to accept a draft made to the drawee.

(b) The following rules are subject to Article 4, agreement of the parties, and clearing-house rules and the like:

(1) Presentment may be made at the place of payment of the instrument and must be made at the place of payment if the instrument is payable at a bank in the United States; may be made by any commercially reasonable means, including an oral, written, or electronic communication; is effective when the demand for payment or acceptance is received by the person to whom presentment is made; and is effective if made to any one of two or more makers, acceptors, drawees, or other payors.

(2) Upon demand of the person to whom presentment is made, the person making presentment must (i) exhibit the instrument, (ii) give reasonable identification and, if presentment is made on behalf of another person, reasonable evidence of authority to do so, and (iii) sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.

(3) Without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule.

(4) The party to whom presentment is made may treat presentment as occurring on the next business day after the day of presentment if the party to whom presentment is made has established a cut-off hour not earlier than 2 p.m. for the receipt and processing of instruments presented for payment or acceptance and presentment is made after the cut-off hour.

 

Presentment is a demand by which the holder of a negotiable instrument is required to do something as per the directives of the instrument. It is the showing of the instrument to the drawee, acceptor or maker for acceptance, sight or payment.

To make out a prima facie case for payment, the person presenting the instrument need only show tha tthe signatures are genuine (and this is presumed unless the defendant specifically denise validity) and that he is a holder of the instrument or otherwise is  entitled to enforce it,. 

7

A holder of a negotiable instrument who has been refused payment when payment was due has a CAUSE OF ACTION against the party or parties liable for payment. Ordinarily, when an individual is sued on a negotiable paper, he or she will try to defend his or her right to refuse payment. Certain defenses, known as real defenses, are valid against ordinary holders as well as holders in due course, whereas personal defenses are only valid against ordinary holders.

REAL DEFENSES: Normally, any defense that can be asserted in an action concerning a contract may also be used in an action brought to enforce payment of a negotiable instrument. The legal incapacity of the maker, drawer, or endorser, a signature effected by duress, illegality, or fraud, and alteration of the instrument qualify as real defenses. Can also include failure of a condition or lack of consideration.  (Intoxication is not a valid defense to dishonor of a commercial paper.)

  • Duress may be used as a defense in the event that the individual against whom a suit is brought can prove that he or she was subject to extreme pressure caused by another at the time of the execution of the paper. If the defendant signed the instrument subject to a threat of immediate physical violence or death, he or she is not legally bound to honor its terms since he or she had not freely entered into the transaction.
  • Certain jurisdictions deem a paper that has been negotiated to pay a usurious loan or gambling debt null and void. An individual can legally avoid payment to the holder in due course of such an instrument based on the illegal nature of the debt it was meant to pay. 
  • Two basic types of fraud exist: fraud in the essence and fraud in the inducement. Fraud in the essence occurs when an individual is intentionally lied to about the nature of the instrument or its terms - DOESN"T UNDERSTAND IT IS A NEGOTIABLE INSTRUMENT. . It is a defense that is valid against both an ordinary holder and a holder in due course. Vs. Inducement - personal
  • A material alteration is an addition or deletion of the language of an instrument, which changes the obligations of any party to it. A defendant may avoid liability for payment of a commercial paper if its terms have been materially altered. Examples of such alterations are a change in the date of payment or amount to be paid. When an individual's own negligence is a contributing factor to a material alteration, that negligence may not be asserted by him or her as a defense against someone who pays the instrument in good faith or against a holder in due course. An alteration made by a holder that is both material and fraudulent can be used as a defense against enforcing the payment of the document by all those people whose agreements were changed. If these two conditions of materiality and fraud are not met, the instrument is ordinarily enforceable according to the way it was initially written, and none of those involved can use the alteration as a defense against payment.

 


 

PERSONAL DEFENSES - 

  • Certain types of duress, such as a threat to report a wrongdoing to the police or to bring a civil lawsuit, are not valid against a holder in due course, although they can be used as valid personal defenses against an ordinary holder.
  • Fraud in the inducement takes place when the party signing the paper is cognizant of its nature and terms but is misled into believing that the reasons for its creation have been satisfied when in actuality they have not. For example, an individual might be induced to issue a check for a certain amount to a mechanic who claims to have repaired a car. If the individual subsequently discovers that the car was not repaired, fraud may be used as a personal defense against the mechanic who has not performed his or her part of the contract to repair the car. Fraud in the inducement is only valid against an ordinary holder, not a holder in due course.
  • When a holder in due course takes a paper following its fraudulent alteration by the previous holder, he or she is entitled to receive payment according to the original terms of the instrument prior to its alteration. None of the parties responsible for payment can use the alteration as a defense against a holder in due course, but it may be used against an ordinary holder.

8

 § 3-302. HOLDER IN DUE COURSE.

(a) Subject to subsection (c) and Section 3-106(d), "holder in due course" means the holder of an instrument if:

(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

An (ordinary)  holder is a person in possession of a negotiable instrument with a right to enforce it.  if a note is made payable to "bearer", any subsequenty party could become a holder simply by receiving possession of it. Even if the possessor stole note, still can present, or assign to a future holder, and maker is obligated to pay unless he has a valid defense.

A holder in due course is someone who accepts a negotiable instrument in a value-for-value exchange without reason to doubt its legitimacy. A holder in due course acquires the right to make a claim for the instrument's value against its originator and intermediate holders.

9

When someone transfers an instrument for consideration, she warrants that:

  1. she is entitled to enforce it,
  2. signatures on the instrument are authorized,
  3. the instrument has not been altered,
  4. no defenses are good against her,  and
  5. there is no knowledge of insovlency proceedings. 

Transfer of note (indorsement or give posession) triggers the five transfer warranties. 

EXAM TIP: Fraud or theft of note would be a breach of Transfer Warranty #1 " she is entitled to enforce it" or   #4: "no defenses are good against her ".

Theft is a personal defense that may be raised against the holder of a negotiable instrument unless he is a holder in due course HDC).  The thief herself would not be a HDC and would breach transfer warranty if she passes along the note.

10

A HDC can take a negotiable  instrument (note or check/draft)  in exchange for a debt and the amounts/sums can be different, can take a large note to pay off a small debt, etc.

Typically the difference is not a defense of lack of value unless there are other facts indicating that there was a lack of good faith in the exchange. 

Notice of presentment - 13 months after issuance would be considered as overdue - However, a HDC would not have notice if there is no date on the document. and the note would still be payable.

11

Fraud in Factum/ Essence is real defense and good against an HDC if a person is fraudulently induced to sign a document, and does not know it is a negotiable instrument and does not have a reasonable opportunity to learn of its character or essential terms.

*EXAM TIP* Whether a reasonable opportunity to read/understand the terms of a document existed is determined by all relevant factors, including:

  • the basis of the signer's confidence in the party making the representation,
  • the availability of a third party who might explain the instrument and
  • the necessity of acting without delay.

12

Defense of personal fraud cannot be raised against a HDC. If person knows he is signing a negotiable instrument but does not read it, or does not realize the amount is incorrect, the defense is only personal . 

Real fraud cannot be asserted by a party who failed to take reasonable steps to ascertain the nature of the transaction, EXAM TIP - look for and receite back FACTS.

 

Note - THEFT or FORGERY of a note or check is a PERSONAL DEFENSE and is not raised against an HDC - only a personal suit can be raised against the thief or forger. 

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Accord & Satisfaction

When a claim is subject to dispute, the claim can be discharged in full if the person against whom the claim is asserted in good faith tenders an instrument that conspicuously states that it is tendered  " in full satisfaction of the claim" or with "payment in full" and the claimant obtains payment of the instrument.

Furthermore, Florida case law defines an accord and satisfaction as follows: “An accord and satisfaction results as a matter of law when the creditor accepts payment tendered on the expressed condition that its receipt is deemed to be a complete satisfaction of a disputed issue.

In addition to the UCC, there is a Florida Statute s. 673.3111 that provides:

“(1) If a person against whom a claim is asserted proves that that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, that the amount of the claim was unliquidated or subject to a bona fide dispute, and that the claimant obtained payment of the instrument, the following subsections apply.

(2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”

DEFENSE - EXCEPTION - UCC provides that an accord and satisfaction can be avoided if the satisfaction was obtained inadvertantly - where a creditor did not realize that payment or a check was intended to fully satisfy the claim, he can object or reject the tender by tendering repayment within 90 days after receiving the initial  payment.

A payment will not be considered inadvertent if it was obtained  by the claimaint, or an agent of the claimant with direct responsibiity for the disputed claim, with knowledge that the instrument was tendered  in full satisfaction. {Was authority given to a 3rd party and not disclosed to principle that a settlement was agreed? }

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