Commercial Paper, Secured Transactions and Suretyship and Creditors Rights Flashcards Preview

Regulation CPA > Commercial Paper, Secured Transactions and Suretyship and Creditors Rights > Flashcards

Flashcards in Commercial Paper, Secured Transactions and Suretyship and Creditors Rights Deck (55):

Holder in Due Course Rule

If a negotiable instrument is negotiated to a holder in due course, the holder in due course will take the instrument subject to very defenses.


Article 3 of the Negotiable Instrument Article

Governs commercial paper, a type of negotiable instruments.


Article 7 governs documents of title

Governs documents of title (bills of lading and warehouse receipts).


Article 8 of UCC

Governs investment securities


Notes-Promise to Pay

A note is two-party commercial paper. It is simply a promise by one party to pay money to another party.


Certificates of Deposit

Involves two parties. A CD is a negotiable instrument issued by a bank that acknowledges receipt of money and promises to repay at a future date.


Drafts-Order for a Third party

Generally three party commercial paper. An order by one person (drawer) to another person (the drawee) demanding the drawee pay a third party.

Drawee must be a bank and must be payable on demand

Trade Acceptances-draft drawn by the payee(seller of goods) and accepted by the drawee (accepting liability on the instruments.


Demand vs Time Instruments

Commercial paper can be payable either on demand or at a specified future date. An instrument payable on demand is a demand note or draft. An instrument payable at future date is a time note or draft.


Negotiable Instrument within Article 3


1) Be in writing
2) Be signed by the maker (note) or drawer (draft)
3) Contained an unconditional promise (note) or order (draft) to pay;
4) Be for a fixed amount of money
5) Be payable on demand or at a definite time
6) Be payable to order or to bearer; with the exception of checks
7) Contain no additional undertaking or instruction not authorized by the UCC.


Unconditional Promise or Order

1) No terms in separate instrument-Subject to Another Agreement
2) No express conditions
3) Permissable Conditions- UCC does allow inclusion of certain conditions. Promise or order will not be made conditional merely because the instrument: subject to implied conditions, States its consideration, refers the transaction out of which the instrument arose, Limits payment to a particular source or fund


Fixed Amount of Money

1) Must me for fixed amount of money.
2) Be payable in money, legal tender.


On Demand or at a Definite Time

Must be payable on demand or at a definite time. Acceleration clauses do not destroy negotiabiility and extension clauses do not destroy negotiability either.


To Order or to bearer

An instrument must be payable to order or to bearer with the exception of checks.

1) Order-Payable to the order of a specified party
2) Bearer-Payable to anyone who possesses it
3) Checks-Does not need to be payable to order of bearer.


No unauthorized Promises

Wont be negotiable if it contains any promises to pay in addition to promise to pay except for auhorized promises except for following

1) Authorization to give, maintain or protect collateral
2) A term authorizing confession of judgment or disposition of the collateral if the instrument is not paid when due
3) Term that waives the benefit of laws intended for the benefit of the obligor


Rules of Construction

1) Typewritten terms control over printed terms
2) Words control figures unless the words are ambigous.


Becoming a Holder in Due Course

1) Bearer paper requires Mere Delivery
2) Order paper requires delivery and endorsement
3) Last Endorsement Controls Order vs Bearer
a) Special Endorsement- Names a particular person as the endorse, further negotiation requires the signature of the special endorse plus delivery.
b) Blank Endorsement- Makes instrument bearer paper, can be negotiated be delivery alone.
c) Break the Chain of Title- If a necessary endorsement is missing or is forged, the chain of title is broken and no subsequent transferee can become a holder.

4) If a drawer or maker's signature is forged this does not constitute a break in the chain of title because the UCC treats the forgery as the signature of the forger.
5) Qualified Endorsement-Adding the words without recourse.
6) Restrictive endorsements generally have no effect on negotiability.


Becoming a Holder In Due Course

1) For Value
a) Performance of consideration
b) Acquistion of a lien or security interest in the instrument.
2) In good faith
3) Without notice of any differences to or claims of ownership on the instrument


Shelter Doctrine

Provides that most subsequent transferees of a HDC can "succeed to" or "take shelter in" the rights of the HDC, even if a person does qualify as a holder in due course.


Claims and Defenses on the Instrument

1) Fraud in the exectution- person is tricked into signing something
2) Forgery
3) Adjuicated insanity
4) Material Alteration
5) Infancy
6) Illegality
7) Durress
8) Discharge in Bankruptcy
9) Suretyship Defenses
10) Statute of Limitations- generally 3 years after dishonor and 6 years after demand or due date on notes.


Personal Defenses

Cannot be raised against one having the rights of a HDC an may be viewed as all.

Unauthorized completion-Personal Defense- occurs when an issuer leaves part of an instrument blank and a later holder fills in the missing information, either without authority or beyond the authority granted.


Liability of all Parties

1) Maker-Primarily Liable
2) Drawer-Secondary Liable
3) Drawee-Primarily Liable After Acceptance, liable with signature which discharges all prior parties.


Liability between Drawer and Drawee

1) Bank is required to honor drafts
2) Oral stop payment order is binding on a bank for 14 days.


Liability of an Endorser

1) Endorser's Contract- Secondarily Liability, presentment must be made within 30 days to preserve the liability of an endorser. Endorser can negate contract liability by endorsing "without recourse".


5 transfer warranties of those transferring for Consideration

1) The transferor is entitled to enforce the instrument
2) All signatures are genuine or authorized
3) Instrument has been materially altered
4) No defense of any party is good against the transferor
5) Transferor has no knowledger of any insolvency proceeding that has been instituted against the maker, acceptor or drawer of an unaccepted instrument.


Accomodation Party

One who signs an instrument for purpose of lending their name and credit to another party. Never liable to person accomodated, liable to capacity in which signed. Liable in effect in which signed.


Effect of Forgery

1) Forgery of Drawer's Name- Liable upon acceptance
2) Forgery of the Payee's Name-Does not Usually pass good title.
3) Exceptions- Impostor rule and fictitous payee rule



Can be discharged as follows:
1) By payment, satisifaction, tender of payment
2) Cancellation or renunciation- if paper is purposely destroyed by holder, all parties discharged.
3) By imparing recourse or collateral
4) By delay in presentment or failure to give notice of dishonor
5) By acceptance or certification of a draft by a bank.

To ensure that discharge will be effective against an HDC it is best to note all discharges on the face of the instrument.


Secured Transactions-Debt Secured by Collateral

Questions generally involve credit transactions. Debtor involves buying something from a creditor or secured party on credit.


Security Interest-Right of a Creditor to Repossess Upon Default

A limited right in specific personal property of the debtor that allows the creditor to take the property if the debtor fails to fufill the credit obligation.


Effective between Creditor and Debtor Upon Attachment

Security Interest is effective berween the partiesas soon as soon certain steps take place to attach the interest.


Effective Against Third Parties Upon Perfection

Attachment does provide creditor with rights against other third parties. A creditor must take steps to perfect the security interest. Perfection saves as a form of notice.


UCC Article 9

Applies to most security interests in personal property or fixtures, does not apply to security interests in land.


Purchase Money Security Interests

Has priority over all other types of security interests in the same collateral. Occurs when:

1) Creditor sells collateral to a debtor on credit, retaining a security interest for purchase price
2) Creditor advances funds used by the debtor to purchase the collateral.


Types of Collateral

Collateral is the property subject to a security interest

Four Types of Collateral:

1) Goods-Consumer Goods, Inventory, Equipment
2) Intangible Collateral Accounts
3) Investment Property
4) Proceeds


Three Requisites of Attachment

1) Must have an agreement creating the security interest by either having an authenticated record of interest or taking possession of collateral.
2) Value must be given by the secured party in exchange for the security interest.
3) Debtor must have rights in the collateral.


Perfection of the Security Interest

5 methods of perfection

1) Filing-Notice is given by filing of a financing statement, which contains Name and Mailing address of debtor and secured party. An indication of the collateral covered by financing stmt., description of real property if appl. Debtor must authorize the filing as well. Must be filed with Secretary of State. Effective for 5 years and can be renewed.
2) Taking possession of collateral
3) Control- Has taken steps necessary to be to have the investment property sold without further action from the owner.
4) Automatic Perfection-Usually for PMSI in Consumer Goods and Small Scale Assignment of Goods.
5) Temporary Perfection- 21 day period in proceeds from original collateral continously perfect for 20 days. For Insterstate shipments valid for 4 months after the collateral is brought into the second state.


Priorities in Secured Transactions

1) Buyer in the ordinary course of business of inventory that serves as collateral; holders in due course, and holders of promissory leans
2) Holder of a properly perfected PMSI in collateral- Second hand consumer purchaser without notice.
3) Holder of a perfected security interest in, or a judicial lien that has attached to, the collateral
4) The holder of an unperfected security interest in the collateral
5) The debtor


Rights on Default

1) Taking possession-no requirement for judical action, collections rights of secured party, or taking possession by replevin.


Sale of Property

Secured party may sell or lease the collateral either in its condition when taken or after reasonable preparation.
1) must be commercially reasonable
2) Debtor and other parties must generally be given notice.
3) Sale wipes out all subordinate interests
4) Debtor has the right to redeem by pay off the indebtedness.


Proceeds of Sale

1) First to pay the expenses of repossession and sale
2) To pay creditors with a security interest in the collateral in order of priority. Creditor with high must be paid in fulld before any proceeds can go to the secured creditor.
3) Any surplus is paid to the debtor



One who is liable for the debt of obligation of another.



Liable to the creditor only if the debtor does not perform his duty to the creditor.


Guarantor of Collectibility

Must exhaust all remedies against debtor.


Statute of Frauds

Surety's Promise must be evidenced by writing.


Gratuitious Suriety

One who is not compensated for his promise to the creditor.


Compensated Surety

Paid Surety


Surety's Rights against creditor

1) No right of notice
2) Generally not right to compel collection
3) No right to compel creditor to apply security held


Surety's Rights against debtor

1) Exonoration-suit to compel payment
2) Subrogation-enforcement of creditor's against principal
3) Reimbursement-Suit against principal after payment


Surety's Rights against co-surties

1) Exnoration
2) Contribution-entitled to contribution from co-surtieis on their share of payment


Defenses of Surety

1) Defrauded Principal
2) Durress upon Principal
3) Illegality of the Principal's Obligation
4) Discharge of Principal's Obligation-Payment and Tender of payment, release of principal debtor, covenant not to sue.
5) Surety's Incapacity or Bankruptcy


Variations of Surety's Risk

1) Alteration of Principal's Contract-any change releases gratuitous surety. A compensated surety is discharged if he can show material change in previous contract
2) For extention of time a gratitous surety is discharged. A compensated surety is discharged if extension materially increased comepsation
3) Release of securtity held by creditor discharges the surety in the amount of the value.


No Defense Situations

1) Principal fraud or durress upon surety
2) Incapacity of Principal
3) Bankruptcy of Principal


Creditor's composition

An agrement between a debtor and at least two creditors that the debtor pays the creditors less than the full claims in full satisification of their claims.


Judicial Lien or Ganrishment

Option for creditors without an interest or mortgage in the debtor's property. For judcial lien, court imposes the lien which will issue a writ of attachemnt.

For garnishment- a writ is orders the person holding the property turn over the property to the creditor or be held personally liable for value of property.


Fair Debt Collection Practices Act

Curbs abuses by collection agencies in the collecting consumer debts. Act does not apply to a creditor attempting to collect its own debts, just to services that collect consumer debts for others.