What is commercial paper governed by?
Articles 3 and 4 of the UCC
What is the holder in due course (HDC) rule
If an instrument is in a special form (called "negotiable") and is transferred in a special way (by "negotiation") to a person who takes the instrument for value, in good faith, and without notice of any defenses to or claims on the instrument (i.e., an "HDC"), the HDC will be able to force someone to pay the money due under the instrument unless the person from whom payment is sought has available one of the very few so-called real defenses provided by Article 3
What are the two basic instruments of commercial paper and what is the main example of each?
The note (e.g., promissory note) and the draft (e.g., a check).
What is a note and who are the two parties involved?
A note is a promise to pay. Two basic parties are involved: the party promising to pay (the "maker") and party to whom payment is promised (the "payee" or "bearer")
What is a Certificate of Deposit and is it a note?
A certificate of deposit is like a note. It is an instrument made by a bank containing: (i) an acknowledgment of money received; and (ii) a promise to repay
What is a draft and who are the three parties involved?
A draft is an order to pay. Three basic parties involved are: one party (the "drawer") orders another party (the "drawee," often a bank) to pay money to a third party (the "payee") or to bearer
What is a check?
A check is any draft payable on demand and drawn on a bank
For the formal requisites of negotiability for commercial paper, what does 'negotiability' depend on? what are the three elements that make up negotiability?
Whether an instrument is negotiable depends on its form. To be negotiable, an instrument must be a written and signed: 1) unconditional 2) promise or order to pay 3) a fixed amount of money (with or without interest) that: is payable to order or bearer when issued or first in possession of a holder; is payable on demand or at a definite time; and states no unauthorized undertaking or instruction by the person promising or ordering payment Note: on your exam you will very likely have to determine whether an instrument is negotiable. The only way to make the determination is to see whether the above elements are present. Thus, you must memorize these elements.
One of what two things will make an instrument condition (and thus not negotiable)?
if (i) it expressly states a condition for payment (e.g., "I promise to pay $500 if this thing happens"), or (ii) it states that the promise or order is subject to or governed by another writing
A promise or order is NOT condition merely because it: (4)
A promise or order is NOT conditional merely because it: (i) refers to another writing regarding collateral, prepayment, or acceleration; (ii) limits payment to a particular source or fund; (iii) requires a countersignature of a specimen signature (e.g., traveler's checks); or (iv) contains a statement required by law that the holder is subject to claims and defenses of the original payee.
Does recitation of the consideration out of which the instrument arose violate the unconditionality requirement for negotiability?
No. Bar examination questions frequently deal with an instrument that recites the consideration out of which the instrument arose. Remember that such recitation does not make the instrument conditional.
What are the rules as to what constitutes a writing or signature as required for a negotiable instrument?
A note must contain a promise to pay (e.g., "I promise to pay"). A draft must contain an order to pay (e.g., "First Bank, pay...."). The UCC rules are liberal as to what constitutes a writing or signature.
How does requiring 1) foreign currency as payment, or 2) something other than money (e.g., gold) as payment affect negotiability?
The requirement that it be a fixed amount of money means that requiring foreign currency does not destroy negotiability, but requiring payment in something other than money makes an instrument nonnegotiable.
What does it mean for the amount of money to be "fixed" as for negotiability?
To be negotiable, the principal due under the instrument must be fixed. Variable or indexed interest rates are acceptable. The "judgment rate" will be applied if the instrument states that it is payable "with interest" but the rate is not specified.
What does it mean for the requirement for negotiability that the fixed amount of money must be payable to order or bearer? (including the three things, any one of which make it payable to bearer)
An instrument is payable to "order" if it is payable to the order of an identified person (e.g., pay to the order of Beck) or to an identified person or order (pay to Becky or her order). An instrument is payable to bearer if it: (i) states that it is payable to "bearer" (e.g., "I promise to pay bearer"), "order of bearer," "order or bearer," "order and bearer," or otherwise indicates the possessor is entitled to payment; (ii) does not name a payee; or (iii) is payable to "cash" or otherwise indicates that it is not payable to an identified person (e.g., I promise to pay to the order of Mickey Mouse). Note: the person to whom an instrument is payable is governed by the intent of the maker or drawer. A payee may be identified by any means, and more than one payee may be named.
When is a negotiable instrument payable on demand as goes the requirement for negotiability that it must be payable either on demand or at a definite time?
An instrument is payable on demand if it fails to state a time for payment or states that it is payable "on demand," "at sight," etc.
When is a negotiable instrument payable at a definite time as goes the requirement for negotiability that it must be payable either on demand or at a definite time?
An instrument is payable at a definite time if it is payable: (i) on a fixed date; (ii) after elapse of a specified period after sight; or (iii) at a time readily ascertainable when the instrument is issued. (Note that events that will occur on an uncertain date (e.g., "after my death") are not "readily ascertainable."
What are acceleration clauses and extension clauses and do either destroy negotiability?
Acceleration clauses (e.g., "pay bearer $5,000 on April 15, 3000, or at my death if I should die sooner") do not destroy negotiability. Extensions at the option of the maker and extensions that are automatic on the happening of an event, are acceptable if the extension is to a further definite time state in the instrument (e.g., "pay bearer $5,000 on August 12, 2005, but if a Uranus mission has been launched, payment may be made on August 12, 2015"). An extension at the option of the holder is always permitted (but he may not exercise it if the maker objects and tenders payment).
As to the requirement of negotiability, only three undertaking or instructions are authorized by the UCC; any other undertaking or instruction will destroy negotiability. The UCC permits:
1) an undertaking or power to give, maintain, or protect collateral; 2) an authorization or power given to the holder to confess judgment or to realize on or dispose of collateral; and 3) a waiver of the benefit of a law that protects the obligor
Where figures on an instrument are handwritten, typed, and printed. What is the order of authority?
Handwritten controls supreme over type and print. Type controls over print.
If there are two or more signers in a single capacity on a negotiable instrument, how does liability work?
Each of the two or more signers are joint and severally liable in that capacity.
How are incomplete instruments treated as to negotiability?
An incomplete instrument may be enforced according to its incomplete terms or as augmented by an authorized completion. If the instrument is completed without authority, it is treated as a fraudulently altered instrument
Ultimately, what are the six elements to check for to determine whether an instrument is negotiable?
Make sure it has the following characteristics to be considered negotiable: (i) unconditional (does not state a condition for payment and is not subject to or governed by another writing); (ii) promise (note) or order (draft) to pay (written and signed); (iii) a fixed amount of money (with or without interest); (iv) is payable to order or bearer; (v) on demand or at a definite time; (vi) contains no unauthorized promise or undertaking
To become an HDC, one must first become a holder. (essentially, a person in possession of an instrument with a right to enforce it). A person becomes a holder through a transfer that qualifies as a negotiation. The steps needed to negotiate an instrument depend on what?
Whether the instrument is payable to bearer or to order
What are the steps needed to negotiate an instrument that is payable to a bearer?
Bearer instruments are negotiated by transferring possession of the instrument (e.g., Yolanda gives Zack a bearer note; there is a negotiation)
How is an order instrument negotiated?
An instrument payable to an identified person (the payee, such as John Smith) is negotiated by transferring possession along with the identified person's indorsement (e.g., John Smith may negotiate a check payable to his order by indorsing the check and delivering it to a transferee)
What two things are needed as to the payee's indorsement in order for the right to enforce to pass in an order instrument?
Generally, the right to enforce will not pass unless the payee's indorsement is authorized and valid. In most cases, forging the payee's name breaks the chain of title, and generally, not subsequent possessors of the instrument can qualify as holders. Note: all necessary signatures of all payees and special indorsees are required
For multiple payees in an order instrument, what are the requirements for the instrument being payable jointly (e.g., "to the order of Becky and Cindy"), and what are the requirements for the instrument being payable severally (e.g., "to the order of Beck or Cindy").
An instrument may be payable to more than one payee, either jointly (e.g., "pay to the order of Becky and Cindy"), in which case EACH must indorse, or severally (e.g., "pay to the order of Beck or Cindy"), in which case any one may indorse
What is the required location of the indorsement for an order instrument?
An indorsement must be written on either the instrument or an allonge affixed to the instrument.
Every indorsement can be described by three certain qualities (and the inverse), what are these?
special or blank; qualified or unqualified; and restrictive or unrestrictive