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1

What is a promissory note?

- A promise to pay a specific amount.

-There are two parties involved - maker and a payee.

- It can reference other transactions without harming the instruments negotiability.

Example: Bank Certificate of Deposit (CD)

2

What is a draft?

- A commercial paper involving three parties- a drawer; a payee and a drawee

- A drawer orders a sum to be paid to a payee by the drawee

-May be payable on demand or in the future

3

What is a check?

- A check is a type of draft that is payable ON DEMAND

-Payable to order of drawer or bearer

- Drawer - person writing the check

- Payee - person being paid

- Drawee - the bank

4

What is the difference between a Post-Dated Check and a Negotiable Time Draft?

- A check is payable on demand; even if post-dated.

- A negotiable time draft is not payable until the date designated for payment.

5

What is a Trade Acceptance?

- Draft drawn by the Payee on the Drawee

&

- Accepted by the drawee

6

What is the purpose of the Negotiation of Commercial Paper?

Transfers ownership to another party

7

What is Required to maintain the Negotiability of a Commercial Paper?

- Must be in writing

- Signed by drawer/maker

- Contain Unconditional Promise or Order

- Payable On Demand or Definite Time

- Amount of money must be Stated & Fixed

- Payable to order or bearer: Exception of checks

8

What characteristics will Cancel the Negotiability of a Commercial Paper?

- An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

- The promise to pay occurs after some action by another party or an event; it cancels negotiability

- Cannot allow for an alternative such as payment or some other action by the maker

- Note: a stated amount of payment plus a stated % of interest is OK

9

What is required to Negotiate Order Paper?

- Must have delivery and endorsement

10

What are the Major types of Endorsements on commercial paper?

- Blank: Mere signature of holder, transforms into a bearer paper

- Special: Names a new payee; transforms into an order paper

- Restrictive: Adds restrictions; doesn't stop further negotiation, "for deposit', 'for collection'

- Qualified: Payment not guaranteed; Without Recourse added to endorsement

- Unqualified

11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Within 7 days

12

On a commercial paper; What type of print & which value will supersede?

- Handwritten terms have control over Typewritten & Printed terms

- Written amount $ supersedes the numerical dollar amount.

13

Who has Primary Liability with respect to a contract liability?

-Pay on the Note/CD:

-- Maker of a Promissory Note

- With a Check/Draft:

--- Drawee ( Bank) if they accept to pay

14

Who has Secondary Liability with respect to contract liability?

-Pay on the note/draft:

--Endorsers (the payee) are secondarily liable

- With a Check/Draft:

-- Endorsers & Drawers (if Drawee fails to pay a Draft)

15

Define Contract Liability.

Guarantees payment of a liability

16

When does warranty liability occur?

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

17

What five warranties occur with every commercial paper transfer?

- Warranty of Title

- No defense will stand against it

- No material alteration

- No knowledge of bankruptcy proceedings

- All signatures are legitimate

18

What are the requirements for a holder to be a Holder in Due Course?

- Holding a Negotiable instrument (Front only)

- For Value

- Taking instrument in Good Faith

- Without Notice of any defenses to or Claims of ownership on the instrument

19

What are the REAL defenses against a Holder in Due Course (HDC)?***

- Fraud in the execution & Forgery

- Adjudicated Insanity & Material Alterations

- Infancy& Illegality

- Duress & Discharge

- Suretyship &Statute of Limitations

"FAIDS"

20

An Unconditional Promise or Order is NOT Negotiable if?

- It states that Payment is conditional

- No terms in separate instrument: Subject to another agreement

- No Express Condition

21

When are instruments Not Negotiable in relation to Time?

- Events certain to happen but uncertain as to Time

- Acceleration Clauses

- Extension Clauses

- Undated, Postdated, Antedated

22

Becoming a Holder in Due Course, provides?

- Freedom from many defenses that a Maker or Drawer might have against payment

23

Bearer Paper Requires?

- Mere Delivery

24

Order Paper Requires?

- Delivery & Endorsement

25

If a necessary endorsement is missing or forged, the Chain of Title is?

- Broken & No subsequent transferee can become holder

- Thus, Subject to all defenses

26

If any One requirement to becoming a Holder in Due Course is missing, Holder gets?

- Same Rights as Transferor

27

What is the Shelter Doctrine?

- If Transferee might not qualify as an HDC, he can claim rights of an HDC who held the commercial paper before him.

28

If Drawee signs a Draft, as Primarily liable, discharges?

- All Prior Parties

29

What is a Blank Endorsement?

-  Mere signature of holder, transforms into a bearer paper

30

What is a Special Endorsement?

- Names a new payee; transforms into an order paper

31

What is a Restrictive Endorsement?

- Adds restrictions; doesn't stop further negotiation, "for deposit', 'for collection'

 

32

What is a Qualified Endorsement?

- Payment not guaranteed; Without Recourse added to endorsement