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)
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
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
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.
What is a Trade Acceptance?
- Draft drawn by the Payee on the Drawee
- Accepted by the drawee
What is the purpose of the Negotiation of Commercial Paper?
Transfers ownership to another party
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
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
What is required to Negotiate Order Paper?
- Must have delivery and endorsement
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
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
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.
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
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)
Define Contract Liability.
Guarantees payment of a liability
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
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
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
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
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
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
Becoming a Holder in Due Course, provides?
- Freedom from many defenses that a Maker or Drawer might have against payment
Bearer Paper Requires?
- Mere Delivery
Order Paper Requires?
- Delivery & Endorsement
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
If any One requirement to becoming a Holder in Due Course is missing, Holder gets?
- Same Rights as Transferor
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.
If Drawee signs a Draft, as Primarily liable, discharges?
- All Prior Parties
What is a Blank Endorsement?
- Mere signature of holder, transforms into a bearer paper
What is a Special Endorsement?
- Names a new payee; transforms into an order paper
What is a Restrictive Endorsement?
- Adds restrictions; doesn't stop further negotiation, "for deposit', 'for collection'
What is a Qualified Endorsement?
- Payment not guaranteed; Without Recourse added to endorsement