Commercial Paper

Question 1

What are the fundamental issues tested in Commercial paper?

Answer 1

1. Person with instrument wants to get paid
2. Person obligated on instrument doesn’t want to pay
3. Person who paid the instrument now wants to recover the money from the person paid and or someone else.

Question 2

What is the approach taken when answering Commercial Paper Questions?

Answer 2

1. Identify the type of paper (representation of money).
2. Identify parties.
3. determine if instrument is negotiable
4. determine if instrument was properly negotiated
5. determine if transferee is holder in due course
6. Determine P’s causes of action, such as contract, warranty, tort, or not properly payable.
7. Determine defendant’s defenses
8. I
   f D is held liable, may D pass liability on to another?

Question 3

What are the two types of commercial paper instruments and the name for their parties?

Answer 3

Note: Maker and Payee

Draft: Drawer, drawee, payee

Question 4

What are all the elements of a commercial paper note?

Answer 4

1. promise to pay money - a two party instrument.
2. the parties are a maker - the promissory (obligor) - person who promises to pay and payee - the promisee - person entitled to payment (the money).

Certificate of deposit - not issued by a financial institution. The institution acknowledges receipt of money, and promises the payee/depositor to repay the money.

Question 5

What are all the elements of commercial paper draft?

Answer 5

1. an order to pay money - three party instrument
2. the parties are the drawer - person ordering payment, drawee - person to make payment, and payee - person to receive the payment.
3. Check - requires financial institution to be drawee and payable on demand.

3a. types of checks

Question 6

What are all the elements of commercial paper draft?

Answer 6

1. an order to pay money - three party instrument
2. the parties are the drawer - person ordering payment, drawee - person to make payment, and payee - person to receive the payment.
3. Check - requires financial institution to be drawee and payable on demand.

3a. types of checks
- ordinary
-certified - check which bank has agreed to pay
-cashier check - drawer and drawee are same bank. Person buying check is remitter
- tellers check - check drawn by one bank on another back, person buying check is remitter
-Traveler’s check - demand instrument requiring countersignature by a person whose specimen signature already appears on instrument.

Question 7

What is the meaning of negotiability?

Answer 7

refers to form of the instrument and is determined at the time of issuance.

Question 8

What are the elements of Negotiability?

Answer 8

In writing

signed by maker or drawer

unconditional promise or order to pay

fixed amount

In money

No other undertaking or instruction

payable on demand or at definite time

Contains words of negotiability

Question 9

What is the rule for signed by maker or drawer in commercial paper?

Answer 9

Any symbol executed or adopted by a party with present intent to authenticate a writing.

Question 10

What is the rule for “unconditional promise or order to pay” in commercial paper?

Answer 10

must be more that a mere acknowledgement of a debt such as an I.O.U. There is a presumption of unconditional promise to pay.

Question 11

What items make a promise or order conditional and thus non negotiable?

Answer 11

1. Express condition to payment (if something happens)
2. promise or order “subject to” or “governed by” another record.
3. Incorporation by Reference of Rights or Obligations

Question 12

What are items that do not make promise or order conditional?

Answer 12

1. statement of consideration
2. reference to another record (as per or in accordance with)
3. incorporation by reference of items that would not hurt holder, such as rights regarding collateral, prepayment, acceleration
4. limitation of payment or particular fund or source
5. countersignature , i.e., traveler’s check
6. Required by law

Question 13

How do you determine if a commercial paper instrument has a “fixed amount?”

Answer 13

Must be able to look at instrument and determine the principal amount due.

Question 14

If an instrument does not state how much interest is due, how is interest determined?

Answer 14

A silent instrument bears no interest.

Question 15

What are ways in which interest may be stated that would not violate the “fixed amount” requirement?

Answer 15

1. amount of money ($20 interest)
2. fixed or variable rated (5% interest)
3. Reference to outside sources (2% above the prime rate)

Question 16

If a note provides “for interest” how is the interest rate determined?

Answer 16

Judgment rule

Question 17

What are the elements for “payable on demand or at a definite time?”

Answer 17

1. On demand through express statements or if silent, instrument is a demand instrument.
2. At definite time though express statements

Question 18

What are words of negotiability?

Answer 18

Bearer language and
Order language

Question 19

What is bearer language?

Answer 19

“payable to bearer”
“payable to order of bearer”
indication that possessor entitled to payment
no payee stated
“to cash” or “to order of cash”
not payable to identified person

Question 20

What is Order language?

Answer 20

Payable to (1) the order of an identified person; or (2) an identified person “or his/her order.”

Question 21

What controls if there is both order and bearer language?

Answer 21

Bearer language.

Question 22

What is the exception for checks regarding words of negotiability?

Answer 22

if this is the only element of negotiability missing for a check, the order or bearer language requirement is waived

Question 23

What is Negotiation in Commercial Paper?

Answer 23

Transfer of negotiable instrument so that transferee is not the holder of the instrument.

Question 24

How does one have holder status?

Answer 24

Possession of negotiable instrument and good title

Question 25

What are the methods of obtaining good title in commercial paper?

Answer 25

will depend on the words of negotiability. Bearer = possession Order = possession plus necessary endorsements

Question 26

What is an indorsement in commercial paper?

Answer 26

an indorsement is a signature on a negotiable instrument by someone other than the maker, drawer, or acceptor normally on the back of the instrument.

Question 27

What is a Blank Indorsement and its effect?

Answer 27

Simplest type of indorsement consisting merely of payee's signature. creates bearer paper

Question 28

What is a special endorsement and its effect?

Answer 28

Payee's signature plus designation of new person to whom instrument is now payable. creates order paper

Question 29

What is a restrictive endorsement and its effect if not followed?

Answer 29

limits what may be done with the instrument if the depositary bank does not comply with indorsement then it will be liable for conversion.

Question 30

How is the identification of the person to whom the instrument is payable determined?

Answer 30

intent of issuer determines initial payee

Question 31

When their are multiple payees how does "and" and "or" determine negotiability?

Answer 31

And : requires all payees to indorse Or: requires any one of the payees to indorse.

Question 32

What are the elements for a holder in due course?

Answer 32

1. Negotiable instrument 2. Holder 3. Authenticity not apparently questioned - instrument does not bear such evidence of forgery or altercation or is not otherwise so irregular or incomplete as to call its authenticity into question. 4. Good faith 5. Without notice at the time of instrument acquisition

Question 33

How is an HDC's good faith determined?

Answer 33

honesty in fact (subjective) plus observance of reasonable commercial standards of fair dealing (objective).

Question 34

How is notice defined for an HDC?

Answer 34

actual knowledge - subjective test Receipt of a notice coupled with a reasonable time to act on the notice From all the facts and circumstances known to the persona at the time in question, the person has reason to know that it exists.

Question 35

What is the shelter rule for commercial paper?

Answer 35

even if the holder does not qualify as an HDC, person may still have rights of HDC by shelter. The transfer of an instrument vests int eh transferee the rights that the transferor had.

Question 36

What rights do a HDC have?

Answer 36

Subject to real defenses. Protected from personal defenses. Free from claims of others to the instrument.

Question 37

What are real defenses?

Answer 37

1. Infancy 2. Duress which voids obligation 3. lack of legal capacity making obligation void 4. illegality making obligation void 5. fraud in the execution (also called Fraud in Factum 6. Discharge in insolvency (banckruptcy) 7. Statute of Limitations 8. Alteration 9. Unauthorized signatures and forgeries

Question 38

What is fraud in the execution?

Answer 38

1. signer lacked knowledge of the instrument's character or essential terms and 2. signer lacked reasonable opportunity to learn of the instrument's character or essential terms?

Question 39

What is the SOL for commercial paper?

Answer 39

6 year from the due date For an unaccepted draft (check), SOL is the earlier of (1) three years after dishonor or (2) 10 years after issue.

Question 40

What are personal defenses to commercial paper?

Answer 40

examples are: failure of consideration breach of warranty fraud in the inducement

Question 41

What is the primary basis for contract liability on an instrument?

Answer 41

A person's signature

Question 42

How is contract liability determined for signatures by agent or principal on an instrument?

Answer 42

For binding the principal you follow general law. For binding the agent: agent escapes personal liability if the principal identified in instrument and signature unambiguously shows it was made on behalf of principal. if the above elements are not satisfied then: the agent will be liable to a HDC unless agent can prove that the holder had notice of the representative nature of agent's signature. the agent will be liable to a non-HDC unless agent can prove that the original parties did not intent the agent to be liable. agent is not liable if principal's name is on the check.

Question 43

Who may disclaim contract liability on commercial paper and how?

Answer 43

Drawer may not disclaim liability on a check but may disclaim liability on other drafts. "without recourse"

Question 44

How does secondary contract liability of a drawer occur?

Answer 44

Drawer liable only after two conditions are first satisfied: 1. presentment to drawee within 30 days 2. dishonor upon presentment

Question 45

When may a liability disclaimer on a check be allowed?

Answer 45

When done by an endorser of the check. The effect will merely pass title.

Question 46

What is the order of liability for endorsers on an instrument?

Answer 46

indorsers are liable to each other in the order of their signatures. sue prior indorsers for payment. liable to other endorsers

Question 47

What is secondary liability of an endorser?

Answer 47

indorsser liable only after three conditions are first satisfied: 1. presentment 2. dishonor (however failure to present check to drawee within 30 days of indorsement discharges indorser. 3. notice of dishonor within 30 days of dishonor

Question 48

What is the general contract rule of liability for a drawee?

Answer 48

A drawee makes no negotiable instruments contract.

Question 49

How does acceptance and certification affect a Drawee?

Answer 49

Drawee may agree to pay the draft by signing the draft the drawee has no obligation to accept a draft and cannot be sued for failing to accept certification discharges the drawer and all prior indorsers.

Question 50

what is the consequences of Drawees final payment on a check in contract actions?

Answer 50

the conract action may no longer be pursued and the drawee bank may not recover on the check from the person's it paid unless there is a breach of presentment warranty.

Question 51

What is the conversion (tort) liability if Drawee pays on a forged indorsement?

Answer 51

drawee who pays on forged indorsement is liable to the payee in conversion. person using in conversion must have received delivery or the instrument. no conversion action if check never reaches payee because it was lost in the mail.

Question 52

What is the rule on payment of checks after the drawer's death?

Answer 52

General rule: drawee bank may continue to pay checks until it knows that the drawer has died and has a reasonable opportunity to act on that knowledge.

Question 53

What type of possession is required for implied warranties of commercial paper?

Answer 53

None.

Question 54

Who makes transfer warranties?

Answer 54

the Defendant. Transferor who receives consideration.

Question 55

To whom are transfer warranties made?

Answer 55

Plaintiff. Immediate transferee and subsequent transferees if tansferor endorsed.

Question 56

What are the transfer warranties

Answer 56

1. warrantor is entitled to enforce the instrument/ (warranty of holder status) 2. all signatures authentic and authorized 3. no alteration 4. No good defense against transferor (perfect plaintiff warranty) 5. No knowledge of insolvency proceedings

Question 57

How are transfer warranties disclaimed?

Answer 57

Checks - cannot be disclaimed Non-checks - may disclaim (without warranties)

Question 58

What are the presentment warranties?

Answer 58

They are made on presentment by defendant (presenter and previous transferors) They are made to parties who pay in good faith, that is maker, drawee, acceptor (plaintiff).

Question 59

What are the warranties for an unaccepted draft (normal check) presented to drawee?

Answer 59

Warrantor entitled to enforce draft or obtain payment No alteration No knowledge of unauthorized Drawer's signature.

Question 60

What is the liability of a forged maker's signature?

Answer 60

Not liable unless alleged maker's conduct may ratify the forgery or cause the alleged maker to be precluded from denying forgery. Forger is liable.

Question 61

What is the liability of a forged drawer's signature?

Answer 61

Alleged drawer not liable. Drawee bank must re-credit alleged drawer's account as check was not properly payable unless drawee bank has a defense. Bank unable to pass on loss unless breach of presentment warranty.

Question 62

What is the Bank Statement Rule?

Answer 62

Duty to inspect statement Customer (drawer) has a duty to inspect statement and canceled checks in timely manner and report forgeries to bank. If customer does not and bank can prove a loss beyond original mistaken payment (not catch forger), customer is precluded from claiming forgery.

Question 63

What is the effect of a forged indorsement on bearer and order paper?

Answer 63

Bearer - irrelevant Order - forgery breaks claim of title and check is not properly payable. Accordingly, the drawer may demand the drawee bank recredit the drawer's account as the check was not properly payable.

Question 64

What is the imposter rule?

Answer 64

drawer/maker estopped to deny validity of forged indorsement when deemed to have acted carelessly in issuing the check and thus contributed to the forgery.

Question 65

What is the rule on fraudulent endorsements by employees?

Answer 65

Payee estopped if an employer entrusts an employee (or independent contractor) with responsibility with respect to an insturment and the employee makes a fraudulent indorsement the indorsement is effective. Payee is estopped to assert forgery.

Question 66

What are the different liabilities of the Drawee (bank)?

Answer 66

1. Conversion liability to payee 2. non properly payable liability to drawer 3. Drawee protected from double liability

Question 67

What are Banks defenses?

Answer 67

1. imposter rule 2. fraudulent indorsement by employee entrusted with a check. 3. drawer's negligence 4. Failure to timely sue.

Question 68

What are the two types of alteration to commercial paper?

Answer 68

Change in obligation - amount, date, name of payees, interest rate Unauthorized completion - completed in unauthorized manner which affects the party's obligation

Question 69

What is the effect of an alteration on an HDC?

Answer 69

for change in obligation - HDC may enforce for original amount. for unauthorized completion - HDC may enforce as completed.

Question 70

What is the effect of an alteration on a NON-HDC

Answer 70

fraudulently made by holder = total discharge of obligor not fraudulent made = obligor liable under original terms

Question 71

What is the general rule for a non properly payable check

Answer 71

an altered check is not properly payable.

Question 72

What are the banks defenses to an altered check?

Answer 72

1. Drawer's Negligence substantial contribution to alteration 2. Bank Statement Rule 3. Breach of transfer and presentment warranties of no alteration