Commercial Paper: Negotiability Requirements

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General overview of commercial paper analysis

(1) Is the writing a negotiable instrument?
(2) was the instrument properly negotiated?
(3) is the holder a HDC?
(4) does the one obligated to pay have any defenses against payment?
(5) who else can be held liable on the instrument?
(6)

What is the purpose of UCC Article 3?

Creates uniform rules for the payment of obligations in forms other than cash, i.e., negotiable instruments or commercial paper

Remember--UCC only applies to negotiable instruments!

Which version of UCC Article 3 does NY follow?

NY follows the 1964 version of Article 3; did not adopt the 1990 revisions

What are the different type of commercial paper?

(1) Note
(2) Draft

What is a note?

A note is a TWO-PARTY instrument in which the maker promises to pay the payee a sum of money; these are generally used to extend credit

What is a certificate of deposit?

A TWO-PARTY instrument particular to banks in which a bank acknowledges that it has received an amount of money and promises to repay that amount

Constitutes a note?

What is a draft?

a.k.a., bill of exchange

A THREE-PARTY commercial paper in which drawer orders the second party (drawee or payor) to pay a sum of money to a 3P payee

e.g., check, cashier's check, travelers check

What is a check?

A draft which is drawn upon a bank and payable on demand

e.g., money order

What is a cashier's check?

A draft in which the drawer and the drawee are the same bank

What is a traveler's check?

A draft which must be counter-signed by a person whose identifying signature appears on the traveler's check

What to do if there any doubt as to whether instrument is a draft or a note?

If there is doubt, holder should treat instrument as either

What does UCC Article 3 not apply to?

Money, documents of title, investment securities

What is a negotiation?

A voluntary or involuntary transfer of an instrument by someone other than its maker or issuer to a person who becomes its holder

What are UCC Article 3's requirements for an instrument to be negotiable?

(1) A writing, signed by the maker or drawer,
(2) containing an unconditional promise or order,
(3) to pay a sum certain in money,
(4) to order or to bearer,
(5) payable on demand or at a definite time, and
(6) containing no other promise, order, obligation or power given by the marker or drawer

What constitutes a writing and signature under UCC Article 3?

Writing includes printing, typewriting, or any other intentional reduction to tangible form

Signature may use any name on instrument, or any word or mark used in lieu of signature, as long as it identifies drawer or maker

Signature may be handwritten, typed, printed, or made in any other manner; need not be subscribed, and may appear in body of instrument without any other mark; parol evidence may be admissible to ID signer

No person is liable on an instrument unless signature appears on it

What is the effect of an agent's signature on a negotiable instrument?

Signature of an agent or other representative is valid; not particular form of appointment is required

Signature of an agent or principal binds the principal if that agent is expressly, impliedly, or apparently authorized under principles of agency law to bind principal

How is the genuineness of a signature proved?

A signature is presumed to be genuine or authorized; if effectiveness of signature is put in issue by party's specific denial, burden of establishing it is on party claiming under the signature

If signature is admitted or established, production of instrument entitles holder to recover on it unless D establishes a defense

What is the priority of handwritten, typewritten, and printed terms?

Handwritten control over typewritten and printed terms, while typewritten terms control over printed terms on an instrument

What is an unconditional promise or order?

To be negotiable, instrument must contain unconditional promise or order to pay

Promise = an ACTUAL promise/undertaking to pay; acknowledgment = insufficient (e.g., IOUs)

Order = direction to pay; must be more than authorization or request and must identify the person to pay with reasonable certainty; may be addressed to more then one person jointly or in the alternative but NOT in succession

What makes a promise or order to pay unconditional?

No limitations/conditions to payment on instrument

If promise/order merely refers to another agreement regarding collateral, prepayment, down payment or acceleration, instrument still unconditional

If payment is expected from an identified fund or source, does not render promise unconditional; but if payment is restricted to be paid only out of a particular fund, will generally render it conditional

What makes a promise or order to pay conditional?

A promise or order that contains an express condition to payment destroys negotiability; promise or order will not be made conditional by fact that instrument is subject to implied or constructive conditions

If promise or order is subject to or governed by any other agreement, it is conditional and not negotiable

What is a "sum certain"?

Sum that is payable must appear certain on the face of instrument, i.e., amount payable must be determinable from instrument itself

e.g., (1) payment with stated rate of interest or by state installments, (2) payment with stated different rates of interest before or after default or before/after specified date, (3) payment with stated discount or addition if paid before or after date fixed for payment, (4) payment with or without an exchange rate, (5) payment with costs of collection or an attorney's fee

Acceleration clause ill not detract from certainty of sum stated

If sum payable expressed in both words and number and there is discrepancy between the two, words take precedence over figures, unless words are ambiguous and figures are not

Will interest on a negotiable instrument destroy negotiability?

NO; principal must be fixed, but negotiable instruments may accrue interest; negotiability will not be affected even if rate of interest cannot be calculated by looking at instrument alone, as long as rate is readily ascertainable by reference in instrument

Provision for interest = interest at judgment rate at place of payment, starting from date of instrument, or from date of instrument's issue

What does it mean that negotiable instruments must be payable in money? i.e., what constitutes money?

If instrument calls for payment in any other form other than money (property, goods, commodities, gold) or allows for payment in the alternative, then NOT a negotiable instrument

Payment in foreign currency = OK

What is an order instrument?

A negotiable instrument payable only to person named or to his order, specified on instrument itself with reasonable certainty

To be negotiated, order paper must be delivered and property indorsed by holder

What is a bearer instrument?

A negotiable instrument payable to anyone who rightfully possesses instrument

Instrument is payable to bearer if it is made payable to: (1) "bearer" or "order of bearer"; (2) "[a specified person]"; or (3) "cash" or the "order of cash" or other indication that doesn't specify payee

To be negotiated, only required delivery (not indorsement)

What happens if an instrument is made payable both to Order and to Bearer?

Instrument made payable both to order and to bearer is payable to order unless bearer words are handwritten or typewritten

What happens to instruments payable with words of description?

Instrument made payable to name payee with addition of words describing him as agent or officer of a specified person (principal), is payable to principal, but agent/payee may act as if he were the holder

If words of description describe agent/payee as any other type of fiduciary for specified person, instrument is payable to agent/payee and may be negotiated, discharged, or enforced by him

If words of description describe agent/payee in any other manner, instrument is payable to agent/payee unconditionally

What does it mean for an instrument to be payable on demand or at a definite time?

Demand = payable at sight or on presentation and those in which no time for payment is stated

Definite time = if it is payable (1) on or before stated date or at a fixed period after stated date, (2) at fixed period after sight, (3) at a definite time subject to any acceleration, or (4) at a definite time subject to extension at option of holder, or to extension to further definite time or automatically upon or after specified act or event

Extension of time conditioned on option of maker or happening of an event does not destroy negotiability if extension is to a further definite time; if no time is specified, instrument is not negotiable

What happens if the payment of an instrument depends on an act or event alone?

If it is payable only upon act or event that is uncertain to occur at a specific time, it is not payable at a definite time even though act or event may have in fact occurred; even if event is certain to occur, not enough for an instrument to be negotiable

How do installment payments affect negotiability of an instrument?

If an instrument is payable in installments, does not destroy negotiability as long as there is fixed time for payment of each installment

What are the exceptions to the "no additional undertakings/instructions" requirement of negotiability? i.e., what terms/omissions will not affect negotiability?

(1) omission of statement of any consideration, (2) statement that collateral has been given to secure obligations of an obligor on the instrument, or that in the case of default of obligations, holder may realize on or dispose of collateral; (3) promise or power to maintain or protect collateral, or to give additional collateral; (4) term authorizing a confession of judgment on instrument if not paid when due; (5) term purporting to waive benefit of any law intended for the advantage or protection of any obligor; (6) term in a draft providing that payee, by indorsing or cashing the draft, acknowledges full satisfaction of an obligation of drawer, or (7) statement in draft drawn in separate parts, making order ineffective if another part has already been honoroed

How does a separate agreement affect the negotiability of an instrument?

Does not necessarily affect negotiability; if instrument is subject to or governed by any other agreement, it is not negotiable, but if merely refers to separate agreement or states that it arises out of such an agreement, it is negotiable

Separate agreement entered into by parties as part of same transaction giving rise to instrument will also not affect negotiability if agreement is neither included as part of instrument nor referenced by instrument

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