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Commercial Paper (Texas Essays)

Terms in this set (66)

Bright line rule
When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
Types of Negotiable instruments
Promissory note
draft
PRomissory note
Promise to pay (like a note)
2 parties
-maker
-payee
Draft
Order to pay (check)
3 Parties
-drawer giving the order
-drawee is ordered to do the paying
-payee is the beneficiary of the order
Indorser
Signs the back of a check
To qualify as a negotiable instrument
WOSSUPP
-Writing
-(payable) Order to bearer
-Signed by maker or drawer (depending on the instrument)
-Sum certain
-Unconditional
-Payable on demand
-Payable in currency
A conditional note is
a contract and therefore, is non-negotiable


not conditional if merely referring to another writing regrding collateral prepayment or acceleration; limits payment to a particular source of funds; requires a countersignature of a specimen signature; or contains a statement required by law that the holder is subject to claims and defenses of original payee
Referring to another writing does not itself make a promise or order
Conditional
If limits payment to particular source or fund
Does not make it consitional
Can a note or order be in goods
no. makes it non-negotiable
Additionl promises or orders
make an instrument non-negotiable
An instrument is payable at a definite time if by its terms it is payable
On or before a given date
At a fixed period after a given date
Acceleration and extension clauses
Are enforceable and do not destroy negotiability--but extension clause must refer to another definite time in the future
To be negotiable, the note or draft must use the word _______ or ________ in connection with the payee's name.
Order
Assigns
IF not payable to order,
it must be payable to bearer
BEing payable to bearer means
IT is payable to anyone who has it
Theories of Getting sued under Art. 3
Contract or Signature Liability
Warranty or Transfer Liability
Contract or Signature Liability
D signs the negotiable instrument and if you sign it, you promise to pay it, and that's how you get sued.
-Maker is the promisor in the promissory note
-Maker, merely by signing his name to the instrument, enters into a contract, whereby he agrees to pay the instrument. If he fails to pay, he issued under signature liability
*********if check bounces and you are notified, you pay. That includes indorsers (indorsers are promising to pay if check bounces)


**indorser signs his name on the blank
**drawer signs the check
**drawee pays the draft (bank)--but does not sign so not liable
When words "without recourse" are included
It's a term used by endorsers and drawers. It represents a disclaimer of liability---no signature liability
Warranty or transfer liability
Liability for a defective instrument
-Anyone who sells the negotiable instrument (so, donors only ones not on the hook)
-If D indorsed the instrument, any P in possession may sue and the indorsement runs with the instrument
-If D did not indorse the instrument then only the defendant's immediate transferee may sue. The warranties will not run with the instrument.
Five warranties
D promises
-he has good title to the instrument
-all signatures are genuine and authorized
*thus forgery is a breach of warranty
-instrument has not been materially altered (when facts tell you that the instrument has been tampered with it is defective)
-there is no defense or good claim against the defendant, meaning the instrument is enforceable
-he has no knowledge of bankruptcy or insolvency action against the maker or drawer
Duly negotiated means there has been
a proper transfer of the instrument. I
If the instrument has been properly transferred, the transferee is
a holder with eligibility to be a holder in due course
If instrument has been improperly transferred, the transferee
is not a holder and therefore, cannot be a holder in due course
When an instrument is payable to the order of a specific payee, it is negotiated by
Delivery to the payee
Any further negotiation when instrument is payable to the order of a specific payee requires
the payee indorse the instrument and deliver it to the transferee (indorsement must be authorized and valid)
If the instrument is payable to the bearer,
indorsement is not required
Types of indorsement
Special or blank
Restrictive or Unrestrictive
Special Indorsement
One that names a particular person as indorsee, who must sign in order for the instrument to be further negotiated
Blank indorsement
Does not have a specific indorsee. May be negotiated by delivery alone
Restrictive indorsement
Contains restrictions (i.e. for deposit only)
How to qualify for Holder in Due Course Status
Holder in due course is a holder who takes the instrument through a proper transfer (duly negotiated)
-for value-must give value for the instrument (not same as consideration, which is a contracts principal . . . also old value is good value)
-in good faith
-without notice that it is overdue or has been dishonored or is subject to any defense or claim
Good faith
Honesty in fact (subjective test)
Notice requirement of being a HIDC
It's objective. Did holder know or have reason to know of the problem
Notices ruining HDC status
-instrument is overdue
-Any defense or claim against the negotiable instrument's enforcement
---when appearance gives notice (VOID or PAID)
---notice that obligation of any party is voidable
---notice of competing claim to the negotiable instrument
---Notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty
Shelter RUle (HDC)
A transferee acquires whatever right her transferor had. **Takes shelter in status of the transferor. So transferee could have all the rights of HDC if she is a donee or fails to qualify if transferor was an HDC
Benefit of Being an HDC
free of all personal defenses and claims but not from real defenses
A claim
is a right to a negotiable instrument because of superior ownership. If a negotiable instrument is duly negotiated to an HDC, the HDC defeats the superior owner
Personal Defenses
Defenses available in ordinary breach of contract action, such as
-lack of consideration
-unconscionability
-Waiver
-estoppel
-Fraud in the inducement
Real Defenses
MADFIFI4 (Remember that from real property)
-Material Alteration (change to the terms of the instrument)
-Duress
-Fraud in the Factum
-Incapacity
-Illegality
-Infancy
-Insolvency
Real fraud
Lie about the instrument (Fraud in the factum)
Personal fraud
Fraud in the inducement. Not effective against an HDC
Duties of Drawee (bank)
-honor customer check (must honor if there are sufficient funds)
-Honor when insufficient funds (may choose to, then customer is liable to bank for overdraft)
-wrongful dishonor (may recover damages for whatever harm is proximately caused by it)
-must honor check as drawn ( so can't charge customer if forged or for more than the order or pays wrong person or if check is post dated and gives notice of post dating with reasonable certainty)
- Stop orders
Death of a customer
Does not revoke bank's authority to pay a check until the bank
--knows of the death
--has reasonable time to act on the knowledge
Stop order
oral stop order Is binding on the bank for 14 days unless renewed in writing within that period. written stop order is binding for 6 months, renewable every six months in writing

If bank pays in spite of this, customer has burden of proving loss has occurred and amount of loss
Properly Payable rule
Drawee bank that honors a forged or materially altered check must recredit the drawer's account, as long as the drawer was not negligent
Drawee bank's remedies for violating the properly payable rule
-can sue the thief (who is always liable)
-Can sue the drawer if negligent (more likely to come up on essays)
When is a drawer negligent
When he
-leaves blanks or spaces on the instrument
-Fails to follow internal procedures designed to avoid forgeries (like putting signature stamp in same unlocked drawer as company's checks)
-Bank statement rule (fails to examine bank statement within a reasonable time and is estopped from demanding recredit)
-Ficticious payee rule (imposter induces drawer to write a check, drawer is negligent)
-Employee indorsement rule: an employer is liable for forgeries by an employee who has been entrusted with responsibility for handling checks (employer must monitor employees)
If a negotiable instrument calls for payment in a foreign currency, may it instead be paid in U.S. dollars
If a negotiable instrument calls for payment in foreign money, it may be paid instead with U.S. dollars at the bank exchange rate in effect when and where the instrument is paid, unless otherwise specified. This payment method is considered to meet the requirement that a negotiable instrument specify the payment of a fixed amount of money.
If an instrument states that it is payable with interest but does not state the rate it is
payable at the rate on a court judgment and interest is payable from the date of the instrument. (judgment rate) Only principal needs to be fixed; the total amount need not be.
A promise or order that is payable to an unidentified person or payable to cash is payable to
Bearer (including fictitious stuff)
NEgotiation is defined as the
voluntary or involuntary transfer of an instrument by someone other than the issuer to a person who gains possession of the instrument and has the right to enforce it.
Indorser can be liable on note for both
makor's insolvency and for makor's inability to be served with process
Alteration
unauthorized change or addition that purports to modify the obligation of any party in any respect is invalid. But ones that don't are not .
The forgery of which party will destroy good title
-The payee or any special indorsee
Does payment of a personal check automatically discharge a debt? Suspend a debt?
If a certified, cashier's, or teller's check is given in satisfaction of an obligation, the obligation is discharged to the same extent as if cash were given (unless otherwise agreed). But if any other negotiable instrument is given to satisfy an obligation, the obligation is only suspended to the same extent as if cash were given (unless otherwise agreed). Suspension of the obligation continues until the instrument is paid (resulting in discharge) or dishonored. An obligation for which a check was given may also be discharged by subsequent certification of the check.
Collateral is impaired if:
(i) a security interest is not perfected or otherwise filed; (ii) collateral is released without obtaining substitute collateral; (iii) there is failure to perform acts required to preserve the collateral's value; or (iv) there is failure to dispose of collateral as the law requires. Impairment of collateral securing a party's obligation on an instrument discharges an indorser or accommodation party having a right of recourse against the obligor to the extent of the impairment. However, the burden of proving the extent of the impairment is on the party claiming discharge.
Can a party who sues to obtain payment on a note recover attorney fees?
In Virginia, typically a party is responsible for his own attorney fees
If an instrument contains contrary terms
words control figures unless words are ambiguous or uncertain, which case, figures control.
Under Art. 3 in VA what is the statute of limitations for actions on notes payable at a definite time or on demand
6 years
What two kinds of instruments do art. 3 apply
notes and drafts
Under Art.3 as adopted in Va, if no demand payment is made on the maker of a note payable on demand or at a definite time, an action to enforce the note is barred if no interest or principal has been paid for ____ years
10
Fraud in the factum
Assertable against holder in due course and is defined as a fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms
If a check payable to a particular person is lost or stolen and is not indorsed by the payee
the payee retains ownership of the check because the check suspends obligation until paid
If an instrument contains contradictory terms, what are the order of prevailing mediums
typewritten prevails over printed
handwritten prevails over both

words prevail over numbers
Can a holder enforce a note against the bearer and anyone else who indorsed
Yes, BUT takes it subject to personal and real defenses.
Sets with similar terms