Two party commercial paper. 

A promise by one party (maker) to pay money to another party (payee/bearer)

Bank Promissory Note

Involves two parties (bank and a payee) 

receipt of money with a promise to pay at a future date. 

Three party commerical paper. 

Order by Drawer to Drawee to Pay a third person the Payee 

Type of Draft

Drawee must be a BANK

Must be payable on demand

Do not need the magic words of negotiability 

Type of Draft 

Drawn by the payee (seller of goods, reciever of money) on the drawee (buyer of goods) and accepted by the drawee (accepts liability). 

Sometimes used as a pre-payment of goods for materials so the seller can produced the goods the buyer wants. 

Demand Not- instrument payable on demand (sight)

Time Note- instrument payable at a future date 

Depends on form. 

1) Be in Writing

2) Signed by the maker of the note or drawer of the draft

3) Contain UNCONDITIONAL promise (note) or order (draft) to pay 

4) Fixed amount of money and money only

5) Payable on demand or definite time 

6) Payable to order or to bearer (unless a check)

7) Contain no additional undertaking or insturction not authorized by UCC

Conditions of Negotiability: 

In writing

Very liberal about what constitues writing

Must be SIGNED by maker or drawer. 

Signature doesn't have to be explicitedly signor's name...can be any mark or assumed name intened to be a signature. 

Conditions of Negotability:

Unconditional Promise or Order

Instrument is generally NOT negotiable if it states ON THE FRONT that payment is conditional. 

Conditions cauase it not be freely transferable. 

Examples of Conditions:

1. Subject to, contigent upon

ALLOWED: implied conditions, states consideration, refers to the conditions of the agreement, limits payment to particular source of fund. 

Conditions of Negotiability 

Fixed Amount of Money

Fixed on the face of the instrument

Specific ascertainable amount

Not goods or services

Legal Tender- payable in currency, even foreign. 

OK:

Payable with interest even if amount is not stated, still negotiable. 

Payable with stated discount Ok. 

Payable with cost of collection attorney's fee upon default- OK. 

Conditions of Negiotability 

On Demand or Definite Time

Demand- specifically states on demand, at sight, on presentation, or when no time is given.

Definite Time- on or before a stated state, or fixed period after stated state, or some time readily ascertinable at time of issuance or definte period of time after sight or acceptance

Acceleration causes ARE definite time-- give a last day of payment. 

Extension clauses are permissible as long as a further definite time is provided. 

When there is no date- assume on demand. 

NOT Definite Time:

-Events not certain to happen

-Events Certain to Happen but not sure when 

Conditions of Negotiability

To Order or to Bearer

Must be payable to "order" or to "bearer" 

Order- specific party, identified

Bearer- payable to anyone who has possession of it. "named person, bearer, or cash"

Checks are an exception

Conditions of Negotiability

No unathorized promises

Not negotiable if it contains any promises EXCEPT for

1) An authorization to give, maintain, or protect collateral 

2) authorizing confession of judgement or disposition of the collateral if the instrument is not paid when due 

3) waives the benefit of laws intended for benefit of the obligor -- ie traial by jury, homestead allowances, etc. 

Handwriting > Typed in > Printed 

Words > Numbers 

If not negotiable, there is no holder in due course. 

Therefore, transferees of the instrument may be subject to any defense against payment that the party may have. 

Nonnegotiable instrument= ordinary contract

Process by which commercial paper is transferred. 

HA person with good title to commercial paper. 

You become a holder through proper negotiation.

--> If BEARER- just may deliver it to the transfree

--> If ORDER- (payable to specific person) requires delivery AND endorsement - 

Endorsements

Special

Names a specific party - ORDER PAPER

Requires signature and delivery. 

IE "Pay John Smith"

Signed by original payee

Endorsements

Blank

Does NOT name a new endorsee-- become BEARER paper. 

Can be negotiated by delivery alone.

----

Signed by original payee

On front. 

Doesn't constitute a break in chain of title. 

It is a good title but the FORGER becomes liable because it was his signature. 

Without Recourse means that there is no guarantee of payment by the endorser (no contract liability). 

Still have WARRANTY liability.

Do not prevent further negotiation-- because its on the back. 

Include conditions, trust endorsements, restricting further negotiation - IE "for deposit only"

Specifies use of instrument or conditions use of instrument. 

A holder will take commercial paper in due course to the extent that he takes the paper 

1) For VALUE

2) In GOOD FAITH

3) Without notice of any defenses or claims of ownership

4) Negotiable. 

If anyone of these requirements is missing, holder is a mere assigne, thus no better rights than transferor. 

Free from personal defenses. 

Becoming a Holder in Due Course

1) Value

1) Performance of agreed consideration (paying for paper)

2) Acquistion of a lien or security interest in instruement

3) Taking the instrument as payment or security for a previous debt 

4) Giving a negotiable instrument for the instrument- trading one for another

5) Making an irrevocable commitment to third parties (letters of credit)

Executory Promise (promise to give in future) is NOT VALUE. 

Fairness is not required, not necessarily face value.

When only partial value is given and the other part is executory (promised later) then the HDC status is proportional to the percentage of agreed amount paid.

IE if promise 20,000 and pay 10,000 with promise to pay 10,000 next week, you are a 50% HDC. 

Must purchase without notice/knowledge that it is OVERDUE, DISHONORED, or ANY DEFENSE or CLAIM against the instrument. What a reasonable person would know. 

Notice: 

1) overdue, acceleration has been made, demand has been made and reasonable time has passed

2) irregular- evidence of forgery or alteration

3) voidable in some part- some valid defense

NOT NOTICE:

1) Antedated or Postdated-- not a problem 

2) Purchased at a discount- doesnt soly give rise to a defense 

Even if though the transferee himself might not qualify as an HDC, he can claim the rights of an HDC who held the commercial paper before him. Thus, transferees of HDCs generally will not be subject to most defenses against payment of the instrument. 

ONLY protects INNOCENT parties - not frauds

Once an HDC, pass on to all subsquent title holders... except when fraud is involved. 

1) Holder a holder of a negotiable instrument? If not, not able to be a HDC

2) Holder give present value?

3) Holder take instrument in good faith?

4) Doler take instrument without notice of defenses or claims of ownership?

Real Defenses

FAIDS

May be asserted against BOTH HDC and non-HDC transeferees 

Fraud in the execution- tricked into signing something that he doesn't know is a contract 

Forgery of necessary signature - such as drawer/maker/endorser

Adjudicated insanity- contract is void from inception

Material Alteration of instrument- to extent of alteration, still liable for original amount 

Infacy- renders contract voidable- minors

Illegality- renders underlying contract void 

Duress- render obligation void

Discharge in Bankrupty

Suretyship Defense- knew prior to acquiring insturment the party was signing as a surety

Statue of Limitations- 3 years after dishonor or acceptance on drafts; 6 years after demand or other due dates on notes

Cannot be raised against HDC or their assignee

Every defense available in ordinary contract actions (e.g. fraud in inducement, failure of consideration, theft of instrument after signed, breach of contract, mistake, impossibility)

Also unauthorized completion is a persoal defesne. Occurs when someone other than the issuer fills in missing information. -- IE blank check. 

Note/CD - 1) Maker 2) Endorser

Draft/Check- 1) Drawee if they accept 2) Drawer & endorsers

Secondary Liability. 

If drawee refuses to pay (dishonors the fraft), the holder can hold drawer liable. 

For example, if bank won't pay your check, go after you. 

Primarily liable after acceptance. 

Not liable unless drawee signs. - becomes acceptor and is primarily liable. Discharges all prior endorsers. 

Certification of a check qualifies as acceptance. 

Secondarily liability unless specify endorsement without recourse--than no contract liability 

IF: 

1) Holder first goes to primary party first

2) Maker or dfawee dishonors (refuses to pay)

3) Endorser is given proper notice of the dishonor 

Presentment must be made within 30 days

Exists even if you don't sign or sign with recourse

Any person who transfers an instrument for consideration makes these warranties:

1) Transferor has good title

2) Signatures are geniune and authorized

3) Instrument has not been materially authorized

4) No defense of any party is good against transferor

5) No knowledge of insolvency proceeding that has been instituted against maker, acceptor, or drawer

If doesnt endorse- warranties apply only to immediate transferees and not subsquent holders

May be disclaimed by language indicating intent-- "transferor makes no warranties"

Discharge from LIABILITY, not the instrument itself.

1. By payment- satisfaction or tender of payment to holder

2. By cancellation or renunciation- holder intentionally destorys the instrument, crossing off their signature, oral renunciation is NOT effective

3. By impairing recourse or collateral- releasing a party that a subsquent party could have looked to for payment 

4. By delay in presentment or failure to give notice of dishonor

5. By acceptance or certification of a draft by a bank. 

Discharge is a PERSONAL defense

Debt secured by collateral 

Debtor buys something from a creditor, creditor wants to be able to rely on something OTHER THAN the debtor's promiser to ensure payment 

Right of Creditor to Repossess Upon Default

Limited right in specific personal property (collateral) of debtor that allows creditor to take the property (repossess) if debtor fails to fulfill the credit obligation. 

Aplies to most security interests in personal property and fixtures and outright sales of AR.

Not apply to security interests in land (mortgages), wage claims, and staturory liens. 

A security interest is effective when certain steps are taken to attach.

After attachment, if debtor defaults, the creditor has some right to take the collateral. 

Does not provide creditor with rights against third parties who might also have an interest in the collateral. 

To gain rights over third parties, a creditor must take added steps to perfect the security interest.

Perfection serves a form of notice that the creditor has a cecurity interest in the collateral, and such as, gives creditor superior rights to collateral to certain third parties. 

Special type of security interst

Has PRIORITY over all other types of secruity interests, if properly perfected. 

* Creditor fronted the money for collateral

Goods - Personal Use

Consumer goods, inventory, and equipment

Intangible Collateral Accounts- Accounts Receivable

Investment Property

Proceeds (when converted). 

1) Duty to file or send debtor a termination statement when debt is paid

2) Confirm for debtor the unpaid amount left on the secured debt

3) Use reasonable care to preserve any collateral in the secured party's possession. 

1) Must have an agreement creating the security interest (either an authenticated record (can be written or electronic) of security agreement or creditor taking possession of control (power to make decisions) of the collateral- pledge) 

2) Value must be given by the secured party in exchange for the security interest

3) Debtor must have rights in collateral 

All three must be satisfied

Debtor acquires interest in future - permissible

Obtain a security interest not only in debtor's present property, but also in property that the debtor will obtain in the future. 

Most often used with inventory and equipment. Attaches to property as soon as debtor acquires an interest in the property. 

Perfection of the Security Interest 

5 Methods of Perfection

To acquire the maximum priority in the collateral over ost such third parties. 

1) Filing 

2) Taking possession of collateral

3) Control

4) Automatic Perfection

5) Temporary Perfection

Not enforceable against any party until it has attached.

Constructive notice. 

A security interest may be perfected as to all kinds of collateral except deposit accounts and money by filing a financing statement. 

Within 5 years unless renewed by filing a continuation statement. 

Perfection by Taking Possession

Must be tangible good. 

Oral agreement is OK. 

Simply by taking possession of the collateral, perfect it.

Example: pawn shop. 

Attached of the security interest without any added requirements. 

Small Scale Assignment of Accounts- ie assignemnt of a few accounts recievable is automatically perfected

PMSI in CONSUMER goods- personal goods. Must be filed to be valid. 

20 day period for proceeds-- Security interest in proceeds from original collateral is continuously perfected for 20 days from debtor's receipt of the proceeds. 

Interstate shipment- 4 month grace period when collateral is taken from one state to another. Must perfect in new state within that 4 months. 

1) Buyer in the ordinary course of business of inventory

2) holder of Perfected PMSI

3) holder of perfected sercurity interested or judicial lien

4) Holder of unperfected security interest

5) debtor 

Buyer who buys goods from a merchant's inventory in ordinary course of business. 

Not necessarily for consumer use. 

Buying a refridegator at a store. 

A repairer who does not get paid for repairing goods can keep possession of the goods to ensure payement. 

Valid as long as they keep possession. 

PMSI in Consumer Goods is already perfected. 

-Don't have to file but you should. 

PMSI in Inventory- Prior Perfection & Notice Required for Priority

-Perfected when debtor gets posession of collateral (filing must occur prior) 

MUST FILE

PMSI in non-inventory (equipment)- Priority if filing within 20 day grace period after recieval. Goes back to original date of possession. No need to give notice. 

MUST FILE

Conflicting Perfected Security Interests- First to File or Perfect 

Conflict between Perfected Security Interest & Judicial Lien - Judicial lien if it is attached (ie sheriff seized property). Security interest if perfected before judicial lien attached. 

Trustee in Bankruptcy- Treated as hypothetical lien creditor as of date of bankruptcy petition is filed. Comes right after Perfected PMSI. 

If there's any surplus, goes to debtor. 

Lowest priority 

Rights on Default 

1)Take Possession

Self Help- No requirement of Judicial Action 

Secured party may take possession without judicial process if done WITHOUT A BREACH OF PEACE. --(the repo man)

Collection Rights of Secured Party-  secured party is entitled to notify the account debtor to make payment to them, rather than the defaulted debtor

Replevin Action- May always take possession of collateral by replevy-- a judicial action seeking transfer of personal property.

Rights on Default 

2) Sale

After default and repossession, secured party may sell or lease the collateral through public (auction) or private sale. 

1. Sale or lease must be commerically reasonable (method, manner, time, place, terms)

2. Must give notice to debtor and other parties

3. Sale wipes out all subordinate interests as long as seller had the highest priority rights to the goods. 

4. Debtor has the right to redeem goods by paying off the indebtness & costs BEFORE the sale. RIGHT OF REDEMPTION

PROCEEDS OF THE SALE: 1st go to pay expenses of repossession & sale, 2nd to all creditors, 3rd to debtor.

If insufficient, secured party may bring court action against debtor. 

Surety- someone who is liable for the debts or obligations of another. 

Involves Creditor (Lender), Principal (Debtor), and Surety 

Surety is directly liable (where is a guarantor is liable only if debtor does not perform) 

Surety must be in writing to be enforceable and signed by surety

Not compensated for their promiser to the creditor. 

Standard example: a parent cosigning child's loan. 

Any variation of surety's risk releases the surety.

Only consideration recieved is the creditor's performance to the principal. IE the creditor making the loan. Must occur first. Can't cosign AFTER loan is made.  

Paid surety. IE a bonding company. 

MATERIAL change increasing risk releases surety. 

Consideration is the amount of compensation. Regardless of timing of promise. 

1) There is no right of notice- creditor doesn't need to immediately notify the surety. 

2) No right to compel collection- can't make creditor collect from principal debtor

3) Generally no right to compel creditor to apply security held to reduce the debt before proceeding against the surety. 

Creditor has rights to immediately demand payment from surety, debtor, and collateral. 

1) Exoneration- suing to compel payment BEFORE surety pays the creditor. Doesn't impair creditor's right to go after surety. 

2) Subrogation - After payment, surety may enforce any rights the creditor had against principal (steps into shoes of lender) 

3) Reimbursement - Suit against principal AFTER payment, entitled to indemnify any amount the surety paid on behalf of debtor. 

Two or more sureties on the same obligation. JOINTLY and SEVERALLY LIABLE. 

1) Exoneration - sue to compel payment before payment is made 

2) Contribution- After - Pro Rata liability. Entitled to reimbursement from co-sureties for their portion of the debt. 

If a co-surety is discharged in bankruptcy, his amount is removed when considering pro-rate share. 

Defenses of Surety 

CPR's

1) Creditor is a bad guy. - Defrauded Principal, Duress upon principal, Illegality of principal obligations

2) Payment and Tender of Payment- if debtor or third party pays the obligation, the surety is released

3) Release of Principal Debtor- If creditor relases the principal, surety is also discharged. Unless there is a convenant not to sue given from principal to creditor- doesn't release the surety. 

4) Surety's Incapacity (minority, adjudicated insanity) or Bankruptcy 

If Gratuitous- any change

If compensated- must be a material change. 

Time Extension discharges a gratitious and a compensated IF material. 

Partial Release for Compensated Sureties: 

Loss of Security- Release of security held by creditor discharges surety. 

Inaction by creditor (ie failure to perfect), surety is discharged. 

If Principal is a bad guy-- well that's why the creditor wanted surety 

1)Principal's fraud or duress upon surety 

2) Incapacity of principal 

3) Bankruptcy of Principal 

Can gain rights in the debtor's property 

Court imposes a lien on specific property owned and possessed by debtor. 

Writ of attachment to seize property.

Debtor has propert in hands of third party (ie. money owed by employer, money in bank, debts owed to debtor)

Writ orders holder of property to turn it over to creditor. 

Federal law provides that social security payments can't be garnished. 

Limitations to prevent the debtor from becoming destitute. 

1) Homestead exemption 

2) Personal injury awards

3)Limit on the amount of an employee's wages

4) IRS can file a lien on all of the taxpayer's property, including property excluded by state law. 

Curbs abuse from "collection agencies"

1) Contacting debtor in middle of night

2) Contacting debtor directly if they have an attorney

3) Abusive or threatening language

4) Making false claims

5) Contacting debtor at place of employment

Damages can be given, statutory $1000 damage award or seek help from FTC