Commercial Paper

Notes and Drafts

Commercial Paper is a a K that calls for a party to pay money rather than deliver goods or perform a service.

Two party instrument

Maker: person who will pay 

Payee: person to whom note is payable

Three Party Instrument

Drawer: person ordering payment (check writer)

Drawee: person ordered to make payment

Payee: person to whom draft is payable

When drawee is a bank- check.  

Certificate of deposit- receipt of bank promising to repay the sum.  

If not negotiable, assignee stands in shoes on assignor.  

If negotiable, depends if assignee is a holder, or a holder in due course (HDC).  

1. Writing

2. Signed by maker or drawer

3. Unconditional

4. Promise to pay or Order another to pay

5. Fixed Amount

6. In Money

7. On demand or at definite time

8. To order or to bearer.  

Note or Draft never uses words "Subject to" or "conditioned upon"

Will not become conditional even if other agreement states:

1. Rights regarding payment or collateral.

2. Limits payment to a particular source or fund

3. Conditions payment on countersignature (common for traveler's checks)

Promise to Pay (Note)

Order to Pay (Draft)

IOU is not negotiable

Wish you would pay, please pay, not negotiable.  

Becomes conditional, and not negotiable, unless instructions related to:

collateral, waiver of benefit of a law for benefit or advantage of the obligor.

To the order of,

or to Paul or his order,

Pay to the order of,

to the order of bearer,

to pay bearer,

to Paul or bearer.

***Checks don't need magic words.  

1. Transferred 

2. Indorsed (specifically or blank)

Bearer paper can be negotiated by possession alone.  

Look at last indorsement to see if order or bearer paper.  

Order paper

v. 

Bearer Paper

Bearer paper: Can be negotiated by transfer of possession alone

Order paper: Transfer of possession + Indorsement

Takes free of all personal defense, but not real defenses

1) Taken for value (consideration)

2) In good faith

3) Without Notice

SHELTER RULE: A person who takes from an HDC takes their place as an HDC.  

Without Notice?

Ways constructive notice may be found

1. So irregular or incomplete appears to lack authenticity

2. Overdue or has been dishonored.

3. looks altered or has an unauthorized signature.

4. A known claim to instrument

5. Know of a defense or claim of recoupment

Breach of K or warranty

Lack or failure of consideration

Fraud in the inducement

Illegality (when stat makes it voidable, not void)

Unadjudicated mental incapacity

Forgery

Fraud in the Execution (when person believes signing something other than Negot. Instr.- signer's age, experience, intelligence are relevant because if reasonable inquiry should have gave notice, cannot claim.)

Material Alteration (partial defenses against HDC)

Minority

Illegality (when stat makes it void)

Adjudicated mental incapacity

Extreme Duress

Discharge in Insolvency

Once forged, no one can qualify as a holder

The payee (he who got forged) can recover from drawer, sue drawee bank, or anyone who took after forgery for conversion.  

Payor (drawer) can recover from party paid if:

That party neither took for value nor in good faith, nor has estoppel defense.  

Forged drawer

(A person writes someone else's check)

Drawee bank liable (the bank who paid the $)

Drawee bank cannot recover from anyone because depository bank takes with good title.  

Only possible recovery is against forger- probably insolvent.  

Person claims to be one person (fake name), gets check from drawer (person writing check) to that fake name, and then indorses to real name, cashes check.  

Drawer loses for being dumb.