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Commercial Paper
Tennessee Bar Exam
55
Law
Professional
02/07/2016

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Term
Commercial Paper

General Approach for commercial paper problem
Definition
1. What is the type of instrument?
2. Who are the parties?
3. Is the instrument negotiable?
4. Is the instrument properly negotiated?
5. Is the transferee a holder in due course?
6. Does D have any defenses?
7. If D is liable, can he pass it to another?
Term
Commercial Paper

What are the two types of negotiable instruments?
Definition
Promissory Notes; and

Drafts
Term
Commercial Paper

What is a promissory note? Who are the parties?
Definition
A promissory note is a written promise to pay which contains an affirmative promise to pay between the Maker and the Payee. It is a two party instrument.

Maker - Promissor
Payee - The promisee (person entitled to payment)
Term
Commercial Paper

What is a certificate of deposit?
Definition
A certificate of deposit is a note issued by a financial institution whereby the financial institution acknowledges receipt of funds and promises the payee to repay the money.
Term
Commercial Paper

What is a draft? Who are the parties?
Definition
A draft is a document which contains an order for the drawee to pay the payee (personal check). This is a three party instrument.

The drawer is the person ordering payment.
Drawee is the person to make payment (the bank)
The payee is the person to receive payment.
Term
Commercial Paper

What are the two requirements to pay money by check?
Definition
1. Financial Institution is a drawee; and
2. The check is payable on demand.
Term
Commercial Paper

What are the 5 types of checks?
Definition
Regular Check;
Certified Check (bank must agree to pay);
Cashier's Check (drawer and drawee are the same bank - the person buying the check is the remitter);
Teller's Check (check drawn by one bank on another bank - person buying the check is the remitter);
Traveler's Check (demand instrument requiring the counter signature by a person whose specimen signature is already on the check)
Term
Commercial Paper

What are the 8 requirements to make a document "negotiable?"
Definition
1. Writing
2. Payable to Order or Bearer;
3. Signed by the maker/drawer;
4. For a fixed amount of money;
5. With an unconditional promise to pay;
6. it is payable in money;
7. With no additional undertaking or instruction; and
8. It is payable on demand or at a definite time.
Term
Commercial Paper

Negotiability: Payable to Order or Bearer
Definition
Payable to Order - must use the word "order" or "assigns"

Payable to Bearer - payable to the person holding the note.

EXCEPTION - Checks: If this is the only requirement of negotiability which is missing, the "order" or "bearer" language is waived.
Term
commercial Paper

Negotiability: Fixed Amount
Definition
Must be able to determine the amount owed by looking at the instrument and the instrument alone.
Term
Commercial Paper

Negotiability: Unconditional Promise to Pay
Definition
A Note contains an unconditional promise.

A draft contains an unconditional Order.

If there is a condition = contract.
Term
Commercial Paper

negotiability: Payable in Money
Definition
Can be domestic or foreign currency.

May not be payable in goods or services.

If words contradict figures - words prevail.
Term
Commercial Paper

Negotiability: No Additional Undertaking/Instruction (3 exceptions)
Definition
(a) undertaking or power to give; maintain, or protect collateral;

(b) confession of judgment clauses;

(c) waiver of laws meant to benefit the obligor
Term
Commercial Paper

Negotiability: Payable on Demand/Definite Time
Definition
On Demand: If it specifically states payable "on demand," "at sight," or "on presentation."

Definite time: payable on or before a given date, or at fixed period after a given date.

An acceleration clause is okay.

If the note doesn't state the date it's due it is a demand instrument.
Term
Commercial Paper

What is a Holder?
Definition
A holder is a person in possession of a note with good title.
Term
Commercial Paper

What is required for proper transfer of an instrument?
Definition
Payable to Order: If it's payable to a specific payee, must be delivered to the payee. Further negotiation requires the payee's signature.

Payee to Bearer: indorsement not required - further negotiation is okay by possession alone.
Term
Commercial Paper

What are three types of indorsements?
Definition
Special Indorsement - names a specific person as the indorsee, who must sign.

Blank Indorsement - Only the payee's signature is present. No specific person is named in the indorsement on the instrument.

Restrictive Indorsement - The indorsement contains a condition (i.e., "for deposit only")
Term
Commercial Paper

If the exact payee(s) is unclear from the face of the instrument, who must indorse?
Definition
One party - the intent of the issuer.

Multiple Payees - If separated by "and," ALL payees must indorse. If separated by "or," only one must indorse.
Term
Commercial Paper

Is an instrument properly transferred if it contains a misspelled name?
Definition
Yes, the payee may indorse with the real or the incorrect name.
Term
Commercial Paper

If the payee lacks capacity to take under the note...
Definition
...she can still effecitvely indorse.
Term
Holders in Due Course

Definition
Definition
A holder in due course takes an instrument free and clear of all claims to it, free of personal defenses, and only subject to real defenses.

This occurs when a negotiable instrument is duly negotiated to Holder in Due Course.
Term
Holders in Due course

What must be satisfied to create a HDC?
Definition
1. The instrument must be negotiable (satisfy all requirements);
2. The person must be a holder (possession + good title);
3. No questions of authenticity (no apparent forgery or alteration);
4. Must pay value for the instrument (promise insuf. but old value is okay)
5. Must take in good faith (honest in fact + observance of reasonable standards of dealing);
6. W/o Notice of issues with the instrument.
Term
Holders in Due Course

How does a Holder take without notice of issues in the instrument?
Definition
The taker must take with no actual knowledge (subjective) that the instrument is:
(i) overdue (principal only);
(ii) was dishonored;
(iii) has unauthorized signature;
(iv) has alterations;
(v) has uncured default w/r/t/ payment of another instrument issued in the same series; or
(vi) is subject to any claims or defenses.

Subsequent notice doesn't remove HDC status.
Term
Holders in Due Course

What is the shelter rule?
Definition
A transferee acquires the rights of the transferor. However, having the rights of an HDC doesn't make you an HDC.
Term
Holders in Due Course

What are the benefits provided to HDCs?
Definition
HDC and subsequent transferees take the instrument free from Claims and Personal Defenses:
(i) lack of consideration;
(ii) unconscionability;
(iii) waiver;
(iv) estoppel;
(v) fraud in the inducement.
Term
Holders in Due Course

What does an HDC take subject to:
Definition
Real defenses only. 1. Material alteration; 2. Duress; 3. Fraud in the Factum; 4. Incapacity; 5. Illegality; 6. Infancy; 7. Insolvency; 8. Statute of Limitations; 9. Omission of Required consumer protection language; 10. Unauthorized signatures and forgeries; 11. Payment to former holder.
Term
Commercial Paper

Contract Liability - What is the basis?
Definition
The basis of contract liability due to a negotiable instrument is that defendant signed the instrument.
Term
Commercial Paper

Contractual Liability - if agent signed the instrument principal is bound if
Definition
If signed by a binding agent for the principal.
Term
Commercial Paper

Contract Liability - Agent will not be liable for signing negotiable instrument if:
Definition
Principal is identified on the instrument; and
Signature clearly shows it was made on behalf of principal.
Term
Commercial Paper

Contract Liability: Agent will be liable for signing negotiable instrument to HDC and non-HDC under what circumstances?
Definition
TO HDC: agent is liable unless the agent can prove the HDC had notice that the agent signed as the principal's agent.

to Non-HDC: agent is liable unless the agent can prove the original parties did not intend the agent to be liable.
Term
Commercial Paper

Contractual Liability: Special Rule for Checks
Definition
An agent for the drawer is not personally liable if the principal's name is on the check.
Term
Commercial Paper

Contract Liability for Maker of a Note
Definition
Maker enters into K to pay the instrument.

Maker must pay when due according to the terms at the time it was issued. Liable to the holder or the indorser who paid the instrument.

Defenses: depends on the holder's status (are they an HDC?)
Term
Commercial Paper

Contract Liability for Indorser of Note/Draft
Definition
Indorse signs the check, and if the draft is dishonored, promises to pay upon notification.

Indorsers are liable to each other in the order of signatures - liable to later indorsers.

May disclaim liability by accompanying signature with specific language (i.e., "without recourse, John Doe)
Term
Commercial Paper

Contract Liability for the Drawer of Draft
Definition
If signed and the draft is dishonored, obliged to pay the draft according to its terms.

May not disclaim liability on the check but may do so on other drafts.
Term
Commercial Paper

Contract Liability for the Drawee (bank)
Definition
No direct liability because the bank generally doesn't sign the draft.

Might be liable if it agrees to pay the draft and signs it, but there is no obligation to do so.
Term
Commercial Paper

Contract Liability for Co-signers, Sureties, and Guarantors
Definition
Signs an instrument to lend credit to another, but receives no direct benefit. Liable in the capacity in which they sign.

Presumed guaranty of payment and may limit liability to collection only.

If they pay the instrument, they are entitled to reimbursement from the accommodated party.
Term
Commercial Paper

Warranty Liability: Generally
Definition
Warranty Liability is based off the instrument. Implied warranties are created by transfer or presentment, not by indorsement.

Defendant is liable for selling a defective instrument.
Term
Commercial Paper

Warranty Liability: Transfer warranties are made by who and to whom?
Definition
Made by: transferor who receives consideration. No warranty if it was a gift.

Made to: the immediate transferee, and subsequent transferees if the transferor indorsed.

Drawees and Makers are not allowed to sue for breach of transfer warranty.
Term
Commercial Paper

Warranty Liability: What are the 5 transfer warranties?
Definition
1. Entitled to enforce the instrument;
2. Signatures are authentic and authorized;
3. No material alteration;
4. No defenses;
5. No knowledge of insolvency proceedings against the maker or the drawer.
Term
Commercial Paper

Warranty Liability: Presentment Warranties are made by who and made to whom?
Definition
Remember - presentment and transfer warranties are mutually exclusive.

Made by: presenter (person asking to be paid on the check); and previous transferor

Made to: parties who pay in good faith - makers, drawees, and acceptors.
Term
Commercial Paper

Warranty Liability: What are the 4 presentment warranties?
Definition
1. Entitled to enforce the draft or obtain payment;
2. No material alteration;
3. No knowledge of an unauthorized drawer's signature; and
4. If remotely-created instrument - the person identified as the drawer authorized it.
Term
Commercial Paper

Warranty Liability: Should one sue under warranty or contract liability?
Definition
If the plaintiff is a HDC, sue indorser on the indorser's contract. If plaintiff is the payor and plaintiff should not have paid, sue the indorser for breach of warranty.
Term
Commercial Paper

Forgery: What is the primary question?
Definition
Whose signature was forged? Different rules apply.
Term
Commercial Paper

Forgery: Who is liable if the Maker's signature is forged?
Definition
Alleged maker is not liable. But, maker may ratify the signature. The forger is liable.
Term
Commercial Paper

Forgery: Who is liable if the drawer's signature is forged?
Definition
Alleged drawer not liable. Drawee bank must credit the alleged drawer's account unless there are defenses.
Term
Commercial Paper

Forgery: Drawer's Signature Forged - what 2 defenses will allow drawee to refrain from crediting drawer's account?
Definition
1. Drawer's Negligence;
2. Bank Statement Rule - drawer has duty to inspect bank statements and canceled checks in timely manner. Must report forgeries to bank w/in 1 year. If repeat offender - w/in 30 days.
Term
Commercial Paper

Forgery: What is the effect of forging the payee's name?
Definition
if forged on bearer paper - forgery is irrelevant

If forged on Order paper - forgery breaks the chain of title and the check is not payable.
Term
Commercial Paper

Forgery: What is the liability of the drawee on a forged indorsement?
Definition
The payee can sue the payor bank and depositary bank for conversion.

The drawer can sue the payor/drawee bank since the check is not payable. BUT, drawee cannot be liable for conversion AND drawer's action.
Term
Commercial Paper

Forgery: What are the bank's defenses to a forged indorsement?
Definition
1. Imposter Rule
2. Fraudulent indorsement by employee entrusted with the check;
3. Drawer negligence;
4. Failure to timely sue (w/in 3 years)
Term
Commercial Paper

Forgery: What is the liability of the presenter for forged indorsement?
Definition
if the bank pays, it may sue the presenter for breach of the presentment warranty of being entitled to enforce
Term
Commercial Paper

Forgery: What is the liability of the transferor for a forged indorsement?
Definition
If the presenter loses, he may sue other transferors for breach of various transfer warranties; entitled to enforce; authentic and authorized signatures; and no good defenses.
Term
Commercial Paper

Alteration: what is the general situation w/r/t alterations?
Definition
The obligor will not pay due to the alteration.
Term
Commercial Paper

Alteration: What is the effect of a fraudulent v. non-fraudulent alteration?
Definition
Non-fraudulent alterations don't discharge any party, and the instrument is enforced according to its original terms.

Fraudulent alterations discharge all obligated parties on the instrument unless the parties assented to or are precluded from asserting the alteration.
Term
Commercial Paper

Alteration: What are the types of alterations?
Definition
Change in Obligation: Unauthroized change in instrument modifying the party's obligation (e.g. amount, date, names of payees, interest rate)

Unauthorized Completion: party's obligation is affected because the instrument was completed in an unauthorized manner.
Term
Commercial Paper

Alteration: What is the effect on an HDC?
Definition
Even if the alteration is fraudulent, the HDC is protected. If there is a change in obligation, the HDC may enforce the original amound.

If it was an unauthorized completion, the HDC may enforce as completed.
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