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IL Bar Review - Commercial Paper
Commercial Paper Review
Not Applicable

Additional Law Flashcards




Commercial Paper: Holder in Due Course

Property or possessory rights in negotiable instruments cannot be successfully asserted against holder in due course


Holder in due course is: 1) holder who took instrument; 2) in good faith; 3) for value; and 4) without notice of problems relating to insturment, including other claims to it

Commercial Paper: Negotiation

Negotiation is satisfied where there is a transfer of possession and instrument is indorsed by payee


Transfer occurrs when instrument is delivered by person other than issuer for purposes of enforcement of instrument by person receiving it


If employer gives imployee responsibility to handle checks, employer assumes the risk of employee's fraudulent indorsement for purposes of negotiation

Commercial Paper: Notice to other Claims

To avoid being subject to other claims to an instrument, holder must take it without: 1) actual knowledge of other claims; 2) having received notification; 3) having reason to know of any other such claims

Commercial Paper: Phases of an Instrument

1) Issuance

2) Negotiation/Transfer

3) Presentment

Commercial Paper: Issuance of Instrument

a. Maker (note)

i.   Primary Liability

ii.  Liable without demand

iii. Not liable until due date

b. Drawer (draft)

i.  Secondary Liability

ii. Only Liable after

1. Presentment to drawee

2. Dishonor

3. NOtice of dishonor to drawer

c. Drawee (draft)

i. No liability unless contract with drawer

ii. Acceptance

1. Creates liability in acceptor

ii. Assumes same liability as maker

Commercial Paper: Negotiable Instrument Requirements

1. Signed writing

2. Contain unconditional promise or order

3. Pay fixed amount of money

4. Payable to bearer or order

5. Payable on demand or at definite time

6.Contain no undertaking or instruction

Commercial Paper: Presentment

a. In General

i. On or after the due date

ii. Within a reasonable amount of time

iii. Place of payment of instrument

iv. Effective when received

b. Presentment waiver/excuse

i. A party cannot be found wiht due diligence

ii. If the maker has repudiated

iii. If presentment is not required or waived expressly

c. Dishonor

i. Triggers secondary liability

ii. Does not occur when payment is refised b/c the instrument lacks a necessary indorsement

iii. Notice of dishonor must be given to all relevant parties once the instrument has been dishonored

Commercial Paper: Analysis Questions

1. What is the nature of the instrument

2.Is the instrument negotiable and has it been negotiated

3.Who is the P and what are the P's rights

4.Is the P the HDC

5.Who is the D and what is the nature of the D's liability

6.What is the D's defense

7. Is the defense raised one that is cut off

Commercial Paper: Nature of Instruments

Notes - two parties, maker and payee


Drafts - three parties, drawer, drawee, payee

- Cashier's checks - one party is drawer and drawee

- Teller's checks - two banks

Commercial Paper: P and P's rights

Plaintiff is:

1. Holder or HDC

- Holder has possession of and rights to the instrment

i. Forged instrument

ii. Fictitious payee

iii. Imposter

2. Non-holder in possession with rights of holder

- Shelter "Umbrella" rule

3. Non-possessor entitled to enforce instrument

- Lost or stolen instrument rule

Commercial Paper: HDC

a. HDC

i. For value

ii. Good faith

iii. W/out notice overdue or dishonored

iv. W/out notice of unauthorized signature or alteration

v. W/out notice of defense or claims

b. HDC Real Defenses

i. Infancy

ii. Duress

iii. Lack of capacity

iv. Illegality

v. Fraud in teh Factum

vi. Discharge in insolvency (bankruptcy)

Commercial Paper: D and D's liability

a. Signor generally - representative vs. unauthorized

b. Maker of a note - primary liability

c. Drawer of a draft - secondary liability

d. Drawee of a draft (acceptor)

e. Transferor - Transfer warranties

f. Indorsers - secondary liability or disclaimed through qualified indorsement

g. Accommodation Party - surety; primarily liable for the capacity signed


Commercial Paper: Transfer Warranties

Transfer Warranties:

1. Transferor is entitled to enforce the instrument - no unauthorized, forged, or missing indorsements)

2. All signatures are authentic & authorized (issuance signatures)

3. The instrument has not been altered

4. The instrument is not subject to a defense or claim of any party against the transferor

5. The transferor has no knowledge of any insolvency proceeding commenced w/respect to the maker, acceptor or drawer

Commercial Paper: D's Defenses

1. Burdens of proof

a. Validity of signatures - P

b. Defenses or claims in recoupment - D proves if validity of signatures proved & P proves entitled to seek enforcement

c.  HDC status - HDC must prove

2. Adverse Claims

3. Real defenses

4. Alterations

5. Forgery

6. Defenses of Accommodation Parties

Commercial Paper: Defenses: Adverse Claims

1. Taker subject to claims of property or possessory rights

2. HDC takes free from claims

3. Notice of claims in recoupment prevent HDC status

4. HDC only subject to claims in recoupment against holder

Commercial Paper: Defenses: Real Defenses

i. Infancy

ii. Duress

iii. Lack of capacity

iv. Illegality

v. Fraud in teh Factum

vi. Discharge in insolvency (bankruptcy)

Commercial Paper: Defenses: Alteraions

1. Elements

a. Unauthorized change or addition

b. Modifying a party's obligation

c. As to amount payable or dates of payment or addition/deletion of name

d. Ubauthorized completion of incomplete instrument

2. Discharges liable party except to incomplete instrument

3. HDC can enforce up to original tenor

Commercial Paper: Defenses: Forgery

1. Available against person who pays instrument in good faith or takes it for value

2. Forger or agent liable as if he had signed his own name

Commercial Paper: Defenses of Accommodation Parties

1. Derivative Defense

a. Exceptions are discharge and insolvency, infancy, lack of legal capacity

2. Suretyship Defense

a. Due date extended

b. Instryment modified

c. Value of collateral impaired

Commercial Paper: Defenses: Cut Off

1. Real defenses are not cut off

2. All other defenses are cut off

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