Commercial Paper

Bar Review 3 with Notsure at Southern Methodist University

About this deck

By: Sean Bellah
Created: 2011-06-03
Size: 73 flashcards
Views: 42

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Approach to Commercial Paper Problems

Identify Type of Paper
Identify Parties
Is instrument negotiable?
Instrument was properly negotiated?
Determine if transferee s a holder in due course
π's cause(s) of action: K, warranty, tort, or not payable
∆'s defenses
Can ∆ pass liability

Step 1: Identify instrument

Types:

Note
Draft

Step 1: Note

Note: promise to pay as a 2 party instrument

Promisor - maker
Promisee - payee

Cert. of Deposit - note issued by a financial institution (FI)

FI acknowledges receipt of money AND
FI promises to repay

Step 1: Draft

Draft: Order to pay as a 3 party instrument

drawer - person ordering payment
drawee - person making payment
payee - person receiving payment

Types:

Checks
Remotely-created item

Step 1: Draft (checks requirements)

Reqs

FI is drawee &
payable on demand

Step 1: Draft (checks types)

Types of checks

Ordinary
Certified checks - FI has agreed to pay
Cashier's check - FI is drawer and drawee

remitter - purchases check

Teller's checks - check drawn by one FI on another
Traveler's checks - demand instrument with counter-signature

Step 1: Draft (Remotely-created item)

Draft not signed by drawer but created with drawer's authority so that 3d party can get paid from drawer's account at a bank.

Usually 3d party is an Internet seller or paying bills over phone using checking account number

Step 3: Negotiability (Requirements)

Writing - no specificity
Signed by maker or drawer - any symbol
Unconditional promise or order to pay
Fixed amount
In money
No other undertaking or instruction
Payable on demand or at a definite time
Contains words of negotiability

Step 3: Negotiability (meaning & importance)

Form of instrument determined at time of issuance
Can opt-out except check (cannot opt in)
If negotiable and negotiated, can lead to holder in due course

Step 3: Negotiability: Unconditional Promise/Order to Pay

Presumed unless:

Express condition to payment
Promise "subject to"/"governed by" another record
Incorporation by reference in another record

Step 3: Negotiability: No effect on unconditional promise

No effect:

Statement of consideration - not conditional
Reference: "as per" or "in accordance with"
Incorporation by Reference of Items that Would not Hurt Holder*
Limit Payment to Fund or Source
Countersignature
Consumer protection language (stop HDC)

Step 3: Negotiability: Incorporation by Reference of Items that Would not Hurt Holder

Rights regarding collateral
Prepayment - right of obligor to pay early
Acceleration - Right of holder to get paid early upon some event

Step 3: Negotiability: Fixed Amount

Principal must be determined

May have interest if:

Amount of money - $20 interest
Fixed or variable rate - 5% this year and 7% next
Reference to outside source - 2% above prime rate
No interest stated = no interest
Interest but not specified = judgment rate

Step 3: Negotiability: In Money

Can be any medium authorized or adopted by a domestic or foreign government as part of its currency.

Payment cannot be in goods or services

In interpretation: words > figures

Step 3: Negotiability: No other undertaking or instruction

Not a full contract - "couriers w/o luggage"

Exceptions:

Promises concerning collateral
Confession of Judgment clauses - unenforceable in TX
Waiver of law meant to benefit obligor

Step 3: Negotiability: Payable on Demand or At A Definite Time

On Demand

Express statement
Silent

At Definite Time

Express Statements

Date
Fixe Period after sight or acceptance
Time Readily Ascertainable at the Time the Promise is Issued

Step 3: Negotiability: At A Definite Time (No effect)

Permitted date change matters that dont effect

Prepayment - obligor can pay early
Accelerate of due date - payee upon certain named events
Provisions in instrument extending the due date

holder - anytime
auto in instrument or obligor - definite time

Step 3: Negotiability: Contains words of negotiability

Bearer language

Payable to (the order of) bearer
Indication that possessor entitled to payment
No payee stated (bearer paper)
"to (order of) cash"
Not payable to identifiable person

Order language

Bearer>order

Exception for checks - waived if only prob.

Step 4: Negotiation

Transfer of the note from the payee to a holder.*

Step 4: Negotiation (Holder Requirements)

Possession of Negotiable Instrument AND
Good Title

Bearer = possession
Order = possession plus necessary endorsements

Step 4: Negotiation (Indorsements)

Blank indorsements - payee signature only ...

creates bearer paper
Signature - normally on back

Special Indorsements - signature plus designation of new person

creates order paper

Restrictive indorsement - limits use "for deposit in my bank acct # ...."

Step 4: Negotiation (Identifying payee for indorsement)

Ambiguous - issuer's intent

Multiple payees

"and" - all payees must indorse
"or" - any payee can indorse

Step 4: Negotiation (Misc. Indorsement issues)

If for value, transferee can get specific performance of indorsement.

Depositary bank becomes holder even w/o t'ee signature.

Misspelled name - can be indorse with either name or both

Payee can indorse even if lacking capacity

Step 5: Holder in Due Course (benefits)

Ordinary holder has rights to receive payment, but HDC has better rights over a holder and can take despite personal defenses raised by maker.

Step 5: Holder in Due Course (Requirements)

Negotiable instrument
Holder
Authenticity not apparently questioned - no apparent forgery, alteration, or substantial incompleteness/irregularity
Holder must pay value
Good faith
Without notice at time of instrument acquisition

Step 5: Holder in Due Course: Paying value

Can be for any value, but if the value is substantially small - no good faith

If the t'ee only pays part of the consideration then they are only an HDC for the portion paid.

Past consideration counts as value.

Step 5: Holder in Due Course: Good Faith

Honesty in fact (subjective) plus
Observance of reasonable commercial standards of fair dealing (objective)

Step 5: Holder in Due Course: Without notice (notice)

Notice means

Actual knowledge
Receipt of a notice coupled with reasonable time to act on notice
Reason to know from facts and circumstances person knows
RECORD NOTICE IS NOT SUFFICIENT

Step 5: Holder in Due Course: Without Notice (notice examples)

Instrument Overdue

Check due = 90 days
Overdue interest is not notice

Inst. dishonored
Uncured default of another inst. issued as part of same series
Unauthorized signature
Alteration
Any claim
Any defenses or claims in recoupment (counterclaim)

Step 5: Holder in Due Course: Shelter Rule

Even a holder does not qualify as HDC, can have rights by shelter. If the transfer was from an HDC then the transferee has HDC rights (but is not an HDC).

EXCEPTION: A person who was party to fraud or illegality - cannot get HDC rights by shelter

Step 5: Holder in Due Course: Burden

The burden to prove HDC status is upon the person asserting HDC status.

Person must prove all elements or proving that person sheltering under met all the elements.

Step 5: Holder in Due Course: Rights subject to real defenses

Infancy
Duress
Lack of Capacity
Illegality
Fraud in the Execution (factum)*
Bankruptcy
Omission of Required Consumer Protection Language
SoL*
Payment to former holder
Alteration
Unauthorized Signatures & Forgeries

Step 5: Holder in Due Course: Fraud in the factum

Requirements

Signer lacked knowledge of instrument's character or essential terms and
Signer lacked reasonable opportunity to learn of the instrument's character or essential terms.

Step 5: Holder in Due Course: Statute of Limitations

Note - 6 yrs from the date of issue
Unaccepted draft (check) - earlier of either

3 yrs from the date of dishonor or
10 yrs from the date of issue

Step 5: Holder in Due Course: Over Personal Defenses

All other defenses

Failure of consideration
Breach of warranty
Fraud in the inducement - fraud about quality

Can still sue the committer of fraud

HDC can take over any claimant

Step 6: Type of Liability (Contract = bound by signature)

Liability arises when a proper payee has not been paid. The primary basis of K liability is a person's signature.

Binding agent - assume agent sign's agent's name & P is bound

if agent not authorized = forgery

Need instrument to bring claim

Step 6: Type of Liability (Contract: is the agent bound by signature)

Agent is not liable if

P Identified in Instrument and
Signature unambiguously shows made on behalf of P

Liability if above not met

HDC - liable unless HDC had notice of signature's nature
Non-HDC - liable unless parties did not intend agent to be liable

Step 6: Type of Liability (Contract agency's liability: Special Rule for Checks)

The agent is not personally liable if the P's name is on the check.

Step 6: Type of Liability (Contract: Maker of Note)

Primary Liability - no conditions precedent

Maker must pay when it is due

Liable to holder or indorser who paid instrument

Defenses - effectiveness depends upon HDC

Step 6: Type of Liability (Contract: Drawer of Draft)

Can disclaim liability on anything but check
Secondary liability only if

Presentment to drawee within 30 days and
Dishonor - drawee refuses to pay the instrument

Step 6: Type of Liability (Contract: Indorser of note or draft)

Can disclaim liability
Order of liability

Indorsers are liable to each other in order of their signatures

Secondary liability only if

Presentment to maker or drawee w/i 30 days of indorsement
Dishonor
Notice of dishonor to indorser w/i 30 days of dishonor

Step 6: Type of Liability (Contract: Drawee)

Generally, drawee makes no negotiable instrument Ks.
Drawee can certify or accept to create liability

no obligation to accept and no suit for failure to accept

Once drawee makes final payment all contract claims are terminated and no suit but warranty

Step 6: Type of Liability (Contract: Drawee (cont))

Drawee is liable for conversion (tort) for paying a forged instrument. π must receive the instrument.

After Drawer's death

D'ee can pay until it knows d'er died
After notice, can pay for 10 days unless person w/ interest tells them to stop paying.

Step 6: Type of Liability (Contract: Accommodation Parties (Definition))

Co-Signers, Sureties, and Guarantors - person who signs an instrument to lend his or her credit to another party but does not receive any benefit from the money.

Accommodated party - principal/debtor
Accommodation party - surety/co-signer
Holder

Step 6: Type of Liability (Contract: Accommodation Parties (Liability))

Liable in capacity which party signs; no special K.

May limit liability to guarantee of collection only (seek accommodated party first)
Can sue accommodated party

Can be created by

express language
Anomalous indorsement - outside of chain of title

Step 6: Type of Liability (Warranty)

Implied warranties are created by transfer or presentment but not indorsement

Possession is not needed like it is with K liability
Warranty liability survives the final payment of the instrument.

Step 6: Type of Liability (Warranty: Transfer Warranties from and to whom?)

Transferor who receives consideration makes a transfer warranty

Don't arise in a gift context

The warranty is made to

immediate t'ee
subsequent t'ees if t'or indorsed

Later collecting banks gets warranty w/o indorsement

Never to drawee or maker

Step 6: Type of Liability (Warranty: Transfer Warranties arise when)

Warrantor is entitled to enforce the instrument (basically warrants holder status)
All signatures authentic and authorized
No alteration
No good defenses against t'or
No knowledge of insolvency proceedings
If remotely-created, drawer actually authorized

Step 6: Type of Liability (Warranty: Disclaiming Warranties)

Checks - cannot disclaim
Non-checks - may disclaim ("without warranties")

Step 6: Type of Liability (Warranty: Presentment Warranties)

Made on presentment (mutually exclusive with transfer warranties)
Presenter's and previous t'ors make the warranty
Made to parties who pay in good faith, that is, maker or drawee or acceptor

Step 6: Type of Liability (Warranty: Presentment Warranties: Unaccepted drafts presented to drawee)

i.e. checks

Warrantor entitled to enforce draft or obtain payment
No alternation
No knowledge of unauthorized drawer's signature
RCI, person identified as drawer authorized the item

Step 6: Type of Liability (Warranty: Presentment: Other Instrument presented)

Warrantor entitled to enforce draft or obtain payment.

Step 6: Type of Liability (Warranty: Warranty v. Indorser's K)

If π is the holder, payor has not paid then holder sues indorser on indorser's K

If the π is payor, payor has paid, payor will attempt to sue indorser for breach of warranty.

Discharge by Holder

Holder of a instrument may discharge obligation by surrendering to obligor, destroying it, writing void, etc.

Effect of Instrument on underlying obligation

Payment by Cert., cashier's, or teller's check - underlying obligation discharged as if paid in cash.

Uncertified checks & notes - obligation suspended

If later paid, discharged
If later dishonored, holder may sue on either instrument or obligation

Failure to produce original instrument

Enforced by person not in possession

Person was holder when loss happened
Loss not due to transfer or lawful seizure
Person cannot reasonably obtain original

Protection for Payor required - security or bond

Miscellaneous Drafts

Overdraft - bank may pay even if it creates an overdraft on account

Postdated checks - bank may pay now unless customer gives bank notice of the postdating which it describes with reasonable certainty.

Stop Payment Orders

Must be in writing

Dated
Signed
Described item w/ certainty

Valid for 6 mo.; can be renewed
Bank's defenses

Reqs not met
No loss - customer would have to pay even if payment had been stopped (HDC)

Cashier's/Teller's check

Remitter cannot stop
Bank can

Wrongful Dishonor (rare)

Drawee dishonors properly payable check. Only the drawer has standing; the payee has no privity of K.

Damages - All damages including cost to defend

Drawee Bank defenses

Payment would have overdrawn
Check is more than 6 mo. old - "stale" check (good chk)

Payment in Full Check

A check (or accompanying communication) on which drawer conspicuously indicates that cashing is payment of debt unliquidated or subject to bona fide dispute.

Payment operates as an accord and satisfaction when cashed

Exceptions to Payment in Full Check

Payee returns the money w/i 90 days

Payee is an organization and had previously notified the drawer of a particular person or address to send payments in full checks.

Forgery and Alteration: Forged Maker's Signature

Alleged maker is not liable

Conduct can ratify forgery and cause Alleged maker to be unable to claim forgery

Forger is liable because his signature appears on the note (even if wrong name).

Forgery and Alteration: Forged Drawer's Signature

Alleged drawer is not liable
Drawee bank must re-credit drawer's account unless breach of presentment warranties (unusual)

Drawee takes risk unless presenter knew it was unauthorized

Bank defenses

D'er negligence substantially contrib.
Bank statement rule*

Forgery and Alteration: Bank Statement Rule

General rule: C has a duty to inspect bank statement. If c doesn't & bank can prove further loss (not finding forger), c precluded

Must report to bank w/i 1 yr

Repeat offender: 1 forges series of checks 30 days to report to recover sub. forgeries

Forgery and Alteration: Forged Indorsement: Effect

Bearer paper: no effect because not necessary

Order paper: forgery breaks the chain of title and check is not properly payable.

drawer may demand drawee bank recredit account

Forgery and Alteration: Forged Indorsement: Some party precluded from asserting forgery of payee's name

Precluded party

Maker/drawer - IMPOSTER RULE estops denying of validity of indorsement
Payee - Fraudulent indorsement by employee entrusted with check

Forgery and Alteration: Forged Indorsement: IMPOSTER RULE

maker/drawer estopped from denying of indorsement validity

4 main fact patterns

M should determine P'ee's identity
M should determine P'ee's authority - Am. Red Cross
Co. should supervise treasurer who cashes to self
Co. should supervise treasurer's sec.

Forgery and Alteration: Forged Indorsement: Drawee Liability if not precluded

Conversion liability to payee or
Not properly payable liability to Drawer
Defenses

Imposter rule
Fraudulent indorsement by employee entrusted with check
Drawer's negligence
Failure to timely sue - 3 years SoL

Forgery and Alteration: Forged Indorsement: Presenter Liability

Drawee bank can then sue the presenter and those prior to the presenter for breaching the presentment warranty of entitled to enforce

Forgery and Alteration: Forged Indorsement: Transferor Liability

Presenter who loses to payor for breach of presentment warranty of good title may sue entitites further up the chain for breach of the various transfer warranties of :

entitled to enforce
all signatures authentic or authorized and
no good defenses

Forgery and Alteration: Alteration (defense)

Obligor does not want to pay because instrument was altered. Two types:

Change in obligation - amount, date, names of payees, or interest rate
Unauthorized completion

Altered checks are not properly payable

Bank defenses

negligence
Bank statement rule

Forgery and Alteration: Alteration (effect on holders)

HDC

Change in obligation - can enforce for original amount
Unauthorized completion - may enforce as completed

Non-HDC

Fraudulently made by holder - total discharge of obligor
Not made by holder - obligor liable under original terms

Forgery and Alteration: Alteration (breach of warranties)

There are transfer and presentment warranties warranting that an instrument has not been altered.

About this deck

By: Sean Bellah
Created: 2011-06-03
Size: 73 flashcards
Views: 42

About StudyBlue

“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis