Commercial Paper Bar Exam - Bar Exam Outlines

Commercial Paper

Main Idea: Party is paying money for good and services in the form of paper

FORMS OF COMMERCIAL PAPER

• Notes: 2 Instrument ( M & P)

  • Maker- person who signs or is identified in a note as the person promising/undertaking to pay

  • Payee- person to whom the note is made payable

    • Ex. Jake promises to pay to the order of Sarah the sum of $100

      • Jake= Maker

      • Sarah= Payee

• Drafts: 3 Party Instrument (DDP)

  • Drawer- person who signs or is identified in a draft as the person ordering payment (writing of the check)

  • Drawee- the person ordered in a draft/check to make payment (bank)

  • Payee- the person to whom the draft is payable

    • Ex. A check

NEGOTIABILITY

• A negotiable instrument is one that can be negotiated or assigned to a 3rd Party

• Requirements

  • Written & Singed (by maker/drawer)

    • On something tangible

    • Almost always paper

      • Could be cow, tshirt, etc.

    • Signed:

      • Any symbol executed/adopted by a party w/ a present intention to authenticate a writing

        • Ex. Printed, stamped, initials, thumbprint

      • Can appear in body of instrument

  • Unconditional

    • Conditional promises okay but destroy negotiability

      • Ex. "I promise to pay IF"= not negotiable

    • Referring to another document will not destroy negotiability so long as payment not made subject to or conditioned upon performance of the underlying contract

      • Ex. "in accordance with" or "as per" is okay

    • Negotiability must be clear on the face of the instrument!!

      • Not conditional merely if

        • Refers to another writing for statement of rights regarding the collateral or payment

        • Limits payment to particular source of funds

        • Requires as a condition to payment a countersignature by a person whose signature appears on the promise (traveler checks)

  • Promise (note) or Order (draft) to Pay

    • IOU not negotiable- not a promise to pay

    • I wish you would pay- not an order to pay not negotiable

• A fixed Amount of $, that is;

  • MUST BE pay in $, not goods or services

  • Holder must be able tell from instrument itself what amount is due

• Payable to Order/Bearer (at time it is issued)

  • Instrument must contain certain magic words either:

    • Order language, or

    • Bearer language

    • Writing lacking these words is not negotiable

      • I promise to pay Paul= not negotiable

      • Exception: Checks --> "Pay Jake Sandlin" are fully negotiable

• Payable on Demand or at a Definite Time

  • Holder must be able to tell when it comes due otherwise non-negotiable

  • Does not require a date

  • Undated instrument which specifies no time for payment treated as instrument payable on demand by holder

    • Ex. Post dated checks, note containing acceleration clause, note containing extension clause as long as extension is to a future definite time

    • Not: event certain to happen but uncertain as to time

      • Ex. When uncle mark dies : not negotiable

• Does not State any unauthorized undertaking or instruction (by the person promising/ordering payment)

  • Must not be burdened by anything other than simple, clean unconditional promise or order

  • What is allowed: (things that strengthen a promise or order)

    • Undertaking or power to give, maintain, or protect collateral to secure payment;

    • Authorization or power to holder to realize on or dispose collateral

    • Waiver of benefit of law intended to benefit or protect obligor

    • Promise to pay costs of collection

NEGOTIATION

• Assignment vs. Negotiation

  • If Assigned to 3rd Party:

    • 3rd party= assignee & has only same rights as assignor does on instrument

    • Any defenses that could be raised against the payee could be raised against the assignee

  • If Negotiated to 3rd Party: (BETTER TO HAVE THIS)

    • 3rd Party= A Holder

      • If holder gives value, takes in good faith, and w/o notice then HOLDER IN DUE COURSE (HIDC)!!!

      • HIDC will take free from most personal defenses that could have been raised against payee

      • Real defenses can be used against HIDC

• How to Transfer

  • Order Paper: Transfer of Possession & Indorsement by Holder (Safer)

    • Holder: the identified person to whom the instrument is payable

    • Transfer may be voluntary or involuntary (Pick Pocket)

    • Indorsement:

      • Special Indorsement- Specifies to whom the instrument is payable

        • An instrument specially indorsed becomes order paper

      • Blank Indorsement- doesn’t specify the person to whom the instrument is payable; generally consists of just a mere signature

        • Blank indorsement makes instrument bearer paper

• Bearer Paper: Transfer of Possession Alone

  • Transfer may be voluntary or involuntary (pick pocket)

  • Thief of bearer paper cannot be a HIDC but can transfer possession to another who can then become a HIDC!!

• Exam Tip: looks at the last indorsement to determine whether the instrument is bearer paper or order paper

• Special Rule:

  • Depository bank ( a bank in which an item is 1st deposited) that takes an unendorsed instrument for collection becomes a holder of the instrument IF the customer was a holder at time of delivery, even if customer has not indorsed the instrument

  • When order paper contains a forged indorsement, none of the parties from the forger on are holders--none have good title--none are entitled to the money

HOLDER IN DUE COURSE!!!!!!!!!!

• Determined at the moment the instrument is negotiated to the holder AND she gives value therefor, whichever occurs later

  • So if transferee of negotiable instrument acquires notice of a claim or defense to the instrument prior to negotiation or giving value, they cant be a HIDC

• Requirements

  • Holder;

    • In possession of bearer paper/ order paper properly indorsed to him

• Who gives value;

  • A party is a HIDC only to the extent that the agreed upon consideration has been performed

  • Look for EXECUTED CONSIDERATION

  • Mere promise to pay not enough

  • Watch for discounts where only a % of consideration has been performed

    • Whomever takes can only be holder for the % of consideration performed

  • Giving a negotiable instrument is giving value

  • Holder also gives value for an instrument when he takes it in payment of or as security for an antecedent (past) claim/debt OR when he makes an irrevocable commitment to 3rd person

    • On 1/1/2012, Mary borrowed $1K from Lois, orally promising to pay by 6/1/2012. Mary unable to pay the $1K, but negotiates a note she received from Charles. Lois has given value for the note

  • Banks

    • Automatically become holders when customer is permitted to draw against a deposited item

    • APPLY FIFO (first in first out) Rule:

      • Bank only be HIDC as to the funds that have been drawn upon that were deposited by the instrument, not the funds that were already in the account

• In good faith;

  • Honesty in fact (subjective)

  • Observance of Reasonable Commercial Standards of Fair Dealing (objective)

• Without notice!!!!!!!!

  • HDIC must take the instrument w/o notice (includes actual notice and reason to know that

    • Instrument so irregular or incomplete as to call into question is authenticity

      • Watch for HUGE DISCOUNTS, they put on notice and so not likely be taken in good faith

    • Instrument overdue or has been dishonored

      • Check overdue 90 days after its date

      • If you take it after that you are not HIDC

    • Contains unauthorized signature or has been altered;

    • There is a claim to the instrument;

    • Any party has a defense or claim that reduces payable amount on instrument

TRANSACTIONS THAT PRECLUDE HIDC STATUS

• Legal process or by purchase in an execution, bankruptcy or creditor's sale or similar;

• Purchase as part of a bulk transaction not in the ordinary course of business of the transferor; or

• As the successor in interest to an estate or other organization

SHELTER RULE

• The transferee acquires whatever rights the transferor had

• This allows the transferee to "step into the shoes' of the HIDC who formerly held the instrument & to obtain rights of an HIDC even though they clearly failed to meet the requirements

• Exceptions to Rule:

  • Never grants HDICs rights to person who were parties to fraud or illegality affecting the instrument

REAL DEFENSES

• HDIC takes free of "personal defenses & claims", but takes subject to "Real Defenses" as follows:

  • Infancy- if simple contract

  • Incapacity/Duress/Illegality

  • Misrepresentation- induced the party to sign w/o knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms

  • Discharge in Insolvency

  • Any other discharge of which holder has notice when he takes the instrument

  • Fraud in the Factum:

    • Signor induced to sign by deception w/r/t character and essential terms of writing & excusably ignorant

• Personal Defenses cant be used against HIDC

  • Fraud in the Inducement:

    • Signor aware of character and essential terms but induced to sign it by fraud based on something else

  • Discharge by Payment:

    • Personal defense & can't be raised against HIDC

    • If pay off then get the check or note back or have it stamped paid

NATURE OF LIABILITY

• Underlying Obligation

  • Once instrument is offered & accepted in satisfaction of an underlying obligation, the obligation merges w/ the instrument & the underlying obligation is SUSPENDED

  • Payment of the instrument discharges the instrument & underlying obligatoin

  • BUT, if the instrument is dishonored, the party issuing the instrument is liable on the instrument & on the underlying obligation

    • Only 1 recovery

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