COMMERCIAL PAPER

Background Types of Commercial Paper Note (Two-party paper) Instrument where maker promises to pay payee. - Certificate of Deposit is where a bank promises to repay. - Maker has primary liability to the payee. If more than one maker, than jointly and severally liable to the holder (i.e., co-maker liability). - As between the maker and payee, there is contractual liability. Drafts (Three-party paper) Instrument where drawer orders drawee to pay payee. - Check = draft payable on demand and drawn on a bank, even w/o words of negotiability. - A Drawee who has agreed to pay the instrument is an acceptor. - Drawer is secondarily liable. - If there are inconsistent words and figures, the words will prevail. Types of Indorsements Signature on instrument. *An indorser is secondarily liable. Special v. Blank Special indorsement identifies the person to whom payable; blank doesnt. Restrictive v. Unrestrictive Restrictive indorsement limits payment; unrestrictive doesnt. Qualified v. Unqualified Qualified indorsements (without recourse) negates secondary liability; unqualified doesnt. Non-anomalous v. Anomalous Anomalous indicates accommodation. Accommodation parties are liable in capacity in which they sign. Surety has right of recourse against accommodated party. Holder v. Maker HDC Rule controls. The HDC Rule A holder in due course in possession of a negotiable instrument that has been negotiated, takes free of personal defenses and claims, subject only to real defenses. Negotiable Instrument Nine requirements WSUP FINOT? A negotiable instrument is a writing, signed by maker/drawer, with an unconditional promise or order to pay a fixed amount in money, with no other unauthorized promises, on demand or at a definite time, to order or bearer. Negotiated Effective even if impediment (e.g. infancy); Must transfer entire instrument. Order = proper indorsement plus delivery Bearer = mere delivery alone Last indorsement rule = last indorsement determines manner instrument can be renegotiated A holder in due course is a holder who takes for value, in good faith, and without notice of any claims, defenses, alterations, unauthorized signatures, or whether the instrument is overdue or has been dishonored.

Holder in Due Course For value, in good faith, w/o notice. Not bulk, estate, judicial sale. For value executed consideration; antecedent claim - A reasonable discount from face value does not indicate bad faith or notice of a problem with the instrument. - Partial HDC situation - Depository bank is an HDC if they give value. In good faith honesty in fact and observance of reasonable commercial standards of fair dealing (objective/merchants test). Without knowledge or notice of overdueness, dishonor, claim, defense, forgery, irregularity, or incompleteness which questions authenticity. - Checks are overdue ninety (90) days after they are drawn. - Time of payment governs status. Measured at the later of the time when the person took possession of the instrument or the time the person gives value for the instrument. o E.g., If a person gives part of the agreed value and then obtains notice of a defense, he is a partial HDC in proportion to the extent of the agreed value given. Takes Free of Personal Defenses and Claims Subject Only to Real Defenses F Forgery, Fraud in factum, A Alteration, Adjudicated insanity, I Infancy, Illegality, D Duress, Discharge in insolvency, S Suretyship defenses (if notice of Suretyship), Statute of Limitations (3 years for drafts, 6 years for notes, unless no demand, then 10 years) FTC Amelioration Human buys consumer goods or services on credit (more than four installments); No HDC rule. Shelter Rule Anyone who takes after HDC, gets rights of HDC, except participant. Holder v. Indorser Contract of Secondary Liability (at time of indorsement) Presentment Holder goes to primary party and demands payment. Dishonor Primary party refuses to pay. Notice of Dishonor Holder tells secondary party. If there is without recourse or no signature Discuss Warranty Liability Transfer Warranty Liability A transferor who indorses makes these five warranties to all subsequent holders. - Right to enforce (title) (i.e., no breaks in the chain of title). - Signature genuine; - No material alteration; - No defenses; - No knowledge of insolvency.

*A transferor who does not indorse makes the warranties only to the immediate transferee. Presentment Warranty Liability arises when a person presents an instrument for payment, he/she makes three warranties: he/she has the right to enforce (title), that the instrument has not been altered; and that he has no knowledge that the drawers signature is unauthorized (does not warrant that the signature is genuine). Holder v. Drawee None, unless acceptance (certification) Certification Drawee will be liable for consequential damages, and Drawer is discharged. Drawee v. Drawee Contractual Relationship (consider: Properly Payable Rule) Where drawee doesnt pay, but should have, drawee is liable to drawer for wrongful dishonor. Where drawee does pay, but shouldnt have, drawee is liable to drawer for breach of contract. Exceptions: Fictitious indorsements are effective; (i.e. Negligence in dealing, accounting, hiring situations) Drawer negligent in the drafting; Drawer negligent in the notifying. Exception: Drawee does not ask for identification. Limits: Statute of Limitations - Forged Drawer one year - Forged Indorsement three years - Multiple forgeries by same wrongdoer 30 days Bank Recovery Finality - Where the bank pays on a forged drawers signature or other mistake (e.g., insufficient funds), payment is final and no recovery is permitted from the innocent party whom the bank paid. - Where the bank pays on a forged indorsement, payment is not final and the bank can recover from the innocent party whom it paid. (Breach of warranty of presentment) (Right to enforce (title)). Accord and Satisfaction Dispute + Conspicuous Accord + Satisfaction - Exceptions: Organization designated agent; Claimant tenders repayment within 90 days. Lost, Destroyed or Stolen Instruments Instrument enforceable if person can prove ownership and facts that prevent production of the instrument. Bond may be required to protect.