COMMERCIAL PAPER

    1. OVERVIEW
    1. Governance
      1. Article III – commercial paper is governed by Art. III of the UCC.
        1. Central Theme of Art. III – HDC RULE
          1. If an instrument is in a special form (called “negotiable”) and is transferred in a special way (by “negotiation”) to a person who takes the instrument for value, in good faith, and without notice of any defenses to or claims on in instrument (an “HDC”), the HDC will be able to force someone to pay the money due under the instrument unless the person from whom payment is sought has available one of the very few so-called real defenses.
    1. Two Functions of Commercial Paper
      1. Substitute for Cash
      2. Used for credit
    1. Note – instrument where make promises to pay the payee
      1. Two parties involved
        1. Party promising to pay = maker
        2. Party to whom payment is made = payee
      2. Ex – certificates of deposit (where there’s a promise by bank to pay)
      3. Liability of Maker – Primary Liability (“promise to pay”)
        1. If there’s more than one maker – Joint & Several Liability to the holder
        2. Liability to each other (if more than 1 maker) – Contractual liability
    1. Draft – Instrument where drawer orders drawee to pay the payee
      1. Three Parties Involved
        1. Party ordering to pay = drawer
        2. Party ordered to pay = drawee
        3. Third party payment made to = payee
      2. Liability of Drawer – Secondary Liability (conditional)
      3. Words v. Figures – words prevail
    1. PARTIES
    1. Makers
    1. Drawers
    2. Indorsers
      1. Indorsement – signature other than that of the maker, drawer, or acceptor (acceptor is drawee who has agreed to pay the instrument)
      2. 4 Qualities of Indorsements
        1. Special v. Blank – special indorsement identifies the person to whom the instrument is payable; blank does not.
        2. Unrestrictive v. Restrictive – restrictive indorsement limits payment; unrestrictive does not
        3. Unqualified v. Qualified – qualified indorsement (“Without recourse”) negates secondary liability; unqualified does not
        4. Non-anomalous v. Anomalous – anomalous indicates accommodation (“out of chain”)
          1. Accommodation parties are liable in capacity in which they sign
          2. Surety has right of recourse against accommodated party
      3. Liability of Indorser – Secondary Liability
    1. HOLDER V. MAKER (DRAWER) ———————- APPLY HDR RULE!!!
    1. HDC Rule – 4 Elements:
      1. Negotiable Instrument
      2. Negotiated
      3. Holder in due course
      4. Takes free of personal defenses and claims, subject only to real defenses
    1. Requirement #1 – Negotiable Instrument
      1. To be negotiable, an instrument must be a written and signed:
        1. Unconditional
        2. Promise or order
        3. To pay a fixed amount of money (with or without interest) that
        4. Is payable to order or to bearer when issued or first in possession of a holder
        5. Is payable on demand or at a definite time
        6. Does not state any unauthorized undertaking or instruction by the person promising or ordering payment.
      2. Unconditional
        1. No express conditions for payment
        2. Not subject or governed by another writing
        3. What’s ok – (1) referring to another writing re: collateral, prepayment, or acceleration; (2) limiting payment to a particular source or fund; or (3) requiring a countersignature of a specimen signature (traveler’s check)
      3. Promise or Order
        1. Can’t be an I.O.U.
      4. Fixed Amount of Money
        1. Money is any medium of exchange adopted by the government
        2. Principal must be fixed; variable or indexed interests are ok
      5. To Order or to Bearer at Time of Issue
        1. Look to “words of negotiability” to see if its bearer or order paper
      6. On Demand or at a Definite Time
        1. Demand – payable on demand if it fails to state a time for payment or states that it is payable “on demand” “at sight” etc.
        2. Definite Time – payable (1) on a fixed date; (2) after elapse of a specified period after sight; or (3) at a time readily ascertainable when the instrument is issued
          1. Acceleration and extension clauses are OK – extension at option of maker ok if it is to a further definite time; extension at option of holder is always permitted
      7. No Unauthorized Undertakings or Instructions
        1. Only three undertakens or instructions are permitted under the UCC. Any other undertaking will destroy negotiability:
          1. An undertaking or power to give, maintain, or protect collateral
          2. An authorization or power given to the holder to confess judgment or to realize on or dispose of collateral; and
          3. A waiver of the benefit of a law that protects the obligor.
    2. Requirement #2 – Negotiated
      1. The steps needed to negotiate an instrument depend on whether the instrument is payable to bearer or to order.
      2. Bearer Instruments – negotiated by transferring possession of the instrument (mere delivery alone will suffice)
      3. Order Instruments – negotiated by transferring possession along with the identified person’s indorsement
        1. Indorsement must be authorized and valid (forging payee’s name breaks chain of title, and generally no subsequent possessors can qualify as holders)
      4. Last Indorsement Rule
        1. Assume instrument payable to order of Sue Jones. She indorses it, “Pay Bob /s/ Sue Jones,” and delivers it to Bob. In order for Bob to “negotiate” it to Sally, Bob must indorse and deliver.
        2. Special indorsement – makes it order paper
        3. Blank indorsement – makes it bearer paper
    3. Requirement #3 – Holder in Due Course (“HDC”)
      1. “Due course” requires the holder to take for value, in good faith, and without notice.
      2. Value
        1. Value is executed consideration (performed consideration)
        2. Any one of the following constitutes value:
          1. Performance of the agreed consideration
          2. Acquisition by the holder of a lien or a security interest in the instrument
          3. Taking the instrument as payment of or security for an antecedent debt
          4. Trading a negotiable instrument for another instrument; or
          5. Giving the instrument in exchange for incurring an irrevocable obligation to a third person by the person taking the instrument
      3. In Good Faith
        1. Must have (1) honesty in fact; and (2) observance of reasonable commercial standards of fair dealing
      4. Without Notice
        1. Must be without notice of overdueness (checks over 90 old), dishonor, claim, defense, forgery, irregularity, or incompleteness which questions authenticity.
      5. Non-Holders in Due Course (but, remember Shelter Rule):
        1. Buying in bulk
        2. Buying from legal process or purchase at a judicial sale
        3. Acquiring it as a successor in interest to an estate or other organization
    4. Requirement #4 – Free from Personal Defenses and Claims, Subject only to Real Defenses
      1. 10 Real Defenses – “FAIDS”
        1. Forgery, Fraud in Factum (key – switched document)
        2. Alteration (unless you negligently leave space), Adjudicated insanity
        3. Infancy, Illegality (key: void illegality – illegal subject matter)
        4. Duress (void duress), Discharge in insolvency
        5. Suretyship defenses (if notice of suretyship), Statute of Limitations (3 years for drafts, 6 years for notes; unless no demand –then 10 years)
      2. FTC Amelioration
        1. Human buys consumer goods or services on credit – If so, NO HDC RULE!!!
        2. Human – non-corporation
        3. Consumer Goods – family use goods
        4. Services – i.g., health clubs governed by FTC; elderly buys 90-year dance studio lessons
        5. Credit – more than 4 installments
      3. Shelter Rule
        1. Anyone who takes after a HDC, gets the rights of the HDC, except a participant in fraud.
    1. HOLDER V. INDORSER ———————– Contract of Secondary Liability
    1. 3 Requirements
      1. Presentment – holder goes to primary party and demands payment
      2. Dishonor – primary party refuses
      3. Notice of Dishonor – holder tells secondary party
    1. Special Circumstance
      1. What if the secondary party signs a qualified indorsement (“without recourse”) or does not sign at all (negotiation by delivery alone – bearer paper)?
        1. Discuss Warranty Liability
      2. Stages of NI’s Life:
        1. Issuance – no warranties given at issuance
        2. Transfer (movement for consideration) – warranties made
        3. Presentment (final surrender) – warranty of title (right to enforce) is made, but not the warranty of genuineness (no forgeries)
      3. Transfer Warranties
        1. Right to enforce the instrument (all indorsements necessary to chain of title are genuine and that the transferor is a proper person, in her own right or as agent, to make presentment and obtain payment)
        2. All signatures are authentic and authorized
        3. The instrument has not been altered
        4. No defense or claim of any party is good against her; and
        5. She has no knowledge of any insolvency proceedings that have been instituted against the maker, acceptor, or drawer.
    1. HOLDER V. DRAWEE —————————— None Unless Acceptance (certified)
    1. A holder cannot make the drawee pay unless the bank has certified the instrument
    1. If certified, drawee liable for consequential damages
    2. If certified, drawer is discharged from liability
    1. DRAWER V. DRAWEE —————————– Contractual Relationship
    1. Property Payable
      1. Overdraft – banks don’t have to pay, but can and then charge you
      2. Date – if check is postdated, they don’t have to pay but can (can disregard the date)
      3. Stop payment – cannot pay over a stop payment unless they pay to a HDC
      4. Dead drawer – can pay, unless they get notice from executor
    1. Where Drawee Doesn’t Pay, But Should Have
      1. Drawee is liable to drawer for wrongful dishonor
      2. This is where drawer had an account and had enough money
    2. Where Drawee Does Pay, But Should NOT Have
      1. Drawee is liable to drawer for breach of contract
      2. Two Situations
        1. When name is forged as drawer
        2. When name is forged as indorser
      3. Exceptions to #2 when name is forged as indorser
        1. Fictitious indorsements are effective
          1. Imposter – negligence in dealing
          2. Corporate comptroller – negligence in accounting (never have one person deposit the checks and credit the account)
          3. Payroll padding – negligence in hiring (you signed, you suffer – you hired the crook, so you have to pay)
        2. Drawer negligent in the drafting
          1. Leaving amount line blank or lots of space
          2. Leaves space and says “I trust you to put the correct amount in.”
        3. Drawer negligent in the notifying
          1. When drawer waits too long to notify bank
          2. Exception to exception – when drawee cashes check w/o seeing ID
          3. Time limits:
            1. Forged drawer – 1 year
            2. Forged indorsement – 3 years
            3. Multiple forgeries by same wrongdoer – 30 days from time you get checks back
    1. BANK RECOVERY (Finality)
    1. Forged Drawer’s Signature or Other Mistake
      1. When the bank pays on a forged drawer’s signature or other mistake, payment is final and no recovery is permitted from the innocent party whom the bank paid
    1. Forged Indorsement
      1. When the bank pays on a forged indorsement, payment is NOT final and the bank can recover from the innocent party whom it paid
        1. Breach of warranty of presentment – right to enforce title

    1. ACCORD AND SATISFACTION

    1. Begin with an unliquidated or disputed claim (if no dispute, then there’s no accord and satisfaction)
    2. Instrument tendered as full satisfaction (conspicuously)
    3. Collection is discharge of debtors’ obligation (accord and satisfaction)
    4. Exceptions:
      1. Organization designated agent (conspicuously) – prevents accord and satisfaction unless sent to the agent
      2. Claimant tenders repayment w/in 90 days – avoids “inadvertent” accord and satisfaction

    1. LOST, DESTROYED, OR STOLEN INSTRUMENTS

    1. Replacement Issue – enforcement (must give security)
    2. Adequate protection – flexible (can be by letter)
    3. Cashier’s, teller’s, or certified check
      1. Payment upon “claim” made before check paid to another (warranty – no bond)
        1. After 90 days – bank pays claimant
        2. Afterwards, if paid to HDC, claimant must repay
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