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BARBRI - Commercial Paper

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What is "money paper"? What is an "order?"

pieces of paper that direct money from one person to another. A check (draft). Bank account holder (drawer) orders bank ("payor bank" or "drawee") to pay out money from a deposit account to a third person ("payee") Drawer and drawee are the same bank (e.g. the bank orders itself to pay). Customer who buys a cashier's check is called a remitter. A promissory note. Certificate of Deposit (CD) = bank's promise to pay you back your deposited money in the future.



One thing that obviously makes an instrument not negotiable? What is "issuance?"

Instrument states conspicuously that it is not negotiable. Drawer of check or maker of note turns it over to payee for the first time. When payee accepts instrument, underlying obligation is suspended until instrument is paid (discharge) or dishonored (reinstatement) If payee accepts a cashier's check, obligation is discharged immediately.



What is a cashier's check? What is a "promise?"


What is the effect of issuance on the underlying obligation?



Requirements for commercial paper to be negotiable? (7)

1. Written & signed promise to pay 2. Unconditional 3. Transfer money (not a car or wheat) 4. Fixed amount 5. Words of negotiability 6. Definite time for payment 7. No extraneous undertakings No explicitly making payment subject to another document although unstated conditions might be enforceable between maker and payee. 1. Note can refer to an accompanying loan agreement or security agreement 2. Note can limit payment to a particular source Perhaps even pursuant to a formula, even floating interest rate. - if terms are contradictory, words > numbers; handwritten > typed 1. Bearer paper: "bearer" or "____" payee line or "cash" 2. Order paper: pay "to the order of [person]" or pay to a particular identified person "or order"


"Accord and Satisfaction:" When does a discounted "full payment" instrument work to finalize settlement of disputed obligations?


Negotiability: Unconditional

1. Drawer must act in good faith to settle a bona fide dispute w/ regard to existence or amount of debt. 2. The "full payment" legend appears conspicuously on instrument 3. The payee obtains payment & doesn't refund that payment w/in 90 days Has no effect.



Negotiability: Fixed Amount

"Accord and Satisfaction:" Effect of crossing of the "full payment" legend, "reserving rights," accepting the money "under protest"? Meaning of "negotiation"?



Negotiability: Words of Negotiability

Payee (and people after her) can "negotiate" the instrument and pass rights to payment under that instrument to other people, like cash. Only a holder. Anyone in possession of it is a holder & entitled to enforce. Only the person identified as payee can be a holder (if that person is in possession) entitled to enforce. Currently holder simply passes possession (perhaps involuntarily -- to a thief!)

17. 9.

Negotiability: Definite Time for Payment Negotiability: No Extraneous Undertakings

Default, if no time listed = UPON DEMAND - prepayment & acceleration are OK No promises or orders to do anything other than paying money. THREE EXCEPTIONS: 1. Give/maintain/protect collateral securing the note 2. Allow holder to confess judgment or dispose of collateral, or 3. Waive protections for maker/endorser (e.g. right to notice of dishonor)

Who can negotiate an instrument? Who is a holder of bearer paper? Who is a holder of order paper?





Bearer paper: how can some new person become the holder who is entitled to enforce?

by failing to perfect) discharges secondary obligors who do not consent to such modification. A had the money to pay but asked lender for an extension. 33. 1. can become the next holder) Signature under instruction directing payment to specific person.requires money from payment to go into the indorser's deposit account. 37. Someone signs a note as a comaker. Must be the holder of the instrument (proper negotiation) 2. including that she was the holder when instrument was lost/stolen. 23. (release of principal would also release secondary under the UCC). What is an anomalous endorsement? Ye Olde-Tyme Anomalous Endoresement Modern Anomalous Endoresment 27. the terms of the instrument and entitlement to enforce it. Requirements to be an HDC? (4) 30. What are the rights of a holder in due course? 28. Must prove. B has a complete defense to need to pursue collection against the primary obligor first. Maker gets "adequate protection" against someone else coming forward. What defenses does B have to payment of the $5000 loan? How can a former holder enforce a lost or stolen instrument? 34. 32.This is opposite of UCC 3-605. 2. Blank indorsement 2. (anyone.21. 36. A was able to pay and. including a thief. with the clear and known intention of guaranteeing to lender that the note/loan will be repaid. B would have been off the hook forever. B is discharged to the full amount because the extension hurt B. 24. by other evidence. 26. A then disappeared.Future promises are not "value" until performed 35. Release 2. Special Indorsement 25. Extending the principal obligor's time to pay. 31. HDC: Value . 1. modifying the note. Must have acquired the instrument w/o notice of defects Value can be anything of past or present value . . payable only to the new identified person. Must have taken the instrument in "good faith" 4. Anomalous Endorsement: what does the guarantee ("accommodation party") promise? Protections for Accommodation Parties? Accommodation Party Protections: Release Guarantor promises to pay as soon as the primary obligor defaults -. B signed on a note for a $5000 loan. ex: your parents sign when you buy a car. Possible Discharge In Illinois. He passes the note to blacksmith as payment for horseshoe. Restrictive Endorsement B co-signed on A's purchase of a car. but only to the extent that such modification/impairment causes them loss. 29. or maker already paid the original payee -. Signature + "For deposit only" . had A done so. & signs it as a surety. note holder release of principal obligor does NOT release secondary obligors (accommodation parties) . Restrictive indorsement Simply signing the back of a check makes order paper into bearer paper. Instrument is now (or still) order paper. B's obligations were discharged when A extended the payment time. Accommodation Party Protections: Discharge 22. Must have acquired the instrument for "value" 3. or impairing the collateral (i.maker must nonetheless pay the HDC and sue the original payee for recovery! 1.we should all do this! (safer) A signature of a third party surety who guarantees payment Lawyer has a promissory note from baker. ex: original payee did not give proper consideration for the instrument. Order paper: how can some new person become the holder who is entitled to enforce? Types of indorsement (3) Blank Indorsement Current holder must pass possession and indorse the instrument (sign on back). Special indorsement 3. When the note came due. 1. Can enforce the instrument FREE of claims and all FREE of all defenses except real defenses.e.

fake goods.this is an exceedingly rare unicorn. 53. Also finder probably didn't have "good faith" b/c taking a check found on the ground is bad. Fraud in the Factum 4. payable to A. A never "ordered" payment so nobody can ever become a holder. duress. etc. A loses this check after endorsing. Transferor is entitled to enforce the instrument (proper negotiation) 2. I write a promissory note to my heroin dealer) 3. . HDC Defects: What is principal payment default? HDC Defects: Unauthorized Signature or Alteration HDC Defects: Claim to Instrument HDC: Defense to Payment A has a check. Liability of Makers & Drawers? Can endorsers waive liability to pay dishonored instruments? Liability on transfer warranties? 44. Drawer or maker of the instrument has a defense to payment or a claim in recoupment Payor is late in making principal payments (OK if late in making interest payments.g.Conversely. Anyone who transfers an instrument in exchange for value and ALSO endorses the instrument makes transfer warranties not just to that transferee but to any subsequent transferee. has the rights of an HDC under the shelter principle 1. 42. but not principal) Instrument contains a forged signature or has been altered . 1. What is "fraud in the inducement?" 50. The transferor doesn't know that the maker/drawer has initiated bankruptcy. Bank refuses to pay a note or check when due & presented . fake charity. how the hell do you not realize you're signing a check? Maker was tricked into signing an instrument in relation to a fraudulent scheme .. from a thief Contract defenses . Anyone who transfers an instrument in exchange for value makes all transfer warranties to transferee. payable to A. Dishonor by bank 2.aka failure of signing "without recourse" 52. Finder didn't give value. 43.g. Even someone who is not an HDC can inherit the rights of an HDC. Can someone else become an HDC? A has a check. "Real Defenses:" the 4 defenses to paying an HDC . 49. Maker of a note is principally liable . dishonored . Clearly the holder is not an HDC b/c didn't give value. Timely notice of dishonor is given to endorser (about 1 month) 51. because. Instrument contains an unauthorized signature or has been altered 3. unlike makers and drawers How? -. THIS IS NOT A REAL DEFENSE. Instrument is overdue.38.) 5. payment. Someone has a claim to the instrument 4. 45. HDC: Good faith Honesty in fact (subjective) and the observance of reasonable standards of commercial fair dealing (objective) 1.e. The instrument has not been altered 4. 54.e. 55. Discharge in bankruptcy of the debt 1. 41. they can. The instrument is not subject to any defense or claim that can be asserted against the transferor (failure of consideration. No. and an HDC must be a holder. or in principal payment default 2. etc. etc. infancy. Drawer of a check is secondarily liable liable only after dishonor by bank Yes. Nonetheless. Infancy of the maker/drawer 2 Illegality of the debt underlying the instrument (i. 2. All signatures are authentic and authorized 3. Transfer Warranties (5) 47. 46.No OBVIOUS signs of tampering or forgery!! Someone else has a property right to get the instrument back . if maker of a note tries to pay and holder refuses tender of payment.liable when due 2. Ex: holder acquired the instrument as a gift from an HDC. the secondary liability of endorsers & accommodation parities is discharged to the extent of the amount of the tender. 48.e. Can the finder become an HDC? HDC: Shelter principle Enforcing Against Endorsers: Requirements (2) Enforcing Against Endorsers: Dishonor by Bank 1. No. 40. A loses this check before endorsing. What is "fraud in the factum?" 39. 1. HDC: Defects (4) Maker did not know or have any reasonable way of knowing that the paper he signed was an instrument.

negligence defense might preclude drawer from asserting an alteration in defense to paying the instrument as altered Father gave son a $100 check to buy school clothes. NOTE: only applies to endorsements. Forgery: Comparative Negligence What is the source of law for commercial paper? Drawer Defined Drawee Defined 67.. or payee's failure of ordinary care substantially contributed to (facilitated) the forgery (or alteration). proper payee of a stolen check has a cause of action for conversion against depository bank or payor bank who gave payee's money to thief over forged endorsement. they are not properly payable Negotiation = improper. Imposters (an imposter can effectively negotiate by endorsing in the named payee's name) 3. Forgery: Negligence A signed but incomplete instrument (e. .Payor bank can't charge drawer's account for forged checks.. 62. not forged drawer signature (aka applies to signatures on BACK. and without notice of the alteration. exceptions. the loss is distributed per each party's negligence (comparative negligence) . If the entity asserting preclusion based on the maker's. in good faith. Odd cases in which forged instruments are presumed valid & effective (3) Forged Instrument: Responsible Employee 61. Fraudulent Alteration or Completion: General Rule . employee takes check and forges for some amount. the forger is liable even if he signed someone else's name. The party who signs the check (draft) The party that pays the draft .56. and instrument is NOT properly payable to that person.g. but only by someone who acquired the instrument for value. Fraudulently changed instrument: Enforceable 57. Possessor is NOT a holder. 59. This may be failure of ordinary care. and w/o notice of the completion. 1. 60. Enforceable Fraudulently Changed Instrument: Example Fraudulently Completed Instrument: Enforceable 65. drawer's. . Fictitious payees (any indorsement in the fictitious name is effective) 2. Son changed $100 to $1000. 64.For checks. drawer's. "Responsible Employee" Employee charged w/ check processing duties fraudulently endorses employer's instrument. in good faith. 58. or payee's negligence ALSO failed to exercise ordinary care in paying the item. but only by someone who acquired it for value. UCC Article 3 66. Forged Signature: Drawer or Maker (Front of Check) Forged Signature: Endorsement (Back of Check) Only someone who actually signs an instrument is liable. the maker/drawer/payee will be precluded from asserting the forgery or alteration against anyone who gave value for the instrument in good faith.usually the bank 68. not FRONT) Discharges maker/drawer liability *BUT. . amount left blank) later fraudulently completed can be enforced according to its terms as completed . made out to Sears. Bank can enforce for $100. Issued instrument fraudulently changed from its original terms can be enforced according to its original terms. forged endorsement is effective to negotiate the instrument.however.Ex: Small business person leaves checks lying out. If maker's.(2) 63.