Commercial Paper

When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.

• The Promissory Note
• The draft

An affirmative promise to pay between two parties.

• Maker - the promisor
• Payee - the promisee

Typically a check, an order by one party telling a second party to pay the third.

• Drawer - gives the order
• Drawee - ordered to do the paying
• Payee - the beneficiary of the order

Appears in the context of promissory notes and checks, sign on the back.

• Writing
• Pay to the order, or bearer (Note -- checks do not need to fulfill the magic words requirement)
• Signed by the maker or drawer
• Sum certain (can say "sum and interest")
• Unconditional with no additional promises
• Payable on demand or at a definite time
• Payable in currency

No, checks do not need to fulfill the magic words requirement in order to be negotiable.

Yes.

• Specifically states that it is payable "on demand" or "at sight" or "on presentation" or even if it is silent as to the time of payment
• Definite time -- payable on or before a stated date or at a fixed period after a stated date

• The promisor in a promissory note (the Maker)
• The indorsor (the guy who signed on the back of the check)
• The drawer (the person who signed the check)
• "Without recourse" - a term of art used by indorsers and drawers - a disclaimer of liability.  They pass title but assume no signature liability.

Any transferor is liable who sells the negotiable instrument.

• Who can sue?  Any plaintiff in possession of it
• --When defendant indorses, warranties run with the instrument
• --When defendant does not indorse, only liable to immediate transferee

Any plaintiff in possession of the negotiable instrument.

• --When defendant indorses, warranties run with the instrument
• --When defendant does not indorse, only liable to immediate transferee

• Plaintiff has good title to the instrument
• That all signatures are genuine and authorized
• Instrument has not been materially altered
• There is no defense or claim good against the defendant, the instrument is enforceable
• Defendant has no knowledge of any bankruptcy or insolvency action against the maker or drawer

When the instrument is payable to the order of a specific payee, it is negotiated by delivery of the instrument to that payee.

Any further negotiation requires that the payee endorse the instrument and deliver it to the transferee.

The indorsement must be authorized and valid.

If the instrument is payable to bearer, indorsement is not required.

• Special
• Blank
• Restrictive
• Unrestrictive

One that names a particular person as "indorsee." The indorsee must sign in order for the instrument to be further negotiated.

Does not name a specific indorsee, may be negotiated yb delivery alone.

Contains a condition "for deposit only."  If drawee does not follow the restrictuion then indorsor can recover for conversion.

• For value
• In good faith
• Without notice

• Must give value for the instrument.
• --A mere promise is not value
• --Old value is good value

Honesty in fact and the observance of reasonable commercial standards of fair dealing.

The holder must acquire the instrument without notice that it is overdue, has been dishonored or is subject to any defense or claim.

• Did the holder know or have reason to know of the problem?
• --If it was payable at a given time that we've passed and they were on notice
• --If a holder knows a payment or more of principal is in arrears then not a holder in due course (but if they know interest is arrears that is OK)
• --If they have notice of any defense or claim against hte instrument's enforcement

• If it was payable at a given time that we've passed and that they were on notice
• If holder knows a payment or more of principal is in arrears then not a holder in due course (but if they know interest is in arrears that is OK)
• If they have notice of any defense or claim against the instrument's enforcement

A transferee acquires whatever rights her transferor had.

Take free from claims and personal defenses but subject to real defenses.

• -Material alteration - a change in the terms of the instrument
• -Duress
• -Fraud in the factum (real fraud) - there has been a lie about the instrument
• -Infancy
• -Insolvency
• -Incapacity
• -Illegality

• Material alteration - a change in the terms of the instrument
• Duress
• Fraud in the factum (real fraud) - there has been a lie about the instrument
• Infancy
• Insolvency
• Incapacity
• Illegality

A change in the terms of the instrument.

A real defense.

There has been a lie about the instrument.

A real defense.