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Commercial Paper -- What is the rule?
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.
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What are the two types of negotiable instruments?
- The Promissory Note
- The draft
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Promissory Note
An affirmative promise to pay between two parties.
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Who are the parties to a promissory note?
- Maker - the promisor
- Payee - the promisee
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The draft
Typically a check, an order by one party telling a second party to pay the third.
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Who are the parties to a draft?
- Drawer - gives the order
- Drawee - ordered to do the paying
- Payee - the beneficiary of the order
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The Indorsor
Appears in the context of promissory notes and checks, sign on the back.
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What is required for a promissory note or draft to be negotiable?
- 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
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Do checks need to pay to the order, or bearer?
No, checks do not need to fulfill the magic words requirement in order to be negotiable.
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Does "sum and interest" count as a "sum certain" for purposes of detemrining whether a note or draft is negotiable?
Yes.
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What is required for a note or draft to be payable on demand or at a definite time?
- 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
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Contract or Signature Liability
- 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.
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Warranty or Transfer 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
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Who can sue under warranty or transfer liability?
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
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Five warranties
- 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
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How do you transfer a negotiable instrument that is payable to order?
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.
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How do you transfer a negotiable instrument that is payable to bearer?
If the instrument is payable to bearer, indorsement is not required.
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What are the types of indorsements?
- Special
- Blank
- Restrictive
- Unrestrictive
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Special indorsement
One that names a particular person as "indorsee." The indorsee must sign in order for the instrument to be further negotiated.
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Blank indorsement
Does not name a specific indorsee, may be negotiated yb delivery alone.
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Restrictive indorsement
Contains a condition "for deposit only." If drawee does not follow the restrictuion then indorsor can recover for conversion.
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Holder in Due Course
- For value
- In good faith
- Without notice
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For value (requirement for HDC status)
- Must give value for the instrument.
- --A mere promise is not value
- --Old value is good value
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In good faith (requirement for HDC status)
Honesty in fact and the observance of reasonable commercial standards of fair dealing.
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Without notice (requirement for HDC status)
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
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When does the holder know or have reason to know of a problem that would bar "holder in due course" (HDC) status?
- 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
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The shelter rule
A transferee acquires whatever rights her transferor had.
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What are the benefits of holder in due course (HDC) status?
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
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What are the "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
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Material alteration
A change in the terms of the instrument.
A real defense.
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Fraud in the factum (real fraud)
There has been a lie about the instrument.
A real defense.
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