Commercial Paper

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BlasterGirl
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162389
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Commercial Paper
Updated:
2012-07-13 15:53:10
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HDC checks notes bearer order paper
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Commercial Paper
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  1. Define: Holder
    Define: HDC
    • Holder:
    • One in possession with right to enforce instrument.

    • HDC:  
    • Holder who takes for value, without notice of defenses and in good faith.
    • Value: performance of agreed-on consideration, acquisition of a SI in instrument, taking as payment of antecedent debt, trading negotiable instruments, giving instrument in exchange for incurring an irrevocable obligation to a 3P. 
    • Good Faith: Honesty in fact (subjective) and observance of reasonable commercial standards (objective). 
    • Notice: Both actual and constructive notice. Facts constituting notice: instrument overdue, unatuhorized signature, claims/defenses to instrument.
  2. Shelter Rule
    • A transferee acquires whatever rights her transferor had UNLESS parties to fraud.
    • Once someone becomes an HDC, all subsequent transferees are also HDCs.  
  3. V.     CLAIMS & DEFENSES 
      A. Real Defenses
           - prevents HDC from enforcing
           - may be asserted against an HDC
           - FAIDS
      B. Personal Defenses 
           - HDC may still enforce  
           - may NOT be asserted against an HDC.
    • Real Defenses:
    • (1) Forgery, Fraud in Factum, Alteration of Instrument, Incapacity to K, Infancy, Illegality, Duress, D/C in bankruptcy, SOL, Suretyship Defenses, D/C known to HDC.
  4. Real Defenses:
    (1) Forgery,
    (2) Fraud in Factum,
    (3) Alteration of Instrument,
    (4) Incapacity to K,
    (5) Infancy,
    (6) Illegality,
    (7) Duress,
    (8) D/C in bankruptcy,
    (9)SOL,
    (10) Suretyship Defenses,
    (11) D/C known to HDC
    • Forgery: If payee's indorsement forged, no one can become HDC b/c no one has rt to enforce. 
    • If drawer's indoresement forged, transferees may be holders b/c forgerer adopts that signature as his own.

    • Fraud Factum: Obligor didn't know what he was signing or it's essential terms.
    • Fruad Inducement: Personal defense.
  5. Real Defenses:
    (1) Forgery, 
    (2) Fraud in Factum, 
    (3) Alteration of Instrument, 
    (4) Incapacity to K, 
    (5) Infancy, 
    (6) Illegality, 
    (7) Duress, 
    (8) D/C in bankruptcy, 
    (9)SOL, 
    (10) Suretyship Defenses, 
    (11) D/C known to HDC
    • Alteration: HDC may collect original amount of altered terms (changing terms already on instrument). 
    • HDC may collect fradulently completed terms (left blank and wrongfully filled in). 
    • Maker liable for completed terms BUT NOT altered terms (b/c negligent in leaving blanks to be fraudulently filled in).
  6. Real Defenses:
    (1) Forgery, 
    (2) Fraud in Factum, 
    (3) Alteration of Instrument, 
    (4) Incapacity to K, 
    (5) Infancy, 
    (6) Illegality, 
    (7) Duress, 
    (8) D/C in bankruptcy, 
    (9)SOL, 
    (10) Suretyship Defenses, 
    (11) D/C known to HDC
    • Infancy: If defense to k law, real defense to comm paper.
    • Illegality: Even if HDC not involved, if underlying transaction renders obligation void, it's a real defense. 
    • Duress: If one party acts involuntarily in a k situation under extreme duress, i.e. gun pointed at head.
  7. Real Defenses:
    (1) Forgery, 
    (2) Fraud in Factum, 
    (3) Alteration of Instrument, 
    (4) Incapacity to K, 
    (5) Infancy, 
    (6) Illegality, 
    (7) Duress, 
    (8) D/C in bankruptcy, 
    (9)SOL, 
    (10) Suretyship Defenses, 
    (11) D/C known to HDC
    • D/C B'ruptcy: D/C of debt in insolvency is real defense.
    • D/C Known To HDC: Any type of D/C, not just from bankruptcy, is a real defense IF the HDC did not know about it (obligor already paid but transferor transferred anyway).
    • If notice of D/C, real defense.
    • If no notice of D/C, personal defense.
  8. Real Defenses:
    (1) Forgery, 
    (2) Fraud in Factum, 
    (3) Alteration of Instrument, 
    (4) Incapacity to K, 
    (5) Infancy, 
    (6) Illegality, 
    (7) Duress, 
    (8) D/C in bankruptcy, 
    (9)SOL, 
    (10) Suretyship Defenses, 
    (11) D/C known to HDC
    • SOL: 3 years for: (i) unaccepted checks, (ii) against issuers of cashier's/certified checks, (iii) conversion, (iv) breach of warranty, (v) to enforce other Art 3 rights.
    • 6 years for: (i) notes payable at definite time or on demand, (ii) C.D.s

    Suretyship (accomodation): If HDC knows of the accomodation, takes subject to the suretyship defenses. If no knowledge, does not take subject to.
  9. Personal Defenses:
    (1) Consideration
    (2) Defenses of Others
         [Thief --> X and X tries to enforce against Maker]
    (3) Simple K Defenses
    Consideration: Comm Paper must be supported by consideration. If it is not, it is a personal defense. 

    • Claims/Defenses of another: If payor pays with (i) knowldge payment is prohibited by injunction, (ii) knowledge instrument stolen or paying to someone in wrongful possession, or (iii) payor rcvd indemnity from a person with a claim to the instrument for refusal to pay person entitled to enforce instrument.
    • *NOTE: Theft defense MUST BE RAISED by payor or waived (and payment is enforceable). If payor knows holder obtained possession by theft or as a result of theft (thief transfers to holder), must raise defense to get out of paying.

    K Defenses: lack or failure of consideration, breach of warranty, fraud in inducement, HDC no notice of D/C, etc.)
  10. VI. TRIAL PROCEDURE
         A. Who may Enforce?
         B. Burden of Proof?
         C. Conversion
         D. Vouching in
    • Who may Enforce?
    • (i) a holder, (ii) a nonholder in poss w/rts of a holder, (iii) person not in poss but w/rts to enforce (lost, stolen).

    • BOP: Prima Facie case: (i) signatures are genuine, and (ii) person presenting instrument is entited to enforce it.
    •      Signatures: Presumption of validity. If not specifically denied, deemed admitted. 
    •      Defenses: Plaintiff who proves prima facie case entitled to payment unless defendant raises defense. If defense raised, plaintiff can cut off defense by raising HDC status.
    •      Lost, Stolen, Destroyed: Person entitled to enforcement may maintain action if can prove ownership, terms and facts preventing prodcution of instrument. May have to indemnify defendant (post bond) against other claims.
  11. VI. TRIAL PROCEDURE
         A. Who may Enforce?
         B. Burden of Proof?
         C. Conversion
         D. Vouching in
    • Conversion: One entitled to conversion may bring action for conversion unless never received delivery.
    • Vouching In: May "vouch in" parties who may be liable to defendant. Notice must be given to 3P.
  12. VII.     LIABILITY OF PARTIES
         A. Parties Potentially Liable
         B. Effect of Persons Signing Jointly
         C. Effect of Rep/Agent Signing
         D.  Effect of Unauthoirzed Signatures
         E. Effect of Alteration and Incomplete Instruments
    • A. Parties Potentially Liable: 
    • (1) Maker of Note, Issuer of Cashier's Check
    • (2) Indorser
    • (3) Transferor
    • (4) Drawer
    • (5) Drawee
    • (6) Acceptor
    • (7) Accomodation Parties
  13. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
         1 - presentment, 2 - dishonor, 3 - notice of dishonor
    (3) Transferor
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    Maker/Issuer: By signing name, k to pay terms as are at time issued. 

    • Indorser: Secondarily liable (after Maker/Drawee) on k or waranty.
    • (1) k obligationsPresentment, Dishonor, Notice of Dishonor. ( Needed only for k liability, irrelevant for warranty liability). 
    •      Presentment: Indorser liable if presented for payment.
    •      Presentment: Excused if: (i) cannot w/resonably diligence present (ii) maker repudiated ogligation to pay/dead/insolvent, (iii) unnecessary by terms, (iv) obligor waived, (v) drawer told drawee not to pay or drawee not obligated to pay. 
    •      Dishonor: Maker/Drawee doesn't pay on date due.
    •      Notice of Dishonor: Indorser not liable UNLESS given timely notice of dishonor (w/in 30 days).  Maker/Drawer need NOT be given notice.
    •      Notice not needed if: (i) not required by terms, (ii) obligor waives. 
    • (2) warranty obligations: (See transferor warranties)
  14. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
    (3) Transferor
         1 - transfer warranties (IDEA)
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    • Transferor Liability:  
    • Transferor: (i) one who transfers FOR CONSIDERATION.
    • *If no consideration, no trasnfer warranties but can still be liable under k as indorser if she indorsed. 
    • Transferred by Indorsement: warranties run to ALL subsequent transferees.
    • Transferred Other Than By Indorsement: Warranties run to IMMEDIATE transferee.

    Warranty Liability: CANNOT be restricted on checks. CAN be restricted by words on notes. 

    • Transferor Warrants That:
    • (1)  She is entitled to enforce instrument
    • (2) All signatures are authentic and authoirzed,
    • (3) Instrument has not been  altered
    • (4) No defense or claim is good against her, and
    • (5) She has no knowledge of any insolvency proceedings against maker/drawer.

    IDEA: Insolvency (none), Defenses (none), Entitled Enforcement, Authentic Authoirzed Alterations (none).
  15. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
    (3) Transferor
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    • Drawer: Secondary Liability
    • If check dishonored, drawer obligated to pay according to terms when signed (or, if incomplete check and is completed, as to completed terms) UNLESS check accepted by a bank.
  16. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
    (3) Transferor
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    • Drawee Liability:     D'er-->D'ee-->P'ee (check)
    • Drawee cannot have liability UNLESS it signs instrument (and therefore accepts check and becomes acceptor).
    •  
    • (1) Duties of Drawee Bank to Customer: 
    • Liable for failure to accept from cusomter if sufficient funds.
    • Bank must honor check AS DRAWN. Cannot charge account if: (i) no order to pay (Drawer's signature forged) (ii)  for more money than original order, (iii) bank pays wrong person (forger), (iv) if postdated and customer notifies bank.

    • (2) Duties Customer to Bank: Discover and notify bank of unauthoirzed payments due to alteration or forgery. 
    • (3) Death of Customer: Bank may pay until (i) knows of death and (ii) has reasonable time to act on knowledge. 

    (4) Subrogation: When bank pays, it is subrogated (substited for) to the rights of the person it paid against a customer. Bank assumes payees rights. If payee was HDC, bank has HDC rights. 

    • (5) Stop Pays: Oral = 14 days, Written = 6 months.
    • Not effective against Casher's checks.
    • If bank pays in violation of stop pay to HDC, customer no recourse b/c would've had to pay HDC anyway. 
    • (6) Bank's Rights vs. 3P: If bank erroneously pays forged instrument to HDC, may not recover from HDC UNLESS breach of transfer or presentment warranty.
  17. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
    (3) Transferor
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    • Acceptor:
    • One who signs a draft (usually drawee bank) and becomes primarily liable. According to terms upon acceptance. Called Presentment for Acceptance.
    • Ex: Certifying a check. Acceptance by a bank on which it was drawn. D/C drawer & all prior indoresees from liability. 
  18. A. Parties Potentially Liable: 
    (1) Maker of Note, Issuer of Cashier's Check
    (2) Indorser
    (3) Transferor
    (4) Drawer
    (5) Drawee
    (6) Acceptor
    (7) Accommodation Parties
    • Accommodation Party: Surety
    • Lends credit to another but receives no benefit. May sign in any  incapacity (co-maker, indorser)
    • Liability: NEVER to the party accommodated. To other parties in capacity signed for. To HDC, if HDC knows of accommodation, can raise suretyship defenses but liable in capacity signed. 
    • Payment: If accommodation party pays, has action against accommodated party. AND becomes subrogated to rights of payee.
  19. VII.     LIABILITY OF PARTIES
         A. Parties Potentially Liable
         B. Effect of Persons Signing Jointly
         C. Effect of Rep/Agent Signing
         D.  Effect of Unauthorized Signatures
         E. Effect of Alteration and Incomplete Instruments
    • B. Jointly & Severally Liable 
    • Either or both can be sued for entire amount. If 1 pays more than his share, entitled to contribution from other party.
  20. VII.     LIABILITY OF PARTIES
         A. Parties Potentially Liable
         B. Effect of Persons Signing Jointly
         C. Effect of Rep/Agent Signing
              (1) Liability of P
              (2) Liability of A
         D.  Effect of Unauthorized Signatures
         E. Effect of Alteration and Incomplete Instruments
    • Liability of Represented Person (Principal)
    • If A auth, P liable whether A signed own name or P name.
    • If A no auth, P liable if (i) ratification or (ii) estoppel (P negligent). 
    • Liability of Representative (Agent)  
    • Depends on whether P's ID disclosed
    • (1) A signs only P's name: P liable if A auth but A not liable cuz A name not on instrument. 
    • (2) A signs A name but P disclosed: If A auth, P liable and A not liable IF signature shows it was on behalf of P.
    • (3) A signs A name and P not disclosed: If signature does not show agency r-ship, A liable to HDC w/o notice but NOT liable to non-HDC if A&P did not intend for A to be liable. 
    • (4) Checks: A w/auth to sign on P's check not liable.
  21. VII.     LIABILITY OF PARTIES
         A. Parties Potentially Liable
         B. Effect of Persons Signing Jointly
         C. Effect of Rep/Agent Signing
         D.  Effect of Unauthorized Signatures
         E. Effect of Alteration and Incomplete Instruments
    • Effect Unauth Sign:
    • Unauth signature ineffective as signature of person whose name is signed but effective as the signature of the signer. Therefore, signer assumes all obligations to any party who gave value. 
    • Unauth Sign Validated
    • (1) Fictitious Payee
    • (2) Fraudulent Indoresements by Employees
    • (3) Failure to Exercise Ordinary Care
    • (4) Bank Statement Rule
    • (5) Estoppel by Certification
  22. Unauth/Forged Signature Validated When:
    (1) Fictitious Payee
    (2) Fraudulent Indorsements by Employees
    (3) Failure to Exercise Ordinary Care
    (4) Bank Statement Rule
    (5) Estoppel by Certification
    • (1) FP: Carelessness of maker/drawer making forgery of payee's name likely. PASSES right to enforce!
    • (2) FIE: If employer entrusts employee and emp'ee fraudulently indoreses, it is effective.
    • (3) FEOC: If failure contributes to alteration or forged signature, person is estopped from raising alteration or forgery defense.
    • (4) BSR: Failing to examine is negligent and can preclude defenses .
    • (5) EC: A bank that certifies a check is estopped from claiming named payee was not original payee.
  23. VII.     LIABILITY OF PARTIES
         A. Parties Potentially Liable
         B. Effect of Persons Signing Jointly
         C. Effect of Rep/Agent Signing
         D.  Effect of Unauthorized Signatures
         E. Effect of Alteration and Incomplete Instruments 
    • Effect Alteration and Incomplete Instruments:
    • (1) Nonfraudulent Alterations: DO NOT d/c  parties and instrument enforceable as to ORIGINAL terms.
    • (2) Fraudulent Alterations: D/C all parties EXCEPT payor bank, or drawee. HDC may enforce (i) alteration as to original terms, or (ii) unauthoirzed completion as to completed terms.
  24. VIII.     PAYMENT
         A. When Can Maker Safely Pay?
              1 - Is person a holder?
              2 - 3P Protecting Claim
              3 - Do Not Pay if Theft
         B. Finality of Payment 
               1 - Presentment Warranties
    • (1) If party seeking payment is a holder, maker may safely pay. If pay non-holder, must also pay true holder if they so demand.
    • (2)  3P can protect claim by (i) indemnifying maker, (ii) seeking injunction in action in which maker/holder/3P are parties. 
    • (3) Maker may not pay if k nows holder acquired by theft or was transferred instrument by theft. If HDC, may pay.
  25. VIII.     PAYMENT
         A. When Can Maker Safely Pay?
              1 - Is person a holder?
              2 - Actions of 3P
              3 - Do Not Pay if Theft
         B. Finality of Payment 
               1 -Presentment Warranties
    Finality: Payment of neg instrument is final EXCEPT that: (i) payor can pursue those who breached transfer warranties; and (ii) holder did not take for value or in GF.

    • (1) Presentment Warranties: 1- made to drawees, or 2-those made to payors (those obligated to pay):
    •  (i) warrantor is entitled to enforce check (no unauth sign)
    • (ii) check not altered
    • (iii) warrantor has no knowledge that drawer's sign unauth.
    • *Note: Forged indorser's signature destorys good title BUT forged drawer's signature does NOT.
  26. IX.     DISCHARGE:
    A. In General
         1-Accord & Satisfaction
    B. D/C By Payment
    C. D/C By Tender of Payment
    D. D/C By Cancellation or Renunciation
    E. D/C By Impairment of Recourse or Collateral - Suretyship Defenses
    F. D/C By Reacquistion
    G. D/C By Any Act D/C'ing a Simple K
    H. D/C By Delay in Presentment of Check
    I. D/C By Failure to Give Notice of Dishonor
    J. D/C By Acceptance of Check By Bank
    K. D/C By Alteration 
    • In General: D/C of a party is a personal defense. Not effective against HDC unless HDC knows of it. 
    • Accord & Satisfaction: 

    Payment: Liaiblity of party D/C to extent of payment (satisfaction) UNLESS payor knows stolen or knows in wrongful possession. 

    Tender: Tender governed by k law. (Tender=to offer or present something formally). Tender of amount due d/c duty to pay interest.

    Cancellation: One entitled to enforce may D/C party by (i) intentional voluntary acts (surrending instrument, striking out name), or (ii) renouncing rights in signed writing. 
  27. IX.     DISCHARGE:
    A. In General
    B. D/C By Payment
    C. D/C By Tender of Payment
    D. D/C By Cancellation or Renunciation
    E. D/C By Impairment of Recourse or Collateral -
    Suretyship Defenses
    F. D/C By Reacquisition
    G. D/C By Any Act D/C'ing a Simple K
    H. D/C By Delay in Presentment of Check
    I. D/C By Failure to Give Notice of Dishonor
    J. D/C By Acceptance of Check By Bank
    K. D/C By Alteration 
    Suretyship Defenses: D/C'ed to extent of loss caused by modification of obligation. Impairment: (i) a SI not perfected, (ii) collateral released w/o obtaining substitute collateral, (iii) failure to perform acts required to preserve collateral's value, (iv) failure to dispose of collateral as law requires. 

    Accommodation Party not D/C UNLESS holder knows of accommodation. 
  28. IX.     DISCHARGE:
    A. In General
    B. D/C By Payment
    C. D/C By Tender of Payment
    D. D/C By Cancellation or Renunciation
    E. D/C By Impairment of Recourse or Collateral -
    Suretyship Defenses
    F. D/C By Reacquisition
    G. D/C By Any Act D/C'ing a Simple K
    H. D/C By Delay in Presentment of Check
    I. D/C By Failure to Give Notice of Dishonor
    J. D/C By Acceptance of Check By Bank
    K. D/C By Alteration 
    Reacquisition: Transfer to former holder, reacquier may cancel indoresements made after her transfer and cancels liability. 

    K: D/C by acts/agreement that would D/C obligation to pay $ under k.

    Delay in Presentment: In not presented w/in 30 days, indorser is D/C.

    Failure to Give Notice: Indorser is D/C from indorsement obligation.

    Acceptance by Bank: Drawer and indorser are D/C.

    Alteration: Fraudulent alterations D/C every party but HDCs may enforce as to original terms (or if fraudulently completed, as to completed terms). 

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