Commercial Paper

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eastmabl
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305048
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Commercial Paper
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2015-07-17 20:03:15
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  1. Note.
    A note is a two-party instrument characterized by a promise to pay.
  2. Maker
    The person making the promise to pay.
  3. Payee
    The person to whom the instrument is payable.
  4. Certificate of deposit
    A common type of note where the bank acknowledges receipt of money and the bank promises the payee to repay the money.
  5. Draft.
    A draft is an order to pay money. Drawer is person ordering payment. Drawee is person being ordered to pay. The payee is the person to whom the instrument is payable. A check is a common type of draft.
  6. Check.
    A check is draft to pay money. The bank is the drawee and the instrument is payable on demand.
  7. Traveler’s check.
    A draft which must be countersigned by a person whose specimen signature appears on the traveler’s check.
  8. Cashier’s check.
    A draft where the drawer and drawee are the same bank.
  9. Teller’s check.
    A check drawn by one bank on another bank.
  10. Contradictory terms.
    If an instrument contain contradictory terms, handwritten trumps typewritten, typewritten trumps printed, and words prevail over numbers.
  11. Negotiable Instrument.
    In order for Article III to apply, the writing must be a negotiable instrument. Seven requirements for a negotiable instrument.
  12. NI: In writing and signed by maker/drawer.
    • A negotiable instrument cannot be oral, but must be reduced to a tangible form.
    • Signed includes any executed or adopted with the present intention to adopt or accept a writing.
    • Very broad, such as a signature which is written, printed, stamped, written thumbprint, trade or business name or computer generated.
  13. NI - Unconditional order to pay.
    • No conditions to payment are permitted, including making payment subject to another writing (“subject to”).
    • A mere reference to another document does not make it condition (“in accordance with”).
    • Payment from a particular fund does not render a promise conditional. A requirement of a countersignature does not render an instrument non-negotiable.
    • References to other records regarding rights as to collateral, prepayment or acceleration do not make the promise to pay conditional
  14. NI - Fixed payment obligation.
    • Principal amount due must be a fixed amount of money.
    • Interest can be variable.
  15. NI - Payable to order/bearer.
    A negotiable instrument must be payable to an order or a bearer instrument.
  16. Order instrument
    • Payable to a specific person.
    • Requires specific person and specific language of negotiability - pay to the order of.”
  17. Bearer instrument
    • An instrument that does not attempt to pay a specific instrument.
    • Payable to: bearer, order of bearer, cash, or payee line left blank.
  18. Doubts between order/bearer
    When in doubt between order and bearer instrument, the instrument is treated as a bearer instrument.
  19. NI - Payable on demand or at a definite time.
    • A writing must be clear as to when the one required to pay on the instrument must do so.
    • Must be readily ascertainable.
    • May be payable on demand (at any time, typically a check) or at a definite time (at a specific time, typically notes). May include acceleration or an extension clauses.
  20. NI - Obligation only to pay money.
    • The writing must only commit the obligor to one legal obligation – to pay money.
    • Promises concerning collateral and provisions that allow a holder to procure judgment.
  21. Holder Status.
    • A person can become a holder in two ways -– issuance or negotiation.
    • A holder has special rights under Article 3.
  22. Issuance.
    • The first delivery of an instrument.
    • The maker/drawer gives the money to the payee.
  23. Negotiation.
    • Transfer of possession, whether voluntary or involuntary, by a person other than the issuer to a person who becomes a holder.
    • Negotiation of a bearer instrument requires transfer of possession.
    • Negotiation of an order instrument requires transfer of possession plus a proper indorsement of the instrument.
  24. Special indorsement
    An indorsement to another.
  25. Blank indorsement
    An indorsement not made a specific person.
  26. Qualified indorsement
    An indorsement made with limitations on liability. “Without recourse.”
  27. Restrictive indorsement
    • Used to limit what a holder can do.
    • Can limit how the instrument can be used, but may not place conditions on the transfer.
  28. Multiple payees on an instrument.
    • If payable jointly, all payees are required to indorse for valid negotiation.
    • If payable severally, either party can sign the instrument for a valid negotiation.
  29. Holder in Due Course.
    • To become a holder in due course, one must:
    • (1) acquire status as a holder,
    • (2) pay value for the instrument and
    • (3) take the instrument in good faith and without notice that there are problems which might affect the obligor’s obligation to pay.
  30. HDC - Value.
    • A person must give/do/forgive something of value.
    • A gift is not value, and neither is unexecuted promises to perform.
    • Executed promises to perform and paying less than the note’s full face value is permissible.
    • Partial performance grants partial rights. Forgiving a preexisting obligation (amnesty of debt) constitutes value.
  31. HDC - Good Faith.
    Subject to subjective (honesty in fact) and objective (observance of reasonable commercial standards of fair dealing) scrutiny.
  32. HDC - Without Notice.
    • Actual notice, notice through the mail and constructive notice.
    • Types of infirmities include (1) notice of claim in recoupment, (2) notice of forged/altered/irregular instrument, and (3) overdue instrument (checks 90 days, instruments the day after the due date).
  33. Consumer Notes
    • Regulated by the FTC.
    • A notice must be placed on a negotiable instrument, as required when (1) for a consumer transaction (2) for sale or lease of goods or services and (3) seller sells the goods within ordinary course of business.
  34. Transfer of Instrument.
    An instrument’s movement other than by the maker/drawer for the purpose of giving the person receiving it the right to enforce the instrument.
  35. Shelter Rule.
    • Whatever rights that the transferor had now transfer to the transferee.
    • Focus on previous party’s HDC status.
    • Does not protect a transferee who commits fraud or engages in illegal activity as it relates to the instrument.
  36. Right to Transferor’'s Indorsement.
    When a transferee pays value for an instrument and a transferor fails to provide a necessary indorsement, the transferee has the legal right to have the transferor provide the indorsement to complete the negotiation.
  37. Transfer Warranties.
    • A breach of any of the following five warranties makes a transferor liability to the transferee.
    • 1. Right to Enforce the Instrument
    • 2. Authentic and Authorized Signatures
    • 3. Unaltered Instrument
    • 4. No defenses or claims
    • 5. No knowledge of insolvency proceedings
  38. Courtroom Enforcement - Prima Facie Case.
    • A plaintiff must prove that (1) the plaintiff is the person entitled to enforce the instrument and (2) that the signatures on the instrument are valid.
    • A person entitled to enforce is a holder, a non-holder in possession with rights of the holder, and person not in possession but with the right to enforce (lost/stolen).
    • Signatures are accepted as valid unless specifically denied in the pleadings. Burden is on the party claiming validity.
    • An issuer or an acceptor cannot bring a case – they have other rights.
  39. Courtroom Enforcement - Lost/Destroyed/Stolen Instrument.
    • A plaintiff has a right to enforce an instrument even if it was lost or stolen.
    • Loss of instrument cannot be due to transfer of instrument, and holder cannot reasonably obtain possession of the instrument.
  40. Courtroom Enforcement - Conversion.
    • Wrongful deprivation of another’s instrument when taken by transfer from a person not entitled to enforce the instrument or receive payment.
    • Damages are the amount payable on the instrument.
  41. Real Defenses
    Available against holders and holders in due course.
  42. Real Defense of Infancy.
    RD. If not 18, a note or draft is voidable by minor. Unlikely in MD.
  43. Real Defense of Incapacity.
    RD. If contract with incapable person is void (not voidable). Unlikely in MD.
  44. Real Defense of Duress.
    RD. When MD state law would make a contract void due to duress.
  45. Real Defense of Illegality.
    RD. When MD state law would make contracts related to gaming void.
  46. Real Defense of Fraud in the Factum.
    RD. (1) Signer is unaware that he is signing a negotiable instrument and (2) did not have a reasonable opportunity to become aware.
  47. Real Defense of Bankruptcy.
    RD. If obligor’s debts have become discharged through bankruptcy.
  48. Real Defense of Alteration & Forgery.
    RD. If a reasonable person would question the authenticity of the negotiable instrument.
  49. Real Defense of Statute of Limitations.
    • RD.
    • For unaccepted drafts, claims must be brought within 3 years of dishonor or 10 years from the date of the draft – whichever is earlier.
    • For other kinds of checks, within 3 years from demand for payment.
    • For notes payable at a definite time, 6 years from the due date.
    • For notes payable on demand, within 6 years after demand for payment.
  50. Personal Defenses
    Only effective against those with holder status. Not a defense to a HDC.
  51. PD: Fraud in the Inducement.
    Signer is aware that he is signing a negotiable instrument but signer is induced based upon misrepresentations.
  52. PD: Issuance.
    When a drawer does not issue the check to the payee.
  53. Contractual Defenses.
    Any contractual defense also applies – breach of contract/warranty, failure of consideration, etc.
  54. Claims in Recoupment.
    An offset against an amount owed on a draft/note which arises from the same transaction or occurrence.
  55. Instruments Issued to Impostors.
    • Issuers must be careful to whom they issue instruments, as an issuer may be liable on an instrument even in the event of fraud.
    • In the event of a party misrepresenting his identity to the drawer, the risk of loss is on the drawer, who is in the best position to control to whom he issues the instrument.
  56. Instruments Payable to Fictitious or Unintended Payees.
    The drawer is responsible for the instruments that an employee or officer with check-writing abilities makes an instrument to fictitious payee or converts an instrument to a real payee to his own use.
  57. Employer’s Liability for Employee’s Fraudulent Indorsement.
    An employer bears the risk of loss for an employee with check-writing privilege who forges indorsements.
  58. Benefitted Parties.
    • A party, such a bank or a purchaser for value, who takes a fraudulent instrument.
    • These benefitted parties will not be responsible for the fraudulent nature of the instrument except where the benefitting parties fail to exercise ordinary care in taking the instruments which substantially contributes to a loss resulting from the payment.
  59. Alterations.
    • An unauthorized modification of an instrument by either words or numbers.
    • The result obligor is discharge on the instrument, although a payor bank, drawee or HDC can enforce rights with respect to the instrument according to the original terms.
  60. Incomplete Instruments.
    • When there is a signed writing where the maker leaves key information blank with the intent to complete the information later.
    • Authorized completions are enforceable, but the obligor is discharged on the instrument from unauthorized completions.
    • A payor bank or HDC can enforce the instrument as completed. Must be signed.
  61. Presentment & Dishonor
    • A demand for payment made to a maker or drawee by person entitled to enforce the agreement must be honored when presented.
    • If presented but dishonored, this is a precondition for liability of other parties to the instrument.
  62. Presentment Excuses.
    • (1) Presenter cannot locate the person liable to whom presentment must be made,
    • (2) maker/acceptor has repudiated the obligation to pay,
    • (3) instrument’s terms do not require presentment,
    • (4) drawer/indorser has waived presentment requirement, or
    • (5) drawer has instructed drawee not to pay the instrument.
  63. Presentment Warranties.
    • Presentor warrants:
    • 1. Warrantor is entitled to enforce.
    • 2. Draft has not been altered.
    • 3. No knowledge that a drawer’s signature is unauthorized.
  64. Parties to the Instrument - Maker’s Liability.
    A maker has primary liability and must pay the instrument when it comes due.
  65. Parties to the Instrument - Drawer’s Liability.
    A drawer has secondary liability, and liability ripens only upon dishonor.
  66. Parties to the Instrument - Drawee’s Liability.
    • A drawee is not legally obligated on the instrument unless the drawee signs the instrument for the purpose of accepting liability on the instrument.
    • Generally, this makes the bank’s liability to the bank customer who deposits money in the bank.
  67. Parties to the Instrument - Acceptor’s Liability.
    The drawee’s signed agreement to pay a draft as presented.
  68. Parties to the Instrument - Indorser’s Liability.
    • By indorsing an instrument, you agree to pay the instrument in the event that the one who has primary liability does not pay.
    • Ripens open (1) dishonor of the note and (2) notice to the indorser. Signers have joint and several liability.
  69. Properly payable rule.
    • A bank is obligated to honor a check which is properly payable.
    • Customer must have sufficient funds in his account. If altered, bank may only charge account for the original amount. Postdated check may be paid unless the customer timely notifies the bank.
  70. Wrongful Dishonor.
    A customer may sue a bank for damages proximately caused by the bank’s failure to honor a properly payable check.
  71. Duty to Inspect a Bank Statement.
    A customer must exercise reasonable care and promptness in inspecting a bank statement to discover unauthorized payments resulting from a forged signature or alteration.
  72. Customer’s Right to Stop Payment.
    • A customer may stop payment on a check.
    • An oral stop payment is valid for 14 days, while a written stop payment is valid for 6 months.
  73. Accommodation Parties.
    • An accommodation party is a surety to an instrument.
    • Due to SOF, an accommodation party must sign the instrument.
    • Accommodation party cannot be direct beneficiary of the value given.
    • Accommodation party’s liability depends upon the capacity in which they sign.
    • The accommodation party is entitled to reimbursement from the maker (full repayment), contribution from co-accommodation parties (pro-rata), and same defenses that the accommodated party would have.
  74. Agent’s Signature on Negotiable Instruments - Principal’s Liability.
    • A principal is not bound by the NI if the agent did not have authority to sign on the principal’s behalf.
    • Principal may nevertheless ratify the agent’s unauthorized signature if he adopts the signature or fails to deny the signature.
    • The principal may be estopped from denying liability against a HDC if the principal negligently contributed to the agent’s unauthorized signature.
  75. Agent’s Signature on Negotiable Instruments - Agent’s Liability.
    • An authorized agent is not liable for the principal’s signature when he clearly indicates that he is signing in his capacity as an agent.
    • An authorized agent who signs his own name but does not clearly indicate his representative capacity or identify the principal has personal liability to the HDC who takes instrument without notice of agency; for a regular holder, not liable if he can establish that the parties never intended the agent to be personally liable.
    • An unauthorized agent is bound by signing an instrument when the agent did not have authority to act on the principal’s behalf by signing the instrument.
  76. Unauthorized Signatures.
    Generally, a person is not liable on the instrument unless that person signed the instrument. A person who signs the instrument is generally liable on that instrument regardless of whether the signature was authorized.
  77. Forged Maker’s Signature.
    A person whose signature was forged is not liable. A person who forged the signature is laible.
  78. Forged Drawer’s Signature.
    A person whose signature was forged is not liable. A person who forged the signature is liable.
  79. Forged Indorser’s Signature.
    A person whose signature was forged is not liable. A person who forged the signature is liable.
  80. Payment by Mistake.
    • May occur when a drawee pays an instrument subject to a stop payment order, or the instrument contains a forged drawer’s signature.
    • Article 3 allows the drawee to seek restitution when (1) drawee pays on a check on the mistaken belief that the drawer’s signature was an authorized signature, or (2) drawee pays a check on the mistaken belief that a stop payment order had not been issued.
    • Restitution may not be recovered for a mistaken payment from a good faith purchaser for value or a person who in good faith changed position in reliance on the payment.
  81. Discharge.
    • In most NI transactions, there are two obligations – (1) underlying obligation and (2) NI itself.
    • When a certified/cashier/teller’s check is taken for obligation, the underlying obligation is discharged.
    • When uncertified check/note is taken, underlying obligation is suspend. It is discharged upon honor, or breached upon dishonor.
  82. Discharge - Lost instrument.
    One entitled to enforce the instrument who has lost the instrument may only sue on the instrument.
  83. Discharge by tender of payment.
    • When a person tenders payment, interest after the due date is discharged.
    • When a person tenders payment and is refused, indorsers and accommodation parties are discharged.
  84. Impairment of collateral.
    If a party’s obligation to pay an instrument is secured by collateral and the person entitled to enforce the instruments impairs the value of the interest of the collateral, then indorsers and accommodation parties are discharged.

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