Chapter Fifteen -- Commercial Paper

Types of Negotiable Instruments

Order Paper Promise Paper

Holders in Due Course

certain holders of negotiable instruments get special rights; a holder in due course of a negotiable instrument takes it free of most contract defenses Three requirements to become a holder in due course: 1. takes the instrument for value, 2. in good faith and 3. without notice of defenses

Order Paper

contains an order by one person for another to pay a sum of money; there are three parties involved 1. Drawer- person signing the order paper 2. Drawee- person or entity ordered to pay 3. Payee- the person who is originally to be paid under the instrument , payee made be named or unnamed

Negotiate

act of transferring ownership of negotiable instrument, when you transfer a negotiable instrument to someone else you have negotiated

Forged Endorsements

endorsements created when one party supplies the signature of another party without permission; forged endorsement may be any type of endorsement primary effect of an endorsement has to do with liability; first the forger now has primary liability on the instrument, second, the person who took the instrument from the forger bears the loss if the forger does not pay

Qualified Endorsements

endorsements in which the endorser includes the words "without recourse" prior to the signature, eliminating endorser secondary liability

Without Notice

holder had no knowledge at the time the instrument was received that there was an available defense to payment

Joint Payees

instrument is payable to the first payee AND the second payee, so both must endorse the document for proper negotiation; prevents claim by one of the payees that they were not properly protected by the drawer or maker EX: pay to the order of Mr. and Mrs. Smith

Alternative Payee

instrument is payable to the first payee OR the second payee, so either party may endorse the instrument instrument in order to negotiate it

Words of Negotiability

instrument must be "payable to order or to bearer": these are the words of negotiability

Draft

order issued by a drawer for a drawee to pay a payee

Bearer Instrument

negotiable instrument payable to bearer or to cash; can happen one of two ways: 1. either the instrument is originally payable to bearer or to cash 2. becomes a bearer instrument when the an endorser signs their name only, without an endorsee

Order Instrument

negotiable intstrument payable to a named payee or endorsee, and signature of holder is required to transfer the instrument after the first delivery

Multiple Payees or Endorsees

note or check provides for more than one payee, or an endorsement names more than one endorsee

Good Faith

person is acting honestly in a certain transaction

Secondary Liability

person is obligated only if another person defaults

Holder

person properly in possession of a properly transferred negotiable instrument; person who has possession and title to a check or promissory note is the holder

Promissory Note

promise by maker to pay a sum of money to payee at a future time; another term for generic promise paper

Promise Paper

promise of one party to pay another; two parties involved: 1. Maker- person who promises to pay 2. Payee- person who is originally to be paid

Commercial Paper

refers to a class of documents which can be easily transferred from one person to another; most common item of commercial paper is a check

Definite Time Requirement

requirement that payment must be due on demand or a definite time; if a note or draft is not payable on demand, then it must be payable at a definite time in the future, can be accomplished by: 1. state a time or date when the instrument is payable 2. stating a period of time after which the payment is due

Certain Sum of Money Requirement

requirement to pay a certain sum of money, or as lawyers and the UCC say, a sum certain in money; requirement means that one must be able to ascertain from the face of the instrument the minimum amount due; certain clauses in a promissory note which alter the amount due do not affect negotiability ; must be paid in money only, not commodities such as gold or silver

Restrictive Endorsements

restrict the rights of the endorsee to collect on the instrument; most common type is "for deposit only" Conditional endorsements place a specific condition upon the right to the endorsee to collect on the instrument trust endorsement endorses the instrument to a trustee who must collect on behalf of a beneficiary

Special Endorsement

signature of the holder naming an endorsee, stating that a certain person be paid; once an instrument with a special endorsement is delivered, it is an order instrument

Endorsement

signature of the holder on the back of the instrument, followed by the delivery of he instrument to the intended recipient; person signing the endorsement is the endorser ; person to whom the instrument is endorsed is the endorsee

Blank Endorsement

signature of the holder without a named endorsee; once a instrument with a blank endorsement is delivered, it is a bearer instrument regardless of what is was before

Certificate of Deposit

special type of promise paper: it is a note of bank acknowledging a deposit and promising to repay at future time with interest

Types of Endorsements

1. Blank Endorsement 2. Special Endorsement 3. Qualified Endorsement 4. Restrictive Endorsement 5. Forged Endorsements

Six Requirements for Negotiability

1. Instrument in writing 2. Signed by the maker or drawer 3. Containing an unconditional, unequivocal promise or order to pay 4. Certain sum of money 5. Due on demand or at a definite time 6. Containing words of negotiability

Negotiable Instrument

document for negotiability which meets all six requirements under Article 3 of the UCC

Check

draft payable on demand in which a bank is the drawee

Negotiation

legal transfer of title to a negotiable instrument; all negotiable instruments require: 1. Delivery from the original maker or drawer to the payee or first intended recipient is sufficient to negotiate the instrument and transfers legal title After the first delivery, negotiation may be done one of two ways: 1. if the instrument is a bearer instrument, the current holder is neither a named payee nor a named endorsee, then physical delivery alone is still sufficient of negotiation 2. If the instrument is an order instrument, then the current holder is either a named payee or a named endorsee, and both physical delivery and the provision of a necessary endorsement is required to negotiate the instrument

For Value

means that the holder pays past or present consideration

Signed Writing Requirement

must be in writing, must be signed by the maker or drawer (Maker=promise paper; Drawer=order paper)

Definite Promise or Order Requirement

must contain an unconditional, unequivocal promise or order to pay; written acknowledgement of a debt is not enough to be a negotiable instrument

Endorsements

the signature of current holder, usually on the back of the instrument, for the purpose of transferring a negotiable instrument to an endorsee

Defenses against Holders in Due Course

two rules regarding the availability of defenses against a holder in due course: a holder in due course takes free of personal defenses, and a holder in due course takes subject to real defenses Personal defenses include breach of contract, or breach of warranty, fraud in the inducement, and failure of consideration; do not work against HDC actual defenses include bankruptcy, or incapacity, fraud in the execution, duress, and forgery Federal law states that the rules protecting holders in due course do not apply in consumer transactions

Endorser Liability

typically secondarily liable on the instrument EX: check paid to you, you endorse it to someone else, you are responsibility to pay them if first party does not pay