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Commercial Paper - New York Bar


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What is the bright line rule for commercial paper transactions?
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
What is a promissory note?
Will say: “I promise to pay to the order of Cameron Diaz FIFTY THOUSAND DOLLARS” and will be signed

Contains an AFFIRMATIVE PROMISE TO PAY and not just a mere IOU.

Two Parties:
1. The promisor is called the MAKER
2. The promisee is called the PAYEE
What is a draft?
Will basically look like a check (because it is a check)

It contains an ORDER or a COMMAND
Three parties:
1. The DRAWER gives the order
2. The DRAWEE is ordered to do the paying (usually the bank)
3. The PAYEE is the beneficiary of the order (the entity who gets to collect)
What is an indorser?
Appears in the context of promissory notes and checks. The indorser signs on the back.
How do you tell whether the writing is a negotiable instrument (promissory note or draft) rather than just a contract?
To qualify as a negotiable instrument, remember WOSSUPP:
1. Writing
2. payable to Order or bearer
3. Signed by maker or drawer
4. Sum Certain
5. Unconditional promise and no additional promises
6. Payable on demand or at definite time
7. Payable in currency
What is required for an instrument to qualify as a negotiable instrument rather than a contract?
The instrument must be signed by maker if it is a promissory note or by the drawer if it’s a draft.

Any authentication, found anywhere on instrument, qualifies - could be initials, defining mark, or nickname found anywhere on paper – not a formal standard.

**The instrument must contain an UNCONDITIONAL PROMISE to qualify as a promissory note or UNCONDITIONAL ORDER to qualify as a draft.
What does it mean to require a SUM CERTAIN?
To be negotiable, the instrument must state a SUM CERTAIN or FIXED AMOUNT, meaning a specifically ascertainable sum – you must be able to calculate how much is to be paid, either from what the writing says or from reference to an outside source.

Calculation of interest rate may be ascertained by a reference in the instrument to a generally accepted commercial or financial index, compendium of interest rates, or announced rate of named financial institution
What does it mean that the sum certain must be paid in currency?
Currency means money, money includes foreign currency, money does NOT mean goods
What does it mean for an instrument to be payable "on demand" or at a "definite time"?
On demand – an instrument is payable on demand when it specifically states that it is payable “on demand” or “on sight” or “on presentation.” If instrument is SILENT as to the time of payment, it is still negotiable and payable on demand.

Definite time: an instrument is payable at a definite time if, by its terms, it is payable on or before a stated date or at a fixed period after a stated date. Acceleration clauses are permissible, and do not destroy negotiability.
What does it mean for a negotiable instrument to be payable "to order" or "to bearer"?
Payable to Order: to be negotiable, the note or draft must use the word “order” or the word “assigns” in connection with the payee’s name.

Payable to Bearer: If the instrument is not payable to order, then to be negotiable it must be payable to bearer, meaning that it is payable to anyone who has it.

**Pay to cash or pay to the order of case are Art. 3 terms of art that will satisfy the standard.
What is contract or signature liability?
Basic Concept: Here, our D signed the negotiable instrument. Remember: when you sign it, you promise to pay it
When can the maker of a promissory note be sued in contract or signature liability?
The maker, merely by signing his name to the instrument, enters into a contract, whereby he agrees to pay the instrument. If he fails to pay, he can be sued
When can the indorser of a draft be sued in contract or signature liability?
By signing the back, the indorser says that if the check bounces, and he is notified, he will pay.

If the indorser does not honor his promise, he can be sued
When can the drawer of a draft be sued in contract or signature liability?
By signing the check, the drawer promises that if it bounces, and he is notified, he will pay.

If the drawer fails to do so, he can be sued.
When can the drawee (bank) be sued in contract or signature liability?
Doesn’t sign, so not liable under signature liability
What do the words "without recourse" mean when accompanying a signature?
Represents a disclaimer of liability – passes title but assumes no signature liability

It’s a term of art used by INDORSERS and DRAWERS
What is warranty or transfer liability?
Think of this as a seller’s liability for selling a defective product
Who can be sued in warranty or transfer liability?
Any transferor who SELLS the negotiable instrument – any transferor who is not a donor
Who is entitled to sue in warranty or transfer liability?
If D indorsed the instrument (i.e. signed on the back), any P in possession of the instrument may sue. When defendant indorses, warranties run with the instrument.

If D did not indorse the instrument, then only the D’s immediate transferee may sue – warranties will not run with the instrument
What are the five warranties made by the defendant in a negotiable instrument transaction?
2. D promises that all SIGNATURES ARE GENUINE AND AUTHORIZED (forgery = breach of warranty)
3. D promises that the instrument has not been MATERIALLY ALTERED. When the facts tell you instrument has been tampered with, it is DEFECTIVE.
4. D promises that there’s no defense or claim good against defendant, meaning instrument is ENFORCEABLE.
5. D promises that she has no knowledge of any bankruptcy or insolvency against the maker or drawer
How is a negotiable instrument properly transferred?
Due negotiation or “duly negotiated” means that there has been PROPER TRANSFER of the instrument. If the instrument has been properly transferred, the transferee is a holder and may be eligible to be a HOLDER IN DUE COURSE. By contrast, if the instrument has been improperly transferred, the transferee is not a holder and cannot qualify as a holder in due course.
What does it mean when an instrument says "payable to order"?
When an 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 payee INDORSE THE INSTRUMENT and DELIVER IT TO TRANSFEREE.

**The indorsement must be authorized and valid.
What does it mean when an instrument is "payable to bearer"?
If instrument is payable to bearer, indorsement is not required.
What are the different types of indorsements?
Every indorsement must be either SPECIAL or BLANK, RESTRICTIVE or UNRESTRICTIVE

1. Special indorsement: one that names a specific person as “indorsee” – the indorsee must sign in order for the instrument to be further negotiated
2. Blank indorsement: one that does not name a specific indorsee – may be negotiated by DELIVER ALONE
3. Restrictive indorsement contains a condition – “For deposit only”
What is a holder in due course?
A holder in due course is one who takes the instrument:
1. for value; and
2. in good faith and
3. without notice that it is overdue or has been dishonored or is subject to any defense or claim.
What does "value" mean for a holder in due course?
The holder must give value for the instrument. Note that giving value does NOT mean giving consideration, which is a contract principle.

Consideration and value differ in two important ways:
1. A mere promise is not value.
2. Old value is good value
What does "good faith" mean for a holder in due course?
Good faith means honest in fact (a SUBJECTIVE test, sometimes referred to as the rule of the pure heart and the empty head)
What does it mean for a holder in due course to take without notice?
The holder must acquire the instrument without notice that it is overdue, has been dishonored or is subject to any defense or claim.

**The notice requirement imposes an OBJECTIVE test. It asks, did the holder KNOW OR HAVE REASON TO KNOW OF THE PROBLEM?
What are different ways a holder can be on notice that an instrument is overdue?
If the holder has notice or reason to know that the instrument should already have been paid, he or she is not a holder in due course.

1. Payable at definite time – date of payment on instrument specifically says an earlier date than date of transfer
2. Principle in arrears: If holder had notice that a payment or more of principal is in arrears, he or she can’t qualify as an HDC.
3. **Interest in arrears: If holder takes with notice that one or more payments of INTEREST are in arrears, he can nonetheless qualify as an HDC
How will the appearance of an instrument give notice of any defense or claim against the instrument's enforcement?
If the instrument is stamped PAID or VOID, then the face of the instrument tells you something is wrong
If an instrument is lost or stolen from the true owner, can a subsequent transferee get holder in due course status?
Transferee could still qualify as a holder in due course if the instrument has been duly negotiated and transferee did not have notice or reason to know of theft or loss.
If a fiduciary has negotiated the instrument in breach of his or her fiduciary duty, is notice required of the breach?
This is the only time actual knowledge matters – if the transferee did not actually know of the breach, then he may still be a holder in due course
What are the benefits of holder in due course status?
A holder in due course (and subsequent transferees who take “shelter” in that status) takes the instrument free from CLAIMS, free from PERSONAL DEFENSES, and subject only to REAL DEFENSES
How does the shelter rule apply to negotiable instruments?
Basic Principle: transferee acquires whatever rights transferor had – transferee takes shelter in status of transferor.

**This rule allows transferee to “step into the shoes” of the HDC, even though she otherwise fails to meet the requirements of due course holding. Thus, transferee has all the rights of an HDC even though transferee is a donee or otherwise fails to qualify
What are the personal defenses that the holder in due course takes free from?
Every defense available in ordiary contract actions, such as lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement.
What are the real defenses that a holder in due course takes subject to?
1. Material Alteration
2. Duress
3. Fraud In the Factum
4. Incapacity
5. Illegality
6. Infancy
7. Insolvency
What are the consequences of a material alteration of a negotiable instrument?
If payee changes amount in the instrument, maker is only liable for the actual amount

If the maker was negligent, he is estopped from raising material alteration as a defense
What is the difference between fraud in factum (real defense) and fraud in the inducement (personal defense)?
Real fraud (fraud in the factum) is assertable against an HDC – means there has been a misrepresentation about the instrument

Personal fraud, meaning fraud in the inducement, is a personal defense – it is ineffective against an HDC

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