Commercial Paper

Commercial Paper If CP shows up invoke the BLR ~ 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 defense. (memorize this) A3 doesnt apply to money, documents of title, or investment securities I. Types of Negotiable Instruments: Writings calling for payment of money - to be in UCC purview its got to be a note or a draft Two types, o (1) The Promissory Note (the note) The Promise Maker it contains an affirmative promise to pay, not just a mere IOU Two parties: The promisor is called the maker The promise is called the payee o (2) The Draft The Commander it contains a command or order (usually a check) Three parties: The drawer gives the command (check writer) The drawee is ordered to do the paying (the bank) The payee is the beneficiary of the order and payment (who check is to) o The Indorser appears in the context of promissory notes and checks signs on the back Determining whether the writing is a negotiable instrument or just a contract o To qualify as a NI, we need: W-O-S-S-U-P-P (i) A writing (ii) Payable to order or to bearer (iii) Signed by the maker or drawer (iv) Reciting a sum certain (v) Containing an unconditional promise or order, and no additional promises or orders (vi) Payable on demand or at a definite time (vii) Payable in currency o (ii) must be payable to order or to bearer (a) Payable to Order use the word order or assigns in connection w/ payees name (b) Payable to Bearer payable to anyone who has it Exs that satisfy the standard: o Pay to bearer o Pay to the order of bearer o Pay to A or bearer o Pay to cash (an A3 term of art that is sufficient by statute) o Pay to the order of cash (means its payable to whoever happens to be in possession) (c) The trick question: if the writing states pay to A it is not negotiable just a K Because it does not contain the magic words to trigger A3 (order or assigns or bearer) o (iii) must be signed by the maker or drawer
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Any authentication found anywhere on the instrument qualifies (iv) must state a sum certain or fixed amount Specifically ascertainable sum Able to calculate amount to be paid, from what writing says or reference to outside source If instrument is payable w/ interest, but doesnt say how much, the judgment rate applies JR: rate on court judgments & set by statute and fixed Calculation of the 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 a named financial institution (v) must contain an unconditional promise or an unconditional order Conditional = contract (outside scope of A3) Non-negotiable: writing that says To be governed by or subject to terms in some other agreement Rights or obligations w/ respect to promise or order contained in another writing Rationale: NI holder should not be required to examine another document to determine rights w/ respect to payment Reference to another writing does not of itself make the writing conditional Writing not conditional just b/c it refers to another for statement of rights w/ respect to collateral, prepayment or acceleration Reference to an outside source re tangential matter is OK (v) must not contain any additional promises or orders Twos a crowd (promise to give A and B negotiable) (vi) payable on demand or at a definite time (a) On demand ~ states that is payable on demand or at sight or on presentation If silent as to the time of payment, it is presumed POD (b) Definite time ~ payable on or before specified date or at a fixed period after stated date Acceleration clauses do not destroy the conclusion of negotiability Future event must be linked to a date certain (not when my first GC is born) (vii) payable in currency Money, including foreign currency Not goods

II. In a Commercial Paper Hypo, How Does the Defendant Get Sued? The Two Theories: A. Contract or Signature Liability o 1. D signed the negotiable instrument - when you sign it, you promise to pay it o 2. Who may have signed for the purpose of imposing liability (who is our D)? (a) The Maker by signing its name enters a K whereby it agrees to pay the instrument (b) The Indorser promises that if the check bounces and it is given notice of that fact it will pay (c) The Drawer by signing the check, promises that if it bounces, and its are notified it will pay (d) The Drawee does not sign and therefore is not liable for the purposes of signature liability (e) Without recourse + the signature represents a disclaimer of liability - passes title but assumes no signature liability B. Warranty or Transfer Liability
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1. Like sellers liability for selling a defective instrument 2. Transferor who sells the NI may be sued for breach of warranty 3. Who is entitled to sue for breach of warranty? (a) If indorsed any P possessing the instrument may sue (warranties run w/ the instrument) (b) If not indorsed only Ds immediate transferee may sue 4. Warranties made by Transfer (assuming liability does attach) D promises that (i) It has good title to the instrument (ii) All the signatures are genuine and authorized (forgery is a breach or warranty) (iii) The instrument wasnt materially altered (if the instruments been tampered with, its defective) (iv) There is no defense or claim good against the D (meaning the instrument is enforceable) (v) It has no knowledge of any BR or insolvency proceeding against the maker or drawer

III. Due Negotiation: How is a Negotiable Instrument Properly Transferred? Due negotiation = proper transfer of the instrument. o If properly transferred, the transferee is a holder and may be eligible for to be HDC. o If improperly transferred, the transferee is not a holder and cannot qualify as a HDC. 1. When payable to the order of a specific payee, it is negotiated by delivery to that payee o Further negotiation requires that the payee indorse and deliver to transferee o Indorsement must be authorized and valid or transferee can never by HDC 2. If payable the bearer, indorsement is not required 3. Types of Indorsements must be either special or blank, and restrictive or unrestrictive o (a) The special indorsement names a particular person as indorsee (must sign to be further negotiated) o (b) The blank indorsement does not name a specific indorsee (may be negotiated by delivery alone) o (c) The restrictive indorsement contains some condition if restriction is ignored not a holder IV. The Holder in Due Course: How Does a Transferee Qualify? A HDC is a holder who takes the instrument: o (1) For value; and o (2) In good faith; and o (3) Without notice that it is overdue or has been dishonored or may be subject to a defense or claim (1) For Value the holder must give value for the instrument o Giving value does not mean giving consideration - consideration and value differ in two important ways (a) A mere promise is not value (b) Old value is good value (2) In good faith in NY GF means honesty in fact o Subjective test - the rule of the pure heart and the empty head (3) Without notice holder must acquire the instrument w/o notice that it is overdue, has been dishonored or is subject to any defense or claim. o Requirement imposes an objective test o It asks, did the holder know or have reason to know of the problem (a) Notice that the instrument is overdue: i.e., should already have been paid If the holder has notice or reason to know - it is not a HDC o (i) Payable at a definite time if instrument recites that it is payable on a given date and the holder buys it after that date, it is not a HDC bought too late
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(ii) Principle in arrears (overdue) notice that a payment or more of principal is in arrears holder cannot qualify as a HDC o (iii) Interest in arrears notice that one or more payments of interest are in arrears it can still qualify as a HDC (b) Notice of any defense or claim against enforcement (i) If appearance of the instrument should give notice e.g., stamped void or paid on its face, buyer cant be a HDC (b/c it had notice that the instrument was not valid) o Face of the instrument should have told the person that something was wrong (ii) Notice that obligation of any party is voidable o Requires a voidable promise to pay (e.g., b/c of fraud) and o Holder w/o notice of the fraud (the makers defense to enforcement) (iii) Notice of a competing claim to the negotiable instrument o If the I is lost or stolen from the true owner, te can qualify as a HDC if Instrument has been properly transferred and Te did not have notice or reason to know of the theft or loss o If so, te is entitled to the instrument over the person it was stolen from!!! (iv) Notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty the standard here is actual knowledge (only place w/ AK standard) (4) The Holder in Due Course and the Shelter Rule o Basic principle: a transferee acquires whatever rights her transferor had (takes shelter in the status of) o Allows transferee to step into the shoes of a HDC, even though it otherwise fails to meet the requirements Ex: HDC transfers a NI to another as a gift the donee qualifies as HDC b/c of the shelter rule o Benefits of HDC Status: Takes Free From Claims and Personal Defenses, but Subject to Real Defenses Claim = right to a NI b/c of superior ownership - if duly negotiated to a HDC, HDC defeats the superior owner Personal defenses include every defense available in ordinary K actions Real defenses to remember think of MAD FIFI4 o Material Alteration change in terms of the instrument o Duress o Fraud In the Factum o Incapacity o Illegality o Infancy o Insolvency If maker is negligent, it is estopped from raising material alteration as a defense Includes leaving blanks or leaving wide spaces on the check Difference between real fraud and personal fraud Real fraud fraud in the factum there has been a misrepresentation about the instrument Personal fraud fraud in the inducement o Ask: did they know they were signing a NI at the time of signing? No real Yes personal

V.