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Mid-Term Review Session

Commercial Paper. Mid-Term Review Session. Analytical Framework. 1 . Identify the type of paper. Promissory note (including CDs) Draft (including checks and remote-created items). Analytical Framework. 2 . Identify the parties, for example: Maker Drawer Payee Drawee Indorser

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Mid-Term Review Session

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  1. Commercial Paper Mid-Term Review Session

  2. Analytical Framework • 1. Identify the type of paper. • Promissory note (including CDs) • Draft (including checks and remote-created items)

  3. Analytical Framework • 2. Identify the parties, for example: • Maker • Drawer • Payee • Drawee • Indorser • Holder • Accommodation Party • Depositary Bank • Payor Bank

  4. Analytical Framework • 3. Is instrument negotiable (form): • In writing • Signed by maker or drawer • Unconditional promise or order to pay • Fixed amount • Of money • No other undertaking or instruction • Payable on demand or at a definite time • Words of negotiability (order or bearer language)

  5. Analytical Framework • 4. Was instrument properly negotiated (transferred to a holder): • Bearer paper = possession • Order paper = possession plus necessary indorsements • Blank (creates bearer paper) • Special (names new owner) • Restrictive (e.g., for deposit only)

  6. Analytical Framework • 5. Does holder qualify as HDC? • Negotiable instrument • Holder status • Authenticity not apparently questioned • Holder gave value for the instrument • Holder took instrument in good faith • Holder was without notice • E.g., overdue, dishonored, unauthorized signature, alteration, claim, defense, claim in recoupment

  7. Analytical Framework • 5. HDC issues • Shelter Rule – taker from HDC may receive HDC rights • Subject to real defenses • Infancy • Duress voiding obligation • Lack of legal capacity making obligation void • Illegality making obligation void • Fraud in the execution [continued]

  8. Analytical Framework • 5. HDC issues [continued] • Subject to real defenses [continued] • Bankruptcy discharge • Omission of required consumer protection language • Statute of limitations • Payment by obligor without notice to former holder • Alteration • Unauthorized signatures and forgeries [continued]

  9. Analytical Framework • 5. HDC issues [continued] • Takes free of personal defenses • Takes free of all claims • Burden of proof on HDC • HDC status sometimes denied by statute

  10. Analytical Framework • 6. Liability of Parties – General Approach • Who wants the money (plaintiff)? • Who does not want to pay (defendant)? • What are plaintiff’s legal theories of recovery? • What defenses may the defendant raise? • If the defendant is a loser, may liability be passed on to another party?

  11. Analytical Framework • 7. Contract liability • Underlying obligation • Maker’s contract • Indorser’s contract • Accommodation parties • Drawer’s contract • Drawee’s contract (acceptance and certification) • Signature by agents [continued]

  12. Analytical Framework • 7. Contract liability [continued] • Checking Account • Properly payable • Wrongful dishonor • Customer’s death or incompetence • Setoff • Stop payment orders • Final payment • Charge back

  13. Analytical Framework • 8. Warranty Liability • Transfer warranties • Entitled to enforce (holder status) • Signatures authentic and authorized • No alteration • No defense good against transferor (perfect plaintiff) • No knowledge of insolvency proceeding against maker, drawer, or acceptor • If remotely created item, the person identified as the drawer authorized the item

  14. Analytical Framework • 8. Warranty Liability [continued] • Presentment warranties (checks) • Entitled to enforce • No alteration • No knowledge of unauthorized drawer’s signature • If remotely-created item, the person identified as the drawer authorized the item. • Presentment warranty (notes) • Entitled to enforce

  15. Analytical Framework • 9. Conversion Liability • Wrongful dominion • Drawee bank paying on forged indorsement

  16. Analytical Framework • 10. Forgery • Maker’s signature • Drawer’s signature • Indorsement • Forgery validation • Ratification • No loss • Impostor Rule (estops issuer) • Fraudulent indorsement by payee’s employee (estops payee) • Negligence • Bank statement rule

  17. Analytical Framework • 11. Alteration • Types • Effect on HDC • Effect on non-HDC • Defenses • Negligence • Bank statement rule

  18. Analytical Framework • 12. Other issues • Discharge by h0lder • Failure to produce original instrument • Overdrafts • Postdated “checks” • Payment in full checks

  19. Sample Objective Questions

  20. Sample Essay 1 Madonna Prince Maker Payee Disco Negotiable? HDC? presentment dishonor Negotiable? HDC? D v. P on underlying obligation D v. M on maker’s contract D v. P on indorser’s contract D v. P on transfer warranties

  21. Sample Essay 2 Bob Al Maker Payee Cal Tom $500 note defective watch blank indorsementlost note $350

  22. Sample Essay 3 Taylor XYZ Drawer Payee First Bank LNB Drawee Check 1 -- $2,500 for furniture Check 2 -- $1,500 for refrigerator Cashed checks Closed account SPO presentment Provides indorsement Dishonored for NSF

  23. Sample Essay 4 theft issuance Della Stella Fred [alleged drawer] [drawer & forger] [fictitious payee] CNB Corner Grocery Drawee State Bank [depositary bank] NPP presentment final payment

  24. Sample Essay 5 • Effect of death of drawer/depositor

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