Mid-Term Review SessionCommercial Paper

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▪ Holder▪ Accommodation Party▪ Depositary Bank▪ Payor Bank

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)

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)

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

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]

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]

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

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?

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]

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

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

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

Analytical Framework

9. Conversion Liability

Wrongful dominion Drawee bank paying on forged

indorsement

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

Analytical Framework

11. Alteration Types Effect on HDC Effect on non-HDC Defenses▪ Negligence▪ Bank statement rule

Analytical Framework

12. Other issues

Discharge by h0lder Failure to produce original

instrument Overdrafts Postdated “checks” Payment in full checks

Sample Objective Questions

Sample Essay 1

Madonna PrinceMaker Payee

Disco

Negotiable?

HDC?presentmentdishonor

1. Negotiable?2. HDC?3. D v. P on underlying obligation4. D v. M on maker’s contract5. D v. P on indorser’s contract6. D v. P on transfer warranties

Sample Essay 2

Bob AlMaker Payee

Cal

Tom

$500 note

defective watch

blank indorsementlost note

$350

Sample Essay 3

Taylor XYZDrawer Payee

First

BankLNBDrawee

Check 1 -- $2,500 for furniture

Check 2 -- $1,500 for refrigerator

Cashed checksClosed account

SPO

Provides indorsementpresentment

Dishonored for NSF

Sample Essay 4

Della Stella Fred[alleged drawer] [drawer & forger] [fictitious payee]

CNB Corner GroceryDrawee State Bank

[depositary bank]

theft issuance

presentmentfinal payment

NPP

Sample Essay 5

Effect of death of drawer/depositor