Commercial Paper

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Commercial Paper

• The law of negotiable instruments
• UCC Article 3

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Types of Negotiable Instruments

• Promissory Note A promise in writing to pay a
  sum of money.
• Draft An order addressed by one person to
  another, ordering the person to whom it is
  addressed to pay a sum of money to a third party

Check Drawee is a bank
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Parties

• Note Two party document
• Maker One who promises to pay
• Payee - One to be paid
• Draft
• Drawer One giving the order to pay
• Drawee - One who is directed to pay
• Payee - One to be paid

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Negotiability

• In writing
• Signed
• Payable at fixed or determinable time or on
  demand
• Payable to order or bearer
• Unconditional promise or order
• To pay a sum certain
• Payable in money

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Time for Payment

• On demand
• If stated in Instrument
• No time for payment is stated

Acceleration clause is permitted Postdating does
not affect negotiability
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Time for Payment

• Determinable future time
• on or before a stated date
• Fixed period after date

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Payable to Order or Bearer

• Exception If a check meets all other
  requirements of negotiability it will remain
  negotiable even if the words order of or
  bearer are missing

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Unconditional

• May make reference to another agreement
• May limit payment to a particular fund or source.
  (Revised Article 3)

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Sum Certain (Fixed amount of Money)

• Minimum amount to be paid to holder must be
  specified.
• May call for the payment of interest

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Negotiation
Order Paper Endorsement and Delivery
Bearer Paper Delivery alone
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Imposter and Fictitious Payee Rules

• Imposter Rule Forged payee endorsement when
  maker/drawer has been induced by imposter to
  issue note/draft is effective for negotiation.

Fictitious Payee Rule A forged endorsement is
effective for negotiation when maker/drawer has
been induced by dishonest employee to issue
note/draft.
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Types of Endorsements

• Blank
• Signature only
• Names no endorsee

Instrument becomes bearer paper Endorser
guarantees payment
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Blank Indorsement
Jane Doe
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Types of Endorsements

• Special
• Endorser specifically names the transferee to
  whom the instrument is payable.

Only transferee can negotiate instrument
further Instrument is order paper Payment
guaranteed by endorser
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Special Indorsement
Pay to the order of Bill Smith Jane Doe
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Types of Endorsements

• Qualified
• Blank endorsement
• Without Recourse added

Endorser does not guarantee payment in event of
default Warranty liability still applies
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Qualified Indorsement
Without Recourse Without Warranty Jane Doe
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Types of Endorsements

• Restrictive
• Attempt to restrict further negotiation
• General Rule Endorsement is Not effective / Once
  instrument is negotiable no endorsement can
  prevent further negotiation

Exception For Deposit Only / For
Collection Only bank can become holder
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Restrictive Indorsement
For Deposit Only Jane Doe
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Holder in Due Course

• Holder Possession of Instrument with all
  necessary endorsements.
• Holder in Due Course Must Take Instrument
• In good faith
• For value
• Without notice of
• Overdue Defects Dishonor Defenses
• Altered or unauthorized signatures

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Holder in Due Course

• Holder in Due Course
• Takes instrument free of personal defenses
• Subject to universal (real) defenses

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Personal Defenses

• Ordinary contract defenses
• Incapacity other than minority and adjudicated
  incompetents
• Fraud in the inducement
• Unauthorized completion
• Theft, when instrument is bearer paper

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Real Defenses

• Fraud in the execution
• Forgery
• Material Alteration
• Incapacity of a minor or adjudicated incompetent
• Illegality or Duress that renders instrument void
• Bankruptcy

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Warranty Liability

• Implied liability whenever instrument is
  negotiated for value

Bearer Paper Warranties extend only to
immediate transferee
Order paper Endorser warrants to all subsequent
holders
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Warranties

• All signatures are genuine
• Good title (transferor is entitled to enforce the
  instrument
• Instrument has not been materially altered
• Transferee has no knowledge of insolvency
  proceedings against any part to instrument
• No defense of any party is good against transferee

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Shelter Rule

• One who takes from a Holder in Due Course or
  traces possession back to a Holder in Due Course
  takes with the rights of a Holder in Due Course
  even if they do not qualify as a Holder in Due
  Course.