Joined: 31 Jan 2005
|Posted: Mon Apr 28, 2014 8:29 am Post subject: Class Notes for Commercial Paper Pt. One
|THIS IS A USER FRIENDLY OUTLINE FOR MY STUDENT'S USE. IT PARALLELS PART V (PART ONE) OF CHEESEMAN'S TEXTBOOK. MY STUDENTS ARE FREE TO DOWNLOAD THIS FOR THIS OWN USE AND FOLLOW ALONG WITH MY LECTURES BASED ON IT.
I. COMMERCIAL PAPER
Documents facilitating transfer of $/Extension of Credit.
II. ONE TYPE OF COMMERCIAL PAPER IS THE NEGOTIABLE INSTRUMENT:
1. Written; 2. Signed; 3 unconditional promise/order to pay; 4. A fixed amount of money to
i. ORDER/BEARER on either (a) demand or at (b) definite time
Both possession of, AND title to instrument transferred from one party to another, w/transferee becoming a "HOLDER"
HOLDER: Possesser of NI (a) issued or (2) DRAWN, or (3) indorsed to that person
III. TWO IMPORTANT TYPES OF COMMERCIAL PAPER:
A. PROMISE TO PAY MONEY (1). promissory note & (2). Bank certificates of deposit); AND
B. ORDER TO PAY MONEY (1). The Draft & (2). The check which is the most common type of draft, it's an ORDER directed to a bank.
WHY NI’s BECAME A FORM OF COMMERCIAL PAPER
1. Became impracticable always pay cash/commodities
2. Much less risk of loss or theft.
3. Also: means of extending credit. Borrower agrees, in writ¬ing, to repay loan. Document (e.g., a promissory note), a simple money-substitute document (e.g., a check), is special type of commercial paper: the NI.
4. Constantly being used by businesses/consumers. Most major business transactions depend on credit. W/o NI’s: no efficient, readily understood method of extending credit on such a grand scale. Likewise, consider checks: most common form of commercial paper (exclud¬ing money itself), and millions of checks written every day.
THE UNIFORM COMMERCIAL CODE, UCC ARTICLES 3 AND 4.
Article 3 (NI’s) and Article 4 (Bank Deposits & Collections).
Attempt: simplify, clarify, and make uniform nation's commercial law. The process is ongoing. 1990 revised Article 3 adopted by 48 states (all but New York and South Carolina).
IV. ELEMENTS OF NEGOTIABILITY (Review)
TO BE NEGOTIABLE AN INSTRUMENT MUST BE:
Signed by maker or drawer;
Contain unconditional promise or order to pay fixed amount of $$$, w/ or w/o interest or other charges described in the instrument; and no other undertaking or instruction given by maker or drawer;
Payable on demand or at definite time; and
Payable to order or to bearer.
REQUIREMENTS STRICTLY CONSTRUED. Ambiguities resolved in favor of non-negotiability; and, if instrument is plainly non-negotiable, parties to instrument cannot agree to make it negotiable.
Negotiability restricted to drafts, checks, certifi¬cates of deposit, and notes.
SIGNATURE OF MAKER OR DRAWER
Signature: Any symbol party executes/adopts to authenticate writing. Need not be handwritten, must be on instrument itself.
Law presumes signature authentic and authorized: w/actual, implied, or apparent consent of person to be bound by signature. Some cases, even unauthorized signature treated as if authorized: example: person whose signature unauthorized knew about it but failed to inform innocent parties who reasonably believed signature authorized.
UNCONDITIONAL PROMISE OR ORDER TO PAY
THE TERM "UNCONDITIONAL": promise/order not limited or changed by clause or any other item contained w/in or incorporated into instrument. Conditions include tying payment to occurrence of an event or performance of an agreement.
E.G.: STATEMENTS WHEREIN DOCUMENT REMAIN NEGOTIABLE
Statements placed on instrument if such statements are not deemed to be conditions on promise or order to pay,
STATEMENTS DESTROYS NEGOTIABILITY (BECOMES CONDITIONAL)
U.C.C. 2 TYPES:
1. Express condition on payment.
2. Statement instrument subject to or governed by another agreement.
E.G.: WRITE ON IT: "Not Negotiable."
FIXED AMOUNT OF MONEY
Must be expressly stated/readily verifiable from terms of instrument. "Fixed" even if includes specified interest rate,
Term "money" encompasses all means of exchange authorized by some government as part of its currency. Therefore instrument payable in dinars, francs, or some other foreign currency can be nego¬tiable. NOT STUFF!!!
TO BE NEGOTIABLE MUST BE PAYABLE ON DEMAND OR AT A DEFINITE TIME
IF NI does not state time for payment, states payable on demand, or at sight, or otherwise indicates payable @ will of holder (e.g., a check). Becomes due (is to be paid) simply upon being present¬ed for payment.
AT A DEFINITE TIME INSTRUMENT MAY BE PAYABLE AT:
Readily ascertainable when instrument issued; e.g.:
Fixed date or dates;
Fixed period after sight (presentment) or acceptance;
Payment time cannot be based on special act/event uncertain as to time of occurrence, even though the act is certain to hap¬pen some time. EXAMPLE: Instrument nonnegotiable if payable on Mr. X's death; although death is a certainty, when Mr. X's death will occur is uncertain.
ELEMENTS OF NEGOTIABILITY CONTINUED:
PAYABLE TO ORDER/OR TO BEARER
"To order: includes instruments that state:
Pay to the order of A (an identified person) and pay to A or his/her order.
"To bearer" includes instruments that do not state a payee, and instruments that state:
(a) pay bearer;
(b) pay to the order of bearer;
(c) pay A or bearer; and
(d) pay cash or to the order of cash
PERSONS can indorse instrument in such a way as to convert it from order to bearer paper, or vice-versa.
RULES OF CONSTRUCTION
1. NI’s may be postdated, antedated, or undated, and need not state place where instrument is drawn or payable. The dates on instruments are presumed correct.
2. Rules of agency applicable: Authorized agents may complete an instrument.
3. If unclear whether NI is a draft or a note, the holder may treat it as either.
4. When disputes as to terms of an instrument, follow¬ing rules govern:
(1). Handwriting prevails over typewriting and print.
(2). Typewriting prevails over print.
(3). Words prevail over numbers.
5. Unspecified rate of interest treated as being the same as the judg¬ment rate (interest rate earned on unpaid judgments) Unless stated differently in the instru¬ment, interest runs from the date of the instrument or, if undated, from the issue date.
6. Two or more persons may sign in the same role (e.g., as comakers or codrawers). Unless otherwise specified, each such person fully respon¬sible for any liability charged to that "role," be it maker, drawer, or what¬ever.
IMPORTANT FACT: IF Instrument is nonnegotiable (as an NI) does not mean it is worthless. It still may evidence a valid, enforceable contract.
TYPES OF NEGOTIABLE INSTRUMENTS see handout #1
Often called promissory note: Two-party instrument in which one person (the maker) makes an unconditional, written promise to pay another person (the payee), or person specified by the payee, a fixed amount of money either on demand or at a particular time in the future.
SEE H.O. # 1 NUMBER ONE
Johnny Deeep is the maker, and Matthew Klein is the payee.
Issued by a FINANCIAL INSTITUTION (e.g., a bank) as an acknowledgment that the institution has received a particular sum of money, certificate of deposit is the institution's note to pay the depositor that sum of money, plus a stated rate of interest.
Three-party instrument in which one person (the drawer) orders a second person (the drawee) to pay a fixed amount of money to third person (the payee), or another person specified by the payee, either on demand or at a particular time in the future.
Thompson is the drawer, Erstwhile the drawee, and Pseudo the payee.
SEE HANDOUT #1 NUMBER TWO
SEE HANDOUT #1 NUMBER THREE
Special type of draft in which drawee is always a bank and the instrument is payable on demand.
Mary Merchant is the payee, Bob Buyer the drawer, and Name of Bank is drawee.
CASHIER’S CHECKS (ALSO CALLED BANK CHECKS):
Drawn by banks upon themselves. The financial institution is both drawer and drawee, but w/ payee/holder required to sign a speci¬men signature on the instrument when it is issued and then re-sign when cashing.
CERTIFIED CHECKS "accepted" by drawee bank in advance.
Bank certifies there’s money in the drawer's account to cover the check. (Discussed under banking.)
THE PARTIES TO A NEGOTIABLE INSTRUMENT
Notes originates with TWO:
1. Maker, who promises to pay.
2. Payee (depositor), who will be paid by the maker.
Drafts start with THREE parties:
1. Drawer, roughly comparable to note's maker.
2. Drawee, the party ordered by drawer to make payment.
3. Payee, essentially equivalent to the note's payee.
Maker of noted promises to pay, more or less directly; Payee, the drawer of a draft states THIRD¬ party-the drawee, will actually pay the payee. The drawee pays w/funds from an account drawer maintains with the drawee.
Both notes and drafts may have additional parties known as INDORSERS. Although indorsements come in different forms, they all have a common feature: the signature of the indorser.
ADVANTAGES OF NI’s OVER ORDINARY CONTRACTS
While they’re greater formal requirements conveyed to holders it’s balanced by greater rights. Also, rights, duties, and lia¬bilities of the parties are generally clearer under Article 3 of the UCC than under the common law of contracts.
MAJOR DIFFERENCES OVER ORDINARY CONTRACT:
Contracts consideration must be proved. NI consideration presumed unless evidence to con¬trary introduced. Even if party proves no con¬sideration, holder's case will generally not be affected if he/she deemed to be a HOLDER IN DUE COURSE (HDC) (To be discussedLater on.) Past consideration (e.g., a pre-existing debt) not usually enforceable basis for ordinary contracts, sufficient for negotiable instruments.
Most important: Assignee of ordinary contract sub¬ject to personal defenses HDC generally not (i.e., many defenses ordinarily available under contract law are not as readily available against some holders).
ASSIGNEE OF CONTRACT VERSUS HOLDER OF NEGOTIABLE INSTRUMENT
ASSIGNEE OF CONTRACT
Synopsis of Law 1 coverage: "Ordinary" contract: Rights assignable (e.g., the right to receive money or goods). The party assigning is called the assignor, party to whom assignor assigns his/her contractual rights is the assignee. Although not usually a party to the original contract, the assignee "STEPS INTO THE SHOES OF THE ASSIGNOR" and not only gains all of the assignor's contractual rights, but also is subject to all of the contractual defenses to which the assignor was subject.
Assignee takes a risk, particularly if cannot verify rights and defenses being assumed.
HOLDER OF NI
To be readily accepted as safe substitute for cash, potential "acceptor" must be confident commercial paper does not entail many risks assumed by assignee of ordinary contract.
If Holder possesses an instrument passing to him/her via an unbroken chain of negotiation, e.g. transferred (see below) and (1) issued, drawn or indorsed to him/her or to his/her order, or (2) payable to bearer.
To qualify as (HDC), holder must have good title which he/she paid value, w/no notice of any claims or defenses, and acquired in good faith. This concept is discussed later on in totality.
Inherent value of negotiable paper rests largely on easy, relative¬ly safe manner in which possession of such paper and title to it can be transferred. The transfer process is called negotiation.
NI’s are "negotiated" when transferred to a holder.
Bearer paper, (e.g. checks made out to "Cash" or indorsed in blank (holder's name is signed on the back w/o any accompany¬ing instruction, such as "Pay to the order of X" or "For deposit only"), can be negotiated merely by a change in possession, that is, by "delivery." Holders of such instruments may not be the lawful owners; for instance, a thief may take bearer paper.
HOWEVER, Order paper negotiation, requires not only deliv¬ery but also proper indorsement(s). E.G.: An instrument payable to the order of Joe Smith not
negotiat¬ed to Barbara Brown until delivered to her with Joe Smith's indorsement. W/o the indorsement, Barbara (and anyone else who acquires the instrument from her) is a mere transferee and NOT A HOLDER.
To have rights under an instrument (e.g., obtain payment), mere trans¬feree (someone to whom instrument was transferred, but to whom there was no effective negotiation) must prove instrument is valid and that he/she has title to it. No presumptions in favor of transferee's claim. A holder, though, benefits from negotiation. Opposing parties have burden of proving holder not entitled to payment.
Written on an NI by/on behalf of the holder: Signature of the holder, w/ or w/o additional or qualifying words, so title to instrument and holder's prop¬erty interest in instrument transferred to new holder. Instru¬ment may be indorsed on front or back, or on an allonge (a paper physically attached to, and made a part of, the instrument).
Treated as an indorsement.
Indorsement may be made either correct name, name as mis-spelled, or both. (Dual indorsement can be demanded by person tak¬ing the instrument.)
SEVERAL TYPES OF INDORSEMENTS: A MERE SIGNATURE
IN BLANK No particular indorsee; Effect: makes instrument payable to bearer.
SPECIAL INDORSEMENTS ARE ORDER PAPER
Specifies person to whom, or to whose order, instrument payable. E.G.: John Smith, payee of a check, specifically indorses check to Mary Jones by writing on instrument "Pay to the order of Mary Jones [signed] John Smith." John Smith could simply indorse "Pay Mary Jones. It renders instrument order paper (to Mary Jones), even though front of NI should not be made out that way.
IMPORTANT RULE: Instrument may have any number and combination of blank and special indorsements. The last (most recent) indorsement determines whether instrument is bearer or order paper.
FOUR TYPES OF THE RESTRICTIVE INDORSEMENT.
1. Conditional. Indorsements can contain conditions that would destroy negotiability if they were in the instrument itself.
FYI ONLY: However, despite its negotiability, no holder except a bank handling or paying instruments in normal course of collection) has any right to enforce the conditionally indorsed instrument until the condition is met. EXAMPLE: Conditional Indorsement John James, payee of a check, indorses it as follows:
"Pay Jane Jones when she delivers 250 shares of Blue chip Stock to me [signed] John James." John then delivers the check to Jane, who in return promises to trans¬fer the stock to John. Jane could negotiate the check to another holder. However, until she met the condition, most subsequent holders could not enforce payment.
2. Attempts to prohibit further transfer of instrument. Like conditional indorsement, an indorsement prohibiting further transfer has no effect on instrument's negotiability. EXAMPLE: "Pay to the order of Joe Doe only." In effect, the UCC con¬verts such an indorsement to "Pay to the order of Joe Doe."
3. Include words "for collection," "for deposit only," "pay any bank," or similar expressions. Like conditional indorsements, those made to facilitate deposits or collections have no effect on negotiabili¬ty. However, holder who first receives such indorsed instrument must obey that indorsement, Although subsequent holders need not. "Pay any bank" also means that only a bank may be a holder of the instrument unless it is specially indorsed by the bank or returned to the indorser.
IMPORTANCE OF TERM “WITHOUT RECOURSE”
Regardless of type, indorsements can have disclaimers. They place subsequent holders on notice that the indorser dis¬claims liability on the instrument if it is not paid.
IMPORTANT HYPOTHETICALS: 22.1 P.369; ALL 22.1-6 P. 373; 22.7 P. 374; 23.1 P. 389; AND 23.1 P. 377.
ALSO THESE HYPOTHTICALS:
A. Marcus Wiley, James Tate, and James Irby partners buying and selling used cars under name Wiley, Tate & Irby. Extended period, partnership sold number of automobiles to Billy Houston, sole proprietor doing business as Houston Auto Sales (Houston). In connection w/each purchase, HOuston executed and delivered to partnership a negotiable instrument drawn on Peoples Bank and Trust Company of Tupelo, Mississippi. Upon delivery of each NI, automobiles delivered to Houston. Each instrument involved contained number of variations in text and form. However, each similar in that each drawn on a bank, signed by the maker, and contained an unconditional order to pay sum certain on demand of the payee. What type of negotiable instrument is each?
B. Broadway) owned & operated American Nursing Center. Briggs received services from center and had executed an instrument to pay for those services. Instrument read, in relevant part, "Ninety days after date, I, we, or either of us, promises to pay to the order of $3,498.45." Briggs refused to pay on the note. Broadway claimed note was bearer paper and payable to the holder. Briggs claimed note was order paper and payable only to a named payee. Can Broadway, as its bearer, collect on this note?