Commercial Paper IL 2011

1. Transferring - Negotiation and Negotiability
2. Holder in Due Course
3. Claims and Defenses on Negotiable instruments
4. Trial Procedure
5. Liability of parties
6. Payment
7. Discharge

If an instrument is
1. Negotiable and
2. transfered by negotiation to
3. a person (holder) who takes instrument for value, in good faith, without notice to any defenses or claims on the instrument (due course)

The holder becomes an HDC, and can force someone to pay money due under instrument unless they have a real defense

A promise to pay. Two parties are involved.

1. The Maker - person who pays
2. The payee/Bearer - Person whom payment is promised

Certificate of Deposit- like a note. Instrument made by a bank that
1. acknowledges receipt of money and
2. promises to repay

An order to pay. IONvolves 3 parties.

1. Drawer - Orders the Drawee to pay
2. Drawee - often a bank, which pays the money to a third party/bearer.
3. Payee recipient of payment

An instrument is not negotiable if it is conditional:
1. It expressly states a condition for payment or
2. it states that the promise/order is subject to or governed by another writing

A promise or order is not conditional merely because it 1. refers to another writing regarding collateral, prepayment or acceleration;
2. limits payment to a particular source or fund;
3. requires a countersignature of a specimen signature
4. contains a statement required by law that the holder is subject to claims and defenses of original payee

mere reference to another writing is irrelevant to negotiability / HDC but CAN modify or control terms of the instrument

any draft payable on demand and drawn on a bank

1. Unconditional
2. Promise or order
3. To pay a fixed amount (w or w/o interest) that:
(i) is payable to order or bearer when issued or first in possession of a holder ;
(ii) is payable on demand or at a definite time; and
(iii) states no unauthorized undertaking or instruction by person promising or ordering payment

A note must contain a promise to pay

A Draft must contain an order to pay

Rules regarding what constitutes a writing or signature are liberal

Any type of currency is ok, non- currency will make the instrument nonnegotiable (e.g. 300 or an ounce of gold)

"fixed" The principal due must be fixed. Variable or indexed interest rates are acceptable. "judgement rate" will be applied if no rate is given but "with interest" is specified

To Order - Instrument is payable to order of identified person (Pay to order of Lucy) or to an identified person or order (pay to Lucy or her order)


To Bearer - An instrument is payable to bearer if it (i) states that it's payable to "bearer", "order of bearer," "order or bearer," "order and bearer," or otherwise indicates the possessor is entitled to payment.
(ii) does not name payee;
OR
(iii) is payable to "cash" or
(iv) indicates it is not payable to an identified person ("I promise to pay to the order of Mickey Mouse")

1. Instrument is payable on demand if it (i) fails to state time for payment or (ii) states that is payable "on demand"

2. Instrument is payable @ a Definite Time if it is payable:
(i) on a fixed date
(ii) after an elapsed or specified period after sight or
(iii) readily ascertainable when issued.

Uncertain events are not readily ascertainable (the death of a pet)

Acceleration clauses do not destroy negotiability (5000$ on April 5, 2090 or at my death should I die sooner)

Extensions at option of the maker that are automatic on the happening of a condition are ok if there is a further definite time. (5000 on April 5, 2090, but if dog dies then April 6, 2100).

Extension at option of holder is ok but maker can object and tender payment to cancel it.

3 undertaking/instructions are ok under UCC

1. An undertaking or power to give, maintain or protect collateral;
2. An authorization of power given to holder to confess judgement or to realize on or dispose of collateral; and
3. a waiver of the benefit of a law that protects the obligor

1. Handwriting controls type and print
2. Type controls print
3. unamiguous words controls figures

Opting Out - Except in checks, negotiability is destroyed by a conspicuous statement on the instrument that it's not negotiable.

Two or more signers are generally jointly and severally liable in that capacity

Incomplete instruments may be enforced according to incomplete terms or as augmented by an authorized completion. If no authority, it's treated as a fraudulently altered instrument.

To become an HDC one must first become a "holder."

In a nutshell, to become a holder person must
1. Have possession of instrument AND

a) the instrument is a bearer instrument OR
b) the person in possession is the named payee OR
c) All necessary signatures are on the instrument and they're genuine

negotiation occurs with transfer of possession

1. Negotiation to specific payee - negotiation occurs by transferring possession along with identified payee's endorsement

2. Endorsement must be authorized and valid. Forgery can break chain of title and subsequent can generally not be holders

3. must be written on instrument or an allonge affixed to instrument

Transfer of possession is not negotiation.
1. Right of transferee - No status as holder unless there's an endorsement. Endorsement can be later obtained and vest title in transferee.
2. Transferee Banks - ! ! A depositary bank that takes an instrument for collection becomes a holder if the customer was a holder at the time of delivery even if customer has not endorsed!

1. Special or blank
2. qualified or unqualified and
3. Restrictive or unrestrictive

1. Special - names particular person as indorsee (pay John Jane [signed] Peter Payee). the indorsee (John Jane) MUST SIGN to be further negotiated.

2. Blank - A signature that is not accompanied by the naming of a specific indorsee (indorser signs his own name like most checks). Blank indorsements create bearer paper which may be negotiated by delivery alone.

Forgery of names not necessary to chain of title will not bar future holders.

Forging of drawer's name does NOT break chain of title because forgery operates as genuine signature of the FORGER.

Last indorsement controls if indorsed several times.

"Without Recorse" with indorsement is qualified and limits contract liability of indorser

Generally ineffective. e.g. check indorsed "pay Pete payee only" may be further negotiated to anyone. However, instrument with words requiring bank collection "for deposit," "for collection" must be paid consistently with the indorsement by any person or the first bank into which the instrument is deposited or it will be deemed to have been converted

usually made by person who is not holder for accommodation (suretyship) purposes. The anomalous indorser becomes liable on instrument.

If negotiable instrument is negotiated to a HDC the HDC takes free of most defenses.

To become an HDC the person must
1. be a holder (see Negotiation - becoming a holder) AND
2. must hold in due course

Holder took instrument for
1. value,
2. in good faith AND
3. without notice

Any of the following constitutes value
1. Performance of agreed consideration
2. Acquisition by holder of a lien or a security interest in the instrument (other than judicial lien)
3. Taking the instrument as payment of or security for an antecedent debt
4. Trading a negotiable instrument for another instrument
5. giving the instrument in exchange for incurring an irrevocable obligation to a 3P by the person taking the instrument

An executory promise is only "value" if it is an irrevocable promise to a 3P

Do not confuse "value" with consideration

Value need not be equivalent to face amount (a 1000$ promissory note purchased for 10$). However, if one only pays partial value they become partial HDC in proportion to % of value paid.

Banks - Become holder for "value" to the extent it lets them withdrawal the amount credited to depositor's account

Honesty in fact (subjective) AND observance of reasonable commercial standards (objective)

time of payment is important in good faith test

holder must NOT HAVE NOTICE. Notice includes actual AND reason to know from facts surrounding transaction.

Due course will be broken if purchaser has notice:

1) An instrument is overdue (anypart), an acceleration has been made, or more than a reasonable time has elapsed after issue of a demand on instrument (90 days for checks)
2) Unauthorized Signature or Alteration
3) Claims (property or possessory right) on the instrument. Notice that fiduciary has negotiated instrument for her own benefit also breaks HDC
4) Defenses (infancy, duress) or Claims in Recoupment by the obligor which reduce amount payable

To be effective notice must be receieved in such time and manner as to give a reasonable opportunity to act on it

and don't break HDC
1) Instrument is antedated, postdated or undated
2) Instrument was issued in return for an executory promise
3) Any party signed for accommodation
4) Incompleted instrument will be treated as complete unless purchaser has notice
5) Negotation made by fiduciary
6) There has been a default in payment of interest
7) There was apublic filing or recording of a document concerning the instrument
8) The instrument was sold at a discount
9) Notice of discharge of a party

No HDC status if instrument taken by legal process or purchase at judicial sale; acquiring it as a successor in interest to an estate or purchasing it as part of a bulk transaction not in the regular course of business of the transferor

Determined at moment instrument is negotiated to the holder or when she gives value (whichever is later). Thus, if transferee acquires notice of a claim or defense prior to negotiation or giving of value she will not be an HDC

If holder has merely a security interest in the instrument and the person obligated to pay has a defense or claim against the person who created the security interest, the holder is an HDC only to the extent of the unpaid portion of the secured obligation.

Payee is involved in the original transaction and generally will not be HDC

Transferee acquires whatever rights transferor had and takes shelter in HDC status. Protects free negotiability of commercial paper.

No rights are given to persons who were parties to fraud or illegality

Once a person qualifies as HDC all subsequent transferees will acquire the same HDC rights unless they are transferees after holder failed to obtain HDC rights because she was party to fraud or illegality

HDC can enforce instrument subject only to real defenses.

If the holder is not an HDC the obligated party may also assert ordinary contract defenses as well.

FAIDS
1. Fraud in Factum
2. Forgery

3. Alteration
4. Ajudicated Insanity

5. Infancy
6. Illegality

7. Dress
8. Discharge through bankruptcy
9. Discharges known by HDC

10. Suretyship defenses
11. Statute of limitations

1. Forgery of name necessary to title - no subsequent taker can be HDC unless forged name is later ratified or is estopped from denying forgery

Forgery of names unecessary to title does not affect right to enforce.

2. Fraud in Fact - Fraud that causes obligor to sign an instrument without knowledge or reasonable opportunity to learn of its character or essential terms e.g. obligor signs what he thinks is a letter but is actually a check. Other frauds are personal defense and don't work on HDC

1. Alteration of instrument- HDC may be only collect original un-altered amount. However HDC may get full amount in fraudulent completitions

Maker is usually liable only for the original amount, not altered. If check is blank and someone completes it without authorization the maker will be liable for the full amount.

2. Ajudication by incompetency - Court rules person incompetent and has no capacity to contract then the contract is rendered void and constitutes a real defense.

If obligations are voidable at option of the incompetent it becomes a personal defense and can't be asserted against an HDC

1. Infancy is a real defense if it is a defense in simple contract action under state law. if state doesn't make such contracts voidable then it is not a real defense.

2. Illegality - if underlying transaction renders obligation void it is a real defense even if HDC was not involved. if K is merely voidable then it is not a real defense

1. Duress - must be extreme
2. Discharge in insolvency proceedings - Discharge of debt in any proceeding intended to liquidate or rehabilitate a person's estate is a real defense

3. Discharges known by HDC

1. Statute of limitations

THREE YEARS:
(i) unaccepted drafts after date of dishonor
(ii) against issuers/acceptors of cashier's check, certified checks after demand
(iii) for conversion
(iv) for breach of warranty
(v) and enforce other Art. 3 rights

SIX YEARS
(i) notes payable at adefenite time or on demand and
(ii) certificates of deposit after demand for payment, but period does not start to run until the stated due date

2. Suretyship - An accomidation party, by signing the instrument, incurs liability without being a direct beneficiary. If HDC knows of the suretyship he takes subject to surety's defenses (discharge to the extent of loss caused by (i) extension of due date; (ii) material modification of obligation; OR (iii) impairment of collateral

Can't be raised against an HDC

1. Lack of consideration, failure of consideration, breach of warranty, fraud in the inducement.

Must be one's own defenses except the payor must raise the defense of theft if known

Prima Facie Case requires
1. signatures are genuine
2. Person presenting instrument is entitled to enforce

Presumption of validity. Must be specifically denied or admitted.

1. Holder
2. Nonholder (i) in possession (ii) with rights of a holder (subrogee) OR
3. A person not in possession but entitled to enforce (lost, stolen or destroyed instruments) - must prove ownership, terms and facts that prevent production of instrument but court has discretion to require protection to indemnify D against other claims

Once prima facie is proven by P, she is entitled to payment unless D raises defense or claims.

Once defense is made P can cut off defenses by establishing HDC status

Parties liable to D maybe "vouched in" if he has recourse rights against a 3P. Must give written notice of litigation. If 3P fails to appear and defend he will be bound by the determination of fact common to a suit against him by the party giving the notice. The vouched in 3P may also vouch in further parties.

1. Maker of Note, Issuer of Cashier's Check

By signing, the maker of the note contracts to pay the instrument according to terms at the time its issued. Promise is unconditional but defenses may be raised.

2. Indorsers on the instrument

2ndary liability i.e. a person is entitled to enforce the instrument first looks to the drawee or maker then Indorser. Indorser may negate liability by including "without recourse" in her indorsement.

To sue indorser the holder must show
1. presentment (enforcing the check)
2. dishonor (drawee doesn't pay), and
3. notice of dishonor (drawee knows he didn't pay)

Holder must show
I. Presentment - Person entitled to enforce makes demand on instrument.
Exceptions:
(1) Liability on check will be discharged unless check is presented for payment or given to a bank within 30 days after endorsement.
(2) Presentment is excused if
(i) entitled holder can't with reasonable diligence
(ii) maker has repudiated obligation to pay or is dead/broke
(iii) by instrument terms
(iv) obligor has waived presentment
(v) drawer instructed drawee not to pay or drawee was not obligated to pay (person tells bank not to pay)

II. Dishonor - Drawee doesn't pay within allowed time after presentment. Other than checks, instruments must be paid on day of presentment. With checks, it is dishonored if bank returns the check and in WRITING says its dishonoring BEFORE (i) final payment OR (ii) Bank's midnight deadline

With time instruments, they are dishonored if not payed on date they become payable or date of presentment, whichever is later.

III. Notice of Dishonor - Given by any reasonable commercial means and must be within 30 days after dishonor. Need not be given to maker of note or drawer of a draft.

Any one indorser is liable to any holder or later indorser of instrument for the full amount that the instrument stated was payable at the time indorser indorsed.