1. Commercial Paper Law

Commercial Paper Law

Video Playlist: 45 Videos: 102 Minutes


Topic Material

Commercial Paper (Intro)

Commercial Paper Explained

What is “Commercial Paper”?


Topics: Learning Material

Introduction to Commercial Paper
Commercial paper is a document that promises to pay a sum of money to the holder or possessor of the instrument. It is very common to use commercial paper as consideration in a business transactions rather than cash. This chapter introduces commercial paper. It identifies the main types and requirements (elements) of commercial paper. It explains the rights of a holder or possessor of the commercial paper and the obligations of the payor of the instrument. It also provides for the rights of subsequent transferees or purchasers of the commercial paper. Notably, it introduces the concept of a holder in due course. Lastly, it provides for the potential liability of any maker, drawer, transferor, signor, or individual presenting the commercial paper for payment. For further written and video explanation, discussion and practice questions, see Commercial Paper (Intro)

What is “Commercial Paper”?
  • An “instrument”

⁃ Promise to pay money to the holder of the instrument.

⁃ Substitute to money.

  • Unconditional right to be paid.

⁃ the paper is negotiable,

⁃ Issued or negotiated to the possessor,

⁃ possessor is holder in the due course, and

⁃ the issuer cannot claim any of the limited number of real defenses.

For further written and video explanation, discussion and practice questions, see What is "Commercial Paper"?

Common Types of Commercial Paper

When examining the attributes of commercial paper, it is important to differentiate between the most common types of paper. The types of commercial instrument include:

  • Notes

⁃ Certificates of Deposit

  • Drafts

⁃ Checks

For further written and video explanation, discussion and practice questions, see What are the common types of commercial paper?

“Holder” of Negotiable Instrument
  • One who has possession of and is entitled to enforce the instrument.

For further written and video explanation, discussion and practice questions, see Who is a "holder" of a negotiable instrument?

“Negotiability” of an Instrument
  • Transfer of negotiable paper from one holder to another.
  • Non-negotiable Commercial Paper
  • Negotiable Commercial Paper

For further written and video explanation, discussion and practice questions, see What is "negotiability" and why is it important?

Requirements for “Negotiability”
  • Writing
  • Signed by Issuer
  • Unconditional Promise to Pay
  • Definite Amount
  • Payable on Demand or on Time
  • Payable to Order or To Bearer
  • No Further Undertaking

For further written and video explanation, discussion and practice questions, see What is required for commercial paper to be "negotiable"?

“Unconditional Promise to Pay”
  • Any requirement in order to receive payment upon presentation of the instrument.

For further written and video explanation, discussion and practice questions, see When does commercial paper contain an "unconditional promise to pay?

“Payable on Demand” or “Payable on Time”
  • Payable on demand - states as much or it does not state any time of payment.
  • On-time instrument - payable at a specific time and date.

⁃ Able to be determined at the time the instrument is issued.

For further written and video explanation, discussion and practice questions, see What is "payable on demand" or "payable on time"?

“Order Paper” and “Bearer Paper”
  • Order Paper - “pay to the order of (identified person)” or “to (identified person) or order”.
  • Bearer Paper - “to bearer” or it is not made out to any specific person

For further written and video explanation, discussion and practice questions, see What is "order paper" and "bearer paper"?

Identifying the Payee
  • An individual named in the instrument (order paper)
  • An individual in possession of the instrument (bearer paper).
  • Name, identifying number, office, or account number.

For further written and video explanation, discussion and practice questions, see How is a payee identified on the negotiable instrument?

Court Rules in Determining Negotiability
  • Words take precedent over numbers,
  • Handwritten terms prevail over typed and printed terms, and
  • Typed terms win over printed or boiler-plate terms.

For further written and video explanation, discussion and practice questions, see What rules does the court apply in determining negotiability?

Negotiation of Commercial Paper to a Holder
  • transfer of possession, and
  • indorsement (signature) by the holder.

For further written and video explanation, discussion and practice questions, see How is commercial paper negotiated to a holder?

Transfer of a Negotiable Instrument
  • Delivered by a person (other than its issuer)
  • Purpose of giving the recipient the right to enforce the paper and receive payment.
  • Transfes right of the transferor to enforce the instrument.
  • Transferee is subject to any defenses from the payor may have to payment.

For further written and video explanation, discussion and practice questions, see What is "transfer" of a negotiable instrument?

Indorsement of a Negotiable Instrument
  • Signing it.
  • Certifies certain things about the instrument.
  • Not required to transfer bearer paper.

For further written and video explanation, discussion and practice questions, see What is "indorsement" of a negotiable instrument?

Various Types of Indorsement
  • Blank Indorsement
  • Special Indorsement
  • Restrictive Indorsement
  • Qualified indorsement
  • Anomalous indorsement

For further written and video explanation, discussion and practice questions, see What are the various types of indorsement?

Holder Received Payment on a Negotiable Instrument
  • Traded for value
  • “presentment”

⁃ exhibit the instrument,

⁃ give reasonable identification, and

⁃ surrender the instrument.

For further written and video explanation, discussion and practice questions, see How does a holder receive payment on a negotiable instrument?

Who is Obligated to Pay Negotiable Instrument?
  • Drawee of a draft is or note maker
  • Anyone who held and then transferred the instrument
  • Individuals who sign the instrument as indorser

For further written and video explanation, discussion and practice questions, see Who is potentially liable on (or obligated to pay) a negotiable instrument?

Liability for Representative Signing Negotiable Instrument
  • Signature shows made on behalf of the represented person, and
  • instrument identifies the represented person.

For further written and video explanation, discussion and practice questions, see When is an individual liable for a representative signing a negotiable instrument?

Rules for a Lost Negotiable Instrument
  • Obligor is obligated to pay the instrument upon presentment.
  • Pay the party losing the instrument requests payment
  • Losing payee must show

Possession

Accidental Loss

Location Unknown

Instrument Terms

For further written and video explanation, discussion and practice questions, see What rules apply if a holder loses a negotiable instrument?

Payment of Negotiable Instrument Overdue
  • Instrument is due, but it has not been paid.

⁃ the day after demand for payment is duly made;

⁃ for a check, 90 days after its posted date; or

⁃ after a period of time unreasonably long under the circumstances.

For further written and video explanation, discussion and practice questions, see When is payment of a negotiable instrument overdue?

Effect of Negotiable Instrument on Underlying Obligation
  • Arise pursuant to an underlying agreement, contract, or obligation.
  • “ordinary instruments” the underlying obligation is merged and suspended until payed.
  • “near-cash instrument” - discharged at the time instrument is accepted

For further written and video explanation, discussion and practice questions, see What effect does a negotiable instrument have on the underlying obligation?

What is a “Holder in Due Course”?
  • HDC status makes the negotiable instrument more valuable to the holder
  • Immune from these defenses at the time of presenting the instrument.
  • The payor of the instrument is estopped denying the validity of the instrument or asserting any defenses
  • The instrument may be purged of any defects that are not apparent to the holder in due course.
  • May seek payment from prior transferor, indorser, if dishonored.

For further written and video explanation, discussion and practice questions, see What is a "holder in due course"?

Requirements to be a Holder in Due Course
  • Value
  • Good Faith
  • Unaware of Defenses

For further written and video explanation, discussion and practice questions, see What are the requirement for a holder to become a holder in due course?

Receive and Instrument for Value
  • Assets, services, or money in exchange for the instrument.
  • A gift is not “for value”.
  • If value is services, must already be provided.

For further written and video explanation, discussion and practice questions, see Receive an instrument for value?

Receive and Instrument in Good Faith
  • Subjective Test - Did the holder believe the transaction was completed without the intent to defraud or deceive?
  • Objective Test - Would a reasonable persona believe the transaction to be commercially reasonable?

For further written and video explanation, discussion and practice questions, see Receive an instrument in good faith?

Receive Instrument without Notice of a Valid Defense
  • Overdue
  • Dishonored
  • Default on Collateral Instrument
  • Instrument is Altered, Forged, or Incomplete
  • Notice of Claims or Disputes

For further written and video explanation, discussion and practice questions, see Receive an instrument without notice of a valid defense?

Effect of “Discharge” of Underlying Obligation
  • Underlying Agreement
  • Holder is affected
  • HDC is not.
  • Not a “notice of a valid defense”

For further written and video explanation, discussion and practice questions, see How does discharge of the "underlying obligation" affect a holder in due course?

What is the “Shelter Rule”?
  • Protect the rights of a holder
  • Transferee of a negotiable instrument receives all of the rights of the transferor
  • Transfer cannot be for fraud or illegal means.
  • Protects transferee of an HDC

For further written and video explanation, discussion and practice questions, see What is the "Shelter Rule"?

Limit Transferee from Holder in Due Course Status
  • The Federal Trade Commission Rule
  • Language in the legend or footnoted
  • “Subject to applicable defenses and a possessor is not a holder in due course”.

For further written and video explanation, discussion and practice questions, see Can you limit a transferee from becoming a holder in due course?

What are “Personal Defenses”?

Personal Defenses

  • Breach of Contract
  • Failure of a Condition
  • Lack or Failure of Consideration
  • Mistake
  • Waiver
  • Prior Payment
  • Theft of the Instrument
  • Unauthorized Completion
  • Fraud in the Inducement
  • Theft

For further written and video explanation, discussion and practice questions, see Personal Defenses?

What are “Real Defenses”?

Real Defenses

  • Forgery
  • Bankruptcy
  • Alteration
  • Duress, Mental Incapacity, Illegality
  • Fraud in Fact

For further written and video explanation, discussion and practice questions, see Real Defenses?

What is a “Claim in Recoupment”?
  • Similar to a personal defense.
  • Set off any claims against the initial payee from the amount payable on the instrument.
  • Valid against a holder, but not against a holder in due course.

For further written and video explanation, discussion and practice questions, see What is a "claim in recoupment"?

Rights of Holder in Due Course if Consumer Transaction
  • Consumer of a good signs a note promising to pay
  • Federal Trade Commission must contain the designation “consumer paper”.
  • Instrument is non-negotiable.

For further written and video explanation, discussion and practice questions, see What are the rights of a holder in due course if the instrument involves a consumer transaction?

Forged Negotiable Instrument
  • Not enforceable against forged party.
  • Enforceable against the forger.

For further written and video explanation, discussion and practice questions, see What happens if a negotiable instrument is "forged"?

Stolen Negotiable Instrument
  • Order paper can only be transferred by the thief if it is altered or forged.
  • Bearer paper may be transferred by anyone in possession of the instrument.

For further written and video explanation, discussion and practice questions, see What happens if a negotiable instrument is "stolen"?

“Guarantor” or “Surety” of a Negotiable Instrument
  • also known as a surety or co-signor)
  • serves to add certainty of payment of a negotiable instrument.
  • Guarantee of Payment
  • Guarantee of Collection

For further written and video explanation, discussion and practice questions, see What is the role of a guarantor or surety of a negotiable instrument?

“Accord & Satisfaction” of a Negotiable Instrument
  • Offer of settlement of a disputed debt.
  • Requirements

Good Faith

Bona Fide Dispute

Payment Accepted

Adequate Notice

For further written and video explanation, discussion and practice questions, see What is an "accord & satisfaction"?

Primary and Secondary Liability on Negotiable Instrument
  • Primary Liability
  • Secondary Liability

For further written and video explanation, discussion and practice questions, see What is primary and secondary liability on an instrument?

“Drawer or maker liability” for a Negotiable Instrument
  • Creator is liable on the instrument.
  • Drawer is liable if dishonored.

For further written and video explanation, discussion and practice questions, see What is "drawer or maker liability" for a negotiable instrument?

“Transferor Warranty”
  • Enforceability
  • Authorization
  • Alterations
  • Defenses
  • Solvency

For further written and video explanation, discussion and practice questions, see What is "transferor warranty" of a negotiable instrument?

What is “Indorser Warranty”?
  • Sign instrument
  • Same as transfer warranties
  • Any good-faith holder of the note may enforce

For further written and video explanation, discussion and practice questions, see What is "indorser warranty" of a negotiable instrument?

What is “Presentment Warranty”?
  • Enforceability
  • No Alterations
  • No Forgeries

For further written and video explanation, discussion and practice questions, see What is "presentment warranty" of a negotiable instrument?

What is “Warrantor’s Liability” for Dishonored Note?
  • Recover damages from a prior warrantor
  • Loss suffered as a result of the dishonor.
  • Plus expenses and loss of interest

For further written and video explanation, discussion and practice questions, see What is a warrantors liability for a dishonored note or draft?

Time Limitation for Warranty of Negotiable Instrument
  • Notice of a claim for breach of warranty - within 30 days
  • Warrantor is discharged to the extent of any loss caused by the delay

For further written and video explanation, discussion and practice questions, see What is the time limitation for warranty of a negotiable instrument?

Discharge from Warranties on Negotiable Instrument
  • Discharge a debt under common contract law
  • Still subject transferors or indorsers to liability.

For further written and video explanation, discussion and practice questions, see When are the warranties of a negotiable instrument discharged?


Flashcard - Study Practice

Q1
____________ is a broad categorization of financial instruments (also referred to as an “instrument”) promising to pay or ordering payment to a person legally entitled to enforce the instrument.

A1
Commercial paper

Q2
Because it has value for the individual in possession or holding the instrument, it is used as _______ in commercial transactions.

A2
a substitute to money

Q3
________ is one party’s unconditional promise to pay money to another party.

Q4
The _______ of the note makes an unconditional promise to pay the payee. The ______ is the person entitled to payment of the note.

Q5
The payment may be due __________ or ____________.

A5
at a date certain; payable on demand.

Resource Video: https://thebusinessprofessor.com/types-of-commercial-paper/

Q6
________ is an order directing someone else to pay money to the payee.

Q7
The ______ is the maker of the draft. The ______ is the party ordered to make payment to the ______ or holder of the draft.

A7

Q8
A _________ is one who is named as payee, has possession of, and is entitled to enforce the instrument.

Q9
If the commercial paper is not payable to a particular person (i.e., it is payable to anyone in possession of the paper), _________ is a holder.

Q10
An individual who is issued a note or draft is a holder. A person can also become a holder by receiving the draft through _________.

A10
“Negotiation” of the instrument

Resource Video: https://thebusinessprofessor.com/who-is-a-holder-of-a-negotiable-instrument/

Q11
To be a substitute for money, commercial paper must be freely transferable in the marketplace. That is, the paper must be _________.

Q12
Paper that is not negotiable may still be transferred. True or False

A12
True. However, the holder has fewer rights in enforcing payment of the non-negotiable, commercial paper.

Resource Video: https://thebusinessprofessor.com/negotiability-of-a-commercial-instrument/

Q13
An individual in possession of a non-negotiable instrument has the same rights as ________.

A13
the original issuee. (If the original party loses his right to be paid (think of defenses to payment of a contract), so does the transferee of the commercial paper.)

Resource Video: https://thebusinessprofessor.com/negotiability-of-a-commercial-instrument/

Q14
When paper is negotiable and validly negotiated to a subsequent holder who qualifies as a _________, the holder may acquire greater rights to enforce the instrument against the payor or maker.

A14
“holder in due course” - The holder in due course will have a greater right to payment because the maker or payor cannot assert certain defenses (personal defenses) to payment against the holder in due course.

Resource Video: https://thebusinessprofessor.com/negotiability-of-a-commercial-instrument/

Q15
An instrument is negotiable if it meets the following qualifications:

A15
The instrument must be in writing; The issuer must sign the instrument; The instrument must contain an unconditional promise to pay; The instrument must state a specific amount of money that it will pay; Must be payable “on demand” or “on time”; Must be payable “to order” or “to bearer”; no further requirements to get paid.

Resource Video: https://thebusinessprofessor.com/requirements-for-commercial-paper-to-be-negotiable/

Q16
A _________ instrument must be paid whenever the holder requests payment, while a payable ________ instrument indicates a specific date and time.

Q17
_______ is payable to a specific individual. This individual’s signature is required if the instrument is transferred to another holder. ________ means that any holder of the paper can present it for payment.

A17
Order paper (“payable to order”); Bearer paper (“Payable to Bearer”)

Resource Video: https://thebusinessprofessor.com/requirements-for-commercial-paper-to-be-negotiable/

Q18
Any condition placed on the payment makes the instrument non-negotiable. True or False

A18
True. A condition is any requirement that a circumstance come to fruition or that the holder undertake any additional actions in order to receive payment upon presentation of the instrument.

Resource Video: https://thebusinessprofessor.com/unconditional-promise-to-pay/

Q19
An on-time instrument is payable at a specific time and date, which must be able to be determined __________.

Q20
Order paper must include the words _____________.

A20
“pay to the order or (identified person)” or “to (identified person) or order”

Resource Video: https://thebusinessprofessor.com/negotiable-instruments-order-or-bearer-paper/

Q21
Designating a payee generally requires the identified person to indorse (sign) the instrument. Signing the instrument makes it _______, unless the signor identifies a person to whom the instrument is being transferred.

A21
bearer paper - that is anyone holding the paper can present it for payment.

Resource Video: https://thebusinessprofessor.com/negotiable-instruments-order-or-bearer-paper/

Q22
If the commercial paper is made out _________, it is bearer paper. It can be redeemed by any holder of the paper, subject to certain defenses.

A22
“to bearer” or it is not made out to any specific person

Resource Video: https://thebusinessprofessor.com/negotiable-instruments-order-or-bearer-paper/

Q23
An instrument that names a payee may name or identify the payee in any number of methods, including __________.

A23
by name, identifying number, office, or account number.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-how-is-payee-identified/

Q24
As a general rule, an instrument is payable to the person intended by the issuer, whether or not that person’s correct name appears on the instrument. True or False

Q25
If the instrument is payable to “either Identified Person or Identified Person” (this may use the word “alternatively” or some derivative thereof), it may be negotiated or enforced by ___________.

A25
any or all of the named individuals.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-how-is-payee-identified/

Q26
If the instrument is made out collectively to two or more individuals (“not alternatively”), it is payable to all of them and __________.

A26
must be enforced by all individuals together. That is, all individuals must indorse the instrument for transfer or present it for payment.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-how-is-payee-identified/

Q27
What are some of the rules that apply to situations where terms in a negotiable instrument contradict each other?

A27
Words take precedent over numbers; Handwritten terms prevail over typed and printed terms; and Typed terms win over printed or boiler-plate terms.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-general-rules-of-interpretation/

Q28
____________ means that an instrument has been transferred (either voluntarily or involuntarily) to the holder by someone other than the issuer.

Q29
If an individual acquires paper by a method other than negotiation, she is a ________ and not a “holder” of the paper.

Q30
Commercial paper is negotiated upon:

A30
Transfer of possession, and Indorsement (signature) by the holder.

Resource Video: https://thebusinessprofessor.com/how-is-negotiable-instrument-negotiated/

Q31
An instrument is transferred when it is delivered by a person (other than its issuer) with the purpose of __________.

A31
bestowing the right to enforce the instrument pursuant to its terms.

Resource Video: https://thebusinessprofessor.com/transfer-of-a-negotiable-instrument/

Q32
Transfer vests in the transferee the rights of the transferor to enforce the instrument. The transferee stands in the same position as the transferor with regard to the payor’s defenses against payment. True or False

Q33
___________ of an instrument means signing it.

Q34
If paper being negotiated is order paper (as apposed to bearer paper), the paper must be indorsed by ___________ prior to transfer to another holder.

A34
the person to whom the paper is payable

Resource Video: https://thebusinessprofessor.com/indorsement-of-a-negotiable-instrument/

Q35
Indorsement by the payee may change the paper from ____________, as well as put other limiting characteristics on the instrument.

A35
order to bearer paper (and vice versa)

Resource Video: https://thebusinessprofessor.com/indorsement-of-a-negotiable-instrument/

Q36
A payee may indorse the instrument to make it bearer paper or have a ___________ indorsement to limit the rights of the future holder of the paper.

A36
special/restrictive/qualified/anonymous

Resource Video: https://thebusinessprofessor.com/indorsement-of-a-negotiable-instrument/

Q37
If the commercial paper in possession of the transferor is bearer paper, the ___________ constitutes a negotiation.

A37
transfer of possession. Even involuntary transfer (such as when the paper is lost or stolen) or voidable transfer (such as from an infant, through fraud, duress, misrepresentation,etc.) are sufficient to constitute negotiation.

Resource Video: https://thebusinessprofessor.com/indorsement-of-a-negotiable-instrument/

Q38
___________ means signing the instrument without designating any particular payee or making any other form of limiting designation.

Q39
__________ is a signature and instruction that limits the instrument to a particular person, and may limit the indorser’s potential liability.

Q40
A ___________ includes the payee’s signature and instructions that limit the instrument to a particular use.

Q41
A ____________ is an individual’s signature including the words, "without recourse”, which limits the potential liability of the indorser who is transferring the instrument in the event the payor ultimately dishonors the instrument.

Q42
___________ is an indorsement by someone other than the holder or transferor of the instrument.

Q43
A negotiable instrument cannot be traded to others prior to the time of payment. True or False

A43
False - It may be traded for value up until the time of payment.

Resource Video: https://thebusinessprofessor.com/presenting-a-negotiable-instrument-for-payment/

Q44
A holder of the instrument may seek payment from a person obligated to pay the instrument through a process known as ________.

Q45
The holder presents a note to __________ , while a holder of a draft presents the draft to _________.

A45

____________ is “primarily obligated” to pay the instrument.

A46
The maker of a note or drawee of a draft

Resource Video: https://thebusinessprofessor.com/liability-to-pay-a-negotiable-instrument/

Q47
If the maker of a note or drawee of a draft fails to honor the note or draft, __________ may be “secondarily liable” to pay it.

A47
anyone who held and then transferred the instrument

Resource Video: https://thebusinessprofessor.com/liability-to-pay-a-negotiable-instrument/

Q48
By transferring the instrument, they warrant that the instrument being held is valid and payable. This is known as __________.

Q49
An individual who signs an instrument as indorser is also potentially liable to pay the instrument if it is dishonored. This is known as __________.

A49
“indorser liability”. (This is true even if the signor never held or transferred the instrument; such as in the case of a guarantor).

Resource Video: https://thebusinessprofessor.com/liability-to-pay-a-negotiable-instrument/

Q50
If a representative (an agent) signs a commercial instrument on behalf of a the represented person or business (the principal), the principal is bound and made liable by the representative signing either __________.

A50
the principal’s name or the agent’s name.

Resource Video: https://thebusinessprofessor.com/liability-for-negotiable-instrument-signed-by-agent/

Q51
A representative signing a negotiable instrument is not liable on the instrument if:

A51
The form of the signature shows unambiguously that the signature is made on behalf of the represented person, and the instrument identifies the represented person.

Resource Video: https://thebusinessprofessor.com/liability-for-negotiable-instrument-signed-by-agent/

Q52

Q53
To be entitled to payment of a lost instrument, the payee losing the instrument must prove:

A53

Q54
Generally, an instrument is overdue when ___________.

A54
the obligation to pay arises (upon presentment or at a specific time), but it has not been paid.

Resource Video: https://thebusinessprofessor.com/overdue-payment-of-negotiable-instrument/

Q55
A payable on demand instrument is overdue on the earliest of:

A55
the day after demand for payment is duly made; for a check, 90 days after its posted date; or after a period of time unreasonably long under the circumstances.

Resource Video: https://thebusinessprofessor.com/overdue-payment-of-negotiable-instrument/

Q56
For _________ the underlying obligation (contract for which the negotiable instrument was issued) is merged and suspended until the negotiable instrument is payed. (That is, the issuee may withhold performance of her obligation under the contract (such as delivery of goods) until the instrument is paid.)

Q57
If the commercial paper is a __________, the maker or drawer’s obligation is discharged at the time the instrument is accepted by the party to the underlying agreement.

A57
“near-cash instrument” (Near cash instruments include certified checks, cashier’s checks, and teller’s checks.)

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-effect-on-underlying-contract/

Q58
The holder of a negotiable instrument is elevated to a higher status than that of a simple holder if she qualifies as a ________.

A58
“holder in due course” (HDC).

Resource Video: https://thebusinessprofessor.com/what-is-a-holder-in-due-course/

Q59
If a holder is not a HDC, her rights in the instrument are the same as ___________.

A59
the original payee of the instrument prior to transfer.

Resource Video: https://thebusinessprofessor.com/what-is-a-holder-in-due-course/

Q60
HDC status makes the holder immune from these defenses at the time of presenting the instrument. HDC benefits are as follows:

A60
The payor of the instrument is estopped (stopped from) denying the validity of the instrument or asserting any personal defenses to payment of the instrument. The instrument may be purged of any defects that are not apparent to the holder in due course. The holder in due course may assert her right to payment against any prior indorsers or immediate transferor of the instrument if the instrument is dishonored (not payed) upon presentment.

Resource Video: https://thebusinessprofessor.com/what-is-a-holder-in-due-course/

Q61
To qualify as a HDC, the holder of the commercial paper must meet the following requirements:

A61
The holder must take the instrument for value. The holder must receive the instrument in good faith (cannot have the intent to defraud anyone in receiving the instrument). The holder cannot have notice that there is a valid defense to enforcement of the instrument.

Resource Video: https://thebusinessprofessor.com/requirements-for-holder-in-due-course-status/

Q62
The holder must provide some form of value, such as assets, services, or money in exchange for the instrument. This includes receiving the instrument as a gift. True or False

Q63
When exchanging the instrument for services or irrevocable obligations, the key characteristic is that the value must ________.

A63
have already been provided in exchange for the instrument.

Resource Video: https://thebusinessprofessor.com/holder-in-due-course-receive-instrument-for-value/

Q64
Receiving an instrument in good faith means acting in accordance with reasonable commercial standards and honesty in fact (no fraudulent intent in receiving the instrument). A holder must meet two tests to determine if good faith is present:

A64
Subjective Test - Did the holder believe the transaction was completed without the intent to defraud or deceive? Objective Test - Would a reasonable person believe the transaction to be commercially reasonable?

Resource Video: https://thebusinessprofessor.com/holder-in-due-course-receive-instrument-in-good-faith/

Q65
Valid defenses of the payor against payment of the instrument may include:

A65
Overdue - If the instrument has a stated time for payment and that time or date has passed, it is overdue.

Dishonored - If the instrument has been presented for payment and is dishonored.

Default on Collateral Instrument - This generally arises when the instrument is issued as part of a series of transactions.

Instrument is Altered, Forged, or Incomplete - An unauthorized alteration, unauthorized filling in of an incomplete instrument, or a forgery of an instrument is a valid defense against payment.

Notice of Claims or Disputes - A valid defense includes when a third party has a claim to the instrument or there is a dispute between the original parties to the instrument.

Resource Video: https://thebusinessprofessor.com/holder-in-due-course-notice-of-valid-defense/

Q66
The UCC specifically excludes a list of individuals from HDC status based upon the manner in which they became holder of the instrument.

A66
Judgment creditors, bulk instrument purchasers, and heirs inheriting the instrument, for example, do not qualify as HDCs.

Resource Video: https://thebusinessprofessor.com/holder-in-due-course-notice-of-valid-defense/

Q67
A Holder in Due Course is not subject to the payor’s personal defenses to payment of the instrument. True of False

Q68
Discharge of either party from her obligations under the contract giving rise to the negotiable instrument may NOT serve as a defense to the payor having to pay the instrument (whether or a Holder or Holder in Due Course).

A68
False. Discharge of the underlying obligation does not, however, affect the payment rights of a HDC who takes the instrument without notice of the discharge.

Resource Video: https://thebusinessprofessor.com/holder-in-due-course-discharge-of-underlying-obligation/

Q69
Pursuant to _______, the transferee of a negotiable instrument receives all of the rights of the transferor of the instrument, unless the transfer is carried out by fraud or illegal means. This is important in situations where the transferor is a holder in due course, but the transferee is not.

A69
the “shelter rule”. The shelter rule provides liquidity to a HDC who, after accepting an instrument, learns of a defense against its enforcement.

Resource Video: https://thebusinessprofessor.com/shelter-principle-and-negotiable-instruments/

Q70
The issuer of a note may limit the ability of anyone to whom the note is transferred to become a holder in due course, if the note is________.

A70
Issued pursuant to the sale of goods.

Resource Video: https://thebusinessprofessor.com/limit-holder-in-due-course-status/

Q71
To limit the ability of a transferee of a note to become a holder in due course, the note must ________.

A71
have the proper language in the legend or footnoted that the paper may be subject to applicable defenses and a possessor is not a holder in due course.

Resource Video: https://thebusinessprofessor.com/limit-holder-in-due-course-status/

Q72
The payor can assert _____________ against the holder in due course.

A72
only real defenses, not personal defenses

Resource Video: https://thebusinessprofessor.com/personal-defenses-to-negotiable-instrument/

Q73
Personal defenses are generally defenses applicable to the underlying agreement or between the original parties to the underlying agreement. Common personal defenses include:

A73
Contract Defenses (Breach of Contract; Failure of a Condition; Lack or Failure of Consideration; Mistake, Fraud in the Inducement; Waiver); The note has already been paid; Theft of the Instrument; Unauthorized Completion of the Instrument;

Resource Video: https://thebusinessprofessor.com/personal-defenses-to-negotiable-instrument/

Q74
Real defenses apply against any holder, including a holder in due course. Common real defenses are as follows:

A74
Forgery; Bankruptcy; Alteration of the Instrument; Duress, Mental Incapacity, Illegality Fraud in Fact (intentional deceit in the underlying contract).

Resource Video: https://thebusinessprofessor.com/real-defenses-to-payment-of-negotiable-instrument/

Q75
A _______, similar to a personal defense, allows a payor to offset any claim that she has against the claimant or the original issuee.

Q76
The Federal Trade Commission and some states require consumer credit contracts (and sometimes consumer promissory notes) to contain the designation __________. This designation makes the instrument non-negotiable.

Q77
A forged negotiable instrument is enforceable against the party whose name was forged. True or False.

A77
False. The forged instrument is, however, enforceable against the forger.

Resource Video: https://thebusinessprofessor.com/forged-negotiable-instrument-and-holder-status/

Q78
Can an individual who receives stolen order paper enforce the instruments?

A78
No. A transferee of stolen, forged order paper is not a holder or holder in due course and therefore does not take free of the payor’s defenses.

Resource Video: https://thebusinessprofessor.com/stolen-negotiable-instrument-and-holder-status/

Q79
Can an individual who receives stolen bearer paper enforce the instruments?

A79
Yes. Bearer paper, on the other hand, may be transferred by anyone in possession of the instrument.

Resource Video: https://thebusinessprofessor.com/stolen-negotiable-instrument-and-holder-status/

Q80
A guarantor of a note or draft is a(n) ______________ who signs the instrument as an indorser.

Q81
A holder may demand payment from _____________ (accommodation party) without first seeking payment from other co-maker.

Q82
A ____________ is an accommodation party who is liable only if a judgment is rendered against a payor and the judgment is uncollectible against the debtor or is returned unsatisfied.

Q83
An ______________ is a resolution of a contested debt. This is an offer of settlement of the disputed debt.

Q84
An instrument that purports to be full payment for an obligation will discharge an obligation if certain requirements are present:

A84
One party, in good faith, tenders an instrument to the claimant as full satisfaction of the claim; The amount of the claim is subject to a bona fide dispute; The party receiving the offer of settlement obtains payment of the instrument; and The instrument or accompanying written communication contains a conspicuous statement to the effect that the instrument is tendered as full satisfaction of the claim.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-accord-and-satisfaction/

Q85
A creditor receiving an offer of accord and satisfaction who inadvertently accepts the payment (not aware of accord language), upon learning of the other party’s intent, may ______________.

A85
make or offer repayment within 90 days of receipt.

Resource Video: https://thebusinessprofessor.com/negotiable-instrument-accord-and-satisfaction/

Q86
____________ are primarily liable to pay an instrument.

A86
The maker of a note and drawee of a draft

Resource Video: https://thebusinessprofessor.com/liability-for-warranties-of-negotiable-instrument/

Q87
Parties who ____________ may be secondarily liable to pay the instrument.

A87
later sign, transfer, or present an instrument

Resource Video: https://thebusinessprofessor.com/liability-for-warranties-of-negotiable-instrument/

Q88
Secondary liability is conditioned upon ____________.

A88
the note or draft being dishonored upon presented for payment to the primarily liable party.

Resource Video: https://thebusinessprofessor.com/liability-for-warranties-of-negotiable-instrument/

Q89
The drawer, as creator of the instrument, is liable if the drawee dishonors (refused to pay) the draft. True of False

Q90
If a maker or drawer wrongfully refuses to pay the instrument, _____________ may sue for wrongful dishonor.

A90
any person entitled to enforce the instrument or any indorser who paid the instrument

Resource Video: https://thebusinessprofessor.com/drawer-or-maker-liability-to-pay-negotiable-instrument/

Q91
A transferor of a negotiable instrument warrants the following to the recipient of the instrument:

A91
Good Title - The transferor has good title to the instrument; Enforceability - The transferor is entitled to enforce the instrument; Authorization - All signatures are authorized and authentic; Alterations - There have been no alterations to the instrument; Defenses - There are no defenses to enforcing the instrument; and Solvency - The transferor does not know the payor to be insolvent.

Resource Video: https://thebusinessprofessor.com/transfer-warranty-of-negotiable-instrument/

Q92
Transfer warranties only apply when ____________.

A92
the transferor transfers the instrument for consideration (in exchange for value).

Resource Video: https://thebusinessprofessor.com/transfer-warranty-of-negotiable-instrument/

Q93
An indorser of an instrument makes warranties to the maker or drawer of an instrument:

A93
Good Title - She has good title to the instrument; Forgery - She has no knowledge of forgery, and Materially Altered - The instrument is not materially altered.

Resource Video: https://thebusinessprofessor.com/indorser-liability-for-negotiable-instrument/

Q94
An indorser of an instrument warrants to a subsequent holder that:

A94
Good Title - She has good title, Signatures - All signatures are genuine, Alterations - The instrument is not materially altered, Defenses - There are no known defenses against payment of the instrument, and Insolvency - There is no knowledge of the maker or drawer’s bankruptcy.

Resource Video: https://thebusinessprofessor.com/indorser-liability-for-negotiable-instrument/

Q95
___________ (A type of warranty) applies when a person entitled to payment of an instrument presents it to a maker or drawee for payment.

Q96
The presenter warrants to a good faith payor the following:

A96
Enforceability - She is entitled to enforce the instrument; No Alterations - The terms of the instrument are genuine and there have been no alterations; and No Forgeries - The drawer of the instrument’s signature is genuine.

Resource Video: https://thebusinessprofessor.com/presentment-warranty-of-a-negotiable-instrument/

Q97
A payor of an instrument can enforce these warranty provisions against ______________.

A97
the presenter and all prior transferors of the instrument.

Resource Video: https://thebusinessprofessor.com/presentment-warranty-of-a-negotiable-instrument/

Q98
An individual presents a draft or note for payment that is dishonored may recover damages from a prior warrantor of the instrument. She may recover from the warrantor _____________.

A98
an amount equal to the loss suffered as a result of the dishonor. This includes, the amount payable on the instrument, plus expenses and loss of interest incurred as a result of the dishonor.

Resource Video: https://thebusinessprofessor.com/warrantor-liability-on-negotiable-instrument-damages/

Q99
The holder of an instrument must make a warranty claim to a warrantor within ______________.

A99
30 days of notice of dishonor of the instrument. Failure to give this notice within 30 days may relieve the warrantor from liability for any losses incurred as a result of the failure of the claimant to give timely notice.

Resource Video: https://thebusinessprofessor.com/warranty-liability-negotiable-instrument-time-limitations/

Q100
Transferor, indorser, and presenter liability is discharged by __________.

A100
any manner that would effectively discharge a party’s obligation on a contract at common law.

Resource Video: https://thebusinessprofessor.com/discharge-warranties-negotiabl-instrument/


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