COMMERCIAL PAPER

Requirements of a Negotiable Instrument:

A promise or order, other than a check, is not an instrument if it contains a conspicuous
statement that it is non-negotiable or not governed by Art. 3. To be negotiable, an instrument
must:
1. be a signed writing;
Forging a signature constitutes the signature of the forger
2. containing an
a. Promise or order is
But a mere reference to
unconditional promise or
conditional if:
another writing doesnt
order;
1) contains an express
make the promise or order
condition to payment;
conditional.
2) states that it is subject
to/governed by another writing;
or
3) states that rights/obligations
associated to it are stated in
another writing.
3. to pay a fixed amount of
must be payable in money only and the amount due must be
money with/without interest or
ascertainable from the instrument.
other charges;
4. be payable to order or to
a. Instrument is payable to order if its payable to the order of
bearer at the time it is either
an identified person or order.
issued or comes into
b. Instrument is payable to bearer if it:
possession of a holder;
1) states that it is payable to bearer or order to bearer;
2) doesnt state a payee;
3) states it is payable to cash; or
4) indicates it is not payable to an identified person.
c. If payable to >2 persons alternatively (X or Y), it is payable
to any of them; and may be negotiated, discharged, or
enforced by any or all of them in possession of the instrument.
d. if payable to >2 persons, jointly, (X and Y), it is payable to
all of them; and may be negotiated, discharged, or enforced by
all of them jointly cant act alone to be the holder of the
instrument.
e. if ambiguous (and/or) , it is payable alternatively.
5. be payable on demand or
a. Instrument is payable on demand if it says it is payable on
at a definite time;
demand or at sight or it doesnt state any time for payment.
b. Instrument is payable at a definite time if it is payable:
1) at a fixed date;
2) at the end of a definite period of time;
3) at a time readily ascertainable at the time of issue, even if
subject to rights of prepayment, acceleration, extension at the
holders option; or extension to a further definite time at the
makers option or automatically upon or after a specified act or
event.
6. contain no undertaking or
A negotiable instrument may not state any other undertaking
instruction given by the
or instruction by the person promising or ordering payment to
maker or drawer except as
do anything besides pay money.
authorized by the Code.
Except:
1) an undertaking or power to maintain or protect
collateral to secure payment
2) an authorization or power to confess judgment;
3) a promise or provision waiving benefit of any law
intended for obligors protection.

Requirements of a Holder in due course:

A person whos in possession of the instrument who is a good faith purchaser who takes the
instrument:
1. for value;
Value means the giving of something other
than a promise for the instrument or the
acquiring of security interest in the instrument.
*Negotiation of an instrument as a gift will not
satisfy the value requirement.
2. in good faith; and
Honesty in fact and the observance of
reasonable commercial standards of fair
dealing.
A person who takes an instrument without
actual knowledge of a defect cannot attain
holder in due course status if a reasonable
person would have notice of the defect.
3. without notice that the instrument is
An instrument payable on demand becomes
overdue, has been dishonored, or has an
overdue at the earliest of the following times:
uncured default of payment on another
1) on the day after the day demand for
instrument in the same series;
payment is made;
2) 90 days after the instruments date,
if it's a check; or
3) if not a check, when it has been
outstanding for an unreasonably
long period after its date
4. without notice of an unauthorized
A person has notice of an unauthorized
signature or alteration; and
signature or alteration if the instrument bears
such apparent evidence of forgery or
alteration or is otherwise so irregular or
incomplete as to call its authenticity into
question.
5. without notice of any defense against or
A claim to an instrument is a claim of property
claim to it on the part of any person.
or possessory rights in the instrument or its
proceeds, including a claim to rescind the
negotiation and to recover the instrument of its
proceeds.
Liability of Signatories on the Instrument
1. Signatures A person is not liable on an instrument unless the person signed it or is
represented by an agent who signed it in a way that binds the person.
a. Representative liability
1. If a representative of a person signs his name or the persons name, the person is
bound to the extent he would be bound in a simple contract.
2. The representative who signs might be liable to third party [holder in due course]
unless the form unambiguously shows that the signature is made in a representative
capacity and clearly identifies the represented person.
b. Unauthorized signatures
1. Where a person signs someone elses name without authority, it does not operate as
the signature of the person whose name was signed (forgery).
2. It will operate as the signature of the forger.
2. Liability of the maker of a note called primary liability
a. There are no conditions to primary liability.
b. If the maker signs an incomplete instrument (e.g., forgets to put the amount, $100), he is
still obliged to pay the instrument according to its terms when completed. (payee fills in the
amount as $10,000 maker is obliged to pay that amount.
1. when words/numbers are added to an incomplete instrument w/o signers authority,
its called alteration.
3. Liability of the drawer of a draft called secondary liability

a. Drawer is only liable to pay where the bank (drawee) refuses to pay after presentment.
4. Liability of the drawee (acceptor) of a draft
a. Initially, the drawee on a draft has no liability to the payee or subsequent holder.
b. Only if the bank/drawee chooses to accept the draft will they become primarily liable.
c. Acceptance of a check is called certification.
d. Banks liability:
1. Death or incompetence of a customer banks authority to accept, pay, collect, or
account is not revoked at the death or incompetence of a customer until it knows of that
fact and has a reasonable opportunity to act on it.
2. Stop payments customer can stop payment or close account as long has bank has
reasonable opportunity to act on it.
3. Postdated check bank may charge for it
5. Transfer Warranties The transferor of a negotiable instrument who receives consideration
warrants to his immediate transferee (and all subsequent transferees, if transfer is by indorsement)
that:
a. the transferor is entitled to enforce the instrument;
b. all signatures are authentic and authorized;
c. the instrument has not been altered;
d. the instrument is not subject to a defense or claim in recoupment of any party against the
transferor; and
e. the transferor has no knowledge or any insolvency proceeding commenced with respect to
the maker, acceptor, or drawer of an unaccepted draft.
6. Indorsers secondarily liable
a. If the maker or the bank doesnt pay, the indorser will be liable.
b. Holder in due course can go all the way back on the chain to the payee if the maker is
insolvent.
c. If there is any forgery in the chain, the transfer warranties will step in and offer the same
protection and liability.
d. An indorser may disclaim liability of his indorsement by giving a qualified indorsement
by signing without recourse
7. Accommodation Parties one who signs commercial paper that is issued for value just to lend
his credit to some other party. Liable in whatever capacity he signed:
A borrows money from B, signs a promissory note for $10k. B will feel safer if As uncle C will
sign on the back of the note as an indorser C is the accommodation indorser (secondarily
liable)
C could also sign the front of the note - accommodation maker (primarily liable)
8. Presentment is when the bearer/ holder of the note requests payments from the maker or
drawee.
a. must be made on or after the date stated in the instrument
b. maker/drawee can ask the presenter to show the note, their identification, and to
surrender the note upon payment.
c. Presentment Warranties: the presenter who presents and gets payment on the draft
warrants the drawee that:
1. he is, or was, at the time of the transfer, a person entitled to enforce the draft;
2. the draft has not been altered; and
3. he has no knowledge that the signature of the drawer of the draft is unauthorized.
Actions to enforce the Instrument
1. Burdens of proof
a. The burden is originally on the plaintiff to show the validity of signatures (admitted unless
specifically denied in the pleadings);
b. If P establishes the validity of the signatures and that he is entitled to seek enforcement of
the instrument, burden shifts to the D to prove a defense or a claim in recoupment.

c. Even if a defense or claim in recoupment to the obligation sued upon is proved, the
burden shifts back to the P to establish the holder in due course status.
2. A person taking an instrument is subject to claims of property or possessory rights in
the instrument or its proceeds, including a claim to rescind the negotiation and to recover
the instrument or its proceeds.
3. Claim in recoupment a claim of the obligor against the original payee of the instrument if the
claim arose from the transaction that gave rise to the instrument.
4. Conversion an instrument is converted if its taken by transfer other than by negotiation from a
person not entitled to enforce the instrument.
5. Personal Defenses K defenses can be raised, but not against the HIDC
a. Discharge HIDC can be discharged by the obligor either by agreement or by payment
or tender of payment (certified check, cashiers check, tellers check). the underlying
obligation of discharged.
1. discharge by accord and satisfaction by tender of an instrument that contains a
conspicuous statement (either on the instrument itself or in an accompanying written
communication) that the instrument is being tendered as full satisfaction of the
claim, if:
(a) that person, in good faith, tendered an instrument to the claimant as full
satisfaction of the claim;
(b) the claim was unliquidated, or the amount was subject to a bona fide dispute;
(c) the claimant obtained payment of the instrument.
2. Claim is not discharged if the claimant proves that within 90 days after payment of the
instrument, he tendered re-payment of the amount back to the person against whom the
claim is asserted.
6. Real Defenses A holder in due course takes free of all defenses except real defenses:
- infancy
- lack of legal capacity
- duress (physical; mere economic is not enough)
- illegality
- fraud in the factum (fraud that induced the party to sign the instrument with neither
knowledge nor reasonable opportunity to learn of the instruments character or its essential
terms. Mere fraud in the inducement will not suffice)
- discharge in insolvency proceedings (bankruptcy)
7. Alterations as defense unauthorized change in an instrument that purports to modify a
partys obligation, or an unauthorized addition to an incomplete instrument
a. discharges the liable party, except as to HIDC who may enforce it according to its
original tender. (the $100 not the $10k)
b. When a note has been dishonored by the maker due to alteration, the holder may sue
indorsers or transferors on warranty liability. (See 5. Transfer Warranties)
c. A person whose negligence substantially contributed to an alteration is precluded or
estopped from raising the alteration as a defense against a person who, in good faith, paid
the instrument or took it for value for collections.
8. Forgery as defense available as a defense even as against a person who, in good faith, pays
the instrument or takes it for value. But a forger is liable as if he had signed his own name.
a. banks liability if a bank pays a forged check, it is liable to its customer and must recredit the account. But if the customer fails to discover the forgery within reasonable time,
bank is not liable unless the bank itself should have discovered it using ordinary care.
1. reasonable time: not to exceed 1y after. Otherwise, you snooze, you lose.
2. for unauthorized indorsement, statute of limitations allows 3y for the customer to seek
to have the bank re-credit his account.
9. Defenses of Accommodation parties can assert any defense that the payee can, except the
real defenses.