COMMERCIAL PAPERS MAGGS FALL 2012

Terminology
People:
·  Maker; 3-103(a)(7): A person who signs, or is identified in a note undertaking to pay.
·  Co-Maker;3-116(a): A co-maker is when two or more people sign the note.
·  Bearer; 3-109(a)(1);1-201(a): A person who is in possession of a negotiable instrument is payable to bearer, and can tell that it is payable to bearer b/c it will say that it is payable to bearer.
·  Drawee: The bank ordered to pay the check
·  Payee; 3-110(a): A person whom the instrument is initially payable to.
·  Holder; 1-201(b)(21); 3-201(a): A holder is entitled to enforce the instrument and can be holder if: (1) A person is in possession of an instrument that is payable to bearer, (OR) if it is payable to the person who is in possession of the instrument.
o  Received instrument that is not payable to you but not indorsed then not holder: If received an instrument that is payable to the person who transferred it to you and they did not indorse it, then not a holder.
o  Indorsed in blank, then holder if in possession: If it is indorsed in blank it is a bearer instrument and the person who is in possession will be the holder.
·  Owner: Person who (1) has a possessory interest in the instrument and can sue a person for conversion to get the instrument back, and (2) has a prior possessory interest in the instrument that is stronger than the person who has the instrument.
o  Owner not necessarily the holder: Owner of instrument is not always owner and likewise, the holder of the instrument is not always the owner of the instrument.
·  Loser; 3-309(a),(b): A person who is not in possession and is entitled to enforce if: (1) the person who lost the instrument was entitled to enforce the instrument when loss of possession occurred, (2)the person did not loose possession of the instrument through transfer or lawful seizure, (3) possession of the instrument is not impossible because the instrument was: destroyed, its whereabouts cannot be determines, it is in the possession of a thief/unknown person, and it is in possession of a person who cannot be found or is not amendable to service of process.
Actions:
·  Deliver;1-201(b)(15): (1) A voluntary transfer of possession where one person delivers an instrument to another person, (AND) (2) it is not a loss.
·  Issue, 3-105(a): First delivery of an instrument by maker or drawer with the purpose of fiving rights of the instrument to another person.
·  Negotiate; 3-201(b):Means in which an instrument goes from one person to another (AND) assigning the rights of the instrument from one person to another.
o  Negotiating an instrument: (1) Payable to bearer then it is negotiated by transfer alone, (2) if lost it is negotiated since it is just a transfer of possession (3) If payable to person then (a) transfer possession (AND) (a) transferor indorses instrument.
·  Indorse, 3-201(a), 3-205(a), (b): (1) Writing name on instrument: If the instrument a blank indorsement then it coverts it to bearer instrument and whoever is in possession of the instrument is considered to be the holder of the instrument. (2) Special indorsement pay to the order of an identified person signing the instrument.
·  Enforce, 3-301: The person who has the right to enforce the instrument if a law suite arises.
o  People with right to enforce:
§  (1) The Holder: The holder of the instrument has the right to enforce the instrument when a lawsuit arises.
§  (2) Person in possession of instrument w/ rights of holder: (1) Sell to 3rd party & fail to indorse: Sell the instrument to a 3rd, but does not indorse then the 3rd party can enforce the instrument.
·  Non holder with rights of holder; 3-203: If not a holder can still get the rights of a holder through transfer that sells you rights to be holder.
·  “A mere transferee:” not considered to be a good faith purchaser for value.
§  (3) A loser; 3-309: A person who is not in possession of the instrument but is entitled to enforce the instrument. Can enforce as loser if: create an instrument bond, but this creates problems since two people are entitled to enforce instrument.
·  Transfer; 3-203(a): Delivered by a person that is not the issuer for the purposes of giving the person receiving the instrument the right to enforcement and is not received by fraud.
1. NEGOTIATION, TRANSFER AND ENFORCEMENT
Enforcing an instrument:
·  Plaintiff must prove to enforce instrument; 3-308(b): (1) Validity of signatures, (2) right to enforce, (3)
o  (1) Validity of signatures: Presumption of validity, unless denied which means that the signatures are assumed to be valid unless evidence is introduced to the contrary. Policy not a lot of forgeries.
o  (2) Right to enforce: Prove that is a holder can do this buy (1) Present the instrument, (2) present evidence that you are entitled to have the rights to enforce the instrument if not holder, but are in possession.
Discharge:
·  Discharge if: (1) make payment to person entitled to enforce the instrument; 3-602(a), except if know the person is a thief; 3-602(e).
·  If pay finder of bearer instrument then discharged: If payable to bearer then it is discharged b/c he found it and did not steal it.
·  Assignment and discharge: Payment to a person not entitled to enforce does not discharge liability except in the states that adopted 2002 Amendment that allows discharge if pay someone formally entitled to enforce.
Presentment; 3-501:
·  Presentment: Demand to pay an instrument made by: (1) showing instrument, (2) show identification, (3) sign a receipt or surrender the instrument
·  Certain contracts waive right to presentment: Fore example how mortgage notes.
·  Assignment of notes and presentment: Causes potential for fraud, but UCC Amended in 2011 to combat this:
o  Someone formally entitled to enforce; 3-603(b): If make payment to someone who was formally able to enforce eth note the obligation is discharged; however, this only applies if have received adequate notification that it has been transferred to the transferee.
§  Notification adequate if: (1) signed by the transferor or the transferee, (2) reasonably identifies the transferred note (AND) (3) provides an address at which subsequent payments can be made.
·  Demand note liable on presentment if assigned; 3-503(a)(1), 3-501(1),(b)(2): If it is a note payable on demand then not liable for it until the third party demands payment on the instrument.
o  Dishonored if presented and not paid; 3-502(1)(b)(2): A note is dishonored if presentment is made to the drawee and payment is not made one the day that it becomes payable.
Defining a Negotiable Instrument:
·  Important b/c if does not meet definition it is a contract: Important in assignment disputes, b/c there is no notification of an assignment of a K then the K is discharged; however, a negotiable instrument(not in 2002 Amendment state) does not have a notification requirement. Does not void the instrument.
·  Must be negotiable at time it was made: Cannot change the rules of negotiation, it has to be a negotiable instrument at the time that it was made.
·  Negotiable instrument is; 3-104(a): (1) An unconditional (2) promise OR order, (3) to pay a fixed amount of money(a currency).
o  (1) An unconditional; 3-106(a),(b): Cannot have any condition that payment depends on, or any conditions of payment that are not on the instrument.
§  Not a condition if it is made on collateral; 3-106(b): In addition to signed note promising collateral repayment or acceleration or b/c the payment is limited to resort to a particular fund or source.
§  No other promise; 3-104(a)(2): No other act in addition to the payment
§  Demand/Definite time; 4-104(a)(2): A note is usually paid at a definite time such as once a month.
o  (2) Promise OR order; 3-103(a)(12),(a)(8): A Promise is a written or assigned promise to pay money to another by the person who is going to pay, i.e. a note. A Order is a written instrument to someone else to pay money signed by the person giving the instrument to someone else, i.e. a check.
o  (3) to pay money(a currency):
§  Money; 1-201(b)(24): A form of currency that is recognized and it does not have to be U.S. currency.
§  Fixed amount(Principle); 3-112 cmt. 1: Considered fixed: The principle has to be fixed, but the interest can be variable. Considered not fixed: A share of profits.
§  Interest; 3-112(b): Interest can be stated in an instrument in a fixed or variable amount of money. If interest rate is not express on the instrument then it will depend on the variable interest rate of the jurisdiction.
·  Payable to bearer or order; 3-108(a); 3-104(a)(i),(c) cmt. 2:
o  Payable to bearer; 3-108(a): (1) Payable to bearer if: (a) says so, (b) payable to cash, (c) no identified payee.
o  Order; 3-104(a): “Magic words of negotiability:” Pay to the order of unless a check then not mandatory.
·  Conspicuous statement; 3-104(d): Not negotiable Can make it not negotiable by saying so on the instrument or if not a check crossing out pay to the order to.
Holder In Due Course:
·  Defenses that MAY NOT be raised against a HIDC; 3-305(a)(2),(6); 3-302(a): (1) Lack of consideration, never received consideration or failure of consideration, (2) fraud or mistake in the inducement, (3) Claims in recouplment;3-305(a)(3),(b), 3-302(a): A claim such a s breach of warranty, or suing someone after you purchase something but saying that you will not pay.
·  Defense that CAN be raised against a HIDC; 3-305(a)(1); 3-302(a): (1) Infancy, party is to young to make a deal, (2) Duress, note was not properly made, (3) fraud in factum illegality in the transaction i.e. induced the obligor to sign the instrument w/o obligor having neither knowledge nor opportunity to learn of the instruments character or essential terms, (4) Bankruptcy.
·  If a holder in due course: Take the instrument free of all claims and defenses; however, if not a holder in due course takes the instrument subject to claims against the instrument.
·  Holder in due course doctrine; 3-306;3-405(a),(b): A holder in due course purchases a negotiable instrument in (1) Good faith, (2) for value, and (3) with out notice that an instrument is (a) overdue, (b) evidence of forger, (c) dishonored, (d) or that there is a flaw on the instrument that competing claims or defenses.
o  (1) Good faith; 1-201(b)(20): Honesty and observing reasonable commercial standers of fair dealing, i.e the conduct of the holder comported with industry or commercial standards applicable to the transaction.
§  Old definition: Pure in hear and empty head test…if you are doing something that would be considered to be dishonest.
o  (2) For value, and; Took for value if: (1) holder bought and paid for the instrument, (2) holder took the instrument as payment for a debt, (3) holder acquired a “security interest” in the instrument, (4) given credit in depository bank. Not taken for value if: (1) holder was given/found/stole instrument, (2) holder promise to pay for an instrument, (3) Only partial consideration was given.
§  Took for value:
·  (1) holder bought and paid for instrument; 3-303(a)(1): Transfer to a bank: Customer issues not to the merchant who sells it to the bank and gives them money.
·  (2)holder took the instrument as payment for debt; 3-303(a)(3): Discharging the debt is value: If have a debt, and give it to person to pay off debt, then the forgiveness of the debt is value.
·  (3) holder acquires a “security interest” interest in the instrument; 3-303(a)(2): A form of collateral against a piece of property, that if you do not pay can be foreclosed on.
o  Bank takes a security interest: Banks take a security interest when a check is deposited by providing credit, or a loan.
·  (4) depository banks giving value; 4-211: Bank gives credit for check immediately.
§  Not take for value:
·  (1) holder was given/found/stole instrument: If an instrument is a gift, lost or stolen then it has not been given for value. Policy: does not promote transferability & encourages wrongful conduct.
·  (2) holder promises to pay for an instrument, i.e. value v. consideration/partial holder due course status; 3-303(b), 3-302(d)+cmt.6: Value is not a promise to pay in the future value has to be something that has already been given.
o  Not value unless actually promised, so if not preformed then not value;303(b): Consideration: Consideration means sufficient to support a simple contract, if no consideration then it could be a defense.
o  Partial consideration; 3-302(d): If an instrument is issued for a promise of performance of the promise is due and the promise has been performed.
o  (3) with out notice; 3-302(a)(iii): (1) overdue (OR) (2) has been dishonored, (OR) (3) that there is an uncured default with respect to payment of another instrument as pat of the same services, (OR) (4) has notice of a breach of fiduciary duty. Typical ways holder may be given notice: told that there is a claim on note, note itself indicates that it is overdue, documents attached reveals that there is a problem, or holder has a close connection with payee and knows business practices and under close connection doctrine has reason to know of the defense.