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Commercial Paper
University of Dayton School of Law
Hallinan, Charles G.

· Anything you can fit in margins and current white space in text
· Set up Transaction patterns in margins (which rules apply to which part of transaction)
· 40 multiple choice questions (sample question on reserve)
o Fact pattern followed by 3-4 specific questions about fact pattern, each with 4 possible answers
· If you think the answers available are wrong (teacher failed in scenario) may provide explanation about why you selected one answer instead of another
o May take explained answer into consideration if explanation makes sense (good credit, even if wrong answer)
o However, if marked right answer and gave bad explanation, don’t get credit (even if right answer)
Commercial Paper Introduction
· In General
o Commercial paper is essentially the law of “money” (checks and promissory notes) and the law of banking
· Negotiable Instrument
o The instrument (note or draft) that represents money in today’s world
o The paper is essentially a promise to pay (note) or an order to pay (draft)
o Must meet the requirements to be a negotiable instrument
· Negotiation
o The act of transferring a negotiable instrument to another
· Effect
o Once proper negotiation of a negotiable instrument occurs, the holder of the instrument has certain rights
· Ultimate Issue
o Does the maker/issuer of the note/draft have the obligation to pay the holder of the note/draft the money that is due?
o Law of commercial paper answers the question
· Commercial Paper vs. Contract Law
o Slight differences as to rights of the parties
o Contract Law Example
§ I promise to pay you $500 if you paint the house
§ You assign your right to payment to a third party
§ Third party comes after me for the $500
· But you haven’t painted yet
§ I have no obligation to pay the third party
· Promise to pay was conditioned upon painting the house
· Condition not satisfied
· Right to payment not vested
o Commercial Paper Example
§ I give you a negotiable note for $500 (negotiable instrument)
§ You transfer note in good faith to a purchaser for value (negotiation)
§ Instrument becomes due
§ Third party can bring action against me for $500 (doesn’t matter if you paint the house)
o Law of Negotiable Instruments covered by Article III of UCC
o §3-102(a)
§ This article applies to negotiable instruments
o §3-103: Definitions
Negotiability (Negotiable Instrument)
· Introduction
o In general
§ Negotiable instrument is the item (note or draft) that represents money
§ If instrument meets certain requirements then it is a negotiable instrument and has certain characteristics
o Negotiable Instrument defined in §3-104(a)
§ It is a negotiable instrument if it is an “unconditional promise or order to pay a fixed amount of money”
o Negotiability Concept
§ If the paper is technically negotiable (based on its form and requirements of §3-104) and it is technically negotiated (transferred iaw negotiation rules) and it reaches the hands of a purchaser for value who has no knowledge of problems with the transaction giving rise to the paper’s creation (holder in due course);
§ Then the HDC becomes a super plaintiff and can sue the parties to the instrument who are not permitted to defend the lawsuit
· Types of Negotiable Instruments
o Drafts
§ Written order by one person (drawer) to another person (drawee) directing the latter to pay money to a third person (payee)
§ Essentially when someone writes a check (drawer) telling their bank (drawee) to pay another (payee)
o Notes
§ Written promise to pay money
· Requirements to be Negotiable Instrument (§3-104(a))
o Negotiable Instrument if;
§ 1) Unconditional (§3-106); and
§ 2) Promise (§3-103(9)) or Order to pay (§3-103(6));
· Written (§1-201(43)) and signed (§1-201(37))
§ 3) Fixed Amount of Money (§3-107)
§ 4) Payable to bearer or order (§3-109)
§ 5) Payable on demand or at a definite time (§3-108); and
§ 6) Has no other undertaking or instruction by maker/drawer (§3-104(a)(3))
o 1) Unconditional (§3-106)
§ Defined
· Four corners of the instrument includes all terms of the agreement; and
· Agreement has no other conditions on payment
· Presumed unconditional unless stated otherwise in instrument
§ General Rules of Unconditional
· Presumption of unconditionality
· Can’t be subject to or governed by another instrument
· Reference to another writing doesn’t make it conditional (must be limited by other writing)
· Implied conditions (i.e. law of negotiable instruments) do not make it conditional
· References to the underlying contract OK, just can’t be “subject to” underlying contract
§ Requirement
· Note must contain an unconditional promise to pay
· Draft must contain an unconditional order to the drawee requiring payment
§ Reason
· No one would want to purchase (negotiate) an instrument that has conditions on payment
· Purchaser would not be able to tell if instrument truly payable b/c of condition and there is no way to verify the occurrence of the condition merely by looking at the instrument
§ §3-106: Unconditional Promise or Order
· (a) Promise or order is unconditional unless it states;
o (i) an express condition to payment;
o (ii) that the promise or order is subject to or governed by another writing; or
o (iii) that rights or obligations w/ respect to promise or order are stated in another writing
o Reference to another writing doesn’t mak

· Pay to “blank” à bearer paper
· Pay to “Merry Christmas” à bearer paper
· If payable to “order of person or bearer” à bearer paper (can’t be both bearer & order paper)
§ Checks
· Are always order paper (“pay to the order of” preprinted on checks)
· §3-104(c): Crossing out “pay to the order of” not effective to destroy negotiability
§ §3-109: Payable to Bearer or Order
· (a) Payable to Bearer if;
o (1) states that it is payable to bearer or to the order of bearer or otherwise indicates person in possession of the promise or order is entitled to payment
o (2) does not state a payee; or
o (3) states that it is payable to or to the order of cash or otherwise indicates that it is not payable to identified person
· (b) Payable to Order if;
o Not payable to bearer and is payable
o (i) to the order of an identified person; or
o (ii) to an identified person or order
· (c) Payable to bearer instrument can become payable to identified person if specially indorsed
· (c) Payable to identified person can become payable to bearer if indorsed in blank
o 5) Payable on demand or at a definite time
§ In general
· Holder must be able to tell when the instrument will come due
· Payable on demand à payable now
· Payable at definite time à clearly discernable time of payment
§ Payable on Demand or Definite Time (§3-108)
· (a) Payable on demand if:
o (i) it states that it is payable on demand, or at sight, or otherwise at will of holder; or
o (ii) does not state any time of payment
· (b) Payable at a definite time if
o Payable
§ after elapse of definite period of time after sight or acceptance or
§ at a fixed date or
§ at a time readily ascertainable at the time the promise or order is issued; and
o Subject to (still definite even though);
§ (i) prepayment;
§ (ii) acceleration;
§ (iii) extension at the option of the holder; or
§ (iv) extension to a further definite time at option of maker or acceptor or automatically upon or after a specified act or event
· (c) If payable on demand and on specified date
o Instrument payable on demand until specified date
o Payable at definite time after specified date