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Commercial Paper
University of Toledo School of Law
Bruce, Kara J.

Commercial Paper Outline Bruce Fall 2011

Types of Instruments

· Notes (credit device) PROMISE

o Written promise to pay money

o If created by a bank than a CD

o Promise means: 3-103(a)(12)

§ A written undertaking

§ To pay money

§ Signed by the person undertaking to pay. – (3-401 – present intent to authenticate writing)

o Note – an acknowledgement of an obligation by the obligor is not a promise unless the obligor undertakes to pay the obligation

o Parties – maker , payee

· Drafts (payment device) – – ORDER 3-103(a)(8)

o Written order by one person (drawer) to another (drawee) directing drawee to pay money to a third person (payee).

o Parties – drawer, drawee, payee

o Most common situation is a checking account.

o Cashiers check – bank is drawer and drawee.

o Tellers check – bank draws a draft on another bank or makes the draft payable through anothers bank

o Order means 3-103(a)(8)

§ A written instruction

§ To pay money

§ Signed by the person giving the instruction

§ The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.

§ Drawee on a draft does not have to be a bank, remember sale of goods hypo

· Remitter – person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser. 3-103(a)(15) i.e. someone buying a cashiers check from a bank.


· In order to get within the scope of Art. 3 you must have a negotiable instrument.

· 3-103(a) – definitions

· 3-104(a) Negotiable Instrument

o unconditional promise or order (signed and in writing as required under 3-103(a))

§ with or without interest or other charges;

o IF

§ (1) is payable to bearer or to order at the time it is issued or first comes into possession of the holder

§ (2) is payable on demand or at a definite time; and

§ (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain

· (i) an undertaking or power to give, maintain, or protect collateral to secure payment,

· (ii) an authorization or power to the holder to confess judgment or realize on or dipose of collateral, or

· (iii) a waiver of the benefit of any law intended for the advantage or protection of the obligor.

o 3-104(c) – if an order meets all of the requirements, except 1 (payable to bearer or order at the time it is issued) and otherwise falls within the definition of check, the instrument is negotiable.

o 3-104(d) – a promise or order other than a check is not an instrument if at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement to the effect that the promise or order is not negotiable.

o 3-104(e) – note if it’s a promise, draft if it’s an order. If it’s both a note and a draft, can be treated as either.

o 3-104(f) – check means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashiers check or tellers check) (can be a check even if labeled money order)

· 3-106 – Unconditional Promises or Order Requirement

o (note 3-106(a) – a promise or order is unconditional unless it states

§ (i) an express condition to payment

§ (ii) that the promise or order is subject to or governed by another record, or

§ (iii) that rights or obligations with respect to the promise or order are stated in another record. A reference to another record does not itself make the promise or order conditional).

· Note words subject to: means it is non-negotiable, but words see contract would be a mere reference.

o Implied conditions do not destroy negotiability.

o Express conditions destroy negotiability

§ Tiffin v. Dillabough – disclaimer on the back not an express condition – more of a warning.

o Also – countersignature by a person whose specimen signature appears on the promise or order does not make it conditional for 3-104(a)

o 3-106(d) – if a promise or order first comes into possession of a holder, contains a statement, required by applicable statutory or administrative law to the effect that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, the promise or order is not conditional, but if it is an instrument, no holder in due course.

§ Note – negotiable instruments are allowed to reference which fund they will be paid from.

· Fixed Amount of Money Requirement –

o It has to be money doesn’t matter that other charges can be ascertained later.

o 9-312 – restrictions on currency is O.K.

· No Unauthorized Undertakings 3-104(3)

o Courier without luggage requirement – is there a promise BEYOND the promise to pay money, and if there is, is it authorized under this section.

§ i.e. maker aggress that signing of this note also indicates acceptance of the contract of sale for which it is given (unauthorized undertaking)

§ i.e. insecurity clauses are O.K.

§ i.e. Choice of Jurisdiction is O.K.

§ i.e. Forfeiture clause – Not O.K.

· Payable on demand or at a definite time 3-108(b)

o Instruments do not have to be dated

o (a)A promise or order is payable on demand if it

§ (i)States that it is payable on demand or at sight, or otherwise indicates it is payable at the will of the holder, or

§ (ii)Does not state any time of payment.

o (b) payable at a definite time if

§ it is payable on elapse of a definite period of time after signt or acceptance or at a fixed date or dates, or at a time or times readily ascertainable at the time the promise or order is issued, subject to the rights of

· (i) prepayment

· (ii)acceleration

· (iii) extension at the option of the holder

· (iv) extension to a further definite time at the option of the maker or acceptor or authomatically upon or after specified act or event.

§ If payable on demand before a fixed date, and payable at a fixed date, instrument is payable on demand until the fixed date, and if demand for payment is not made yet, then becomes payable at a definite time.

§ Note – payer can extend time, but not indefinitely.

· Payable to Bearer or Order requirement – 3-109

o Instrument – payable to bearer – same effect as making a check out to cash. Or order – this instrument is enforceable by whoever john wants it to be.

o Checks are okay not to have this language. Promissory notes MUST have it.

o 3-109(a) – a promise or order is payable to bearer if it

§ states that it is payable to bearer or to the order of bearer or otherwise indicatest hat the person in the possession of the promise or order is entitled to payment.

§ Does not state a payee; or

§ States that it is payable to the order of case or otherwise indicatest hat it is not payable to an identified person.

o 3-109(b) – a promise or order that is not payable to bearer is payable to order if it is payable

§ (i) to the order of an identified person, or

§ (ii) to an identified person or order.

§ A promise to order that is payable to order is payable to the identified person

o 3-109(c) – an instrument payable to bearer may become payable to an identified person if it is specifically indorsed (3-205) Vice Versa – instrument payable to ID’d person can become payable to bearer if indorsed in blank.

Negotiation of a Negotiable Instrument

· 3-201(a) – Negotiation means – a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.

· 3-201(b) – except for a negotiation by remitter, if any instrument is payable to an ID’d person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If the instrument is payable to bearer, it may be negotiated by transfer of possession alone.

· What is a holder? 1-201(b)(21)(a) – a holder is the person who is in possession of negotiable instrument that is payable to bearer, or to an Identified person (if it is the person in possession).

o If the instrument is forged, no one can be a holder.

· 3-204 – What’s an indorsement? (necessary for transfer of ID’d person)

o Signature

o Other than the maker, drawer, or acceptor

o That alone or by company of other words is made on an instrument

o 3-205 Special

ty to pay an instrument is subject to the following

§ (1) Real Defenses – valid against HIDC

· infancy to the extent that it is a defense in simple contract

o state law decides = some jurs. Say that infant cannot rescind transaction or set up d unless holder is restored to the position bheld before instrument was taken, which in the case of an HIDC is normally impossible, some say if the infant misrepresented agaie then he cannot assert (estoppel)

o effect is to render instrument voidable, but not void.

o Policy = protection of infant

· duress, lack of legal capacity, or illegality of the transaction which under the law would nullify the obligation

o largely statutory – if the effect of state law would render the obligation void, then the defense can be asserted against an HIDC, if it’s just voidable at the election of the obligor, then the defense won’t work.

o Duress is a matter of degree – can be void or voidable (won’t work) depending on how bad.

· fraud that induced the obligor to sign the instrument with neither

o knowledge or

o reasonable opp. To learn of its character or essential terms

§ this is fraud in factum – it’s likei f you signed your autograph and then it turned into something else.

§ (Culver – farmer case, could have read contract) note exingency matters.

· discharge of obligor in insolvency proceedings.

· * note forgery will work as a real defense

o because if you have a forgery of a necessary signature, if you assign it you’re not liable on the instrument. Milton Money problem 39 – Jimmy told John he was Milton, signed check as Milton, John gave check to bank, bank was an HIDC, Milton doesn’t have to pay.

§ (2) Personal Defenses i.e. not valid against HIDC

· defense of the obligor that would be available if the PETE were enforcing a right to payment under simple contract

o also defenses under Art III.

o i.e. nonissuance

o conditional issuance

o issuance for a special purpose

o failure to countersign travelers check

o modification of obligation by separate agreement

o payment that violates restrictive indorsement

o instruments issued without consideration or for which promised performance has not been given

o discharge as payment (If you’re in a state where the 2002 amendments are adopted, then if you pay the old payee and not the new payee, then it’s fine as long as you did not get notice)

o breach of warranty when the draft is accepted.

o Fraud

o Misrepresentation or mistake in issuance of instrument

o In most cases, the HIDC doctrine is irrelevant if defenses are being asserted against the payee of the instrument, but sometimes the payee may be an HIDC

§ Ex: B issues not to S in payment for goods that S promises to deliver fraudulently and they aren’t delivered, S negotiates the note to H who has no notice of the fraud, H is an HIDC (maybe) and wouldn’t be subject to Buyer’s defense of fraud.

§ Ex 2: B fraudulently induces bank to issue cashier’s check to S. Check is delivered by bank to S who has no notice of fraud. S can be an HIDC and can take the check free of banks defense of fraud.

§ (3) claims in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument, but the claim of the obligor may be asserted against a transferee of an instrument only to reduce the amount owing on the instrument at the time the action is brought.