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Commercial Paper
University of Toledo School of Law
Campbell, Bruce A.

Commercial Paper Outline
I.       Basic forms of negotiable instruments/terminology.
a.       Note: A promise to pay money.
                                                              i.      The person making the promise to pay initially is the maker.
1.      Is also usually the issuer as well.
                                                            ii.      The person to whose order the note is initially payable to is the payee.
                                                          iii.      In order to fall under Art. III, the note must be signed by the maker.
b.      Draft: An order to pay money.
                                                              i.      Drawer = the person who makes the order to pay.
                                                            ii.      Drawee = the person who is ordered to pay.
                                                          iii.      Payee = the person to whose order the drawee is ordered to pay.
1.      Ex) Pay $1000 to the order of Rachel on April 1, 2007. To: Bill, /s/ John.
a.       John = drawer, Bill = drawee, Rachel = payee.
2.      Presentment: The demand made by the drawer to the drawee to enforce the instrument.
                                                          iv.      Honor/dishonor: If the drawee pays the instrument they have honored it. If not, they have dishonored it.
c.       Check: A draft payable on demand and drawn on a bank.
                                                              i.      The check is payable from the drawee on demand at the time a person entitled to enforce the instrument demands payment.
II.    Terminology and Processes
a.       Payable to order or bearer (3-109):
                                                              i.      A negotiable instrument may be payable to the bearer (whomever possess the instrument either rightfully or wrongfully) or payable to the order of an identifiable person.
1.      Must be payable to one or the other to be a negotiable instrument.
                                                            ii.      When is an instrument payable to bearer?
1.      When it says on the instrument.
2.      When it states no payee at all.
3.      When it is made payable to case or the order of cash.
4.      Otherwise indicates it is not payable to an identifiable person.
a.       Ex) Check payable to order of “Merry Christmas”.
                                                          iii.      When is an instrument payable to an identifiable person?
1.      When its payable to the order of an identifiable person. Or.
2.      Payable to an identifiable person or [his/her] order.
a.       Must be payable to someone’s order = if no order, then not in Art. III.
b.      Holder (1-201(b)(21)(A)):
                                                              i.      The holder is a person in possession of the instrument and by the instrument’s terms is entitled to enforce it.
1.      The holder entitled to either demand the drawee pay the instrument or negotiate it to a third party.
a.       If the holder wishes to sell the instrument to a third party, the best way is for them to endorse the instrument and deliver it to the party.
                                                                                                                                      i.      The conveyee then becomes a holder and thus a PEEI.
2.      Holder is a person entitled to enforce the instrument (PEEI).
a.       That means they are entitled to collect the note from either the maker or the drawee.
3.      If the instrument is lost, destroyed, or stolen from the holder, they will no longer be a holder.
                                                            ii.      If the customer of a depository bank deposits the instrument and forgets to endorse it, the bank is a holder if the customer was a holder.
                                                          iii.      Negotiation.
1.      As noted above, a holder can negotiate the instrument to a third party by endorsing it on the back and transferring possession.
a.       The endorsement serves as the original holder’s “order” as to who next can be a holder and PEEI.
                                                                                                                                      i.      The endorsement functions as the holder’s “title order”.
2.      The form of the endorsement determines the terms of the title order.
a.       Special endorsement: Specifies who the instrument is payable to.
                                                                                                                                      i.      Ex) “Pay to the order of Sam” /s/ Rachel.
b.      Blank Endorsement: Usually consists of a signature alone and makes the instrument payable to bearer.
                                                                                                                                      i.      Ex) /s/ Rachel.
c.       Restrictive Endorsement: A blank endorsement that restricts disposition of the proceeds.
                                                                                                                                      i.      Ex) “For Deposit Only”.
Liability “on the instrument”
I.       Intro
a.       Ordinarily, one who signs an instrument in any capacity (maker, drawer, acceptor, endorser) is liable on the instrument in the capacity in which they sign personally, or through a representative.
                                                              i.      Liability “off the instrument” is any liability that does not flow directly from one’s signature on the instrument in a particular capacity.
II.    Liability of the “maker” of a note.
a.       § 3-412 Maker’s Contract: The obligation of the issuer of a note is to pay the instrument according to its term at the time of its issue.
b.      Ex) “I promise to pay $1000 on April 1, 2007 to the order of Rachel. /s/ John.
                                                              i.      If John doesn’t pay, what ri

2.      If dishonor happens, Customer’s bank will timely return the check to X’s bank who will cancel the credit made to X’s account or otherwise recover the credit from him.
                                                        vii.      Stop payment orders render the check not properly payable.
1.      If the bank pays the check despite the stop payment order, they cannot rightfully charge the customer’s account.
a.       There are exceptions in 4-403(c) and 4-407.
b.      Drawee Liability
                                                              i.      The drawee is not liable on the instrument until he accepts it.
1.      The drawee ordinarily does not sign the instrument, so therefore is not liable on it.
                                                            ii.      How can the drawee become liable on the instrument?
1.      Signing the instrument which serves as an acceptance.
a.       The drawee’s signature on the instrument is an acceptance, which renders them liable as an acceptor to pay the draft when presented for payment.
                                                                                                                                      i.      The acceptance by signature also serves as a certification. The check becomes a certified check.
1.      To certify the check, an authorized person at the bank will stamp it “certified” with a date and handwritten initials or signature of the person conducting the transaction.
c.       Drawer Liability
                                                              i.      The drawer is the one who signs the draft and as such, is liable on the instrument as a drawer.
1.      The signature can be the drawer’s real name or an assumed name.
a.       The signature can be given by the drawer himself, or his personal representative.
2.      The drawer is only liable to a PEEI only if the draft has been dishonored.
a.       Remember: Dishonor requires 1) due presentment and 2) non-payment.
                                                            ii.      Discharge of Liability
1.      Drawer liability is not forever, certain events discharge the liability. Those events are:
a.       Payment: If the instrument is paid by the drawee, drawer’s liability is dishcharged.
b.      Certification: If the drawee certifies the check, they become liable on it and thus the drawer’s liability is discharged.
The payee sits on the check for more