Term
| What is a promissory note? |
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Definition
| A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD) |
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Term
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Definition
A commercial paper involving three parties- a drawer; a payee and a drawee
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future |
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Term
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Definition
A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer
Drawer - person writing the check
Payee - person being paid
Drawee - the bank |
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Term
| What is the difference between a post-dated check and a negotiable time draft? |
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Definition
A check is payable on demand; even if post-dated.
A negotiable time draft is not payable until the date designated for payment. |
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Term
| What is a trade acceptance? |
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Definition
Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability |
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Term
| What is the purpose of the negotiation of commercial paper? |
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Definition
| Transfers ownership to another party |
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Term
| What is required to maintain the negotiability of a commercial paper? |
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Definition
Must be in writing
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Amount of money must be stated
Payable to order or bearer |
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Term
| What characteristics will cancel the negotiability of a commercial paper? |
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Definition
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
The promise to pay occurs after some action by another party or an event; it cancels negotiability
Cannot allow for an alternative such as payment or some other action by the maker
Note: a stated amount of payment plus a stated % of interest is OK |
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Term
| What is required to negotiate Order Paper? |
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Definition
Must have delivery and endorsement
If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement |
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Term
| What are the major types of endorsements on commercial paper? |
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Definition
Blank - Doesnt name a new payee; transforms into a bearer paper
Special - Names a new payee; transforms into an order paper
Restrictive - Adds restrictions; doesnt stop further negotiation
Qualified - Payment not guaranteed; without recourse added to endorsement |
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Term
| If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable? |
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Definition
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Term
| On a commercial paper; which value will supersede - words or numerical dollar amount? |
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Definition
Written amount supersedes the numerical dollar amount.
For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00. |
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Term
| Define primary liability with respect to a contract. |
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Definition
First in line to pay on the note/draft
Maker of a Promissory Note has primary liability and must pay according to terms of the note
With a Check; no party has Primary Liability
Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay |
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Term
| Define secondary liability with respect to contract liability |
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Definition
Drawers are Secondarily Liable if Drawee fails to pay a Draft
Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed Without Recourse |
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Term
| Define contract liability. |
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Definition
| Guarantees payment of a liability |
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Term
| When does warranty liability occur? |
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Definition
Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only |
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Term
| What five warranties occur with every commercial paper transfer? |
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Definition
Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate |
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Term
| What are the requirements for a holder to be a holder in due course? |
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Definition
Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrument
Giving a *present value* for the instrument (a future value doesnt count) |
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Term
| What are the personal defenses against a holder in due course (HDC) which will LOSE? |
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Definition
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)
Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts |
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Term
| What are the REAL defenses against a holder in due course (HDC); which will WIN? |
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Definition
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution |
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