Commercial Paper

Requirements of negotiable instrument:

1) In writing
2) Unconditional promise/ order to pay
3) Be a fixed amount of $
4) Payable at a definite time or on demand
5) Payable to order or bearer (except checks)
6) No other obligation or promise; must not incorporate terms outside the instrument
7) signed by maker (note)/drawer (draft)

Steps to determine commercial paper on cpa exam

1. type of paper? note or draft
2. negotiable? 7 requirements
3. does holder qualify as HDC?
4. does maker/drawer have a real or personal defense?

What must be done to become a holder in due course?

The holder must have:

1.for VALUE-past debt ok, not future (executory promise)
2. taken in GOOD FAITH-honesty in fact
3. W/O NOTICE OF ANY DEFENSES

What happens if instrument is not negotiable?
1.no HDC
2. transferee must take instruments subject to any defense against payment
3. becomes an ordinary contract

What is a holder? for bearer paper? for order paper?

A person with "good title" to the commercial paper, proper negotiation:
bearer paper-delivery
order paper-delivery and endorsement
A person with "good title" to the commercial paper means

1.properly current negotiation
2.every prior negotiation was proper
3. can't break chain of title

"without recourse" means

no guarantee of pymt by the endorser (no contract liability). still has warranty liab

What is the shelter doctrine?

"a holder through a HDC". Any transferee after an HDC gets that HDC's claims. not subject to personal defenses

A HDC will take a negotiable instrument subject to which defenses?

real defenses

-FFAAIIDDSS
Fraud in execution
Forgery of necessary signature
Adjudicated insanity
Alterations that are material
Infancy that renders contract vvoidable
Illegality
Duress
Discharge in Bankruptcy
Suretyship if status know
Statute of limitations-3 drafts, 6 on notes

What are some personal defenses?

unauthorized completion-issuer leaves part of instrument blank, filled in by someone else
fraud in inducement, failure of consideration, theft of instrument after signed, break of contract, mistake, impossibility, etc