2.0 BUSINESS LAW 2.5 COMMERCIAL PAPER OVERVIEW Defined - Commercial paper (a type of negotiable instrument) is a special type of contract for the payment of money that is unconditional and capable of transfer through negotiation When payment of money is promised at a later time, commercial paper can be used by the holder in due course as money • Holder in due course – A central theme of the Negotiable Instrument Article The term refers to a person that takes a negotiable instrument (1) for value (2) without knowledge of any known defect in the instrument (3) without any defenses or other claims • Not Holder in due course = Not a Negotiable Instrument = Ordinary Contract TYPES OF COMMERCIAL PAPER • Two Party Commercial Paper Notes (Promise) - Instrument that represents a promise to pay money to the other party (payee) (e.g Certificates of Deposit) Payer->Payee • Three Party Commercial Paper Drafts (Order) - Instrument that represents an order by one party (drawer) to another party (drawee) to pay money to a third party (payee) (e.g checks, trade acceptances) Drawer>Drawee-> Payee NEGOTIABILITY REQUIREMENTS Pursuant to Article of the UCC, a negotiable instrument must have the following requirements: • • • • • • Unconditional promise (note) or order (draft) Fixed amount of money Payable to bearer or to order Payable on demand or at a definite time Does not state any other undertaking or instruction per the UCC Written and signed by the promisor (note) or drawer (draft) If an instrument does not meet the above mentioned requirements, then the instrument is not negotiable and the rule of a holder in due course in not applicable As such, a non-negotiable instrument will merely be treated as a contract Unconditional promise (note) or order (draft) • Unconditional – Not “subject to” or conditional upon Fixed amount of money • Fixed – Instrument must indicate certain monetary amount Promises to pay in goods or services are not accepted forms for negotiation Payable to bearer or to order • • Payable to Bearer - Refers to holder of the instrument To be negotiable, the instrument must include term “to/or/and bearer” Payable to Order – Refers to a specific party To be negotiable, the instrument must include the term “to the order of” or “or order.” Payable on demand or at a definite time • • Payable on Demand – Term that indicates commercial paper can be payable on demand or at sight Payable at a Definite Time – Term that indicates commercial paper to be payable at a future fixed date or time Does not state any other undertaking or instruction per the UCC • • Other Undertaking – Refers to additional promises aside from payment Exceptions: Collateral Prepayment for penalty Payment for legal fees Waiver of judicial trial Written and signed by the promisor (note) or drawer (draft) • • Writing – Requirements for writing are broadly defined Various forms are accepted (e.g handwritten, typewritten) Signed – Any sufficient authorization is acceptable (e.g signature or stamp) NEGOTIABLE POSSESSION • • • Bearer Instrument – Negotiable upon delivery Order Instrument – Negotiable upon delivery and endorsement Bearer vs Order Instrument – Negotiability determined endorsement by most recent HOLDER IN DUE COURSE (HDC) The process to transfer a negotiable instrument is referred to as negotiation In order for a negotiable instrument like commercial paper to be transferred and protected under UCC Article 3, the transfer must meet certain requirements The following example illustrates how a party becomes a HDC: • • • Original creditor makes a loan to a borrower in return for a promise to repay loan along with interest Original creditor sells the credit contract to a new creditor New creditors assumes the credit contract without any knowledge of: Defect in credit contract Any misrepresentations made by original creditor to borrower Any act that indicates the borrower to make a legal claim against the original creditor Requirements to become HDC Presuming the instrument is negotiable, the negotiable instrument must be: • • • For value Obtained without knowledge of any known defect Obtained without any defenses or other claims CLAIMS AND DEFENSES Overview • In instances where an HDC makes a claim on the negotiable instrument and an obligor refuses to pay, the only defense an obligor can make is a real defense Real Defenses • Fraud in Execution – Fraud inducing obligor to sign instrument without a reasonable opportunity to learn of its fraudulent character or essential terms Personal defenses cannot be made by an obligor of an HDC • Forgery - Forgery of a necessary signature • Adjudicated Insanity – adjudicated insanity which renders the instrument void • Material Alteration – Material change of the instrument (e.g.amount) • Infancy - Infancy which renders the instrument voidable or void • Illegality – Illegality which renders the instrument void • Duress – Duress at the time of making the instrument • Discharge in Bankruptcy - Discharge of obligor in insolvency proceedings, or any discharge known to the HDC • Suretyship Defense – For example, a holder knew that an endorser was signing as an accommodation party (surety) • Statute of Limitation – Generally years after dishonor of a draft or years after demand or other due date on a note ... Payable on Demand – Term that indicates commercial paper can be payable on demand or at sight Payable at a Definite Time – Term that indicates commercial paper to be payable at a future fixed date... negotiable instrument is referred to as negotiation In order for a negotiable instrument like commercial paper to be transferred and protected under UCC Article 3, the transfer must meet certain