MODULE 25 COMMERCIAL PAPER 187

COMMERCIAL PAPER
Overview provisions are nonnegotiable and are transferable only by
Commercial paper is heavily tested on the CPA assignment. The assignee of a nonnegotiable instrument
exam.' Coverage includes the types of negotiable instru- takes it subject to all defenses.
ments, the requirements of negotiability, negotiation, the A central theme of exam questions on negotiable in-
holder in due course concept, defenses, and the rights of struments is the liability of the primary parties and of the
parties to a negotiable instrument. The functions of secondarily liable parties under various fact situations.
commercial paper are to provide a medium of exchange Similar questions in different form emphasize the rights
that is readily transferable like money and to provide an that a holder of a negotiable instrument has against pri-
extension of credit. It is easier to transfer than contract mary and secondary parties. Your review of this area
rights and not subject to as many defenses as contracts should emphasize the legal liability arising upon execu-
are. To be negotiable, an instrument must tion of negotiable commercial paper, the legal liability
1. Be written arising upon various types of endorsements, and the war-
2. Be signed by the maker or drawer ranty liabilities of various parties upon transfer or present-
3. Contain an unconditional promise or order to ment for payment. A solid understanding of the dis-
pay tinction between real and personal defenses is required.
Also tested is the relationship between a bank and its
4. State a fixed amount in money
customers.
5. Bepayable on demand or at definite time
6. Be payable to order or bearer
These requirements must be present on the face of the
instrument. Instruments that do not comply with these
7. General Concepts of Commercial Paper
8. Commercial paper has two important
functions
a. Used as a substitute for money
EXAMPLE: One often pays a bill with a check instead of using cash.
b. Used as extension of credit
EXAMPLE: X gives a promissory note to Y for $100 that is due one year later.
9. To encourage commercial paper to be transferred more easily by making it easier to be collected, ne-
gotiable commercial paper was established
10. If an instrument is negotiable, favorable laws of Article 3 of UCC apply as discussed in this mod-
ule
11. If an instrument is nonnegotiable, laws of ordinary contract law apply (i.e., assignment of contract
rights)
(1) Assignees of contract rights can get only the rights given by the assignor and therefore are
burdened by any defenses between prior parties
EXAMPLE: C receives a nonnegotiable instrument from B. C now wishes to collect from A, the one who had
issued the nonnegotiable note 'to B when he purchased some goods from B. Assume that A would have owed B
only two-thirds of the amount stated on the instrument due to defects in the goods. Since. C obtained only the
rights that B had under an assignment under contract law, C can only collect two-thirds from A on this
nonnegotiable instrument.
12. It is helpful to get "the big picture" of negotiable instruments (negotiable commercial paper) before
covering details
13. Whether an instrument is negotiable or not is determined by looking at its form and content on the
face of the instrument
(1) This is so that individuals seeing an instrument can determine whether it is negotiable or not
(2) If a person has a negotiable instrument and also is a holder in due course (discussed later), s/he
may collect on instrument despite contract defenses
14. Types of Commercial Paper
15. Article 3 of UCC describes two types of negotiable commercial paper
16. A draft (also called bill of exchange)
(1) Has three parties-in which one person or entity (drawer) orders another (drawee) to pay a third
party (payee) a sum of money