![]() Is the purchaser of the paper a holder in due course? See Chapter 21 "Holder in Due Course and Defenses".Was the paper negotiated properly? See Chapter 20 "Negotiation of Commercial Paper". ![]() Is the paper negotiable? That is, is the paper in the proper form? We explore that issue in this chapter.We then proceed to four fundamental issues that must be addressed to determine whether parties such as First Bank, in the preceding example, can collect: In this chapter, we examine the history and nature of commercial paper and define the types of parties (persons who have an interest in the paper) and the types of instruments. Because the note is negotiable and because the bank, we assume, bought the note in good faith (i.e., unaware that the rackets were warped), the bank will recover the $100,000 (see Figure 19.2 "Sale of Negotiable Note"). By adding that the note is negotiable, the result changes significantly. Now let us add one fact: In addition to signing a contract, Love gives Rackets a negotiable note in exchange for the rackets, and Rackets sells the note to the bank. (By nonnegotiable we do not mean that the note cannot be sold but only that certain legal requirements, discussed in Section 19.3 "Requirements for Negotiability" of this chapter, have not been met.) (Here, of course, Loves defense against paying is that the rackets are worthless.) The result would be the same if Love had given Rackets a nonnegotiable note, which Rackets proceeded to sell to the bank. Under the “shoe rule” an assigneehere, the banksteps into the shoes of the assignor and takes the assigned rights subject to any defense of the obligor, Love. May the bank collect from Love $100,000, the value of the contract rights it purchased? No. Rackets files for bankruptcy.įigure 19.1 Assignment of Contract Rights Unfortunately, the rackets that arrive at Love’s are warped and thus commercially worthless. Rackets then sells for $90,000 its contract rights (rights to receive the payment from Love of $100,000) to First Bank (see Figure 19.1 "Assignment of Contract Rights"). The contract price of the rackets is $100,000. She orders a truckload of new tennis rackets from Rackets, Inc., a manufacturer. It illustrates a distinction that is critical to the discussion in our four chapters on commercial paper. To understand the importance of commercial paper, consider the following example. Like money, commercial paper is a medium of exchange, but because it is one step removed from money, difficulties arise that require a series of interlocking rules to protect both sellers and buyers. zip file containing this book to use offline, simply click here.Ĭommercial paper is the collective term for various financial instruments, or tools, that include checks drawn on commercial banks, drafts (drawn on something other than a bank), certificates of deposit, and notes evidencing a promise to pay. You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. ![]() This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license.
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