978-0078023194 Chapter 23 Lecture Notes

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Essentials of Business Law, 9th edition

INSTRUCTOR’S MANUAL

Chapter 23 Transfer and Discharge of Commercial Paper

LESSON OVERVIEW

While the previous chapter gave a detailed introduction to commercial paper, Chapter 23 intends to

deal with yet another major aspect of commercial paper—the transfer and discharge of commercial

paper. This chapter identifies the purpose of endorsing commercial paper and describes the four kinds

of endorsements. It further explains the obligations, warranties, and discharge of endorsers, and

specifies the five warranties assumed to exist in endorsements. Students will also learn the four

requirements that qualify a person as a holder in due course, distinguish between personal and real

defenses against payment of commercial paper, and list the types of defenses in each case when

presentment of commercial paper occurs and when a commercial paper is deemed dishonored. Finally,

students’ understanding of the topics is evaluated through objective-type questions, discussion

questions, and case scenarios. Students are encouraged to conduct their own research through the use of

the Internet and other sources.

CHAPTER OUTLINE

A. ENDORSING COMMERCIAL PAPER (p. 374)

B. KINDS OF ENDORSEMENTS (p. 374-377)

1. Blank Endorsement (p. 375)

2. Special Endorsement (p. 375-376)

3. Restrictive Endorsement (pp. 376-377)

4. Qualified Endorsement (pp. 377)

C. OBLIGATIONS, WARRANTIES, AND DISCHARGE OF ENDORSERS (pp. 377-378)

D. HOLDER IN DUE COURSE (pp. 378-379)

E. DEFENSES AGAINST PAYMENT OF COMMERCIAL PAPER (pp. 379-383)

1. Personal Defenses (p. 380)

2. Breach of Warranty (pp. 380-381)

2. Real Defenses (pp. 381-383)

F. PRESENTMENT OF COMMERCIAL PAPER (p. 383)

G. DISHONOR OF COMMERCIAL PAPER (pp. 383-384)

H. CHAPTER SUMMARY (p. 384)

I. CHAPTER ASSESSMENT (pp. 385-390)

1. Matching Legal Terms (p. 385)

2. True/False Quiz (p. 386)

3. Discussion Questions (pp. 386-387)

4. Thinking Critically About the Law (pp. 387-388)

5. Case Questions (p. 388)

6. Case Analysis (pp. 389-390)

7. Legal Research (p. 390)

KEY TERMS

Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed

in bold in the copy. They are listed here for your quick reference.

§ endorsement (p. 374)

§ endorser (p. 374)

§ endorsee (p. 374)

§ blank endorsement (p. 375)

§ bearer instrument (p. 375)

§ special endorsement (p. 375)

§ restrictive endorsement (p. 376)

§ qualified endorsement (p. 377)

§ without recourse (p. 377)

§ holder in due course (p. 378)

§ personal defense (p. 379)

§ real defense (p. 380)

§ counterclaim (p. 381)

§ material alteration (p. 382)

§ presentment (p. 383)

§ dishonored (p. 383)

LEARNING OUTCOMES

The chapter Learning Outcomes will help you and the students discover the concepts and information

that should be understood upon completion of the chapter. You may want to access the PowerPoint

(PPT) slides for Chapter 23 when you begin the study of the chapter and discuss each Learning

Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are

shown here in total as an overview of the sections being presented in Chapter 23. The corresponding

text page numbers and PPT slides are listed next to each outcome. These slides should be used to

reinforce the main points of the lecture.

After completing this chapter, the students will be able to:

1. Identify the purpose of endorsing commercial paper. (pp. 374, PPT slides 2-4)

2. Describe the four kinds of endorsements. (pp. 375-377, PPT slides 5-6)

3. Explain the obligations, warranties, and discharge of endorsers, and specify the five warranties

assumed to exist in endorsements. (pp. 377-378, PPT slides 7-9)

4. Describe the four requirements that qualify a person as a holder in due course. (pp. 378-379, PPT

slides 10-11)

5. Distinguish between personal and real defenses against payment of commercial paper, and list the

types of defenses in each case. (pp. 379-383, PPT slides 12-15)

6. Explain when presentment of commercial paper occurs. (p. 383, PPT slide 16)

7. Describe when commercial paper is deemed dishonored. (pp. 383-384, PPT slide 17)

LECTURE OUTLINE

A. ENDORSING COMMERCIAL PAPER

One of the valuable characteristics of commercial paper in our personal and business lives is the ease

with which it can be transferred from one person to another and the ease with which final settlements

can be made. When the holder of commercial paper signs his or her name, with or without other words,

on the back of the instrument, this writing is referred to as an endorsement.

B. KINDS OF ENDORSEMENTS

Any of the following endorsements may be used in transferring commercial paper. The choice of

endorsement will depend on the purpose of the transfer.

1. Blank Endorsement

A blank endorsement is an endorsement where the name of the payee is written by the

payee on the back of a negotiable instrument.

2. Special Endorsement

A special endorsement, or full endorsement, is one in which the payee specifies the

person to whom, or to whose order, it is to be paid.

3. Restrictive Endorsement

A restrictive endorsement is a signature to which words have been added restricting

the further endorsement of the instrument.

4. Qualified Endorsement

In the case of a qualified endorsement, the endorser avoids liability for payment even

if the maker or drawer defaults on the instrument.

C. OBLIGATIONS, WARRANTIES, AND DISCHARGE OF ENDORSERS

The endorser of a promissory note or the drawer or endorser of a draft or check is liable for the

payment of the instrument if the following conditions are met:

1. It has been properly presented for payment to the maker of the note or to the drawee of the draft or

check.

2. Payment has been refused by the maker or drawee.

3. Notice of the refusal has been given to the drawer ore.

D. HOLDER IN DUE COURSE

A holder in due course of commercial paper, according to the UCC (UCC 3-302), is one who has

taken the paper in good faith and for value, before maturity, and without actual or constructive notice

(notice inferred from circumstances) of any defects in the instrument.

E. DEFENSES AGAINST PAYMENT OF COMMERCIAL PAPER

A defense against payment of commercial paper that may be used against any party except a holder in

due course is called personal defense. A defense against payment of commercial paper that claims the

instrument was void from the beginning is known as real defense, or absolute defense.

1. Personal Defenses

Personal defenses against payment of commercial paper relate to the acts or

circumstances leading to the issue of the paper rather than to the paper itself.

a) Lack of Consideration

Although consideration is presumed to have been given for a promissory note,

draft, or check, proof by the maker or drawer that consideration was in fact

lacking can be used as a defense against paying the instrument.

b) Fraud, Duress, or Undue Influence

If fraud, duress (threat of harm to person or property), or undue influence was

used to induce a person to sign a negotiable instrument, the injured person may

use any of these as a personal defense against any person who is not a holder in

due course.

2. Breach of Warranty

In the event of breach of warranty, the injured party may assert the breach as a personal

defense.

a) Nondelivery of a Completed Instrument

Sometimes a completed negotiable instrument comes into the possession of an

immediate party (the payee indicated on the instrument) before the maker or

drawer has delivered it. In such a case, the payee cannot collect on the

instrument.

b) Nondelivery of an Incomplete Instrument

Under the UCC, no distinction is made between lack of delivery of a completed

and an incomplete instrument. In either case, it is treated as a personal defense,

not effective against a holder in due course.

c) Payment before Maturity

Suppose the maker of an instrument paid it before maturity but failed to get the

paper itself back. In this case, he or she would be discharged from further

liability to immediate parties (the payees) but would remain liable on the note if

it should come into possession of a holder in due course.

d) Counterclaim

The maker of a note or the drawer of a check or draft may deduct from the

amount demanded by an immediate party any amounts owed him or her by the

payee. This type of personal defense is called a counterclaim.

3. Real Defenses

Real, or absolute, defenses to payment of commercial paper, good against anyone,

including holders in due course, include forgery, material alteration, lack of intent to

execute commercial paper, incapacity of the parties to contract, and illegality created by

law.

a) Forgery

Commercial paper on which the signature of the maker or drawer has been

forged is void. Even a holder in due course cannot collect on an instrument if he

or she obtained title after a forgery. Endorsers of a forged instrument who

negotiate the paper are liable.

b) Material Alteration

Any change made to an instrument that affects the rights of the parties is called a

material alteration.

c) Lack of Intent to Execute Commercial Paper

A person cannot be held liable, even by a holder in due course, if he or she signs

an instrument that is apparently not negotiable and the paper is later fraudulently

converted into a negotiable instrument.

d) Incapacity of Parties to Contract

An incompetent person who makes, signs, and delivers a negotiable instrument

cannot be held liable for its payment.

e) Discharge in Bankruptcy

If a bankruptcy court discharges a debt secured by commercial

paper during a bankruptcy proceeding, the maker of the commercial paper is

released from all liability associated with it (see Chapter 21). In such a case, the

maker of the commercial paper has a real defense against payment.

f) Illegality Created by Law

Often state statutes expressly declare that commercial paper given for gambling

transactions or at usurious rates of interest is void.

F. PRESENTMENT OF COMMERCIAL PAPER

In order to establish the liability of the endorsers of commercial paper, the holder must engage in what

is known as presentment, that is, tendering a note to the maker and demanding its payment, or

showing a draft or check to the drawer and requesting its acceptance or payment, on or after the

maturity date at the place stated in the instrument.

G. DISHONOR OF COMMERCIAL PAPER

A negotiable instrument is considered dishonored if it is not accepted when presented, if it is not paid

when presented for payment at maturity, or if presentment is excused or waived and the instrument is

past due and unpaid.

INSTRUCTOR NOTES

A resulting answer or explanation is provided below for each Learning Outcome in Chapter 23. Every

outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter

assessment exercises and activities for ease of reference and use.

LO1. Identify the purpose of endorsing commercial paper.

The purpose of an endorsement is to transfer ownership of commercial paper from one party to another.

When the transferee receives the indorsed instrument, that person becomes the new holder, or owner, of

it.

Text Pages: 374

PowerPoint: Slides 2-4

Thinking Critically About the Law: 34

LO2. Describe the four kinds of endorsements.

There are four kinds of endorsements: (a) a blank endorsement is one in which the name of the

payee is written by the payee on the back of a negotiable instrument; (b) a special endorsement is one

in which the payee specifies the person to whom, or to whose order, it is to be paid; (c) a restrictive

endorsement is a signature in which words have been added restricting further endorsement of the

instrument; and (d) a qualified endorsement is one in which the endorser avoids liability for payment

even if the maker or drawer defaults on the instrument.

Text Pages: 375-377

PowerPoint: Slides 5-6

Discussion Questions: 26, 28

Thinking Critically About the Law: 36

Case Analysis: 40

LO3. Explain the obligations, warranties, and discharge of endorsers, and specify the five

warranties assumed to exist in endorsements.

The endorser of a promissory note or the drawer or endorser of a draft or check is liable for the

payment of the instrument provided it has been properly presented for payment to the maker of the note

or to the drawee of the draft or check; payment has been refused by the maker or drawee; and notice of

the refusal has been given to the drawer or endorser. The UCC assumes the following five warranties

exist in every endorsement: (1) the instrument is genuine; (2) all prior parties were qualified to enter

into a legally binding contract; (3) the instrument is for a valid and existing obligation; (4) the endorser

will pay what is due on the paper to the holder or to any subsequent endorser who had to pay on the

instrument if it was not paid when presented for payment; and (5) the endorser is the true owner of the

paper.

Text Pages: 377-378

PowerPoint: Slides 7-9

Discussion Questions: 27, 31

Thinking Critically About the Law: 33

Case Analysis: 43

LO4. Describe the four requirements that qualify a person as a holder in due course.

The four requirements for being a holder in due course are: (a) the paper must be complete and regular

on its face, (b) the paper must have been acquired on or before the due date, (c) the paper must have

been acquired for a valuable consideration, and (d) the paper must have been taken in good faith and

for value.

Text Pages: 378-379

PowerPoint: Slides 10-11

Case Questions: 39

LO5. Distinguish between personal and real defenses against payment of commercial paper, and

list the types of defenses in each case.

Personal defenses against payment of commercial paper can be used against anyone except a holder in

due course; real defenses can be used against any party, including a holder in due course. Personal

defenses include lack of consideration; fraud, duress, and undue influence; nondelivery of a completed

instrument; nondelivery of an incomplete instrument; payment before maturity; and counterclaim. Real

defenses include forgery, material alteration, lack of intent to execute commercial paper, incapacity of

the parties to contract, and illegality created by statute.

Text Pages: 379-383

PowerPoint: Slides 12-15

Discussion Questions: 29-30

Thinking Critically About the Law: 32, 35

Case Questions: 37-38

Case Analysis: 41-42

LO6. Explain when presentment of commercial paper occurs.

Presentment of commercial paper occurs when a holder tenders a note to the maker and demands its

payment, or shows a draft to the drawer and requests its acceptance or payment, on or after the maturity

date at the place stated in the instrument.

Text Pages: 383

PowerPoint: Slide 16

LO7. Describe when commercial paper is deemed dishonored.

A commercial paper is deemed dishonored if it is not accepted when presented for acceptance, if it is

not paid when presented for payment at maturity, or if presentment is excused or waived and the

instrument is past due and unpaid.

Text Pages: 383-384

PowerPoint: Slide 17