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Commercial paper has been my nemesis and I am making a last-ditch effort to understand it.

What I am struggling to understand is when you would sue under a contract theory versus a warranty theory?

According to the LeanSheets for Commercial Paper, if you are stuck at the "end of the line" with a defective instrument and want to sue "up the chain" to recover your money, whether you sue under a contract theory or a warranty theory depends on whether you are a holder or a holder in due course (HDC). If you are a mere holder, then they say you should sue on a contract theory. That is, you sue the person prior to you in the chain of transfers on the basis of their indorsement. They are liable to you because they breached a contract (which they signed, via their indorsement) to sell you a good instrument. On the other hand, if you are a HDC, then you should sue under a warranty theory which is implied by mere transfer. That is, the person up the chain from you is liable for selling a defective instrument.

I don't see this distinction made anywhere in my Themis materials. In fact, unless I'm massively missing something, they don't even really make the distinction between a contract theory and a warranty theory. But now that I see the difference from the LeanSheets, it has confused me because the distinction seems real but I don't understand when to invoke it. When do I sue someone earlier in a train of transfers merely because they indorsed the note/draft, and when do I sue them based on a transfer or presentment warranty? (And if LeanSheets is right and it depends on whether you are a holder or an HDC, can someone explain why that is the case?)

Anyone understand this well enough to help me out? Thanks in advance!

Sojourner2 wrote:Commercial paper has been my nemesis and I am making a last-ditch effort to understand it.

What I am struggling to understand is when you would sue under a contract theory versus a warranty theory?

According to the LeanSheets for Commercial Paper, if you are stuck at the "end of the line" with a defective instrument and want to sue "up the chain" to recover your money, whether you sue under a contract theory or a warranty theory depends on whether you are a holder or a holder in due course (HDC). If you are a mere holder, then they say you should sue on a contract theory. That is, you sue the person prior to you in the chain of transfers on the basis of their indorsement. They are liable to you because they breached a contract (which they signed, via their indorsement) to sell you a good instrument. On the other hand, if you are a HDC, then you should sue under a warranty theory which is implied by mere transfer. That is, the person up the chain from you is liable for selling a defective instrument.

I don't see this distinction made anywhere in my Themis materials. In fact, unless I'm massively missing something, they don't even really make the distinction between a contract theory and a warranty theory. But now that I see the difference from the LeanSheets, it has confused me because the distinction seems real but I don't understand when to invoke it. When do I sue someone earlier in a train of transfers merely because they indorsed the note/draft, and when do I sue them based on a transfer or presentment warranty? (And if LeanSheets is right and it depends on whether you are a holder or an HDC, can someone explain why that is the case?)

Anyone understand this well enough to help me out? Thanks in advance!

Not important. That’s probs why Themis didn’t make a big deal of it. All you need to know is that you sue up the chain, and the only way someone up the chain can avoid being sued is by writing “no recourse”.