Legal Definitions - paper

In legal terms, "paper" is a versatile word with several specific meanings, often referring to official documents or financial instruments.

• Paper (General)

  In its broadest sense, "paper" refers to any written or printed document or instrument. More specifically, it can refer to documents that create, prove, or transfer legal rights or obligations. It can also collectively describe financial instruments used in commerce or documents filed in court.

  • Example 1: A homeowner signs a detailed contract for a major home renovation project.

    Explanation: This contract is a piece of "paper" because it is a written document that legally binds both the homeowner and the contractor to specific terms, obligations, and rights regarding the renovation.

  • Example 2: A company issues a certificate to an investor confirming their ownership of a certain number of shares in the company.

    Explanation: This share certificate is considered "paper" as it is a formal document that serves as proof of ownership and the associated legal rights of the shareholder.

  • Example 3: An attorney files a motion with the court asking a judge to dismiss a lawsuit.

    Explanation: The motion, along with other filings in the case, are referred to as "court papers" because they are official documents submitted to the judicial system as part of a legal proceeding.

• Bankable Paper

  This term refers to financial documents or instruments that banks readily accept and treat as equivalent to cash. These instruments are considered highly reliable and easily convertible into money, making them suitable for deposit or as collateral for loans.

  • Example 1: A person receives a cashier's check from their bank to pay for a large purchase.

    Explanation: A cashier's check is "bankable paper" because it is guaranteed by the issuing bank, meaning the funds are assured, and other banks will accept it as a secure form of payment, treating it much like cash.

  • Example 2: A business holds short-term U.S. Treasury bills as part of its liquid assets.

    Explanation: Treasury bills are "bankable paper" due to their extremely low risk and high liquidity. Banks and financial institutions readily accept them as collateral or can easily convert them into cash.

  • Example 3: A client deposits a certified check into their account.

    Explanation: A certified check is "bankable paper" because the bank has already verified that sufficient funds exist in the payer's account and has set them aside, guaranteeing payment and making it readily accepted by other banks.

• Bearer Paper

  A financial document or instrument that is payable to whoever physically possesses it, rather than to a specifically named person or entity. Ownership and the right to payment are transferred simply by handing the document over to another person.

  • Example 1: Historically, some corporate bonds were issued with detachable coupons that, when presented, entitled the holder to an interest payment.

    Explanation: These bond coupons were "bearer paper" because whoever physically held and presented the coupon could claim the interest payment, without needing to prove identity or ownership of the original bond.

  • Example 2: A gift card for a coffee shop that does not require registration or a name to be used.

    Explanation: This gift card functions as "bearer paper" because anyone who possesses it can redeem its value. Its value is tied to its physical possession, not to a specific individual.

  • Example 3: An old-style share certificate for a company that explicitly states it is payable to the "bearer."

    Explanation: This share certificate would be "bearer paper" because the person holding the physical certificate would be recognized as the owner of the shares, and ownership could be transferred by simply delivering the certificate.

• Commercial Paper

  This term has two main meanings: 1) A broad category of financial documents, such as checks, drafts, or promissory notes, used in business transactions for the payment of money. These are often governed by Article 3 of the Uniform Commercial Code (UCC), a set of laws governing commercial transactions in the U.S. 2) More specifically, it refers to short-term, unsecured promissory notes issued by large, financially stable corporations to meet immediate cash needs, often sold to investors.

  • Example 1: A large manufacturing company issues short-term promissory notes to institutional investors to raise funds for its quarterly operating expenses, promising to repay the principal plus interest in 90 days.

    Explanation: This is "commercial paper" in the specific sense of a short-term, unsecured debt instrument issued by a corporation to cover immediate financial needs, rather than taking out a traditional bank loan.

  • Example 2: A small business writes a check to its supplier for a shipment of raw materials.

    Explanation: The check is a form of "commercial paper" in the broader sense, as it is a common financial instrument used in commercial transactions for the payment of money, governed by the UCC.

  • Example 3: A bank issues a certificate of deposit (CD) to a customer who deposits a sum of money for a fixed period at a specified interest rate.

    Explanation: A certificate of deposit is considered a type of "commercial paper" (specifically a promissory note) because it is a financial instrument representing a promise to pay money, used in the commercial banking sector.

• Commodity Paper

  This refers to a financial instrument that represents a loan secured by physical commodities (like agricultural products, metals, or oil) that are either stored in a warehouse or in transit. The evidence of these commodities, such as a warehouse receipt or a bill of lading, serves as the collateral for the loan.

  • Example 1: A grain exporter takes out a loan from a bank, using a warehouse receipt for 50,000 bushels of wheat stored in a licensed facility as security.

    Explanation: This is "commodity paper" because the loan is backed by a physical commodity (wheat), and the warehouse receipt serves as the legal document proving ownership and storage, acting as collateral.

  • Example 2: An oil trading company obtains a short-term loan by pledging a bill of lading for a tanker full of crude oil currently sailing from the Middle East to Europe.

    Explanation: The loan is "commodity paper" because it is secured by the crude oil in transit, with the bill of lading acting as the document of title and collateral for the financing.

  • Example 3: A coffee importer uses a warehouse receipt for several tons of green coffee beans held in a customs-bonded warehouse as collateral for a line of credit.

    Explanation: This arrangement involves "commodity paper" as the loan is secured by the stored coffee beans, and the warehouse receipt is the instrument that legally ties the loan to the physical commodity.

• Order Paper

  A financial document or instrument that is payable to a specific person or entity named on the document, or to someone that specific person or entity formally designates (usually through an endorsement). Unlike bearer paper, it cannot be transferred simply by physical delivery; an instruction from the named payee is required.

  • Example 1: A person receives a refund check from an online retailer made out "Pay to the Order of Sarah Chen."

    Explanation: This check is "order paper" because it is specifically payable to Sarah Chen. She must either cash it herself or endorse it (sign the back) to transfer the right to payment to someone else.

  • Example 2: A business receives a bank draft from a client, with the payee clearly stated as "Acme Supply Co."

    Explanation: This bank draft is "order paper" because the funds are designated for Acme Supply Co. Only Acme Supply Co. can deposit the draft or formally endorse it to transfer the payment rights to another party.

  • Example 3: A mutual fund issues a dividend check to an investor, with the payee line reading "To the Order of David Lee."

    Explanation: This dividend check is "order paper" because David Lee is the specific payee. He has control over the funds and must take action (like depositing or endorsing) to complete the transaction.