II.

NEGOTIABLE INSTRUMENTS

A negotiable instrument comes in four forms

1. Check
2. Draft
3. Promissory Note
4. Certificate of Deposit (CD)

While satisfying the following criteria;

1. Written
2. Signed
3. Contain a promise or order to pay
4. Unconditional
5. For a fixed amount
6. For money
7. Contain no other undertaking or instruction
8. Payable on demand or at a definite time
9. Payable to order or bearer

A forged wire transfer is definitely not a negotiable instrument.

Negotiable instruments are written orders or unconditional promises to pay a

fixed sum of money on demand or at a certain time. Promissory notes, bills of
exchange, checks, drafts, and certificates of deposit are all examples of negotiable
instruments.
Negotiable instruments may be transferred from one person to another, who is known
as a holder in due course. Upon transfer, also called negotiation of the instrument, the
holder in due course obtains full legal title to the instrument. Negotiable instruments
may be transferred by delivery or by endorsement and delivery.
One type of negotiable instrument, called a promissory note, involves only two parties,
the maker of the note and the payee, or the party to whom the note is payable. With a
promissory note, the maker promises to pay a certain amount to the payee. Another
type of negotiable instrument, called a bill of exchange, involves three parties. The party
who drafts the bill of exchange is known as the drawer.
The party who is called on to make payment is known as the drawee, and the party to
whom payment is to be made is known as the payee. A check is an example of a bill of
exchange, where the individual or business writing the check is the drawer, the bank is
the drawee, and the person or business to whom the check is made out is the payee.
To be valid a negotiable instrument must meet four requirements.
A. First, it must be in writing and signed by the maker or drawee.
B. Second, it must contain an unconditional promise (promissory note) or order (bill
of exchange) to pay a certain sum of money and no other promise except
as authorized by the Uniform Commercial Code (UCC).
C. Third, it must be payable on demand or at a definite time. Finally, it must
be payable either to order or to bearer.
The laws governing negotiable instruments are spelled out in Article 3 of the UCC.
Modeled after the Negotiable Instruments Law, Article 3 has been adopted as law by all
50 states and the District of Columbia. It spells out the basic requirements for valid
negotiable instruments and covers such matters as the rights of the holder, types of
endorsement, warranties given to subsequent holders, forgeries, dating, and
alterations.
A negotiable instrument is said to be dishonored when, upon presentation, payment
or acceptance has been refused. To qualify as a holder in due course, an individual or
business must have taken the negotiable instrument before it was overdue and without
notice that it had been previously dishonored, if such was the case. The negotiable
instrument must also be complete and regular upon its face; that is, all of the necessary
information must be present. The holder must also take the instrument in good faith
and for value. At the time it was negotiated, the holder in due course must have had no
notice of an infirmity in the instrument or a defect in the title of the person negotiating
it.
If these conditions are met, then the holder in due course generally holds the
instrument free from any defect of title of prior parties involved with the instrument.
The holder in due course may enforce payment of the instrument for the full amount
against all parties liable thereon, free from any defenses available to prior parties
among themselves.
Negotiable instruments may be endorsed in various ways, and some negotiable
instruments do not require any endorsement. If a negotiable instrument is a bearer
instrument, then it may be negotiated by simply delivering it from one person to
another with no endorsement required. Such negotiable instruments typically have a
blank endorsement consisting of a person's name only. If the negotiable instrument is
an order instrument, then the payee must first endorse it and deliver it before
negotiation is complete. For example, if the instrument says, "Pay to the order
of Jane Smith," then it is an order instrument and Jane Smith must endorse it and then
deliver it to the payer or drawee.
Endorsements such as "Pay to the order of Jane Smith" are known as special
endorsements and have the effect of making the instrument an order instrument rather
than a bearer instrument. Restrictive endorsements ("Pay to Jane Smith only") and
qualified endorsements ("Pay without recourse to the order of Jane Smith") also have
the effect of requiring the payee to endorse the negotiable instrument. Qualified
endorsements also affect the nature of implied warranties associated with
endorsement.
Under the UCC, an unqualified endorser who receives payment or consideration for a
negotiable instrument provides a series of implied warranties to the transferee and any
subsequent holder in due course. An unqualified endorser warranties that he or she has
good title to the instrument or represents a person with title, and that the transfer is
otherwise rightful. The endorser also warranties that all signatures are genuine or
authorized, that the instrument has not been materially altered, that no defense of any
prior party is good against the endorser, and that the endorser has no knowledge of
any insolvency proceeding involving the payer.
Other issues concerning negotiable instruments are also covered in Article 3 of the UCC.
In the case of a forgery, the negotiable instrument becomes inoperative. Antedated or
past-dated instruments are not invalid, provided the dating was not done for fraudulent
or illegal purposes. Negotiable instruments that have been materially altered without
the permission of all parties involved are void. But a holder in due course who is not
party to the material alteration can enforce payment according to the instrument's
original terms. Also covered in Article 3 are interpretations of contradictions that may
appear from time to time in negotiable instruments.