PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5th Edition by Henry R.

Cheeseman

Chapter 19 Creation and Transfer of Negotiable Instruments

Slides developed by Les Wiletzky Wiletzky and Associates

Copyright 2006 by Pearson Prentice-Hall. All rights reserved.

Negotiable Instruments (1 of 2)
To qualify as a negotiable instrument

(commercial paper), the document must meet certain requirements established by Revised Article 3 (Negotiable Instruments) of the Uniform Commercial Code (UCC)

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Negotiable Instruments (2 of 2)
If the requirements of Article 3 are met, a

transferee who qualifies as a holder in due course takes the instrument free of many defenses that can be asserted against the original payee In addition, the document is considered an ordinary contract that is subject to contract law
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Functions of Negotiable Instruments

Negotiable instruments serve the following

functions:
Substitute for money Credit device Record-keeping device

Most purchases by businesses and many

individuals are made by negotiable instruments instead of cash

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Types of Negotiable Instruments

Instrument
Term that means

negotiable instrument [UCC 3-104(b)]

Revised Article 3 recognizes four finds of instruments: 1. Drafts 2. Checks 3. Promissory Notes 4. Certificates of Deposit

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Drafts (1 of 2)
A draft is a three-party instrument that is

an unconditional written order by one party that orders the second party to pay money to a third party

Drawer of a draft Drawee of a draft

Payee of a draft

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Drafts (2 of 2)
Time Draft A draft payable at a designated future date Sight Draft A draft payable on sight Also called a demand draft Trade Acceptance a sight draft that arises when credit is extended with the sale of goods
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Checks
A distinct form of draft drawn on a

financial institution and payable on demand

Drawer of a check Drawee of a check Payee of a check

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Promissory Notes
A two-party negotiable instrument that is

an unconditional written promise by one party to pay money to another party

Maker of a note Payee of a note

Types of notes: Time note Demand note Collateral

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Certificates of Deposit (CD)

A two-party negotiable instrument that is a special

form of note created when a depositor deposits money at a financial institution in exchange for the institutions promise to pay back the amount of the deposit plus an agreed-upon rate of interest upon the expiration of a set time period agreed upon by the parties
Maker of the CD Payer of the CD

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Summary: Types of Negotiable Instruments (1 of 2)

Instrument: Orders to Pay Draft Party Drawer Drawee Description of Party Person who issues the draft Person who owes money to the drawer; person who is ordered to pay the draft and accepts the draft Person to whom the draft is made payable Owner of a checking account at a financial institution; person who issues the check Financial institution where drawers checking account is located; party who is ordered to pay the check Person to whom the check is made payable

Payee
Check Drawer Drawee Payee

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Summary: Types of Negotiable Instruments (2 of 2)

Instrument:

Promises to Pay
Promissory Note Certificate of Deposit (CD)

Party
Maker Payee Maker Payee

Description of Party
Party who issues the promissory note; usually the borrower Party to whom the promissory note is made payable; usually the lender Financial institution that issues the certificate of deposit Party to whom the certificate of deposit is made payable; usually the depositor

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According to UCC 3-104(a), a negotiable instrument must:

Be in writing

Be signed by the maker or drawer

Be an unconditional promise or order to pay

State a fixed amount of money

Not require any undertaking in addition to the

payment of money Be payable on demand or at a definite time Be payable to order or to bearer

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Summary: Formal Requirements for a Negotiable Instrument (1 of 4)

Requirement Writing Description Writing must be permanent and portable. Oral or implied instruments are nonnegotiable [UCC 3104(d)]. Signature must appear on the face of the instrument. It may be any mark intended by the signer to be his or her signature. Signature may be by an authorized representative [UCC 3-104(a)]. Instrument must be an unconditional promise or order to pay [UCC 3-104(a)]. Permissible notations listed in UCC 3-106(a) do not affect instruments negotiability. If payment is conditional on the performance of another agreement, the instrument is nonnegotiable.
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Signed by maker or drawer

Unconditional promise or order to pay

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Summary: Formal Requirements for a Negotiable Instrument (2 of 4)

Requirement Fixed amount of money Description Fixed amount: Amount required to discharge the instrument must be on the face of the instrument [UCC 3-104(a)]. Amount may include payment of interest, discount, and costs of collection. Revised Article 3 provides that variable interest rate notes are negotiable instruments. In money: Amount must be payable in U.S. or foreign countrys currency. If payment is to made in goods, services, or non-monetary items, the instrument is nonnegotiable [UCC 3-104(a)].

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Summary: Formal Requirements for a Negotiable Instrument (3 of 4)

Requirement Description

Cannot require any A promise or order to pay cannot state any other undertaking in addition to undertaking to do an act in addition to the payment of the payment of money money [UCC 3-104(a)(3)]. A promise or order to may include authorization or power to protect collateral, dispose of collateral, waive any law intended to protect the obligee, and the like.

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Summary: Formal Requirements for a Negotiable Instrument (4 of 4)

Requirement Description Payable on demand or at Payable on demand: Payable at sight, upon a definite time presentation, or when no time for payment is stated [UCC 3-108(a)]. Payable at a definite time: Payable at a definite date, or before a stated date, a fixed period after a stated date, or at a fixed period after sight [UCC 3-108(b)(c)]. Instrument payable only upon the occurrence of an uncertain act or event is nonnegotiable.

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Nonnegotiable Contract
A promise or order to pay that does not

meet the requirements of a negotiable instrument It is not subject to the provisions of UCC Article 3 A nonnegotiable contract can be enforced under normal contract law

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Transfer by Assignment or Negotiation

Transfer by Assignment Transfer by Negotiation The transfer of rights The transfer of a under a contract negotiable instrument by a person other than the It transfers the rights of the issuer transferor (assignor) to the transferee (assignee) The person to whom the instrument is transferred becomes the holder Negotiating order paper Negotiating bearer paper
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Indorsement
The signature (and other directions)

written by or on behalf of the holder somewhere on the instrument The signature may:
Appear alone Name an individual to whom the instrument is to be paid; or Be accompanied by other words

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Types of Indorsements (1 of 3)
Type of Indorsement Description

Blank
Special

Does not specify a particular indorsee. This indorsement creates bearer paper.
Specifies the person to whom the indorser intends the instrument to be payable. This indorsement creates order paper.

Unqualified

Does not disclaim or limit liability. The indorsee is liable on the instrument if it is not paid by the maker, acceptor, or drawer.

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Types of Indorsements (2 of 3)
Type of Indorsement Qualified Description Disclaims or limits the liability of the indorsee. There are two types: 1. Special qualified indorsement 2. Blank qualified indorsement No instructions or conditions attached to the payment of funds

Nonrestrictive

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Types of Indorsements (3 of 3)
Type of Indorsement Restrictive Description Conditions or instructions restrict the indorsees rights. There are four types: 1. Conditional indorsement 2. Indorsement prohibiting further indorsement 3. Indorsement for deposit or collection 4. Indorsement in trust

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Misspelled or Wrong Name

Where the name of the payee or indorsee

is misspelled in a negotiable instrument, the payee or indorsee can indorse the instrument in the misspelled name, the correct name, or both A person paying or taking the instrument for value or collection may require a signature in both the misspelled and the correct name [UCC 3-204(d)]
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Multiple Payees or Indorsees

Payable Jointly An instrument that is payable to two or more persons with and between their names All their indorsements are required to negotiate the instrument Payable in the Alternative An instrument that is payable to two or more persons with or between their names Only one of their indorsements is required to negotiate the instrument

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Forged Indorsement
Forged Indorsement the forged signature

of a payee or holder on a negotiable instrument Generally, the person who took the check from the forger is liable on a forged indorsement There are two exceptions:
The Imposter Rule The Fictitious Payee Rule

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Forged Indorsement: Exceptions to

the General Rule

The Imposter Rule A rule that says if an imposter forges the indorsement of the named payee, the drawer or maker is liable on the instrument and bears the loss The Fictitious Payee Rule A rule that says that a drawer or maker is liable on a forged or unauthorized indorsement of a fictitious payee

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