Article 3 Flashcards
The Role of Negotiable Instruments
- Created to be reliable cash substitute
- To be easily transferable, with ready assurances of payment
- These goals are supposed to be achieved by resort to the four corners of the paper.
Negotiability elements
- A promise or order
- A signed writing
- An unconditional promise/order
- Payment of a fixed amount of money
- Payable to bearer or order
- Payable on demand or at a definite time
- No additional undertakings
Negotiability: A promise or order
Order = written instruction to pay money signed by the person giving the instruction
Instrument type: Check
Parties: drawer, drawee (bank), payee
Promise = written unequivocal undertaking to pay money signed by the person undertaking to pay. An acknowledgment of an obligation by the obligor is not a promise unless the obligor undertakes to pay the obligation.
Instrument type: Note (aka Promissory Note)
Parties: maker (person that makes promise); payee
Mere acknowledging the existence of a debt is not enough
Cashier’s Check
The bank is both the drawer and the drawee.
The bank takes the money from the person’s bank account (the one paying), and the bank instructs themselves to pay to payee.
Negotiability: A Signed Writing
- Signed-includes using any symbols executed or adopted with present intention to adopt or accept a writing.
* It may be printed, stamped or written
* Partial names, ficticious names, trade names, initials or even thumbprint may suffice. - Writing-includes printing, typewriting, or any other intentional reduction to tangible form.
Emails do not constitute “writings”
Tangible form important for physical possession
Negotiability: A signed Writing
Writing must be signed by:
- the person undertaking the promise to pay (maker); or
- the person giving the instruction to pay (drawer)
Negotiability: Unconditional promise/order
A promise or order defeats negotiability (conditional) if:
A promise or order defeats negotiability (conditional) if:
1. Express condition-it it’s expressly conditioned on the occurrence of a specified even then it fails the unconditional requirement.
- Subject or governed by another record- “controlled by the terms of another record”
“subject to”
“governed by”
“any rights and obligations with respect to the promise or order stated in another record”
“pursuant to” it’s still unconditional
referencing or acknolwedging existence of another record - still unconditional
- Rights or obligations stated in another record-any rights and obligations can’t be in another record.
“Pursuant to”
Does not defeat unconditional requirement.
these words may simply indicate that the promissory note relates to or arises from the Purchase Agreement.
Negotiability: Unconditional promise/order
Exceptions to conditions that defeat negotiability
- Promise/order contains a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration,
- Payment is limited to resort to a particular fund or source (e.g. “John Smith’s Bank of America personal checking account ending in 1234”)
- Implied conditions
Negotiability: Unconditional promise/order
Why does the existence of a condition defeats negotiability?
-Cash substitute
-Right to payment under a negotiable instrument should be assessable by reference to nothing more than the instrument itself (4 corners).
Limiting negotiable instruments to unconditional obligations to pay eliminates any need to look beyond the face of the writing itself.
Negotiability: Payment of a Fixed Amount of Money
- Promise/order must be for the payment of money
- Amount of payment obligation must be fixed
Negotiability: Payment of a Fixed Amount of Money
Not Money
- diamonds (even if traded in a commodities market with easily discernible prices)
- Stocks
- Virtual currency (bitcoin)
Negotiability: Payment of a Fixed Amount of Money
Money
-Dominican pesos
-Vietnamese Dong
Foreign currency
Negotiability: Payment of a Fixed Amount of Money
To what “fixed amount” this element applies to?
The “fixed amount” requirement applies only to the PRINCIPAL amount. It does NOT apply to:
-interest
-attorneys fees
-collection fees
-prepayment penalties
-late fees
Negotiability: Payable to Bearer or Order
Payable to Bearer
Payable to Bearer: person in possession of the instrument. Does not state a payee
“payable to bearer”
“payable to the order of bearer”
“the person in possession of the promise/order is entitled to this payment”
“pay to bearer”
“payable to the order of cash”
What if a negotiable instrument purports to be “payable to bearer” and “payable to order”?
Then it is “payable to bearer”
Negotiability: Payable to Bearer or Order
Payable to Order
Person identified in the instrument
payable to “the order of …” or to an identified person or order.
Difference between “payable to” v. “payable to the order of”
“payable to …” - only payable to that person, cannot be transferred.
“payable to the order of ….” - the person can transfer to other people. The person has the right to transfer to others.
Negotiability: Payable on Demand or at a Definite Time
Payable on Demand
Payable on demand if:
-It states that its payable or at sight, or otherwise indicates that is payable at the will of the holder, or
-does not state any time of payment
“on demand” “on sight”
Negotiability: Payable on Demand or at a Definite Time
Payable at a Definite Time
Payable at a Definite Time if
its payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise/order is issued, subject to rights of:
-pre-payment
-acceleration
-extension at the option of the holder, or
-extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
Negotiability: Payable on Demand or at a Definite Time
What’s ok? What’s not okay?
What’s ok?
-“On demand” / “On sight”
-“On August 30, 2029”
-“On August 30, 2029. All amounts owed under this promissory note will become immediately due and payable upon any default. This promissory note may be paid at any time in advance of the Maturity Date without any penalty.”
What’s not ok?
-“I promise to pay to the order of David $5,000 when I have funds available.”
Negotiability: No other undertakings
Subject to a few exceptions, the inclusion of any additional undertakings and instructions by the maker/drawer prevents a promise or order from qualifying as a negotiable instrument:
Exceptions:
- An undertaking or power to give, maintain or protect collateral to secure payment.
- An authorization or power to holder to confess judgment or realize on or dispose collateral; or
- a waiver of the benefit of any law intended for the advantage or protection of an obligor.
Negotiability: No other undertakings
The “courier without luggage rule”
Negotiable instruments are limited to payment obligation and nothing more.
Issuance
the FIRST DELIVERY of an instrument by the maker or drawer, whether to a holder or a non holder, for the purpose of giving rights on the instrument to any person
Requirements:
1. maker/drawer must have delivered instrument
2. maker/drawer must have intended to grant rights on the instrument to someone.
DELIVERY + INTENT
Transfer
2 elements:
- Delivery-Someone OTHER THAN THE ISSUER must deliver the instrument to another person.
- Intent-Person who delivers the instrument must do so for the purpose of giving the right to enforce the instrument.
Unlike issuance, there must be intent to grant the recipient the right to enforce.
Negotiation
Means transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the initial issuer of the instrument to a person who thereby becomes it’s holder.
Negotiation = Transfer to a holder
Negotiation does not equal negotiability
What does a negotiation requires?
If instrument is payable to:
1. identified person-negotiation requires transfer of possession of the instrument and its endorsement by the holder.
2. bearer-it may be negotiated by transfer of possession alone.
Who is a holder?
Person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.
The person that has possession of the negotiable instrument and has the right to enforce it.
Identification of person to whom instrument is payable
“X or Y” - it is payable to any of them, and may be negotiated by any or all of them in possession of the instrument.
“X and Y”- payable to ALL of them, may be negotiated, enforced ONLY by ALL of them, X and Y together.
“X and/or Y”- treated as “or”
What is an indorsement?
Means a signature. Must appear on the instrument itself, or a separate piece of paper that is affixed to the instrument.
Two Types of Indorsements:
- Special Indorsement - indorsement by the holder of the instrument that identifies a person to whom the instrument is payable (order paper)
- Blank Indorsement - indorsement by the holder of the instrument that does not identify a person to whom the instrument is payable (bearer paper)
Only the holder of an instrument can make a valid indorsement, whether special or blank
What is Presentment?
A demand for payment made on the maker or the drawee of a draft.
*Can be made in any way that is commercially reasonable, unless instrument provides otherwise.
*An effective presentment can be made via oral, written or electronic communication.
What is needed for presentment?
-Instrument must be produced along with reasonable identification.
-If presentment made on behalf of another person, then reasonable evidence of authority must also be provided.
-Recipient on demand can then determine whether the instrument is properly payable.
-Party to whom presentment is made may:
-return instrument for lack of
necessary indorsement
-refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument.
What is Dishonor?
-A demand is dishonored if not paid on day of presentment
-A time note is dishonored (if presented on or after due date) if not paid on day of presentment (or due date, if presented earlier).
-A draft/check is dishonored if not paid on day of presentment
Dishonor Exceptions
-No presentment needed if note not payable on demand AND not payable through a bank; dishonored on due date if not paid.
-Checks that are not presented for immediate payment over the counter. Dishonored if bank returns the check in a timely manner or sends timely notice of dishonor or nonpayment.
Enforcement and Liability
Who has the right to enforce an instrument?
- the holder of the instrument
- a non holder in possession of the instrument who has the rights of a holder (e.g. received transfer but not negotiation; contracts right only); or
- a person not in possession of the instrument who is entitled to enforce the instrument (e.g. because it was lost or stolen)
Who is liable for payment on an instrument?
No one can be held liable for payment of an instrument unless they (or an agent) signs the instrument.
Basis of liability depends on whether the person signed the instrument as an:
* Issuer,
* Drawee (acceptor),
* Drawer or
* Indorser
Issuer Liability
Issuer liability (maker of note or bank issuing cashiers’ check)
Issuer of a note or cashier’s check is obliged to pay the instrument according to its terms at the time it was issued.
Makers are primarily liable. They owe when the note is due, period.
Drawee (Acceptor) Liability
Drawee (like banks) are not liable unless they choose to be by accepting (signing) the draft and committing to pay when subsequently requested. Once accepted, acceptors are primarily liable, like makers. They owe when the draft is due/presented, period.
Drawer Liability
Drawer is generally secondarily liable. They can be called upon to pay if the drawee dishonors (unless draft/check was accepted/certified by bank drawer, in which case drawer is discharged)
Indorser Liability
Generally, secondarily liable. They can be called upon to pay if the drawee dishonors. If made to pay, can seek contribution up the chain, not downward.
- can avoid/disclaim indorsement liability by signing “without recourse”
- discharged if:
-no notice of dishonor
-bank accept draft or
-30 days after endorsement was made
Holder in Due Course
- enjoys favored treatment
- insulated from defenses that would otherwise prevent collection
- most defenses will not render the payment obligation uncollectable
- can treat a negotiable instrument as the functional equivalent of cash
Holder in Due Course
(enjoys favored treatment)
To be an instrument’s holder in due course, a person must be:
I. instrument when issued or negotiated to holder does not bear apparent evidence of forgery or alteration, and is not so irregular to call into question its authenticity.
AND
II. The holder took the instrument:
1. a holder of an instrument
2. the person must take the instrument for value, in good faith, and without notice of various problems affecting the instrument’s enforceability, and
3. the instrument must bear no evidence of forgery or alteration, and
4. it must not be otherwise so irregular or incomplete as to call its authenticity into question.
Evidence of Authenticity
A holder in due course must show that the instrument does not contain any obvious defect that would cause its authenticity to be questioned.
- instrument must not show any apparent evidence of forgery or alteration
- even if no forgery, it cannot be irregular or incomplete that its authenticity is called into question.
Value
An instrument is issued or transferred for value in three situations:
1. Promise of Future Performance
2. Security Interest or Lien
3. Payment of or Security for a Pree-existing Claim
Value: Promise of Future Performance
An instrument is issued or transferred for a promise of future performance to the extent that the performance has been performed. (e.g. promise is partially performed = value only to the extent of the performance)
Exceptions:
1. a negotiable instrument is issued or transferred in exchange for another negotiable interest.
2. a bank issues a letter of credit to a 3rd party in exchange for a negotiable instrument.
Value: Security Interest or Lien
The transferee obtains a security interest or nonjudicial lien in the instrument.
Value: Payment Of or Security for a Pre-existing Claim
Against any person, whether or not the claim is due.
An instrument can be given in payment of (or as a security for) a 3rd person’s obligation or debt.
Good Faith
Two components:
- Subjective-whether the person in question acted with willful or intentional dishonesty
- Objective-whether the person in question complied with reasonable commercial standards of fair dealing
No Notice of Certain Defects
a person cannot obtain HDC status if they take the instrument with notice of one of the following types of problems or defects:
- That the instrument has been dishonored or is overdue;
- The instrument has been altered or contains an unauthorized signature
- A third party has a claim to the instrument
- A person obligated to pay on the instrument has a defense to payment or a claim in recoupment.
What you need to know:
Notice exists when a person should know of a fact based on the circumstances.
Defenses
- Infancy-minors lack legal capacity to enter into a contract.
- Duress-unlawful threats induce person to act a way they wouldn’t act otherwise.
- Incapacity-lacks legal capacity for any reason other than infancy
- Illegality-instrument in connection with a transaction that violates a statute (illegal gambling)
- Fraud in the inducement-obligor must be induced by fraud to sign the instrument without knowledge or the opportunity to learn of the instrument’s character or its essential terms
- Discharge of obligor in insolvency proceedings-any proceeding intended to liquidate or rehabilitate the estate of the person involved (e.g. bankruptcy)
