Formal Requisites of Negotiability

Question 1

*Requirements of Negotiability

Answer 1

• memorize
  1. unconditional;
  2. promise or order to pay; and
  3. a fixed amount of money that:

(a) is payable to order or bearer when issued or first in possession of holder;
(b) is payable on demand or at a definite time;
(c) states no unauthorized undertakings by the person promising order or payment

all of this must be at time of making

Question 2

Requirements of Negotiability:

unconditional

Answer 2

instrument is conditional (and thus non-negotiable) if it:

(i) expressly states a condition for payment (e.g. “I will pay you if the Cowboys win”); or
(ii) states that the promise or order is subject to or governed by another writing

(don’t memorize) promise or order is not conditional merely because it

(a) refers to another record regarding collateral, prepayment, or acceleration;
(b) limits payment to a particular source of funds;
(c) requires a countersignature or a specimen signature (e.g. traveler’s check)
(d) or contains statement required by law that holder is subject to claims and defenses of original payee

• if there merely is a reference to the consideration out of which the instrument arose, it is still unconditional.

Question 3

Requirements of Negotiability:

Promise or order to pay

Answer 3

Note must contain promise to pay (i.e. written undertaking to pay signed by the person undertaking to pay, such as “I promise to pay.”)

• I.O.U. is not sufficient because it is merely acknowledgment of a debt.

Draft must contain an order to pay (i.e. a written instruction to pay signed by the person giving the order, such as “First Bank, pay…”

UCC rules are liberal as to what constitutes a writing or signature.

Question 4

Requirements of Negotiability:

Fixed Amount of Money

Answer 4

Fixed: principal (but not interest rates) due under the instrument must be fixed

money = any medium of exchange authorized by govt. (e.g. currency)

cannot be something like gold or other non-currency

“$300 or gold” = no good because there cannot be a non-currency alternative

Question 5

Requirements of Negotiability:

Payable to Order

Answer 5

instrument is payable to order if it is payable to the order of an identified person (e.g. “pay to the order of Becky) or to an identified person or order (“pay to Becky or her order”)

• identification of payee: person to whom an instrument is payable is governed by the intent of the maker or drawer (e.g. payable to “John Smith” is only the specific John Smith that was intended)

Question 6

Requirements of Negotiability:

Payable to Bearer

Answer 6

instrument is payable to bearer if it:

(i) states that it is payable to bearer, order of bearer, order or bearer, etc. and otherwise indicates that possesssor is entitled to the payment; or
(ii) does not state a payee; or
(iii) is payable to “cash” or otherwise indicates that it is not payable to an identifiable person.

Question 7

*Requirements of Negotiability:

Payable On Demand or at a Definite Time

Answer 7

Demand: instrument payable on demand if it fails to state a time for payment or states that it is payable on demand, at sight, etc.

Definite Time: instrument is payable at definite time if it is payable: (a) on a fixed date, (b) after elapse of a specific period after sight, and (c) *at a time readily ascertainable when the instrument is issued.

• Acceleration clauses (e.g. “Pay bearer $5k on April 11 or at my death should I die sooner”) do not destroy negotiability
• Extensions: (e.g. “pay bearer $5k on April 11 or on May 11 if the Cowboys win today” are acceptable if the extension is to a further definite time

Question 8

Requirements of Negotiability:

No Authorized Undertakings or Instructions

Answer 8

*Only three undertakings authorized by the UCC are:

(i) undertaking or power to give, maintain, or protect collateral
(ii) authorization or power to the holder to confess judgment or to realize on or dispose of collateral
(iii) waiver of the benefit of a law that protects the obligor.

any other undertakings destroys negotiability

Question 9

Miscellaneous

Answer 9

Rules of construction: handwriting controls type and print; type controls print, and unambiguous words control figures

Opting out: except in the case of checks, negotiability is destroyed by a conspicuous statement on the instrument that it is not negotiable.

Two or More Signers in Single Capacity: two or more signers in a single capacity are J + S liable in that capacity.

Question 10

Incomplete Instruments

Answer 10

incomplete instrument may be enforced according to its incomplete terms or as augmented by authorized completion, even if the instrument would not qualify as an instrument but for the completion.

If instrument is completed without authority, it is treated as a fraudulently altered instrument.

Question 11

*Statute of Limitations

Answer 11

statute of limitations on a negotiable instrument is 6 years