Negotiable Instruments

Question 1

Requirements for Negotiability

Answer 1

1. Be in writing
2. Be signed by the maker or drawer
3. Contain a promise or an order (instruction) to pay
4. Be unconditional
5. Be for a fixed amount
6. Be payable in money
7. Be payable on demand or at t definite time
8. Be payable “to order” or “to bearer”
9. Not state any other undertaking or instruction by the maker or drawer

Question 2

How to be a “holder” of an instrument

Answer 2

Bearer paper (i.e. “to bearer”) - only need to be in possession

Order paper (i.e. “to order of”) - need to be in possession and be the person made out to

Question 3

Transfer of instrument (steps)

Answer 3

Bearer paper - merely transfer possession

Order paper - transfer possession and endorsement by orderee

Question 4

Holder in Due Course (status requirements)

Answer 4

Be a holder (instrument bears no indication of forgery or alteration, AND
take the instrument
1. for value
2. in good faith; and
3. without notice that:
a) it is overdue or has been dishonored
b) it contains unauthorized signature or alteration
c) that there is any claim to it, and
d) that a party has a defense or a claim in recoupment.

Question 5

Rights of holder in due course

Answer 5

Takes the instrument free from all claims of ownership and all defenses or claims in recoupment of any persons obligated to pay, except for “real defenses”

Question 6

Overdue

Answer 6

Instrument on demand is overdue on earliest of 1) day after demand for payment is made, 2) 90 days after the date written on the instrument if it is a check, or 3) an unreasonably long time in light of the nature of the instrument and usage of trade if not a check and demand has not been made

Instrument payable at definite time is overdue: 1) the day after the due date, if no acceleration 2) day after acceleration due date if acceleration due to nonpayment of principal, but not for nonpayment only of interest

Question 7

Real Defenses

Answer 7

1) infancy of obligor (Ind Law estops one from claiming infancy on loan, sale, or secured transaction if he misrepresented in writing his age as being 18 or older)
2) duress, lack of capacity, illegality
3) fraud in which person is tricked into signing be being made to believe that what he is signing is something else (“fraud in the factum”)

Question 8

Shelter Rule

Answer 8

A transferee of a negotiable instrument acquires all of the rights the transferor had, including rights of a HIDC, unless the transferee participated in fraud or illegality affecting the instrument. (e.g. HIDC can give instrument and donee will have HIDC rights even though didn’t take for value so isn’t HIDC)

Question 9

Holder not in Due Course

Answer 9

Takes instrument subject to:

1) all valid claims of ownership by any person
2) all defenses of any person available in simple contract
3) all claims in recoupment
4) obligor’s proof that the instrument was lost or stolen