Negotiable Instruments

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Negotiable Instruments
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I. GENERAL IDEAS FUNCTIONS A. To make like
money 1. Originated with merchants before
paper currency a. Allowed trade without
having any thing to trade b. Allowed transfer
of cash without carrying coins 2. Created in a
time when many did not read, merchants
created their own rules, provided their own
security 3. Now paper currency is the
model 4. Limitations Relies on the
credit and integrity of the issuer Requires
physical document/writing 5. May involve
numerous parties (not really standard) 6. Chec
ks (cheques) are negotiable instruments but not
all nego tiable instruments are checks
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B. Legalistic Requirements 1. Two
types a. ____________ to pay (promissory
note or note) b. __________ to pay
(draft) A check is a draft drawn on a
bank. Drawn on means the bank (drawee) is
ordered to pay 2. Negotiable documents
(instruments) are FORMAL contracts a. If
the format (form) requirements are met The
instruments is contract (consideration not
needed) Legal obligations are automatic
(imposed by law) b. If format requirements are
not met, may still be a regular contract if
all contract-law requirements satisfied
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3. Formal requirements To be negotiable,
document must a. In writing (on relatively
permanent medium) Size and shape are not
important Language is not important b. Sig
ned by __________ note or ____________
draft c. Make _____________ promise note
or order draft to pay d. State a
_____________________ of money Money is
any currency adopted by a government
(or group like E.U.) as a medium of
exchange Interest is definite if objective
means of calculation is stated e. Payable
on ___________ or at a definite time
(date) f. Payable to ___________ or to
_____________ 4. Determined at the time of
issue Subsequent events, indorsements, do not
change status
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C. Steps in establish negotiable instrument
legal result 1. Note/draft issued by
maker/drawer Normally given as payment for
something (can be gift) Recipient is subject
to any related contract obligations 2. Note/draf
t negotiated by original recipient
(issue-ee) a. Bearer instruments negotiated
by __________________________ b. Order
instruments must also be _______________________
(1) Regular indorsement sign name on
back Converts order instrument to
_____________ instrument (2) Special
indorsement Pay to . . . . with
signature (3) Restrictive indorsement
limits what can be done by recipient Fo
r deposit only Without recourse Pa
yment in full c. Recipient is a
_________________
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3. Holder can be Holder in Due Course (HDC)
if a. Is a holder (received by negotiation)
who takes b. For ____________ Some
thing or legal right exchanged for
instrument Promise to do something is not
for value until done c. In
____________________ Did not actually know
of any related problems Acquisition appeared
commercially reasonable d. ___________________
___ of claims or defects Outstanding
claims Forgery or alteration Overdue or
not paid on demand NOTE There is no need for
a prospective holder to investigate beyond
normal inquiries to current holder. Most of the
things that would create notice would be
apparent on the face of the document and the
prospective holder would not accept
the instrument. Almost anything that would
make an acquisition be in bad faith would
also give notice of claims or defects.
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II. HOLDER IN DUE COURSE A. Step 2 in making
like money 1. HDC _______________ to most (in
occurrence) contract defenses 2. All persons
who take after HDC are treated like HDC
under the ______________________ Excluding
persons who held before HDC or participated
in creating the problem (e.g. forgery, fraud,
theft etc.) 3. Special limitation in consumer
situation Federal law prevents holder from
claiming HDC status in collecting from a
consumer who made/issued the document Same
federal law requires consumer noted to contain
language (as above) that prevents holder from
claiming HDC status. They have notice of
special status
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B. HDC subject ONLY to defenses of 1. Fraud
_____________ (did not know it was a negotiable
instrument) Fraud in inducement is normal
fraud defense issue was defrauded about the
quality, identity, etc., of goods or services
purchased with instrument. 2. Incompetence
(including minority if a defense where
issued) An incompetent person cannot
intentionally create any legal
obligation 3. __________________ credible
threat of immanent physical harm to issuer or
other human (not just family members) Blackma
il is not extreme duress Difficult financial
situation is not extreme duress 4. Forgery
still can collect against ________________________
____ 5. Alteration can still collect
_________________ of instrument If
maker/issuers negligent or intentional act made
alteration possible (or very easy), he/she
cannot use this defense 90 of defenses in
contract cases failure to perform
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C. Enforcing Payment not in
text 1. Two types of liability a. __________
______ contract liability Person must
pay the instrument as stated on its
face (including interest, etc.) b. ________
___________ liability Person must pay all
damages suffered as a result of the breach of
warranty Usually the face amount (or portion
unpaid) plus cost incurred to
enforce 2. Signature liability a. Imposed on
every person who signed the instrument (maker/d
rawer, indorser) b. Runs in favor of any
person who takes instrument after the person
signed c. Disclaimed by indorsement without
recourse
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3. Warranty liability a. Made by anyone who
transfers or presents item for payment b. Warra
nties include (1) Transferor has ___________
(or agent) with right to transfer (2) All
________________ authentic / authorized (no
forgery) (3) Instrument has not been
_________________ (4) No defense on the
instrument good against warrantor (5) No
knowledge of ______________________
proceedings against maker/drawer c. Warrant
ies cannot be disclaimed d. Average transferor
would not know if any warranty except (5) were
actually breached e. Warranties go to
______________________________
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D. Effect of signature warranty
liability 1. If note/draft is not paid, holder
can collect from previous holders If the
maker/drawer is the bad guy this does no good
for the person who received it from the
maker/drawer The disagreement between these
two is the most likely reason why a
maker/drawer would not pay 2. Liability runs
back up the chain a. If there is a problem
(e.g. forgery) the person left holding the
instrument is the person who dealt with the
forger b. If there is a dispute at some point,
the person left holding the instrument is one
of the persons involved The U.C.C. generally is
set up so that if disputes arise or there is a
bad guy involved somewhere, the person left
holding the bag is the one who was in the best
position to prevent the problem from occurring in
the first place. That encourages persons to
take reasonable care in all their business
practices.