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| person who issues it and promises to pay |
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| person to whom the note is made payable |
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| person who creates the draft & orders the drawee to pay |
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| person to whom the drawer addresses in order of payment (usually the bank) |
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| person entitled to payment |
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A person who purchases an instrument from its issuer, if the instrument is payable to an identified person other than the purchaser
1. ex. Buyer gets cashier check from bank payable to seller. Buyer here is a remitter
2. Note: if the drawee on the draft is not a bank, Art 3 still applies but the instrument not longer meets the tech definition of a check |
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| What are the two types of Commercial Paper |
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A promissory note is a written promise to pay money to a designated party (“the payee”) by the maker of the promise 3-104(e)
1. Promise is an undertaking to pay , therefore must be more than a mere acknowledgement of an obligation.
a. An “IOU” isn’t a promise to pay but a mere recognition that the debt exists – so it can’t be promissory note |
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| a written order by one person (drawer) to another directing the latter (drawee) to pay money to a third person (the payee) |
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| Drafts must identify who and with what? |
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| Drafts must identify the drawee with “reasonable certainty” so that the payee knows where to present the instrument for payment |
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| What are the three types of Drafts |
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| Check, Cashiers Check, and Teller's Check. |
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| a draft written on a bank & payable on demand |
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check that is drawn by the bank itself ( bank is both drawee & drawer)
i. The remitter is the person who buys a cashiers check is intending to transfer it ot another to pay a deb |
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one bank draws a draft on another or makes the draft payable through another bank
i. The person who busy such a check intending to transfer it to another to pay a debt is also called a remitter |
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a. The drawer of a draft must “order” the drawee to pay
b. This requires more than an authorization or request to pay |
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| whether the instrument is in the proper form to meet tech req’s of a negotiable instrument |
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| 2 ways to transfer or negotiate a check |
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1. order paper
2. bearer paper |
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| iHolder in order to collect must be holder in due course which they have to have what? .. Hint 3 things |
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Definition
1. they must give value
2. receive in good faith
3. can’t have notice that there was anything wrong with the instrument |
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| A person can’t be a HIDC of ? |
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| A non-negotiable instrument |
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| “Negotiability” refers to the form of an instrument, to be negotiable an instrument must |
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Definition
1. Be in writing
2. Be signed by the maker or drawer
3. Contain an unconditional promise or order to pay
4. a fixed amount of money [ w/w/o interest or other charges]
5. Payable on demand or at a definite time
6. Contain words of negotiability [to bearer or order] and
7. Is free from unauthorized promise |
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| Writing Requirement for Negotiability: |
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| A negotiable instrument can’t be oral ; however the writing doesn’t need to be on paper |
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i. A signature is any mark or symbol placed on the instrument (or already there and subsequently adopted) by the maker or drawer that is his present intent to authenticate the writing
1. initials or thumbprint ok
2. the maker or drawer is bound even is he signs with an assumed name or trade name, it can be made manually or by a machine
3. a person isn’t liable on an instrument unless they signed it or their agent or rep signed it
4. it doen’st have to appear at the bottom of the instrument, it can be located in the letterhead, body, or any other location – as long as its meant to authenticate |
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1. An unauthorized signature is ineffective unless its made in favor of a person who in good faith pays the instrument or takes it for value.
a. If the signature of more than one person is required to be the sig of an orgnatization – if the required sigs are lacking it unauthorized
2. a person names that is signed w/o his authority isn’t liable unless he ratifies [adopts the sig], however the unauthorized signer is personally liable just as if he had signed his own name
3. Forgery of the Payees Name
a. If an instrument is payable to the order of a named payee only that payee can become a holder
b. That person doesn’t become a holder until the payee gets possession of the instrument
c. Thereafter no one can qualify as a holder until the payee endorses the instrument
d. w/o the payees’ indoresement no later transferees will have taken by a valid negotiation which remains the payees property
e. an unauthorized signature ( forgery or signature by non-agent) is not effective to negotiate the instrument
f. following a forgery of they payees name no later transferee (no matter how innocent) can qualify as a holder
g. Note: If no signature you the other person can’t cash it, you have greater rights, |
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| Burden of Establishing signatures |
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Definition
1. Unless specifically denied in the pleadings, each signatures on an instrument is deemed admitted
a. There is a presumption that all signatures are genuine or authorized
b. The D must produce evidence of forgery or else the P is entitled to recover
c. The rebuttable presumption of validity doesn’t apply where the D has died or is incompetent, here the P must prove the genuiness |
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| Unconditional Promise to Pay |
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Definition
| A promissory note must contain an unconditional promise and a draft must contain an unconditional order to be negotiable |
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| Things that destroy negotiability of an instrument: |
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Definition
| 1. Implied or constructive conditions in the instrument don’t destroy negotiability; however, a promissory note that is expressly conditioned on some event destroys negotiability |
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| Do References to other agreements for stmt of rights as to collateral or prepayment or acceleration destroy negotiability? |
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Definition
| Mere reference in the instrument to other agreements or documents doesn’t impair negotiability |
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| Do descriptions of consideration destroy negotiability? |
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Definition
a description of collateral or other transaction connected with the instrument doesn’t by itself make the instrument conditional as to the things described
*** A promissory note describing in detail the K that gave rise to the note including all its terms is negotiable as long as the promissory note is not made subject to the K |
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| Does Incorporation of separate agreement or document in the instrument destroy negotiability? |
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Definition
a. While mere reference to or description of agreemens doesn’t affect negotiability, an incorporation to those things into the instrument makes the note non-negotiable b/c later purchasers can’t determine the applicable terms from the four corners of the instrument
i. “This instrument is subject to the terms of X K” is non-negotiable
ii. “ Terms of the mortgage made part therof” destroys negotiability |
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| Does In accordance with” or “As per” destroy negotiability? |
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Definition
| instrument stating that its executed or matures “in accordance with another K” or “as per another K” is negotiable - b/c these are references & not incorporation |
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| Does Prepayment of acceleration destroy negotiability? |
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Definition
| i. An instrument can incorporate terms of another writing to govern the rights of the parties regarding prepayment of the instrument or acceleration of the maturity date & for a stmt of rights as to any collateral |
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| Does Statement of Security destroy negotiability |
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Definition
| a stmt in an instrument that the underlying obligation is secured, and describes but doesn’t incorporate, the collateral & SA doesn’t affect negotiability |
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| Does requiring a Countersignature as condition to payment destroy negotiability? |
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Definition
If a promise/order requires as a condition to payment a counter-signature by person whose sig is on the promise – this doesn’t make it conditional
a. if person doesn’t countersign – this is a defense to obligation by issuer
b. but it doesn’t prevent the transferee from becoming a holder of the instrument
i. Note: this applies to travelers checks |
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| Fixed Amount of Money Requirement |
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Definition
“Money” is the medium of exchange authorized or adopted by a domestic or foreign govnt as part of its currency.
Fixed Amount - Absolute certainty of the sum isn’t required. Its enough that the amt due on the instrument may be mathematically computed. The fixed amt may include interest and other charges.
interest may be stated in an instrument in fixed or variable amt in any manner including referring to information not contained in the instrument ie referencing another document |
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| Payable on Demand or at a Fixed Time |
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Definition
| Unless you can determine from the face of the instrument when or on the happening of what events the obligation will become due, the instrument is non-negotiable |
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| 1. An instrument is payable “on demand” if it expressly states so , or uses similar words such as “at sight” or “upon presentation” or if no time for payment is stated, at the will of the holder |
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1. An instrument is payable at a definite time if its payable 3-108(b)
a. On a fixed date
b. On or before a fixed date
c. At a time readily ascertainable when the instrument is issued or
d. After elapse of a specified period after sight
2. Note: An instrument stating that its “payable at sight” is a demand instrument
3. An instrument dated 1/10/08 is payable at a definite time if it states its payable
a. “On 2/X/Y”
b. “On or before X”
c. “ 60 days after X” or “60 days after sight” |
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Definition
A clause that makes the instrument payable earlier than its stated maturity date – have no effect on negotiability
i. Either the maker or the holder may be given the unconditional right to accelerate the maturity date on the instrument
ii. If maker promises to pay to the order of payee “on or before X” – the maker has a right to pay before the due date
iii. If make promises to pay to the order of payee “on or before X, or sooner if holder chooses to accelerate”, payee has a right to demand payment from the maker before that date |
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| Good faith limitation on holder’s right to accelerate |
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| Where the holder is given the right to accelerate “at will” – this is construed to mean that the holder has the power to accelerate if the holder in goods faith believes that the prospect of payment is impaired |
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a. An extension clause makes an instrument payable later than the stated maturity date. Whether this violates the “definite time” requirement depends on the terms of the clause
b. Extension at option of the holder
i. The holder is the current possessor of the instrument
ii. If extension is at the option of the holder the instrument is considered payable at a definite time & negotiable even if no new maturity date is stated 3-108(b)(iii)
c. Extension at option of maker or drawer, or extension automatically on the happening of event
i. Such an extension is valid only if a new maturity date on extension is stated on the instrument 3-108(b)(iv)
1. ex. “payable in 6mths but extended another 6 if my crop fails or at my option” |
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| Impact of Dates on Negotiability |
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a. The negotiability of an instrument is not affected by the fact that its undated, antedated, or postdated.
i. Undated instruments are payable on demand (at anytime)
ii. Antedated or postdated ones are payable on or after the stated date |
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| Words of Negotiability: Payable to bearer or order |
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Definition
i. Generally 3-104(a)(2) requires that in order for an instrument to be negotiable it must state either that its payable to either “to order “ or “to bearer”
1. So if it states “pay to bearer” or “pay to the order of (named payee)” it contains words of negotiability
2. Instrument payable to bearer alone can be transferred w/o indorsement just like cash
3. Order paper names a specific payee & requires the payee’s indorsement for further negotiation
4. an instrument stating “pay to J D” is non-negotiable b/c it contains neither order or bearer language Hall |
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| If an instrument is not made payable to order or bearer it is... |
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its non-negotiable
1. Exception: Checks
a. Words of negotiability aren’t required for checks & a HIDC is not affected by the absence
i. So a check that says “pay to M” would be negotiable & later takers might qualify as HIDC of such checks |
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| What’s an “Order” instrument |
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1. An instrument is payable to order when its drawn “ payable to the order of an identified person”
a. It’s indorsed by the proper person – who becomes the indorser- who delivers it to the transferee- who qualifies as a holder
2. It may be drawn payable to the order of the maker or drawer [the obligor herself], the drawee, or a payee who is not the maker.
3. It may be drawn payable to several payees jointly or severally Ex. To B & J, or either of them
4. It may be drawn payable to the order of a partnership or other unincorporated association, or to the order of an estate, trust or fund in which case its paybel to the order of the rep of such an entity.
5. It may be drawn to a public office of officeholder , in which case its payable to the incumbent holder of the office |
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| What’s a “bearer” instrument ? |
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Definition
1. An instrument is payable to the bearer only if its drawn payable:
a. to bearer
b. to a specified person or bearer “ pay to JD or bearer” or
c. to “cash”, “the order of cash” or
d. any indication that does not purport to designate a specific payee
2. Note: bearer paper is not payable only to an identified person, its payable to anyone legimately processing the instrument
3. Bearer language controls
a. In an instrument is made payable to order and to bearer – the bearer language controls |
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| No other Promise Requirement – Courier w/o luggage |
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Definition
i. With certain exceptions, the instrument must not state any other undertaking or instruction by the person promising or demanding payment to do any act in addition to the payment of money. 3-104(a)(3)
1. This means to keep the document free of clutter so that the negotiable instrument may be a “courier without luggage” |
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| Maintain or deposit additional collateral |
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Definition
| a provision requiring the promisor to maintain or protect collateral deposited as a security for a loan, or to deposit additional collateral on demand of the holder, are allowe |
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| Omission of Interest Rate |
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Definition
A provision in a negotiable instrument stating that the maker or drawer agrees to pay an amount “with interest” but doesn’t specify the rate – is construed as the judgment rate ( as determined by each state) 3-112(b)
1. Interest accrues on the amt specified from the date the instrument
2. if undated, then from the date on which it was first issued to the payee 3-112(a)
ii. If instrument doesn’t provide the interest rate – no interest is payable |
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a. an unauthorized change in an instrument that modifies the obligation of a party or
b. an unauthorized addition of words or numbers or other change to an incomplete instrument about the obligation of a party |
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i. “Incomplete Instrument” means signed writing that shows it was incomplete at the time of signing but that the signer intended it to be completed by additional words or numbers 3-115(a)
ii. 3-115(b) If an incomplete instrument is a negotiable instrument [under 3-104] it may be enforced according to its incomplete terms or according to its completed terms
1. if the instrument wasn’t a negotiable instrument but after completion becomes one – the instrument may be enforced according to its completed terms
iii. 3-115(c) If words or numbers are added to the incomplete instrument w/o authority, there has been an alteration under 3-407 |
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| Except as provided in C, an alteration fraudulently made discharges a party whose obligation is affected unless he assents to it or is precluded from asserting the alteration |
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| is the process by which an instrument is transferred by a person other than the issuer to a subsequent party who qualifies as a “holder” |
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person who issues the note & promises to pay
1. 3-412 issuer of a note/cashier’s check has a duty to pay the instrument
a. according to its terms at the time it was issued or
b. if the issuer signed an incomplete instrument, according to its terms when completed |
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Definition
- person to whom the note is made payable, or in case of a draft the person specified by drawer as entitled to receive payment
1. With notes & Drafts if the draft is payable to bearer – there is no specific payee, any holder is entitled to payment from the drawee
2. If the check is drawn payable to the order of a specific person, that person is the payee and may further transfer (negotiate) the check as described |
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| by drawing a draft, the drawer agrees to pay it if the draft is dishonored |
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the person to whom the drawer addresses the order of payment
1. it’s the bank where the drawer has an account |
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– the first bank to take an item even though its also the payor bank
1. 4-205(1) If a customer delivers an instrument to a depository bank for collection that bank becomes a holder at the time it receives it, if the customer was a holder at the time of delivery,
a. Indorsement by customer doesn’t matter
b. Bank can become holder in due course by satisfying |
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| the person in current possession – its either the original payee or the person who has taken the instrument after that pursuant to a valid negotiation |
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is the first delivery of an instrument by the maker or drawer to a holder or a remitter 3-105(a)
1. D writes a check to P payee & signs it – the check is “issued” as soon as D gives it to P |
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Definition
is a person who makes payment using an instrument created by someone else
1. ex cashiers check drawn up at the request of a customer & sent to a creditor
a. bank = drawer
b. creditor = payee
c. bank’s customer = remitter
2. the bank would issue the check by delivering it to the remitter for transmittal to the creditor/payee
3. Note: Remitter is not the holder b/c he doesn’t have title to the check |
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| delivery by a person other than the issuer “for the purpose of giving to the person receiving delivery the right to enforce the instrument” |
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| Person entitled to enforce the instrument |
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| Anyone in possession of a bearer instrument is a holder – so he can enforce the instrument |
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The named payee becomes the holder upon acquiring possession of the instrument
i. Before a subsequent transferee can acquire title, the payee must indorse (signs) the instrument & surrender possession to the transferee |
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Definition
1. A negotiable instrument created as bearer paper or sub converted into bearer is negotiated simply by delivering the instrument. Once the transferee has possession he qualifies as a holder.
a. Ex. D writes a check payable to “cash” – this is bearer instrument, so anyone who comes in possession of the instrument is the holder |
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Definition
1. An instrument payable to the order of a specific payee is negotiated by delivery of the instrument to that payee & any further negotiation requires that the payee indorse the instrument & deliver it to the transferee.
a. Ex. D Drawer writes a check payable to P payee, once she receives it she qualifies as a holder; if she subsequently wants to negotiate it, she must indorse & deliver possession to her transferee – who then will also qualify as a holder |
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Definition
Indorsement means a signature other than that of a singer as maker, drawer or acceptor that is made on an instrument for the purposes of
i. Negotiating the instrument
ii. Restricting payment
iii. Incurring indorser’s liability
b. Note: in determining whether a signature is made on an instrument , a paper affixed to an instrument is part of the instrument |
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| person making the indorsement |
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| Determining whether transferee is a Holder |
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Definition
| an indorsement that transferred a SI in the instrument is effective as an unqualified indorsement of the instrument |
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| If an instrument is payable to a holder under a name that isn’t that of the holders – indorsement may be made by holder in the name on the instrument or in his real name or both |
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a. (a) If an instrument is dishonored, the indorser must pay the amt due on the instrument either:
i. According to its terms at the time it was indorsed or
ii. If an incomplete instrument was indorsed according to it completed terms subject to incomplete instrument) & (alterations)
iii. Note: the indorse is obligated to a person entitled to enforce the instrument or a sub indorser who paid the instrument |
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