1. substitute for money
2. credit device for a loan

1. drafts (3 party instrument with drawer, drawee, and payee)
2. checks (3 party instrument with drawer, drawee, and payee)
3. notes (2 party instrument consisting of a maker and a payee)
4. certificated of deposit (2 party instrument consisting of a maker and a payee)

• 3 party instrument drawn by one party as a means of ensuring payment
• in sale-of-goods transactions, seller=drawer, buyer=drawee and seller or seller's bank=payee

1. sight draft
2. time draft
3. trade acceptance

• draft drawn buy the seller on the buyer for the buyer's agreement to pay the amount of the purchase price of the sale plus interest upon presentment 
• if drawn on buyer's bank, it is referred to as a banker's acceptance

1. cashier's check
2. teller's check
3. traveler's check
4. certified check

written promise by a maker to pay money to another party, or to a bearer

1. promissory note
2. function note

1. mortage notes
2. collateral note
3. instlamment note

• note made by bank which acknowledges it has a deposit of funds payable to the holder (usually payee)
• most CDs are time-interest instruments but can be demand CDs
• small CDs<$100,000
• jumbo CDs>=$100,000

1. letters of credit
2. warehouse receipts
3. bills of lading
4. stocks and bonds
5. contracts

1. written
2. signed
3. unconditioned promise or order
4. sum certain in money
5. payable on demand or at a definte time
6. payable to order, or payable to bearer

1. note or CD must contain a definite promise to pay, not a mere acknowledgment of debt
2. draft or check must contain language which orders the drawee to pay

• sum is certain if a holder can calculate the amount owed at time payment is due or anytime thereafter
• money- any medium of exchange recognized by a governemnt as its currency

• demand instrument- payable immediately or those with no specified time period
• time instrument- payable at specific time (includes options to pay early, acceleration clauses, and extension clauses)

• an identified person, agent, trust, estate office or organization
• must be identified with certainty
• can by payable jointly or alternatively
• not required of a check (to be negotiable)

1. contradictory terms
2. omission of date
3. postdating or antedating
4. collateral

• praviling order for terms: Handwritten, typewritten, printed
• prevailing order for numerical amounts: written word over numerical numbers unless written word number is ambiguous

1. blank
2. special
3. qualified
4. restrictive

• specify no specific holder to receive payment
• converts an order instrument into a bearer instrument
• transfer warranties are extended to subsequent holders after blank indorsement
• blank insorser has secondary liability to pay all subsequent holders

• specifies a person to whom payment or to whose order payment is to be made
• requires signature insorsement of person specified, plus delivery to further negotiate
• converts a bearer instrument to an order instrument
• transfer warranties are extended to subsequent holders
• special indorser has a secondary liability to pay all subsequent holders

• "without recourse" or similar words used
• disclaims contract signature (secondary) liability
• transfer warranties are extended to all subsequent holders

1. conditional (upon event)
2. prohibitive (can't be further transferred)
3. for deposit or collection (makes indorsee bank a collection agent of the indorser)

• CAN'T prohibit further negotiation
• except for conditional, the indorser's liability for subsequent holders is limited to the restriction being met
• if a conditional indorsement or instriction is met, the indorser can be held secoundary liable

• jointly-all must indorse
• alternative-anyone of the parties can indorse

• important because an HDC can have better rights that an assignee in seeking payment
• can take free from most defenses to contracts 
• can get paid regardless of underlying contract disputes

1. must be holder
2. must take instrument for value
3. in good faith
4. without notice that the instrument is overdue, has been prviously paid, or of any claim or defense 

• holder gives consideration for the instrument which has been performed (face value HDC if everything agreed upon for consideration has been performed)
• holder can take the instrument in payment of debt, or security for debt
• holder can give a negotiable instrument for it

• time and demand instruments overdue immediately
• check is overdue if taken more than 90 days after its date

1. must be presented within 30 days
2. postdating a check has no effect on time for presentment
3. bank enjoys a presumption of paying in good faith for six months after the date of the check
4. banks can still pay after 6 month period but must verify with drawer first

• any refusal to pay or, where required accept, is a dishonor
• excpetion: where holder refuses to show i.d. or show evidence of authority to receive payment, exhibit the instrument, or sign a receipt that the holder has receiver

• must be given 30 days after notice of dishonor is received or within 30 days of dishonor (30 days forward, 30 days back)
• banks must give notice by midnight of next banking day or bank can be accountable for instrument
• once received, is a notice for all subsequent shareholders

• if such cannot be made with reasonable diligence, the drawer or indorser can waive
• instrument terms excuses it
• drawer instructs drawee not to pay or accept
• maker or acceptor is deceased
• drawer disclaimed contract liability

1. indorser's secondary- comletely discharged
2. drawer's secondary- liability excused only to extent the drawer is deprived of funds due to such failure

can be asserted against ordinary holders but not against a HDC or a holder with rights of an HDC

1. breach of contract
2. failure of consideration
3. fraud in inducement
4. unauthorized completion of an incomplete instrument
5. nondelivery of instrument
6. voidable transactions
7. prior payment

can be asserted against all holders, including HDCs and those with rights of HDC

1. forgery
2. fraud in execution
3. minority
4. discharge decree in bankruptcy
5. void events
6. material alteration

• person is deceived into signing a negotiable insturment
• doesn't apply if person should have known what they were signing

1. complete defense- against both an oridnary and HDC
2. partial defense- original tenor of the instrument is altered cleverly by changin $7. 00 to $700.00.  altered amount is a real defense ($693), but a HDC can enforce the instrument for its original tenor ($7)
3. no defense- original document is incomplete but later completed in an unathorized manner, alteration is no longer a defense against an HDC and the HDC can enforce the instrument as completed (ex: blank check filled in with wrong amount)

1. makers of CDs and Notes
2. acceptors of drafts or checks

• only drawees can become acceptors
• acceptance only required when instrument requires it or time period is fixed by date and acceptance
• certification by a drawee of a check isn't required but is acceptance 

1. drawers of an ordinary check or draft
2. indorsers

• liability depends on who they are accomodating
• accomodating maker of note of CD or acceptor of a check or draft= primary liability
• accomodating an indorser or a drawer of a check/draft=secondary liability
• if forced to pay, can be reimbursed by the accommodated party

1. transfer warranty liability
2. presentment liability

general and qualified indorsers make warranties to all subsequent holders that....

1. transferor is entitled to enfore the instrument (has good title)
2. signatures are authorized and genuine
3. instrument has not been altered
4. instrument isnt subject to a claim or defense by any party and
5. transferor has no knowledge of any insolvency proceeding commences with respect to maker, acceptor, or drawer

1. can't be disclaimed by checks, but can for other types
2. claim for breach- must be maid within 30 days of breach and the time the claimant knows of warrantor's identity
3. nonindorsers- who receive consideration make the same transfer warranties but these only flow to the transferor's immediate transferee

• these warranties can't be disclaimed
• anyone who obtains a payment or acceptance of a draft or check warrants to the party who pays or accepts that...

1. the person obtaining payment or acceptance is authorized to do so and is entitled to enfore the instrument,
2. instrument hasn't been altered, and
3. the person obtaining payment or acceptance has no knowledge that the signature of the drawer is unauthorized

unathorized signature liability (forgery)

• includes those that are forged and those made by persons knowing that they are not entitled to payment
• forged signature- for liability purposes, treated as the signature of the forger

• person who poses as someone else and indorces as that person, produces an effective endorsement
• drawer or maker can't treat the indorsement as unauthorized and is liable to anyone who in good faith pays the instrument 

dishonest employee who drafts checks for the employer's signature or has authority to draft and sign checks for the employer, and makes them out to persons not entitled to payment

indorsements are effective in favor of anyone who in good faith pays the instrument