Walker – Payment Systems – Fall 2012
I. Negotiability
A. Negotiability
1. Types of Negotiable Instruments (writings)
i. Draft – order to pay (3-104(e))
a. Drawer = person giving the order to pay (signer of check)
b. Drawee = person receiving the order (bank) or the “payor”
i. Bank on who check is drawn; my bank if I’m drawer
c. Payee = person getting paid/benefit of the draft
i. Notes:
1. All checks are drafts, but not all drafts are checks
2. Check will be drawn on a bank
3. draft may be drawn on corporation or individual
ii. Note – promise to pay (3-104(e))
a. Maker (promisor) = person promising to pay
b. Payee (promisee) = person getting paid
2. Definition
i. “Negotiability” = the form of an instrument; the ability to transfer, sell the instrument
ii. “Negotiable instrument” = a signed writing that orders or promises payment of money
iii. Protection of buyers of commercial paper (HIDCs and others) applies only when the instrument is “negotiable” under 3-104(a)
iv. A non-negotiable instrument is merely a K – since the assignee of a K merely acquires the rights of the assignor, the purchaser of a negotiable instrument takes it subject to the claims and defenses of prior parties
v. If the instrument is not negotiable, HIDC status is not assigned to the holder
3. Requirements (3-104(a))
i. Be in writing
a. Cannot be oral
b. Either a promise (3-103(a)(12) or an order (3-103(a)(8))
i. Promise = written undertaking signed by the person undertaking to pay
ii. Order = written instruction to pay money signed by the person giving the instruction
ii. Be signed by the maker/drawer
a. Any mark made with the intent to authenticate the writing = signature (1-201(b)(37))
b. Signature by agent binds the maker/drawer (3-402(a))
c. Maker is bound even if he/she signs with assumed or trade name (3-401(b))
d. Unauthorized signature (forgery) does not bind the person whose name is signed but the unauthorized signer is personally liable just as if he/she signed own name (3-403(a))
e. There is a rebuttable presumption that all signatures are genuine and authorized (3-308(a))
f. Location of the signature does not matter (1-201)
iii. Contain an unconditional promise or order to pay a fixed amount of money, on demand or at a definite time
a. Implied conditions do not destroy negotiability (i.e. a note stating that it’s given as a down payment on a K)
b. Express conditions destroy negotiability
i. What if it is a conditional order to pay; so not negotiable instrument?
1. Can’t be transferred and no one can become a holder in due course, but is still enforceable cause at very least it’s a contract
2. Still evidence of obligation and promise to pay
3. Reason want it to be negotiable is so that subsequent holders can become holders in due course and that by and large they can get paid, if take it in good faith, for value, etc.
c. Mere reference or description of other agreements/writings does not affect negotiability
d. Incorporation of those other matters destroys negotiability b/c later holders cannot determine the terms from the 4 corners 3-106(a)
i. Example: “instrument subject to the terms of a separate K” makes it non-negotiable while “instrument arises out of/as per/in accordance with separate K” is ok
e. “Fixed amount of money” = absolute certainty is not required if the amount can be mathematically calculated from the instrument itself w/o reference to any outside source
i. Interest – must be determined from the face of the note (so “prime rate” or “bank rate” is not negotiable)
ii. Variable interest rates are negotiable
iii. “With interest” = negotiable b/c state judgment interest will be implied
iv. Taylor v. Roeder – not negotiable if you have to look beyond the 4 corners of the document to know the amount
f. Timing = must be determined from the face of the instrument
i. “On demand” = words expressly say it, “on sight” or no time for payment is stated (3-108)
ii. “Definite time” = states a date such as 1/1/10 or “60 days after date”
iii. Acceleration clauses (“on or before x” – make the instrument payable earlier than the date) do not affect negotiability (3-108(b))
g. 3-104a3; can add info about how bank will protect collateral; get its money back if you don’t pay
i. (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.
iv. Contain words of negotiability (3-109) and
a. “Pay to order” – names specific payee so requires payee’s indorsement for further negotiation/transfer
b. “Pay to bearer” – names no one specifically and can be transferred w/o indorsement; anyone in possession can negotiate the instrument
i. or “cash” or other indication that does not designate a specific payee – “pay to order of Happy Birthday” creates bearer paper
c. Exception: checks – 3-104(c); words of negotiability are not required for checks and HIDC status is not affected by absence
v. Be free from unauthorized promises
a. A promise to “pay $500 and deliver a quantity of goods” makes it a K and non-negotiable
b. Direction giving the holder and election to do some act in lieu of payment destroys negotiability
vi. Quick guide:
a. Needs date/time
b. Amount
c. Payable to bearer or order of
d. Unconditional promise or order to pay
e. Fixed amount of money
B. Negotiation
II. How does one become a holder of an negotiable instrument and ultimately become a holder in due course
A. 1st note or check has to be issued
1. note: holder in due course does not occur when note or check is first issued
2. Difference between payee and holder in due course
i. When make out note to X (payee), X is not a holder in due course because X will take subject to any defenses maker has against X
a. Because if I buy a tv that doesn’t work I can note pay owner; owner not holder in due course
b. But what if owner transferred note to Paul
ent sale sold to third party they sold it to fourth party, then the owner bought it back, he can’t then gain rights of holder in due course cause he engaged in fraud
c. Person not in possession but entitled to enforce pursuant to 3-309 (lost) or 3-418 (dishonored) instruments
i. again third party technically not a holder, but it was sold to them, and inventory showing for example that they should have possession of it so under this should be able to collect and enforce instrument
ii. Person can still enforce the instrument even though the person is not the owner or is in wrongful possession of the instrument
iii. Merger doctrine: the debt merged in the instrument so the instrument = claim or debt which it evidences
1. Means must instrument in your hands to enforce except for under lost/dishonored instruments
2. 3-203: transfer of instrument; rights acquired by transfer
3. If a transferor purports to transfer less than the entire instrument, negotiation of the instrument does not occur. The transferee obtains no rights under this article and has only the rights of a partial assignee
5. Indorsement
i. Definition: a signature, other than that of a signer as maker/drawer/acceptor, that alone or accompanied by other words that is made on the instrument for the purpose of: (3-204(a))
a. Negotiating the instrument
b. Restricting payment or
c. Incurring indorser’s liability
ii. Special indorsement (3-205(a)) = makes the instrument payable to a person; payee of the instrument names a new payee and thus requires a valid indorsement of the new payee for further negotiation
iii. Blank indorsement (3-205(b)) = makes the instrument payable to bearer; no new payee named
iv. Qualified indorsement (3-415) = an indorsement containing language such as “without recourse” that disclaims liability
v. Forger of indorsement impairs negotiability and subsequent possessors ¹ holders with rights to enforce
vi. Multiple payees – if the instrument is payable to several jointly, negotiation is only effective if all of them sign it
vii. Transfer w/o indorsement = transfer of possession but ¹ negotiation
viii. Different rule for banks: a depository bank that takes an unendorsed check for collection becomes a holder w/o the necessity of any indorsement at all – as long as the bank’s customer was a holder at the time of deposit, the depository bank becomes a holder and warrants to later parties that the check was paid (4-205)
a. Places the risk that the money was not in the right place on the depository bank
ix. 3-110(d) – if an instrument is payable to 2 or more persons and it is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively
