Book Notes 9/4-9/6
Is this a “Negotiable Instrument?”
Ø Instrument = note or draft
§ note = written promise of maker to pay money to payee, 2 party transaction (3-104(a))
§ draft = written order of drawer 3-103(a)(3) to the drawee/payor (3-103(a)(2)) to pay money to the payee (always a 3 party transaction)
· all bank checks are drafts; drawee/payor is the drawer’s bank.
Ø Is there a “holder?” person in possession of the negotiable instrument
§ 1-201(20) person in possession of bearer paper; identified person also in possession if order
§ can’t be a holder w/o valid negotiation (defined in 3-201(a))
Ø negotiation = requires (1) transfer of possession and (2) indorsement if order; nothing if bearer
Ø indorsement = blank = converts to bearer; special = remains order
Ø drawee can never be an indorser; drawee can never be a holder
Ø Who can enforce the instrument against the obligor?
§ The right to enforce an instrument belongs to the holder of the instrument
Ø Whom does the obligor pay to be discharged on the instrument?
§ the person obliged to pay the instrument discharges the obligation only by paying the holder.
Ø Transfer: there has been a conveyance by the transferor to the transferee of the transferor’s right to enforce the instrument
§ Can occur only by delivery – voluntary transfer, plus intent by the transferor to give to the transferee the right to enforce.
Holder in Due Course
Ø Takes an instrument by negotiation, for value and in good faith, without notice of problems, claims or defenses good against it
What is the UCC? Model code à each state makes it their own
Article 3 & 4 – traditional payment statutes, 4A governs wire transfers, credit cards, and debit cards.
When you see an official case look at NY version first, not general.
Use Appendix C
Two ideas in the law of negotiable instruments:
Good Faith Purchase idea: the stranger who purchased the bill in the market was entitled to do so without inquiry into the facts of the underlying transaction or of previous transfers of the bill and without being affected by them.
Doctrine of merger: The idea that a piece of paper on which the bill was written or printed should be treated as if it was itself the claim or debt which it evidence. Debt is merged in the instrument.
*Under merger theory the only way of transferring the debt represented by the bill was by physical delivery of the bill itself to the transferee,
* of immense importance from the point of view of the paying party
***any state statute is superseded by any federal statute in conflict.
§ 3-103. DEFINITIONS.
(a) In this Article:
(1) “Acceptor” means a drawee who has accepted a draft.
(2) “Consumer account” means an account established by an individual primarily for personal, family, or household purposes.
(3) “Consumer transaction” means a transaction in which an individual incurs an obligation primarily for personal, family, or household purposes.
(4) “Drawee” means a person ordered in a draft to make payment. (bank)
(5) “Drawer” means a person who signs or is identified in a draft as a person ordering payment. (writer of check)
(6) [reserved] (7) “Maker” means a person who signs or is identified in a note as a person undertaking to pay. Problem p. 592 Mark is the maker
(8) “Order” means a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay. (check is an order to bank)
(9) “Ordinary care” in the case of a person engaged in business means observance of reasonable com
(b) Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone.
§ 1-201. General Definitions.
(21) “Holder” means: (A) the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession; or (B) the person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession.
Problem p. 592, is Theresa a holder? Yes if, Patricia indorsed the instrument.
§ 3-204. INDORSEMENT.
(a) “Indorsement” means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser’s liability on the instrument… Problem p. 592
§ 3-412. OBLIGATION OF ISSUER OF NOTE OR CASHIER’S CHECK.
The issuer of a note or cashier’s check or other draft drawn on the drawer is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument…Problem p. 592, Mark is obligated
§ 3-301. PERSON ENTITLED TO ENFORCE INSTRUMENT.