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Commercial Transactions
UMKC School of Law
Abdel-Khalik, Jasmine C.


-Will have art. 3 essay
-Will have a comparison essay (compare two different systems)
-NACHA will not be an essay question

Negotiable Instruments

I. Negotiable Instruments
a. Negotiability and Liquidity
i. Liquidity
1. Ease with which an asset can be sold at the asset’s economic value
2. Useful for payment obligations as well as for assets
ii. Negotiability
1. Enhances liquidity by:
a. Free transferability
i. Offering an easy way to verify a party’s power to transfer an enforceable interest in the instrument
b. Holder-in-due-course status
i. Strips away most of the defenses to payment that the payor could have asserted against the original payee
ii. “Holder in due course” takes instrument free from all personal defenses
iii. Must be in possession of the instrument to be holder-in-due-course
b. Parties to a Negotiable Instrument/Terminology
i. Remitter §3-103(a)(15) – asks the bank to draw the check; remits the check to payee
ii. Drawer §3-103(a)(5) – party who is identified in the draft as ordering payment directs the payment;
1. Cashier’s checks or teller’s checks à bank is the drawer, issuer, and drawee
a. “Cashier’s Check” § 3-104(g)
i. Draft where the drawer and drawee are the same bank
2. Uncertified check or draft à individual who writes the draft is the drawer
iii. Payee – receives check from remitter; takes check to drawee for payment
iv. Drawee §3-103(a)(4) – person directed to make payment; then obtains payment from drawer

II. Negotiability Requirements § 3-104
a. Promise or Order Requirement § 3-104(a)
i. Obligation must be a written promise or order
1. Order § 3-103(a)(8)
a. Written instruction by on person (drawer) directing some other party to pay a drawee
b. Instrument containing an order is called a “draft”
i. Checks § 3-104(f)
ii. Cashier’s checks § 3-104(g)
iii. Teller’s checks § 3-104(h)
2. Promise § 3-103(a)(12)
a. Written undertaking to pay signed by person undertaking to pay
b. Instrument containing a promise is called a “note”
i. Notes have less people involved
b. Unconditional Requirement § 3-104(a)
i. Negotiable instrument must be unconditional
1. Unconditional Promise or Order § 3-106(a)
a. A promise or order is conditional if the promise to pay is:
i. subject to an express condition;
ii. governed by another writing; or
iii. the instrument does not enumerate all of the rights and obligations
b. Exceptions § 3-106(b)
i. Promises conditioned on a writing respecting collateral
ii. Documents in which payment is limited to resort to a particular fund or source
iii. Reference to another record does not of itself make the promise or order conditional
c. Money Requirement § 3-104(a)
i. Promise or order must be for the payment of money
1. Money § 1-201(24)
a. Money is a broad concept and includes both domestic and foreign currency
b. Test for Money
i. Sanction of government recognizes the circulating medium as part of the official currency of that government
2. Payable in Foreign Currency § 3-107
a. Instrument that states the amount payable in foreign currency may be paid in foreign currency or equivalent dollar value, unless the instrument says otherwise
d. Fixed Amount Requirement § 3-104(a)
i. Principal
1. Amount of obligation must be fixed à promises to pay unspecified sums are not fixed
a. Principal must be fixed
b. Interest may be variable
ii. Interest § 3-112(b)
1. Interest may be stated in a negotiable instrument as a fixed or variable amount of money or interest rate
e. Payable to Bearer or to Order Requirement § 3-104(a)(1)
i. § 3-109
1. (a) – Payable to bearer when:
a. States “payable to bearer” or “payable to order of bearer” or indicates person in possession is entitled to payment
b. Does not state a payee: “payable to _____”; “to the order of ______”
c. States “payable to the order of cash”
2. (b) – Payable to order when:
a. Payable to the “order of” an identified person
b. Payable to an identified person “or order” thereof: “payable to Kevin Jones, or order”
ii. Exception § 3-104(c)
1. If instrument fails payable to bearer or order requirement (i.e. “to Kevin Jones”), it may still be a negotiable instrument if the instrument meets all of the other requirements and falls within the definition of “check”
a. Check § 3-104(f)
i. Instrument is a check if it is a:
1. draft payable on demand (§ 3-108(a)) and drawn on a bank; or
2. cashier’s or teller’s check
iii. Identifying the Person Payable To § 3-110
1. Intent of person signing the instrument determines to whom the instrument is payable
f. Payable On Demand or Definite Time Requirement § 3-104(a)(2)
i. Obligation must be payable on demand or at a definite time
1. Payable on Demand or at Definite Time § 3-108
a. (a) – Promise is “payable on demand” when:
i. States that it is “payable on demand” or “at sight”;
ii. Indicates that it is payable at the will of the holder; or
iii. Does not state any time of payment
b. (b) – Promise is “payable at a definite time” when it is:
i. Payable at elapse of a definite period of time after acceptance; or
ii. Payable at a fixed date or dates
g. No-Extraneous-Undertakings Requirement § 3-104(a)(3)
i. Forbids inclusion of a promise calling for something other than the payment of money
1. Exceptions
a. Collateral § 3-104(a)(3)(i)
b. Authorization of default judgment § 3-104(a)(3)(ii)
c. Conditions in which borrower waives laws intended his benefit § 3-104(a)(3)(iii)

III. Transferring a Negotiable Instrument
a. Transfer/Negotiation of Instrument
i. Transfer distinguished from negotiation
1. Indorsement required to negotiate an order
2. No indorsement needed to transfer an instrument
3. Negotiation is a method of transferring, but not the only way to transfer rights in the instrument
a. Negotiation transfers to a “person who becomes the holder”
b. Transfer does not require recipient to become the holder
ii. Negotiation § 3-201
1. (a) – Requirements:
a. Voluntary or involuntary;
b. transfer of possession;
c. of an instrument;
d. by person other than issuer;
e. to a person who becomes the holder
i. Holder § 1-201(b)(21)
1. Person in possession, and if the instrument identifies a person, then the person in possession must be the identified person;
2. of a negotiable instrument;
3. that is payable to bearer;
a. à § 3-109(a)
4. or is payable to order
a. à § 3-109(b)
2. (b) – Indorsement Required?
a. Bearer Paper
i. May be negotiated by transfer of possession alone
b. Order Paper
i. Must have indorsement of identified payee
iii. Transfer of Negotiable Instrument § 3-203
1. (a) – How to Transfer
a. Delivery by a person;
b. other than the issuer;
c. for the purpose of giving to the transferee the right to enforce the instrument
2. (b) – Rights Acquired by Transferee
a. Transferee receives rights of transferor to enforce the instrument, no matter if the transfer is a negotiation
3. (c) – Transfer Without Indorsement
a. Transferee has right to indorsement

ii. Governed by agency principles
c. Agent’s Liability § 3-402(b)
i. Not liable if:
1. Signature unambiguously shows that agent is signing on behalf of the represented person; and
2. The instrument identifies the represented person
d. Issuer Liability § 3-412
i. Party that issues an note or draft drawn on the drawer is directly and unconditionally liable on the instrument
1. Issuer and drawer are the same party under this provision
2. Does not apply to drafts like personal checks
a. à Bank would become the drawee
ii. Issuer’s obligation to pay is owed to:
1. person entitled to enforce under § 3-301; or
2. to an indorser who paid the instrument under § 3-415
e. Drawee Liability
i. At time of issuance à no liability § 3-408
ii. At time of acceptance à liable on the draft § 3-413(a)
f. Drawer Liability § 3-414
i. § 3-414(a)
1. This section does not apply to drafts drawn on the drawer i.e. cashier’s checks, etc.
2. Basically, this provision doesn’t apply to banks
ii. § 3-414(b)
1. Drawee bank dishonors à drawer liable on draft § 3-414(b)
a. Dishonor à §§ 3-502, 3-503
2. Drawee bank accepts draft à no liability § 3-414(c)
3. Drawn “without recourse” à no liability § 3-414(e)
g. Indorser Liability § 3-415
i. If bank accepts the instrument after indorsement à no liability § 3-415(d)
ii. If bank dishonors the instrument à liable for draft § 3-415(a)
1. Exception: Qualified Indorsement § 3-141(b)
a. Signed “without recourse” à no liability
h. Acceptor Liability § 3-413
i. Acceptor of a draft is liable to pay the draft
1. Acceptance § 3-409
a. Acceptance occurs when drawee agrees to pay the draft by signing it
i. Signature § 1-201(b)(39)
1. Any symbol executed or adopted by a party with present intention to authenticate a writing
i. Accommodation Liability
i. § 3-419
j. Transfer Warranties § 3-416
i. (a) – Warranties to the Transferee
1. Person who transfers an instrument for consideration warrants to the transferee that:
a. the warrantor is a person entitled to enforce;
i. à Parties Entitled to Enforce § 3-301
b. all signatures on the instrument are authentic;
c. the instrument has not been altered; AND
d. the instrument is not subject to a defense which can be asserted against the warrantor
ii. (b) – Damages Recoverable
1. May recover from warrantor all damages up to the amount of the instrument plus expenses and interest caused by a result of the breach
iii. (c) – Disclaimer of Warranty
1. Cannot disclaim transfer warranty with respect to checks
iv. (c) – Notice of Breach of Warranty
1. If transferee does not give notice to the warrantor within 30 days after the transferee has reason to know of the breach, then the liability of the warrantor is discharged
k. Presentment Warranties § 3-417
i. (a) – Warranties to the Drawee