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

COMMERCIAL TRANSACTIONS
Abdel-Khalik
Fall 2007

Negotiability

Negotiable Instruments
I. Negotiability & Liquidity
a. Negotiable instruments are a device to facilitate transfer of value
b. Negotiability is a system of enhancing liquidity (each with which assets can be sold/transferred)
i. Offer easy way for verifying party’s power to transfer an enforceable interest in the instrument
ii. Purchaser that becomes “HIDC” takes the instrument free from all personal defenses
1. transfer of a negotiable instruments strips away most of the defenses to payment that the payor could’ve asserted against original payee
c. Types of negotiable instruments:
i. Notes: Promise to pay money
ii. Drafts: Order to make payment (e.g. checks)
d. §3-103(a): Definitions
i. (5):Drawer: party that directs payment (a.k.a. issuer)
ii. (15):Remitter: person who caused draft to be issued
iii. (4): Drawee: party directed to make payment/party on whom draft is drawn

II. Negotiability Requirements (§3-104(a))
☼ If instrument IS negotiation, Article 3 applies; If not negotiable, common law applies
☼ Must satisfy all 7 requirements (with limited exception) to have negotiable instrument
a. (1) Promise or Order
i. §3-103(12):Promise is a direct commitment to pay
1. party that makes a promise is “maker”; instrument that contains a promise is a “note”
ii. (8):Order is an instruction by one person (drawer) directing another party to pay (drawee)
1. Instrument that contains an order is a “draft”
2. Types of drafts: (§3-104)
a. (f):Check: A draft drawn on a bank
b. (g):Cashier’s check: Type of check in which drawer & drawee are same bank
c. (h):Teller’s check: Draft drawn by one bank on another bank
iii. MUST be in writing – paper only; not electronic (§1-201(46))
b. (2) Unconditional (§3-106)
i. (a):Promise/order is conditional IF:
1. States express condition to the payment of money
2. Subject to or governed by other writings
3. Rights or obligation specified in another writing
4. (b):Exceptions:
a. References another writing for a statement of rights w/ respect to collateral, prepayment, or acceleration
b. States that payment must come from a particular source
ii. DBA Enterprises v. Findlay: Promissory note stated that maker’s obligation was subject to conditions recited in Bill of Sale and non-compete agreements
1. Court held such language to render the note conditional and, therefore, non-negotiable

c. (3) Money Requirement
i. Requires promise/order to be for payment of money
1. excludes exchange of goods or services
2. §1-201(24):money can be foreign OR domestic
d. (4) Fixed Amount
i. Excludes promises to pay unspecified sums of money w/ regards to the principal (e.g. “I promise to pay half of my 2002 profits”)
1. Nagel v. Cronebaugh: Promissory note didn’t provide fixed principal amount; court held it to be a non-negotiable instrument
ii. Obligation to pay interest or other charges described in the instrument is OK
iii. Variable rates of interest – §3-112(b): Interest may be stated as a fixed or variable amount/rates
e. (5) Payable to Bearer or Order (§3-104(a)(1))
i. If an instrument doesn’t contain the precise words requires to satisfy the tests set forth in §3-109, it is NOT an instrument
ii. §3-109(a):Payable to Bearer:
1. (1):States “payable to bearer” or “payable to the order of bearer”
a. Or, if it otherwise indicates that the person in possession of the promise/order is entitled to payment
2. (2):Does not state a payee
3. (3): Payable to cash
iii. (b): Payable to Order:
1. (i): Payable to order of identified person
2. (ii): Payable “to an identified person or order” (requires the whole phrase)
iv. §3-104(c): Exception
1. A check that fails the bearer or order requirement, but satisfies all of the remaining negotiability requirements, qualifies as a negotiable instrument despite that failure
f. (6) Payable on Demand or Definite Time (§3-104(a)(2))
i. §3-108(a):Promise/order is “payable on demand” IF it:
1. (i): states that it is POD or at sight, or otherwise indicates it’s payable at the holder’s will
2. (ii): OR, doesn’t state any time of payment (e.g. checks)
ii. (b): When a promise/order is “payable at definite time”
1. Includes the conventional obligation that is due on a particular date or schedule of dates
2. Includes documents that allow the holder to extend the date of payment
3. Permits provisions that alter the time of payment to allow acceleration & prepayment
4. Extensions at maker’s option (w/ some limitations)
☼ Only obligation that would fail is a document giving the issuer either a completely unqualified option to extend or a qualified option to extend that didn’t state a date to which the extension would run
g. (7) No Extraneous Undertakings (§3-104(a)(3))
i. Forbids inclusion of a promise calling for something other than the payment of money
1. (e.g. Maker promises to pay $100k & deliver 100 tons of wheat)
2. Late charges & atty.’s fees are OK
ii. Exceptions:
1. (i):Permits undertaking or power to give, maintain, or protect collateral to secure payment
a. Provisions in which maker promises to provide collateral to secure the debt
2. (ii): Authorization to holder to confess judgment or realize on or dispose of collateral
a. Maker authorizes holder to obtain a default judgment on the note
3. (iii): Permits conditions in which borrower waives laws intended for the benefit/protection of the borrower or obligor
a. Usually waiver of common law protections (e.g. presentment, dishonor)

Transfer &

o Enforce an Instrument
i. §3-301:Person Entitled to Enforce
1. (i):Holder of instrument
2. (ii): Non-holder in possession w/ rights of holder, OR
a. Transfer under §3-203(b)
3. (iii): No possession and §3-309 (lost instrument) or 3-418 (payment by mistake)
ii. Party can enforce instrument even if it has no lawful right to payment
b. Presentment & Dishonor
i. §3-501:Presentment – Demand for payment made by person entitled to enforce the instrument
ii. §3-502: Dishonor
1. (a)(1), (b)(2): Default Rule: System assumes party intends to dishonor if it doesn’t take affirmative steps to honor
a. (b)(1):Exception: Checks – assumption of intent to honor
c. Defenses to Enforcement
i. §3-305(a)(2), (3):Allows obligor to interpose wide variety of defenses, including any claim obligor has against payee w/ respect to original transaction
V. Liability on an Instrument
a. §3-401(a): General Rule: Person is liable on instrument only if signed by that person or signature by representative
i. (b), §1-201(37): Broad definition of signature
b. Can still be liable on presentment & transfer warranties without signature
c. §3-402:Signature by Representative
i. Represented person is bound by the signature to same extent represented person would be bound if the signature were on a simple contract
ii. (b)(1):Representative not liable if signature unambiguously shows he is signing on behalf of represented person and the instrument identifies the represented person
iii. (b)(2): If either test above is not met, representative is personally liable on instrument to HIDC that took instrument w/out notice that rep. was not intended to be liable
1. Rep. is liable to any other person unless he can prove that original parties didn’t intend for him to be bound
iv. (c):Modification for checks: When rep. signs w/out indication of represented status, but check is payable from an account of the represented person, individual signer is NOT liable as long as authorized signature

d. §3-412:Liability of Issuer
i. Party that issues a note, cashier’s check, or other draft drawn on the drawer is directly & unconditionally liable on the instrument
Liable to person entitled to enforce the instrument OR indorser who