I) ARTICLE III OF THE UCC: Negotiable Instruments
A) The UCC
1) Erie: (US 1938)
(a) The federal courts in diversity cases must use the law of the highest court/authority of the appropriate state in which they are sitting (not federal law)
2) Article I: General Provisions
(a) Applies to all of the other articles unless it’s superseded by a more specific provision in that article
(b) §1-201- Definitions
(c) §1-303- Performance, Course of Dealing & Usage of Trade
3) Article 2: Sales of Goods
4) Article 3: Negotiable Instruments
(a) §3-104(a)
(i) Definition of a negotiable Instrument
(b) §3-104
(i) Definitions of notes, checks, etc.
(ii) Very dense
(c) §§3-103(a)(8), (a)(12)
(d) FIRST: Determine if you are working with a negotiable instrument
(i) §3-104
(e) SECOND: Has it been negotiated?
(i) §3-201
· It must be payable to bearer (can be valid upon delivery) or order (must have delivery AND indorsement for it to be valid)
(ii) §3-204, §3-205
(iii)§3-304- Enforcement of instruments
· Can only be executed by a person entitled to execute the instrument
(iv)§3-402:
(v) PART IV §§3-4xx
· §3-401: Liabilities to an instrument
Þ A person is not liable on an instrument unless he or she signs it
Þ WATCH OUT: Liability of different parties
5) Article 4: Bank Deposits and Collections
(a) Focused on the check & other items handles by banks
(i) Contrast: Article III deals w/ notes, etc.
6) Be sure to study the official comment, particularly when you see “OC” notation
II) Article III
A) Promissory Notes: The Formal Requirements of Negotiability
1) Requirements of a Negotiable Instrument
(a) There is an unconditional promise or order
(i) §3-106
(ii) §3-103
(b) The promise or order is for a fixed amount of money
(i) §3-112
(c) It is payable “to bearer” or “To order” at time it is first issued or first comes into possession of the holder
(i) §3-109
(d) It is payable on demand or at a definite time
(i) §3-108
(e) IT does not also state any other undertaking by the person promising payment to do any act in the addition to paying money (it is unconditional)
(i) §3-104(a)(3)
2) Introduction: Negotiable Instrument—(Article 3) A negotiable instrument is a contract; it is a piece of paper that contains a promise or order to pay money to a payee, and if it is in the proper form and transferred in the proper manner, and if the transferee takes the instrument for value and without notice of any problems with it, the transferee becomes a holder in due course and thereby takes the instrument free of most claims and defenses the maker or drawer or any other person may have with respect to the instrument
B) §3-104
1) A negotiable instrument means an unconditional promise or order to pay a fixed amount in money
(a) Must be payable to bearer or order
(b) Must be payable on demand or at a definite time
(c) Must not contain no other undertaking except as permitted
C) §3-106
1) What constitutes unconditionality
D) §3-103
1) What is an order or promise
(a) Must be a written undertaking to pay money
(b) Cannot be oral or electronic
2) Must be written
E) §3-107
1) What is money?
(a) An instrument may be payable in foreign money
F) §3-108
1) Must be payable at a “definite time”
G) §3-109
1) Must not contain any other undertaking except as permitted
H) Emerson v. Jerskey (p.8)
1) Whether a note before the court was a negotiable instrument?
(a) Issue: Statute of limitations
(i) Article III has its own statute of limitations, which if applied, the enforcement of the note would still be w/in the SOL
(ii) If not a negotiable instrument, then not under Article III, and then SOL would have expired
(b) Satisfies all conditions of a negotiable instrument, so the note before the court is a negotiable instrument and is therefore subject to the UCC’s 6 year SOL
(i) Promise or order?
· §3-103
Þ Must be in writing
· Order: Written instruction to pay money
· Promise: Written undertaking to pay money
· Here- it is a promise
Þ “I promise to pay…”
Þ §3-104(e)- If it’s a promise to pay, then it’s a NOTE
à If it is an order to pay, it is a DRAFT
(ii) Unconditional?
· §3-106
· Unconditional unless the promise to pay is subject to an express condition for payment
(iii)The amount of money must be a fixed amount
· With or without interest or other charges described in the order
· Providing for interest does not detract from negotiability
(iv)On demand (or sight) or at a definite time?
· Here, it’s payable on demand
Þ Payable at the will of the holder
Þ OR does not state any time for payment
(v) §3-118
· (a) Action to enforce note w/ due date must be commenced within 6 years of due date of the note
· (b)Action to enforce note payable on demand must be commenced within 6 years of the demand
Þ Had to remand to determine when demand was made
Þ §3-118(b)(1) If demand has not been made, then the statute of limitations is 10 years
(vi)§1-201(b)(43)
· What is a writing?
Þ A printing, typewriting, or any other intentional reduction to tangible form and written as a corresponding means
Þ Must be signed
à Defined Article I
* Any symbol executed or adopted with a present intention to adopt or accept a writing
*
Actual UCC §3-109
Þ (a) A promise or order is payable to bearer if it:
à (1) states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
à (2) does not state a payee; or
à (3) states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.
Þ (b) A promise or order that is not payable to bearer is payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order. A promise or order that is payable to order is payable to the identified person.
Þ (c) An instrument payable to bearer may become payable to an identified person if it is specially indorsed pursuant to Section 3-205(a). An instrument payable to an identified person may become payable to bearer if it is indorsed in blank pursuant to Section 3-205(b).
(b) §3-201
(i) (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.
· Order: you need two things
Þ (1)Delivery of possession
Þ (2) Indorsement
· Bearer: you only need transfer of possession
(ii) Examples
· “I promise to pay to Bernie or his order $100”- Order
· “I promise to pay to the order of Bernie $100” – Order
· If Bernie wants to negotiate the order w/ Wells, he must
Þ Indorse
Þ Turn over possession to Wells
· If Bernie has bearer paper
Þ What if he loses it and Wells finds it?
à Wells can go be paid
à Just like Wells found $100 bill
Þ What if it is stolen?
à The thief is a “holder”
à All you need to be a holder of bearer paper,
· HEADS UP:
Þ When you work through and identify a negotiable instrument, Work through to see if it is order or bearer paper
à Order- only can be holder w/ indorsement AND transfer of possession
à Bearer- all you need to be holder is possession
· Problem 1-1
