U.C.C. Article 3
Part One: The Basic Law of Negotiable Instruments
Chapter 1: What is a Negotiable Instrument?
I. Introduction to Payment Systems
1. The field of payment systems is concerned with how wealth can be and is moved around from place to place and from person to person. The transfer is made in terms of cash only.
2. Not all transfers of money with which we deal involve a party’s attempt to “pay” for something that he or she has received, some property transferred, or some services rendered.
3. Payments by cash still ranks as by far the most common type of payment transaction.
4. Once larger sums have to be transferred, however, payment by cash turns out to be a much less attractive option.
5. “Note” – a promise to pay
a. Example: Certificate of Deposit
6. “Draft” – An order to pay (most common draft is a check – an instrument drawn on a bank and payable on demand) We have a third party whenever there’s a draft.
a. Types of Checks
i. Cashier’s Check: Bank takes out the amount of money from customer’s account and issues their own [Bank] check. Bank is both the drawer and the drawee.
ii. Teller’s Check: The drawer is a bank, but it’s payable at another bank that has a relationship with the first bank.
II. The Definition of a Negotiable Instrument
1. § 3-104(a) “Negotiable Instrument” Elements:
a. An unconditional
b. Promise to Pay (Note) or Order to Pay (Draft/check)
i. Both these must be signed and must be in writing. If you do not have a writing, you do not have a negotiable instrument.
c. Have a fixed amount of money
i. With or without interest
d. It has to be Payable to Bearer or Payable to Order
i. “Payable to Bearer” – the holder can pass the instrument on just by delivery.
1. Example of Payable to Bearer: Check payable to “Cash.” If you drop it, anyone can pick it up and cash it.
ii. “Payable on Order” – there has to be delivery AND an endorsement from the person who’s name is on the instrument.
e. It has to be Payable on Demand or at a Definite Time
f. Cannot include any other undertaking by the signor.
g. A check is a draft (order to pay) that is directed to a bank and payable on demand
h. Although a document fails as a negotiable instrument, it nonetheless may still be a legally binding contract
i. You can make a promissory note or a draft, other than a check, non-negotiable by conspicuously stating on the instrument when it is first issued that it is non-negotiable 3-104b
2. § 3-103(a)(9) “Promise”: A written undertaking to pay money signed by the party undertaking to pay. An acknowledgment of an obligation to pay by the obligor is not a promise unless the obligor also undertakes to pay the obligation.
3. § 3-103(a)(6) “Order”: A written instruction to pay money signed by the person giving the instruction … An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.
a. For an order to be an “order” and for a promise to be a “promise,” for Article 3 purposes, the given promise or order must be in writing.
4. § 1-201(46) “Writing”: Includes not only verbiage rendered by hand but also “printing, typewriting or any other intentional reduction to tangible form.”
a. Thus, first and foremost, a negotiable instrument is a tangible thing: a piece of paper.
5. § 1-201(37) “Signed”: Includes “using any symbol executed or adopted by a party with present intention to adopt or accept a writing.” It’s the intention that matters.
a. A negotiable instrument must be signed either by the party making the promise or the one issuing the order.
6. Negotiable instruments come in two main varieties:
a. Note: it is a promise (see § 3-104(e));
b. Draft: it is an order (see § 3-104(e)).
i. Also need to be able to identify a check (see § 3-104(f)).
7. § 3-103(a) Identifies parties by their role either as:
a. Maker: a person who signs or is identified in a note as a person undertaking to pay;
b. Drawee: a person ordered in a draft to make payment; OR
c. Drawer: a person who signs or is identified in a draft as a person ordering payment.
8. Words of negotiability: “magic words”
a. In order to be negotiable, an instrument must be payable either “to bearer” or “to order of” when it is issued 3-104a1
b. Words must appear in a note or a draft, but not a check – see exception
c. Without the words of negotiability, it will be treated as a contract, NOT as a negotiable instrument
d. If you have an id’d person, must use “to the order of”
e. Exception: 3-104(c) If you have a check that meets all the requirements of (a), except for having the magic words of “payable to bearer” or “payable to order of”, it will still be a negotiable instrument.
9. Unconditional
a. Prohibited: 3-106a
i. An express condition to payment
ii. “subject to” another writing
iii. Rights/obligations are stated in another writing
b. Allowed: 3-106b
i. reference to another writing re collateral, prepayment, acceleration
1. mere reference ok!
ii. payment limited to particular fund or source
c. Rationale:
i. Comment 1: “the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment.”
10. Fixed amount of money (with or without interest)
a. “Money” means a medium of exchange authorized or adopted by a domestic or foreign government
11. Interest 3-112
a. An instrument does not bear interest unless so specified
b. Payable from date of the instrument (unless otherwise specified)
c. Expressed as fixed or variable amount of money
d. Expressed as fixed or variable rate
i. May require reference to information not contained in the instrument – can move off “the four corners” to determine interest rate
ii. If amount of interest cannot be ascertained from the instrument, interest is payable at the judgment rate (essentially a statutory default interest rate)
12. Payable on demand or at a definite time 3-108
a. Only two options are on demand or definite time! Not one of these, not a negotiable instrument.
b. Payable on demand:
i. If it states that it is payable on demand
ii. It is states that it is payable on sight
iii. Otherwise indicates that it is payable at the will of the holder
iv. Fails to state any time of payment
c. Definite time
i. At a fixed date
ii. At a time readily ascertainable at the time the promise or order is issued
iii. Fd – see powerpoint
d. You can accelerate, prepay, extension – 3-108b
i. Holder can reserve the option to extend, maker can reserve option to extend only if a definite time at the option of the maker
13. Does not state any other extraneous undertakings or instruction by the maker/drawer 3-104a3
a. General rule – no additional undertakings
b. Exceptions
i. Give, maintain or protect collateral to secure payment
ii. Authorize holder to confess judgment or dispose of collateral
iii. Waive benefit of laws protecting an obligor
14. Special types of checks
a. “certified checks” means a check accepted by the bank on which it is drawn 3-409
i. Acceptance means the drawee’s signed agreement to pay a draft as present, writ
ii. Should we conclude, after examining the writing itself, that we would
have to consult another document to answer any of these questions, or
would have to question a party for crucial information or to discern that
party’s or a set of parties’ “intention”, we are dealing with something that
is NOT a negotiable instrument to begin with.
Any negotiable instrument is a special type of document that carries all
the pertinent information about it right on its face or on its flip side.
6. §3-112(b) regarding variable-interest rate notes. Author notes that he’d like to say the whole controversy has been rendered moot by the promulgation and near-uniform passage by the states of the Revised Version of Article 3, but unfortunately that isn’t entirely the case. Notes are typically term instruments and in some instances the terms are quite long. Plenty of notes still out there were entered into prior to the adoption of the 1990 revisions, and hence they are still subject to the rules, whatever they may be for the particular state, of the original Article 3.
7(a). To constitute a negotiable instrument, either the word “bearer” or the word “order” must appear. These words serve as markers of negotiability, placed right there in the document itself.
The absence of these two words does not render the promise unenforceable. The result is only that any enforcement of the promise will be enforcement under the traditional law of contract. What the enforcing party cannot do is enforce the promise as an obligation on a negotiable instrument.
9. Fundamental Principle: A negotiable instrument is a promise or order to pay a sum of money and the maker or the drawer cannot, if his or her creation is to retain its negotiable status, tack on any additional promises or instructions unrelated to that fundamental monetary obligation.
11(a). An incomplete instrument must be a signed writing.
11(b). Signed check with amount filled out. Payable to … has not been filled out. It’s an incomplete instrument. It is also a negotiable instrument under § 3-109(a)(2). A draft if payable to bearer if it states that it is payable “to the order of …” but then has no name appearing in the space provided for naming a specific person as payee.
11(c). When the price is left blank, it cannot be a negotiable instrument. § 3-104(a) requires “a fixed amount of money.”
Chapter 2: Principles of Negotiation and Becoming a Holder
Issuance – negotiation – presentment
I. The Life Story of a Negotiable Instrument
1. A negotiable instrument is created by the maker of the note; or the drawer of the draft.
2. A negotiable instrument goes through a series of events:
a. Issuance of the Instrument: §3-105(a) “Issue” means the first delivery of an instrument by the maker or the drawer, whether to a holder or a nonholder, for the purpose of giving rights on the instrument to any person.
1. Elements of “Issuance”
1. Delivery of an instrument
a. “Delivery” under § 1-201(15) is a “voluntary transfer of possession” (must be voluntary!!)
b. Issuance can only be voluntary.
2. By the maker/drawer
3. Whether to a holder or nonholder
4. For purposes of giving rights on the instrument to any person.
5. Must use words of negotiability “payable to order of” or “payable to bearer.”
b. Transfer of the Instrument: it is perfectly possible that the person to whom the instrument is initially issued will himself directly present it for payment. In many instances, however, there is some intervening steps. § 3-203(a): An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving the person receiving delivery the right to enforce the instrument.
