Commercial Paper Outline
I. Negotiable Instruments – Article 3
A. Negotiability: the technical form that the instrument must meet to qualify as a negotiable instrument subject to Article 3 of the UCC. Negotiability refers to the form of the instrument.
1. If the instrument is not technically negotiable, no one can be a holder in due course, and thus various defenses may be asserted against the instrument.
2. UCC 3-104(e): An instrument is a “note” if it is a promise, and is a “draft” if it is an order. – If an instrument falls within the definition of both “note” and “draft”, a person entitled to enforce the instrument may treat is as either.
3. UCC 3-104(a)(1): “Negotiable Instrument” means an unconditional promise or order to pay a fixed amount of money with or without interest or other charges described in the promise or order, it is: is payable to bearer or to order at the time it is issued or first comes into possession of a holder.
B. To be negotiable, an instrument must:
1. Be in writing.
2. Be signed by the maker or drawer;
3. Contain an unconditional promise or order to pay a fixed amount of money, on demand or at a definite time;
4. Contain “words of negotiability”; and
5. Be free from unauthorized promises.
C. Types of Negotiable Instruments
1. Note – A note is a written promise to pay money
a. The person making the promise to pay the note initially is the “maker”, who will also usually be the “issuer.”
1) UCC 3-103(a)(12): “Promise” means a written undertaking to pay money signed by the person undertaking to pay. An acknowledgement of an obligation by the obligor is not a promise unless, the obligor also undertakes to pay the obligation.
2) UCC 3-1-3(a)(7): “Maker” means a person who signs or is identified in a note as a person undertaking to pay.
b. The person to whom the promise to pay is initially made is usually the “payee”. The payee is the person to whom or to whose order the note is initially payable.
c. The note is not an Art. 3 note unless it is signed by the maker.
1) UCC 3-401(b): “A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.”
a) Intention to authenticate does not require an intention to pay, or knowledge that a person is signing a document that requires him to pay.
2. Draft – A draft is an order to pay money.
a. The person who makes the order to pay is the drawer.
1) UCC 3-103(a)(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.
2) UCC 3-103(a)(5): “Drawer” means a person who signs or is identified in a draft as a person ordering payment.
3) UCC 3-103(a)(4): “Drawee” means a person ordered in a draft to make payment.
4) UCC 3-108(a)(ii): A promise or order is “payable on demand” if it “does not state any time of payment.”
b. The person who is ordered to pay is the drawee.
c. The person ordered to be paid, or to whose order the drawee is ordered to pay, is the payee, as on the note.
3. Check – A check is a draft payable on demand and drawn on a bank
a. UCC 3-104(f): “Check” means (i) a draft, other than a documentary draft, payable upon demand and drawn on a bank or (ii) a cashier’s check or teller’s check. An instrument may be a check even though it is described on its face by another term, such as “money order.”
b. Payable to order or bearer – A negotiable instrument may be payable to the bearer or payable to the order of an identified person.
1) UCC 3-109(a)(1): A promise or order is payable to bearer if it: 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.
a) The background rule is that an instrument payable to bearer may be enforced by anyone who “bears,” that is, possesses it, rightfully or wrongfully.
2) An instrument is payable to the order of an identified person if it says it is payable to the order of an identified person, or payable to an identified person or her order.
a) UCC 109(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. (“identified person” 3-110)
c. Background Rule: an instrument payable to bearer may be enforced by anyone who “bears,” that is, possesses it, rightfully or wrongfully.
A. Key Terms
1. Negotiation is the transfer process – the process by which an instrument is transferred by a person other than the issuer to a subsequent party who qualifies as a “holder
2. Holder is a technical term, meaning that the person in current possession is either the original payee or has taken the instrument thereafter pursuant to a valid negotiation.
a. The holder of an instrument is a “person entitled to enforce” the instrument.
3. Issue – an issue is the first delivery of an instrument by the maker or drawer to a holder or a remitter. (3-105(a))
a. A “remitter” is a person who makes payment using an instrument created by someone else. The most common example is a bank cashier’s check drawn up at the request of a customer and sent ot a creditor. The bank is the drawer, the creditor is the payee, and the bank’s customer is the remitter.
b. The remitter is not a “holder” because the remitter does not have title to the check.
4. Transfer – the term “transfer” is defined as delivery by a person other than the issuer “for the purpose of giving to the person rece
owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under 3-415.
2. Defenses available to maker (3-305): if sued on the note, the maker can assert whatever claims or defenses are available against the party suing.
3. Incomplete instruments: if the maker signs an incomplete note, the maker is bound by the terms as subsequently filled in. 3-412, 3-115, 3-406, 3-407
4. Multiple or Co-makers: if two or more persons sign as co-makers in the same transaction, they are jointly and severally liable (each can sued on the whole amount).
a. Right of Contribution: if one co-maker is forced to pay the full amount to the holder, the co-maker may seek pro rata reimbursement from the other co-makers. 3-116(b)
b. Suretyship: if the co-maker forced to pay the full amount is a surety for one of the other co-makers, he may seek complete reimbursement from the principal. 3-419(e)
c. This is liability “off the instrument.”
5. Obligation/Liability of a Drawer: The drawer of a draft is one who signs the draft, ordering the drawee to pay. 3-103(a)(5) As a signer, the drawer is liable on the instrument as a drawer. The obligation incurred by the drawer of a draft is similar to that of an indorser, in that the drawer promises to pay the draft only if first accorded certain technical procedural rights. 3-414
a. The drawer can eliminate contractual liability on the instrument by adding “without recourse” to his signature.
b. When sued, the drawer may raise all appropriate claims and defenses to avoid liability. 3-305
c. A drawer is liable to a person who is entitled to enforce the instrument only if the draft has been “dishonored”. 3-414(b)
1) Dishonor normally requires a due presentment, followed by non-payment.
a) A presentment of a draft for payment is a demand that the draft be paid, made by a person entitled to enforce the instrument, to a person initially ordered to pay, the drawee. 3-301
2) If a bank charges an account for a check that is not properly payable, the background rule is that the bank must recredit the account.
d. Discharge: Liability is not forever, there are certain events under Art 3 that will discharge liability on an instrument. 3-601(a)
1) Payment – the most common discharge of liability results from payment. 3-602
Certification – if the bank certifies the check, becoming liable on it, then the drawer’s