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Payment Systems
West Virginia University School of Law
Chincheck, Julia A.

What is a negotiable instrument
A.    Issue:
a.       In terms of delivery, 3-105
b.      Delivery: the voluntary transfer of possession, 1-201
B.     Negotiation,
a.       3-201(a):  a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
b.      Negotiation of a bearer instrument requires only transfer of possession of the instrument, whether the transfer of possession is voluntary or involuntary. 3-201(b)
c.       Negotiation of an instrument payable to an identified person requires:
                                                              i.      Transfer of possession
                                                            ii.      Indorsement by the holder
C.     The requirements:
a.       Words of negotiability are words that make an instrument payable “to order.” An instrument is payable to order if it is payable “to the order of an identified person” or to “an identified person or order.” 3-109(b). For example, a note payable “to the order of Smith” or “to Smith or his order” is a note payable to order. A note payable “to Smith” is not payable to order b/c it lacks the words of negotiability. Words of negotiability put the maker on notice that he or she is dealing with the N/I and may have defenses stripped away by HDC.
b.      Section 3-104(a) does not require the instrument to be dated, and 3-113(b) acknowledges that N/I can be undated.
c.       The absence of any stated payee renders the note “payable to bearer” under 3-109(a)(2), satisfying the requirement of 3-104(a)(1) that the instrument be “payable to bearer or to order”
d.      3-104(a) acknowledges that the promise to pay a fixed amount of money can be “with or without interest,”
e.       3-112: unless otherwise provided in the instrument, an instrument is not payable with interest
f.       The omission of a payment date renders the note “payable in demand” under 3-108(a)(ii), thereby satisfying the requirement of 3-104(a)(2) that the note be “payable on demand or at a definite time.”
g.      3-104(a) does not require the instrument to reference a place of payment, in which case 3-111 fills the gap.
h.      Must be a writing
i.        Signed:
                                                              i.      Maker if a note
                                                            ii.      Drawer if a draft
j.        Must contain an unconditional promise or order to pay
                                                              i.      “promise” means a written undertaking to pay money signed by the person undertaking to pay.
                                                            ii.      An acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation
                                                          iii.      Unconditionally
1.      A promise or order is unconditional unless it states:
a.       An express condition to payment
b.      That the promise or order is subject to or governed by another record, or
c.       That rights or obligations with respect to the promise or order are stated in another record.
d.      The reference to another record does not of itself make the promise or order conditional.
2.      A promise or order is not made conditional
a.       By a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration, or
b.      b/c payment is limited to resort to a particular fund or source.
k.      The promise or order must be to pay a fixed amount of money with or without interest
                                                              i.      Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. 3-312(b)
l.        Must be payable to bearer or to order at the time it is issued:
                                                              i.      To be a “negotiable instrument,” the note must be “payable to bearer or to order at the time it is issued or first comes into possession of a holder, 3-104(a)(1). The maker “issued” the note when it delivered the note to the payee. 3-105(a). At that time, the note was “payable to bearer” b/c the note failed to state a payee. 3-109(a)(2). Also, the payee became a “holder” under section 1-201(b)(21) b/c he had possession of a note payable to bearer. Therefore, the note was N/I when the maker delivered it to the payee, and the fact that the payee inserted “Ronald Garcia” rather than ___________ as required by section 3-109(b): “the order of Ronald Garcia” or “Ronald Garcia or order” does not remove the note from the scope of UCC Art. 3. UCC continues to apply, so Ronald can be a HDC under section 3-302, who under section 3-305(b) will not be subject to the maker’s personal defense.
                                                            ii.      To be N/I, the instrument must be payable to bearer or to order at the time it is issued or first comes into possession of a holder. 3-104(a)(1). → an instrument payable to a named payee or her order is payable to order under 3-109(b)(ii).
                                                          iii.      An instrument that fails to state a payee is payable to bearer under 3-109(a)(2).
                                                          iv.      An instrument payable to “the order of CASH” is payable to bearer, 3-109(a)(3)
                                                            v.      An instrument is payable to order if the promise “is not payable to bearer.” 3-109(b)
                                                          vi.      Payable to bearer:
1.      “I promise to pay to the bearer of this instrument,”
                                                        vii.      Payable to order
1.      I promise to pay to the order of Granger
                                                      viii.      Personal promise – non-negotiable
1.      I promise to pay Granger $1000.
                                                          ix.      The “payable to bearer or order” requirement applies only to promissory notes, not to checks. 3-104c
1.      Checks are negotiable
m.    Must be payable on demand or at a definite time, 3-108
                                                              i.      Definite time:  a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued.
                                                            ii.      The use of an acceleration clause is allowed :
1.      Payment shall be due and payable on February 1, 2030; provided that payment shall be accelerated, and become immediately due and payable, upon the death of Earl Robertson.”
n.      No extra promises
                                                              i.      The person making the promise or order must not state any other undertaking or instruction to do anything in addition to the payment of the money
                                                            ii.      The promise or order may contain
1.      An undertaking or power to give, maintain, or protect collateral to secure payment
2.      An authorization or power to the holder to confess judgment or realize on or dispose of collateral

strument: PEEI may recover from wrongful possessor
                                                                              v.            Conversion: someone who takes or pays the instrument from a non-PEEI is liable to the PEEI.
                                                                            vi.            Properly payable and wrongful dishonor: bank must pay check that is properly payable, only to the PPEI.
3.      Transfer:
a. delivery of N/I a person other than its issuer
c. to give the right to collect
d.                        the transferee receives whatever rights the transferor had
e. the transferor potentially makes transfer warranties to the transferee and subsequent parties
4.      presentment:  a demand made by or on behalf of a PEEI:
a. to pay the instrument made to the drawee or a party obliged to pay the instrument
b.or to accept a draft made to the drawee
5.      Issuer:  the maker or the drawer of the instrument
a. Issue in terms of delivery. 3-105
                                                                                i.            Delivery:  the voluntary transfer of possession
6.      Drawer:  the person ordering the payment. 3-103(a)(5) and 3-105(c)
7.      Drawee: 
a. the person ordered to make the payment. 3-103(a)(4)
8.      Payee:  the person to whom or to who’s order the drawer orders the drawee to pay.
a. When the payee takes possession, he becomes a holder, a person entitled to enforce the instrument (PEEI). 1-201(b)(21)(A) and 3-301
9.      Indorser:  a person who signs the instrument for the purpose of negotiating it, restricting payment of it, or incurring indorser’s liability on it. 3-204
10.  PEEI:  the person who has the right to get the money represented by the instrument
a. The holder of the instrument
b.A non-holder who has the rights of a holder
c. A person not in possession of the instrument by who has a right to enforce it under 3-309 or 3-418
11.  Depositary Bank:  the first bank to take the instrument when it is collected through the bank collection process, even if it is also the Payor Bank. 4-105(2)
12.  Payor Bank:  the bank that is the drawee of a draft. It is the only bank that can pay the instrument, b/c it is the only bank that has the money that the drawer has ordered to be paid. 4-105(3)
13.  Intermediary bank:  a bank other than a depositary or payor bank, which is the transferee of an instrument being collected through the bank collection process. 4-105(4)
14.  Collecting bank:  any bank other than the payor bank, handling the instrument for collection through the bank collection process. 4-105(5)
15.  Presenting bank:  the bank which presents the item to the payor bank. The presenting bank cannot be the payor bank. 4-105(6)
B.     Obligations of the parties on the instrument
1.      Requirement of a signature. 3-401
a. No person can be liable on an instrument unless he, or an authorized representative, signs it. 3-401(a)