John Talyor Sales Outline January 2012
Friday, December 23, 2011
1:07 PM
1. Negotiability
a. Types of Negotiable Instruments
i. 2 basic categories notes and drafts
1. Note – is a written promise to pay money OR a two party instrument in which one party (maker) promises to pay a sum of money to another party (payee)
a. Maker means a person who signs or is identified in a note as a person undertaking to pay
b. Payee means the person identified in the note as the recipient of the money
c. If a note is created by a bank it is called a certificate of deposit (or CD for short)
i. Investors by CDs because they pay higher interest rates than a normal savings account but the CDs have a disadvantage because the investor is not able to reclaim the money until the CD matures or comes due.
d. The typical note is not made by a bank but is a promissory note
2. Draft –> is a written order by one person (the drawer) to another (the drawee). Directing the latter to pay money to a third person (the payee).
a. OR put another way a draft is a 3 party instrument written by one party (Drawer) to another (drawee) directing the drawee to pay money to a 3rd party
i. Drawee means a person ordered in a draft to make a payment
ii. Drawer means a person who signs or is identified in a draft as a person ordering payment
b. The most common situation involving drafts arises when someone deposit in a checking account and then writes checks addressed to the bank, ordering it to pay out the account money to those nominated
i. In this situation the bank's customer is the drawer, the bank is the drawee, and the nominee is the payee.
c. Personal check
i. a check that is drawn on your personal bank account
d. Cashier's check
i. Where the drawer and the drawee are the same bank or same branches of a bank
ii. If the check is drawn by the bank on itself the instrument is called a cashier's check
e. Teller's check
i. A check that is drawn by one bank on another bank OR it is payable to another bank
ii. If one bank draws a draft on another or makes the draft payable through another bank, the instrument is called a teller's check
1. Exception if the drawee on a draft is not a bank, Article 3 still applies but the instrument no longer meets the technical definition of a check –> which requires the bank to be the drawee
f. Certified check
i. This is a check that is drawn by a customer where the bank certifies or guarantees that the check is good
b. The Negotiability Concept
i. Generally
1. Whether an instrument is technically negotiable is a threshold issue for Article 3 to apply
a. Article 3 only applies IF the instrument is negotiable 3-102, and if the instrument is negotiable then:
i. It triggers the application of article and all of the other applications – such as becoming a holder in due course which is a type of super plaintiff (in which most defenses can not be raised successfully)
ii. IF the instrument is not negotiable then article 3 does not apply and the normal K defenses apply like fraud, duress
2. Whenever the word negotiable is applied to any type of paper, the concept always means this:
a. If the paper is technically negotiable (which refers to its form), it is technically negotiated (which refers to the transfer process) AND
b. reaches the hands of a purchaser for value who has no knowledge of problems with the transactions giving rise to the paper's creation
i. Called a holder in due course
c. Then the later purchaser becomes super-plaintiff and can sue the parties to the instrument who are not permitted to defend the lawsuit; the Ds simply loose and pay up
3. Negotiable Instrument basically means from 3-104
a. 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, if it:
i. is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
ii. is payable on demand or at a definite time; and
iii. does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain
1. an undertaking or power to give, maintain, or protect collater
> it can not be made to truck around other legal obligations because if it contains any other additional promises then the note becomes non negotiable
a. because the prospective holder is then given notice that the note is or may be conditioned on the performance of the other promise
2. Exceptions to what it may contain from 3-104(a)
a. does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain
i. Collateral
1. an undertaking or power to give, maintain, or protect collateral to secure payment,
ii. Confession of Judgment
1. an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or
1. Avoid trial by confessing judgment against you
iii. Person Promises Payment
1. a waiver of the benefit of any law intended for the advantage or protection of an obligor.
vi. Payable on Demand or at a Definite Time 3-108
1. A holder of an instrument must be able to tell when it comes due but there is no requirement that it be dated
a. An undated instrument that specifies no time of payment is treated as an instrument payable on demand by the holder see 3-108 and 3-113
2. Under 3-108 an instrument is payable on demand if it:
a. States that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder OR
b. Does not state any time of payment
3. Under 3-113
a. An instrument may be antedated or post dated –> this will not destroy negotiability
4. Common problems that arise
a. Acceleration Clause
i. They speed up time payment is due
1. These are always permissible
b. Extension Clause
i. Delay the time of payment
1. These are okay as long as the extension is to a further definite date
