Sales Outline
Negotiable Instruments- Article III and IV
Key Terms:
§ A note is a two party instrument in which one parry, who is called the maker, promises to pay a certain sum of money to another party, who is referred to as the payee.
ü For example, your car note, if you have a car note that you finance through a lending institution, one of those documents that you sign would have been a note, in which you promised to pay the bank a certain sum of money.
§ A draft is a fancy name that the code uses for a check; we refer to drafts as checks. A draft is a (3) party instrument in which one party who is called the drawer directs another party who is called a drawee (who is going to be the bank) to pay a certain sum of money to a third party who is called the payee. There are several types of drafts:
ü Personal check- where you have a personal checking account here is a check that is drawn from a person’s own bank account.
ü Cashier’s check- it is a check where the drawer and the drawee are the same bank or the draft is from the same bank.
ü Teller’s check- is a check that is drawn on one bank. It is a check that is drawn by one bank which is payable to another.
ü Certified check- is a check that is drawn by a bank’s customer in which the bank guarantees or certifies that the funds are available.
§ In order for the Uniform Commercial Code (UCC) (Article III) to apply the instrument has to be negotiable.
§ If the instrument is negotiable then a couple of things happen. For example, it would trigger the application of Article III of the UCC and all the possibilities contained therein such as how a person can be a holder in due course.
§ On the other hand, if an instrument is not negotiable then the instrument is nothing more than an ordinary contract (k) that is being passed around subject to all the different defenses you can raise against an ordinary k—such as lack of consideration, fraud, duress, and all of the k2 avoidance doctrines learned.
Basic Definition
§ According to 3.104 (1-3), a 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 if it meets (7) requirements.
(7) Requirements of negotiable instruments:
1. It has to be in writing;
2. The instrument has to be signed;
3. The instrument must contain an unconditional promise or order;
4. It has to be a fixed amount of money;
5. It has to be a courier without luggage;
6. It has to be payable on demand or at a definite time;
7. The instrument has to be payable to order or to bearer.
1st Requirement: Writing 3.104 Comment 1:
§ The writing requirement is limited to a signed writing that orders a promise to pay the money. If the promise to pay is not in writing, then it cannot be a negotiable instrument. In other words, you cannot have a verbal negotiable instrument.
2nd Requirement: Signed 1.201 Comment 37; 3.401B:
§ The signature requirement means the signature has to be executed or adopted by a party with the present intent to authenticate the writing. The signature requirement is liberally construed, the signature can be manually or by machine device. It can mean any kind of word, mark, trade name, assumed name, business name, symbol etc.
ü The term signed does not mean that a completed signature is necessary. The symbol may be printed, stamped or written. It may be on any part of the document and in appropriate cases it may be found in the billhead or letterhead.
ü For example, the artist formally known as Prince uses a symbol as his signature. As long as at the time he signs the document, he is doing so, with the present intent to authenticate (or adopt) the writing then his signature will satisfy the signed requirement of negotiable instruments.
ü Hypo: Walter Capitalist is the sole proprietor of the capitalist company. He signs all to the stores checks by writing capitalist company on the drawer’s line, but the checks are drawn on his personal checking account at his bank. Can the bank treat the check as if Walter had signed his own name? A: Yes, you can use your trade name, business name, assumed name etc… In this case, Walter decided to use his business name.
3rd Requirement: Instrument Must Contain an Unconditional Promise or Order 3.106 (a)(b)
§ This requirement does not allow any express conditions to payment. This requirement means that the instrument has to be a clean document, which does not contain any express conditions to payment. The reason is because the drafters of the UCC wanted the instrument to be readily acceptable in commerce without the holder always having to check to see if the condition has been satisfied.
ü For example, Triffin case, the issue in this case was whether the instrument contained an unconditional promise or order. There was a legend on the back of a money order that read: important do not cash for strangers this money order will not be paid if it has been altered or stolen or if an endorsement is missing or forged be sure you have effective recourse against your customer. The majority held that this language did not represent an express condition; however, the dissent argued that the word “if” implies an express condition on the instrument.
§ The instrument may mention the details of the underlying k without destroying negotiability as long as payment of the note is not made subject to the performance of that k.
ü Words that typically constitute a condition are words such as “if, in the event of, on the condition that, provided that, etc.”
ü Example, date, I promise to pay bearer $500.00 subject to the k I signed with honest John. This note is not negotiable becaus
order besides that promise to pay money violates the courier without luggage requirement. And the unconditional promise or order requirement only refers to an express condition. So, the courier without luggage requirement is much broader it refers to expressed conditions or if it involves any other promise or order to pay besides the payment of money.
Example Problems:
§ Problem 1-8: do any of the following clauses in an otherwise negotiable promissory note destroy negotiability:
1. “Maker agrees that signing this note also indicates acceptance of the k of sale for which it is given.” Yes. This is precisely the type of conditional promise or order beyond the promise to pay money that the courier without luggage requirement prohibits; therefore, it does destroy negotiability because it contains something other than the promise or order to pay money. It is saying the banker also agrees when he signs the note to accept the k for sale.
2. “Maker agrees and promises that if the holder of this note deems himself insecure at anytime, he may so inform the maker, who will then supply additional collateral in an amount and kind to be specified by the holder.” This clause does not destroy negotiability of the instrument because it refers to the payment of collateral, which is an exception to the courier without luggage requirement.
3. “Maker agrees to let the holder select an attorney for the maker; at anytime the holder directs, said attorney is hereby given the authority to confess judgment against the maker in any appropriate court.” This confession clause or confession of judgment, which is another exception to the courier without luggage requirement.
4. Promissory note with the following clause: “I have the right to make payments of principal at anytime before they are due. A payment of principal only is known as prepayment. When I make the prepayment. I will tell the note holder in writing that I am doing so. I may not designate a payment as a prepayment. I have not made all the monthly payments.” This clause would destroy negotiability because it contains other undertakings besides the payment of money.
5. “Maker hereby grants the payee a security interest in collateral described above.” Quick Rule: any type of payment of collateral you can include in the instrument without destroying the negotiability of that instrument.
