Chapter 30 Negotiability and Negotiation of Commercial Paper 3/11/2018 Chapter 30 Negotiability and Negotiation of Commercial Paper 30-1 Requirements of Negotiability 30-2 Proper Indorsement and Negotiation Chapter 30 LAW

Types of Negotiable Instruments Drafts Checks Certificates of Deposit Promissory Notes © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

30-1 Requirements of Negotiability GOALS Explain the importance of negotiability Distinguish negotiable from non-negotiable instruments Chapter 30

THE IMPORTANCE OF NEGOTIATION Negotiable instrument Assigned instrument Chapter 30

WHAT MAKES AN INSTRUMENT NEGOTIABLE? In writing and signed by the maker or drawer Unconditional promise or order Payable in a sum certain in money Payable on demand or at a definite time Payable to bearer or to someone’s order Chapter 30

Negotiable Instruments To qualify as a negotiable instrument (commercial paper), the document must meet certain requirements established by Revised Article 3 (Negotiable Instruments) of the Uniform Commercial Code (UCC). © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Negotiable Instruments (continued) If the requirements of Article 3 are met, a transferee who qualifies as a holder in due course takes the instrument free of many defenses that can be asserted against the original payee. In addition, the document is considered an ordinary contract that is subject to contract law. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Functions of Negotiable Instruments Negotiable instruments serve the following functions: Substitute for money Credit device Record-keeping device Most purchases by businesses and many individuals are made by negotiable instruments instead of cash. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

HOW IS COMMERCIAL PAPER TRANSFERRED? Indorsement Indorser Indorsee Holder Chapter 30

Transfers Negotiable instruments can be transferred to subsequent parties by negotiation. Done by placing endorsement on instrument © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Transfer by Assignment or Negotiation The transfer of rights under a contract. It transfers the rights of the transferor (assignor) to the transferee (assignee). Transfer by Negotiation The transfer of a negotiable instrument by a person other than the issuer. The person to whom the instrument is transferred becomes the holder. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Transfer by Negotiation Order Paper Negotiated by delivery with necessary indorsement Bearer Paper Negotiated by delivery Instruments can be converted between order and bearer paper many times © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Holder Versus Holder In Due Course A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank. Holder in Due Course (HDC) A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Requirements for HDC Status To qualify as an HDC, the transferee must meet the requirements established by the UCC. The person must be the holder of a negotiable instrument that was taken: For value In good faith Without notice that it is overdue, dishonored, or encumbered in any way, and Bearing no apparent evidence of forgery, alterations, or irregularity © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Taking for Value Holder must have given value for instrument Performs agreed upon promise Acquires security interest or lien Takes in payment of or as security for antecedent claim Gives instrument as payment Gives an irrevocable obligation as payment © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Taking in Good Faith Good faith means honesty in fact in the conduct or transaction Subjective Applies only to holder © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Taking Without Notice of Defect Must not be aware of any defects, including: Being overdue. That it has been dishonored. That it contains an unauthorized signature. Red light doctrine That there is a claim against it by another. That there is any defense against it. That there is evidence of alteration or forgery. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Negotiable Instrument Negotiable Instrument Holder in Due Course (HDC) Maker or Drawer Payee or Bearer Holder Takes a negotiable instrument For value In good faith Without notice of defect The instrument bears no apparent evidence of forgery, alterations, or irregularity © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

30-2 Proper Endorsement and Negotiation GOALS Describe how commercial paper is transferred Compare the functions of the various indorsements Chapter 30

INDORSEMENTS AND THEIR FUNCTIONS Blank indorsements Special indorsements Qualified indorsements Restrictive indorsements Accommodation parties Chapter 30

BLANK INDORSEMENTS Chapter 30

SPECIAL INDORSEMENTS Chapter 30

Endorsement The signature (and other directions) written by or on behalf of the holder somewhere on the instrument. The signature may: Appear alone Name an individual to whom the instrument is to be paid, or Be accompanied by other words © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Endorsements (continued) Misspelled or Wrong Name - Payee or indorsee can indorse the instrument in the misspelled name, correct name or both Multiple Payees or Indorsees Payable jointly Payable in the alternative Virgule Either party may indorse and negotiate © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

PREVENT LEGAL DIFFICULTIES In dealing with commercial paper Remember that even if an instrument is not negotiable commercial paper, it still may be a valuable contract or creditor’s claim and be freely transferable by assignment. If you issue commercial paper that is payable on demand, be ready to pay at any time. Civil and even criminal penalties may result from your failure to do so. Continued on the next slide Chapter 30

PREVENT LEGAL DIFFICULTIES Learn and utilize the various indorsements. They have been created to fulfill vital purposes. Only issue bearer paper or create it by indorsement if you immediately deposit it or immediately transfer it and receive value in exchange. Otherwise unauthorized persons may misuse the bearer paper with the loss falling to you. Continued on the next slide Chapter 30

PREVENT LEGAL DIFFICULTIES If you are the payee of commercial paper, try to include a clause for the payment of reasonable attorney’s fees and collection costs by the issuer in case of default. Do not sign as an accommodation party unless you are prepared to pay the full amount of the instrument or have your credit standing damaged by it going into default before you are requested to pay it. Chapter 30