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Quote of the Day “A negotiable bill or note is a courier without luggage.” John B. Gibson, Overton v. Tyler, 1846

Commercial Paper  Commercial paper is a contract to pay money.  It can be: A Substitute for Money A Loan of Money

Promissory Note  The possessor of a piece of commercial paper has an unconditional right to be paid, as long as: the paper is negotiable; it has been negotiated to the possessor; the possessor is a holder in due course; and the issuer cannot claim any of the limited number of “real” defenses.

Types of Negotiable Instruments  Note (also called a promisory note) is a promise to pay money. Certificate of Deposit (CD) is a note made by a bank.  Draft is an order directing someone else to pay money for you (e.g., checks). Cashier’s check -- a draft drawn by a bank on its own account. Traveler’s check -- a draft issued by and paid by the same company (such as American Express)

Rights  The possessor of non-negotiable commercial paper has the same rights-- no more, no less--as the person who made the original contract.  The possessor of negotiable commercial paper has more rights than the person who made the original contract.

Requirements for Negotiability  The Instrument Must: Be in Writing. Be Signed by the Maker or Drawer. Contain an Unconditional Promise or Order to Pay. State a Definite Amount of Money. Be Payable on Demand or at a Definite Time. Be Payable to Order or to Bearer.

Definitions  Trade acceptance -- draft drawn by a seller of goods on the buyer and payable to the sell or some third party  Sight draft -- payable on demand  Time draft -- payable at some particular time in the future  Order paper -- payable to the named person or anyone designated by that named person  Bearer paper -- payable to anyone in possession of the paper

Interpretation of Ambiguities  Negotiation To be negotiated, order paper must first be indorsed and then delivered to the transferee. Bearer paper must simply be delivered to the transferee; no indorsement is required.

Contradictory Terms  When terms contradict, three rules apply: Words take precedence over numbers. Handwritten terms prevail over typewritten terms. Typed terms prevail over printed terms.

Indorsement  An indorsement is the signature of the payee. Blank Indorsement -- does not designate a new payee; becomes bearer paper. Special Indorsement -- does designate a new payee; only that person may cash the check. Restrictive Indorsement -- limits the check to one particular use (such as deposit into a particular account).

Holder in Due Course  A holder in due course has an automatic right to receive payment for a negotiable instrument (unless issuer can claim one of a few “real” defenses).  Requirements for Holder in Due Course Under §3-302 of the UCC, a holder in due course is a holder who have given value for the instrument, in good faith, without notice of outstanding claims or other defects.

Notice of Outstanding Claims or Other Defects  The instrument is overdue  The instrument is dishonored  The instrument is altered, forged, or incomplete  The holder has notice of certain claims or disputes

Shelter Rule  Under the shelter rule, the transferor of an instrument passes on all of his rights.  When a holder in due course transfers an instrument, the recipient acquires all the same rights even if she is made a holder in due course herself.

Defenses  Real and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course.  Real Defenses Include: Forgery, Bankruptcy, Minority, Alteration Duress, Mental Incapacity, Illegality, and Fraud in the Execution.  Personal Defenses Include Breach of Contract, Lack of Consideration, Prior Payment, Unauthorized Completion, Fraud in the Inducement, Non- Delivery and Claims in Recoupment.

“Commercial paper is a fact of life for most people today; it is used extensively in business and consumer transactions. But, whenever someone acquires a document, he ought to quickly ask himself, ‘How certain am I to be paid the face value of this document?’” “Commercial paper is a fact of life for most people today; it is used extensively in business and consumer transactions. But, whenever someone acquires a document, he ought to quickly ask himself, ‘How certain am I to be paid the face value of this document?’”