Commercial Paper The law of negotiable instruments UCC Article 3

Types of Negotiable Instruments Promissory Note: A promise in writing to pay a sum of money. Draft: An order addressed by one person to another, ordering the person to whom it is addressed to pay a sum of money to a third party Check – Drawee is a bank

Parties Note: Two party document –Maker – One who promises to pay –Payee - One to be paid Draft Drawer – One giving the order to pay Drawee - One who is directed to pay Payee - One to be paid

Negotiability In writing Signed Payable at fixed or determinable time or on demand Payable to order or bearer Unconditional promise or order To pay a sum certain Payable in money

Time for Payment On demand: –If stated in Instrument –No time for payment is stated Acceleration clause is permitted Postdating does not affect negotiability

Time for Payment Determinable future time –“on or before a stated date” –Fixed period after date

Payable to Order or Bearer Exception : If a check meets all other requirements of negotiability it will remain negotiable even if the words “order of” or “bearer” are missing

Unconditional May make reference to another agreement May limit payment to a particular fund or source. (Revised Article 3)

Sum Certain (Fixed amount of Money) Minimum amount to be paid to holder must be specified. May call for the payment of interest

Negotiation Order Paper Endorsement and Delivery Bearer Paper Delivery alone

Imposter and Fictitious Payee Rules Fictitious Payee Rule: A forged endorsement is effective for negotiation when maker/drawer has been induced by dishonest employee to issue note/draft. Imposter Rule: Forged payee endorsement when maker/drawer has been induced by imposter to issue note/draft is effective for negotiation.

Types of Endorsements Blank –Signature only –Names no endorsee Instrument becomes bearer paper Endorser guarantees payment

Blank Indorsement Jane Doe

Types of Endorsements Special –Endorser specifically names the transferee to whom the instrument is payable. Only transferee can negotiate instrument further Instrument is order paper Payment guaranteed by endorser

Special Indorsement Pay to the order of Bill Smith Jane Doe

Types of Endorsements Qualified –Blank endorsement –“Without Recourse added Endorser does not guarantee payment in event of default Warranty liability still applies

Qualified Indorsement Without Recourse Without Warranty Jane Doe

Types of Endorsements Exception: “For Deposit Only / “For Collection” Only bank can become holder Restrictive –Attempt to restrict further negotiation General Rule: Endorsement is Not effective / Once instrument is negotiable no endorsement can prevent further negotiation

Restrictive Indorsement For Deposit Only Jane Doe

Holder in Due Course Holder: Possession of Instrument with all necessary endorsements. Holder in Due Course Must Take Instrument –In good faith –For value –Without notice of: Overdue DefectsDishonorDefenses Altered or unauthorized signatures

Holder in Due Course Holder in Due Course : Takes instrument free of personal defenses Subject to universal (real) defenses

Personal Defenses Ordinary contract defenses Incapacity other than minority and adjudicated incompetents Fraud in the inducement Unauthorized completion Theft, when instrument is bearer paper

Real Defenses Fraud in the execution Forgery Material Alteration Incapacity of a minor or adjudicated incompetent Illegality or Duress that renders instrument void Bankruptcy

Warranty Liability Bearer Paper : Warranties extend only to immediate transferee Order paper : Endorser warrants to all subsequent holders Implied liability whenever instrument is negotiated for value

Warranties All signatures are genuine Good title (transferor is entitled to enforce the instrument Instrument has not been materially altered Transferee has no knowledge of insolvency proceedings against any part to instrument No defense of any party is good against transferee

Shelter Rule One who takes from a Holder in Due Course or traces possession back to a Holder in Due Course takes with the rights of a Holder in Due Course even if they do not qualify as a Holder in Due Course.