Business Law -- week 7 Negotiable Instruments: a contract to pay money (commercial paper) Checks Cashier’s checks Promissary Notes Certificate of Deposit

Business Law -- week 7 Two categories of Negotiable Instruments Notes (between 2 people) –Promissary Note –CD Drafts (3 people -- drawer, drawee, payee) –Check –Cashier’s check

Business Law -- week 7 Negotiable vs. Non-negotiable –Depends on how you write it Pay to the order of …. Pay to …. Why is this important? –UCC vs Common Law –A negotiable instrument can be signed over to a designee

Business Law -- week 7 Requirements of a negotiable instrument –In writing –Signed –Unconditional –Definite $ amount –Payable “on demand” or “specific date” –Pay to the order of or to bearer

Business Law -- week 7 Rules about contradictions on checks Order of precedence: –Words over numbers –Handwritten over typed –Typed over printed

Business Law -- week 7 A person who holds a “commercial paper” has the right to be paid if: Its negotiable Its been negotiated to that person That person is a “holder in due course” The issuer cannot claim any “real defenses”

Business Law -- week 7 What is a “holder in due course” and what are these “real defenses?”

Business Law -- week 7 A holder in due course: In possession of the note that has been signed over “to the order of” Has given something of value for the note Purchased in “good faith” Knows of no claims against note –Exception: Shelter Rule

Business Law -- week 7 Defenses Real or personal

Busiess Law -- week 7 Real Defenses Forgery Bankruptcy Minority Alteration Mental incapacity Fraud

Business Law -- week 7 Personal Defenses Breach Lack of consideration Prior payment Unauthorized completion Fraud Non-delivery

Business Law -- week 7 Summary of Negotiable Instruments Notes are a promise between 2 parties,-- I.e. promissary note or CD Drafts involve a third party such as a bank -- checks, cashier’s checks. To be negotiable it must be able to be signed over to someone else and only negotiable instruments are covered under UCC.

Business Law -- week 7 Liability of Negotiable Instruments Who pays …. when you give someone a check? if there is insufficient funds to cover the check? if the signature has been forged? if the amount has been altered? if the bank teller suspects fraud

Business Law -- week 7 Who Pays: Bank (drawee) has primary liability - may pay or dishonor Issuer (drawer) has secondary liability - if bank dishonors must pay Indorser -- liable after drawee and drawer Accommodation Party -- a second signature on a note equally liable to first signator

Business Law -- week 7 Who Pays: Forgery: Bank is responsible Imposter: Issuer/Drawer responsible Fictitious Payee: Issuer/Drawer responsible Employer Indorsment: Issuer/Drawer responsible Exception: If bank suspects fraud they have a duty to protect innocent party

Business Law -- week 7 A note is discharged … Payment Agreement Cancellation Certification by bank Alteration

Business Law -- week 7 Protect yourself from check fraud … Don’t give out Checking account # or information Report lost/stolen checks Check statements and accounts regularly Report irregularities immediately Give checks time to clear More at

Business Law -- week 7 What responsibility does the bank have … After wrongfully dishonoring a check For checks that come in after death of customer When a customer declared incompetent Post-dated checks & Stale checks Stop payment orders

Business Law -- week 7 What responsibility does the bank have … Make funds available from checks deposited to customer per EFAA time limits Debit -credit cards not active until requested by customer Must provide customers with documentation of transactions Must investigate suspected errors