Business Law Chapter 14: Negotiable Instruments, Securities and Secured Transactions

What Are Negotiable Instruments? What we today call “negotiable instruments” were once known under the more general category of “commercial paper.”

Negotiable Instrument: An unconditional promise or order to pay a fixed amount of money, with or without interest.

Examples of negotiable instruments include drafts and notes.

Drafts Drafts are negotiable instruments that order payment to be made.

Notes Notes are instruments that promise payment in the future.

Cash versus Negotiable Instruments Currency is designed to be anonymous and to pass freely from person to person. Negotiable instruments, on the other hand, can be converted into cash at some point.

Negotiable instruments are both more secure and more easily regulated than the use of cash.

Negotiable Instruments Are Governed By The UCC The Uniform Commercial Code also governs negotiable instruments under Article 3.

What Makes a Document Negotiable? UCC §3-104 explains that a document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.

Organization of Article 3 Article 3 is divided into subparts that deal with a broad spectrum of negotiable instruments.

Part 1, Article 3 Article 3 only applies to instruments that are payable to the bearer or to order at the time that they are issued.

Identifying Parties to be Paid Article 3 provides that the means for identifying the party to be paid must come from the language of the document and the intent of the signor.

Holder in Due Course The Holder in Due Course Rule grants complete and legal title to an instrument even when there are outstanding claims against it. It protects buyers who act in good faith.

Warranties Article 3 provides specific warranties including: That the signatures on the instrument are authentic and authorized That the instrument has not been altered

That the person who transferred the instrument has no knowledge of an insolvency proceeding concerning the transaction

Accord and Satisfaction Article provides that when an instrument contains a conspicuous statement that the instrument was tendered as payment in full, the debt is discharged and no further actions are warranted.

Negotiable Instruments and Securities Securities and negotiable instruments are sometimes confused with one another. A security is a share or ownership interest in a company. A negotiable instrument promises payment; a security is evidence of company ownership.

What Qualifies as a Security? A security is defined as a share in a corporation or an obligation by an issuing company.

Securities and Federal Law Securities law is controlled not only by state law, through the Uniform Commercial Code, but also through various federal statutes.

Federal Laws that Apply to Securities The first of a series of federal legislative initiatives aimed at the securities field was the Securities Act of The Securities Act was quickly followed by the Securities Exchange Act of 1934 which authorized the creation of the Securities and Exchange Commission.

The Securities and Exchange Commission The Securities and Exchange Commission (SEC) has been a potent force in the securities field since its inception. It polices stock exchanges, brokers, investment advisors, financial institutions and publicly-traded companies.

Registration with the SEC One way of ensuring that investors receive accurate information is the SEC’s requirement that all securities sold in the United States must be registered.

Viewing Registration Information The SEC maintains all of this information in a public-access database called EDGAR. This database can be accessed directly from the SEC’s web page at

Securities and State Law (The UCC) Article 8 of the Uniform Commercial Code governs securities.

Provisions of Article 8 of the UCC Other features in Article 8 include a provision making the Statute of Frauds inapplicable to securities agreements. The Article is comprehensive in its coverage of securities and should always be referred to whenever a securities question arises.

Stock Stock represents ownership interest in companies.

Common Stock Common stock is the stock that a company issues in order to raise capital. This stock is sold on stock exchanges around the world.

Preferred Stock Preferred stock is a class of stock that entitles the person who possesses it with priority when it comes to paying dividends.

Article 9 Article 9 of the UCC concerns secured transactions. A secured transaction is any promise to pay on a loan that is guaranteed by some form of collateral.

Care and Maintenance of the Collateral Other rules enforced under Article 9 include the requirement to care for the collateral. Article requires the party in possession of collateral to use reasonable care in its custody and preservation.

Priority in Paying Claims Priority refers to the order in which claims will be paid. Article 9 creates rules for priority of claims.

UCC Financing Statements Article 9 also provides that proof of a secured transaction in property must be filed in order to substantiate the claim. These documents are often referred to as “UCC Financing Statements” and can often be located in the local courthouse.