Chapter 13 Negotiable Instruments

 What are the requirements for an instrument to be negotiable?  What are the minimum requirements for HDC status?  What is the key to liability on a negotiable instrument?  What are the bank’s responsibilities regarding stale checks, stop payments and forged checks?  What is e-money and how is it stored?  What are the requirements for an instrument to be negotiable?  What are the minimum requirements for HDC status?  What is the key to liability on a negotiable instrument?  What are the bank’s responsibilities regarding stale checks, stop payments and forged checks?  What is e-money and how is it stored? Learning Objectives

Article 3  A negotiable instrument is a signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at a specified time to a specific person or bearer.  Can function as a substitute for money or an extension of credit.  A negotiable instrument is a signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at a specified time to a specific person or bearer.  Can function as a substitute for money or an extension of credit.

Types of Instruments  Drafts and Checks (Orders to Pay) Draft—unconditional written order that involves three parties. Drawer (creates the draft) who Orders the party holding the money (the Drawee) to pay money To a Third Party (the Payee) Time Draft Sight Draft  Drafts and Checks (Orders to Pay) Draft—unconditional written order that involves three parties. Drawer (creates the draft) who Orders the party holding the money (the Drawee) to pay money To a Third Party (the Payee) Time Draft Sight Draft

Types of Instruments  Promissory Notes and C.D.’s (Promises to Pay) Promissory Note—written promise to pay money by Maker to Payee. C.D.—type of note. Created when party deposits money with bank who promises to pay, with interest, on a certain date.  Promissory Notes and C.D.’s (Promises to Pay) Promissory Note—written promise to pay money by Maker to Payee. C.D.—type of note. Created when party deposits money with bank who promises to pay, with interest, on a certain date.

Requirements for Negotiability  Must meet the following criteria: Be in Writing Be signed by the Maker or Drawer Be unconditional promise or order to pay State a fixed amount of money. Be payable on demand or definite time Be payable to order or bearer, unless a check.  Must meet the following criteria: Be in Writing Be signed by the Maker or Drawer Be unconditional promise or order to pay State a fixed amount of money. Be payable on demand or definite time Be payable to order or bearer, unless a check.

Transfer of Instruments  By Assignment Transferee is an Assignee  By Negotiation Transfer in which the transferee becomes a holder Negotiating Order Instruments Negotiating Bearer Instruments  By Assignment Transferee is an Assignee  By Negotiation Transfer in which the transferee becomes a holder Negotiating Order Instruments Negotiating Bearer Instruments

Holder in Due Course (HDC)  A holder (assignee) is generally subject to the same defenses that the assignor is subject to.  A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.  A holder (assignee) is generally subject to the same defenses that the assignor is subject to.  A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.

Requirements for HDC  A Holder in Due Course must: Give value for the instrument Performance Payment for preexisting debt Irrevocable commitment Take in Good Faith (honesty in fact) Take Without Notice (of any defect)  A Holder in Due Course must: Give value for the instrument Performance Payment for preexisting debt Irrevocable commitment Take in Good Faith (honesty in fact) Take Without Notice (of any defect)

Signature Liability  Every party who signs a negotiable instrument is either primarily or secondarily liable for payment. Primary Liability (only makers and acceptors are primarily liable) Secondary Liability (contingent liability) Proper and Timely Presentment Dishonor Proper Notice  Every party who signs a negotiable instrument is either primarily or secondarily liable for payment. Primary Liability (only makers and acceptors are primarily liable) Secondary Liability (contingent liability) Proper and Timely Presentment Dishonor Proper Notice

Signature Liability  Accommodation Parties Signs for the purpose of lending her name as credit for another party.  Agents’ Signatures If authorized, can bind the principal. If unauthorized (forgery) signature is void.  Unauthorized Indorsements Imposters Fictitious Payees  Accommodation Parties Signs for the purpose of lending her name as credit for another party.  Agents’ Signatures If authorized, can bind the principal. If unauthorized (forgery) signature is void.  Unauthorized Indorsements Imposters Fictitious Payees

Warranty Liability  Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment.  Transfer Warranties (if consideration) Transferor has the right to enforce the instrument All signatures are authentic and authorized Instrument has not been altered. Instrument is not subject to a defense or claim Transferor has no knowledge of insolvency  Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment.  Transfer Warranties (if consideration) Transferor has the right to enforce the instrument All signatures are authentic and authorized Instrument has not been altered. Instrument is not subject to a defense or claim Transferor has no knowledge of insolvency

Warranty Liability  Presentment Warranties protect the person to whom the instrument is presented: Person obtaining payment has the right to enforce the instrument Instrument has not been altered Person accepting has no knowledge that instrument is unauthorized.  Presentment Warranties protect the person to whom the instrument is presented: Person obtaining payment has the right to enforce the instrument Instrument has not been altered Person accepting has no knowledge that instrument is unauthorized.

Defenses to Liability  Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC Forgery Fraud in the Execution Material Alteration Discharge in Bankruptcy Infancy (Minor) Illegality Mental Incapacity Extreme Duress  Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC Forgery Fraud in the Execution Material Alteration Discharge in Bankruptcy Infancy (Minor) Illegality Mental Incapacity Extreme Duress

Defenses to Liability  Personal (or limited ) Defenses (only for holders, not HDC) Breach of Contract or Warranty Lack or Failure of Consideration Fraud in the Inducement Illegality (voidable) Mental Incapacity Discharge by Payment/Non-Delivery  Personal (or limited ) Defenses (only for holders, not HDC) Breach of Contract or Warranty Lack or Failure of Consideration Fraud in the Inducement Illegality (voidable) Mental Incapacity Discharge by Payment/Non-Delivery

Checks and Banking System  Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee). Cashier’s Check—bank is both drawer and drawee. Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. Certified Check—accepted in writing by drawee bank.  Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee). Cashier’s Check—bank is both drawer and drawee. Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. Certified Check—accepted in writing by drawee bank.

Bank’s Duties  Drawee (Bank) has a legal duty to honor Drawer’s (Maker) checks. If it wrongfully dishonors a check, it is liable for damages.  Overdrafts  Postdated Checks (Notice required)  Stale Checks (six months)  Stop-Payment Orders  Drawee (Bank) has a legal duty to honor Drawer’s (Maker) checks. If it wrongfully dishonors a check, it is liable for damages.  Overdrafts  Postdated Checks (Notice required)  Stale Checks (six months)  Stop-Payment Orders

Bank’s Duties  Death or Incompetence of Customer  Forged Drawers’ Signatures General Rule—no legal effect Customer Negligence—bank normally not liable. Timely Examination of Statements by Customer Time Limit for Bank’s Liability  Death or Incompetence of Customer  Forged Drawers’ Signatures General Rule—no legal effect Customer Negligence—bank normally not liable. Timely Examination of Statements by Customer Time Limit for Bank’s Liability

Bank’s Duties  Forged Instruments Bank must recredit customer’s account if payment made on forged instrument.  Altered Checks  Bank has a Duty to Accept Deposits Availability Schedule for Deposited Checks Collection Process (local and Federal Reserve)  Forged Instruments Bank must recredit customer’s account if payment made on forged instrument.  Altered Checks  Bank has a Duty to Accept Deposits Availability Schedule for Deposited Checks Collection Process (local and Federal Reserve)

Electronic Fund Transfers  EFT is a transfer of funds via the use electronic means  Types of EFT systems: Automated Teller Machine Point of Sale (debit card) Direct Deposit and Withdrawal Pay by Telephone Error Resolution and Damages  Commercial Transfers  EFT is a transfer of funds via the use electronic means  Types of EFT systems: Automated Teller Machine Point of Sale (debit card) Direct Deposit and Withdrawal Pay by Telephone Error Resolution and Damages  Commercial Transfers

E-Money  Stored-Value Cards (pre-paid cards for use with long distance, cellular and library copy machines)  Smart Cards— can authenticate the validity of transactions with digital signatures. Deposit Insurance Legal Protection  Encyrption and Privacy Protection  Stored-Value Cards (pre-paid cards for use with long distance, cellular and library copy machines)  Smart Cards— can authenticate the validity of transactions with digital signatures. Deposit Insurance Legal Protection  Encyrption and Privacy Protection

Online Banking  Virtual Banks (e.g., Bank of the Internet at )  Uniform Money Services Act August 2001, NCCUSL would subject online banking and e-money to same regulations as traditional banks. Internet-Based Money—Paypal.com?  Virtual Banks (e.g., Bank of the Internet at )  Uniform Money Services Act August 2001, NCCUSL would subject online banking and e-money to same regulations as traditional banks. Internet-Based Money—Paypal.com?