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