CHAPTER 14 Negotiable Instruments

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CHAPTER 14Negotiable Instruments
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Learning Objectives

• What are the four types of negotiable instruments
  which Article 3 is concerned? Which of these
  instruments are orders to pay and which are
  promises to pay?
• What requirements must an instrument meet to be
  negotiable?
• What are the requirements for attaining HDC
  status?
• What is the key to liability on a negotiable
  instrument? What is the difference between
  signature liability and warranty liability?
• Certain defenses are valid against all holders,
  including HDCs. What are these defenses called?
  Name four defenses that fall within this
  category.

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Articles 3 and 4 of the UCC

• A negotiable instrument is a signed writing
  containing an unconditional promise to pay an
  exact sum of money.
• History of negotiable instruments began in
  England bills of exchange so that merchants
  were able to exchange money while keeping their
  money safe in the banks.
• Today--UCC Article 3.

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Types of Negotiable Instruments

• Drafts and Checks are ORDERS to pay.
• Three parties Drawer, Drawee and Payee.
• Checks (cashiers, tellers and travelers) are
  drafts on a bank.
• Trade acceptances seller is drawer and payee.
• Flatiron Linen v. First American State Bank
  (2001).

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Types of Negotiable Instruments

• Promissory Notes are PROMISES to pay.
• Two party instruments
• Maker (Promisor) and
• Bearer (Promisee).
• Certificates of deposit (CDs) two party
  instruments.

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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.

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Holder in Due Course

• 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.

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Requirements for HDC

• Taking for Value
• Performance.
• Payment for preexisting debt.
• Irrevocable commitment.
• Taking in Good Faith (honesty in fact).
• Mid Wisconsin Bank v. Forsgard Trading, Inc.
  (2003).
• Taking Without Notice (of any defect).

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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. Messing v. Bank of America, N.A.
  (2003).
• Proper Notice.

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Unauthorized Signatures

• Rule is that an unauthorized signature does not
  bind the principal, unless
• Signature is an affirmation.
• Person whose name is forged is negligent in
  preventing the forgery.

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Special Rules for Unauthorized Indorsements

• Agents Signatures.
• If authorized, can bind the principal.
• If unauthorized (forgery) signature is void.
• Unauthorized Indorsements.
• Imposters.
• Fictitious Payees.

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Warranty Liability

• Transferors make certain implied warranties on
  instruments they are transferring Transfer and
  Presentment.

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Transfer Warranties

• 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.

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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.

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Universal 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.

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Personal Defenses to Liability

• Personal (limited ) Defenses (only 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.

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Discharge From Liability

• All parties are liable when primary party pays
  the holder the amount in full.
• Intentional cancellation discharges the liability
  of all parties.
• Can occur when right of recourse is impaired.