Negotiabal instrument


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Negotiabal instrument

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Negotiabal instrument

  1. 1. Creating a Negotiable Instrument CHAPTER 23
  2. 2. Quote of the Day <ul><li>“ A negotiable bill or note is a courier without luggage.” </li></ul><ul><li>John B. Gibson, </li></ul><ul><li>Overton v. Tyler, 1846 </li></ul>
  3. 3. Commercial Paper <ul><li>Commercial paper is a contract to pay money. </li></ul><ul><li>It can be: </li></ul><ul><ul><li>A Substitute for Money </li></ul></ul><ul><ul><li>A Loan of Money </li></ul></ul>
  4. 4. Promissory Note <ul><li>The possessor of a piece of commercial paper has an unconditional right to be paid, as long as: </li></ul><ul><ul><li>the paper is negotiable; </li></ul></ul><ul><ul><li>it has been negotiated to the possessor; </li></ul></ul><ul><ul><li>the possessor is a holder in due course; and </li></ul></ul><ul><ul><li>the issuer cannot claim any of the limited number of “real” defenses. </li></ul></ul>
  5. 5. Types of Negotiable Instruments <ul><li>Note (also called a promisory note) is a promise to pay money. </li></ul><ul><ul><li>Certificate of Deposit (CD) is a note made by a bank. </li></ul></ul><ul><li>Draft is an order directing someone else to pay money for you (e.g., checks). </li></ul><ul><ul><li>Cashier’s check -- a draft drawn by a bank on its own account. </li></ul></ul><ul><ul><li>Traveler’s check -- a draft issued by and paid by the same company (such as American Express) </li></ul></ul>
  6. 6. Rights <ul><li>The possessor of non-negotiable commercial paper has the same rights--no more, no less--as the person who made the original contract. </li></ul><ul><li>The possessor of negotiable commercial paper has more rights than the person who made the original contract. </li></ul>
  7. 7. Requirements for Negotiability <ul><li>The Instrument Must: </li></ul><ul><ul><li>Be in Writing. </li></ul></ul><ul><ul><li>Be Signed by the Maker or Drawer. </li></ul></ul><ul><ul><li>Contain an Unconditional Promise or Order to Pay. </li></ul></ul><ul><ul><li>State a Definite Amount of Money. </li></ul></ul><ul><ul><li>Be Payable on Demand or at a Definite Time. </li></ul></ul><ul><ul><li>Be Payable to Order or to Bearer. </li></ul></ul>
  8. 8. Definitions <ul><li>Trade acceptance -- draft drawn by a seller of goods on the buyer and payable to the sell or some third party </li></ul><ul><li>Sight draft -- payable on demand </li></ul><ul><li>Time draft -- payable at some particular time in the future </li></ul><ul><li>Order paper -- payable to the named person or anyone designated by that named person </li></ul><ul><li>Bearer paper -- payable to anyone in possession of the paper </li></ul>
  9. 9. Interpretation of Ambiguities <ul><li>Negotiation </li></ul><ul><ul><li>To be negotiated, order paper must first be indorsed and then delivered to the transferee. </li></ul></ul><ul><ul><li>Bearer paper must simply be delivered to the transferee; no indorsement is required. </li></ul></ul>
  10. 10. Contradictory Terms <ul><li>When terms contradict, three rules apply: </li></ul><ul><ul><li>Words take precedence over numbers. </li></ul></ul><ul><ul><li>Handwritten terms prevail over typewritten terms. </li></ul></ul><ul><ul><li>Typed terms prevail over printed terms. </li></ul></ul>
  11. 11. Indorsement <ul><li>An indorsement is the signature of the payee. </li></ul><ul><ul><li>Blank Indorsement -- does not designate a new payee; becomes bearer paper. </li></ul></ul><ul><ul><li>Special Indorsement -- does designate a new payee; only that person may cash the check. </li></ul></ul><ul><ul><li>Restrictive Indorsement -- limits the check to one particular use (such as deposit into a particular account). </li></ul></ul>
  12. 12. Holder in Due Course <ul><li>A holder in due course has an automatic right to receive payment for a negotiable instrument (unless issuer can claim one of a few “real” defenses). </li></ul><ul><li>Requirements for Holder in Due Course </li></ul><ul><ul><li>Under §3-302 of the UCC, a holder in due course is a holder who have given value for the instrument, in good faith, without notice of outstanding claims or other defects. </li></ul></ul>
  13. 13. Notice of Outstanding Claims or Other Defects <ul><li>The instrument is overdue </li></ul><ul><li>The instrument is dishonored </li></ul><ul><li>The instrument is altered, forged, or incomplete </li></ul><ul><li>The holder has notice of certain claims or disputes </li></ul>
  14. 14. Shelter Rule <ul><li>Under the shelter rule, the transferor of an instrument passes on all of his rights. </li></ul><ul><li>When a holder in due course transfers an instrument, the recipient acquires all the same rights even if she is made a holder in due course herself. </li></ul>
  15. 15. Defenses <ul><li>Real and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course. </li></ul><ul><li>Real Defenses </li></ul><ul><ul><li>Include: Forgery, Bankruptcy, Minority, Alteration Duress, Mental Incapacity, Illegality, and Fraud in the Execution. </li></ul></ul><ul><li>Personal Defenses </li></ul><ul><ul><li>Include Breach of Contract, Lack of Consideration, Prior Payment, Unauthorized Completion, Fraud in the Inducement, Non-Delivery and Claims in Recoupment. </li></ul></ul>
  16. 16. “ Commercial paper is a fact of life for most people today; it is used extensively in business and consumer transactions. But, whenever someone acquires a document, he ought to quickly ask himself, ‘How certain am I to be paid the face value of this document?’”