The document discusses negotiable instruments and commercial paper. It provides an overview of negotiable instruments, including different types like promissory notes, checks, and certificates of deposit. It also covers key concepts like negotiability, holders in due course, and the Uniform Commercial Code articles that govern commercial paper. Examples are provided of cases involving ambiguous terms in negotiable instruments.

1. C H A P T E R
31
Negotiable Instruments
We at Chrysler borrow money the
old-fashioned way. We pay it back.
Lee Iacocca, Chairman and CEO
of Chrysler Corporation, quoted in
the New York Times (1983)
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2. Learning Objectives
• Explain advantages of commercial
paper and the requirements to
qualify as a negotiable instrument
• Identify different types of negotiable
instruments and the key features
• Apply UCC rules for situations when
the terms of an instrument are
ambiguous or inherently conflicting
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3. Overview
• Commercial paper refers to checks,
promissory notes, & certificates of deposit
– Basically a contract for payment of money
• Commercial paper may be negotiable:
– Transferred from party to party and
accepted as a money substitute payable
immediately (check) or as credit
(promissory note)
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4. The Uniform Commercial Code
• UCC Article 3 (Negotiable Instruments)
and Article 4 (Bank Deposits and
Collections) cover commercial paper
– Other negotiable documents (documents
of title, investment securities) covered by
other sections
• Two basic types of negotiable instruments:
– Promises to pay money
– Orders to pay money
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5. Promises to Pay Money
• Promissory notes and certificates of
deposit issued by banks are promises to
pay money
• Promissory note: two-party instrument in
which the maker promises unconditionally
in writing to pay the payee, a person
specified by the payee, or the bearer of
the note, a fixed amount of money (with
or without interest) either on demand or
at a specified, future time [3–104]
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6. Promises to Pay Money
• A certificate of deposit is an instrument
containing (1) an acknowledgment by a
bank that it has received a deposit of
money and (2) a promise by the bank to
repay the sum of money [3–104(j)]
– Generally in electronic form
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7. Orders to Pay Money
• A draft is an order (not a promise) by one
person to a second person to pay money
to a third person [3–104(e)]
– A check is the most common draft
• Specifically, the drawer orders the drawee
to pay a certain sum of money to the
payee, to a person specified by the
payee, or to the bearer of the instrument
– Example: writing a bank check to pay a bill
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8. Orders to Pay Money
• Cashier’s check: draft on
which drawer and drawee
are the same bank (or
branches of same bank)
• Teller’s check: draft
drawn by a bank (as
drawer) on second bank or
payable through a bank
[3–104(g) and (h)]
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9. Negotiability
• Purpose of negotiability is to decrease risk
of transfer (assignment of commercial
paper contract) so the instrument will be
accepted as a substitute for money
• Thus, (1) the contract for payment of
money must meet requirements for
negotiability, and (2) the person who
acquires instrument must qualify as a
holder in due course
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10. A Holder in Due Course
• A holder in due course has good title to
the instrument, paid value for it, acquired
it in good faith, and had no notice of
certain claims or defenses against
payment
– Instrument bears no evidence of forgery or
triggers concerns about authenticity
• A holder in due course takes instrument
free of all defenses and claims except
those that concern its validity
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11. Requirements For Negotiability
• For an instrument to be negotiable, it must
be in writing, signed by the maker,
containing an unconditional promise or
order to pay a fixed amount of money,
payable to order or to bearer, payable on
demand at a definite time, lack any other
instruction by the maker (three exceptions)
[3–103; 3–104]
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12. The Signed Writing
• The instrument must be in
writing and signed by the
maker
• Any writing (print,
handwritten) or type of
signature (handwritten,
authorized stamped
signature, or an X if
witnessed)
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13. Unconditional Promise or Order
• The instrument must must contain an
unconditional promise or order to
pay (e.g., “pay to the order of”)
• Conditional phrases destroy the
negotiability, though reference to
another document about collateral,
prepayment, or acceleration does
not destroy negotiability
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14. Fixed Amount of Money
• The requirement of a
“fixed amount of money”
applies only to principal
• Interest may be stated in
an instrument as a fixed
or variable amount of
money or expressed as a
fixed or variable rate or
rates
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15. Payable on Demand or
At a Definite Time
• A promise or order is payable on demand
if (1) it states it is payable on “demand” or
“sight” or (2) does not state a specific
time for payment [3–108(a)]
• A promise or order is payable at a definite
time if payable at fixed date(s) or at
time(s) readily ascertainable at the time
the promise or order is issued [3–108(b)]
– The typical promissory note
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16. Payable to Order or Bearer
• An instrument is payable to order (order
paper) if payable to (1) order of
identified person or (2) an identified
person or that person’s order [3–109(b)]
– Requires indorsement for negotiation
• An instrument payable to bearer or to
cash (bearer paper) may be negotiated
or transferred by delivery of possession
without indorsement [3– 201(b)]
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17. Pelican National Bank v. Provident Bank
• Facts: Insurance company issued check
drawn on a bank to several payees listed
without punctuation or grammatical
connector (and/or)
• Holding: Court concluded the check was
ambiguous and applied the default rule
that treated the document as if payable in
the alternative: “The indorsement of any
one of the payees was sufficient.”
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18. Special Terms
• A instrument will remain negotiable if it
includes statements about:
– Giving, maintaining, or protecting
collateral to secure payment
– An authorization to confess judgment or
realize on or dispose of collateral
– Waiving the benefit of any law intended
for the protection or benefit of a person
obligated on the instrument
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19. Ambiguous Terms
• If terms conflict or ambiguous term exists,
general rules of interpretation apply:
– Typewritten terms prevail over printed
terms, handwritten terms prevail over
printed and typewritten terms, and where
words and numbers conflict, words
control the numbers [3–114]
– See Galatia Community State Bank v. Kindy:
• Ambiguity caused by difference between
numbers on the check from checkwriting
machine and number written by hand
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20. Test Your Knowledge
• True=A, False = B
– Commercial paper includes checks,
promissory notes, and certificates of deposit.
– A holder in due course takes the instrument
free of all defenses and claims.
– UCC Articles 3 & 4 cover commercial paper.
– A certificate of deposit is a negotiable
instrument in which a bank acknowledges is
received a money deposit and promises to
repay the sum in the future.
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21. Test Your Knowledge
• Multiple Choice
– Basic types of commercial paper
include:
a) Promises to pay money
b) Orders to pay money
c) A document of title
d) Both A and B
e) All of the above
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22. Test Your Knowledge
• Multiple Choice
– Which of the following would be non-
negotiable?
a) Please pay to the order of Sarah $100.”
b) “This promissory note is secured by my
property in Pender County.”
c) “This promissory note is subject to Sarah’s
graduation from college.”
d) None of the above; they are all
negotiable
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23. Thought Questions
• Do you use negotiable instruments?
How do you do your banking?
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