Transcript Business Law Today, Essentials, 9th Ed.

BUSINESS LAW TODAY
Essentials 9th Ed.
Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus
Chapter
14
Negotiable Instruments
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Learning Objectives





What requirements must an instrument meet to
be negotiable?
What are the requirements for attaining the
status of a holder in due course (HDC)?
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.
Certain defenses can be used against an
ordinary holder but are not effective against an
HDC. 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.
 2002 Revisions updated UCC with
regard to e-commerce and UETA.
The term “Record” now replaces “Writing.”
Other updates related to telephone
transactions.
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Types of Instruments
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Drafts and Checks
 Draft is Unconditional Order to Pay
involving Three Parties:
Drawer (Customer), Drawee (Bank) and
Payee.
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Drafts and Checks
 Time Drafts and Sight Drafts.
Time: payable at a future time.
Sight: payable on sight (on demand).
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Drafts and Checks
 Trade acceptances: Seller is drawer and
Payee.
 Checks (cashier’s, teller’s and traveler’s)
are drafts on a bank.
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Promissory Note
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Promissory Notes and CD’s
 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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Small CD
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Requirements for Negotiability
 (1) Writing signed by the maker or the
drawer.
 (2) Unconditional promise or order to pay
 (3) A fixed amount of money.
 (4) Payable on demand or at a definite
time.
 (5) Payable to Order or Bearer.
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Requirements for Negotiability
 Written Form.
Must be on material that lends itself to
permanence.
Writing must have portability.
 Signatures.
Signed by maker (if note or CD)
Signed by drawer (if check or draft).
Any symbol (or electronic) is good.
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Requirements for Negotiability
 Unconditional Promise or Order to
Pay.
Payment cannot be conditioned on the
occurrence or nonoccurence of any event.
Only unconditional promises are negotiable.
Express promise to pay.
 Fixed Amount of Money.
Ascertainable on face of instrument.
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Requirements for Negotiability
 Payable on Demand or Definite Time.
Includes words “payable at sight” or
“payable upon presentment.”
If no time presented, it is presumed payable
on demand.
 Definite Time.
To be negotiable, instrument must be
payable on demand or at a definite time.
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Requirements for Negotiability
 Acceleration Clause.
Allows holder to demand payment if certain
condition occurs.
Negotiable because exact value can be
determined and payable on a specific date.
 CASE 14.1 Foundation Property Investments,
LLC v. CTP, LLC (2007). Accepting repeated late
payments waives the right to demand full payment
under an acceleration clause.
 Extension Clause.
Reverse of an acceleration clause, extends
maturity date to be extended forward into time.
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Requirements for Negotiability
 Payable to Order or Bearer.
Order instrument is payable to identified
person or order. Identified person may
transfer check to whomever she wishes.
Bearer instrument is literally payable to the
possessor of the instrument.
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Factors That Do Not Affect Negotiability
 Undated checks.
 Pre or Post-Dating Checks.
 Handwritten Terms.
Outweigh typed or printed terms.
 Words outweigh Figures.
 “With Interest.”
 Check says “Nonnegotiable.”
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Transfer of Instruments
 Transfer by Assignment.
Transferee is an Assignee.
 Transfer by Negotiation.
Transfer in which the transferee becomes a
holder.
• Negotiating Order Instruments.
• Negotiating Bearer Instruments.
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Indorsements
 Indorsement is a signature, with or
without words or statements.
 Indorser: person who transfers
instrument by signing it and delivering to
another person.
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Indorsements
 Blank
Indorsements.
 Special
Indorsements.
 Qualified
Indorsements.
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Restrictive Indorsements
 Conditional Indorsements.
 Indorsements for Deposit and
Collection.
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in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Restrictive Indorsements
 Trust (Agency) Indorsements.
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Miscellaneous Indorsement Problems
 Misspelled Names. Indorsement should be
identical to the name on the instrument.
 Alternative or Joint Payees. Only one of
the payees needs to indorse.
 Suspension of the Drawer’s Obligation.
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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.
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in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Requirements for HDC Status
 A Holder in Due Course must:
Take for Value:
• Performance.
• Payment for preexisting debt.
• Irrevocable commitment.
Taking in Good Faith (honesty in fact).
CASE 14.2 Georg v. Metro Fixtures
Contractors, Inc. (2008). Payee of check that
was embezzled was an HDC taking in good faith.
Loss is suffered by Metro.
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Requirements for HDC Status
 A Holder in Due Course must:
Take for Value:
Taking in Good Faith (honesty in fact).
Take Without Notice of any defect:
• Overdue, dishonored, uncured, contains
unauthorized signature or alteration, defense or
claim, irregular or incomplete.
• CASE 14.3 South Central Bank of Daviess
County v. Lynnville National Bank (2009). South
Central took the check for value, in good faith, and without
notice of a defects.
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Holder Through an HDC
 The “Shelter” Principle:
Holder, who
does not qualify as an HDC, can acquire
the rights and privileges of an HDC.
Depends upon whether holder can ‘trace’ her
title back to HDC.
 Limitations:
Reacquired instruments.
Fraud or illegality.
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Signature and Warranty 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.
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Signature Liability
 Accommodation Parties.
Signs for the purpose of lending her name as
credit for another party.
 Authorized Agents’ Signatures.
If authorized, can bind the principal.
If unauthorized (forgery) signature is void.
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Special Rules for
Unauthorized Indorsements
 Unauthorized Indorsements.
Burden of loss falls on first party to take the
instrument with the forged/unauthorized
instrument.
 Imposter Rule.
 Fictitious Payee Rule.
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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.
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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.
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Defenses, Limitations, and Discharge
 Universal (Real) Defenses to Avoid
Liability by ALL Holders, including
HDC’s:
Forgery.
Fraud in the Execution.
Material Alteration.
Discharge in Bankruptcy.
Infancy (Minor).
Illegality.
Mental Incapacity.
Extreme Duress.
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Personal Defenses
 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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Federal Limitations on HDC’s
 Federal Trade Commission issued rule in
1976 that effectively abolished HDC
status in consumer credit transactions.
 FTC Rule 433.
 Modern application is to car purchases
that turn out to be ‘lemons.’
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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.
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