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Business Law and the Legal Environment for a New Century Alternate Edition
Quote of the Day
“A negotiable bill or note is a courier without luggage.” John B. Gibson, Overton v. Tyler, 1846
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Business Law and the Legal Environment for a New Century Alternate Edition
Commercial Paper
Commercial paper is a contract to pay money.
It can be: • A Substitute for Money • A Loan of Money
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Business Law and the Legal Environment for a New Century Alternate Edition
Promissory Note
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as: • the paper is negotiable; • it has been negotiated to the possessor; • the possessor is a holder in due course; and • the issuer cannot claim any of the limited number of “real” defenses.
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Business Law and the Legal Environment for a New Century Alternate Edition
Types of Negotiable Instruments
Note (also called a promisory note) is a promise to pay money.
• Certificate of Deposit (CD) is a note made by a bank.
Draft is an order directing someone else to pay money for you (e.g., checks).
• Cashier’s check -- a draft drawn by a bank on its own account.
• Traveler’s check -- a draft issued by and paid by the same company (such as American Express)
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Business Law and the Legal Environment for a New Century Alternate Edition
Rights
The possessor of non-negotiable commercial paper has the same rights- no more, no less--as the person who made the original contract.
The possessor of negotiable commercial paper has more rights than the person who made the original contract.
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Business Law and the Legal Environment for a New Century Alternate Edition
Requirements for Negotiability
The Instrument Must: • Be in Writing.
• Be Signed by the Maker or Drawer.
• Contain an Unconditional Promise or Order to Pay.
• State a Definite Amount of Money.
• Be Payable on Demand or at a Definite Time.
• Be Payable to Order or to Bearer.
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Business Law and the Legal Environment for a New Century Alternate Edition
Definitions
Trade acceptance -- draft drawn by a seller of goods on the buyer and payable to the sell or some third party
Sight draft -- payable on demand Time draft -- payable at some particular time in the future
Order paper -- payable to the named person or anyone designated by that named person
Bearer paper -- payable to anyone in possession of the paper 23
Business Law and the Legal Environment for a New Century Alternate Edition
Interpretation of Ambiguities
Negotiation • To be negotiated, order paper must first be indorsed and then delivered to the transferee. • Bearer paper must simply be delivered to the transferee; no indorsement is required.
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Business Law and the Legal Environment for a New Century Alternate Edition
Contradictory Terms
When terms contradict, three rules apply: • Words take precedence over numbers.
• Handwritten terms prevail over typewritten terms.
• Typed terms prevail over printed terms.
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Business Law and the Legal Environment for a New Century Alternate Edition
Indorsement
An indorsement is the signature of the payee.
• Blank Indorsement -- does not designate a new payee; becomes bearer paper.
• Special Indorsement -- does designate a new payee; only that person may cash the check.
• Restrictive Indorsement -- limits the check to one particular use (such as deposit into a particular account).
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Business Law and the Legal Environment for a New Century Alternate Edition
Holder in Due Course
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).
Requirements for Holder in Due Course • 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.
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Business Law and the Legal Environment for a New Century Alternate Edition
Notice of Outstanding Claims or Other Defects
The instrument is overdue The instrument is dishonored The instrument is altered, forged, or incomplete The holder has notice of certain claims or disputes
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Business Law and the Legal Environment for a New Century Alternate Edition
Shelter Rule
Under the shelter rule, the transferor of an instrument passes on all of his rights. 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.
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Business Law and the Legal Environment for a New Century Alternate Edition
Defenses
Real and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course.
Real Defenses • Include: Forgery, Bankruptcy, Minority, Alteration Duress, Mental Incapacity, Illegality, and Fraud in the Execution.
Personal Defenses • Include Breach of Contract, Lack of Consideration, Prior Payment, Unauthorized Completion, Fraud in the Inducement, Non Delivery and Claims in Recoupment.
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Business Law and the Legal Environment for a New Century Alternate Edition
“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?’”
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Business Law and the Legal Environment for a New Century Alternate Edition