Chapter 24. The Function and Creation of Negotiable Instruments.

Types of Negotiable Instruments.
- and (Orders to Pay)
-- and
--
--Checks
- (Promises to Pay)
- of Deposit (Promises to Pay)

Requirements for Negotiability
-
-Signatures
--Signature Requirements
-- of the Signature
- Promise or Order to Pay
--Promise or Order
-- of the Promise or Order
-A of Money
--
--Payable in Money
-Payable or a Time
--Payable
--Payable a Time
-- Clause
-- Clause
-Payable to or to
-- Instruments
-- Instruments

Factors that do not Affect

A negotiable instrument can function as a substitute or as an credit.

For a negotiable instrument to operate practically as either a substitute for cash or a , or both, it is essential that the instrument be easily without danger of being .

A negotiable instrument is a (or record) that contains an or to pay an amount, either or a time.

A demand instrument is payable —that is, it is payable immediately after it is and for a reasonable period of time. is "the first delivery of an instrument by the maker or drawer (...) for the purpose of rights the instrument to any person" [...[.

A draft is an written that involves parties.

A draft is payable at a definite future time. A draft (or draft) is payable —that is, when it is to the .

A draft may be payable . is the drawee's written promise to pay the draft when it comes due.

A is a type of that is frequently used in the of . In a , the of the is both the drawer and the payee. The to whom credit is is the drawee.

[The] [is] the market that businesses use for short-term borrowing.

The most commonly used type of is a check. The of the check is the drawer, the bank which the check is drawn is the drawee, and the person whom the check is is the payee.

With certain types of checks, such as checks, the bank is both the and the .

A note is a written made by one person (the of the ) to pay another (usually a ) a specified sum. A note, which is often referred to simply as a note, can be made at a definite time or demand. It can name a specific or merely be payable to bearer.

A of deposit () is a type of issued when a party deposits funds a bank, and the bank promises to repay the funds, with interest, on a certain date. The bank is the of the note, and the is the payee.

Normally, negotiable instruments must be by a writing or record. [...] The writing must be material that permanence. [...] The writing must also have .

For an instrument to be negotiable, it must be signed by (1) the if it is a note or a certificate of deposit or (2) the if it is a draft or a check.

Almost any symbol executed or adopted by a person with the intent a written or electronic document can be a signature.

The terms of the promise or order must be included the writing the of a negotiable instrument. The terms must also be —that is, they cannot be on the occurrence or nonoccurrence of some other event or agreement [...].

A mere of the debt, such as an I. O. U. [...], might logically imply a promise, but it is not sufficient under the UCC. This is because the UCC requires that a promise be an (express) .

A promise or order is conditional (and not negotiable) if it (1) an express condition payment, (2) that the promise or order is subject to or by another writing (or record), or (3) that the rights or obligations with respect to the promise or order are in another writing or record.

Negotiable instruments must state with certainty a amount of money, with or without interest or other described in the promise or order, to be paid at the time the instrument is . [...] This requirement ensures that the of the instrument can be determined with clarity and certainty.

The term "fixed amount" (sometimes called sum certain) means that the amount must be the face of the instrument. [...] The rate of interest may also be determined with reference to information that is not contained in the instrument if that information is by reference to a formula or a source described in the instrument.

An is a drawee who has , or agreed to pay, an instrument when it is presented later for payment.

With an - instrument, it is necessary to know the exact during which the interest will to determine the instrument's value at the present time.

means a demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument.

An instrument is payable at a time if it states that it is payable (1) on a specified date, (2) within a period of time (such as thirty days) after being for payment, or (3) on a date or time readily at the time the promise or order is issued.

An instrument that is and made payable "one month after date" is clearly nonnegotiable. There is no way to determine the date the of the instrument.

Because one of the functions of a negotiable instrument is to as a substitute for cash, freedom to is essential.

An order instrument is an instrument that is payable (1) "to the an identified person" or (2) "to an identified person ". An identified person is the person "to whom the instrument is initially payable" as determined by the intent of the maker or drawer.

A bearer instrument is an instrument that does not a specific payee.

Unless the date of an instrument is necessary to determine a definite time payment, the fact that an instrument is does not affect its negotiability. A typical example is an check, which is still negotiable.

terms and terms [...], and terms terms. unless the are ambiguous.

When an instrument simply states "with interest" and does not specify a particular interest rate, the interest rate is the rate of interest (a rate of interest by statute that is applied to a monetary awarded by a court until the is paid or terminated).

A negotiable instrument can be transferred to others by or by .

Negotiation is the of an instrument in such form that the transferee becomes a . [...] The [of negotiating an instrument so that the receiver becomes a ] depends on whether the instrument is an instrument or a instrument.

An instrument contains the name of a capable of indorsing it.

Negotiating order instruments requires both delivery and .

If an instrument is payable to bearer, it is negotiated by delivery—that is, by transfer into another person's .

An indorsement is a with or without additional words or .

A indorsement does not a particular and can consist of a mere signature. An instrument indorsed in becomes a instrument and can be negotiated by alone.

A indorsement contains the signature of the and identifies the person to whom the intends to make the instrument payable; that is, it names the .

To avoid the risk of loss from theft, a holder may a indorsement to a indorsement by writing, above the signature of the , words identifying the .

Generally, an indorser, merely by indorsing, impliedly promises to pay the holder, or any indorser, the amount of the instrument in the event that the drawer or maker defaults the . [...] An indorser who does not wish to be liable an instrument can use a indorsement to this liability [...].

[ indorsements] [] indorser of any liability for payment of the instrument [...].

A indorsement requires the indorsee to comply with certain regarding the funds involved but does not prohibit further negotiation of the instrument.

A common type of indorsement makes the indorsee (almost always a bank) a agent of the indorser.

When a drawer gives one alternative or joint payee a check, the drawer's obligation the check to other payees is .

A holder in due course (HDC) is a holder who, by certain requirements [...], takes an instrument of most of the defenses and claims that could be against the transferor. Stated another way, an HDC can normally a higher level of than can an holder in regard to defenses against payment the instrument or ownership claims the instrument by other parties.

And HDC must first be a of a negotiable instrument and must have the instrument (1) for , (2) in , and (3) without that it is (such as when the instrument is overdue, dishonored, irregular, or incomplete).

An HDC must have for the instrument. A person who receives an instrument as a gift or inherits it has not met the requirement of value.

A holder takes an instrument for if the holder has done any of the following:

1- the promise for which the instrument was issued or transferred.
2- Acquired a or other in the instrument, excluding a obtained by a judicial [...].
3- Taken the instrument in payment of, or as security for, an claim [...].
4- Given a negotiable instrument as payment.
5- Given an irrevocable (such as a letter of credit [...]) as payment.

Although an promise (a promise to give in the future) is clearly a valid consideration to a contract, it does not sufficient to make the promisor an HDC. [...] A holder takes an instrument for only the extent that the promise has been .

The holder must take the instrument in good faith. [...] This means that the holder must have acted honestly in the process of acquiring the instrument. [The Uniform Commercial Code] defines "good faith" as "honesty in and the of reasonable standards of dealing" [..].

The good faith requirement only the holder.

The holder in due course is designed to the and usage of checks and facilitate the of capital.

To be a holder one must meet two conditions * * *: (1) he or she must have (2) of an instrument drawn, issued, or indorsed to him or her.

The final requirement HDC status concerns of . A person cannot be an HDC if she or he or has reason to that the instrument is in any one of the following ways [...]:

1. It is .
2. It has been .
3. It is part of a series in which at least one instrument has an (uncorrected) default.
4. The instrument contains an signature or has been .
5. There is a against the instrument or a to the instrument.
6. The instrument is so incomplete or irregular as to its ,

A holder will be deemed to have if she or she (1) has actual of the defect; (2) has received a of the defect (such as a letter from a bank identifying the serial numbers of stolen bearer instruments); or (3) has to know that a defect exists, given all the facts and circumstances known at the time in question [...].

What constitutes notice that an instrument is overdue depends on whether it is a demand instrument (payable on demand) or a instrument (payable at a definite time). A purchaser has notice that a demand instrument is overdue if he or she either takes the instrument knowing that demand has been or takes the instrument an length of time after its . For a check, a " time" is after the date of the check. For all other demand instruments, what will be considered a time depends on the circumstances [...].

Normally, a time instrument is the day after its date; hence, anyone who takes a time instrument after the date is notice that it is [...].

An instrument is when the party to whom the instrument is refuses to pay it. If a holder knows or has reason to know that an instrument has been , the holder is on notice and cannot HDC status.

A holder cannot become an HDC if he or she has notice of any claim to the instrument or defense against it [...]. Knowledge of claims or defenses can be (attributed) to the purchaser if these claims or defenses are on the face of the instrument or if the purchaser otherwise had reason to know of them from facts surrounding the transaction.

A purchaser cannot become an HDC of an instrument so incomplete its that an element of is lacking [...]. omissions are permissible because they do not the validity of the instrument [...].

Any irregularity the of an instrument (such as an obvious forgery or alteration) that its validity or ownership, or that creates an ambiguity as to the party to pay, will HDC status.

A person who does not as an HDC but who his or her title an HDC can acquire the rights and privileges of an HDC. This rule [...] is sometimes called the [...].

The extends the benefits of an HDC status and is designed to the HDC in readily the instrument. Anyone, no matter how far from an HDC, who can ultimately her or his title back to an HDC comes within the .

By the benefits of HDC status, the promotes the and free transferability of negotiable instruments.

A holder is defined as a person in of an instrument "if the instrument is payable to or, in the cases of an instrument payable to an identified person, if the identified person is in " [...].

Liability a negotiable instrument can either from a person's signature on the instrument (signature liability) or from the that are implied when the person the instrument negotiation ( liability). A person who signs a negotiable instrument is potentially liable payment of the amount stated the instrument. Unlike signature liability, liability does not require a signature and to both signers and nonsigners.

The general rule is that every party, except a indorser [one who indorses "without "], who signs a negotiable instrument is either primarily or secondarily liable payment of that instrument when it due.

Signature liability is liability—no person will be held liable for an instrument that he or she has not signed personally or through an authorized (agent).

A person who is primarily liable on a negotiable instrument is required to pay the instrument—unless, of course, he or she has a valid defense payment. Liability is immediate when the instrument is signed or issued. No action by the holder of the instrument is required. Only makers and of instruments are primarily liable [...].

The maker of a promissory note unconditionally promises to pay the note according to its terms. It is the maker's promise to pay that the instrument negotiable.

An is a drawee who promises to pay an instrument when it is later for payment [...] Once a drawee a draft [...], the drawee becomes an and is obligated to pay the draft when it is presented for payment[...]. of a check is called .

Drawers and are liable. On a negotiable instrument, liability is similar to the liability of a guarantor in a simple contract [...] in the sense that it is liability. In other words, a or an indorser will be liable only if the party that is responsible for paying the instrument refuses to do so—that is, the instrument.

On drafts and checks, a drawer's liability does not arise until the drawee fails to pay or to the instrument, whichever is required. With regard to promissory notes, an indorser's liability does not arise until the maker, who is primarily liable, has defaulted the instrument [...].

Parties are secondarily liable on a negotiable instrument only if the following events occur:

1. The instrument is and timely .
2. The instrument is .
3. Timely of is given to the secondarily liable party.

[...] occurs when a person an instrument either to the party liable the instrument for payment or to a drawee for . [...] The to whom the instrument must be depends on the type of instrument involved. A note or certificate of deposit (CD) must be to the maker for payment. A draft is to the drawee for acceptance, payment, or both. A check is to the drawee (bank) for payment [...].

Timeliness is important for proper . [...] Failure to present an instrument time is a common reason for presentment and can lead to unqualified indorsers being from secondary liability. A reasonable time for presentment is determined by the nature of the instrument, any usage of banking or trade, and the facts of the particular time.

[...] [A]n instrument is when payment or acceptance of the instrument is refused or cannot be obtained within the time. An instrument is also when the required presentment is (as it would be, for example, if the maker had died) and the instrument is not properly accepted or paid [...].

In certain situations, a in payment or a refusal to pay an instrument will not the instrument. When presentment is made after an established hour (not earlier than 2:00 PM), for instance, a bank can postpone payment until the following day without the instrument [...].

Once an instrument has been dishonored, notice must be given to secondary parties (drawers and indorsers) for them to be liable. Notice may be given any reasonable manner [...]. If the party giving notice is a bank, it must give any necessary notice before its midnight deadline (midnight of the banking day after receipt) [...]. Notice by any party other than a bank must be given within days following the day of dishonor or the day on which the person who is secondarily liable received notice of dishonor [...].

An party is one who an instrument for the purpose of his or her name as to another party the instrument [...].

Generally, an authorized agent binds a principal an instrument if the agent clearly names the principal in the signature (by writing, mark, or some symbol).

An authorized agent may be held personally liable on a negotiable instrument in three situations. First, [...], if the agent signed the own name on the instrument with no indication that she or he was signing as an agent, an HDC can hold the agent personally liable. Second, an agent may be held liable if the agent signed in both the agent's name and the principal's name but nothing on the instrument indicated the relationship. [...] The third situation in which an agent may be liable is when the agent indicates agency status in signing a negotiable instrument but fails to name the [...].

An important exception to the rules on agent liability is made for checks that are signed by agents. If an agent signs his or her own name on a check that is payable the account of the , and the is identified on the check, the agent will not be personally liable on the check [...].

Unauthorized signatures arise in two situations—when a person another person's name on a negotiable instrument and when an agent who lacks the signs an instrument on behalf of a principal. The general rule is that an unauthorized signature is wholly and will not bind the person whose name is signed or .

[I]f an agent lacks the authority to sign the principal's name or has the authority given by the principal, the signature does not bind the principal but will bind the "unauthorized signer" [...].

There are two exceptions to the general rule that an unauthorized signature will not the person whose name is signed:

1- When the person whose name is signed (affirms) the signature, he or she will be [...].
2.When the of the person whose name was forged contributed to the forgery, a court may not allow the person to deny the effectiveness of an unauthorized signature [...].

A person who forges a check or signs an instrument without authorization can be personally liable payment by a holder in due course, or HDC. [...] A holder who knew the signature was unauthorized would not qualify as an HDC (because of the good faith requirement) and thus could not from [a person forging a check or signing an instrument without authorization] the instrument.

Generally, when an indorsement is forged or unauthorized, the of falls the first party to take the instrument with the forged or unauthorized indorsement. The reason for this general rule is that the first party to an instrument is in the best to prevent the . [...] This general rule has two important exceptions. These exceptions arise when an indorsement is made by an or by a .

An is one who, by her or his personal appearance or use of the mails, Internet, telephone, or other communication, a maker or drawer issue an instrument in the name of an payee.

When a person causes an instrument to be issued to a payee who will have no in the instrument, the payee is referred to as a . A can be a person or firm that does not truly exist, or it may be an identifiable party that will not acquire any in the instrument [...].

In addition to the signature liability, make certain warranties regarding the instrument that they are negotiating. Warranty liability arises even when a does not indorse (sign) the instrument [...]:

Warranties fall into two categories: those that arise from the of a negotiable instrument and those that arise . Both and warranties attempt to liability back to the wrongdoer or to the person who face to face with the wrongdoer and thus was in the best to prevent the wrongdoing.

[...] [O]ne who an instrument for consideration makes the following five warranties to all subsequent and holders who take the instrument in good faith with some exceptions [...]):
1. The is entitled to the instrument.
2. All are authentic and authorized.
3. The instrument has not been .
4. The instrument is not subject to a defense or claim of any part that can be asserted against the .
5. The has no knowledge of any proceedings against the maker, the acceptor, or the drawer of the instrument.

For warranties to arise, an instrument must be for consideration.

of an order instrument by indorsement and delivery extends warranty liability to any holder who takes the instrument in good faith. The warranties of a person who, for consideration, without indorsement (by delivery of a bearer instrument), however, will extend only to the immediate .

A or holder who takes an instrument in good faith can sue the basis of breach of a warranty as soon as he or she has reason to know of the breach [...]. Notice of a claim for breach of warranty must be given to the warrantor within days after the or holder has reason to know of the breach and the identity of the warrantor, or the warrantor is not liable for any loss caused by a delay [...].

Any person who an instrument for payment or acceptances makes the following warranties to any other person who in good faith pays or accepts the instrument [...]:

1. The person obtaining payment or acceptance is entitled to the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to the instrument [...].
2. The instrument has not been .
3. The person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is .

Depending on whether a holder or a holder in due course (HDC)—or a holder through an HDC—makes the demand for payment, certain defenses can bar collection from persons who would otherwise be liable an instrument. There are two general categories of defenses— defenses and defenses [...].

defenses (also called defenses) are valid against all holders, including HDCs and holders through HDCs.

Forgery [...]

Fraud in the . If a person is deceived into signing a negotiable instrument, believing that she or he is signing something other than a negotiable instrument (such as a receipt), fraud in the (or inception) is committed against the signer [...]. This defense cannot be raised, however, if a inquiry would have revealed the nature and terms of the instrument.

Forgery [...]
Fraud in the [...]
alteration. An alteration is if it changes the contract terms between two parties in any way. [...] alteration is a defense against an ordinary holder but only a defense against an HDC. [...]

defenses (sometimes called limited defenses) [...] are used to avoid payment to an holder of a negotiable instrument, but not to an HDC or a holder through an HDC.

Fraud in the ( fraud). A person who issues a negotiable instrument based on false statements by the other party will be able to avoid payment that instrument, unless the holder is an HDC.

To protect who purchased defective products, the () adopted Rule .