Overview of Negotiable Instruments and Bankruptcy Law

Negotiable Instrument

Defined by UCC as a transferable financial document.

Rights to Enforce

Arise after the instrument is issued.

Draft

Unconditional order involving drawer, drawee, and payee.

Check

Draft drawn on a bank, payable on demand.

Promissory Note

Written promise to pay a specified sum.

Certificate of Deposit

Bank's promise to repay deposited funds with interest.

Demand Instrument

Payable immediately upon issuance.

Time Instrument

Payable at a specified future date.

Acceptance

Drawee's written promise to pay a draft.

Trade Acceptance

Draft where drawer is also the payee.

Banker's Acceptance

Draft ordering a bank to pay upon presentation.

Collateral Note

Secured by personal property like an automobile.

Installment Note

Note payable in multiple installments.

Requirements of Negotiability

Must be in writing, signed, and unconditional.

Fixed Amount

Must specify a definite sum of money.

Payable on Demand

Must be payable immediately or at a definite time.

Transferability

Negotiable instruments can be transferred easily.

Signature Requirements

Must be signed by maker or drawer.

Unconditional Promise

Terms must be clear and not conditional.

Foreign Currency

Acceptable if specified amount is ascertainable.

Nonnegotiable Instrument

Cannot be transferred or enforced as a negotiable instrument.

Permanence

Writing must be on durable, portable material.

Portability

Instrument must be easily transferable.

UCC

Uniform Commercial Code governing commercial transactions.

Endorsement

Can be conditional, unlike the original promise.

Hypothetical Examples

Used to illustrate negotiability requirements.

Negotiable vs. Nonnegotiable

Distinction based on transferability and enforceability.

Written Form

Negotiable instruments must be in written form.

UCC 3-104(a)(2)

Defines negotiable instruments under the Uniform Commercial Code.

Acceleration Clause

Allows full payment demand upon certain events.

Extension Clause

Permits postponement of payment maturity date.

Order Instrument

Payable to an identified person or order.

Bearer Instrument

Does not designate a specific payee.

Antedating

Dating an instrument earlier than its actual date.

Postdating

Dating an instrument later than its actual date.

Judgment Rate of Interest

Statutory interest rate applied to court judgments.

Nonnegotiable Statement

Does not affect checks' negotiability under UCC.

Gambling Marker

A negotiable instrument for gambling debts.

Negotiable Order Instruments

Negotiated by delivery with necessary indorsements.

Negotiable Bearer Instruments

Negotiated with only delivery required.

Indorsement

Signature on an instrument for transfer.

Allonge

Indorsement on a separate attached paper.

Blank Indorsement

Indorsement without specifying an indorsee.

Special Indorsement

Identifies the person to receive payment.

Definite Time Requirement

Instrument must specify when payment is due.

Uncertain Payment Date

Payment date must be definite for negotiability.

Instrument Payable to X

Considered a bearer instrument if X is nonexistent.

Words vs. Figures

Words on instruments take precedence over figures.

Interest Specification

Unspecified interest defaults to judgment rate.

Default Event

Triggers acceleration of payment obligation.

Negotiable Note Example

Marta's loan to Ruth with acceleration provision.

Maturity Extension

Allows extending payment beyond original due date.

Negotiable Instrument Requirements

Must be in writing, signed, and unconditional.

Qualified Indorsement

Disclaims liability for payment if default occurs.

Without Recourse

Indicates no secondary liability for endorser.

Primary Liability

Responsibility of the check writer.

Restrictive Indorsement

Limits indorsee's use of funds but allows negotiation.

Conditional Indorsement

Payment contingent on specific conditions being met.

Indorsement for Deposit

Limits check to deposit into specified account.

Trust Indorsement

Funds must be used for the benefit of the indorser.

Fiduciary Duty

Obligation to act in another's best interest.

Misspelled Names

Indorsement can use correct or misspelled name.

Instruments Payable to Entities

Authorized representatives can negotiate on behalf of entities.

Alternative Payees

Only one signature needed for payment.

Joint Payees

All payees must sign for negotiation.

Stacked Payees

Payees listed without 'and' or 'or' are ambiguous.

Bank

Entity engaged in banking activities.

Cashier's Check

Bank draws check on itself for immediate payment.

Traveler's Check

Payable on demand, used as cash substitute.

Certified Check

Bank guarantees payment by certifying the check.

UCC 3-415(a)

Defines qualified indorsements under Uniform Commercial Code.

UCC 3-206(a)

Defines restrictive indorsements under Uniform Commercial Code.

UCC 3-204(d)

Misspelled names indorsement rules under UCC.

UCC 3-110(d)

Rules for ambiguous instruments under UCC.

UCC 4-105(1)

Defines banking entities under Uniform Commercial Code.

Endorser

Original payee who transfers rights.

Indorsee

Recipient of rights from an indorsement.

Secondary Liability

Liability incurred if primary party defaults.

Conditions for Negotiation

Specific requirements must be met for payment.

Bank's Duty to Honor Checks

Banks must honor checks if sufficient funds exist.

UCC 4-402(b)

Banks liable for damages if they wrongfully dishonor checks.

Overdraft

Insufficient funds lead to dishonor or fee charge.

Joint Account Overdraft Liability

Joint owners liable if they benefit from overdraft.

Postdated Checks

Banks may charge unless notified not to pay.

Stale Check

Check over six months old may not be paid.

Stop-Payment Order

Customer requests bank not to pay a specific check.

Verbal Stop Payment Orders

Valid for 14 days unless renewed in writing.

Written Stop Payment Orders

Effective for six months after issuance.

Forged Drawers' Signatures

Bank usually bears loss from forged signatures.

Customer Negligence

Negligence can prevent bank from recrediting account.

Failure to Report Forgeries

Report forgeries within 30 days to recover losses.

Forged Indorsements

Bank must recredit account for checks with forged indorsements.

Altered Checks

Banks liable if they fail to detect alterations.

Expedited Funds Availability Act

Regulates when deposited funds must be available.

Local Check Availability

Funds available within one business day after deposit.

Nonlocal Check Availability

Funds available within five business days after deposit.

Check Clearing in the 21st Century Act

Requires immediate crediting upon receipt of funds.

Cash Deposits Availability

Funds available next business day after deposit.

Wire Transfers Availability

Funds available next business day after transfer.

Government Checks Availability

Funds available next business day after deposit.