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Contractual Obligation
Obligation to pay cash
Assignor
The party making the assignment
Assignee
The party to whom the assignment is made
Obligor
One who owes an obligation to another
Negotiability
Characteristic of a document that allows it to be legally/freely assignable, saleable, or transferable. Elements include a signature, it must be written, and must state the amount to be paid
Negotiable Instrument
A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee's right to payment.
EX:
-Checks
-Promissory Notes
-Drafts
-Certificates of Deposits
-Bonds
-Mortgages
-Credit/Debit Cards
Notes (Promise to Pay)
A written promise by a maker (issuer) to pay a payee (2 parties)
Certificates of Deposit (CD) (Promise to Pay)
A specialized form of note that is given by a bank
Drafts (Order to Pay)
Involves three parties: The drawer orders the drawee to pay a fixed amount of money to the payee
Drawee possesses money belonging to drawer or owes drawer money
Checks (Order to Pay)
A specialized form of draft that is drawn on a bank and payable on demand; the drawer (check signer) orders the drawee (bank) to pay the payee on demand
Drawee
The person, company, or financial institution ordered to pay a draft
Drawer
The person who executes any draft (Check)
Writing (First Requirement of Negotiable Instruments)
Any intentional reduction to tangible form is sufficient
Need not be on paper
Electronic documents
Signed (Second Requirement of Negotiable Instruments)
Any symbol executed or adopted by a party with the present intention to authenticate/adopt or accept a writing
Signature most common, but not required
Mark, symbol, initials, tradename
Indicates intent to satisfy obligation
Promise (note) (Third Requirement of Negotiable Instruments)
An undertaking to pay, which must be more than a mere acknowledgment or recognition of an existing debt
IOU
Two party instrument
Order (draft) to pay (Third Requirement of Negotiable Instruments)
Instruction to pay
Three party instrument
Affirmative Act
Policies and procedures designed to compensate for past discrimination against women and members of minority groups
Unconditional (Fourth Requirement of Negotiable Instruments)
An absolute promise/order to pay that is not subject to any contingencies
A promises to pay B if the goods are delivered on time
Unconditional Reference to Other Agreements
Does not destroy negotiability unless the recital makes the instrument subject to or governed by the terms of another agreement EX: I promise to pay to order of Tom $10,000 if the goods as described in attached Purchase Order are delivered
The Particular Fund Doctrine
Order or Promise to pay only out of a particular fund (source) no longer is conditional and does not destroy negotiability
Recital of Consideration
Not destroy negotiability
"This note is made in consideration of a purchase of a computer"
Fixed Amount (Fifth Requirement of Negotiable Instruments)
The holder (Payee) must be assured of a determinable minimum amount
Lump sum or installments
Provisions in the instrument may increase the amount of recovery under certain circumstances
Not apply to interest (or other charges)
Money (Sixth Requirement of Negotiable Instruments)
Legal tender authorized or adopted by a sovereign government as part of its currency
Need not be US currency
Virtual Currency
Not commodities (gold)
No Other Obligation/Undertaking (Seventh Requirement of Negotiable Instruments)
Promise or order to do anything in addition to the payment of money destroys negotiability
Promise to pay money and only money
Collateral OK
Payable on Demand or Definite Time (Eighth Requirement of Negotiable Instruments)
Instrument is demand paper if it must be paid upon (holder's) request
Instrument is TIME paper if it is payable at a DEFINITE time
Date must be determined from the instrument itself
Dated instrument
"Payable 90-days after issuance"
Latest date for payment
Payable to Order or Bearer (Ninth Requirement of Negotiable Instruments)
Negotiable instrument must contain words indicating that the maker or drawer intends that it pass into the hands of someone other than the payee
Instrument may be transferred by payee to others
"Magic words of negotiability"
Payable to Order
Payable to the "order of" (or equivalent words) a named person or anyone designated by that person
Payable to Bearer
Payable to bearer or order of bearer
Payable to Cash or left blank
Payable to order of Payee or bearer
Whoever has possession
Incomplete Instrument
Instrument is not negotiable until completed
Ambiguous Instruments
Holder may treat instrument as either a draft or a note if it is unclear
Holder
Possessor of an instrument with all necessary indorsements
Entitled to get paid
Includes original payee
Bear paper only required possession
Assignment
Assignee stands in shoe of assignor
Not negotiation
B may normally assign its right to get paid to another party (C)
Negotiation of Order Paper
Transferred by possession and indorsement by all appropriate parties
Negotiation of Bearer Paper
Transferred by possession alone
The Imposter Rule
An indorsement of an imposter in the name of the named payee is effective if the imposter has induced the maker/drawer to issue the instrument to him using the name of the payee
A issues check to man claiming to be Elon Musk. Payee forges Musk's name
The Fictitious Payee Rule
An indorsement by any person in the name of the named payee is effective if an agent/employee of the maker/drawer has supplied her with the name of the fictitious payee
A's employee issues check payable to "Ajax Inc." & forges indorsement by Ajax to that employee
Indorsements
Signature/Mark (on the instrument) of a payee, drawee, accommodation party, or holder
Blank Indorsement
One specifying no indorsee and making the instrument bearer paper
Special Indorsements
Identify an indorsee to be paid and makes the instrument order paper
Unrestrictive Indorsements
Do not limit rights of indorsee
Restrictive Indorsements
Limit purpose for which the proceeds of can be applied
Indorsements for Deposit or Collection
Limit further negotiation to those consistent with the indorsement
Indorsements in Trust
Require indorsee to pay or apply all funds in accordance with the indorsement
Indorsements with Ineffective Restriction
Conditional indorsements and indorsements attempting to prohibit further negotiation
Unqualified Indorsement
One that imposes liability on the indorser
Qualified Indorsement
Without recourse, one that limits the indorser's contractual liability
Indorsement: "John Doe"
Blank, Nonrestrictive, Unqualified
Indorsement: "Pay to Richard Roe, John Doe"
Special, Nonrestrictive, Unqualified
Indorsement: "Without Recourse, John Doe"
Blank, Nonrestrictive, Qualified
Indorsement: "Pay to Richard Roe in trust for John Roe, without recourse, John Doe"
Special, Restrictive, Qualified
Indorsement: "For collection only, without recourse, John Doe"
Blank, Restrictive, Qualified
Indorsement: "Pay to XYZ Corp., on the condition that if it delivers goods ordered this date, John Doe"
Special, Nonrestrictive, Unqualified
Place of Indorsements
Must be on the instrument or on an allonge (paper attached to the instrument)
Often on back of instrument
Incorrect or Misspelled Indorsement
Holder may require indorsement to be in the name stated, the correct name, or both
Holder in Due Course
One who acquires a negotiable instrument in good faith and for consideration, and thus has certain rights above the original payee
Takes instrument free of all personal defenses
Value
Differs from contractual consideration and consists of any of the following:
Performance of legal consideration (excludes executory promises)
The acquisition of a security interest/lien
Taking the instrument in payment for a debt
The giving of a negotiable instrument; or
The giving of an irrevocable commitment to a third party
Good Faith
Honesty in fact and the observance of reasonable commercial standard of fair dealing
Subjective = Honesty
Objective = Reasonable commercial standards
Notice an Instrument is Overdue
Time paper is overdue after its stated date
Demand paper is overdue after demand has been made or after it has been outstanding for an unreasonable amount of time
Notice an Instrument Has Been Dishonored
Dishonor is refusal to pay or accept an instrument when it is due
Notice of a Claim or Defense
A defense protects a person from liability, but a claim is an assertion of ownership
Without Reason to Question its Authenticity
Instrument cannot bear such apparent evidence of forgery or alteration or otherwise be so irregular or incomplete as to call into question its authenticity
A Payee may be Holder in Due Course
3rd party involvement
EX: A fraudulently induces B to write check payable to C. C may qualify as HDC
The Shelter Rule
The transferee of an instrument acquires the same rights that the transferor had in the instrument
If transferor was HDC, later transferee is HDC (Even if transferee does not qualify as HDC)
Unless transferee was participant in the fraud or other wrongful act
Real Defenses
Real defenses are available against ALL holders, including HDC:
Infancy
Void Obligations
Fraud in the Execution
Discharge in Insolvency Proceedings
Discharge of Which the Holder Has Notice
Unauthorized Signature
Fraudulent Alteration
Personal Defenses
All other defense that might be asserted in the case of any action for breach of contract
Voidable
EX:
Fraud in inducement
Non-physical duress
Failure of consideration
Federal Trade Commission
Consumer Credit Contracts
Transferee of consumer credit contracts cannot take as a holder in due course
Contractual Liability: Signature
No person has contractual liability unless their signature appears on it:
Bearer paper
Signature loosley defined
Signature of agent
Unauthorized signature
Forgery
EX: Maker, Drawer, Endorser, Acceptor
Primary Liability
Absolute obligation to pay a negotiable instrument
Makers
The maker guarantees that he will pay the note according to its original terms
Acceptors
A drawee assumes primary liability when she accepts it
Acceptance
A drawee's signed engagement to honor the instrument
Certification acceptance of a check by a bank
Secondary Liability
If the instrument is not paid by a primary party, indorsers and drawers are secondarily liable unless they have disclaimed their liability or have a valid defense (forgery)
If a draft (check) is accepted by a bank (drawee), the drawer and all prior indorsers are discharged from contractual liability
Acceptor
A drawee that has accepted the draft for payment
Disclaimer
Drawer (except on a check) or indorser may disclaim contractual liability by a qualified drawing or indorsement ("WITHOUT RECOURSE")
Contractual liability
Liability assumed through a hold-harmless agreement.
Hold-Harmless Agreement
A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.
Dishonor
Involves the refusal to pay an instrument when presented
Drawer of Unaccepted Draft
Liability contingent upon dishonor (by drawee)
Any Indorser or the Drawer of an Accepted Draft
Liability is contingent upon dishonor and notice of dishonor
Contractual Liability: Conversion
Occurs when the instrument is taken by transfer, other than negotiation, from a person not entitled to enforce the instrument OR a bank makes payment for a person not entitled enforce or receive payment
EX: Drawee bank pays a check with a forged or missing indorsement
Discharge
Liability is terminated due to:
Payment
Tender of Payment
Cancellation
Renunciation
Warranty Liability (Article 3)
Transferor's Warranties
Presenter's Warranties
Applies regardless of signature
Negotiation of bearer paper by transferring possession alone (no signature) - Transferor warranty only applies to immediate transferee
May be disclaimed
Express language required
Transferor's Warranties
Transfers instrument to subsequent holder and receives consideration. Includes:
Entitlement to Enforce
Authentic and Authorized Signatures
No Alteration
No Defenses
No Knowledge of Insolvency
Warrantor
All people who obtain payment/acceptance of an instrument as well as all prior transferors
Beneficiary
The presenter's warranties run to any person who in good faith pays/accepts the instrument
Payor of instrument
Warranty Liability
A liability that is recorded for the future costs of claims that are anticipated because of product warranty agreements
Warranty (Warranty Liability)
Drawees of unaccepted drafts (banks)
Entitled to Enforce
No Alteration
Genuineness of Drawer's Signature
Depositary Bank
The bank in which the payee or holder deposits a check for credit
Intermediary Bank
A bank, other than the depositary/payor bank, involved in the collection process
Payor Bank
Under its contract with the drawer, the payor bank (drawee) agrees to pay to the payee, or his order, checks that are issued by the drawer
Provided it is not countermanded by a stop payment order and provided there are sufficient funds in the drawer's account
Wrongful dishonor & "stale checks"
Stop Payment Order
Command from a drawer to a drawee not to pay an instrument
Oral stop payment order is binding for 14 days; a written order is effective for six months and may be renewed
Provisional Credit
Tentative credit for the deposit of an instrument until final credit is given
Amount not available for withdrawal
Final Credit
After payment of the instrument by the payor bank
Provisional credits become final
If the payor bank (drawee) does not pay the check, the depositary bank reverses the provisional credit
Collecting Bank (Depositary & Intermediary Banks)
Responsibilities including agency, duty of care, duty to act timely, indorsements, and warranties
Agency
A collecting bank is an agent of the owner of the check until the settlement becomes final
Duty of Care
Must exercise ordinary care
Duty to Act Timely
A collecting bank acts timely if it takes proper action before its midnight deadline
Banking day (9-4)
Collecting Bank Indorsements
If an item is restrictively indorsed "for deposit only," only a bank may be a holder
Warranties
Customers and collecting banks give warranties on transfer, presentment, and encoding
Final Payment
Occurs when the payor bank does any of the following, whichever happens first:
Pays an item in cash;
Settles and does not have the right to revoke the settlement; or
Makes a provisional settlement and does not properly revoke it
Note 
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