Chapter 23: Introduction to UCC Article 3 (Commercial Paper)

Introduction

• Possible to do business in cash, but cash substitutes are necessary

  • Large sums of money must change hands

  • Majority of transactions not carried out in cash

• Article 3 of Uniform Commercial Code (UC) concern's ‘commercial paper’

  • Checks

  • Drafts

  • Notes

  • Certificates of Deposit

• Commercial paper serve as

  • Substitutes for cash (checks and drafts)

  • Means of facilitating credit (notes and certificates of deposit

• Commercial papers has been used for centuries

  • UCC consolidated common law into single, comprehensive code

  • 1990 revision adopted in almost every state

  • 2002 update make e-commerce amendments but only adopted in 11 states

• In order for commercial paper to be accepted, must have clear assurance of rules for payment

  • Law provides certain guarantees to those who accept in good faith

• Distinguish feature of commercial paper as compared to other financial or contractual instruments

  • Negotiable instruments gives special protection to persons to whom it is legally negotiated in the course of business

  • Provided conditions met, persons who take negotiable instruments in good faith and give value are free of most defenses against payment

Parties to Commercial Paper

• Drawer : the party who makes or executes a draft

• Drawee : the party who is directed to pay a draft or a note

  • If the draft is a check, the drawee is always a bank or other financial institutions

• Maker : the party who makes or executes a note

• Payee : the party to whom a note or draft is made payable

• Bearer : the party in possession of a note or draft made out to him as payee or made out to bearer

• Accommodation Party : a party who signs a note or draft of a maker or drawer as a maker, drawer, acceptor, or indorser to guarantee payment if the note or draft is dishonored when presented for payment

• Acceptor : a drawee of a draft who binds herself to pay the payee the face value of the draft when it is presented for payment in signing as acceptor on the face of the draft

• Guarantor : a party who signs a note or draft on its face guaranteeing payment in case the note or draft is dishonored when it is presented for payment

• Indorser : the party who signs her name on the back of a note or draft naming her as a payee to obtain payment on it or negotiate it to a third party

• Indorsee : the party to whom a negotiable instrument is indorsed as the new payee

Forms of Negotiable Instruments

• Regardless of type, must meet the following requirements

  • The instrument must be in writing

  • It must be signed by the maker or drawer (the person who creates the instruments)

  • It must contain an unconditional promise or order to pay a sum certain (a specifically identifiable amount) in money

  • It must contain no other promise or obligation

  • It must be payable on demand or at a definite time; and

  • It must be payable to order or bearer

• An instrument must all criteria to have status of negotiable instrument

Types of Negotiable Instruments

• Draft

  • An order

  • By drawer

  • To drawee

  • To pay a sum in money on demand or at a specific date

  • To the order of a specified payee or to bearer

  • A draft is used as a substitute for money

• Check

  • A draft that is drawn on a bank

  • The drawer is a depositor who order the drawee (the bank) to pay the payee a specific amount of money

  • Also a substitute for money

• Note

  • Evidence of debt

  • Drafter is called the “maker”

  • Person for whose benefit note is drafted is “payee”

  • Maker of note drafts in exchange for receiving something of present value for which maker agrees to pay the payee in the future

• Certificates of Deposit

  • Also instrument that evidences debt

  • CoD issued by bank or financial institution

  • Deposit of money is a loan to the bank

    • CoD is a promise by bank to repay debt

Requirements for Negotiability

• The Requirement of a Signed Writing

  • UCC does not define

  • Courts have liberally construed

    • Words written on nearly any portable surface that affords some permanence

  • No specific words required

  • A check can technically be written on nearly any surface capable of accepting writing

  • Signature requirement also liberally construed

    • Manually or by device or machine

    • Any name, word, mark, symbol adopted by person or company

• The Requirement of an Unconditional Promise

  • Instrument must on its face makes an unconditional promise to pay a specific amount of money by a drawer or a maker to a named payee or bearer

  • Conditional promise to pay destroyed negotiable nature (with some exceptions)

• The Requirement of a Sum Certain in Money

  • Must be payable in cash

  • Amount payable must be ascertainable from the instrument itself

  • Money can be legal tender of any country

    • Can be paid in US equivalent at time and place of presentment

  • Fixed or variable interest will not affect negotiability (even if interest is made in reference to information outside of instrument)

  • If interest cannot be ascertained, interest payable at the judgment rate at the place and time of payment

• The Requirement of No Other Promise or Obligation

  • Must contain only an unconditional promise to pay a sum certain in currency

  • If any other obligations are included, instrument is not negotiable

• The Requirement That the Instrument Be Payable on Demand or at a Specific Time

  • Must be payable either on demand or at a specifically ascertainable date

  • Instruments not payable at specific time are demand instruments (e.g. checks)

  • If instrument is payable on or after a specific date, must be clear from instrument

  • Acceleration does not destroy negotiability

  • Subject to extension upon request of one or more parties does not destroy negotiability

  • If payable upon event not certain to occur, not negotiable

• The Requirement The the Instrument Be Payable to Order or to Bearer

  • Must be payable to a specific person or to bearer

    • Bearer instrument payable to anyone holding the instrument

General Rules Applicable to Commercial Paper (pp. 172-173)

• Antedating and Posting the Date on Negotiable Instruments (S3-113)

  • Negotiability is not affected by postdating or antedating

• Incomplete Instruments (S3-115)

  • Incomplete instrument not negotiable until complete

  • Holder can complete if authorized

  • If completion unauthorized, rules relating to material alteration apply

  • Good faith additions to negotiable instruments by persons who have possession are lawful unless unauthorized

• Instruments Payable to Two or More Persons [§3-110(d)].

  • If payable to two or more persons, can be negotiated by any of the named

    parties.

  • If made payable jointly to multiple parties, signatures of all parties are necessary for negotiation.

• Contradictory Terms of Instrument [§3-114].

  • Typewritten terms prevail over pre-printed.

  • Handwritten prevail over both typewritten and pre-printed.

  • Words prevail over numbers.

• Statute of Limitations [§118].

  • Collect on note payable at definite time: six years.

  • Action to enforce a demand note: within six years of demand for payment.

    • Barred after ten years if neither interest or principal is paid for a continuous

      period of ten years.

  • Action to enforce unaccepted draft: the first to occur of three years after dishonor or ten years after date of draft if not present for payment and dishonor.

  • Action to enforce the obligation of an acceptor of a certified check or the issue of a cashier’s check, teller’s check, or traveler’s check: three years after demand is made.

  • Action to collect on dishonored certificate of deposit: six years of due date.

  • Action to enforce accepted draft (other than a check): six years after due date or

    dates or within six years of acceptance (if payable on demand).