BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 14 Negotiable Instruments
Learning Objectives • What requirements must an instrument meet to be negotiable? • What are the requirements for attaining the status of a holder in due course (HDC)? • What is the difference between signature liability and warranty liability? • Certain defenses are valid against all holders, including HDCs. What are these defenses called? Name four defenses that fall within this category. • Certain defenses can be used against an ordinary holder but are not effective against an HDC. What are these defenses called? Name four defenses that fall within this category.
Articles 3 and 4 of the UCC • A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. • 2002 Revisions updated UCC with regard to e-commerce and UETA. • The term “Record” now replaces “Writing.” • Other updates related to telephone transactions.
Drafts and Checks • Draft is Unconditional Order to Pay involving Three Parties: • Drawer (Customer), Drawee (Bank) and Payee.
Drafts and Checks • Time Drafts and Sight Drafts. • Time: payable at a future time. • Sight: payable on sight (on demand).
Drafts and Checks • Trade acceptances: Seller is drawer and Payee. • Checks (cashier’s, teller’s and traveler’s) are drafts on a bank.
Promissory Notes and CD’s • Promissory Notes are PROMISES to pay. • Two party instruments: • Maker (Promisor) and • Bearer (Promisee). • Certificates of Deposit (CDs): two party instruments.
Requirements for Negotiability • (1) Writing signed by the maker or the drawer. • (2) Unconditional promise or order to pay • (3) A fixed amount of money. • (4) Payable on demand or at a definite time. • (5) Payable to Order or Bearer.
Requirements for Negotiability • Written Form. • Must be on material that lends itself to permanence. • Writing must have portability. • Signatures. • Signed by maker (if note or CD) • Signed by drawer (if check or draft). • Any symbol (or electronic) is good.
Requirements for Negotiability • Unconditional Promise or Order to Pay. • Payment cannot be conditioned on the occurrence or nonoccurence of any event. Only unconditional promises are negotiable. • Express promise to pay. • Fixed Amount of Money. • Ascertainable on face of instrument.
Requirements for Negotiability • Payable on Demand or Definite Time. • Includes words “payable at sight” or “payable upon presentment.” • If no time presented, it is presumed payable on demand. • Definite Time. • To be negotiable, instrument must be payable on demand or at a definite time.
Requirements for Negotiability • Acceleration Clause. • Allows holder to demand payment if certain condition occurs. • Negotiable because exact value can be determined and payable on a specific date. • CASE 14.1Foundation Property Investments, LLC v. CTP, LLC (2007). Accepting repeated late payments waives the right to demand full payment under an acceleration clause. • Extension Clause. • Reverse of an acceleration clause, extends maturity date to be extended forward into time.
Requirements for Negotiability • Payable to Order or Bearer. • Order instrument is payable to identified person or order. Identified person may transfer check to whomever she wishes. • Bearer instrument is literally payable to the possessor of the instrument.
Factors That Do Not Affect Negotiability • Undated checks. • Pre or Post-Dating Checks. • Handwritten Terms. • Outweigh typed or printed terms. • Words outweigh Figures. • “With Interest.” • Check says “Nonnegotiable.”
Transfer of Instruments • Transfer by Assignment. • Transferee is an Assignee. • Transfer by Negotiation. • Transfer in which the transferee becomes a holder. • Negotiating Order Instruments. • Negotiating Bearer Instruments.
Indorsements • Indorsement is a signature, with or without words or statements. • Indorser: person who transfers instrument by signing it and delivering to another person.
Indorsements • Blank Indorsements. • Special Indorsements. • Qualified Indorsements.
Restrictive Indorsements • Conditional Indorsements. • Indorsements for Deposit and Collection.
Restrictive Indorsements • Trust (Agency) Indorsements.
Miscellaneous Indorsement Problems • Misspelled Names. Indorsement should be identical to the name on the instrument. • Alternative or Joint Payees. Only one of the payees needs to indorse. • Suspension of the Drawer’s Obligation.
Holder in Due Course (HDC) • A holder (assignee) is generally subject to the same defenses that the assignor is subject to. • A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.
Requirements for HDC Status • A Holder in Due Course must: • Take for Value: • Performance. • Payment for preexisting debt. • Irrevocable commitment. • Taking in Good Faith (honesty in fact). • CASE 14.2Georg v. Metro Fixtures Contractors, Inc. (2008). Payee of check that was embezzled was an HDC taking in good faith. Loss is suffered by Metro.
Requirements for HDC Status • A Holder in Due Course must: • Take for Value: • Taking in Good Faith (honesty in fact). • Take Without Notice of any defect: • Overdue, dishonored, uncured, contains unauthorized signature or alteration, defense or claim, irregular or incomplete. • CASE 14.3South Central Bank of Daviess County v. Lynnville National Bank (2009).South Central took the check for value, in good faith, and without notice of a defects.
Holder Through an HDC • The “Shelter” Principle: Holder, who does not qualify as an HDC, can acquire the rights and privileges of an HDC. • Depends upon whether holder can ‘trace’ her title back to HDC. • Limitations: • Reacquired instruments. • Fraud or illegality.
Signature and Warranty Liability • Every party who signs a negotiable instrument is either primarily or secondarily liable for payment. • Primary Liability (only makers and acceptors are primarily liable). • Secondary Liability (contingent liability): • Proper and Timely Presentment. • Dishonor. • Proper Notice.
Signature Liability • Accommodation Parties. • Signs for the purpose of lending her name as credit for another party. • Authorized Agents’ Signatures. • If authorized, can bind the principal. • If unauthorized (forgery) signature is void.
Special Rules for Unauthorized Indorsements • Unauthorized Indorsements. • Burden of loss falls on first party to take the instrument with the forged/unauthorized instrument. • Imposter Rule. • Fictitious Payee Rule.
Warranty Liability • Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment. • Transfer Warranties (if consideration): • Transferor has the right to enforce the instrument • All signatures are authentic and authorized • Instrument has not been altered. • Instrument is not subject to a defense or claim. • Transferor has no knowledge of insolvency.
Warranty Liability • Presentment Warranties protect the person to whom the instrument is presented: • Person obtaining payment has the right to enforce the instrument. • Instrument has not been altered. • Person accepting has no knowledge that instrument is unauthorized.
Defenses, Limitations, and Discharge • Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC’s: • Forgery. • Fraud in the Execution. • Material Alteration. • Discharge in Bankruptcy. • Infancy (Minor). • Illegality. • Mental Incapacity. • Extreme Duress.
Personal Defenses • Personal (limited ) Defenses (only holders, not HDC): • Breach of Contract or Warranty. • Lack or Failure of Consideration. • Fraud in the Inducement. • Illegality (voidable). • Mental Incapacity. • Discharge by Payment/Non-Delivery.
Federal Limitations on HDC’s • Federal Trade Commission issued rule in 1976 that effectively abolished HDC status in consumer credit transactions. • FTC Rule 433. • Modern application is to car purchases that turn out to be ‘lemons.’
Discharge From Liability • All parties are liable when primary party pays the holder the amount in full. • Intentional cancellation discharges the liability of all parties. • Can occur when right of recourse is impaired.