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Negotiable Instruments. “A negotiable bill or note is a courier without luggage.” John B. Gibson, Overton v. Tyler, 1846.

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Presentation on theme: "Negotiable Instruments. “A negotiable bill or note is a courier without luggage.” John B. Gibson, Overton v. Tyler, 1846."— Presentation transcript:

1 Negotiable Instruments

2 “A negotiable bill or note is a courier without luggage.” John B. Gibson, Overton v. Tyler, 1846

3  System for transferring paper funds easily  Types of commercial paper ◦ Negotiable ◦ Non-negotiable

4  Note: (promissory note) is a promise that you will pay money ◦ Two people involved  Maker: Issuer of a promissory note  Payee: Someone who is owed money under the terms of an instrument

5  Draft: Order directing someone else to pay money for you ◦ Check: Most common form of a draft  Order telling a bank to pay money ◦ Three people involved  Drawer: Person who issues a draft  Drawee: One ordered by the drawer to pay money to the payee  Payee  Issuer: All purpose term that means both maker and drawer

6  Possessor of commercial paper has an unconditional right to be paid, so long as: ◦ Paper is negotiable ◦ It has been negotiated to the possessor ◦ Possessor is a holder in due course ◦ Issuer cannot claim a valid defense

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8  The instrument must: ◦ Be in writing ◦ Be signed by the maker or drawer ◦ Contain an unconditional promise or order to pay ◦ State a definite amount of money ◦ Be payable on demand or at a definite time ◦ Be payable to order or to bearer

9  When terms contradict, three rules apply: ◦ Words take precedence over numbers ◦ Handwritten terms prevail over typewritten terms ◦ Typed terms prevail over printed terms

10  Means that an instrument has been transferred to the holder by someone other than the issuer ◦ To be negotiated, order paper must first be indorsed and then delivered to the transferee ◦ Bearer paper must simply be delivered to the transferee  No indorsement is required

11  Order paper: Instrument that includes the words “pay to the order of” or their equivalent  Bearer paper: Note is a bearer paper if it is made out to “bearer” or it is not made out to any specific person ◦ Can be redeemed by any holder in due course  Indorsement: Signature of a payee

12  Has an automatic right to receive payment for a negotiable instrument  Requirements for holder in due course: ◦ Is a holder who has given value for the instrument, in good faith  Without notice of outstanding claims or other defects

13  Requirements for holder in due course ◦ Holder: For order paper, anyone in possession of the instrument if it is payable to or indorsed to her  For bearer paper, anyone in possession ◦ Value: Holder has already done something in exchange for the instrument ◦ Good faith  Two tests to determine  Subjective test  Objective test

14  The instrument is overdue  The instrument is dishonored  The instrument is altered, forged, or incomplete  The holder has notice of certain claims or disputes

15  Issuer of a negotiable instrument is not required to pay if: ◦ Signature on the instrument was forged ◦ After signing, debts were discharged in bankruptcy ◦ Amount was altered after he signed it ◦ Signed under duress, mentally incapacitated, or part of illegal transaction ◦ Tricked into signing the instrument

16  Federal Trade Commission has special rules for consumer credit contracts  Consumer credit contract: Consumer borrows money from a lender to: ◦ Purchase goods and services from a seller who is affiliated with the lender

17  Signature liability: Liability of someone who has signs an instrument  Warranty liability: Liability of someone who receives payment on an instrument

18  Primary liability: Unconditionally liable ◦ Must pay unless he has a valid defense  Secondary liability: Must pay only if the person with primary liability does not pay  The holder of an instrument must first try to get payment from: ◦ The party with primary liability before making demands against a party with secondary liability

19  The maker is primarily liable  The drawer of a check has secondary liability  The bank (drawee) is not liable to: ◦ The holder and owes no damages to the holder for refusing to pay the check

20  Drawee ◦ Certified check: A check the issuer’s bank has signed, indicating its acceptance of the check ◦ Acceptor: Bank (drawee) that accepts a check (draft), thereby becoming primarily liable on it ◦ Cashier’s check: Check drawn on the bank itself  Promise that the bank will pay out of its own funds

21  Indorser: Anyone, other than an issuer or acceptor, who signs an instrument ◦ Secondary liable  Indorsers are not liable if: ◦ They write the words “without recourse” next to their signature on the instrument ◦ Bank certifies the check ◦ Check is presented for payment more than 30 days after the indorsement ◦ Check is dishonored and the indorser is not notified within 30 days

22  Someone, other than an issuer, acceptor, or indorser: ◦ Who adds her signature to an instrument for the purpose of being liable on it  Accommodated party: Someone who receives a benefit from an accommodation party  An accommodation party has the same liability to the holder as the person for whom he signed

23  The wrongdoer is always liable  The drawee bank is liable if it pays a check on which the drawer’s name is forged ◦ The bank can recover from the payee only if the payee had reason to suspect the forgery  In any other case of wrongdoing, a person who first acquires an instrument from a wrongdoer is ultimately liable to anyone else who pays value for it

24  When someone transfers an instrument, she warrants that: ◦ She is the holder of the instrument ◦ All signatures are authentic and authorized ◦ Instrument has not been altered ◦ No defense can be asserted against her ◦ As far as she knows the issuer is solvent

25  A forged signature is invalid and creates no signature liability for the person whose name was signed ◦ The recipient of a forged item may recover under transfer warranties  Signature liability rules do not apply to the transfer of bearer paper since no indorsement is required ◦ Transfer warranties apply

26  Apply to someone who demands payment for an instrument from the maker, drawee, or anyone else liable  Presenter warrants that: ◦ She is a holder ◦ The check has not been altered ◦ She has no reason to believe the drawer’s signature is forged  Anyone who presents a promissory note for payment warrants that he is a holder of the instrument

27  Conversion liability ◦ Conversion: Means that:  Someone has stolen an instrument  Bank has paid a check that has a forged indorsement  Impostor rule ◦ If someone issues an instrument to an imposter:  Any indorsement in the name of the payee is valid as long as the person who pays the instrument does not know of the fraud

28  Fictitious payee rule ◦ If an instrument is issued to a person who does not exist:  Indorsement in the name of the payee is valid as long as the payer does not know of the fraud  Employee indorsement rule ◦ If an employee with responsibility for issuing instruments forges an instrument:  Indorsement in the name of the payee is valid as long as the payer does not know of the fraud

29  Anyone negligent in creating or paying an unauthorized instrument is liable to an innocent third party ◦ Anyone careless in paying an unauthorized instrument is liable:  Despite the three rules ◦ Anyone careless in allowing a forged or altered instrument to be created is also liable:  Whether or not he has violated one of the three rules

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