1. Chapter 30 Negotiability and Negotiation of Commercial Paper
3/11/2018
Chapter 30 Negotiability and Negotiation of Commercial Paper
30-1 Requirements of Negotiability
30-2 Proper Indorsement and Negotiation
Chapter 30
LAW

2. Types of Negotiable Instruments
Drafts
Checks
Certificates of Deposit
Promissory Notes
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

3. 30-1 Requirements of Negotiability
GOALS
Explain the importance of negotiability
Distinguish negotiable from non-negotiable instruments
Chapter 30

4. THE IMPORTANCE OF NEGOTIATION
Negotiable instrument
Assigned instrument
Chapter 30

5. WHAT MAKES AN INSTRUMENT NEGOTIABLE?
In writing and signed by the maker or drawer
Unconditional promise or order
Payable in a sum certain in money
Payable on demand or at a definite time
Payable to bearer or to someone’s order
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6. Negotiable Instruments
To qualify as a negotiable instrument (commercial paper), the document must meet certain requirements established by Revised Article 3 (Negotiable Instruments) of the Uniform Commercial Code (UCC).
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

7. Negotiable Instruments (continued)
If the requirements of Article 3 are met, a transferee who qualifies as a holder in due course takes the instrument free of many defenses that can be asserted against the original payee.
In addition, the document is considered an ordinary contract that is subject to contract law.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

8. Functions of Negotiable Instruments
Negotiable instruments serve the following functions:
Substitute for money
Credit device
Record-keeping device
Most purchases by businesses and many individuals are made by negotiable instruments instead of cash.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

9. HOW IS COMMERCIAL PAPER TRANSFERRED?
Indorsement
Indorser
Indorsee
Holder
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10. Transfers
Negotiable instruments can be transferred to subsequent parties by negotiation.
Done by placing endorsement on instrument
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

11. Transfer by Assignment or Negotiation
The transfer of rights under a contract.
It transfers the rights of the transferor (assignor) to the transferee (assignee).
Transfer by Negotiation
The transfer of a negotiable instrument by a person other than the issuer.
The person to whom the instrument is transferred becomes the holder.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

12. Transfer by Negotiation
Order Paper
Negotiated by delivery with necessary indorsement
Bearer Paper
Negotiated by delivery
Instruments can be converted between order and bearer paper many times
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

13. Holder Versus Holder In Due Course
A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank.
Holder in Due Course (HDC)
A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

14. Requirements for HDC Status
To qualify as an HDC, the transferee must meet the requirements established by the UCC.
The person must be the holder of a negotiable instrument that was taken:
For value
In good faith
Without notice that it is overdue, dishonored, or encumbered in any way, and
Bearing no apparent evidence of forgery, alterations, or irregularity
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

15. Taking for Value Holder must have given value for instrument
Performs agreed upon promise
Acquires security interest or lien
Takes in payment of or as security for antecedent claim
Gives instrument as payment
Gives an irrevocable obligation as payment
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

16. Taking in Good Faith
Good faith means honesty in fact in the conduct or transaction
Subjective
Applies only to holder
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

17. Taking Without Notice of Defect
Must not be aware of any defects, including:
Being overdue.
That it has been dishonored.
That it contains an unauthorized signature.
Red light doctrine
That there is a claim against it by another.
That there is any defense against it.
That there is evidence of alteration or forgery.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

18. Negotiable Instrument Negotiable Instrument Holder in Due Course (HDC)
Maker or Drawer
Payee or Bearer
Holder
Takes a negotiable instrument
For value
In good faith
Without notice of defect
The instrument bears no apparent evidence of forgery, alterations, or irregularity
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

19. 30-2 Proper Endorsement and Negotiation
GOALS
Describe how commercial paper is transferred
Compare the functions of the various indorsements
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20. INDORSEMENTS AND THEIR FUNCTIONS
Blank indorsements
Special indorsements
Qualified indorsements
Restrictive indorsements
Accommodation parties
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21. BLANK INDORSEMENTS
Chapter 30

22. SPECIAL INDORSEMENTS
Chapter 30

23. Endorsement
The signature (and other directions) written by or on behalf of the holder somewhere on the instrument.
The signature may:
Appear alone
Name an individual to whom the instrument is to be paid, or
Be accompanied by other words
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

24. Endorsements (continued)
Misspelled or Wrong Name
- Payee or indorsee can indorse the instrument in the misspelled name, correct name or both
Multiple Payees or Indorsees
Payable jointly
Payable in the alternative
Virgule
Either party may indorse and negotiate
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

25. PREVENT LEGAL DIFFICULTIES
In dealing with commercial paper
Remember that even if an instrument is not negotiable commercial paper, it still may be a valuable contract or creditor’s claim and be freely transferable by assignment.
If you issue commercial paper that is payable on demand, be ready to pay at any time. Civil and even criminal penalties may result from your failure to do so.
Continued on the next slide
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26. PREVENT LEGAL DIFFICULTIES
Learn and utilize the various indorsements. They have been created to fulfill vital purposes.
Only issue bearer paper or create it by indorsement if you immediately deposit it or immediately transfer it and receive value in exchange. Otherwise unauthorized persons may misuse the bearer paper with the loss falling to you.
Continued on the next slide
Chapter 30

27. PREVENT LEGAL DIFFICULTIES
If you are the payee of commercial paper, try to include a clause for the payment of reasonable attorney’s fees and collection costs by the issuer in case of default.
Do not sign as an accommodation party unless you are prepared to pay the full amount of the instrument or have your credit standing damaged by it going into default before you are requested to pay it.
Chapter 30