1. 31-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 31-2 7 Negotiable Instruments Negotiation and Holder in Due Course Liability of Parties Checks and Electronic Transfers Commercial Paper P A R T

3. 31-3 Negotiable Instruments PA E TR HC 31 We at Chrysler borrow money the old-fashioned way. We pay it back. Lee Iacocca, Chairman and CEO of Chrysler Corporation, quoted in the New York Times (1983)

4. 31-4 Learning Objectives Explain advantages of commercial paper and the requirements to qualify as a negotiable instrument Identify different types of negotiable instruments and the key features Apply UCC rules for situations when the terms of an instrument are ambiguous or inherently conflicting

5. 31-5 Commercial paper refers to checks, promissory notes, & certificates of deposit –Basically a contract for payment of money Commercial paper may be negotiable: –Transferred from party to party and accepted as a money substitute payable immediately (check) or as credit (promissory note) Overview

6. 31-6 UCC Article 3 (Negotiable Instruments) and Article 4 (Bank Deposits and Collections) cover commercial paper –Other negotiable documents (documents of title, investment securities) covered by other sections Two basic types of negotiable instruments: –Promises to pay money –Orders to pay money The Uniform Commercial Code

7. 31-7 Promissory notes and certificates of deposit issued by banks are promises to pay money Promissory note: two-party instrument in which the maker promises unconditionally in writing to pay the payee, a person specified by the payee, or the bearer of the note, a fixed amount of money (with or without interest) either on demand or at a specified, future time [3–104] Promises to Pay Money

8. 31-8 A certificate of deposit is an instrument containing (1) an acknowledgment by a bank that it has received a deposit of money and (2) a promise by the bank to repay the sum of money [3–104(j)] –Generally in electronic form Promises to Pay Money

9. 31-9 A draft is an order (not a promise) by one person to a second person to pay money to a third person [3–104(e)] Specifically, the drawer orders the drawee to pay a certain sum of money to the payee, to a person specified by the payee, or to the bearer of the instrument Drawer and drawee may be the same bank (cashier’s check) or drawer bank on second bank (teller’s check) Orders to Pay Money

10. 31-10 Purpose of negotiability is to decrease risk of transfer (assignment of commercial paper contract) so the instrument will be accepted as a substitute for money Thus, (1) the contract for payment of money must meet requirements for negotiability, and (2) the person who acquires instrument must qualify as a holder in due course Negotiability

11. 31-11 A holder in due course has good title to the instrument, paid value for it, acquired it in good faith, and had no notice of certain claims or defenses against payment –Instrument bears no evidence of forgery or triggers concerns about authenticity A holder in due course takes instrument free of all defenses and claims except those that concern its validity A Holder in Due Course

12. 31-12 For an instrument to be negotiable, it must be in writing, signed by the maker, containing an unconditional promise or order to pay a fixed amount of money, payable to order or to bearer, payable on demand at a definite time, lack any other instruction by the maker (three exceptions) [3–103; 3–104] Requirements For Negotiability

13. 31-13 The instrument must must contain an unconditional promise or order to pay (e.g., “pay to the order of”) Conditional phrases destroy the negotiability, though reference to another document about collateral, prepayment, or acceleration does not destroy negotiability Unconditional Promise or Order

14. 31-14 A promise or order is payable on demand if (1) it states it is payable on “demand” or “sight” or (2) does not state a specific time for payment [3–108(a)] A promise or order is payable at a definite time if payable at fixed date(s) or at time(s) readily ascertainable at the time the promise or order is issued [3–108(b)] –The typical promissory note Payable on Demand or At a Definite Time

15. 31-15 An instrument is payable to order (order paper) if payable to (1) order of identified person or (2) an identified person or that person’s order [3–109(b)] –Requires indorsement for negotiation An instrument payable to bearer or to cash (bearer paper) may be negotiated or transferred by delivery of possession without indorsement [3– 201(b)] Payable to Order or Bearer

16. 31-16 Instrument remains negotiable if words: –Give, maintain, protect collateral as security –Confess judgment or dispose of collateral –Waive benefit of law protecting obligor If terms conflict or an ambiguous term exists, general rules of interpretation apply: –Typewritten over printed, handwritten over printed/typewritten, words control numbers Special or Ambiguous Terms

17. 31-17 Thought Questions Do you use negotiable instruments? How do you do your banking?