Payments Systems/Negotiable Instruments Outline 1. 2. 3. 4. ID all parties and which could be HIDC Negotiable instrument? (6) Properly negotiated? (endorsed + transfer of possession) Defenses (real (only for HIDC) or both real and personal (for nonHIDC)) Negotiable instrumentscontain an unconditional promise to render payment for an exact sum. For a piece of paper to be as good as cash, or negotiable by law, it must be a written document signed by the entity drawing on the instrument. This is what makes it marketable or transferable. It must also have an explicit order or promise to pay and state a specific amount of money. The agreement also provides instructions on timing, such as on demand or some time in the future, and must be made out to a specific person or entity. That said, if the instrument does not have a date, it does not impact its negotiability. Non-negotiable describes the price of a good or security that is firmly established and cannot be adjusted, or a part of a contract or deal that is considered a requirement by one or both involved parties. Additionally, the term can relate to a good or security whose ownership is not easily transferable from one party to another. An item can be considered non-negotiable if one party involved in a transaction is not willing to make any changes to a condition that has been set in place. This can refer to the price for a particular good or service, an element within a contract, or a financial product that cannot be exchanged or transferred to a new owner, even through the use of secondary markets. Securities and products that are considered non-negotiable cannot be transferred from one party to the next and thus are typically illiquid. An example of a non-negotiable instrument, also referred to as a non-marketable instrument, would be a government savings bond. These can only be redeemed by the owner of the bond and are not allowed to be sold to other parties. Negotiable Instruments Tested essay only Payment systems Negotiable Instruments A draft transaction usually involves three people, the drawer, the drawee bank and the indorsers. The drawer is the one who makes the promise to pay on the check (also known as a type of draft), the indorser is one who indorses the check and can also sometimes also be the payee in the transaction. The drawee (usually a bank) is the one who gives the money upon presentment. Note-promise to pay (2 party contract) Maker-owes the $ (creates the note) Payee-gets the $ Draft transaction (Bill of Exchange) (3 party K) Drawer-creates the draft –tells the drawee to pay the payee Drawee-pays the payee gives the darwer’s money upon presentment of the draft -if it is blank, it will be a check Payee-gets the $ at the end The first issue here is whether the cashier's check was negotiable and if so, was the check required to be paid by First Bank. A draft transaction usually involves three people, the drawer, the drawee bank and the indorsers. The drawer is the one who makes the promise to pay on the check (also known as a type of draft), the indorser is one who indorses the check and can also sometimes also be the payee in the transaction. The drawee bank is the one who pays/ gives the money upon presentment. A cashier's check is a type of draft that has been authorized by the drawee bank-- indicating that it promises to pay and in fact, relieves the drawer from liability when there is a dishonor of presentment. A cashier's check is also bearer paper because it generally does not require one's signature in order to be negotiable It is important to note that if a draft or note is not properly negotiable, general contract rules apply. =Although obligations are suspended under the note or draft, an indorser may sue based on the contract obligations if it is not negotiable. Why trade? You are trading the right to get paid Ex. being able to substitute cash for a check Negotiable Instrument? A negotiable instrument is a written, signed, unconditional promise to pay to order or bearer a fixed sum of money on demand or at a definite time which states no unauthorized undertakings. It is important to note that if a draft or note is not properly negotiable, general contract rules apply.=Although obligations are suspended under the note or draft, an indorser may sue based on the contract obligations if it is not negotiable. = To be negotiable, the draft must be (i) in writing (ii) unconditional promise to pay (iii) on demand or at a definite time (iv) with or without interest (but not permitted on checks to have interest) (v) payable to order or bearer paper (vi) a fixed amount of money (vii) signed by the drawer (viii) without any unauthorized undertakings. It is important to note that if a draft or note is not properly negotiable, general contract rules apply.=Although obligations are suspended under the note or draft, an indorser may sue based on the contract obligations if it is not negotiable. = Written Signed by a maker (for a note) or signed by a drawer (for a draft) Contain an unconditional promise (for the note) OR order (for the draft) o I wil pay you $50 o I will pay you 50 on the condition that.. money Pay a fixed amount of for principal Ex. $50.00 NOT ex. $50.00 + interest=impermissible conditiondestroy negotiability. Ex. a Porsche -=If it is not payable in money, it is not freely transferable. Here, it seems that William is the drawer on the check. First Bank is the drawee bank on the check. Debbie is the payee of the check. Car Buyer is the initial on the check. The check is arguably negotiable because it is bearer paper; it is arguably for $25,000 since that is the amount that was sold for the car. Furthermore, it is a fixed amount and checks are presumed to be payable on demand, even if there is no date given on the check. It is presumably signed by the drawer but also by the drawee bank as the authorized promisor of the check. There seem to be no unauthorized undertakings and s a result, there is a negotiable instrument. Next, it was properly negotiated because the indorser, Car Buyer, signed it and indorsed it to Debbie. It had the genuine and authentic signatures of the indorser and as a cashier's check, it was bearer paper so it only needed to be transferred to be properly negotiated. As such, it was properly negotiated. If the check states that it is payable to bearer paper, then it is freely negotiable and the signature of the payee can be anyone. freely negotiable =easiy transferable Once it is determined that a draft is negotiable, it must be determined if it is properly negotiated. There must be (i) entitlement to endorse the check and (ii) genuine and authentic signatures. Blank Amounts-if the amount is blank, you cannot fill in unless the K allows Negotiation -process by which we transfer your right to get paid/enforce payment Was it properly negotiated? Once it is determined that a draft is negotiable, it must be determined if it is properly negotiated. There must be (i) entitlement to endorse the check and (ii) genuine and authentic signatures. Bearer instrument is payable to anyone possessing the instrument and is properly negotiable by transfer alone. = 1. transfer possession -if you made it payable to cash, you made it “bearer paper” such as shares or bonds or cash Order Instrument An instrument payable to the order of a person is negotiated by a transferring of possession plus endorsement. If one of these qualifications is not met, the instrument was not negotiated. = 1.“specific” pay to the order of 2. Indorse/sign (ex. must sign back of the check) Endorsing an order instrumentmakes it bearer instrument There is no indication Uncle endorsed, so the note was apparently not negotiated. you make it an order 3. Transfer of possession to that personyou make it bearer paper! that person can’t cash it “for deposit only” destroys negotiability/cannot be transferred/negotiated Order Instrument An instrument that names a specific designee who can collect payment on that instrument. Bearer instruments, on the other hand, do not name a specific payee; anyone who bears the instrument can collect payment on it. Bearer instruments are negotiable only if they are payable to anyone possessing the instrument, and is negotiable by transfer alone. An order instrument is negotiable only if must identify a named payee on the payee line. Endorsing an order instrumentmakes it bearer instrument For example, when you receive a payment by check and endorse that check, your check, which was an order instrument prior to endorsement, becomes a bearer instrument. Once endorsed, anyone who bears, or possesses, your check can cash it, even if they’re not the person named on the payee line. It’s for this reason that consumers are advised to avoid endorsing checks until they are depositing them. However, a payee can avoid turning an order instrument into a bearer instrument after endorsing it. The payee can use a special endorsement, which involves signing the instrument over to another payee. To do this with a check, for example, the payee can write the words “Pay to the Order Of (named person or entity)” in the endorsement space on the back of the check, and then sign it. =??= “for deposit only” destroys negotiability/cannot be transferred/negotiated Fraudulent Indorsement NOTE: Forged signature does not void-this has no legal effect Ex. someone took a crayon to it There is more gray area we will not get into The person who holds the check is always liable if the payee does not get paid Holder in Due Course (“HIDC”) = A holder in due course (HDC) is a person who takes an instrument for value, in good faith, and without notice of any claims or defenses. Good faith is defined as honesty in fact and observance of commercial standards of fair dealing. For value=paying for the check. Without notice of defenses or claims means he doesn’t have reason to know of any alterations, fraud or that the instrument is overdue. If a negotiable instrument is “negotiated” to a “holder in due course,” he takes free of “personal defenses” and subject only to real defenses (FAIDS+FAIDS) *issuer/maker of check can NEVER take by negotiation Requirement for HIDC-HIDC must take the negotiable instrument For value=paying for the check tBirthday gift checkNOT for valuenot an HIDC In good faith =honesty fraud or deceit (never an issue on BAR) Without notice of defenses or claims = so long as he doesn’t have reason to know of any alterations, fraud or that the instrument is overdue 1. Notice of overdue check (by 90 days from when you obtained it)if you take it knowing the check is >90 days old, you cannot be a HIDC a. You can still cash it because youlre still a holder 2. Notice of forgery/unauthorized signature Payment of overdue invoice???? To get paid/enforce payment, go after the issuer of the check (issue: can they get out of paying you?) Defenses:--if youre not a HDC, all defenses can be raised against you Real defenses can be raised against HIDC or anyone FAIDS FAIDS Fraud in factum- where drawer didn’t have knowledge of what he was signing and was reasonably excused therefore Forgery Alteration Adjudicated incompetency in a nursing home? Infancy >18 Illegality if there is any indication that Broker violated securities law in the transaction. Duress Discharge in bankruptcy Discharge known by HIDC Suretyship Defenses SOL Personal defenses (basic K defenses) -personal defenses cannot be raised against HIDC Ex: mistake, failure of CP, bilateral, unilateral unjust enrichment / restitution (to disgorge ill-gotten gains) Other personal remedies A payee may bring an action against a drawee bank when there has been (i) presentment (ii) dishonor of presentment. Presentment is a demand for payment. Dishonor of presentment occurs when the drawee bank refuses to make a payment on the draft. Next, Carlos can try to claim under the contract obligations of the check that First Bank was not permitted to honor the check. He may claim a "not properly payable action" against First Bank and will argue that the check was improperly converted. Conversion is a remedy permitted by the courts for an indorser who was entitled to payment but did not receive the payment. Conversion is the substantial interference of one's property. However, with conversion, the indorser must have actual possession over the check. If Carlos never received the check, he does not have a proper conversion action against First Bank. It does not suffice that he only claim conversion but not actually receive the action. Carlos may try to argue unjust enrichment / restitution (to disgorge ill-gotten gains) against Debbie for maintaining the 75 percent that was for Carlos under contract theories of remedies.
