Business Law
Chapter 14: Negotiable
Instruments, Securities and
Secured Transactions
What Are Negotiable
Instruments?
• What we today call “negotiable
instruments” were once known under
the more general category of
“commercial paper.”
• Negotiable Instrument: An
unconditional promise or order to pay a
fixed amount of money, with or without
interest.
• Examples of negotiable instruments
include drafts and notes.
Drafts
• Drafts are negotiable instruments that
order payment to be made.
Notes
• Notes are instruments that promise
payment in the future.
Cash versus Negotiable
Instruments
• Currency is designed to be anonymous
and to pass freely from person to
person.
• Negotiable instruments, on the other
hand, can be converted into cash at
some point.
• Negotiable instruments are both more
secure and more easily regulated than
the use of cash.
Negotiable Instruments Are
Governed By The UCC
• The Uniform Commercial Code also
governs negotiable instruments under
Article 3.
What Makes a Document
Negotiable?
• UCC §3-104 explains that a document
becomes negotiable when it contains an
unconditional promise to pay money
and is payable to a bearer or payable
on demand.
Organization of Article 3
• Article 3 is divided into subparts that
deal with a broad spectrum of
negotiable instruments.
Part 1, Article 3
• Article 3 only applies to instruments that
are payable to the bearer or to order at
the time that they are issued.
Identifying Parties to be Paid
• Article 3 provides that the means for
identifying the party to be paid must
come from the language of the
document and the intent of the signor.
Holder in Due Course
• The Holder in Due Course Rule grants
complete and legal title to an instrument
even when there are outstanding claims
against it.
• It protects buyers who act in good faith.
Warranties
• Article 3 provides specific warranties
including:
• That the signatures on the instrument
are authentic and authorized
• That the instrument has not been
altered
• That the person who transferred the
instrument has no knowledge of an
insolvency proceeding concerning the
transaction
Accord and Satisfaction
• Article 3-311 provides that when an
instrument contains a conspicuous
statement that the instrument was
tendered as payment in full, the debt is
discharged and no further actions are
warranted.
Negotiable Instruments and
Securities
• Securities and negotiable instruments
are sometimes confused with one
another.
• A security is a share or ownership
interest in a company.
• A negotiable instrument promises
payment; a security is evidence of
company ownership.
What Qualifies as a Security?
• A security is defined as a share in a
corporation or an obligation by an
issuing company.
Securities and Federal Law
• Securities law is controlled not only by
state law, through the Uniform
Commercial Code, but also through
various federal statutes.
Federal Laws that Apply to
Securities
• The first of a series of federal legislative
initiatives aimed at the securities field
was the Securities Act of 1933.
• The Securities Act was quickly followed
by the Securities Exchange Act of 1934
which authorized the creation of the
Securities and Exchange Commission.
The Securities and Exchange
Commission
• The Securities and Exchange
Commission (SEC) has been a potent
force in the securities field since its
inception.
• It polices stock exchanges, brokers,
investment advisors, financial
institutions and publicly-traded
companies.
Registration with the SEC
• One way of ensuring that investors
receive accurate information is the
SEC’s requirement that all securities
sold in the United States must be
registered.
Viewing Registration
Information
• The SEC maintains all of this
information in a public-access database
called EDGAR. This database can be
accessed directly from the SEC’s web
page at <http://www.sec.gov>
Securities and State Law
(The UCC)
• Article 8 of the Uniform Commercial
Code governs securities.
Provisions of Article 8
of the UCC
• Other features in Article 8 include a
provision making the Statute of Frauds
inapplicable to securities agreements.
• The Article is comprehensive in its
coverage of securities and should
always be referred to whenever a
securities question arises.
Stock
• Stock represents ownership interest in
companies.
Common Stock
• Common stock is the stock that a
company issues in order to raise capital.
• This stock is sold on stock exchanges
around the world.
Preferred Stock
• Preferred stock is a class of stock that
entitles the person who possesses it
with priority when it comes to paying
dividends.
Article 9
• Article 9 of the UCC concerns secured
transactions.
• A secured transaction is any promise to
pay on a loan that is guaranteed by
some form of collateral.
Care and Maintenance of the
Collateral
• Other rules enforced under Article 9
include the requirement to care for the
collateral.
• Article 9-207 requires the party in
possession of collateral to use
reasonable care in its custody and
preservation.
Priority in Paying Claims
• Priority refers to the order in which
claims will be paid.
• Article 9 creates rules for priority of
claims.
UCC Financing Statements
• Article 9 also provides that proof of a
secured transaction in property must be
filed in order to substantiate the claim.
• These documents are often referred to
as “UCC Financing Statements” and
can often be located in the local
courthouse.