Commercial Paper
The law of negotiable instruments
UCC Article 3
Types of Negotiable Instruments
• Promissory Note: A promise in writing to
pay a sum of money.
• Draft: An order addressed by one person to
another, ordering the person to whom it is
addressed to pay a sum of money to a third
party
Check – Drawee is a bank
Parties
• Note: Two party document
– Maker – One who promises to pay
– Payee - One to be paid
• Draft
Drawer – One giving the order to pay
Drawee - One who is directed to pay
Payee - One to be paid
Negotiability
• In writing
• Signed
• Payable at fixed or determinable time or on
demand
• Payable to order or bearer
• Unconditional promise or order
• To pay a sum certain
• Payable in money
Time for Payment
• On demand:
– If stated in Instrument
– No time for payment is stated
Acceleration clause is permitted
Postdating does not affect negotiability
Time for Payment
• Determinable future time
– “on or before a stated date”
– Fixed period after date
Payable to Order or Bearer
• Exception : If a check meets all other
requirements of negotiability it will
remain negotiable even if the words
“order of” or “bearer” are missing
Unconditional
• May make reference to another agreement
• May limit payment to a particular fund or
source. (Revised Article 3)
Sum Certain
(Fixed amount of Money)
• Minimum amount to be paid to holder must
be specified.
• May call for the payment of interest
Negotiation
Order Paper
Endorsement and Delivery
Bearer Paper
Delivery alone
Imposter and Fictitious Payee
Rules
•Imposter Rule: Forged payee endorsement
when maker/drawer has been induced by
imposter to issue note/draft is effective for
negotiation.
Fictitious Payee Rule: A forged
endorsement is effective for negotiation
when maker/drawer has been induced by
dishonest employee to issue note/draft.
Types of Endorsements
• Blank
– Signature only
– Names no endorsee
Instrument becomes bearer paper
Endorser guarantees payment
Blank Indorsement
Jane Doe
Types of Endorsements
• Special
– Endorser specifically names the transferee to
whom the instrument is payable.
Only transferee can negotiate instrument further
Instrument is order paper
Payment guaranteed by endorser
Special Indorsement
Pay to the order of
Bill Smith
Jane Doe
Types of Endorsements
• Qualified
– Blank endorsement
– “Without Recourse added
Endorser does not guarantee payment in event of default
Warranty liability still applies
Qualified Indorsement
Without Recourse
Without Warranty
Jane Doe
Types of Endorsements
•Restrictive
–Attempt to restrict further negotiation
General Rule: Endorsement is Not
effective / Once instrument is negotiable
no endorsement can prevent further
negotiation
Exception: “For Deposit Only / “For Collection”
Only bank can become holder
Restrictive Indorsement
For Deposit Only
Jane Doe
Holder in Due Course
• Holder: Possession of Instrument with all
necessary endorsements.
• Holder in Due Course Must Take Instrument
– In good faith
– For value
– Without notice of:
• Overdue
Defects Dishonor
• Altered or unauthorized signatures
Defenses
Holder in Due Course
• Holder in Due Course :
• Takes instrument free of personal defenses
• Subject to universal (real) defenses
Personal Defenses
• Ordinary contract defenses
• Incapacity other than minority and
adjudicated incompetents
• Fraud in the inducement
• Unauthorized completion
• Theft, when instrument is bearer paper
Real Defenses
•
•
•
•
Fraud in the execution
Forgery
Material Alteration
Incapacity of a minor or adjudicated
incompetent
• Illegality or Duress that renders instrument
void
• Bankruptcy
Warranty Liability
•Implied liability whenever instrument is
negotiated for value
Bearer Paper : Warranties extend only to immediate
transferee
Order paper : Endorser warrants to all subsequent
holders
Warranties
• All signatures are genuine
• Good title (transferor is entitled to enforce
the instrument
• Instrument has not been materially altered
• Transferee has no knowledge of insolvency
proceedings against any part to instrument
• No defense of any party is good against
transferee
Shelter Rule
• One who takes from a Holder in Due
Course or traces possession back to a
Holder in Due Course takes with the rights
of a Holder in Due Course even if they do
not qualify as a Holder in Due Course.