Business Law -- week 7
Negotiable Instruments: a contract to pay money
(commercial paper)
• Checks
• Cashier’s checks
• Promissary Notes
• Certificate of Deposit
Business Law -- week 7
Two categories of Negotiable Instruments
• Notes (between 2 people)
– Promissary Note
– CD
• Drafts (3 people -- drawer, drawee, payee)
– Check
– Cashier’s check
Business Law -- week 7
Negotiable vs. Non-negotiable
– Depends on how you write it
• Pay to the order of ….
• Pay to ….
• Why is this important?
– UCC vs Common Law
– A negotiable instrument can be signed over to a
designee
Business Law -- week 7
Requirements of a negotiable instrument
– In writing
– Signed
– Unconditional
– Definite $ amount
– Payable “on demand” or “specific date”
– Pay to the order of or to bearer
Business Law -- week 7
Rules about contradictions on checks
Order of precedence:
– Words over numbers
– Handwritten over typed
– Typed over printed
Business Law -- week 7
A person who holds a “commercial paper” has
the right to be paid if:
• Its negotiable
• Its been negotiated to that person
• That person is a “holder in due course”
• The issuer cannot claim any “real defenses”
Business Law -- week 7
What is a “holder in due course” and what are
these “real defenses?”
Business Law -- week 7
A holder in due course:
• In possession of the note that has been signed over
“to the order of”
• Has given something of value for the note
• Purchased in “good faith”
• Knows of no claims against note
– Exception: Shelter Rule
Business Law -- week 7
Defenses
• Real or personal
Busiess Law -- week 7
Real Defenses
• Forgery
• Bankruptcy
• Minority
• Alteration
• Mental incapacity
• Fraud
Business Law -- week 7
Personal Defenses
• Breach
• Lack of consideration
• Prior payment
• Unauthorized completion
• Fraud
• Non-delivery
Business Law -- week 7
Summary of Negotiable Instruments
Notes are a promise between 2 parties,-- I.e.
promissary note or CD
Drafts involve a third party such as a bank -checks, cashier’s checks.
To be negotiable it must be able to be signed over
to someone else and only negotiable instruments
are covered under UCC.
Business Law -- week 7
Liability of Negotiable Instruments
Who pays ….
when you give someone a check?
if there is insufficient funds to cover the check?
if the signature has been forged?
if the amount has been altered?
if the bank teller suspects fraud
Business Law -- week 7
Who Pays:
Bank (drawee) has primary liability - may pay or
dishonor
Issuer (drawer) has secondary liability - if bank
dishonors must pay
Indorser -- liable after drawee and drawer
Accommodation Party -- a second signature on a
note equally liable to first signator
Business Law -- week 7
Who Pays:
Forgery: Bank is responsible
Imposter: Issuer/Drawer responsible
Fictitious Payee: Issuer/Drawer responsible
Employer Indorsment: Issuer/Drawer responsible
Exception: If bank suspects fraud they have a duty
to protect innocent party
Business Law -- week 7
A note is discharged …
• Payment
• Agreement
• Cancellation
• Certification by bank
• Alteration
Business Law -- week 7
Protect yourself from check fraud …
• Don’t give out Checking account # or information
• Report lost/stolen checks
• Check statements and accounts regularly
• Report irregularities immediately
• Give checks time to clear
• More at
http://www.treas.gov/usss/faq.shtml#faq14
Business Law -- week 7
What responsibility does the bank have …
• After wrongfully dishonoring a check
• For checks that come in after death of customer
• When a customer declared incompetent
•
Post-dated checks & Stale checks
• Stop payment orders
Business Law -- week 7
What responsibility does the bank have …
• Make funds available from checks deposited to customer per
EFAA time limits
• Debit -credit cards not active until requested by customer
• Must provide customers with documentation of transactions
• Must investigate suspected errors