• What requirements must an
instrument meet to be negotiable?
• What are the requirements for
attaining the status of a holder in due
course (HDC)?
• What is the difference between
signature liability and warranty
liability? 
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2
• Certain defenses are valid against all
holders, including HDCs. What are
these defenses called? Name four
defenses that fall within this category.
• Certain defenses can be used against
an ordinary holder but are not effective
against an HDC. What are these
defenses called? Name four defenses
that fall within this category.
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3
• A “negotiable instrument” is a signed
writing containing an unconditional
promise to pay an exact sum of
money.
• Most negotiable instruments are
paper documents, referred to as
commercial paper.
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4
• The UCC specifies four types of
negotiable instruments:
–Drafts, Checks, Notes, and Certificates
of Deposit. 
• Can be Orders to Pay or Promises to Pay.
• Can also be demand instruments or time
instruments.
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5
• Drafts and Checks (Orders to Pay).
–Unconditional order involves three
parties: Drawer (creator of draft),
Drawee (financial institution) and
Payee.
–Most common type of draft is a bank
check.
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6
• Drafts and Checks (cont’d).
–Time Drafts and Sight Drafts.
• Time Draft: payable certain future time.
• Sight Draft: payable on sight. May be
payable on acceptance (drawee’s written
promise to pay the draft when due).
–Trade Acceptances: seller of goods is
both drawer and payee. Buyer of
goods is the drawee.
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7
• Drafts and Checks (cont’d).
–Checks.
• Three parties: Writer of the check is
drawer, the bank is drawee, and person to
whom check is made is payee.
• Checks are payable on demand.
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8
• Promissory Notes and Certificates of
Deposit (Promises to Pay).
–Promissory Notes are two party
instruments:
• Maker (Promisor) and
• Bearer (Promisee).
• Can be payable at a definite time or on
demand.
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9
• Promissory Notes and Certificates of
Deposit (cont’d).
–Certificate of Deposit: type of note
issued when a party deposits funds
with a bank, and bank promises to
repay funds with interest on certain
date.
–Bank is maker, and Depositor is Payee.
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10
• For an instrument to be negotiable, it
must:
–Be in Writing.
• Permanence.
• Portability.
–Be Signed by the Maker or Drawer.
• Signature Requirements: manual or by a
device.
• Placement of the Signature. 
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11
• Be an Unconditional Promise or
Order to Pay.
–Promise or Order.
–Unconditionality of the Promise or
Order.
• State a Fixed Amount of Money.
–Ascertainable.
–U.S. Currency.
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12
• Be Payable on Demand or at a Definite
Time.
–On Demand: “Payable at sight” or
“Payable upon presentment.”
• CASE 22.1 Roger Development, LLC v.
National City Bank (2010). Why doesn’t
the duty of good faith apply to lenders
seeking payment on demand notes?
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13
• Be Payable on Demand or at a
Definite Time (continued).
–Payable at a Definite Time: specified
date, within definite period of time,
date or time readily ascertainable. 
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14
• Be Payable on Demand or at a
Definite Time (cont’d).
–Acceleration Clause: allows holder to
demand full payment if a certain event
occurs.
–Extension Clause: allows date of
maturity to be extended into the
future.
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15
• Payable to Order or Bearer.
–Order Instruments: payable to “the
order of” an identified person, or to
“an identified person or order.”
–Bearer Instruments: the holder is the
payee.
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16
• Factors That Do Not Affect
Negotiability.
–Omission of Date.
–Postdating or Antedating.
–Handwritten Terms outweigh
typewritten and preprinted terms.
–Words outweigh figures. 
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17
• Factors That Do Not Affect
Negotiability (cont’d).
–If instrument states “with interest” but
doesn’t specify the rate, it is the
judgment rate of interest.
–Check is negotiable even if there is a
“nonnegotiable” note on it.
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18
• A negotiable instrument can be
transferred by assignment or
negotiation.
• Transfer by Assignment.
–Similar to assignments discussed in
Chapter 17. Transferree is the
assignee, rather than a holder.
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19
• Transfer by Negotiation.
–Negotiating Order Instruments:
requires both indorsement and delivery.
–Negotiating Bearer Instruments:
delivery only. Indorsement is not
necessary.
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20
• Signature with or without additional
words or comments.
• Blank Indorsements: does not specify a
particular indorsee and may consist of a
mere signature.
• Special Indorsements: contains
signature and identifies payee. 
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21
• Qualified Indorsements: indorser who
does not wish to be liable (“without
recourse”).
–Effect of Qualified Indorsements.
–Special versus Blank Indorsements.
–CASE 22.2 Hammett v. Deutsche Bank
National Co. (2010). What was the legal
effect of the blank qualified indorsement?
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22
• Restrictive Indorsements: requires
indorsee to comply with certain
instructions regarding funds.
–Conditional Indorsements.
–Indorsements for Deposit or Collection.
–Trust (Agency) Indorsements.
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23
• Miscellaneous Indorsement
Problems
–Misspelled Names. Indorsement
should generally be identical to name
on instrument.
–Alternative or Joint Payees: either may
indorse. Jointly - both must indorse..
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24
• Holder versus Holder in Due Course
(HDC).
–Holder possess an order or bearer
paper and the instrument is drawn or
indorsed to the holder.
–HDC: holder plus takes for value, takes
in good faith, and without notice of
defense to payment. 
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25
• Requirements for HDC Status.
–Taking For Value: No value if gift or
inheritance. Not the same as
consideration. Holder can take for value
by:
• Performing the instrument’s promise.
• Acquiring a security interest or other lien
in the instrument. 
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26
• Requirements for HDC Status (cont’d).
–Taking For Good Faith.
• Honesty in fact and observance of
reasonable commercial standards of fair
dealing.
• Only applies to holder, not transferor.
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27
• Requirements for HDC Status (cont’d).
–Taking Without Notice (cont’d).
• Holder takes the instrument with notice if
he knows/has reason to know:
–Instrument is overdue.
–Instrument has been dishonored.
–At least one instrument has an uncured default.
–Contains an unauthorized signature or
alteration.
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28
• Requirements for HDC Status (cont’d).
–Taking Without Notice (cont’d).
• Holder takes the instrument with notice if
he knows/has reason to know:
–Defense or claim against the instrument.
–The instrument is so irregular or incomplete
as to call into question its authenticity.
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29
• Requirements for HDC Status (cont’d).
–Taking Without Notice (cont’d).
• CASE 22.3 South Central Bank of Daviess
County v. Lynnville National Bank (2009).
What were the ‘real’ defenses the HDC
could have raised?
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30
• Requirements for HDC Status (cont’d).
–Holder Through an HDC.
• Shelter Principle: A person who is not an
HDC but who derives her title through an
HDC can acquire the rights and defenses of
an HDC. Extends benefits of HDC and
allows HDC to dispose of instrument.
• Limitations on the Shelter Principle: no
fraud, illegality, claim or defense.
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31
• Signature Liability.
–Relates to signatures on instruments.
–Signers of negotiable instruments are
potentially liable for amount stated on
instrument.
• Primary Liability: Makers/Acceptors. 
• Secondary Liability: Drawers/Indorsers.
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32
• Signature Liability.
–Primary Liability.
• Makers promise to pay the note and are
obligated to pay terms of instrument at
time of signing.
• Acceptors: drawee promises to pay an
instrument when presented for
payment.
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33
• Signature Liability (cont’d).
–Secondary Liability.
• Proper Presentment.
–Must be timely (checks w/in 30 days).
–Dishonor?
• Proper Notice.
–Manner of Notice in any Reasonable
manner.
–Notice to Indorsers.
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34
• Signature Liability (cont’d).
–Unauthorized Signatures arise in two
situations:
• Forgery: does not bind Principal but Bank
may be liable if negligent.
• Unauthorized Signature: Agent is
personally liable, but Principal is not,
unless ratified.
• Exceptions.
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35
• Signature Liability (cont’d).
–Unauthorized Signatures (cont’d).
• Exceptions.
–Ratification of Signature: principal become
liable.
–Negligence: party who substantially
contributed to forgery is liable.
–Holder in Due Course: person who forges a
check can be held liable for payment by an
HDC.
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36
• Signature Liability (cont’d).
–Special Rules for Unauthorized
Indorsements: does not bind
maker/drawer except:
• Imposter Rule: imposter indorsement will
be effective.
• Fictitious Payee Rule: payee’s indorsement
is not a forgery and an innocent holder can
hold the maker liable.
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37
• Warranty Liability.
–Transferors make certain implied
warranties regarding instruments they
negotiate.
–Warranty Liability not subject to
conditions of proper presentment,
dishonor, or notice.
–Warranties: Transfer or Presentment. 
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38
• Warranty Liability (cont’d).
–Transfer Warranties. Following transfer
warranties extend to all subsequent
holders:
• Transferor is entitled to enforce the
instrument.
• Signatures are authentic and authorized. 
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39
• Warranty Liability (cont’d).
–Transfer Warranties. Following transfer
warranties extend to all subsequent
holders:
• Instrument has not been altered.
• Instrument not subject to defense.
• Transferor has no notice of insolvency.
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40
• Warranty Liability (cont’d).
–Transfer Warranties.
• Parties to Whom Warranty Liability
Extends: Extends warranty to any holder who
takes in good faith. Without indorsement,
warranties extend only to immediate transferee.
• Recovery for Breach of Warranty: good faith
holder can sue for breach of warranty. Notice of
the claim within 30 days.
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41
• Warranty Liability (cont’d).
–Presentment Warranties: person who
presents an instrument makes the
following presentment warranties:
• No missing or unauthorized indorsements.
• Instrument has not been altered.
• Person obtaining payment has no
knowledge signature is unauthorized.
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42
• Universal (or Real) - can be used to
defeat a holder and a HDC. 
• Personal - can be used to defeat a
holder but not a HDC. 
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43
• Universal Defenses.
–Forgery of maker’s or drawer’s
signature.
• Or if an authorized agent exceeds his
authority to the amount which exceeds
his authority.
–Fraud in the Execution: the ”autograph”
situation, not fraud in the inducement. 
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44
• Universal Defenses (cont’d).
–Material Alteration: changes the contract
terms in any way. Making any changes in
the amount, date, or rate of interest is
material.
• Complete or Partial Defense: material
alteration is a complete defense against a
holder, partial defense against an HDC.

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45
• Universal Defenses (cont’d).
–Discharge in Bankruptcy.
–Minority (infancy): to the extent
allowed by state law.
–Illegality: statute must make
transaction illegal and void.
–Mental Incapacity: adjudicated by
court. 
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46
• Universal Defenses (cont’d).
–Extreme Duress: If instrument signed
under threat of immediate force or
violence.
• Personal Defenses: valid against
holders but not HDC’s.
–Breach of Contract or Warranty.
–Lack or Failure of Consideration. 
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47
• Personal Defenses (cont’d).
–Fraud in the Inducement (Ordinary
Fraud).
–Illegality: if statute provides
transaction is voidable, only a personal
defense.
–Mental Incapacity: not severe enough
to make void.
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48
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49
• Federal Limitations on the Rights of
HDC’s.
–FTC Rule 433: severely limits rights of
HDC’s in consumer credit transactions.
–Effect of the Rule: allows consumer to
assert any defense she might have
against the seller of goods or services,
against the subsequent HDC as well.
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50
• Discharge from Liability on an
instrument can occur by:
–Payment or Tender of Payment.
–Cancellation or Surrender.
–Reacquisition.
–Impairment of Recourse.
–Impairment of Collateral.
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51