978-0134004006 Chapter 22 Lecture Note

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170

“The great object of the law is to encourage commerce.”

Judge Chambre

I. Teacher to Teacher Dialogue

their part. If students understand that this material is frustrating to all, yet undeniably essential to

the conduct of both personal and business affairs, then you will find that they are more motivated

to learn the essentials introduced in this section.

Another teaching tool I use is the check process as the focal illustration throughout the entire

substitute for money, extension of credit, and recordkeeping. Like so many areas of specialized

human endeavors, this often sounds strange and unreasonably complex at first, but they will

hopefully develop an appreciation for the actual scope of commercial transactions carried on with

negotiable instruments.

recordkeeping, and extension of credit. Negotiable instruments are important money substitutes,

and, as such, it is critical that the elements of negotiability be identified and in place before these

documents are passed to third parties.

Another problematic misconception held by first-time students of negotiable instruments is

CREATION OF NEGIOTIABLE

INSTRUMENTS

Creation of Negotiable Instruments

the last element listed: “Payable to order of bearer.” These are the two methods of negotiable

transfer allowed by Article 3. These words provide your first road signs about which direction

this instrument may take on its travels through the hands of third parties. Remember it is only a

clue to the first step. Subsequent steps in the negotiation process may convert the instrument from

II. Chapter Objectives

1. Distinguish between negotiable and nonnegotiable instruments.

2. Describe drafts and checks and identify the parties to these instruments.

instruments.

III. Key Question Checklist

 Does the common law or UCC apply to your document?

 How will it be classified under the UCC?

 Are the elements required by the UCC in place?

1. In writing?

IV. Text Materials

Negotiable instruments, also called commercial paper, include checks and promissory notes.

Negotiable Instruments

Article 3 of the UCC establishes the standard requirements for a negotiable instrument, which are

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Functions of a Negotiable Instruments – Certain forms of negotiable instruments serve as a

Contemporary Environment: Revised Article 3 (Negotiable Instruments) of the UCC

Originally merchants in the Middle Ages developed their own set of rules governing commerce

Types of Negotiable Instruments

There are four kinds of negotiable instruments: drafts, checks, promissory notes, and certificates

of deposit.

Draft – Drafts are three-party instruments by which a drawer orders a drawee to make a payment

to a payee. The drawee/acceptor must be obligated to pay the drawer money and should indicate

acceptance of the order by writing “Accepted,” accompanied by their name and the date on the

Trade Acceptance – This is a sight draft arising when credit is extended with the sale of goods.

Check – Checks are three-party instruments like drafts that are drawn on specific financial

Promissory Note – Notes are unconditional written promises by a party, the maker, to pay

money to another, the payee. They may be in the form of either time or demand notes, and may

Certificate of Deposit – This instrument is created by a depositor (payee) depositing money with

Creating a Negotiable Instrument

A negotiable instrument must be in writing and be signed by the maker or drawer, offering an

Writing – Negotiable instruments must be in writing that is permanent and portable.

including signatures of agents.

Creation of Negotiable Instruments

signed by authorized agents.

Unconditional Promise or Order to Pay

The instrument must contain either an unconditional promise or order to pay.

a payee.

Promise to Pay – Notes must include the maker’s unconditional promise to pay. CDs do not

require an express promise to pay.

Critical Legal Thinking – The UCC is using the term negotiable instrument to represent a

Fixed Amount of Money

Payable in Money – Negotiable instruments must be paid in currency. Instruments payable in

other forms like gold or silver are not negotiable.

Variable Interest Rate Loan – This type of loan ties interest rates to a set measure, e.g., the

Not Require Any Undertaking in Addition to the Payment of Money – Negotiable

Payable on Demand or at a Definite Time

Payable on Demand – Demand instruments are created by either specific language or by silence

as to when payment is due.

Payable at a Definite Time – Time instruments state that the instrument is payable on or before

Case 22.1 Negotiable Instrument: Las Vegas Sands, LLC, dba Venetian Resort Hotel Casino v.

Nehme

632 F.3d 526, 2011 U.S. App. Lexis 492 (2011), United States Court of Appeals for the Ninth

Circuit

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Issue: Is the Venetian’s casino marker signed by Nehme a negotiable instrument under the

Nevada Uniform Commercial Code?

Decision: Yes, the marker is a negotiable instrument and a check because it provides a

mechanism for payment of $500,000 from Bank of America to the order of the Venetian, is

instrument under Nevada law.

Ethics Questions: According to UCC 3-104(a), a negotiable instrument must, (1) Be in writing,

(2) Be signed by the maker or drawer, (3) Be an unconditional promise or order to pay, (4) State a

fixed amount of money, (5) Not require any undertaking in addition to the payment of money, (6)

Be payable on demand or at a definite time, and (7) Be payable to order or to bearer. It can be

Payment, Acceleration, and Extension Clauses – These types of clauses are frequently found in

promissory notes and do not affect their negotiability.

Critical Legal Thinking – Even if an instrument is not defined as a negotiable instrument

Nonnegotiable Contracts

Any promises or orders to pay that do not meet the requirements are considered nonnegotiable

contracts and are not subject to the provisions of the UCC and, along with promises or orders that

International Law: Negotiable Instruments Payable in Foreign Currency

In South Korea, the UCC expressly provides that an instrument may state that it is payable in

foreign currency [UCC 3-107].

V. Key Terms and Concepts

of an event.

 Article 3 of the UCC—A model code that establishes rules for the creation of, transfer of,

enforcement of, and liability on negotiable instruments.

 Bearer—The person in possession of the instrument is called the bearer.

 Bearer instrument—A bearer instrument is payable to anyone in physical possession of the

Creation of Negotiable Instruments

 Collateral—Security against repayment of the note that lenders sometimes require; can be a

car, a house, or other property.

 Collateral note—Notes that are secured by personal property are called collateral notes.

 Conditional—A promise or an order that is conditional on another promise or event is not

person who held the instrument.

 Draft—A three-party instrument that is an unconditional written order by one party that

orders the second party to pay money to a third party.

acceptor of a draft.

 Drawer of a check—The checking account holder and writer of the check.

 Drawer of a draft—The party who writes the order for a draft.

 Fixed amount requirement—The fixed amount requirement ensures that the value of the

instrument can be determined with certainty.

 Holder in due course—Holder in due course (HDC) takes the instrument free of many

defenses that can be asserted against the original payee.

 Money—A “medium of exchange authorized or adopted by a domestic or foreign

government.”

 Mortgage note—Notes that are secured by real estate are called mortgage notes.

 Negotiable instrument—A special form of contract that satisfies the requirements established

instruments to subsequent transferees.

 Nonnegotiable contract—Fails to meet the requirements of a negotiable instrument and,

 Order instrument—An instrument is an order instrument if it is payable (1) to the order of an

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demand or at a definite time.

 Payable in foreign currency—The UCC expressly provides that an instrument may state that

 Payable in money—UCC 3-104(a) provides that the fixed amount of a negotiable instrument

must be payable in money.

demand or at a definite time.

 Payable to bearer—The UCC requires that negotiable instruments be either payable to order

or payable to bearer [UCC 3-104(a)(1)].

 Payable to order—The UCC requires that negotiable instruments be either payable to order or

payable to bearer [UCC 3-104(a)(1)].

 Payee of a CD—The depositor (lender).

to be easily transported between areas.

 Prepayment clause—A clause in an instrument that permits the maker to pay the amount due

prior to the date of the instrument.

 Promise to pay—A maker’s (borrower’s) unconditional and affirmative undertaking to repay

a debt to a payee (lender).

the maker or drawer.

 Revised Article 3—A comprehensive revision of the UCC law of negotiable instruments that

reflects modern commercial practices.

 Sight draft—A draft payable on sight. Also called a demand draft.

 Signature—The UCC broadly defines signature as any symbol executed or adopted by a party

as his or her signature.

 Small CD—CDs under $100,000 are commonly referred to as small CDs.

 Substitute for money—Certain forms of negotiable instruments—such as checks—serve as

substitutes for money.

 Time draft—A draft payable at a designated future date.

Creation of Negotiable Instruments

drawee.

 Unconditional—Promises to pay and orders to pay must be unconditional in order for them to

be negotiable.

 Unconditional order to pay—A negotiable instrument must contain either an unconditional

promise to pay (note or CD) or an unconditional order to pay (draft or check).

check).

 Variable interest rate loan—These loans tie the interest rate to some set measure, such as a

major bank’s prime rate or another well-known rate.