California Uniform Commercial Code (2010) Negotiable instruments are written orders or unconditional promises to pay a fixed sumof money on demand or at a certain time. Promissory notes, bills of exchange, checks,drafts, and certificates of deposit are all examples of negotiable instruments. Negotiableinstruments may be transferred from one person to another, who is known as a holder indue course. Upon transfer, also called negotiation of the instrument, the holder in duecourse obtains full legal title to the instrument. Negotiable instruments may be transferred by delivery or by endorsement and delivery.
One type of negotiable instrument, called a promissory note, involves only twoparties, the maker of the note and the payee, or the party to whom the note ispayable.
With a promissory note, the maker promises to pay a certain amount to the payee. Another type of negotiable instrument, called a bill of exchange, involves three parties. The party who drafts the bill of exchange is known as the drawer. The party whois called on to make payment is known as the drawee, and the party to whom payment isto be made is known as the payee. A check is an example of a bill of exchange, where theindividual or business writing the check is the drawer, the bank is the drawee, and the person or business to whom the check is made out is the payee.To be valid a negotiable instrument must meet four requirements
. First, it
must be inwriting and signed
by the maker or drawee. Second, it must contain anunconditional promise (promissory note) or order (bill of exchange) to pay
a certain sum of money
payable on demand
or at a definite time.Finally, it must be
payable either to order or to bearer.
The laws governing negotiable instruments are spelled out in Article 3 of the UCC.Modeled after the Negotiable Instruments Law, Article 3 has been adopted as law by all50 states and the District of Columbia. It spells out the basic requirements for validnegotiable instruments and covers such matters as the rights of the holder, types of endorsement,warranties given to subsequent holders, forgeries, dating, and alterations.
A negotiable instrument is said to be dishonored when, upon presentation, payment or acceptance has been refused.
To qualify as a holder in due course, an individual orbusiness must have taken the negotiable instrument before it was overdue andwithout notice that it had been previously dishonored, if such was the case. Thenegotiable instrument must also be complete and regular upon its face; that is, all of the necessary information must be present. The holder must also take theinstrument in good faith and for value. At the time it was negotiated, the holder indue course must have had no notice of an infirmity in the instrument or a defect inthe title of the person negotiating it.
If these conditions are met, then the holder in due course generally holds the instrumentfree from any defect of title of prior parties involved with the instrument. The holder in1