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General Rule Commercial paper is governed by UCC Art 3. The two basic instruments are the note and the draft. Art 3 does not apply to money. Types of Negotiable Instruments Note A Note is an affirmative promise to pay money, not just a mere IOU. The person promising to pay is the maker and the person to whom payment is promised is the payee or bearer. Draft A draft is an order to pay (a check). The drawer orders another party, the drawee, to pay money to a third person, the payee or bearer. Indorser The indorser is a person who signs a note or draft on the back. Requirements for a Negotiable Instrument (1) a writing (2) payable to order or to bearer pay to [Name] is not negotiable (3) signed by the maker or drawer any authentication, anywhere on the instrument (4) reciting a sum certain either in note or by reference to an outside source (5) making an unconditional promise, and no additional promises or order conditional promises make it a contract references to an outside source re a collateral matter ok cannot be a limitation to pay from a particular source (6) payable on demand or at a definite time, AND if instrument is silent as to time, it is still negotiable must be payable on or before a stated date OR at a fixed period after a state date (7) payable in currency includes foreign currency, but not goods

Theories of Liability Contract or Signature Liability 1. A party who signs a negotiable instrument enters into a contract whereby he promises to pay it the instrument and is liable for a failure to pay. Ex: a drawer who signs a check 2. An indorser, meaning a person who signs their name on the back of the instrument, is also liable because they promise to pay the instrument if it bounces and have notice. Exception: Signing ³Without Recourse´ This is a term of art representing a disclaimer of signature liability which passes title only

Warranty or Transfer Liability Any transferor who sells a defective negotiable instrument is liable for breach of warranty to: 1. Ex: ³pay to A.´ The indorsee must sign in order for the instrument to be further negotiated. it is duly negotiated by delivery of the instrument to that payee. that they are passing good title to the instrument 2. that the instrument is enforceable. Blank A blank indorsement is one that does not name a specific indorsee and it may be negotiated by delivery alone 3. /s/ B´ 2. Types of Indorsements 1. /s/ A´ . that the instrument has not been materially altered or tampered with 4. Special A special indorsement is one that names a particular person as ³indorsee. Instrument Payable to Order When the instrument is payable to the order of a specific payee. they cannot be liable Warranties Made by Transferor A transferor makes the following warranties in selling a negotiable instrument: 1. Instrument Payable to Bearer If the instrument is payable to bearer. the immediate transferee from the transferor if the transferor did not indorse the instrument If the transferor is a donor. indorsement is not required for due negotiation. that all signatures are genuine and authorized 3. If the instrument is properly transferred. Restrictive A restrictive indorsement contains a condition Ex: ³for deposit only. any party who is in possession of an instrument the transferor indorsed 2. The indorsement must be authorized to be valid. Any further negotiation requires that the payee indorse the instrument and deliver it to the transferee. meaning there is no defense or claim good against them 5. the transferee is a holder and may be eligible for holder in due course status. that he has no knowledge of any bankruptcy or insolvency action against the maker or drawer Due Negotiation General Rule Due negotiation means that there has been a proper transfer of the instrument.

Holders in Due Course General Rule Where the instrument is negotiable and properly transferred and therefore duly negotiated. performance 2. overdue: notice that the principal is overdue (but interest overdue is ok) or takes after a demand has been made for payment 2. another negotiable instrument Note that value is different from consideration. actual notice that a fiduciary negotiated the instrument in breach of fiduciary duty The notice requirement is an objective test. b. empty head Taking ³Without Notice´ Holder must acquire instrument without notice that it is: (knew or had reason to know) 1. allowing the transferee to step into the shoes of a holder in due course. Taking ³For Value´ A holder must give value for the instrument. AND (3) without notice that is overdue. Sometimes referred to as the rule of the pure heart. Exceptions: . which may be: 1. taking the instrument as payment for an antecedent debt 4. The Shelter Rule A transferee acquires whatever rights the transferor had. has been dishonored. Consideration can be a mere promise. This is a subjective test. or is subject to any defense or claim The holder in due course takes the instrument free from claims and personal defenses and is only subject to any real defenses. c. notice from the appearance of the instrument (stamped PAID or VOID). meaning honesty in fact. money 3. notice that the obligation of any party is voidable. which is a contract principle. Thus. subject to any defense or claim a. a transferee may qualify for holder in due course status if he takes the instrument: (1) for value. This allows a donee to qualify as a holder in due course. (2) in good faith. the transferee takes shelter in the status of the transferor. meaning it asks whether the holder knew or had reason to know of the problem with the instrument. not a reasonable person analysis. OR 3. notice of a competing claim (they knew it was lost or stolen) d. despite otherwise clearly failing to meet the requirements for due course holding. Taking in ³Good Faith´ A holder must take the instrument in good faith. has been dishonored.

estoppels 5. Incapacity 6. Fraud In the Factum this is a life about the instrument itself rather than facts surrounding the making of the instrument (told they are signing a different type of document) 4. unconscionability 3. waiver 4. Personal Defenses Asserted on a Negotiable Instrument A holder in due course takes the instrument free from the following personal defenses: 1. Illegality 7. a prior holder with notice of defenses or claims 2.1. Material Alteration this is a change in the terms of the instrument and a negligent maker is estopped from this defense 2. fraud in the inducement Real Defenses Asserted on a Negotiable Instrument A holder in due course takes the instrument subject to the following real defenses: MAD FIFI4 1. a party to fraud or illegality concerning the instrument Claims and Defenses on Negotiable Instruments General Rule The maker or drawer of an instrument can successfully refuse to pay a transferee of the instrument if they have a valid defense against that transferee. lack of consideration 2. A holder in due course takes the instrument free of personal defenses and claims of superior ownership but is still subject to real defenses. Duress 3. Infancy 5. Insolvency . An ordinary holder of a negotiable instrument is subject to any defenses or claims to the instrument that the maker or drawer may have.