Blank Promissory Note - PowerPoint

							    Commercial Paper

The law of negotiable instruments
         UCC Article 3
Types of Negotiable Instruments
• Promissory Note: A promise in writing to
  pay a sum of money.
• Draft: An order addressed by one person to
  another, ordering the person to whom it is
  addressed to pay a sum of money to a third
  party       Check – Drawee is a bank
                   Parties
• Note: Two party document
  – Maker – One who promises to pay
  – Payee - One to be paid
• Draft
    Drawer – One giving the order to pay
    Drawee - One who is directed to pay
    Payee - One to be paid
                Negotiability
• In writing
• Signed
• Payable at fixed or determinable time or on
  demand
• Payable to order or bearer
• Unconditional promise or order
• To pay a sum certain
• Payable in money
               Time for Payment
• On demand:
   – If stated in Instrument
   – No time for payment is stated
Acceleration clause is permitted
Postdating does not affect negotiability
           Time for Payment
• Determinable future time
  – “on or before a stated date”
  – Fixed period after date
    Payable to Order or Bearer
• Exception : If a check meets all other
  requirements of negotiability it will
  remain negotiable even if the words
  “order of” or “bearer” are missing
             Unconditional
• May make reference to another agreement

• May limit payment to a particular fund or
  source. (Revised Article 3)
           Sum Certain
     (Fixed amount of Money)
• Minimum amount to be paid to holder must
  be specified.

• May call for the payment of interest
               Negotiation

Order Paper
  Endorsement and Delivery


Bearer Paper
     Delivery alone
Imposter and Fictitious Payee
           Rules
•Imposter Rule: Forged payee endorsement
when maker/drawer has been induced by
imposter to issue note/draft is effective for
negotiation.


Fictitious Payee Rule: A forged
endorsement is effective for negotiation
when maker/drawer has been induced by
dishonest employee to issue note/draft.
        Types of Endorsements
• Blank
  – Signature only
  – Names no endorsee


Instrument becomes bearer paper
Endorser guarantees payment
Blank Indorsement

       Jane Doe
       Types of Endorsements
• Special
  – Endorser specifically names the transferee to
    whom the instrument is payable.

  Only transferee can negotiate instrument further
  Instrument is order paper
  Payment guaranteed by endorser
Special Indorsement

       Pay to the order of
       Bill Smith
       Jane Doe
        Types of Endorsements
• Qualified
  – Blank endorsement
  – “Without Recourse added

  Endorser does not guarantee payment in event of default
  Warranty liability still applies
Qualified Indorsement

         Without Recourse
         Without Warranty
         Jane Doe
       Types of Endorsements
    •Restrictive
       –Attempt to restrict further negotiation
       General Rule: Endorsement is Not
       effective / Once instrument is negotiable
       no endorsement can prevent further
       negotiation
Exception: “For Deposit Only / “For Collection”
Only bank can become holder
Restrictive Indorsement

  For Deposit Only
  Jane Doe
         Holder in Due Course
• Holder: Possession of Instrument with all
  necessary endorsements.
• Holder in Due Course Must Take Instrument
  – In good faith
  – For value
  – Without notice of:
     • Overdue        Defects Dishonor      Defenses
     • Altered or unauthorized signatures
        Holder in Due Course
• Holder in Due Course :

• Takes instrument free of personal defenses

• Subject to universal (real) defenses
          Personal Defenses
• Ordinary contract defenses
• Incapacity other than minority and
  adjudicated incompetents
• Fraud in the inducement
• Unauthorized completion
• Theft, when instrument is bearer paper
             Real Defenses
• Fraud in the execution
• Forgery
• Material Alteration
• Incapacity of a minor or adjudicated
  incompetent
• Illegality or Duress that renders instrument
  void
• Bankruptcy
             Warranty Liability

 •Implied liability whenever instrument is
 negotiated for value

Bearer Paper : Warranties extend only to immediate
transferee


Order paper : Endorser warrants to all subsequent
holders
                Warranties
• All signatures are genuine
• Good title (transferor is entitled to enforce
  the instrument
• Instrument has not been materially altered
• Transferee has no knowledge of insolvency
  proceedings against any part to instrument
• No defense of any party is good against
  transferee
              Shelter Rule
• One who takes from a Holder in Due
  Course or traces possession back to a
  Holder in Due Course takes with the rights
  of a Holder in Due Course even if they do
  not qualify as a Holder in Due Course.