Chapter 13Negotiable Instruments

Chapter 13Negotiable Instruments

What are the requirements for an instrument to be negotiable?

What are the minimum requirements for HDC status?

What is the key to liability on a negotiable instrument?

What are the bank’s responsibilities regarding stale checks, stop payments and forged checks?

What is e-money and how is it stored?

What are the requirements for an instrument to be negotiable?

What are the minimum requirements for HDC status?

What is the key to liability on a negotiable instrument?

What are the bank’s responsibilities regarding stale checks, stop payments and forged checks?

What is e-money and how is it stored?

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Article 3Article 3

A negotiable instrument is a signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at a specified time to a specific person or bearer.

Can function as a substitute for money or an extension of credit.

A negotiable instrument is a signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at a specified time to a specific person or bearer.

Can function as a substitute for money or an extension of credit.

Types of InstrumentsTypes of Instruments

Drafts and Checks (Orders to Pay)Draft—unconditional written order that

involves three parties.• Drawer (creates the draft) who• Orders the party holding the money (the Drawee)

to pay money• To a Third Party (the Payee)

Time DraftSight Draft

Drafts and Checks (Orders to Pay)Draft—unconditional written order that

involves three parties.• Drawer (creates the draft) who• Orders the party holding the money (the Drawee)

to pay money• To a Third Party (the Payee)

Time DraftSight Draft

Types of InstrumentsTypes of Instruments

Promissory Notes and C.D.’s (Promises to Pay)Promissory Note—written promise to

pay money by Maker to Payee.C.D.—type of note. Created when party

deposits money with bank who promises to pay, with interest, on a certain date.

Promissory Notes and C.D.’s (Promises to Pay)Promissory Note—written promise to

pay money by Maker to Payee.C.D.—type of note. Created when party

deposits money with bank who promises to pay, with interest, on a certain date.

Requirements for Negotiability

Requirements for Negotiability

Must meet the following criteria:Be in WritingBe signed by the Maker or DrawerBe unconditional promise or order to payState a fixed amount of money.Be payable on demand or definite timeBe payable to order or bearer, unless a

check.

Must meet the following criteria:Be in WritingBe signed by the Maker or DrawerBe unconditional promise or order to payState a fixed amount of money.Be payable on demand or definite timeBe payable to order or bearer, unless a

check.

Transfer of InstrumentsTransfer of Instruments

By AssignmentTransferee is an Assignee

By NegotiationTransfer in which the transferee becomes

a holder• Negotiating Order Instruments• Negotiating Bearer Instruments

By AssignmentTransferee is an Assignee

By NegotiationTransfer in which the transferee becomes

a holder• Negotiating Order Instruments• Negotiating Bearer Instruments

Holder in Due Course (HDC)

Holder in Due Course (HDC)

A holder (assignee) is generally subject to the same defenses that the assignor is subject to.

A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.

A holder (assignee) is generally subject to the same defenses that the assignor is subject to.

A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.

Requirements for HDCRequirements for HDC

A Holder in Due Course must:Give value for the instrument

• Performance• Payment for preexisting debt• Irrevocable commitment

Take in Good Faith (honesty in fact)Take Without Notice (of any defect)

A Holder in Due Course must:Give value for the instrument

• Performance• Payment for preexisting debt• Irrevocable commitment

Take in Good Faith (honesty in fact)Take Without Notice (of any defect)

Signature Liability Signature Liability

Every party who signs a negotiable instrument is either primarily or secondarily liable for payment.Primary Liability (only makers and acceptors

are primarily liable)Secondary Liability (contingent liability)

• Proper and Timely Presentment• Dishonor• Proper Notice

Every party who signs a negotiable instrument is either primarily or secondarily liable for payment.Primary Liability (only makers and acceptors

are primarily liable)Secondary Liability (contingent liability)

• Proper and Timely Presentment• Dishonor• Proper Notice

Signature LiabilitySignature Liability

Accommodation PartiesSigns for the purpose of lending her name as

credit for another party. Agents’ Signatures

If authorized, can bind the principal. If unauthorized (forgery) signature is void.

Unauthorized Indorsements ImpostersFictitious Payees

Accommodation PartiesSigns for the purpose of lending her name as

credit for another party. Agents’ Signatures

If authorized, can bind the principal. If unauthorized (forgery) signature is void.

Unauthorized Indorsements ImpostersFictitious Payees

Warranty LiabilityWarranty Liability

Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment.

Transfer Warranties (if consideration)Transferor has the right to enforce the instrumentAll signatures are authentic and authorized Instrument has not been altered. Instrument is not subject to a defense or claimTransferor has no knowledge of insolvency

Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment.

Transfer Warranties (if consideration)Transferor has the right to enforce the instrumentAll signatures are authentic and authorized Instrument has not been altered. Instrument is not subject to a defense or claimTransferor has no knowledge of insolvency

Warranty LiabilityWarranty Liability

Presentment Warranties protect the person to whom the instrument is presented:Person obtaining payment has the right to

enforce the instrumentInstrument has not been alteredPerson accepting has no knowledge that

instrument is unauthorized.

Presentment Warranties protect the person to whom the instrument is presented:Person obtaining payment has the right to

enforce the instrumentInstrument has not been alteredPerson accepting has no knowledge that

instrument is unauthorized.

Defenses to LiabilityDefenses to Liability Universal (Real) Defenses to Avoid Liability by

ALL Holders, including HDCForgeryFraud in the ExecutionMaterial AlterationDischarge in Bankruptcy Infancy (Minor) IllegalityMental IncapacityExtreme Duress

Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDCForgeryFraud in the ExecutionMaterial AlterationDischarge in Bankruptcy Infancy (Minor) IllegalityMental IncapacityExtreme Duress

Defenses to LiabilityDefenses to Liability

Personal (or limited ) Defenses (only for holders, not HDC)Breach of Contract or WarrantyLack or Failure of ConsiderationFraud in the Inducement Illegality (voidable)Mental IncapacityDischarge by Payment/Non-Delivery

Personal (or limited ) Defenses (only for holders, not HDC)Breach of Contract or WarrantyLack or Failure of ConsiderationFraud in the Inducement Illegality (voidable)Mental IncapacityDischarge by Payment/Non-Delivery

Checks and Banking System

Checks and Banking System

Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee).Cashier’s Check—bank is both drawer and

drawee.Traveler’s Check—payable on demand, payable

by a financial institution, designated as a traveler’s check.

Certified Check—accepted in writing by drawee bank.

Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee).Cashier’s Check—bank is both drawer and

drawee.Traveler’s Check—payable on demand, payable

by a financial institution, designated as a traveler’s check.

Certified Check—accepted in writing by drawee bank.

Bank’s DutiesBank’s Duties

Drawee (Bank) has a legal duty to honor Drawer’s (Maker) checks. If it wrongfully dishonors a check, it is liable

for damages. Overdrafts Postdated Checks (Notice required) Stale Checks (six months) Stop-Payment Orders

Drawee (Bank) has a legal duty to honor Drawer’s (Maker) checks. If it wrongfully dishonors a check, it is liable

for damages. Overdrafts Postdated Checks (Notice required) Stale Checks (six months) Stop-Payment Orders

Bank’s DutiesBank’s Duties

Death or Incompetence of CustomerForged Drawers’ Signatures

General Rule—no legal effectCustomer Negligence—bank normally not

liable.Timely Examination of Statements by

CustomerTime Limit for Bank’s Liability

Death or Incompetence of CustomerForged Drawers’ Signatures

General Rule—no legal effectCustomer Negligence—bank normally not

liable.Timely Examination of Statements by

CustomerTime Limit for Bank’s Liability

Bank’s DutiesBank’s Duties

Forged InstrumentsBank must recredit customer’s account if

payment made on forged instrument.

Altered ChecksBank has a Duty to Accept Deposits

Availability Schedule for Deposited ChecksCollection Process (local and Federal Reserve)

Forged InstrumentsBank must recredit customer’s account if

payment made on forged instrument.

Altered ChecksBank has a Duty to Accept Deposits

Availability Schedule for Deposited ChecksCollection Process (local and Federal Reserve)

Electronic Fund TransfersElectronic Fund Transfers

EFT is a transfer of funds via the use electronic means

Types of EFT systems:Automated Teller MachinePoint of Sale (debit card)Direct Deposit and WithdrawalPay by TelephoneError Resolution and Damages

Commercial Transfers

EFT is a transfer of funds via the use electronic means

Types of EFT systems:Automated Teller MachinePoint of Sale (debit card)Direct Deposit and WithdrawalPay by TelephoneError Resolution and Damages

Commercial Transfers

E-MoneyE-Money

Stored-Value Cards (pre-paid cards for use with long distance, cellular and library copy machines)

Smart Cards—can authenticate the validity of transactions with digital signatures.Deposit InsuranceLegal Protection

Encyrption and Privacy Protection

Stored-Value Cards (pre-paid cards for use with long distance, cellular and library copy machines)

Smart Cards—can authenticate the validity of transactions with digital signatures.Deposit InsuranceLegal Protection

Encyrption and Privacy Protection

Online BankingOnline Banking

Virtual Banks (e.g., Bank of the Internet at www.bofi.com )

Uniform Money Services ActAugust 2001, NCCUSL would subject

online banking and e-money to same regulations as traditional banks.

Internet-Based Money—Paypal.com?

Virtual Banks (e.g., Bank of the Internet at www.bofi.com )

Uniform Money Services ActAugust 2001, NCCUSL would subject

online banking and e-money to same regulations as traditional banks.

Internet-Based Money—Paypal.com?