Negotiable Instruments

Negotiable Instruments & Docs of Title Elements Required for a Negotiable Instrument 1. In Writing 2. Unconditional Promise to Pay 3. Sum Certain 4. Definite Time 5. Payable to Order of/Bearer 6. Signed by the Maker (note)/Drawer (draft) 7. Not “subject to” another agreement Negotiability Rules • All endorsers of an instrument have secondary liability to later endorsers of the instrument • Indorsements alone cannot permanently destroy negotiability (can convert to order/bearer paper with a special indorsement) • Qualified Endorsement = “without recourse” • Restrictive Endorsement = “for deposit only”, “for collection only”, etc… Holder in Due Course (HDC) 1. Must be holder of the instrument 2. Instrument must be negotiable 3. VFW I. Value is given II. Good Faith III. Without notice of dishonor, claims, overdue, or defenses • • •

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Shelter Provision: Non-HDC has all rights of a HDC if he can show that some transferor in her/his chain of ownership was an HDC Partial Value Example: A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank  endorsement for $4,000. King steals the note from Bane and sells it to Ott who promises to  pay King $4,500. After paying King $3,000, Ott learns that King stole the note. Ott makes no  further payment to King. Ott is a HDC to the extent of $3,333. ○ (3,000/4,500)*(5,000) ○ Ordinary holder to remainder due (no HDC status after learning of fraud)

A holder in due course generally takes a negotiable instrument free from personal, but not real, defenses. ○ Personal: Breach of Contract, Absence of consideration, Fraud in the Inducement (trick someone into paying $10K for a $5 fake painting), Non-delivery of instrument, unauthorized instrument completion, payment before maturity, discharge (other than bankruptcy/insolvency), nonperformance of condition precedent ○ Real: Fraud in the Factum (affects validity of instrument), discharge in an insolvency proceeding, and incapacity (infancy)

Negotiable Instruments & Docs of Title

Notice of Dishonor: Must be given within 3 days of default on payment of a note Documents of Title: “duly negotiated” = PRESENT value (can’t pay for antecedent debts), Without notice of defense or claim, Good Faith Novation: Substitution by agreement of a new contract for an old one, with the rights under the old one being terminated. Releases original party from liability. Substituted Contract: Different contract between the same parties that supersedes and replaces the old contract.