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Chapter 24 The Function and Creation of Negotiable Instruments

Chapter 24 The Function and Creation of Negotiable Instruments . §1: Articles 3 and 4 of the UCC. A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money.

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Chapter 24 The Function and Creation of Negotiable Instruments

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  1. Chapter 24 The Function and Creation of Negotiable Instruments

  2. §1: Articles 3 and 4 of the UCC • A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. • History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks. • Today, UCC Article 3.

  3. §2: The Function of Instruments • To function as a substitute for money or credit device. • In order for an instrument to operate practically, it has to be easily transferable. • Laws of assignment did not allow for ease of transfer because the assignee was always subject to the defenses that could be used against the assignor. • Article 3 provided that some defenses could not be used against certain assignees.

  4. §3: Types of Negotiable Instruments • Drafts and checks are 3 party instruments: Drawer, Drawee and Payee. • Checks (cashier’s, teller’s and traveler’s) are drafts on a bank. • Trade acceptances seller is drawer and payee. • Case 24.1:Flatiron Linen v. First American State Bank (2001).

  5. Types of Negotiable Instruments • Promissory Notes are two party instruments: • Maker (Promisor) and • Bearer (Promisee). • Certificates of deposit (CDs): two party instruments. • Case 24.2:U.S. v. Durbin (1999).

  6. §4: Requirements for Negotiability • Writing signed by the maker or the drawer. • Unconditional promise or order to pay a fixed amount of money. • Payable on demand or at a definite time. • Acceleration and Extension clauses. • Be payable to order or to bearer, unless it is a check. • Case 24.3:Barclay’s Bank v. Johnson (1998).

  7. §5: Factors Not Affecting Negotiability • Omission of date. • Postdating or antedating. • No place for payment: address or Drawee or maker or, if none, place of business or, if none, residence.

  8. §5: Factors Not Affecting Negotiability • Handwritten over typewritten or printed. • Words over numbers. • With interest = judgment rate. • Mention of collateral.

  9. Law on the Web • NCCUSL on final drafts of new UCC Articles 3 and 4. • The UCC at Cornell U. • Legal Research Exercises on the Web.

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