Chapter 13 Negotiable Instruments

1. Chapter 13Negotiable Instruments

2. Learning Objectives • 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?

3. Article 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.

4. Types 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 Draft • Sight Draft

5. Types 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.

6. Requirements for Negotiability • Must meet the following criteria: • Be in Writing • Be signed by the Maker or Drawer • Be unconditional promise or order to pay • State a fixed amount of money. • Be payable on demand or definite time • Be payable to order or bearer, unless a check.

7. Transfer of Instruments • By Assignment • Transferee is an Assignee • By Negotiation • Transfer in which the transferee becomes a holder • Negotiating Order Instruments • Negotiating Bearer Instruments

8. 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.

9. Requirements 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)

10. 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

11. Signature Liability • Accommodation Parties • Signs 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 • Imposters • Fictitious Payees

12. Warranty 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 instrument • All signatures are authentic and authorized • Instrument has not been altered. • Instrument is not subject to a defense or claim • Transferor has no knowledge of insolvency

13. Warranty Liability • Presentment Warranties protect the person to whom the instrument is presented: • Person obtaining payment has the right to enforce the instrument • Instrument has not been altered • Person accepting has no knowledge that instrument is unauthorized.

14. Defenses to Liability • Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC • Forgery • Fraud in the Execution • Material Alteration • Discharge in Bankruptcy • Infancy (Minor) • Illegality • Mental Incapacity • Extreme Duress

15. Defenses to Liability • Personal (or limited ) Defenses (only for holders, not HDC) • Breach of Contract or Warranty • Lack or Failure of Consideration • Fraud in the Inducement • Illegality (voidable) • Mental Incapacity • Discharge by Payment/Non-Delivery

16. 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.

17. Bank’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

18. Bank’s Duties • Death or Incompetence of Customer • Forged Drawers’ Signatures • General Rule—no legal effect • Customer Negligence—bank normally not liable. • Timely Examination of Statements by Customer • Time Limit for Bank’s Liability

19. Bank’s Duties • Forged Instruments • Bank must recredit customer’s account if payment made on forged instrument. • Altered Checks • Bank has a Duty to Accept Deposits • Availability Schedule for Deposited Checks • Collection Process (local and Federal Reserve)

20. Electronic Fund Transfers • EFT is a transfer of funds via the use electronic means • Types of EFT systems: • Automated Teller Machine • Point of Sale (debit card) • Direct Deposit and Withdrawal • Pay by Telephone • Error Resolution and Damages • Commercial Transfers

21. E-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 Insurance • Legal Protection • Encyrption and Privacy Protection

22. Online Banking • Virtual Banks (e.g., Bank of the Internet at www.bofi.com ) • Uniform Money Services Act • August 2001, NCCUSL would subject online banking and e-money to same regulations as traditional banks. • Internet-Based Money—Paypal.com?