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Chapter 15: Negotiable Instruments (Requirements for Negotiability…
Chapter 15: Negotiable Instruments
Commercial Paper
A substitute for money
a loan for money
Types of Negotiable Instruments
Note (promissory note) is a promise to pay money
Draft is an order directing someone else to pay money for you
Drawer: issues a draft
Drawee: pays a draft
Negotiability
to work as a substitute for money, commercial paper must be freely transferable in the marketplace. in the other words, it must be negotiable
The possessor of non-negotiable commercial paper has the same rights-no more, no less- as the person who made the original contract
Requirements for Negotiability
contain an unconditional promise or drawer
state a definite amount of money
Be signed by the maker or drawer
be payable on demand or at a definite time
Be in Writing
be payable to order or to bearer
Interpretation of Ambiguities
When terms contradict, three rules apply:
Handwritten terms prevail over typewritten terms
typed terms prevail over printed terms
Words take precedence over numbers
Negotiation
Negotiation means that an instrument has been transferred to the holder by someone other than the issuer
order paper must be indorsed and then delivered to the transferee
bearer paper must simply be delivered to the transferee; no indorsement is required
Indorsement
an indorsement is the signature or the payee
Holder in Due Course
A holder in due course has an automatic right to receive payment for a negotiable payment
Requirements for holder in Due Course
under 3-302 of the UCC, a holder in due coursed is a holder who have given value for the instrument, in good faith, without notice of outstanding claims or other defects.
Notice of Outstanding Claims or other Defects
the instrument is altered, forged, or incomplete
the holder has noticed of certain claims of disputes
the instrument is dishonored
the instrument is overdue
Defense Against a Holder in Due Course
An issuer of a negotiable instrument is not required to pay in certain situations involving:
Alteration Duress
Mental Incapacity
Minority
Illegality
Bankruptcy
Fraud in the execution
Forgery
Consumer Exception
A consumer credit contract is one in which the seller is also the lender
In such cases, the Federal Trade Commission requires a specifically-worded notice to be included on the contract, making it non-negotiable