California Uniform Commercial Code (2010) Negotiable Negotiable instruments instruments are written written orders or unconditiona unconditionall promises promises to pay a fixed sum of money on demand or at a certain time. Promissory notes, bills of exchange, checks, drafts, and certificates of deposit are all examples of negotiable instruments. Negotiable instruments may be transferred from one person to another, who is known as a holder in due course. Upon transfer, also called negotiation of the instrument, the holder in due course obtains full legal title to the instrument. Negotiable instruments may be transferred by delivery or by endorsement and delivery. d elivery. One type of negotiable instrument, called a promissory note, involves only two parties, the maker of the note and the payee, or the party to whom the note is payable. With a promissory note, the maker promises to pay a certain amount to the payee. Another type of negotiable instrument, called a bill of exchange, involves three parties. The party who drafts the bill of exchange is known as the drawer. The party who is called on to make payment is known as the drawee, and the party to whom payment is to be made is known as the payee. A check is an example of a bill of exchange, where the individual or business writing the check is the drawer, the bank is the drawee, and the person or business to whom the check is made out is the payee.
To be valid a negotiable instrument must meet four requirements. First, it must be in writi writing ng and and signe signed d by the the make makerr or dra drawee. wee. Seco Second nd,, it must must cont contai ain n an unconditional promise (promissory note) or order (bill of exchange) to pay a certain sum sum of mone moneyy and and no othe otherr prom promis isee exce except pt as auth author oriz ized ed by the the Uniform Commercial Code (UCC). Third, it must be payable on demand or at a definite time. Finally, it must be payable either to order or to bearer. The laws governing negotiable instruments are spelled out in Article 3 of the UCC. Modeled after the Negotiable Instruments Law, Article 3 has been adopted as law by all 50 states and the District of Columbia. It spells out the basic requirements for valid negotiable instruments and covers such matters as the rights of the holder, types of endorsement, warranties given to subsequent holders, forgeries, dating, and alterations. A negotiable instrument is said to be dishonored when, upon presentation, payment or acceptance has been refused. To qualify as a holder in due course, an individual or business busi ness must hav havee tak taken en the negotiable negotiable instrument instrument bef before ore it was overdue overdue and without notice that it had been previously dishonored, if such was the case. The negotiable instrument must also be complete and regular upon its face; that is, all of thee ne th nece cess ssar ary y in info form rmat atio ion n mu must st be pr pres esen ent. t. Th Thee ho hold lder er mu must st al also so ta take ke th thee instrument in good faith and for value. At the time it was negotiated, the holder in due course must have had no notice of an infirmity in the instrument or a defect in the title of the person negotiating it. If these conditions are met, then the holder in due course generally holds the instrument instrument free from any defect of title of prior parties involved with the instrument. The holder in
1
due course may enforce payment of the instrument for the full amount against all parties liable thereon, free from any defenses available to prior parties among themselves. themselves. Nego Negoti tiab able le inst instru rume ment ntss may may be endor endorsed sed in vari various ous ways ways, and some negotiable instruments do not require any endorsement. If a negotiable instrument is a bearer instrument, then it may be negotiated by simply delivering it from one person to another with with no endors endorseme ement nt requir required. ed. Such Such negotia negotiable ble instru instrumen ments ts typic typicall ally y have have a blank blank endorsement consisting of a person's name only. If the negotiable instrument is an order instrument, then the payee must first endorse it and deliver it before negotiation is complete. For example, if the instrument says, "Pay to the order of Jane Smith," then it is an order instrument and Jane Smith must endorse it and then deliver it to the payer or drawee. Endo Endors rsem emen ents ts such such as "Pay "Pay to the the orde orderr of Jane Jane Smit Smith" h" are are know known n as spec specia iall endorsements and have the effect of making the instrument an order instrument rather than than a bearer bearer instr instrume ument. nt. Restri Restricti ctive ve endorse endorsemen ments ts ("Pay ("Pay to Jane Jane Smith Smith only") only") and qualified endorsements ("Pay without recourse to the order of Jane Smith") also have the effe effect ct of requ requir irin ing g the the paye payeee to endo endors rsee the the nego negoti tiab able le inst instru rume ment nt.. Qual Qualif ifie ied d endorsements also affect the nature of implied warranties associated with end orsement. Under the UCC, an unqualified endorser who receives payment or consideration for a negotiable instrument provides a series of implied warranties to the transferee and any subsequent holder in due course. An unqualified endorser warranties that he or she has good title to the instrument or represents a person with title, and that the transfer is otherw otherwise ise right rightful ful.. The endors endorser er also also warran warrantie tiess that that all signat signature uress are genuin genuinee or authorized, that the instrument has not been materially altered, that no defense of any prior party is good against the endorser, and that the endorser has no knowledge of any insolvency proceeding involving the payer. Other issues concerning negotiable instruments are also covered in Article 3 of the UCC. In the case of a forgery, the negotiable instrument becomes inoperative. Antedated or past-dated instruments are not invalid, provided the dating was not done for fraudulent or illegal purposes. Negotiable instruments that have been materially altered without the permission of all parties involved are void. But a holder in due course who is not party to the material alteration can enforce payment according to the instrument's original terms. Also covered in Article 3 are interpretations of contradictions that may appear from time to time in negotiable instrument
2
