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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
Chapter 24

The Function and Creation of Negotiable Instruments

1 articles 3 and 4 of the ucc
§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.
2 the function of instruments
§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.
3 types of negotiable instruments
§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).
types of negotiable instruments
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).
4 requirements for negotiability
§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).
5 factors not affecting negotiability
§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.
5 factors not affecting negotiability1
§5: Factors Not Affecting Negotiability
  • Handwritten over typewritten or printed.
  • Words over numbers.
  • With interest = judgment rate.
  • Mention of collateral.
law on the web
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.