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#Gilbert Law Summaries - Negotiability

Gilbert Law Summaries Negotiability

Negotiability (1)

A. Significance of negotiability

If an instrument is not negotiable, it is a mere contract (subjects to the claims and defenses of prior parties), and HDC [holder in due course] status is impossible. [27]

B. Requirements for negotiability

To be negotiable, an instrument must meet the following requirements. [30]

1. Written instrument: a negotiable instrument must be in writing; however the writing need not be on paper. [31]

2. Signature of maker or drawer: Any mark or symbol made by the maker or drawer with the intent to authenticate the writing is sufficient. [33] a. Signature by agent or with assumed or trade name: Such signatures will also bind the maker or drawer. [34]

b. Unauthorized or forged signatures: Unauthorized signatures will not bind the purported maker, absent ratification or estoppel, but will bind the actual signer. [36]

c. Burden of establishing signatures: In most cases, a rebuttable presumption exists that the signature is valid. A defendant must specifically plead invalidity, whereupon plaintiff must prove the signature is valid. Defendant must then produce evidence of forgery, etc. or plaintiff will recover. [38]

d. Location of signature: The signature may be placed any place on the instrument as long as it is intended to authenticate the writing. [43]

3. Unconditional promise or order to pay: A promissory note must contain an unconditional promise and a draft must contain an unconditional order. The purchaser must be able to determine the terms and conditions from the four corners of the instrument. [44]

a. Implied conditions: Implied or constructive conditions are permissible. However, express conditions make an instrument non-negotiable. [45]

b. Reference to other agreements: Mere reference to a separate agreement between the same parties (e.g. "this note arises out of a contract between A. and B.") does not impair negotiability. [47]

c. Descriptions of consideration: A description of collateral or of other transactions connected with the instrument is not a condition; therefore, negotiability is not destroyed. [48]

d. Incorporation of separate document: Mere reference to or description of separate documents is permissible but their incorporation destroys negotiability. However, "as per" or "in accordance with" language is allowable, as are separate terms for payment or acceleration. Reference to another document is also permissible concerning rights to collateral. [49]

e. Statement of security: A description (but not an incorporation) of the collateral and security agreement does not affect negotiability. [52]

4. Fixed amount of money

a. What constitutes "money": Money is "the medium of exchange authorized or adopted by a domestic or foreign government as part of its currency". [53]

b. What constitutes a "fixed amount": Absolute certainty as to the sum due at all times is not required. However, at any particular time, interest rates can be variable or based on an outside source, such as a particular bank's prime rate or the local judgment rate. [54]

5. Specified time of payment: The face of the instrument must show when (or upon what events) the obligation is due. [58]

a. Demand instruments: An instrument is payable "on demand" if so expressed, and if no time for payment is stated. [59]

b. Time instruments: An instrument payable at a definite time in the future is a time instrument. [61]

(1) Date left off: If the date is left off an instrument and maturity depends on a date being stated, the instrument is not enforceable until the date is filled in by someone with authority. [62]

(2) Acceleration clauses: Either the maker or the holder may be given the unconditional right to accelerate the maturity date. However, the holder must have a good faith belief that the prospect of payment is impaired in order to accelerate "at will". [63]

(3) Extension clauses: Extension of the maturity date at the option of the holder is valid. However, extension at the option of the maker or upon the happening of an event is permissible only if the new maturity date is stated in the instrument. [64]

c. Impact of dates: Undated instruments are payable at any time, on demand, while ante-dated or post-dated instruments are payable on or after the date stated. [67]

6. Words of negotiability: An instrument must be payable either "to bearer" (bearer instrument) or "to order of" a specified payee (order instrument). [68]

a. Effect of omitting words of negotiability: If an instrument is not payable to order or bearer, it is non-negotiable. However, Article 3 of the U.C.C. still governs the rights and liabilities of the involved parties, but no one can be an HDC [holder in due course]. "Note: Words of negotiability are not required for checks". [71]

7. "No other promise" requirement: With the exception of promises affecting security (e.g. regarding confession of judgment or maintenance of collateral, waiving laws benefitting bound parties, and the like), the instrument may not contain any other undertaking or instruction by the person promising or demanding payment to do any act in addition to the payment of money. [72]

Footnotes

(1) Gilbert Law Summaries, Commercial Paper and Payment Law, by Douglas J. Whaley, pp. ii-iii, Sec. II. 15th Ed. ISBN 0-15-900367-9, 1997.