LECTURE NOTES

Chapter 23. Creation of Negotiable Instruments

Chapter Objectives
Distinguish between a negotiable and a nonnegotiable instrument.
Describe the functions served by negotiable instruments.
Distinguish between orders to pay and promises to pay.
Describe a check and identify the parties to a check.
Describe a promissory note and identify the parties to the note.
Describe a certificate of deposit and identify the parties to a CD.
Describe the requirements of permanence and portability of a negotiable instrument.
Describe how a negotiable instrument must be signed.
Distinguish between instruments payable on demand and payable at a definite time.
Distinguish between instruments payable to order and payable to bearer.
Describe how negotiable instruments are indorsed and transferred.
Distinguish between blank and special indorsements.
Define and apply the imposter rule and the fictitious payee rule.

Difference between a negotiable and a nonnegotiable instrument
Negotiable instruments must meet certain requirements established by Article 3 of the Uniform Commercial Code. An instrument that does not meet these requirements is not a negotiable instrument and is subject to contract law.
According to the UCC 3-104(a), a negotiable instrument must:

Article 3 of the UCC recognizes four kinds of instruments: Functions of negotiable instruments Orders to pay and promises to pay

Checks and parties to a check
Parties to a check are:

Promissory notes and parties to a note
Parties to a note are:

Other items about notes:

Certificate of deposit and parties to a CD
Parties to a CD:

Requirements of permanence and portability of a negotiable instrument
A negotiable instrument must:

Signing a negotiable instrument
A negotiable instrument must:

Instruments payable on demand and payable at a definite time Instruments payable to order and payable to bearer How order and bearer paper are negotiated

How order and bearer paper can be converted
Instruments can be converted from order paper to bearer paper, and vice versa, many times until the instrument is paid. The deciding factor is the type of indorsement placed on the instrument at the time of each subsequent transfer. An indorsement is the signature (and other directions) written by or on behalf of the holder somewhere on the instrument.

Blank and special indorsements Qualified and unqualified indorsements Restrictive and nonrestrictive indorsements

Imposter rule
The imposter rule says if an imposter forges the indorsement of the named payee, the drawer or maker is liable on the instrument and bears the loss.

Fictitious payee rule
The fictitious payee rule says the drawer or maker is liable on a forged or unauthorized indorsement of a fictitious payee.

Terms

Internet Links

Legal Information Institute—Overview of Negotiable Instruments Law: http://www.law.cornell.edu/topics/negotiable.html
UCC—Article 3 Negotiable Instruments: http://www.law.cornell.edu/ucc/3/overview.html
How to recognize fraudulent checks: http://www.businessfraudprevention.com/checks.htm