Chapter 26 Negotiable Instruments: Negotiability and Transferability Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO26-1: Why we need negotiable instruments? • LO26-2: What types of negotiable instruments does the UCC recognize? • LO26-3: What are the requirements of negotiability? • LO26-4: What are the words of negotiability? 26-2 Chapter 26 Hypothetical Case • On November 1, Paula Aldridge presents a check for $1,250 to Daniel Carrier in payment for a debt she owes him The check is dated November 15 Aldridge postdates the check because she currently has insufficient funds in her account; however, she expects direct deposit of her payroll check from her employer on November 14 The amount of her payroll check will be more than sufficient to account for the $1,250 check she presents to Carrier • Is Daniel Carrier legally obligated to refrain from cashing Aldridge's check until November 15? Is Paula Aldridge's bank legally obligated to refrain from processing the check if Carrier presents it for payment before November 15? 26-3 Chapter 26 Hypothetical Case • Glenn Porter, a staunch Republican, owes Harry O'Donnell, a Democrat, $1,000 for 50 expensive cigars that O'Donnell sold him In return for the cigars, Porter issued a promissory note with the following language: "I, Glenn Porter, promise to pay to the order of Harry O’Donnell the sum of one thousand and no/100 dollars, due and payable on November 9, 2016 Signed, Glenn Porter." At the bottom of the promissory note, Porter included the following language: "This promissory note is invalid if a Republican wins the United States presidential election on November 8, 2016." O’Donnell neglected to notice the statement at the bottom of the note November 8, 2016 arrived, and Republican Sarah Monee became the forty-fifth president of the United States On November 9, O'Donnell approached Porter with the promissory note, and requested to be paid the $1,000 face value of the note Glenn replied, "Gotcha, Harry! I don't owe you one red cent Look at what I wrote on the bottom of the note!" O'Donnell was not the confrontational type, but he still felt that Porter was legally obligated to pay the $1,000 • Is this promissory note a negotiable instrument? If it is not, is Glenn Porter not obligated to pay Harry O'Donnell the $1,000? 26-4 Negotiable Instruments • Negotiable instrument: Substitute for cash; written document containing signature of creator that makes unconditional promise or order to pay sum certain in money, either on demand or at a definite time • Note: Promise by maker to pay a payee • • Example: Certificate of deposit Draft: Order by drawer to a drawee to pay a payee • Example: Check 26-5 Why Do We Need Negotiable Instruments? • Must have an acceptable substitute for cash • Documents of payment: commercial paper or negotiable instruments 26-6 Demand Instrument Versus Time Instrument • Demand instrument: Payee can demand actual payment at any time • Time instrument: Payment made only at specific designated time in future 26-7 Types of Checks • Check: Special draft that orders a bank (the drawee) to pay a specified sum of money to the payee from the drawer's account • Cashier's check: Draft with respect to which the drawer and drawee are the same bank or branches of same bank • Traveler's check: Payable on demand, drawn on or payable at or through bank, designated by term "traveler's check" or similar, requires countersignature • Certified check: Accepted by bank on which it is drawn 26-8 Requirements For Negotiability • Must be written • Signed by creator • Unconditional promise/order to pay • Specify certain sum • Payable on demand or at a definite time • Contain "to the order of" or similar • Contain no additional promises 26-9 Order Versus Bearer Paper • Order paper: Specific payee named on instrument • Classic example: "Pay to the order of John Smith" • Bearer paper: Instrument payable to possessor • • • Bearer paper treated like cash Endorsing order instrument converts instrument into bearer paper Instruments payable to no one, to "X", or to "cash" are considered bearer paper 26-10 Words of Negotiability • Words of negotiability: Essential for the instrument to indicate it was created for the purpose of being transferred • To the order of • Pay to bearer • Pay to [name] or bearer • Pay to cash • Pay to the order of cash or bearer 26-11 Chapter 26 Hypothetical Case • Tom LaRue and Ron Zell are avid football fans; LaRue is a rabid Pittsburgh Ironmen supporter, and Zell's favorite team is the Dallas Cattle Ranchers The two teams are bitter rivals and are scheduled to play during Week of the 2016 United Football League (UFL) schedule Before the season starts, LaRue and Zell wager that their respective teams will win in the Ironmen–Cattle Ranchers clash LaRue presents $500 in cash to secure the bet, and Zell produces a written IOU that states: "In the event that the Pittsburgh Ironmen defeat the Dallas Cattle Ranchers in Week of the 2016 UFL season, I promise to pay the sum of five hundred and no/100 dollars to Tom LaRue Signed, Ron Zell." In Week of the UFL season, LaRue endorses and transfers the Zell IOU to Kenneth Russell as payment for a $250 bet he lost to Russell (Russell's favorite team, the Oakland Swashbucklers, defeated LaRue's Ironmen in Week 3.) In Week 4, the Ironmen defeat the Cattle Ranchers • Can Russell recover the $500 face amount of the IOU from Zell? 26-12 Chapter 26 Hypothetical Case • Rita Dayton borrowed $1,000 from her friend, Nora Hayworth At the time of the loan, Dayton wrote up a document that stated, “On December 30, 2016, Rita Dayton will pay to the order of Nora Hayworth the sum of $500 and a promise of 50 hours of babysitting.” Hayworth thought the note was funny; Dayton thought the note was a negotiable instrument • Is Dayton right? Is this document a negotiable instrument? Explain your answer 26-13