Negotiable Instruments: Negotiability and Transferability
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• LO26-1: Why do 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?
Chapter 26 Hypothetical Case 1
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?
Chapter 26 Hypothetical Case 2
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?
• 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
Why Do We Need
• Must have an acceptable substitute for cash
• Documents of payment: commercial paper or negotiable instruments
Demand Instrument Versus
• Demand instrument: Payee can demand actual payment at any time
• Time instrument: Payment made only at specific designated time in future
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
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
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
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
Chapter 26 Hypothetical Case 3
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 4 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 4 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 3 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?
Chapter 26 Hypothetical Case 4
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
Is Dayton right? Is this document a negotiable instrument? Explain your answer.