Negotiability Concept

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Negotiability Concept

Back 1

A) technically negotiable (refers to its form)
B) It is technically negotiated (refers to the transfer process)
C) it reaches the hands of purchaser for value who has no knowledge of problems giving rise to the instrument's creation (such person is called a holder in due course.

D) Then the HDC becomes a super plaintiff and can sue the parties to the instrument who can defend the lawsuit on only narrow grounds (called real defenses) and not on broader grounds (called personal defenses)

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Rules

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1) Where a negotiable instrument is negotiated to a HDC, the HDC takes the instrument free of personal defenses and claims and subject only to the real defenses.

HINT: Analysis for checks will be more pro forma because they are already printed by the bank, only so much you do with it.

Front 3

Negotiable instrument (9 elements that need to be satisfied, 8 for checks)

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1) Writing
2) Signed by the maker (drawer)
3) Unconditional 4) promise or order)
5) Pay a fixed amount (fixed principle, ok to have interest payable, penalties, attorney fees).
6) Of money
7) No other unauthorized promise (3 exceptions relating to secured loans: a) promise to protect collateral. b) confession of judgment. c) borrower's waiver of rights and defenses.
8) On demand or at a definite time.
9) To "order" or to "bearer"

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Negotiated

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An instrument is negotiated when it is transferred to a subsequent party who becomes a "holder." Initially, a note or a check begins its life as either order or bearer paper.

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Order paper

Back 5

Negotiation through proper endorsement plus delivery

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Bearer paper

Back 6

Negotiation through delivery alone.

Once the instrument is transferred, you need to look at the last endorsement or the "back" of the instrument to determine the type of paper

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Last indorsement rule

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You locate the last endorsement and this will tell you whether check or note is order paper or bearer paper.

Special indorsement=order paper
Blank indorsement= bearer paper.