Chapter 18: Negotiable Instruments: Transferability and Liability

extension clause

A clause in a time instrument that allows the instrument's date of maturity to be extended into the future

acceleration clause

A clause that allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in the payment of an installment when due.

Personal defenses

A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC.

personal defense

A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC.

check

A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of funds to the payee on demand.

acceptor

A drawee that accepts, or promises to pay, an instrument when it is presented later for payment.

holder in due course

A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is defective (such as that it is overdue, has been dishonored, is subject to a defense against it or a claim to it, contains unauthorized signatures, has been altered, or is so irregular or incomplete as to call its authenticity into question).

order instrument

A negotiable instrument that is payable "to the order of an identified person" or "to an identified person or order."

certificate of deposit

A note issued by a bank in which the bank acknowledges the receipt of funds from a party and promises to repay that amount, with interest, to the party on a certain date.

fictitious payee

A payee on a negotiable instrument whom the maker or drawer did not intend to have an interest in the instrument. Indorsements by fictitious payees are treated as authorized indorsements under Article 3 of the UCC.

bearer

A person in possession of an instrument payable to bearer or indorsed in blank.

payee

A person to whom an instrument is made payable

indorsement

A signature placed on an instrument for the purpose of transferring one's ownership rights in the instrument

negotiable instrument

A signed writing (record) that contains an unconditional promise or order to pay an exact sum on demand or at a specified future time to a specific person or order, or to bearer.

promissory note

A written promise made by one person (the maker) to pay a fixed amount of funds to another person (the payee or a subsequent holder) on demand or on a specified date.

special indorsement

An indorsement on an instrument that identifies the specific person to whom the indorser intends to make the instrument payable. Thus, it names the indorsee.

blank indorsement

An indorsement that specifies no particular indorsee and can consist of a mere signature. An order instrument that is indorsed in blank becomes a bearer instrument

Universal defenses

Defenses that are valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs.

maker

One who promises to pay a fixed amount of funds to the holder of a promissory note or a certificate of deposit (CD).

imposter

One who, by use of the mails, Internet, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of an impersonated payee. Indorsements by imposters are treated as authorized indorsements under Article 3 of the UCC.

Presentment

The act of presenting an instrument to the party liable on the instrument in order to collect payment. Presentment also occurs when a person presents an instrument to a drawee for a required acceptance.

drawer

The party that initiates a draft (such as a check), thereby ordering the drawee to pay.

drawee

The party that is ordered to pay a draft or check. With a check, a bank or a financial institution is always the drawee.

shelter principle

The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course (HDC), but who derives his or her title through an HDC, acquires the rights of an HDC.

Negotiation

The transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder.

dishonor

To refuse to pay or accept a negotiable instrument, whichever is required, even though the instrument is presented in a timely and proper manner.

dishonored

To refuse to pay or accept a negotiable instrument, whichever is required, even though the instrument is presented in a timely and proper manner.

draft

Any instrument drawn on a drawee that orders the drawee to pay a certain amount of funds, usually to a third party (the payee), on demand or at a definite future time.

holder

Any person in possession of an instrument drawn, issued, or indorsed to him or her, to his or her order, to bearer, or in blank.

Acceptance

In negotiable instruments law, a drawee's signed agreement to pay a draft when it is presented.

qualified indorsement

An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument. The notation "without recourse" is commonly used to create a qualified indorsement.

trust indorsement

An indorsement to a person who is to hold or use funds for the benefit of the indorser or a third person. It is also known as an agency indorsement

restrictive indorsement

Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. A restrictive indorsement does not prohibit the further negotiation of the instrument.

bearer instrument

Any instrument that is not payable to a specific person, including instruments payable to the bearer or to "cash."

transfer warranties

Five implied warranties made by any person who transfers an instrument for consideration to the transferee and, if the transfer is by indorsement, to all subsequent transferees and holders who take the instrument in good faith.

presentment warranties

Implied warranties, made by any person who presents an instrument for payment or acceptance, that (1) the person is entitled to enforce the instrument or is authorized to act on behalf of a person who is so entitled, (2) the instrument has not been altered, and (3) the person has no knowledge that the drawer's signature is unauthorized.