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Bills and Notes

Bills and Notes

Anne M.H. Foley, J.D., John R. Kennel, J.D., Jane E. Lehman, J.D., Joan C. McKenna, J.D., and Anne E. Melley, J.D., of the staff of National Legal Research Group, Inc.

Scope

This article covers those contracts known as bills and notes for the payment of money, whether negotiable or nonnegotiable, and negotiable instruments from inception to discharge, and the rights and obligations of various parties to such instruments.

Federal Aspects

This article discusses the D'Oench, Duhme doctrine, which bars certain defenses by the maker of a note against the Federal Deposit Insurance Corporation (FDIC) and its assignees. Also covered herein is the statutory authority of the Secretary of the United States Treasury to issue checks and other drafts on public money in the Treasury. See "Federal Legislation," below, for USCA citations.

Treated Elsewhere

Accord and satisfaction, giving of note by debtor as adequate to establish, see 1 Am. Jur. 2d, Accord and Satisfaction §§38, 39

Alteration of commercial paper, see 4 Am. Jur. 2d, Alteration of Instruments

Attachment and garnishment of negotiable instruments, see 6 Am. Jur. 2d, Attachment and Garnishment §§149–158

Bankruptcy, creditor's presentation by creditor of negotiable instrument, and giving of notice of dishonor of such instrument, notwithstanding automatic stay, see 9A Am. Jur. 2d, Bankruptcy §1471

Banks, powers and duties of in connection with instruments for payment of money, see 10 Am. Jur. 2d, Banks and Financial Institutions §§888 et seq.

Choice of law by parties to govern transaction that is within the scope of the Uniform Commercial Code, see 15A Am. Jur. 2d, Commercial Code §11

Conflict of law relating to transaction that is within the scope of the Uniform Commercial Code, see 15A Am. Jur. 2d, Commercial Code §11

Conversion of commercial paper, see 18 Am. Jur. 2d, Conversion

Corporate stock, bills or notes as consideration for issuance of, see 18A Am. Jur. 2d, Corporations §§502, 503

Decedent's estate, right to collect money due under note as asset of, see 31 Am. Jur. 2d, Executors and Administrators §507

Electronic Fund Transfer Act, see 17 Am. Jur. 2d, Consumer and Borrower Protection §§226–240

Embezzlement, bills or notes as property subject to, see 26 Am. Jur. 2d, Embezzlement §10

Execution upon promissory note, see 30 Am. Jur. 2d, Executions and Enforcement of Judgments §§156, 253

False pretenses in obtaining bill or note, see 32 Am. Jur. 2d, False Pretenses §40

Gifts of bills and notes, see 38 Am. Jur. 2d, Gifts §§54–69

Larceny, bills or notes as subject of, see 50 Am. Jur. 2d, Larceny §78

Money, generally, see 53A Am. Jur. 2d, Money

Rent, notes in payment of, see 49 Am. Jur. 2d, Landlord and Tenant §§692, 695, 697, 722

Truth in Lending Act, see 17 Am. Jur. 2d, Consumer and Borrower Protection §§1–168

Uniform Consumer Credit Code, see 17 Am. Jur. 2d, Consumer and Borrower Protection §§306 et seq.

Wills, construction or interpretation of term "notes" as used in, see 80 Am. Jur. 2d, Wills §1246

Research References

Primary Authority

12 USCA §1823(e) (codification, at least in part, of the D'Oench, Duhme doctrine, which bars certain defenses by a maker of a note against the Federal Deposit Insurance Corporation or its assignees)

31 USCA §337 (authority of the Secretary of the United States Treasury to issue checks and other drafts on public money in the Treasury)

A.L.R. Library

A.L.R. Digest: Alteration of Instruments;

A.L.R. Digest: Bills and Notes;

A.L.R. Digest: Contribution;

A.L.R. Digest: Conversion;

A.L.R. Digest: Corporations;

A.L.R. Digest: Duress;

A.L.R. Digest: Estoppel and Waiver;

A.L.R. Digest: Evidence;

A.L.R. Digest: Forgery;

A.L.R. Digest: Fraud and Deceit;

A.L.R. Digest: Guaranty;

A.L.R. Digest: Limitation of Actions;

A.L.R. Digest: Lost Instruments;

A.L.R. Digest: Parties;

A.L.R. Digest: Partnership;

A.L.R. Digest: Payment;

A.L.R. Digest: Pleading;

A.L.R. Digest: Principal and Agent;

A.L.R. Digest: Principal and Surety;

A.L.R. Digest: Signature;

A.L.R. Digest: Trial;

A.L.R. Digest: Uniform Commercial Code

A.L.R. Index: Acceleration of Maturity;

A.L.R. Index: Acceptance;

A.L.R. Index: Accommodation Party or Paper;

A.L.R. Index: Accord and Satisfaction;

A.L.R. Index: Account Stated;

A.L.R. Index: Agents and Agency;

A.L.R. Index: Annotations, Acceptance, Alteration of Instruments;

A.L.R. Index: Assignments;

A.L.R. Index: Banks and Banking;

A.L.R. Index: Bills and Notes;

A.L.R. Index: Cancellation or Rescission;

A.L.R. Index: Certificates of Deposit;

A.L.R. Index: Checks and Drafts;

A.L.R. Index: Collecting Bank;

A.L.R. Index: Consideration;

A.L.R. Index: Conversion;

A.L.R. Index: Counterclaim and Setoff;

A.L.R. Index: Delivery;

A.L.R. Index: Discharge or Release;

A.L.R. Index: Disclaimers;

A.L.R. Index: Dishonor;

A.L.R. Index: Duress and Coercion;

A.L.R. Index: Estoppel and Waiver;

A.L.R. Index: Fraud and Deceit;

A.L.R. Index: Good Faith;

A.L.R. Index: Holder in Due Course;

A.L.R. Index: Indorsement;

A.L.R. Index: Lost or Destroyed Instruments;

A.L.R. Index: Maturity;

A.L.R. Index: Notice of Dishonor;

A.L.R. Index: Parol Evidence;

A.L.R. Index: Parties;

A.L.R. Index: Payment;

A.L.R. Index: Pleadings;

A.L.R. Index: Presentation or Presentment;

A.L.R. Index: Presumptions and Burden of Proof;

A.L.R. Index: Principal and Surety;

A.L.R. Index: Protest;

A.L.R. Index: Signature;

A.L.R. Index: Uniform Commercial Code;

A.L.R. Index: Warranties

Treatises and Practice Aids

1 Anderson on the Uniform Commercial Code (3d ed.) §§1-101:2, 1-102:36, 1-106:3, 1-106:5, 1-106:11, 1-201:265, 1-201:266, 1-201:277, 1-201:9;

1A Anderson on the Uniform Commercial Code (3d ed.) §1-208:113;

5, 5A, 6 Anderson on the Uniform Commercial Code (3d ed.) §§3-101:1 et seq.;

6A Anderson on the Uniform Commercial Code (3d ed.) §§3-101:1 et seq.;

7 Anderson on the Uniform Commercial Code (3d ed.) §§4-401:4, 4-401:7

Brady on Bank Checks ¶¶6.2–6.5, 7.21, 8.3, 9.15, 9.16, 9.8, 9.9, 27.1, 28.1, 28.3

Trial Strategy

Foundation for Admission of Secondary Evidence, 35 Am. Jur. Proof of Facts 2d 147

Bank's Liability for Payment of Check or Withdrawal on Less Than Required Number of Signatures, 25 Am. Jur. Proof of Facts 2d 165;

Negligence Contributing to Alteration or Unauthorized Signature, 14 Am. Jur. Proof of Facts 2d 693;

Bank's Failure to Use Ordinary Care in Detecting Forged or Altered Checks, 13 Am. Jur. Proof of Facts 2d 347;

Promissory Note Executed Under Economic Duress or Business Compulsion, 11 Am. Jur. Proof of Facts 2d 23;

Personal Liability of Corporate Officer on Promissory Note, 8 Am. Jur. Proof of Facts 2d 193;

Ratification of Forged or Unauthorized Signature, 7 Am. Jur. Proof of Facts 2d 675;

Status as Accommodation Party, 7 Am. Jur. Proof of Facts 2d 283;

Questioned Handwriting, 17 Am. Jur. Proof of Facts 507;

Promissory Notes and Other Negoitable Instruments, 9 Am. Jur. Proof of Facts 573;

Alteration of Instruments, 1 Am. Jur. Proof of Facts 479;

Forms

3B Am. Jur. Legal Forms 2d, Bills and Notes;

9A Am. Jur. Legal Forms 2d, Guaranty;

18 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 1—General Provisions;

19 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 3—Negotiable Instrument

4A Am. Jur. Pleading and Practice Forms, Banks;

5 Am. Jur. Pleading and Practice Forms, Bills and Notes;

6 Am. Jur. Pleading and Practice Forms, Commercial Code Art 1—General Provisions;

6 Am. Jur. Pleading and Practice Forms, Commercial Code Art 4—Bank Deposits and Collections

6A Am. Jur. Pleading and Practice Forms, Commercial Code Art 3—Negotiable Instruments;

KeyCiteâ: Cases and other legal materials listed in KeyCite Scope can be researched through West's KeyCite service on Westlawâ. Use KeyCite to check citations for form, parallel references, prior and later history, and comprehensive citator information, including citations to other decisions and secondary materials.

I. Introduction [§§1–51]

A. In General; Origin and Development of the Law; Scope of UCC Article 3; Construction [§§1–19]

Research References

Additional References

UCC §§1-102 through 1-106, 1-108, 1-109, 1-201, 1-204;

UCC §§3-101 through 3-104, 3-122, 3-802, 3-805 [1952]

UCC §§3-101 through 3-105, 3-310 [1990 Rev];

UCC §§4-104, 4-105 [1952]

UCC §4-104 [1990]

UCC §§10-101 through 10-104

Primary Authority

12 USCA §4007

A.L.R. Library

A.L.R. Digest: Bills and Notes §§1–4;

A.L.R. Digest: Duress §§1–7;

A.L.R. Digest: Estoppel and Waiver §§33, 58–69;

A.L.R. Digest: Fraud and Deceit §§1 et seq.;

A.L.R. Digest: Principal and Agent §§36, 59, 108;

A.L.R. Digest: Uniform Commercial Code §§1–3

A.L.R. Index: Agents and Agency;



A.L.R. Index: Duress and Coercion;

A.L.R. Index: Estoppel and Waiver;

A.L.R. Index: Fraud and Deceit;

A.L.R. Index: Uniform Commercial Code


1 Anderson on the Uniform Commercial Code (3d ed.) §§1-101:2, 1-102:36

Forms

18 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 1—General Provisions §§253.11–253:17, 253:62–253:76;

19 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 3—Negotiable Instruments §§253:2211–253:2263

6 Am. Jur. Pleading and Practice Forms, Commercial Code Art 1—General Provisions §1:26

1. Definitions; Nature of Commercial Paper [§§1, 2]

§ 1. Generally

Bills and notes in their various forms are contracts, and may be negotiable or nonnegotiable. 1 "Bills and notes" are commonly defined as commercial paper or negotiable or nonnegotiable instruments, 2 and, in turn, "commercial paper" is commonly defined as negotiable instruments, drafts, checks, certificates of deposit, and promissory notes. 3

Commercial paper is governed by the provisions of Article 3 of the Uniform Commercial Code. 4

FOOTNOTE 1.

§2.

FOOTNOTE 2.


Ballentine's Law Dictionary (3d ed.).

FOOTNOTE 3.


Ballentine's Law Dictionary (3d ed.).

Forms

Terms used in commercial paper; Types of negotiable instruments. 19 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 3—Negotiable Instruments §§253:2211–253:2263.

FOOTNOTE 4.

UCC §§3-101 to 3-805 [1952]UCC §§3-101 to 3-605 [1990 Rev].

For a general discussion of the Uniform Commercial Code and Article 3, see §§5, 13.

As to the relationship of Article 3 to other articles of the Uniform Commercial Code, see §17.

§ 2. Contractual nature of negotiable instruments

Bills and notes, or, in modern terminology, drafts, checks, notes, and certificates of deposit, are contracts; 5 accordingly, the fundamental rules governing contract law 6 are applicable to the determination of the legal questions which arise over such instruments. 7

An instrument may be negotiable, 8 and, while not removed from the law relating to contracts, 9 such an instrument constitutes a commercial specialty. 10 A negotiable instrument is distinguished from an ordinary contract 11 by incidents having their foundation in the law merchant, 12 which in most jurisdictions has been in large part codified by statute, first in the Uniform Negotiable Instruments Act 13 and subsequently in the Uniform Commercial Code. 14

Between ordinary contracts and negotiable instruments there is the difference between "assignability" and "negotiability." 15 Also, a negotiable instrument itself imports a consideration under the law merchant and under the Uniform Commercial Code and, thus, is subject to special rules as to lack of necessity for the existence or proof of consideration. 16

Nonnegotiable instruments are governed by the rules of law applicable to ordinary contracts, 17 and not by Article 3 of the Code. 18 However, the principles relating to negotiability may apply to nonnegotiable instruments by analogy. 19

FOOTNOTE 5.

Swift & Co. v Bankers Trust Co., 280 NY 135, 19 NE2d 992 (ovrld on other grounds as stated in American Home Assurance Co. v Employers Mut. of Wausau (1st Dept) 77 App Div 2d 421, 434 NYS2d 7).

FOOTNOTE 6.

Legal Encyclopedias

17A Am. Jur. 2d, Contracts §§1 et seq.

FOOTNOTE 7.

Coral Gables, Inc. v Mayer, 241 App Div 340, 271 NYS 662.

As between the immediate parties, a negotiable instrument is merely a contract. Official Comment 3 to UCC §3-119 [1952].

If an acceleration term in an instrument is uncertain it may fail on ordinary contract principles, but the instrument remains negotiable and is payable at the defined time. Comment 4 to UCC §3-109 [1952].

FOOTNOTE 8.

§23.

FOOTNOTE 9.

Beadall v Moore, 199 App Div 531, 191 NYS 826.

FOOTNOTE 10.

Weissman v Banque De Bruxelles, 254 NY 488, 173 NE 835.

FOOTNOTE 11.

Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; Allison Hill Trust Co. v Sarandrea, 236 App Div 189, 258 NYS 299.

FOOTNOTE 12.

§3.

FOOTNOTE 13.

§4.

FOOTNOTE 14.

§§5 et seq.

FOOTNOTE 15.

§21.

FOOTNOTE 16.

As to consideration, generally, see §§141 et seq.

As to want, failure, or illegality of consideration as a defense, see §§557 et seq.

As to the burden of proof regarding want, failure, or illegality of consideration, see §663.

FOOTNOTE 17.

Edgar v Haines, 109 Ohio St 159, 141 NE 837, 38 ALR 795.

FOOTNOTE 18.

UCC §3-102(a) [1990 Rev].

FOOTNOTE 19.

Official Comment to UCC §3-805 [1952]Official Comment 2 to UCC §3-104 [1990 Rev].

Nonnegotiable instruments are governed by many of the same principles which apply to negotiable instruments. Rubel v Honig, 178 App Div 53, 164 NYS 219.

2. Origin and Development of Law [§§3–12]

a. In General [§§3, 4]

§ 3. Generally; the law merchant

The law merchant is the law which confers negotiability on commercial paper and governs negotiable instruments, 20 More specifically, it is the prestatutory or nonstatutory law 21 which governed bills of exchange 22 and promissory notes, 23 namely the lex mercatoria or the custom of merchants 24 and is the basis for the modern statutes on the subject, the Uniform Negotiable Instruments Act, and the Uniform Commercial Code, which, in a large measure but not entirely, provide the law governing commercial paper. 25 Bills and notes were developed under the law merchant as convenient instrumentalities of trade and commerce, 26 and it was the necessities of such trade and commerce which impressed upon them the unique quality and the consequences of negotiability. 27 They were intended as substitutes for money in commercial transactions and, by the understanding and usage of those employing them, were closely assimilated to money. 28

Originally a separate and peculiar body of law, the law merchant became a part of the common law, 29 thereby creating exceptions to the general common-law rules 30 prohibiting the assignment of chooses in action 31 and governing rights in lost or stolen property. 32

Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating clause, supplement the Code provisions. 33

Comment: The listing given in Article 1 of the bodies of law that continue to be applicable except insofar as they are explicitly displaced by the Code is merely illustrative since no listing could be exhaustive. Nor is the fact that in some sections particular circumstances have led to express reference to other fields of law intended at any time to suggest the negation of the general application of the principles set forth in Article 1 regarding the continued applicability of other bodies of law. 34

§ 3. Generally; the law merchant [Supplement]

UCC Article 1 was extensively revised in 2001 and may now be cited as Uniform Commercial Code—General Provisions.

FOOTNOTE 20.

Persky v Bank of America Nat'l Ass'n, 261 NY 212, 185 NE 77.

FOOTNOTE 21.

Hibbs v Brown, 190 NY 167, 82 NE 1108; Rose Check Cashing Service, Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679, 252 NYS2d 100.

FOOTNOTE 22.

Commercial Bank of Kentucky v Varnum, 49 NY 269.

FOOTNOTE 23.


FOOTNOTE 24.

Commercial Bank of Kentucky v Varnum, 49 NY 269.

FOOTNOTE 25.

§4.

FOOTNOTE 26.


When new forms of instruments develop, the courts are called upon to fix such forms into the law merchant and the statutes governing negotiable instruments. Rose Check Cashing Service, Inc. v Chemical Bank New York Trust Co., 43 Misc 2d 679, 252 NYS2d 100.

FOOTNOTE 27.

Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; In re Goodchild, 160 Misc 738, 290 NYS 683.

FOOTNOTE 28.

Akron Auto Finance Co. v Stonebraker (Summit Co) 66 Ohio App 507, 20 Ohio Ops 521, 35 NE2d 585.

FOOTNOTE 29.

Hibbs v Brown, 190 NY 167, 82 NE 1108.

FOOTNOTE 30.

Chauncey v Arnold, 24 NY 330.

FOOTNOTE 31.

Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; Allison Hill Trust Co. v Sarandrea, 236 App Div 189, 258 NYS 299.

FOOTNOTE 32.

Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988; In re Goodchild, 160 Misc 738, 290 NYS 683.

FOOTNOTE 33.

UCC §1-103.

UCC §1-103 is a detailed restatement of the principle that the general law applies when a case is not covered by statute. Roy Supply, Inc. v Wells Fargo Bank (3rd Dist) 39 Cal App 4th 1051, 46 Cal Rptr 2d 309, 95 CDOS 8401, 95 Daily Journal DAR 14450, 27 UCCRS2d 1363.

FOOTNOTE 34.

Official Comment 3 to UCC §1-103.

§ 4. Uniform Negotiable Instruments Act

The Uniform Commercial Code supplanted the Uniform Negotiable Instruments Act, which was promulgated in 1896 as the first "Uniform Law" by the National Conference of Commissioners on Uniform State Laws 35 and was in force in all of the states of the United States until superseded. 36 The Act was largely a codification of the rules of the law merchant, or the common-law rules relating to negotiable instruments, which previously were in force and effect by virtue of judicial pronouncement or legislative enactment. 37 Its purpose was to establish certain fixed rules governing negotiable instruments and to bring about a uniform system of laws on the subject, and thereby do away with the confusion that had existed in the law of commercial paper. 38

The Act did not apply to or affect the rights or liabilities of persons on paper that was not, within its meaning, negotiable; but if it was a negotiable instrument within the meaning of the Act, then, in the absence of any special statutory provisions governing such an instrument, the rights and liabilities of the parties to the instrument were fixed and determined by the provisions of the Act alone. 39

Over the course of its more than 50-year history, the Act became obsolete because of vast changes in commercial practices relating to the handling of negotiable instruments, and the need for revision of this important statute was felt for some years before the drafting of the Uniform Commercial Code was undertaken. 40

FOOTNOTE 35.

Strother v Lynchburg Trust & Sav. Bank, 155 Va 826, 156 SE 426, 73 ALR 166.

FOOTNOTE 36.

§5.

FOOTNOTE 37.

President & Directors of Manhattan Co. v Morgan, 242 NY 38, 150 NE 594.

FOOTNOTE 38.

Elyria Sav. & Banking Co. v Walker Bin Co., 92 Ohio St 406, 111 NE 147.

FOOTNOTE 39.

George D. Harter Bank v Schrembs (Cuyahoga Co) 55 Ohio App 116, 8 Ohio Ops 378, 22 Ohio L Abs 621, 9 NE2d 154, motion overr.

FOOTNOTE 40.

Official Comment to UCC §3-101 [1952].

b. The Uniform Commercial Code [§§5–12]

(1). In General [§§5–9]

§ 5. Generally

The Uniform Commercial Code has been enacted, at least in part, by every state in the United States and by the District of Columbia and the Virgin Islands. 41 The Uniform Commercial Code is arranged in 10 Articles; Article 1 contains general provisions, Article 10 is the effective date and repealer article, and Articles 2 through 9 are each concerned with a particular type of commercial activity. 42 The Code as a whole is known and may be cited as the Uniform Commercial Code. 43

The Uniform Commercial Code as proposed by its sponsors, the American Law Institute and the National Conference of Commissioners on Uniform State Laws, is accompanied by extensive comments explanatory of and correlating the various Code provisions. 44 The Official Comments are not part of the Code in the sense that they are not enacted by the state legislatures adopting the Code, 45 but the comments may be resorted to by the courts as an aid in construction. 46

§ 5. Generally [Supplement]

Research References

Law Reviews and Other Periodicals

Unauthorized and forged indorsements: A glitch in revised Article 3 of the Uniform Commercial Code, 37 Santa Clara LR 2:349 (1999).

UCC Article 1 was extensively revised in 2001 and may now be cited as Uniform Commercial Code—General Provisions.

FOOTNOTE 41.


1 Anderson on the Uniform Commercial Code (3d ed.) §1-101:2.

FOOTNOTE 42.

Legal Encyclopedias

15A Am. Jur. 2d, Commercial Code §2.

FOOTNOTE 43.

UCC §1-101.

FOOTNOTE 44.

Legal Encyclopedias

15A Am. Jur. 2d, Commercial Code §20.

FOOTNOTE 45.


1 Anderson on the Uniform Commercial Code (3d ed.) §1-102:36.

FOOTNOTE 46.

Appeal of Copeland (CA3 Del) 531 F2d 1195, 18 UCCRS 833; Brace v United States (In re Brace) (BC WD Pa) 163 BR 274, 22 UCCRS2d 1184; National Sav. & Trust Co. v Park Corp. (CA6 Ohio) 722 F2d 1303, 37 UCCRS 817, cert den 466 US 939, 80 L Ed 2d 464, 104 S Ct 1916; Yamaha Motor Corp. v Tri-City Motors & Sports, Inc., 171 Mich App 260, 429 NW2d 871, 7 UCCRS2d 1190; Carlund Corp. v Crown Ctr. Redevelopment (Mo App) 849 SW2d 647, 21 UCCRS2d 176; Gardner Zemke Co. v Dunham Bush, Inc., 115 NM 260, 850 P2d 319, 20 UCCRS2d 842; B & W Glass v Weather Shield Mfg. (Wyo) 829 P2d 809, 18 UCCRS2d 1, ans conformed to (CA10) 1992 US App LEXIS 13503.

§ 6. Purpose of adoption; repeal of inconsistent laws

The underlying purposes and policies of the Uniform Commercial Code are to simplify, clarify, and modernize the law governing commercial transactions; to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and to make uniform the law among the various jurisdictions. 47

The Code is intended to give a unified coverage of its subject matter; therefore, it is provided, with certain specified exceptions, that all laws and parts of laws inconsistent with the Code are repealed. 48 Included among the statutes expressly repealed by the Code is the Uniform Negotiable Instruments Act. 49 Other statutes expressly repealed by the Uniform Commercial Code are the Uniform Warehouse Receipts Act, the Uniform Sales Act, the Uniform Bills of Lading Act, the Uniform Stock Transfer Act, the Uniform Conditional Sales Act, the Uniform Trust Receipts Act. 50 The Code also repeals any act regulating bank collections, bulk sales, chattel mortgages, conditional sales, and assignment of accounts receivable, as well as factor's liens acts and farm storage or grain or similar acts. 51

However, statutes of a regulatory nature, such as those governing interest and usury and certain consumer financing transactions, are expressly saved from repeal. 52

§ 6. Purpose of adoption; repeal of inconsistent laws [Supplement]

UCC Article 1 was extensively revised in 2001. UCC §1-102 now covers the scope of Article 1. UCC §1-103(a) now provides for the construction of the code in order to promote its purposes and policies, and UCC §1-103(b) provides for the applicability of supplemental principles of law.

FOOTNOTE 47.

UCC §1-102(2).

FOOTNOTE 48.

UCC §10-103.

FOOTNOTE 49.

UCC §10-102.

The purpose of Article 3 was to modernize, clarify, and consolidate the provisions of the Uniform Negotiable Instruments Act. Wood v Willman (Wyo) 423 P2d 82, 4 UCCRS 75.

FOOTNOTE 50.

UCC §10-102.

FOOTNOTE 51.

UCC §10-102.

FOOTNOTE 52.

UCC §10-104.

§ 7. Application where United States is a party

If the United States is a party to an instrument, its rights and duties are governed by federal common law in the absence of a specific federal statute or regulation. 53 Whether the federal common-law rule should follow the state rule is determined by a three-pronged test. 54 In most instances, courts applying that test have shown a willingness to adopt Uniform Commercial Code (UCC) rules in formulating federal common law on the subject, 55 or have at least looked to the UCC for guidance. 56

FOOTNOTE 53.

Clearfield Trust Co. v United States, 318 US 363, 87 L Ed 838, 63 S Ct 573 (not followed on other grounds by Powers v United States Postal Serv. (CA7 Ind) 671 F2d 1041) and (superseded by statute on other grounds as stated in Pennsylvania, Dep't of Public Welfare v United States (CA3 Pa) 781 F2d 334) and (not followed on other grounds by FDIC v Hulsey (CA10 Okla) 22 F3d 1472, 23 UCCRS2d 596) and (among conflicting authorities on other grounds noted in United States v Administrative Enters. (CA7 Ill) 46 F3d 670, 95-1 USTC ¶50083, 75 AFTR 2d 95-843).

Federal law applied to the question of whether the plaintiff bank could recover from United States the amount of a check drawn on the bank payable to the Internal Revenue Service, for which the bank gave its cashier's check in the mistaken belief that the drawer's account contained sufficient funds to cover the check. First Nat'l Bank v United States, 8 Cl Ct 774, 41 UCCRS 1583.

Federal law governed United States' suit against a bank to recover an overpayment on a Treasury check issued by the Army. United States v Hibernia Nat'l Bank (CA5 La) 841 F2d 592, 5 UCCRS2d 1392, 96 ALR Fed 895, reh den, en banc (CA5 La) 847 F2d 840 and reh den, en banc (CA5 La) 847 F2d 840.

As to preemption by federal law, see §8.

FOOTNOTE 54.

United States v Kimbell Foods, Inc., 440 US 715, 59 L Ed 2d 711, 99 S Ct 1448, 20 CBC 1, 26 UCCRS 1 (among conflicting authorities on other grounds noted in United States v Pearson's E.F. & C., Inc. (SD Tex) 771 F Supp 810, 37 CCF ¶76231).

FOOTNOTE 55.

Official Comment 4 to UCC §3-102 [1990 Rev].

FOOTNOTE 56.

Federal Deposit Ins. Corp. v Blue Rock Shopping Center, Inc. (CA3 Del) 766 F2d 744, 41 UCCRS 1.

§ 8. Preemption by federal or international law

Although the terms of Article 3 of the Uniform Commercial Code apply to transactions by federal reserve banks, federal preemption would make ineffective any such provision that conflicts with federal law. 57 Consequently, the activities of the federal reserve banks are governed by regulations of the Federal Reserve Board and by operating circulars issued by the reserve banks themselves. 58 Thus, the Code expressly provides that regulations of the Board of Governors of the Federal Reserve System and operating circulars of the federal reserve banks supersede any inconsistent provision of Article 3 to the extent of the inconsistency. 59

Federal statutes may also preempt Article 3; for example, the Expedited Funds Availability Act 60 provides that the Act and the regulations issued pursuant to the Act supersede any inconsistent provisions of the Uniform Commercial Code. 61

In 1989, the United Nations Commission on International Trade Law completed a Convention on International Bills of Exchange and International Promissory Notes; if the United States becomes a party to this convention, the convention will preempt state law with respect to international bills and notes governed by the convention; thus, an international bill of exchange or promissory note that meets the definition of "instrument" in Article 3 will not be governed by that article if it is governed by the convention. 62

§ 8. Preemption by federal or international law [Supplement]

Paying bank was required to provide notice of dishonor of drafts drawn on farm credit services corporation and deposited into state bank by 4:00 p.m. of the second business day after receipt of drafts, rather than by midnight deadline of Uniform Commercial Code (UCC), to comply with implementing regulations of Expedited Funds Availability Act. Farm Credit Services of America v. American State Bank, 212 F. Supp. 2d 1034 (N.D. Iowa 2002).

FOOTNOTE 57.


FOOTNOTE 58.


FOOTNOTE 59.

UCC §3-102(c) [1990 Rev].

FOOTNOTE 60.

12 USCA §§4001 et seq.

FOOTNOTE 61.

12 USCA §4007(b).

FOOTNOTE 62.


§ 9. Effective date; retrospective application

The Uniform Commercial Code provides that it will become effective at midnight on December 31st following its enactment. 63

Observation: The majority of states have established different effective dates. 64

The Code applies to transactions entered into and events occurring after its effective date. 65

Transactions validly entered into before the effective date and the rights, duties, and interests flowing from them remain valid thereafter and may be terminated, completed, consummated, or enforced as required or permitted by any statute or other law amended or repealed by the Code as though such repeal or amendment had not occurred. 66

The 1990 amendments 67 to Article 3 of the Code are not to be applied retroactively. 68 Thus, a note is governed by the version of Article 3 in force when the note was executed, not a later version. 69 Nor, where the 1990 version of Article 3 does not contain a provision comparable to one in the pre-1990 version, will the 1990 version be applied retroactively to destroy rights arising under the provision in the pre-1990 version. 70

Caution: At least one court has held that to the extent the 1990 version of Article 3 seeks only to clarify the intent of the former version, its provisions may be applied retroactively. 71

FOOTNOTE 63.

UCC §10-101.

FOOTNOTE 64.

Uniform Laws Annotated, Uniform Commercial Code, Table of jurisdictions wherein code has been adopted.

FOOTNOTE 65.

UCC §10-101.

FOOTNOTE 66.

UCC §10-102(2).

FOOTNOTE 67.

§13.

FOOTNOTE 68.

In re Bahara (BC MD Pa) 191 BR 69; Title Ins. Co. v Comerica Bank-California (6th Dist) 27 Cal App 4th 800, 32 Cal Rptr 2d 735, 94 CDOS 6325, 94 Daily Journal DAR 11493, 24 UCCRS2d 584.

FOOTNOTE 69.

Qatar v First Am. Bank (ED Va) 880 F Supp 463, 26 UCCRS2d 284, later proceeding (ED Va) 885 F Supp 849, 27 UCCRS2d 168; Bankers Trust v 236 Beltway Inv. (ED Va) 865 F Supp 1186, 26 UCCRS2d 776; Ashland State Bank v Elkhorn Racquetball, 246 Neb 411, 520 NW2d 189, 24 UCCRS2d 968.

FOOTNOTE 70.

Smith v Haran (1st Dist) 273 Ill App 3d 866, 210 Ill Dec 191, 652 NE2d 1167, reh den (Jul 28, 1995) and app den 164 Ill 2d 583, 214 Ill Dec 332, 660 NE2d 1281 (referring to UCC §3-805 [1952]).

FOOTNOTE 71.

Lassen v First Bank Eden Prairie (Minn App) 514 NW2d 831, 23 UCCRS2d 482, review den (Minn) 1994 Minn LEXIS 534.

(2). Variation of Effect of Code By Agreement of Parties [§§10–12]

§ 10. Provisions for determining time

Whenever the Uniform Commercial Code requires the taking of action within a reasonable time, any time that is not manifestly unreasonable may be fixed by agreement. 72 Such agreement need not be part of the main agreement but may occur separately. 73

What is a reasonable time for taking any action depends on the nature, purpose, and circumstances of such action, 74 including the course of dealing or usages of trade or course of performance. 75

An action is taken "seasonably" when it is taken at or within the time agreed upon, or if no time is agreed upon, at or within a reasonable time. 76

§ 10. Provisions for determining time [Supplement]

UCC §1-204, regarding time, reasonable time, and seasonably, was revised and renumbered in 2001 as UCC §1-205 and UCC §302(b).

FOOTNOTE 72.

UCC §1-204(1).

Forms

Time; contract provisions with respect to time for performance, time of the essence, duration of agreement, future events as terminating the contract, and suspension of performance. 18 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 1—General Provisions §§253:62–253:76.

FOOTNOTE 73.


FOOTNOTE 74.

UCC §1-204(2).

FOOTNOTE 75.


FOOTNOTE 76.

UCC §1-204(3).

§ 11. Agreement to vary effect of statute

The effect of provisions of the Uniform Commercial Code may be varied by agreement, except as otherwise provided in the Code; but the obligations of good faith, diligence, reasonableness, and care prescribed by the Code may not be disclaimed by agreement. 77 The parties may by agreement determine the standards by which the performance of such obligations are to be measured, if such standards are not manifestly unreasonable. 78

The presence in certain code provisions of the words "unless otherwise agreed," or words of similar import, does not imply that the effect of other provisions may not be varied by agreement as described above. 79

Comment: The Code affirmatively states a "freedom of contract" principle under which, except as otherwise provided, the effect of the Code provisions may be varied by agreement. However, private parties cannot make an instrument negotiable within the meaning of Article 3 of the Code, except as provided in the Code, nor can they change the meaning of such terms as "bona fide purchaser," "holder in due course," or "due negotiation," as used in the Code. 80

§ 11. Agreement to vary effect of statute [Supplement]

UCC Article 1 was extensively revised in 2001. UCC §1-102 now covers the scope of Article 1; it no longer contains provisions regarding variance by agreement.. UCC §1-103(a) now provides for the construction of the code in order to promote its purposes and policies, and UCC §1-103(b) provides for the applicability of supplemental principles of law.

FOOTNOTE 77.

UCC §1-102(3).

Forms

Variation by agreement. 18 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 1—General Provisions §§253:11–253:17.

FOOTNOTE 78.

UCC §1-102(3).

FOOTNOTE 79.

UCC §1-102(4).

FOOTNOTE 80.


As to what constitutes a negotiable instrument under the Code, see §23.

As to holders in due course, see §§247 et seq.

§ 12. Agreement to select law governing multistate transaction

Generally, where a transaction bears a reasonable relation to a state which has enacted the Uniform Commercial Code (UCC) and to another state or nation, the parties may agree that the law of either state, or either the state or the nation, will govern their rights and duties. 81 The chosen law must bear a reasonable relation to the transaction. 82 However, where one of certain enumerated Code provisions specifies the applicable law, that provision controls, and a contrary agreement is effective only to the extent permitted by law (including the conflict-of-laws rules) so specified. 83

Comment: Where a transaction has significant contacts with a state which has enacted the UCC and also with other jurisdictions, the question of what relation is "appropriate" is left to judicial decision. In deciding the question, the court is not strictly bound by precedents established in other contexts. Thus, a conflict-of-laws decision refusing to apply a purely local statute or rule of law to a particular multistate transaction may not be valid precedent for refusal to apply the Code in an analogous situation. Application of the Code in such circumstances may be justified by its comprehensiveness, by the policy of uniformity, and by the fact that it is in large part a reformulation and restatement of the law merchant and of the understanding of a business community which transcends state and even national boundaries. In particular, where a transaction is governed in large part by the Code, application of another law to some detail of performance because of an accident of geography may violate the commercial understanding of the parties. 84

§ 12. Agreement to select law governing multistate transaction [Supplement]

UCC Article 1 was extensively revised in 2001. Former UCC §1-105 was replaced by Part 3, Territorial Applicability and General Rules, UCC §§1-301 et seq.. Revised Article 1 provides, with respect to all transactions, that an agreement by the parties to use the law of any state is effective, regardless of whether the transaction bears a reasonable relation to that state. However, if one of the parties is a consumer, such a choice-of-law provision may not deprive the consumer of legal protections afforded by the law of the state in which the consumer resides, or where the consumer contracts and takes delivery of goods.

FOOTNOTE 81.

UCC §1-105(1).

FOOTNOTE 82.

Davidson Oil Country Supply Co. v Klockner, Inc. (CA5 Tex) 908 F2d 1238, CCH Prod Liab Rep ¶12551, 30 Fed Rules Evid Serv 1230, 17 FR Serv 3d 473, 12 UCCRS2d 664, later proceeding (CA5 Tex) 908 F2d 1249 and corrected, reh den, in part (CA5 Tex) 917 F2d 185; Cerami-Kote, Inc. v Energywave Corp., 116 Idaho 56, 773 P2d 1143; United Wholesale Liquor Co. v Brown-Forman Distillers Corp., 108 NM 467, 775 P2d 233, 9 UCCRS2d 18.

FOOTNOTE 83.

UCC §1-105(2).

Legal Encyclopedias

As to conflict-of-laws rules relating to contract rights, generally, see 16 Am. Jur. 2d, Conflict of Laws §§74–97.

FOOTNOTE 84.


3. Scope of UCC Article 3 [§§13–18]

§ 13. Generally

Article 3 of the Uniform Commercial Code, which replaced the Uniform Negotiable Instruments Act, 85 is concerned with commercial paper. 86

The original version of Article 3 was first promulgated in 1952, and was revised in 1990; several states have enacted a version of the 1990 revision. 87

The provisions of Article 3 under the pre-1990 version may be cited as "Uniform Commercial Code—Commercial Paper," 88 and the provisions of Article 3 under the 1990 version may be cited as "Uniform Commercial Code—Negotiable Instruments." 89

While Article 3 deals with negotiable instruments, not all "negotiable" writings are governed by it. 90 The Code permits variation of the effect of the Code by agreement, 91 in furtherance of its principle of freedom of contract. 92


UCC §1-102, amended in 2001, no longer contains provisions regarding variance by agreement.

FOOTNOTE 85.

§4.

FOOTNOTE 86.

UCC §§3-101 through 3-805 [1952]UCC §§3-101 through 3-605 [1990 Rev].

As to preemption of Article 3 by federal or international law, see §8.

FOOTNOTE 87.

UCC Rep Serv, State UCC Variations Binder, State Correlation Tables.


Bakey, New 1990 Uniform Commercial Code: Article 3, negotiable instruments, and Article 4, bank deposits and collections. 29 Will LR 409 (1993).

Del Duca, What the general practitioner needs to know about the new negotiable instruments and bank deposits and collection amendments to the Uniform Commercial Code. 64 Pa BAQ 70 (1993).

Dolan, Changing commercial practices and the Uniform Commercial Code. 26 Loy LR (LA) 579 (1993).


Garland, A new law of negotiable instruments: Revised Article 3 of the UCC. 109 Bank LJ 557 (November/December 1992).

Golden, Florida enacts revised Uniform Commercial Code Arts. 3 and 4. 67 Fla BJ 11:12 (1993).

Harrell & Miller, The new UCC Articles 3 and 4: Impact on banking operations. 47 Consum Fin LQ Rep 3:283 (Summer 1993).

Heatherman, Good faith in revised Article 3 of the Uniform Commercial Code: Any change? Should there be? 29 Will LR 567 (1993).

Lawrence, What would be wrong with a user-friendly Code?: The drafting of revised Articles 3 and 4 of the Uniform Commercial Code. 26 Loy LR (LA) 659 (1993).


Littlefield, Articles 3, 4, and 4A (Uniform Commercial Code Survey). 49 Business Lawyer 1937 (August 1994).


Murray, Revised Articles 3 and 4 of the Uniform Commercial Code: A Friendly Critique. 47 U Miami L Rev 337 (November 1992).

Norwood, An overview of revised articles three and four of the UCC. 97 Commercial LJ 1 (Spring 1992).

Robertson, Report of the commercial code committee of the section of business law of the State Bar of Texas on revised UCC Articles 3 and 4. 47 Baylor LR 425 (Spring 1995).

FOOTNOTE 88.

UCC §3-101 [1952].

FOOTNOTE 89.

UCC §3-101 [1990 Rev].

FOOTNOTE 90.

§14.

FOOTNOTE 91.

UCC §1-102(3).

FOOTNOTE 92.


As to variation of effect of the UCC by agreement of the parties, see §12.

§ 14. Definitions

Article 3 of the Uniform Commercial Code contains a section setting forth the specific definition of various terms used in Article 3, and these definitions apply unless the context otherwise requires. 93 The term "instrument" as used in Article 3 means a negotiable instrument. 94

Observation: The pre-1990 version of Article 3 provides that in other articles of the Code, and as the context may require, the terms designating particular instruments, that is, "draft," "check," "certificate of deposit," and "note," may refer to instruments which are not negotiable within Article 3 as well as to instruments which are negotiable; 95 the 1990 version of Article 3 omits this provision.

Another provision of Article 3 provides a basic definition of "negotiability" by setting forth the requirements which must be met if a writing is to be a negotiable instrument. 96

Other terms defined in Article 3 are—

—. "issue," which means the first delivery of an instrument to a holder or a remitter. 97

—. "order," a direction to pay, which must be more than an authorization or request, identifying the person to pay with reasonable certainty and addressed to one or more persons jointly or in the alternative but not in succession. 98

—. "promise," which means an undertaking to pay which must be more than an acknowledgment of an obligation. 99

—. "secondary party," which means a drawer or indorser. 1

Other definitions applicable to Article 3 are listed in the definitional section along with the sections in Article 3 in which they appear. 2

The definitions of certain terms defined in Article 4 are applicable to Article 3. 3 These definitions are:

• "Bank" means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company 4

• "Banking day" means the part of a day in which a bank is open to the public for carrying on substantially all of its banking functions 5

• "Clearing house" means an association of banks or other payors regularly clearing items 6

• "Collecting bank" refers to a bank, except the payor bank, handling an item for collection 7

• "Depositary bank" is the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter 8

• "Documentary draft" means a draft to be presented for acceptance or payment if specified documents, certificated securities or instructions for uncertificated securities, or other certificates, statements, or the like are to be received by the drawee or other payor before acceptance or payment of the draft 9

• "Intermediary bank" is a bank, except the depositary or payor bank, to which an item is transferred in the course of collection 10

• "Item" means an instrument or a promise or order to pay money handled by a bank for collection or payment but does not include a payment order governed by Article 4A or a credit or debit card slip 11

• "Payor bank" is a bank that is the drawee of a draft 12

• "Suspends payments" means that a bank has been closed by order of the supervisory authorities, that a public officer has been appointed to take it over, or that it ceases or refuses to make payments in the ordinary course of business. 13

In addition, Article 1 contains general definitions and principles of construction and interpretation 14 applicable throughout Article 3. 15

§ 14. Definitions [Supplement]

UCC §3-103(a)(6) was redesignated UCC §3-103(a)(8) in 2002. UCC §3-103(a)(9) was redesignated UCC §3-103(a)(12) in 2002.

UCC §4-104(c), as amended in 2002, added references to UCC §3-103 for definitions of "record" and "remotely-created consumer item." UCC §3-103(c) was amended to delete the reference to the definition of "bank."

FOOTNOTE 93.

UCC §3-102(1) [1952]UCC §3-103(a) [1990 Rev].

Absent a contrary definition in Article 9, a definition contained in Article 3 controls the meaning of terms used in Article 9. In re Cambridge Biotech Corp. (BC DC Mass) 178 BR 34, 26 BCD 976, 25 UCCRS2d 1076.

FOOTNOTE 94.

UCC §3-102(1)(e) [1952]UCC §3-104(b) [1990 Rev].

As to negotiable instruments generally, see §23.

FOOTNOTE 95.

UCC §3-104(3) [1952].

FOOTNOTE 96.

UCC §3-104(1) [1952]UCC §3-104(a) [1990 Rev].

As to negotiability generally, see §20.

FOOTNOTE 97.

UCC §3-102(1)(a) [1952]UCC §3-105(a) [1990 Rev].

FOOTNOTE 98.

UCC §3-102(1)(b) [1952]UCC §3-103(a)(6) [1990 Rev].

FOOTNOTE 99.

UCC §3-102(1)(c) [1952]UCC §103(a)(9) [1990 Rev].

FOOTNOTE 1.

UCC §3-102(1)(d) [1952] (omitted from 1990 version).

FOOTNOTE 2.

UCC §3-102(2) [1952]UCC §3-103(b) [1990 Rev].

FOOTNOTE 3.

UCC §3-102(3) [1952]UCC §3-103(c) [1990 Rev].

FOOTNOTE 4.

UCC §4-105(1) [1990 Rev].

FOOTNOTE 5.

UCC §4-104(1)(c) [1952]UCC §4-104(a)(3) [1990 Rev].

FOOTNOTE 6.

UCC §4-104(a)(d) [1952]UCC §4-104(a)(4) [1990 Rev].

FOOTNOTE 7.

UCC §4-105(d) [1952]UCC §4-105(5) [1990 Rev].

FOOTNOTE 8.

UCC §4-105(a) [1952]UCC §4-105(2) [1990 Rev].

FOOTNOTE 9.

UCC §4-104(1)(f) [1952]UCC §4-104(a)(6) [1990 Rev].

FOOTNOTE 10.

UCC §4-105(c) [1952]UCC §4-105(4) [1990 Rev].

FOOTNOTE 11.

UCC §4-104(1)(g) [1952]UCC §4-104(a)(9) [1990 Rev].

FOOTNOTE 12.

UCC §4-105(b) [1952]UCC §4-105(3) [1990 Rev].

FOOTNOTE 13.

UCC §4-104(1)(k) [1952]UCC §4-104(a)(12) [1990 Rev].

FOOTNOTE 14.

UCC §1-201.

FOOTNOTE 15.

UCC §3-102(4) [1952]UCC §3-103(d) [1990 Rev].

§ 15. Instruments affected

Article 3 of the Uniform Commercial Code applies to negotiable instruments. 16

Observation: Unlike the 1990 version, the pre-1990 version of Article 3 has no provision affirmatively stating its scope; 17 rather, an Official Comment states that Article 3 is restricted to commercial paper, that is, negotiable instruments in the form of drafts, checks, certificates of deposit, and notes as defined in UCC §3-104(2). 18

Article 3 does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8. 19

Observation: The pre-1990 version of Article 3 specifically excludes from its coverage money, documents of title, and investment securities; 20 however, the 1990 version omits the reference to "documents of title" as superfluous because these documents contain no promise to pay money. 21

Although treasury bills are both negotiable instruments and investment securities, treasury bills are not governed by Article 3. 22 Also, an electronic funds transfer is not within Article 3 because it is not a signed negotiable instrument. 23

Practice guide: Even though an instrument does not come within the scope of Article 3, the parties may, by their agreement, specify that one or more of the provisions of Article 3 determine their rights and obligations under the instrument. 24

Under the pre-1990 version of Article 3, nonnegotiable instruments in the technical sense are covered by Article 3 with one exception; namely, Article 3 applies to any instrument whose terms do not preclude transfer and which is otherwise negotiable within Article 3 but which is not payable to order or to bearer, except that there can be no holder in due course of such an instrument. 25 The 1990 version of Article 3 contains no provision comparable to UCC §3-805 of the pre-1990 version. 26 However, an order or promise that is excluded from the 1990 version of Article 3 because it does not fall within the definition of negotiable instrument 27 may nevertheless be similar to a negotiable instrument in may respects, and although such a writing cannot be made a negotiable instrument within Article 3 by contract or conduct of its parties, in a particular case the court may arrive at a result similar to the result that would follow if the writing were a negotiable instrument, 28 by using Article 3 as a guide for reaching its decision. 29

FOOTNOTE 16.

UCC §3-102(a) [1990 Rev].

As to particular instruments or type of instruments as negotiable, see §§26 et seq.

FOOTNOTE 17.

Official Comment 1 to UCC §3-102(a) [1990 Rev].

FOOTNOTE 18.

Official Comment 1 to UCC §3-103 [1952].

Article 3 applies to all checks regardless of the purpose for which they are issued. Frangiosa v Kapoukranidis, 160 Vt 237, 627 A2d 351, 21 UCCRS2d 486.

FOOTNOTE 19.

UCC §3-102(a) [1990 Rev].

The definition of "payment order" in UCC §4A-103(a)(1)(iii) excludes drafts which are governed by Article 3, so this provision plus the specific exclusion in UCC §3-102(a) of payment orders makes Article 3 and Article 4A mutually exclusive. Official Comment 2 to UCC §3-102 [1990 Rev].

FOOTNOTE 20.

UCC §3-103(1) [1952].

Forms

Instruction to jury—"Document of title" defined. 6 Am. Jur. Pleading and Practice Forms, Commercial Code Art 1—General Provisions §1:26.

FOOTNOTE 21.


FOOTNOTE 22.

Morgan Guaranty Trust Co. v Third Nat'l Bank (CA1 Mass) 529 F2d 1141, 18 UCCRS 483; Brannon v First Nat'l Bank, 137 Ga App 275, 223 SE2d 473, 19 UCCRS 234.

FOOTNOTE 23.

Shawmut Worcester County Bank v First American Bank & Trust (DC Mass) 731 F Supp 57, 11 UCCRS2d 417.

FOOTNOTE 24.

Official Comment 2 to UCC §3-104 [1952]Official Comment 2 to UCC §3-104 [1990 Rev].

FOOTNOTE 25.

UCC §3-805 [1952].

FOOTNOTE 26.


FOOTNOTE 27.

UCC §3-104 [1990 Rev].

FOOTNOTE 28.


FOOTNOTE 29.

Semler v Knowling (Iowa) 325 NW2d 395, 34 UCCRS 1542.

§ 16. Principal changes from Uniform Negotiable Instruments Act

Article 3 of the Uniform Commercial Code dealing with commercial paper represents a complete revision and modernization of the Uniform Negotiable Instruments Act. 30 Certain matters formerly governed by the Uniform Negotiable Instruments Act are covered by Articles of the Uniform Commercial Code other than Article 3; for example, bearer bonds and any investment security are governed by Article 8 of the Code, a special negotiable instruments law dealing with investment securities. 31

§ 16. Principal changes from Uniform Negotiable Instruments Act [Supplement]

Article 9 of the Uniform Commercial Code was revised in its entirety in 1999. The revised article follows the general approach and retains much of the terminology of former Article 9, although the coverage was expanded.

FOOTNOTE 30.


FOOTNOTE 31.


Observation:

In addition, matters pertaining to bank deposits and collections, letters of credit, and secured transactions are treated in other Articles of the Code; UCC Article 4 deals with bank deposits and collections of "items" which may include commercial paper; UCC Article 5 deals with letters of credit; UCC Article 9 deals with secured transactions.

§ 17. Relationship of Article 3 to other Code articles

If there is conflict between Article 3 and Articles 4 or 9, Articles 4 and 9 govern. 32 In the case of a negotiable instrument which is subject to Article 4 because it is in the course of collection or to Article 9 because it is used as collateral, the provisions of Article 3 continue to be applicable except insofar as there may be conflicting provisions in Articles 4 or 9. 33

Occasionally, a particular writing may fit the definition of both a negotiable instrument under Article 3 and of an investment security under Article 8 and, in such cases, the instrument is subject exclusively to the requirements of Article 8. 34 However, although Article 8 is the sole source of law governing the rights of parties to a transaction involving an investment security, where a particular question as to an investment security cannot be resolved solely on the basis of the language of Article 8, it is appropriate to look to Article 3 for guidance. 35 Article 3 encompasses isolated transactions such as the issuance of a savings certificate by a savings and loan association as part of the financial arrangements for a loan, whereas Article 8 is directed to multiple transactions in which a group of promises, all for the same amount and all due at the same time, are made to multiple parties with the intention that the security evidencing the promises will be traded. 36

FOOTNOTE 32.

UCC §3-103(2) [1952]UCC §3-102(b) [1990 Rev].

The provisions of Article 3 on notice of dishonor must be considered in conjunction with the provisions of Article 4 where the question is one of liability as between a depositor (indorser) of a check and the depositary bank. Mercantile Bank & Trust Co. v Hunter, 31 Colo App 200, 501 P2d 486, 11 UCCRS 545; Available Iron & Metal Co. v First Nat'l Bank (1st Dist) 56 Ill App 3d 516, 13 Ill Dec 940, 371 NE2d 1032, 23 UCCRS 694.

FOOTNOTE 33.


FOOTNOTE 34.

Official Comment 2 to UCC §3-103 [1952]Official Comment 2 to UCC §3-102 [1990 Rev].

FOOTNOTE 35.

Bankhaus Hermann Lampe KG v Mercantile-Safe Deposit & Trust Co. (SD NY) 466 F Supp 1133, 25 UCCRS 1141; E. F. Hutton & Co. v Manufacturers Nat'l Bank (ED Mich) 259 F Supp 513, 3 UCCRS 752.

FOOTNOTE 36.

Jones v United Sav. & Loan Asso. (Mo App) 515 SW2d 869, 16 UCCRS 179.

§ 18. Relationship between Article 3 and law merchant and common law

The Uniform Commercial Code provides that, unless displaced by its particular provisions, the principles of law and equity, including the law merchant and the law relating to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause, will supplement its provisions. 37 This provision indicates the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by the Code. 38

FOOTNOTE 37.

UCC §1-103.

FOOTNOTE 38.

Official Comment to UCC §1-103.

4. Construction of Governing Law [§19]

§ 19. Generally

The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies, 39 which are expressly stated. 40 Remedies provided in the Code are to be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed, but neither consequential or special nor penal damages may be had except as specifically provided in the Code or by other rule of law. 41 Any right or obligation declared by the Code is enforceable by action unless the provision declaring it specifies a different and limited effect. 42

The Code is drawn to provide flexibility so that it will provide its own machinery for expansion of commercial practices; and it is intended to make it possible for the law embodied in the Code to be developed by the courts in the light of unforeseen and new circumstances and practices. 43 However, the proper construction of the Code requires that its interpretation and application be limited to its reason. 44

Since the Code is a general act intended as a unified coverage of its subject matter, no part of it will be impliedly repealed by subsequent legislation if such construction can reasonably be avoided. 45

Comment: This provision in Article 1 is intended to express the policy that no act which bears evidence of carefully considered permanent regulative intention should lightly be regarded as impliedly repealed by subsequent legislation. The Code, carefully integrated and intended as a uniform codification of permanent character covering an entire "field" of law, is to be regarded as particularly resistant to implied repeal. 46

In accordance with the objective of the Code to secure uniformity in legislation and decision among the states, it is the duty of courts in construing the Code to have in mind the purpose of securing uniformity in the law of commercial paper. 47 Further, courts should generally follow the majority rule in other jurisdictions in the construction of the Code provisions, 48 unless there is something manifestly erroneous in the interpretation of a statute given by the courts of one jurisdiction, in which case it should not be followed by the courts in other jurisdictions. 49

If any provision or clause of the Code or application thereof to any person or circumstances is held invalid, such invalidity does not affect other provisions or applications of the Code which can be given effect without the invalid provision or application, and to this end the provisions of the Code are declared to be severable. 50

Unless the context otherwise requires, words in the singular number include the plural and vice versa; and words of the masculine gender include the feminine and the neuter. 51

Section captions are parts of the Code. 52


UCC §1-102, amended in 2001, no longer contains provisions regarding singular and plural and gender, which are now in UCC §1-106. The severability clause of former UCC §1-108 is now contained in UCC §1-105.

UCC §1-102 now covers the scope of Article 1. UCC §1-103(a) now provides for the construction of the code in order to promote its purposes and policies, and UCC §1-103(b) provides for the applicability of supplemental principles of law.

UCC §1-109, regarding section captions, was replaced in 2001 by UCC §1-107.

UCC Article 1 was extensively revised in 2001. Former UCC §1-106 was replaced by UCC §1-305, providing that remedies are to be liberally administered.

FOOTNOTE 39.

UCC §1-102(1).

A.L.R. Library

What constitutes taking instrument in good faith, and without notice of infirmities or defenses, to support holder-in-due-course status, under UCC §3-302, 36 A.L.R. 4th 212.

Payee's right of recovery, in conversion under UCC §3-419(1)(c)for money paid on unauthorized indorsement, 23 A.L.R. 4th 855.

Who is holder of instrument for "value" under UCC §3-303, 97 A.L.R. 3d 1114.

Construction and application of UCC §3-403(2)dealing with personal liability of authorized representative who signs negotiable instrument in his own name, 97 A.L.R. 3d 798.

What constitutes unconditional promise to pay under Uniform Commercial Code §3-104(1)(b), 88 A.L.R. 3d 1100.

Fraud in the inducement and fraud in the factum as defenses under UCC §3-305against holder in due course, 78 A.L.R. 3d 1020.

Construction and effect of UCC Art. 3, dealing with commercial paper, 23 A.L.R. 3d 932.

FOOTNOTE 40.

§6.

FOOTNOTE 41.

UCC §1-106(1).

This provision governs construction of the entire Uniform Commercial Code. Cincinnati Ins. Co. v First Nat'l Bank, 63 Ohio St 2d 220, 17 Ohio Ops 3d 136, 407 NE2d 519, 29 UCCRS 1581.

Definition:

"Aggrieved party" means a party entitled to resort to a remedy. UCC §1-201(2).

FOOTNOTE 42.

UCC §1-106(2).

Definition:

"Action" in the sense of a judicial proceeding includes recoupment, counterclaim, setoff, suit in equity, and any other proceedings in which rights are determined. UCC §1-201(1).

FOOTNOTE 43.


FOOTNOTE 44.


FOOTNOTE 45.

UCC §1-104.

FOOTNOTE 46.


FOOTNOTE 47.

Utah State Nat'l Bank v Smith, 180 Cal 1, 179 P 160.

FOOTNOTE 48.

Charles Nelson Co. v Morton, 106 Cal App 144, 288 P 845.

FOOTNOTE 49.

People's Finance & Thrift Co. v Shaw-Leahy Co., 214 Cal 108, 3 P2d 1012.

FOOTNOTE 50.

UCC §1-108.

FOOTNOTE 51.

UCC §1-102(5).

FOOTNOTE 52.

UCC §1-109.

B. Negotiability and Nonnegotiability [§§20–51]

Research References


UCC §1-201;

UCC §§3-102 through 3-104, 3-106, 3-118, 3-206, 3-409, 3-412, 3-415, 3-419, 3-502 [1990 Rev];

UCC §§3-104 through 3-105, 3-110, 3-121, 3-202, 3-206, 3-411, 3-413, 3-415, 3-501, 3-503, 3-507, 3-801, 3-805 [1952]

UCC §§4-104, 4-106 [1990 Rev];

UCC §7-104

Primary Authority

15 USCA §1631

A.L.R. Library

A.L.R. Digest: Bills and Notes §§52–67

A.L.R. Index: Accommodation Party or Paper;


A.L.R. Index: Certificates of Deposit;


A.L.R. Index: Uniform Commercial Code


6A Anderson on the Uniform Commercial Code (3d ed.) §§3-101:19–3-101:24;



6A Anderson on the Uniform Commercial Code (3d ed.) §§3-104:16–3-104:22

Forms

3B Am. Jur. Legal Forms 2d, Bills and Notes §§41:29, 41:71, 41:91, 41:92;

19 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 3—Negotiable Instruments §§253:2211–253:2263, 253:2452, 253:2593

6 Am. Jur. Pleading and Practice Forms, Commercial Code Art 1—General Provisions §1:28;

6A Am. Jur. Pleading and Practice Forms, Commercial Code Art 3—Negotiable Instruments §§3:5–3:8; 3:30

1. In General [§§20–25]

§ 20. Negotiability; generally

The provisions of Article 3 of the Uniform Commercial Code deal with "instruments," which is defined as meaning negotiable instruments. 53 "Negotiability" is a technical term derived from the usage of merchants in transferring bills of exchange and promissory notes. 54 The function of negotiability is to separate the negotiable instrument from the underlying transaction out of which it arose. 55

Negotiability is the most vital and distinctive characteristic of a negotiable instrument; the term imports a quality of easy or simple transferability 56 by any possessor. 57 In fact, negotiability is a characteristic of such importance to commercial paper that any doubt is resolved against negotiability. 58

The quality of negotiability enables the holder to sue in his or her own name, 59 and to take free of many claims or equities and defenses which could be asserted against the person transferring the instrument. 60

The term "negotiable" signifies that a paper possesses the quality and requisites of negotiability, 61 which are fixed at the time of the execution of the instrument and exist prior to the performance of any necessary ceremony of the process of negotiation. 62 For the same reason, though custom may be important in assisting courts to interpret statutes to determine whether a particular instrument is negotiable, custom never overcomes positive provisions of statutes which preclude negotiability. 63

Because under the law the character of an instrument as negotiable or nonnegotiable must be determined from the form of the instrument itself, 64 that character is not determined by a mere stipulation of the parties that the instrument will or will not be negotiable. 65 And, obviously, mere belief that instruments are negotiable cannot alter their terms so as to render them negotiable when in fact they are nonnegotiable under the statutes. 66

FOOTNOTE 53.

UCC §3-102(1)(e) [1952]UCC §3-104(b) [1990 Rev].

Forms

Complaints, petition, or declaration—Requisites of negotiability of draft. 6A Am. Jur. Pleading and Practice Forms, Commercial Code Art 3—Negotiable Instruments §§3:5–3:8.

FOOTNOTE 54.

Knox v Eden Musee Americain Co., 148 NY 441, 42 NE 988.

FOOTNOTE 55.

Persky v Bank of America Nat'l Ass'n, 261 NY 212, 185 NE 77.

FOOTNOTE 56.


The principle of negotiability is in the instrument's having a circulating credit and its being transferable by indorsement and delivery, or by delivery merely. Manhattan Sav. Inst. v New York Nat'l Exch. Bank, 170 NY 58, 62 NE 1079.

FOOTNOTE 57.

Manhattan Sav. Inst. v New York Nat'l Exch. Bank, 170 NY 58, 62 NE 1079.

FOOTNOTE 58.

Jefferson v Mitchell Select Furniture Co. (Civ App) 56 Ala App 259, 321 So 2d 216, 18 UCCRS 431; Geiger Finance Co. v Graham, 123 Ga App 771, 182 SE2d 521, 9 UCCRS 598; Pacific Finance Loans v Goodwin (Cuyahoga Co) 41 Ohio App 2d 141, 70 Ohio Ops 2d 265, 324 NE2d 578, 16 UCCRS 750.

FOOTNOTE 59.


FOOTNOTE 60.

Shakespear v Smith, 77 Cal 638, 20 P 294; Manhattan Sav. Inst. v New York Nat'l Exch. Bank, 170 NY 58, 62 NE 1079.

As to availability of particular defenses, see §§546 et seq.

FOOTNOTE 61.


As to the definition of negotiable instrument, see §23.

As to what constitutes "negotiation," see §§212, 214.

FOOTNOTE 62.

Pitman v Walker, 187 Cal 667, 203 P 739.

FOOTNOTE 63.

American Nat'l Bank v A. G. Sommerville, Inc., 191 Cal 364, 216 P 376.

FOOTNOTE 64.

UCC §3-104(1) [1952]UCC §3-104(1) [1990 Rev], setting out the general formal requirements of negotiable instruments.

FOOTNOTE 65.

American Nat'l Bank v A. G. Sommerville, Inc., 191 Cal 364, 216 P 376; Hollywood State Bank v Wilde, 70 Cal App 2d 103, 160 P2d 846.

FOOTNOTE 66.

Kohn v Sacramento E., G. & R. Co., 168 Cal 1, 141 P 626.

§ 21. Negotiability; generally - Assignability distinguished

Negotiability is limited to the special class of contracts known as negotiable instruments, 67 while assignability applies to contractual rights and chooses in action in general, as well as to any right of property or interest therein. 68

A draft, note, or other commercial paper, whether it is negotiable or not, may be transferred by assignment, 69 but there is a difference in regard to the rights of a transferee of a negotiable instrument where there is a negotiation and where there is merely an assignment without negotiation. 70 The assignor can convey no greater title than he or she has, and one who takes by assignment simply steps into the shoes of the assignor and takes subject to all the infirmities, equities, and defenses which could have been set up against the assignor at the time of the assignment or which exist before notice of the transfer. 71 Under Article 3, this rule applies where a negotiable instrument is assigned. 72 However, a person taking through a holder in due course is afforded the rights and the protection accorded a holder in due course, even where the person taking does so by assignment. 73 On the other hand, where negotiable commercial paper is negotiated, a person taking the paper as a holder in due course may acquire a better title or rights than the original party had. 74

FOOTNOTE 67.

UCC §3-102(1)(e) [1952]UCC §3-104(b) [1990 Rev].

FOOTNOTE 68.

Legal Encyclopedias

6 Am. Jur. 2d, Assignments §§7, 8.

FOOTNOTE 69.

Edgar v Haines, 109 Ohio St 159, 141 NE 837, 38 ALR 795.

FOOTNOTE 70.

§§202, 206 et seq.

FOOTNOTE 71.

Holly Hill Acres, Ltd. v Charter Bank of Gainesville (Fla App D2) 314 So 2d 209, 17 UCCRS 144.

FOOTNOTE 72.

§247.

FOOTNOTE 73.

§§253, 254.

FOOTNOTE 74.

§260.

As to what constitutes negotiation, see §§212, 214.

§ 22. Negotiability; generally - Continuance or termination of negotiability

The Uniform Negotiable Instruments Act specifically provided for the continuance and termination of the negotiable quality of an instrument negotiable in its origin, and such an instrument continued to be negotiable until restrictively indorsed or discharged by payment, or otherwise. 75 No similar provision is included in Article 3 of the Uniform Commercial Code. 76 Under the Code, no restrictive indorsement prevents further transfer or negotiation of the instrument and the placing of a restrictive indorsement on an instrument thus does not terminate negotiability. 77

Maturity of an instrument and its consequent dishonor does not destroy its negotiability, particularly in the limited or nontechnical sense 78 and particularly under the Uniform Commercial Code, which does away with the absolute concept of pre-Code law under which an indorsee taking a note after maturity could not be a holder in due course. 79

FOOTNOTE 75.

Uniform Negotiable Instruments Act §47 (superseded by UCC Article 3).

As to Uniform Negotiable Instruments Act generally, see §4.

FOOTNOTE 76.

Official Comment 1 to UCC §3-206 [1952], stating that by omitting such a provision, there is avoided any implication that a discharge is effective against a holder in due course.

FOOTNOTE 77.

UCC §3-206(1) [1952]UCC §3-206(a) [1990 Rev].

For a discussion of restrictive indorsements see §230.

FOOTNOTE 78.

St. John v Roberts, 31 NY 441; Lessen v Lindsey, 238 App Div 262, 264 NYS 391.

FOOTNOTE 79.

Goff v Morgan County Nat'l Bank, 144 Fla 671, 198 So 484.

For a discussion of the Code rule, see §290.

§ 23. Negotiable instruments

"Negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it (a) is payable to bearer or order at the time it is issued or first comes into the possession of a holder, (b) is payable on demand or at a definite time, and (c) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but it may contain (1) an undertaking or power to give, maintain, or collect collateral to secure payment, (2) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (3) a waiver of the benefit of any law intended for the advantage or protection of an obligor. 80

Observation: The pre-1990 version of Article 3 provides that for a writing to be a negotiable instrument, it must (1) be signed by the maker or drawer, (2) contain an unconditional promise to pay a sum certain in money and no other promise, order, obligation, or power given by the make or drawer except as authorized by the UCC, (3) be payable on demand and at a definite time, and (4) be payable to order or to bearer. 81 The provisions in both the 1990 version and the pre-1990 version of Article 3 setting out the requisites of negotiability was specifically intended to be an expansion of the rules for negotiability that existed under the Uniform Negotiable Instruments Law. 82

The instruments to which the Uniform Commercial Code definition of negotiability applies are drafts, checks, certificates of deposit, and notes. 83 In light of the Code definitions, the term "negotiable instrument" is limited to a signed writing that orders or promises payment of money. 84 The negotiability of an instrument is determined from the four corners of the instrument at the time it is issued without reference to extrinsic facts. 85

Practice guide: The Uniform Commercial Code does not expressly state that it is not necessary that an instrument follow the language of the statute, as did the former Uniform Negotiable Instruments Act. 86 The omission of such a provision in the Code does not mean that an instrument to be negotiable must follow the statutory language, or that one term may not be recognized as clearly the equivalent of another; it does mean, however, that either the statutory language or a clear equivalent must be found in the instrument, and that in doubtful cases the decision should be against negotiability. 87

Practice guide: Negotiability is a question of law, and a court does not need to find any facts to determine whether the instrument before it is a negotiable instrument. The parties' stipulation regarding negotiability is not binding on any court. 88

An instrument that is negotiable in its origin should retain to the end the character given to it and written into its face. 89 This does not mean, however, that an instrument negotiable in its origin may not be limited and modified by a subsequent contract between the parties so as to affect the rights of subsequent holders, to the extent that they take the paper with notice of the specific limitation. 90

§ 23. Negotiable instruments [Supplement]

Research References

A.L.R. Library

What constitutes undertaking or instruction to do any act in addition to payment of money as limitation on definition of negotiable instrument under UCC §3-104, 75 A.L.R. 5th 559.

FOOTNOTE 80.

UCC §3-104(a) [1952].

As to the requirement that the promise or order be unconditional, see §§91 et seq.

As to the requirement that the promise or order be paid a fixed amount of money, see §§98 et seq.

As to the requirement that the instrument be payable to bearer or order, see §§88, 89.

As to the requirement that the instrument be payable on demand or at a definite time, see §§105, 106.

As to the requirement that the instrument not contain any undertaking or instruction other than those specified, see §§112, 116.

A.L.R. Library

Negotiability of instrument providing for variable rate of interest under UCC §3-106, 69 A.L.R. 4th 1127.

Effect on negotiability of instrument, under terms of UCC §3-104(1)of statements expressly limiting negotiability or transferability, 58 A.L.R. 4th 632.

Forms

Complaints, petition, or declaration—Allegation—Requisites of negotiability. 6A Am. Jur. Pleading and Practice Forms, Commercial Code—Negotiable Instruments §§3:5–3:8.

FOOTNOTE 81.

UCC §3-104(1) [1952].

FOOTNOTE 82.

Ameritrust Co., N.A. v White (CA11 Ga) 73 F3d 1553, 9 FLW Fed C 818.

FOOTNOTE 83.

UCC §3-104(2) [1952]UCC §3-104(e)–(j) [1990 Rev].

FOOTNOTE 84.


FOOTNOTE 85.

Bankers Trust v 236 Beltway Inv. (ED Va) 865 F Supp 1186, 26 UCCRS2d 776; Partney v Reed (Mo App) 889 SW2d 896, 25 UCCRS2d 154.

FOOTNOTE 86.

Uniform Negotiable Instruments Act §1 (superseded by UCC Art 3).

FOOTNOTE 87.


FOOTNOTE 88.

Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. v Bailey (CD Cal) 710 F Supp 737, 9 UCCRS2d 145; Drabkin v Capital Bank, N.A. (BC DC Dist Col) 156 BR 102, 5 Fourth Cir & Dist Col Bankr Ct Rep 537, 21 UCCRS2d 135; Cartwright v MBank Corpus Christi, N.A. (Tex App Corpus Christi) 865 SW2d 546, writ den (May 4, 1994) and rehg of writ of error overr (Jul 28, 1994) (decided under prior law).

FOOTNOTE 89.


FOOTNOTE 90.


§ 24. Extent of negotiability

While it has been said that there is no middle term between negotiable and nonnegotiable, 91 the courts sometimes use the term "quasi-negotiable." 92 An instrument may possess some, but not all, of the elements of negotiability, or be negotiable in a limited sense rather than in the full, exact, or true sense. 93

The judicial basis for negotiability of documents other than those expressly recognized as negotiable by statute, or the basis of quasi-negotiability, is contract or, more frequently, estoppel, based on the familiar equitable doctrine that where one of two innocent persons is to suffer, the sufferer should be the one whose confidence put into the hands of the wrongdoer the means of doing the wrong. 94

FOOTNOTE 91.


FOOTNOTE 92.

Hulburt v Walker, 258 NY 8, 179 NE 34.

FOOTNOTE 93.


FOOTNOTE 94.

In re Goodchild, 160 Misc 738, 290 NYS 683.

§ 25. Nonnegotiable instruments

A nonnegotiable instrument is an instrument which does not meet the requirements laid down in the Uniform Commercial Code to qualify an instrument as negotiable; thus, a note or draft that does not contain an unconditional covenant to pay a sum certain in money is not a negotiable instrument. 95 Likewise, a note or draft that is not payable to order or to bearer, or that is not payable on demand or at a definite time, is not a negotiable instrument. 96

Caution: There is an exception to the rule that an instrument must be payable to bearer or to order to be negotiable. An order that meets the requirements of the Code for negotiability except the requirement that it be payable to bearer or to order and that otherwise falls within the Code's definition of a "check" is a negotiable instrument and a check. 97

Comment: Under the pre-1990 version of Article 3, a check that is not payable to order or to bearer is governed by Article 3, but there can be no holder in due course of such a check; 98 but under the 1990 version, such a check is governed by Article 3 and there can be a holder in due course. 99

No instrument which does not meet the requirements for negotiability may be made negotiable by agreement of the parties. 1 Moreover, a writing that does not meet the requirements of the Code cannot be made a negotiable instrument within Article 3 by contract or by conduct. 2

Comment: An order or promise may fail to meet the statutory requirements for negotiability but be similar to a negotiable instrument in many respects. Nothing in Article 3 is intended to mean that a court could not arrive at a result similar to the result that would follow if the writing were a negotiable instrument and it may be appropriate for a court to apply one or more of the provisions of Article 3 by analogy, taking into account the expectations of the parties and the differences between the writing and an instrument governed by Article 3. 3

A promise or order other than a check is not a negotiable instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not a negotiable instrument governed by Article 3. 4

Comment: The Code allows exclusion from Article 3 of a writing that would otherwise be an instrument by a statement to the effect that the writing is not negotiable or is not governed by Article 3. For example, a promissory note can be stamped with the legend NOT NEGOTIABLE. The effect under the Code is not only to negate the possibility of a holder in due course, but to prevent the writing from being a negotiable instrument for any purpose. The pertinent provision does apply, however, to a check. 5

Under the pre-1990 version of Article 3, except for the provisions applicable to a holder in due course, all of Article 3 is applicable to a nonnegotiable instrument whose terms do not preclude transfer. 6 Furthermore, as used in other Articles of the Code and as the context may require, the terms "draft," "check," "certificate of deposit," and "note" may refer to instruments which are not negotiable within Article 3 as well as to instruments which are so negotiable. 7 Thus, under the pre-1990 version, the term "negotiable instrument" is used as a technical term of art and, as so used, refers to a particular type of instrument which meets all the requirements as to form of a negotiable instrument, except that it is not payable to order or bearer. 8 The pre-1990 version of Article 3 applies to a nonnegotiable instrument whose terms do not preclude transfer, except those peculiar to a holder in due course. 9 The 1990 version of Article 3 applies only to negotiable instruments. 10

§ 25. Nonnegotiable instruments [Supplement]

Research References

A.L.R. Library

When is instrument "payable to bearer or to order" as required to constitute negotiable instrument under Article 3 of the Uniform Commercial Code [rev] §§3—104(a)(1) and 3—109, 77 A.L.R. 5th 523.

FOOTNOTE 95.

First Bank of Marianna v Havana Canning Co., 142 Fla 554, 195 So 188.

A nonrecourse clause, which insulates the maker from personal liability on a note, renders the note conditional and destroys its negotiability. United Nat'l Bank v Airport Plaza Ltd. Partnership (Fla App D3) 537 So 2d 608, 13 FLW 2601, review den (Fla) 547 So 2d 1209.

A.L.R. Library

Provision in draft or note directing payment "on acceptance" as affecting negotiability, 19 A.L.R. 4th 1268.

FOOTNOTE 96.

Plotch v Gregory (Fla App D4) 463 So 2d 432, 10 FLW 314.

FOOTNOTE 97.

UCC §3-104(c) [1990 Rev].

FOOTNOTE 98.

UCC §3-805 [1952].

FOOTNOTE 99.

UCC §3-104(c) [1990 Rev].

FOOTNOTE 1.


FOOTNOTE 2.

Official Comment 2 to UCC §3-104 [1952 and 1990 Rev].

FOOTNOTE 3.

Official Comment 2 to UCC §3-104 [1952 and 1990 Rev.]

FOOTNOTE 4.

UCC §3-104(d) [1990 Rev].

A.L.R. Library

Effect on negotiability of instrument, under terms of UCC §3-104(1)of statements expressly limiting negotiability or transferability, 58 A.L.R. 4th 632.

FOOTNOTE 5.


FOOTNOTE 6.

UCC §3-805 [1952].

FOOTNOTE 7.

UCC §3-104(3) [1952].

FOOTNOTE 8.


For a definition of negotiable instrument, see §23.

FOOTNOTE 9.

UCC §3-805 [1952].

FOOTNOTE 10.

UCC §3-102(a) [1990 Rev].

2. Particular Instruments or Types of Instruments As Negotiable [§§26–51]

a. In General [§§26–38]

§ 26. Generally; commercial paper

The Uniform Commercial Code uses the term commercial paper when referring to negotiable instruments 11 of a particular kind, that is, drafts, checks, certificates of deposit, and notes as defined by Article 3 provisions. 12

However, the term "commercial paper," long antedates the Uniform Commercial Code as a business and legal term in common use, and in such usage, was deemed synonymous with "negotiable paper" 13 or "bills and notes," 14 and was applied to nonnegotiable as well as negotiable instruments. 15

Some instruments which constituted negotiable instruments and commercial paper under the prior law, specifically bearer bonds and certain notes, are excluded from the term "commercial paper" and covered by the term "investment securities," which brings them under a distinct and separate article of the Code. 16

FOOTNOTE 11.


FOOTNOTE 12.


Forms

Terms used in negotiable instruments; Types of negotiable instruments. 19 Am. Jur. Legal Forms 2d, Uniform Commercial Code Art 3—Negotiable Instruments §§253:2211–253:2263.

Complaints, petition, or declaration—Allegation—Requisites of negotiability. 6A Am. Jur. Pleading and Practice Forms, Commercial Code Art 3—Negotiable Instruments, Form 3:5–3:8.

FOOTNOTE 13.

Hall v Bank of Blasdell, 306 NY 336, 118 NE2d 464.

FOOTNOTE 14.

Gramatan Nat'l Bank & Trust Co. v Mikolajczak (Sup) 142 NYS2d 564.

FOOTNOTE 15.

Chase Nat'l Bank v Faurot, 149 NY 532, 44 NE 164.

FOOTNOTE 16.


Legal Encyclopedias

As to investment securities, see 15A Am. Jur. 2d, Commercial Code §§73–121.

§ 27. Accommodation paper

While the term "accommodation paper" is not defined in the Uniform Commercial Code, Article 3 of the Code defines the term "accommodation party," as one who signs an instrument in any capacity for the purpose of lending his or her name to another party to the instrument. 17 Article 3 also deals with the contract of an accommodation party and his or her liabilities. 18

The accommodation party usually expects that not he or she, but the accommodated party, will provide payment of the paper when it falls due. 19 The obligation of the accommodation party is that of a surety on the instrument. 20 Accommodation paper creates no obligation upon delivery to the accommodated party, but only when it is delivered by the latter to a holder for value. 21 When the instrument is taken for value before it is due, the accommodation party is liable in the capacity in which he or she has signed, but such party's obligation is terminated at the time limit unless in the meantime the obligation of the principal has become effective. 22

Accommodation paper is distinguished from other paper, which in contradistinction is called "business paper." 23

FOOTNOTE 17.

UCC §3-415(1) [1952]UCC §3-419 [1990 Rev].

FOOTNOTE 18.

UCC §3-415 [1952]UCC §3-419 [1990 Rev].

FOOTNOTE 19.

Callery v Lyons, 292 NY 15, 53 NE2d 376.

FOOTNOTE 20.

§483.

As to liability of accommodated party to accommodation party, see §482.

FOOTNOTE 21.

§483.

FOOTNOTE 22.

§483.

FOOTNOTE 23.

Jacobus v Jamestown Mantel Co., 211 NY 154, 105 NE 210.

§ 28. Securities

In the Uniform Commercial Code a "security" and a "negotiable instrument" have different definitions, although one instrument may be both. 24 The formal requisites of negotiability go to matters of form exclusively; 25 the definition of "security," on the other hand, looks principally to the manner in which an instrument is used. 26 It is functional rather than formal. 27

Article 8 of the Uniform Commercial Code, designated "Investment Securities," 28 is essentially a negotiable instruments law dealing with securities. 29

FOOTNOTE 24.

Official Comment 2 to UCC §3-103 [1952]Official Comment 2 to UCC §3-102 [1990 Re

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