California Uniform Commercial Code (2010)

Negotiable instruments are written orders or unconditional promises to pay a fixed sum
of money on demand or at a certain time. Promissory notes, bills of exchange, checks,
drafts, and certificates of deposit are all examples of negotiable instruments. Negotiable
instruments may be transferred from one person to another, who is known as a holder in
due course. Upon transfer, also called negotiation of the instrument, the holder in due
course obtains full legal title to the instrument. Negotiable instruments may be transferred
by delivery or by endorsement and delivery.

One type of negotiable instrument, called a promissory note, involves only two
parties, the maker of the note and the payee, or the party to whom the note is
payable. With a promissory note, the maker promises to pay a certain amount to the
payee. Another type of negotiable instrument, called a bill of exchange, involves three
parties. The party who drafts the bill of exchange is known as the drawer. The party who
is called on to make payment is known as the drawee, and the party to whom payment is
to be made is known as the payee. A check is an example of a bill of exchange, where the
individual or business writing the check is the drawer, the bank is the drawee, and the
person or business to whom the check is made out is the payee.

To be valid a negotiable instrument must meet four requirements. First, it must be in

writing and signed by the maker or drawee. Second, it must contain an
unconditional promise (promissory note) or order (bill of exchange) to pay a certain
sum of money and no other promise except as authorized by the Uniform
Commercial Code (UCC). Third, it must be payable on demand or at a definite time.
Finally, it must be payable either to order or to bearer.

The laws governing negotiable instruments are spelled out in Article 3 of the UCC.
Modeled after the Negotiable Instruments Law, Article 3 has been adopted as law by all
50 states and the District of Columbia. It spells out the basic requirements for valid
negotiable instruments and covers such matters as the rights of the holder, types of
endorsement, warranties given to subsequent holders, forgeries, dating, and alterations.

A negotiable instrument is said to be dishonored when, upon presentation, payment or

acceptance has been refused. To qualify as a holder in due course, an individual or
business must have taken the negotiable instrument before it was overdue and
without notice that it had been previously dishonored, if such was the case. The
negotiable instrument must also be complete and regular upon its face; that is, all of
the necessary information must be present. The holder must also take the
instrument in good faith and for value. At the time it was negotiated, the holder in
due course must have had no notice of an infirmity in the instrument or a defect in
the title of the person negotiating it.

If these conditions are met, then the holder in due course generally holds the instrument
free from any defect of title of prior parties involved with the instrument. The holder in

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due course may enforce payment of the instrument for the full amount against all parties
liable thereon, free from any defenses available to prior parties among themselves.

Negotiable instruments may be endorsed in various ways, and some negotiable

instruments do not require any endorsement. If a negotiable instrument is a bearer
instrument, then it may be negotiated by simply delivering it from one person to another
with no endorsement required. Such negotiable instruments typically have a blank
endorsement consisting of a person's name only. If the negotiable instrument is an order
instrument, then the payee must first endorse it and deliver it before negotiation is
complete. For example, if the instrument says, "Pay to the order of Jane Smith," then it is
an order instrument and Jane Smith must endorse it and then deliver it to the payer or
drawee.

Endorsements such as "Pay to the order of Jane Smith" are known as special
endorsements and have the effect of making the instrument an order instrument rather
than a bearer instrument. Restrictive endorsements ("Pay to Jane Smith only") and
qualified endorsements ("Pay without recourse to the order of Jane Smith") also have the
effect of requiring the payee to endorse the negotiable instrument. Qualified
endorsements also affect the nature of implied warranties associated with endorsement.

Under the UCC, an unqualified endorser who receives payment or consideration for a
negotiable instrument provides a series of implied warranties to the transferee and any
subsequent holder in due course. An unqualified endorser warranties that he or she has
good title to the instrument or represents a person with title, and that the transfer is
otherwise rightful. The endorser also warranties that all signatures are genuine or
authorized, that the instrument has not been materially altered, that no defense of any
prior party is good against the endorser, and that the endorser has no knowledge of any
insolvency proceeding involving the payer.

Other issues concerning negotiable instruments are also covered in Article 3 of the UCC.
In the case of a forgery, the negotiable instrument becomes inoperative. Antedated or
past-dated instruments are not invalid, provided the dating was not done for fraudulent or
illegal purposes. Negotiable instruments that have been materially altered without the
permission of all parties involved are void. But a holder in due course who is not party
to the material alteration can enforce payment according to the instrument's original
terms. Also covered in Article 3 are interpretations of contradictions that may appear
from time to time in negotiable instrument