DEFENSES ΤΟ COMMERCIAL PAPER CHAPTER 1 INTRODUCTORY Subdivision I. Commercial paper and definitions, §§ 1, 2. Subdivision II. What instruments negotiable-When negotiability destroyed, and when not, §§ 3-18. SUBDIVISION I. COMMERCIAL PAPER AND DEFINITIONS. Section 1. Meaning of term "commercial paper." 2. Definitions. § 1. Meaning of term "commercial paper."-The terms "commercial paper" and "negotiable paper," are synonymous, and embrace more than is covered by the expression "bills and notes." Commercial paper has been defined to be "bills of exchange, promissory notes, bank checks and other negotiable instruments for payment of money, which, by their form and their face, purport to be such instruments as are by the law merchant recognized as falling under designation of commercial paper." Again it is defined to comprise "negotiable paper given in due course of business, whether the element of negotiability be given it by the law merchant or by 1 Black's Law Dictionary (2d ed.), p. 221. The legislatures of the states have the power to determine what shall constitute negotiability in instruments. Farmers' Sav. Bank v. Neel, 193 Iowa 685, 187 N. W. 555. A bill or note may be negotiable after it is paid. Beauchamp v. Zellmer (Tex. Com. App.), 237 S. W. 911. statute."2 The term "commercial paper," as used in the bankruptcy act of 1867, denotes bills of exchange, promissory notes and negotiable checks, governed by the rules of the law merchant, and is applied to bankers as well as to merchants and traders.3 Under these definitions, the bonds of a railroad corporation, payable to an individual or his assigns, are in the nature of commercial paper negotiable by delivery under an assignment in blank, and are not specialties subject to equities between the corporation and the person named in the bonds as the primary payee. "When such obligations are issued to secure the payment of money upon time, and contain upon their face an expression showing that they are expected to pass from one person to another, and thus to perform the office of bills and notes, or of money, as the words 'bearer,' or 'assigns,' or 'the holder,' or the like, the courts of this country, with a single exception, and those of this state, without any exception, have concurred in attaching to them the attributes of commercial paper." But receivers' certificates are not commercial paper, and the holder takes them subject to all the equities between the original parties, though he acquires them for value and without notice.5 6 § 2. Definitions. In the Uniform Negotiable Instruments Law, a negotiable promissory note is defined as "an unconditional promise in writing, made by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer," and 2 Bouvier's Law Dictionary. 3 In re Nickodemus, Fed. Cas. No. 10,254; Central Nat. Bank v. Hazard, 30 Fed. 484. 4 Brainerd v. New York &c. R. Co., 25 N. Y. 496. See, also, Chase Nat. Bank v. Faurot, 149 N. Y. 532, 44 N. E. 164, 35 L. R. A. 605. 5 McCurdy v. Bowes, 88 Ind. 583; Staunton v. Alabama & C. R. Co., 31 Fed. 585. 6 The Uniform Negotiable Instruments Act supersedes all pre-existing contradictory rules. Ingalls v. Marston, 121 Maine 182, 116 Atl. 216. But does not apply to notes which were executed and which had matured previous to the time when the act went into effect. Spurgin v. Denton County Nat. Bank (Tex. Civ. App.), 235 S. W. 970. The state legislature has power to declare what instruments shall be negotiable. Farmers' Sav. Bank v. Neel, 193 Iowa 685, 187 N. W. 555. The word "note" evidencing indebtedness means a "negotiable note." Road Improvement Dist. No. 4 of Cleveland County v. Southern Trust Co., 152 Ark. 422, 239 S. W. 8. "where a note is drawn to the maker's own order, it is not complete until indorsed by him." The same act defines a check as “a bill of exchange drawn on a bank payable on demand," and provides that, “Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange payable on demand apply to a check."8 Such act also defines "acceptance" as "an acceptance completed by delivery or notification," and "bearer" as "the person in possession of a bill or note which is payable to bearer." It also defines "delivery" as "transfer of possession, actual or constructive, from one person to another," and provides that "holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof," and under that act "indorsement means an indorsement completed by delivery," and "value means valuable consideration;" and "bill means bill of exchange, and note means negotiable promissory note." A draft is an open letter of request; an order from one person to another to pay a certain specified sum of money to a third person. 10 7 Negot. Inst. Act, art. "Promissory Notes and Checks", § 184. Road Imp. Dist. No. 4 v. Southern Trust Co., 152 Ark. 422, 239 S. W. 8; Beadall v. Moore, 199 App. Div. 531, 191 N. Y. S. 826. If such instrument is not payable to order or bearer it is not negotiable. Rottman v. Hevener, 54 Cal. App. 485, 202 Pac. 334. Where a note signed by the makers was made payable one year after date, to the order of a certain person, and stated the consideration, it fulfilled the requirements of the Negotiable Instruments Law. Lynchburg Shoe Co. v. Hensley, 186 Ky. 769, 218 S. W. 243. Where one wrote a letter to another stating that it contained the sender's note for a certain sum payable three years after date with interest, stated to be given in consideration of care of the sender by the sendee during the former's sickness, it was held not to be a promis sory note, but a letter which was intended to accompany a note. Holtman v. Butterfield, 51 Cal. App. 89, 196 Pac. 85. 8 Negot. Inst. Act, art. "Promissory Notes and Checks", $185. A check is an unconditional order to a bank or banker to pay on demand to the person indicated or his order, or to the bearer thereof a specified sum of money. Metropolitan Loan Co. v. Reeves (Tex. Civ. App.), 236 S. W. 762. 9 Negot. Inst. Act, art. "General Provisions", § 191. 10 The terms "drafts" and "bills of exchange" are used synonymously and though a paper in the f rm of a draft or bill of exchange be called a "trade acceptance" its characteristic as a draft or bill of exchange is not affected. Ennis V. Coshocton Nat. Bank, 27 Ga. App. 479, 108 S. E. 811. SUBDIVISION II. WHAT INSTRUMENTS NEGOTIABLE-WHEN Section 3. Importance of determining negotiability. 4. What is negotiability. 5. What instruments negotiable and what not. 6. Written and signed instruments. II. 12. 13. Place of payment. Instrument payable to order or bearer. Certainty as to payee or drawee. Intent to conform to the requirements of the act. 14. Effect of omissions, seal or designating kind of money to be paid. 15. Effect of additional provisions on negotiability. 16. Nature of consideration. 17. Negotiability, how destroyed and how preserved. 18. Making negotiable bonds nonnegotiable. § 3. Importance of determining negotiability.-Since commercial paper is negotiable paper, and the right to take paper free from the defenses that might be interposed by the defendant in action by the holder depends upon the question whether or not the instrument is negotiable or nonnegotiable, it is deemed advisable to set forth the rules by which the negotiability of instruments are to be determined; for, among the first questions that will arise in many cases of this character will be, is the instrument a negotiable or nonnegotiable one? If nonnegotiable then all the equities and defenses are available to the defendant that are not barred by waiver, estoppel, or by statute. If the instrument is held to be negotiable, then the plaintiff, if a holder in due course, takes the instrument free from all equities and defenses existing between the prior parties to the instrument subject to a few exceptions to be hereafter noted. However, it should be borne in mind that the validity of the instrument does not depend upon its negotiability, as the instrument may be valid as a contract and yet not be negotiable. § 4. What is negotiability.-An instrument is negotiable when its form is such that it can be transferred or negotiated either by indorsement or delivery to another so as to constitute him a holder and owner of the instrument, and such that transfer to one who is a holder in due course bars all equities and defenses which existed between the prior parties to the instrument. In other words, the instrument must come within the requirements of the Negotiable Instruments Act, or of the law merchant. All other instruments which do not fulfill such requirements are nonnegotiable. And an instrument is negotiated "when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by indorsement to the holder completed by delivery".11 In speaking of the transfer of negotiable instruments, it is proper to designate them as having been negotiated, while in speaking of the transfer of nonnegotiable instruments it should be referred to as an assignment of the instrument. But these terms are sometimes used interchangeably by persons who do not observe their true application when applied to instruments of this character. § 5. What instruments negotiable, and what not.-Negotiable instruments include promissory notes, bills of exchange, drafts, checks, certificates of deposit, certain kind of municipal bonds, warrants and certificates, certain orders, and certain corporate bonds and interest-bearing coupons when they fulfil the requirements of the Negotiable Instruments Act or the law merchant, if such act is not applicable. But stock certificates, ordinary receipts and orders, credit certificates, vouchers and due bills, and deposit books, coupon books and drainage warrants, are not ordinarily negotiable instruments. Promissory notes. The Negotiable Instruments Act defines a promissory note as "An unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a 11 Negot. Inst. Act, art. "Negotiation," § 30. |