Also known as: negotiable instrument · negotiability · commercial paper
Written by attorneys · grounded in primary & secondary sources — see below
A written promise or order to pay a fixed sum of money that meets statutory criteria for unconditional transfer by delivery or endorsement. The document must be payable to bearer or order on demand or at a definite time without additional undertakings that destroy negotiability. Such instruments receive special rules for enforcement and good-faith acquisition free of many defenses.
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Prairie Sky issued convertible promissory notes to Nathaniel and attached a white paper falsely claiming five hundred test hours. Crown Aero later bought the notes from Nathaniel after reviewing the attached white paper. Crown Aero suffered loss when the notes declined in value because the test-hour claim was false. Prairie Sky is liable to Crown Aero for the loss caused by justifiable reliance on the misrepresentation embodied in the notes.
The Federal Deposit Insurance Authority mailed Treasury payout checks to former account holders of a failed firm. MetroBroker deposited several checks bearing missing endorsements. The Authority reversed the credits and sued MetroBroker in federal court. Federal common law supplies the uniform rule governing MetroBroker's liability on the checks rather than varying state law.
Ridge Harvest assigned its right to payment for delivered corn to Pinnacle Farms. West Farms owed the invoice amount under the sales contract. Pinnacle Farms notified West Farms of the assignment and demanded payment. West Farms may assert its quality defense against Pinnacle Farms because the obligation is an account rather than a negotiable instrument.
Pinnacle Gallery held a security interest in negotiable warehouse receipts covering stored display cases. Dusk Arts defaulted on the loan. Pinnacle notified the storage company of its intent to sell the underlying goods. Because the obligation is evidenced by a negotiable instrument, Pinnacle may enforce under the UCC rules for the person entitled to enforce the instrument.
Dusk Arts signed a note promising to pay Pinnacle Gallery one million dollars on a stated date. The note contained no conditions and was payable to order. Pinnacle Gallery later sought to enforce the note against Dusk Arts after default. The note qualifies as a negotiable instrument because it meets the statutory criteria for an unconditional promise to pay a fixed amount.
Alpha Culture issued warehouse receipts covering stored artifacts. Pinnacle Gallery took a security interest in the receipts to secure a loan to Dusk Arts. After default Pinnacle sought to enforce its interest. The receipts are instruments because they are negotiable instruments under the governing definition.
A document qualifies only if it contains an unconditional promise or order to pay a fixed amount of money, is payable to bearer or order, and is payable on demand or at a definite time. Additional undertakings or conditions that destroy these features prevent negotiability.
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When the United States issues checks or other commercial paper, federal common law supplies uniform rules rather than varying state laws. This rule protects the federal interest in predictable treatment of its own payment obligations across jurisdictions.
…Between Citizens of Different States (1933) 19 A.B.A.J. 71, 74-75; Beutel, Common Law Judicial Technique and the Law of Negotiable Instruments — Two Unfortunate Decisions (1934) 9 Tulane L. Rev. 64. [^maj-23]: Kuhn v. Fairmont Coal Co. , 215 U.S. 349, 370-372; Black & White Taxicab Co. v. Brown & Yellow Taxicab Co. , 276 U.S.…
…of the period. Id. at 357. The dissent by our colleague Justice Handler seeks to distinguish Lesnevich because it involved negotiable instruments. However, the law of negotiable instruments
…the liberal approach toward the receipt of extrinsic evidence, in the face of the proliferation of standard form contracts and
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After default a secured party may choose to proceed against the documents or the goods they cover when the collateral consists of documents. The election is available even if the security agreement describes only the documents.
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The exclusion prevents overlap between accounts and instruments. A person obligated on a negotiable instrument is governed by Article 3 rules rather than the account rules of Article 9 even if the instrument also evidences chattel paper.
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Yes. A party who places a fraudulent misrepresentation in a negotiable instrument or similar commercial document is liable for pecuniary loss to anyone who justifiably relies on the representation when dealing with the document or a third party.
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