3-102 Subject Matter

(a) This Article applies

to negotiable
Instruments.

Terms
Draft: An order to pay money
Note: A promise to pay
A draft is a written order by one person (the
drawer) to another (the drawee), directing the
drawee to pay money to a third person (the payee).
In the most common situation, the banks customer
is the drawer, the bank is the drawee, and the
nominee is (e.g. person named on check) is the
payee.

Scope of Article 3
The rules of Article 3 apply to an
instrument, regardless of whether it is
a note or a draft, if and only if - the
instrument is negotiable within the
rigid requirements of 3-104(a).

Implications of
Negotiability
If a document is negotiable and has
been negotiated (that is, transferred)
to a purchaser for value who has no
knowledge of problems (thereby
becoming a holding in due course),
then the HDC can sue parties to
instrument.

3-104(a)
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:
(1) is payable to bearer or to order at the time it is
issued or
first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) 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 the promise or order may contain (i) an
undertaking or power to give, maintain, or protect
collateral to secure payment, (ii) an authorization or
power to the holder to confess judgment or realize

Order - 3-103(a)(8)
Order means a written
instruction to pay money signed
by the person giving the
instruction.

Promise - 3-103(a)(12)
"Promise" means a written
undertaking to pay money signed by
the person undertaking to pay. An
acknowledgment of an obligation by
the obligor is not a promise unless the
obligor also undertakes to pay the
obligation.

Promise - 3-103(a)(12)
Promise for the purpose of
establishing negotiability is a :
1. Writing
2. Signed
3. Unconditional Promise or Order

Writing - 1-201(43)
"Writing" includes printing,
typewriting, or any other
intentional reduction to tangible
form.

Signed - 1-201(37)
"Signed" includes using any
symbol executed or adopted with
present intention to adopt or
accept a writing.

Signature - 3-401
(a) A person is not liable on an instrument unless
(i) the person signed the instrument, or (ii) the
person is represented by an agent or representative
who signed the instrument and the signature is
binding on the represented person under Section 3402.

(b) A signature may be made (i) manually or by

means of a device or machine, and (ii) by the use of
any name, including a trade or assumed name, or
by a word, mark, or symbol executed or adopted by
a person with present intention to authenticate a
writing

Unconditional Promise or
Order
A note must contain an
unconditional promise to pay.
A draft must contain an
unconditional order to pay.

Unconditional Promise or Order - 3106(a)

(a) Except as provide in this sectiona

promise or order is unconditional
unless it states (i) an express
condition to payment, (ii) that the
promise or order is subject to or
governed by another record, or (iii)that
rights or obligations with respect to the
promise or order are stated in another
record. A reference to another
record does not of itself make the
promise or order conditional.

Triffin v. Dillabough, p. 405

The money orders bore this

language:
DO NOT CASH FOR STRANGERS
THIS MONEY ORDER WILL NOT BE
PAID IF IT HAS BEEN ALTERED OR
STOLEN OR IF AN ENDORSEMENT
IS MISSING OR FORGED. BE SURE
YOU HAVE EFFECTIVE RECOURSE
AGAINST YOUR CUSTOMER.

Unconditional Promise or Order 3-106(b)

(b) A promise or order is not made
condition (i) by a reference to another
record for a statement of rights with
respect to collateral, prepayment, or
acceleration, or (ii) because payment
is limited to resort to a particular fund
or source.

Unconditional Promise or Order 3-106(b)

Many notes issued in commercial transactions are secured by

collateral, are subject to acceleration in the event of default, or
are subject to prepayment. A statement of rights and
obligations concerning collateral prepayment, or acceleration
does not prevent the note from being an instrument if the
statement is in the note itself.In some cases it may be
convenient not to include a statement concerning collateral,
prepayment, or acceleration in the note, but rather to refer to
an accompanying loan agreement, security agreement, or
mortgage for that statement. Subsection (b)(i) allows a
reference to the appropriate writing for a statement of these
rights. For example, a note would not be made conditional by
the following statement: "This note is secured by a security
interest in collateral described in a security agreement dated
April 1, 1990 between the payee and maker of this note. Rights
and obligations with respect to the collateral are (stated in)
(governed by) the security agreement.

3-104(a): Fixed Amount of Money

"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

3-112: Interest
(a) Unless otherwise provided in the instrument, (i) an
instrument is not payable with interest, and (ii) interest on
an interest-bearing instrument is payable from the date of
the instrument.
(b) Interest may be stated in an instrument as fixed or
variable amount of money or it may be expressed as a
fixed or variable rate or rates. The amount or rate of
interest may be stated or described in the instrument in
any manner and may require reference to information not
contained in the instrument. If an instrument provides for
interest, but the amount of interest payable cannot be
ascertained from the description, interest is payable at the
judgment rate in effect at the place of payment of the
instrument and at the time interest first accrues.

Heritage Bank v. Bruah

Bruha promisd to pay the principal
amount of Seventy-five Thousand &
00/100 ($75,000) or so much as may
be outstanding, together with
interest on the unpaid outstanding
principal balance of each advance.
The note stated that it evidence[d]
a revolving line of credit.
Advances of $10,000; $40,0000;
$1,000 for total of $51,000.

3-104(a)(3): Additional Undertakings & Instructions

"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:
(3) 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 the promise or order
may contain (i) an undertaking or power to give,
maintain, or protect collateral to secure payment,
(ii) an authorization or power to the holder to
confess judgment or realize on or dispose of
collateral, or (iii) a waiver of the benefit of any law
intended for the advantage or protection of an
obligor.

Woodworth v. The Richmond Indiana

Venture

The undersigned agrees that, in the event

any payment due pursuant to the terms of
this note be not timely made, at the option
of the Partnership, the undersigned shall
retroactively lose any interest in the
Partnership from the date hereof and the
Partnership shall have no obligation to
account for any payments theretofore made
by the undersigned, and that this remedy is
in addition to other remedies afforded by the
Partnership Agreement.

Woodworth v. The Richmond

Indiana Venture

This term is clearly a promise by the maker

resulting in a forfeiture of his partnership
interest and payments in the event of default.
The term is more than a mere reference to the
partnership agreement, a recitation of security,
or an agreement to protect collateral; it is a
forfeiture provision in addition to other remedies
under the referenced partnership
agreement.Nothing in 3-104 or 3-112
authorizes the forfeiture term at issue. Based on
the above analysis, the court finds that the
negotiability of this promissory note is doubtful.
Where there is doubt, the decision should be
against negotiability.

3-104(a)(2): Payable on Demand or at

Definite Time

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:
(2) is payable on demand or at a
definite time

3-108: Payable on Demand or at Definite Time

a) A promise or order is "payable on demand" if it (i) states that it is
payable on demand or at sight, or otherwise indicates that it is
payable at the will of the holder, or (ii) does not state any time of
payment.
b) A promise or order is payable at a definite time if it is payable on
elapse of a definite period of time after sight or acceptance or at a
fixed date or dates or at a time or times readily ascertainable at
the time the promise or order is issued, subject to rights of (i)
prepayment, (ii) acceleration, (iii) extension at the option of the
holder, or (iv) extension to a further definite time at the option of
the maker or acceptor or automatically upon or after a specified
act or event.
c) If an instrument, payable at a fixed date, is also payable upon
demand made before the fixed date, the instrument is payable on
demand until the fixed date and, if demand for payment is not
made before that date, becomes payable at a definite time on the
fixed date.

3-104(a) Payable to Bearer or to

Order

(a) 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:
(1) is payable to bearer or to order at
the time it is issued or first comes into
possession of a holder.

3-109 Payable to Bearer or to Order

(a) A promise or order is payable to bearer if it:
(1) States that it is payable to bearer or to the order of bearer or
otherwise indicates that the person n possession of the promise
or order is entitled to payment.
(2) Does not state a payee; or
(3) States that it is is payable to or to the order of cash or
otherwise indicates that it is not payable to an identified person.
(b) A promise or order that is not payable to bearer is payable to
order if it is payable (i) to the order of an identified person or (ii)
to an identified person or order. A promise or order that is
payable to order is payable to the identified person.