Negotiable Instruments & Docs of Title

Elements Required for a Negotiable Instrument

1. In Writing
2. Unconditional Promise to Pay
3. Sum Certain
4. Definite Time
5. Payable to Order of/Bearer
6. Signed by the Maker (note)/Drawer (draft)
7. Not “subject to” another agreement

Negotiability Rules
• All endorsers of an instrument have secondary liability to later
endorsers of the instrument
• Indorsements alone cannot permanently destroy negotiability
(can convert to order/bearer paper with a special indorsement)
• Qualified Endorsement = “without recourse”
• Restrictive Endorsement = “for deposit only”, “for collection
only”, etc…

Holder in Due Course (HDC)

1. Must be holder of the instrument
2. Instrument must be negotiable
3. VFW
I. Value is given
II. Good Faith
III. Without notice of dishonor, claims, overdue, or defenses

• Shelter Provision: Non-HDC has all rights of a HDC if he can

show that some transferor in her/his chain of ownership was
an HDC
• Partial Value Example:
• A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank 
endorsement for $4,000. King steals the note from Bane and sells it to Ott who promises to 
pay King $4,500. After paying King $3,000, Ott learns that King stole the note. Ott makes no 
further payment to King. Ott is a HDC to the extent of $3,333.
○ (3,000/4,500)*(5,000)
○ Ordinary holder to remainder due (no HDC status after learning of fraud)
• A holder in due course generally takes a negotiable
instrument free from personal, but not real, defenses.
○ Personal: Breach of Contract, Absence of consideration,
Fraud in the Inducement (trick someone into paying
$10K for a $5 fake painting), Non-delivery of instrument,
unauthorized instrument completion, payment before
maturity, discharge (other than bankruptcy/insolvency),
nonperformance of condition precedent
○ Real: Fraud in the Factum (affects validity of
instrument), discharge in an insolvency proceeding, and
incapacity (infancy)
Negotiable Instruments & Docs of Title

Notice of Dishonor: Must be given within 3 days of default on payment

of a note

Documents of Title: “duly negotiated” = PRESENT value (can’t pay for

antecedent debts), Without notice of defense or claim, Good Faith

Novation: Substitution by agreement of a new contract for an

old one, with the rights under the old one being terminated. Releases
original party from liability.

Substituted Contract: Different contract between the same parties

that supersedes and replaces the old contract.