8.1 Negotiable Instruments

8.1 Negotiable Instruments

Under Chapter 673 of the Florida Statutes, negotiable instruments serve as a vital commercial substitute for money. To trigger the specialized protections of UCC Article 3, an instrument must first be negotiable. If an instrument is non-negotiable, ordinary contract assignment principles apply, and any transferee takes the contract subject to all claims and defenses. The Florida Bar Exam frequently tests the technical requirements of negotiability, Holder in Due Course (HDC) status, the Shelter Rule, and the distinction between real and personal defenses.

The Nine Requirements of Negotiability

To qualify as a negotiable instrument under Florida law, a writing must strictly satisfy nine elements:

1. A Writing: The instrument must be on a tangible, portable, and durable medium. Oral promises are never negotiable.
2. Signed: The maker (for a note) or drawer (for a draft) must sign the instrument. A signature includes any mark, symbol, or trade name executed with the present intent to authenticate.
3. Unconditional: The promise or order to pay must not be subject to any conditions. A promise is conditional if it states an express condition to payment, or states that it is governed by or subject to another record. However, referring to another record for information regarding collateral, prepayment, or acceleration does not destroy negotiability.
4. Promise or Order: A promissory note must contain an undertaking or "promise" to pay (more than a mere I.O.U.). A draft or check must contain an instruction or "order" to a third party (drawee) to pay.
5. Fixed Amount: The principal amount due must be determinable from the face of the instrument. The interest rate may be stated as a fixed or variable rate, and may refer to external sources.
6. Of Money: The instrument must be payable in money, which includes any medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.
7. No Other Undertaking: The instrument must not require any act other than the payment of money. Statutory exceptions permit promises to protect collateral, powers to confess judgment, or waivers of legal protections.
8. Payable on Demand or at a Definite Time: It must be payable at sight, on presentment, or at a fixed date, or after an elapsed period. Acceleration and extension clauses are permissible if the extension is to a definite time.
9. Payable to Order or Bearer: The instrument must contain words of negotiability. Order paper is payable to a specific person or their order (e.g., "pay to the order of John"). Bearer paper is payable to bearer, cash, or left blank. (Note: A check payable simply to "John" is negotiable, but a promissory note payable to "John" is not).

Negotiation and Endorsements

Negotiation is the proper transfer of an instrument to a person who becomes a holder.

• Bearer Paper: Negotiable by delivery alone.
• Order Paper: Requires delivery and the holder's proper indorsement.

Indorsements determine how the instrument must be negotiated next:

• Blank Indorsement: The holder signs their name, converting order paper to bearer paper.
• Special Indorsement: The holder signs and designates a specific payee (e.g., "Pay to Jane, /s/ John"), keeping it order paper.
• Qualified Indorsement: An indorsement "without recourse" disclaims contractual signature liability.
• Restrictive Indorsement: Indorsements like "for deposit only" require banks to follow the instruction or face conversion liability.

Holder in Due Course (HDC) Status

An HDC is a holder who takes an instrument free of personal defenses. To qualify, a person must be a holder of a negotiable instrument and take it:

1. For Value: Performing the promise, taking it as security for an antecedent debt, or paying for it. Executory promises (a promise to perform in the future) do not constitute value until performed.
2. In Good Faith: Satisfying both subjective good faith (honesty in fact) and objective good faith (observance of reasonable commercial standards).
3. Without Notice: Lacking notice that the instrument is overdue, dishonored, altered, contains unauthorized signatures, or is subject to any party's defense or claim.

The Shelter Rule

Under the Shelter Rule, a transferee acquires the rights of their transferor. If an HDC transfers an instrument, the transferee succeeds to the HDC's rights, even if the transferee did not pay value or had notice of a defense. This allows HDCs to market their instruments. However, the shelter rule does not protect a transferee who was a party to any fraud or illegality affecting the instrument.

Real vs. Personal Defenses

An HDC takes an instrument free of personal defenses but remains subject to real defenses. On the exam, you must classify the obligor's defenses:

• Personal Defenses (defeated by HDC): Breach of contract, lack of consideration, fraud in the inducement, unconscionability, and payment or discharge.
• Real Defenses (survive HDC):
  1. Infancy: To the extent it makes the contract voidable under state law.
  2. Incapacity, Duress, or Illegality: If the effect under state law is to render the obligation completely void.
  3. Fraud in the Factum: Execution of an instrument without knowledge or reasonable opportunity to obtain knowledge of its character or essential terms.
  4. Material Alteration: Although an HDC may enforce it according to its original terms.
  5. Forgery: Of the obligor's signature, unless they are precluded from denying it.
  6. Discharge in Insolvency: Bankruptcy.