Negotiable Instruments and Secured Transactions
Negotiable Instruments and Secured Transactions tests Article 3 negotiability and holder-in-due-course status, plus Article 9 attachment, perfection, and priority.
Core rules
- Negotiable instrument: signed writing, unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer, with no unauthorized additional undertaking.
- Holder in due course: holder who takes for value, in good faith, without notice of dishonor, default, claim, or defense. An HDC takes free of personal defenses but not real defenses such as fraud in the factum, forgery, infancy, or discharge in bankruptcy.
- Article 9 attachment: value given, debtor has rights in collateral, security agreement authenticated. Perfection: filing, possession, control, or automatic.
- Priority: first to file or perfect; a PMSI in goods has superpriority if perfected within 20 days of debtor's possession; a buyer in ordinary course cuts off security interests.
Worked example
Bank loans a dealer $100,000 for inventory and files a financing statement. Later another lender loans against the same inventory and files. The bank's earlier filing gives it priority, but a customer who buys a unit in the ordinary course takes free of the bank's interest.
Traps
Negotiability is not the same as assignability. The shelter rule lets a transferee step into the transferor's HDC status. After-acquired property clauses work in Article 9 but not for consumer goods without specific consent. Proceeds remain subject to the security interest.