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[arve url=”https://youtu.be/2eNzIVSSAtc” title=”Lost Negotiable Instruments” description=”This video explains what are the rules for honor and liability for a lost negotiable instrument. ” /]
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What rules apply if a holder of a negotiable instrument loses the instrument?
An obligor is generally only obligated to pay the instrument upon presentment. If an instrument is lost and has not been presented to the obligor for payment, the obligor may pay the instrument when the party losing the instrument requests payment (without actual presentment of the instrument). Paying the proper payee of a lost instrument will discharge the obligors duty to pay the instrument, including satisfying the obligor’s obligations to other parties who may find the lost instrument. To be entitled to payment of a lost instrument, the payee losing the instrument must prove:
Possession – She was in possession and entitled to enforce when instrument was lost;
Accidental Loss – The loss was not the result of transfer or lawful seizure;
Location Unknown – The instrument’s location cannot be determined; and
Instrument Terms – She must provide adequate evidence of the terms of instrument.
Even if these condition are met, the payee must provide adequate protection, such as a surety bond, to protect the payor in the event the instrument is wrongfully paid.
Note: State statutory or common law may provide a cause of action against and individual who has no property rights in an instrument but presents a lost instrument for payment. These state law protections are pursuant to property law and not part of the UCC.
Discussion: Why do you think the UCC allows for payment of a lost instrument? How do you feel about the obligation to pay a holder who finds lost bearer paper? Should there be additional protections under the UCC for holders who lose commercial paper?
Practice Question: Martin is the payee on a note. The note is negotiable, bearer paper. Martin indorses the paper with the purpose of transferring it to Fran. He somehow loses the paper. What must Martin do to seek payment of the note? Can Fran seek payment? What happens if Jason finds the note and presents it to the maker for payment?