Article 3 — Negotiable Instruments · Section 3-408
UCC § 3-408 addresses the concept of instrument validity and the impact of illegality or fraud on negotiable instruments.
Source: U.C.C. § 3-408
An instrument is not payable if it is expressed to be payable 'for value received' and the holder has not actually received value; or if it is issued to secure an obligation, the holder is not liable for the obligor's debt on the instrument and is not subject to defenses typically available to the obligor.
UCC § 3-408 states that a negotiable instrument may be considered void if it was issued for illegal or fraudulent purposes, meaning if the reason behind its issuance violates public policy or laws. This section helps delineate the responsibilities of holders in determining the validity of negotiable instruments.
A written document promising to pay a specified sum of money to a designated person or the bearer, at a specified future date or on demand.
Consideration received by the issuer of the instrument in exchange for the instrument, which is typically a benefit or legal right.
Example 1
A borrower issues a promissory note to a lender but the loan is based on a contract for illegal activities; the note may be void under UCC § 3-408.
Example 2
If a check is written to pay for a service that is illegal, the holder of the check may not be able to enforce it because it was issued for an unlawful purpose.