Negotiable Instruments - Form and Content

Which statement impairs negotiability? #1: "This note is given in partial payment for a color TV set to be delivered two weeks from date in accordance with a contract of this date between the payee and the maker" #2: "This note is subject to all terms of said contract"

#2 because such words make the promise to pay conditional upon the adequate performance of the TV set in accordance with the terms of the contract and thus render the instrument nonnegotiable; #1 merely describes the consideration and the transaction giving rise to the note. It does not place any restriction or condition on the maker's obligation to pay.

What are the 4 exceptions that may be included in instruments without adversely affecting negotiability?

1. An undertaking or power to give, maintain, or protect collateral in order to secure payment; 2. an authorization or power to confess judgment (written authority by the debtor to allow the holder to enter judgment against the debtor in favor of the holder) on the instrument; 3. an authorization or power to sell or dispose of collateral upon default; 4. a waiver of the benefit of any law intended for the advantage or protection of the obligor

Besides the ability to pass freely from person to person, what characteristics must the instrument have in order to make it negotiable?

1. be in writing 2. be signed 3. contain a promise or order to pay 4. be unconditional 5. be for a fixed amount 6. be for money 7. contain no other undertaking or instruction 8. be payable on demand or at a definite time 9. be payable to order or to a bearer

What 3 parties are involved in a draft, and how are they involved with the draft?

One party, the drawer, orders the second party, the drawee, to pay a fixed amount of money to a third party, the payee; the drawer "draws" the draft on the drawee; the drawee is typically a person or entity that either is in possession of money belonging to the drawer or owes money to him; the same party may appear in more than one capacity, for example, the drawer may also be the payee

Can variable rate mortgages be negotiable under the fixed amount rule?

Yes, they may be negotiable because the fixed amount rule applies only to the principal

cashier's check

a check drawn by a bank upon itself to the order of a namely payee

time draft

a draft payable at a specified future date

sight draft

a draft payable on demand

negotiability

a legal concept that makes written instruments freely transferable and therefore a readily accepted form of payment in substitution for money

substitute check / image replacement document

a new negotiable instrument which is the legal equivalent of the original check and includes all the information contained on the original check

time note

a note payable at a definite time - ex. six months from the date of April 7, 2012

demand note

a note payable upon the request or demand of the payee/holder of the note

no other undertaking or instruction

a promise or order to do an act in addition to the payment of money destroys negotiability; ex: a promise to pay $100 "and a ton of coal" would be nonnegotiable

unconditional

a promise or order to pay is unconconditional if it is absolute and not subject to any contingencies or qualifications; upon the delivery of an instrument, the maker or drawer may state that the instrument will be paid only if what they get in return meets all contractual specifications because the instrument is negotiable

Particular Fund Doctrine

an order or promise to pay only out of a particular fund is no longer conditional and does not destroy negotiability

What constitutes a signature on a negotiable instrument?

any symbol a party executes or adopts with the present intention to authenticate a writing; it may consist of any word or mark used in place of a written signature, such as initials, an X, thumbprint; it may be a trade name or an assumed name; an instrument may be signed by an agent for her principal

order to pay

checks and drafts contain orders to pay; an order to pay is an instruction to pay. It must be more than an authorization or request and must identify with reasonable certainty the person to be paid. The usual way to express an order is by the use of the word pay: "Pay to the order of John Jones" or "Pay bearer"

check

contains orders/directions to pay money; a specialized form of draft, namely, an order to pay money drawn on a bank and payable on demand; the most widely used form of negotiable instruments

drafts

contains orders/directions to pay money; checks of a specialized form which provide an important monetary and credit function in the business world, both inside and outside the banking system

If the instrument turns out to be nonnegotiable, the rights of the parties are governed by the law of what?

contract (assignment)

What happens if an instrument does not state a rate of interest? What if the instrument states that it is payable "with interest" but does not specify a rate?

if an instrument does not state a rate of interest, it is payable without interest; if it does not specify the rate but is payable with interest, the judgment rate of interest applies

negotiable instruments

includes drafts, checks, promissory notes, and certificates of deposit; they are crucial to the sale of goods and services as well as to the financing of most businesses

certificate of deposit

involves a promise to pay money; it is a specialized form of promise to pay money given by a bank; it is a written acknowledgement by a bank of the receipt of money that it promises to repay; the issuing party (maker), which is always a bank, promises to pay the payee name in the CD

promissory note

involves a promise to pay money; it is an instrument involving 2 parties in 2 capacities, where the maker (one party) promises to pay the payee (other party) a stated sum of money, either on demand or at a stated future date; includes installment notes, collateral notes, mortgage notes, and judgment notes

What happens if an instrument does not state a time for payment?

it is assumed to be payable on demand

money

medium of exchange currently authorized or adopted by a domestic or foreign government; an instrument payable in commodities other than money would be nonnegotiable because of the lack of government sanction of such media as legal tender

promise to pay

notes and CDs must contain promises to pay; a promise to pay is an undertaking and must be more than the acknowledgment or recognition of an existing obligation or debt, for example, "due Adam Brown $100" or "IOU, Adam Brown, $100" are not negotiable because they do not contain promises to pay

time paper

payable at a definite time

demand paper

payable upon request

In terms of the requirement for a negotiable instrument to be in writing, what does writing include?

printing, typing, writing, handwriting, or any other intentional tangible expression

Explain "reference to another agreement" in relation to an unconditional instrument

reference to another agreement does not destroy negotiability unless the recital makes the instrument subject to or governed by the terms of another agreement

demand

request for payment made by the holder of an instrument

What three parties are involved with a check, and how are they involved with the check?

the drawer, who orders the drawee, a bank, to pay the payee on demand

fixed amount

the holder must be assured of a determinable minimum principal payment, although provisions in the instrument may increase the amount of recovery under certain circumstances; negotiability is not affected by the inclusion or omission of a stated rate of interest