Chapter 25: Negotiable Instruments

In promises to pay, define maker and payee

Maker: the person who promises to pay Payee: the person to whom the promise is made

Define unconditional

Negotiable instrument must be unconditional, meaning they cannot be conditioned on the occurrence or no occurrence of some other event or agreement

Does a reference to another writing make a promise or order conditional?

No

If a note is written on the side of the cow, would it meet the requirements of a negotiable instrument ? (Permanence and portability)

No, a cow cannot be easily transferred in the ordinary course of business, the "instrument" is nonnegotiable

Are purchaser-payee typically allowed to withdraw the funds before the date of maturity?

No, besides disability or death

Is a promissory note a debt?

No, it is only the evidence of a debt

Is a I.O.U (I owe You) suffice under the UCC?

No, it might logically imply a promise, but it is not sufficient under the UCC. This is because the UCC requires that a promise be an affirmative (express) undertaking.

Define presentment

Occurs when a demand to either pay or accept an instrument is made by or on behalf of a person entitled to enforce the instrument. Occurs when a person brings the instrument to the appropriate party for payment or acceptance

Why should negotiable instruments be in written form (may be evidenced by electronic record)?

Oral promise can create danger of fraud or make it difficult to determine liability.

Define time draft

Payable at a definite future time

Define installment note

Payable order a period of time (ex: over a twelve month period)

If a payee wants to access the funds before the maturity date, what can he/she do?

Sell(negotiate) the CD to a third party. CD'S in small denominations (for amounts up to 100,000) are often sold by savings and loan associations, savings banks, commercial banks, and credit unions.

Define "indorsement."

Signature

A negotiable instrument must be "payable on demand or at a definite time" T or F

T

CDs are time deposits, true or false

T

Checks are still more common than promissory notes or other types of pay T or F

T

Instruments have to be payable in money T or F

T

Only unconditional promises or orders can be negotiable. T or F

T

Writings use be on material that lends itself to permanence. T or F

T. Promises carved in block of ice or inscribed in the sand or on other impermanent surfaces would not qualify as negotiable instruments.

The writing must have portability t or f

T. The instrument must be movable, it obviously meet the requirement that it be freely transferable an act as a substitute for cash.

Define fixed amount aka sum certain

The amount must be ascertainable from the face of the instrument

Define cashiers checks

The bank is both the drawer and the drawee

Define uniform commercial code

The body of laws governing commercial transactions in the US

Define acceptance

The drawee's written promise to pay the draft when it comes due. Usually, an instrument is accepted by writing the word accepted across its face, followed by the date of acceptance and the signature of the drawee.

For an instrument to be negotiable, it must be signed by

The maker if it is a note or a certificate of deposit The drawer if it is a draft or a check An authorized agent also counts

Define commercial money market

The market that businesses use or short term borrowing.

An order is associated with

Three-party instruments, such as checks, drafts, and trade acceptances. Directs a third party to pay the instrument as drawn

Define trade acceptances

Type of draft that s frequently used in the sale of goods. The seller of the goods is both the drawer and the payee. The buyer to whom credit is extended is the drawee.

Define UCC

Uniform Commercial Code

A promise or order is conditional (and not negotiable) if it states any of the following

1. An express condition to payment 2. That the promise or order is subject to or governed by another writing 3. That the rights or obligations with respect to the promise or order are stated in another writing

What are the requirements or negotiability?

1. Be in writing 2 Be signed by the maker or the drawer 3. Be an unconditional promise or order to pay 4. State a fixed amount of money 5. Be payable on demand or at a definite time 6. Be payable to order or to bearer

Requirements for negotiability (8)

1. Must be in writing 2. Must be signed by a maker or drawer 3. Must be a definite promise or order 4. Must be unconditional 5. Must be an order or promise to pay a fixed amount 6. Must be payable in money 7. Must be payable on demand or at a definite time 8. Must be payable to order or to the bearer

An instrument is payable at a definite time if it states any o the following:

1: That it is payable on a specified date 2: That it is payable within a definite period of time (such as thirty days) after being presented for payment 3:That it is payable on a date or time readily ascertainable at the time the promise or order is issued

Negotiable instruments may also be classified as either demand instruments or time instruments. Define both

A demand instrument is payable on demand—-that is, it is payable immediately after it is issued an for a reasonable period of time thereafter. Ex: checks because they are payable on demand. Time instrument is payable at a future date

Define check

A draft drawn on a bank and payable on demand (with certain types of checks, such as cashier's checks, the bank is both the drawer and the drawee)

Define Certificate of Deposit

A note made by a bank acknowledging a deposit of funds made payable to the holder of the note

Define promissory note

A promise by one party to pay money to another party or to bearer

Define legal rate of interest, is it negotiable

A rate of interest fixed by statute. It is negotiable

Define variable rate of interest, is it negotiable

A rate that fluctuates as a result of the market conditions. It's negotiable

Define negotiable instruments

A signed writing that contains an unconditional promise or order to pay an exact amount, either on demand or at a specific future time.

Define Acceleration Clause.

Allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a specified event occurs

Define extension clause

Allows the date of maturity to be extended into the future.

Define order instrument

An instrument that is payable, which is needed to ensure a proper transfer

define draft

An order by one person to another person or to bearer

Give examples to what constitutes as a signature

Any symbol executed or adopted by a person with the intent to authenticate a written or electronic document can be a signature. A signature can be made by a device, such as a rubber stamp, or a thumb print. Can consist of any name, including a trade or assumed name, or a word, mark or symbol. If necessary, patrol evidence (such as oral testimony) is admissible to identify the signer.

When a draft orders the buyers bank to pay, it is called a

Bankers acceptance. Banker acceptances are commonly used in international trade

What is another name for negotiable instruments?

Commercial paper since negotiable instruments were originally paper documents

For an instrument to be negotiable it must:

Contain an express promise or order to pay

What are the four types of negotiable instruments? What are the two classifications?

Drafts, checks (orders to pay) notes, and certificates of deposits (CD). (Promises to pay)

In orders to pay, define drawer, drawee, and payee

Drawer: the person who signs or makes the order to pay Drawee: the person to whom the order to pay is made Payee: the person to whose the payment is ordered

Are checks and notes written on napkins, menus, table cloths, shirts, etc considered negotiable instruments?

Yes

Are checks demand instruments?

Yes, because they are payable on demand.

Are promissory note a negotiable instrument?

Yes, extension of credit

Can an order be addressed to more than one person?

Yes, jointly "to A and B" or alternatively "to A or B"

Are checks negotiable instruments?

Yes, substitute for cash

For a I.O.U, when is the need for an express promise satisfied?

If such words as "to be paid on demand" or "due on demand" are added to an I.O.U, the need for an express promise is satisfied

Define promissory note

Is a written promise made by one person (the maker of the promise) to pay another (usually a payee) in a specified sum. An be made payable at a definite time or demand. It can name a specific payee or merely be payable to bearer.

Define bearer instrument.

Is an instrument that does not designate a specific payee. The person is not identified

Define holder

Is an person in possession of a negotiable instrument that is payable either to the bearer or to a identified person that is the person in possession

Define drafts

Is an unconditional written order that involves three parties. The party reacting the draft(the drawer) orders another party (the drawee) to pay money, usually to a third party (the payee) ex: check

Define Certificate of Deposit

Is issued when a party deposits funds with a bank and the bank promises to repay the funds, with interest, on a certain date. The bank is the maker of the note, and the depositor is the payee

define sight draft/demand draft

Is payable on sight (that is when it is presented to the drawee, usually a bank or financial institution) for payment. A sight draft may be payable on acceptance.

Can a draft be both a time and a sight draft?

Yes. Such a draft is payable at a stated time after sight. An example would be a draft that states that it is payable ninety days after sight.

Define lex mercatoria

"Law merchant" later codified in England and is the forerunner of article 3 of the uniform commercial code (UCC). Imposes special requirements for the form and content of negotiable instruments.

Define issue

"The first delivery of an instrument by the maker or drawer...for the purpose of giving rights on the instrument to any person"

For negotiable instrument to operate practically as either cash substitute or a credit device, t is essential that

the instrument be easily transferable without danger of being uncollectible