Chapter 25: The Function and Creation of Negotiable instruments

Any instrument containing terms such as the following is a bearer instrument:

1. "Payable to the order of bearer." 2. "Payable to Simon Reed or bearer." 3. "Payable to bearer." 4. "Pay cash." 5. "Pay to the order of cash."

Requirements for Negotiability of an instrument

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.

An instrument is payable at a definite time if it states any of 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

Written Form

1. The writing must be on material that lends itself to permanence (i.e. NOT carved in blocks of ice or inscribed in the sand, but napkins, shirts count) 2. The writing must also have portability (i.e. not on the side of a cow)

Factors That Do not Affect Negotiability

1. Unless the date of an instrument is necessary to determine a definite time for payment, the fact that an instrument is undated does not affect its negotiability. (i.e. undated check) 2. Antedating or postdating an instrument does not affect its negotiability 3. Handwritten terms outweigh typewritten and printed terms (preprinted terms on forms, for example), and typewritten terms outweigh printed terms 4. Words outweigh figures unless the words are ambiguous (when the numerical amount and the written amount on a check differ) 5. When an instrument simply states "with interest" and does not specify a particular interest rate, the interest rate is the judgment rate of interest 6. A check is negotiable even if there is a notation on it stating that it is "nonnegotiable" or "not governed by Article 3." (any other instrument can be made nonnegotiable by the marker's note, however)

certificate of deposit (CD); maker; payee

A ___________ is a type of note 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 ______ of the note, and the depositor is the ______-

promissory note (or "note")

A ___________ is a written promise made by one person (the maker of the promise) to pay another (usually a payee) a specified sum. It can be made payable at a definite time or on demand.

FALSE A draft can be both a time and a sight draft. Such a draft is payable at a stated time after sight. (i.e. payable 90 days after sight)

A draft CAN'T be both a time and a sight draft.

collateral note; collateral

A note may be secured by personal property, such as an automobile. This type of note is referred to as a ____________ because property pledged as security for the satisfaction of a debt is called ________________

installment note

A note payable in installments, such as installment payments for a large-screen 3D LCD television over a twelve-month period, is called an ___________ .

order

An _______ is associated with three-party instruments, such as checks, drafts, and trade acceptances. It directs a third party to pay the instrument as drawn. A command such as "pay" is mandatory. "please/kindly pay" is okay but not "I wish you would pay"

order instrument

An ______________ is an instrument that is payable (1) "to the order of an identified person" or (2) "to an identified person or order"

acceleration clause

An _______________ allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in payment of an installment when due (meaning the maker fails to make an installment payment).

Can; CANNOT

An instrument ________be payable to nonexistent person (as though it were payable to cash; __________ be payable to nonexistent organization

TRUE. Whether the time period is a month or a year, if the date is uncertain, the instrument is not payable at a definite time.

An instrument that is undated and made payable "one month after date" is clearly nonnegotiable.

FALSE Assignment does not affect the maker's obligation to pay the note as promised.

Assignment affectS the maker's obligation to pay the note as promised.

TRUE. If a payee wants to access the funds before to the maturity date, he or she can sell (negotiate) the CD to a third party.

Because CDs are time deposits, the purchaser-payee typically is not allowed to withdraw the funds before the date of maturity (except in limited circumstances, such as disability or death).

Promises

For an instrument to be negotiable, it must contain an EXPRESS promise or order to pay. A mere acknowledgment of the debt, such as an I.O.U. ("I owe you"), might logically imply a promise, but it is not sufficient EXCEPTION:. No express promise is required in a CD because the bank's acknowledgment of the deposit and the other terms of the instrument clearly indicate a promise by the bank to repay the sum of money

Signatures

For an instrument to be negotiable, it must be signed by (1) the maker if it is a note or a certificate of deposit or (2) the drawer if it is a draft or a check If a person signs an instrument as an authorized agent for the maker or drawer, the maker or drawer has effectively signed the instrument

TRUE

For the drawee to be obligated to honor the order, the drawee must be obligated to the drawer either by agreement or through a debtor-creditor relationship.

Payable in Money

Gold is NOT a medium of exchange adopted by the U.S. government, so a note made payable in gold is nonnegotiable. Foreign money is okay.

trade acceptance

In a ________ ,the seller of the goods is both the drawer and the payee. The buyer to whom credit is extended is the drawee. Essentially, the draft orders the buyer to pay a specified amount to the seller, usually at a stated time in the future

TRUE. A signature can be made by a device, such as a rubber stamp, or a thumbprint, and can consist of any name, including a trade or assumed name, or a word, mark, or symbol

Nearly any symbol executed or adopted by a person with the intent to authenticate a written or electronic document can be a signature

A Fixed Amount of Money

Negotiable instruments must state with certainty a fixed amount of money to be paid at the time the instrument is payable (ensures the value of the instrument is determined)

commercial money market

The buyer accepts the draft by signing its face and is obligated to pay. If the seller needs cash before it's due, the seller can sell the draft through the _______________ - the market that businesses use for short-term borrowing.)

Placement of the Signature

The location of the signature on the document is unimportant, although the usual place is the lower right-hand corner

FALSE The maker or drawee is under no obligation to pay until the specified date. The option to pay early does not violate the definite-time requirement

The maker or drawee may be obligated to pay before the specified date.

extension clause

The reverse of an acceleration clause is an __________ , which allows the date of maturity to be extended into the future. If the right of extension is given to the maker or drawer of the instrument, interval of the extension must be specified; if it's to the holder, the extended maturity date need NOT be specified.

Payable on Demand or at a Definite Time

To determine the value of a negotiable instrument, it is necessary to know when the maker, drawee, or acceptor is required to pay; when the obligations of secondary parties, such as indorsers will arise; when an instrument is due in order to calculate when the statute of limitations may apply; and the exact interval during which the interest will accrue to determine the instrument's value at the present time.

banker's acceptance

When a draft orders the buyer's bank to pay, it is called a ______________

acceptor

a drawee who has accepted, or agreed to pay, an instrument when it is presented later for payment

bearer

a person in possession of an instrument that is payable to bearer or indorsed in blank (with a signature only)

FALSE. a promissory note is not a debt. it is only the evidence of a debt.

a promissory note is a debt.

indorsement

a signature placed on an instrument, such as on the back of a check, generally for the purpose of transferring one's ownership rights in the instrument.

negotiable instrument

a signed writing (or electronic record) that contains an unconditional promise or order to pay an exact amount, either on demand or at a specific future time. Can function as a substitute for cash or as an extension of credit .

bearer instrument

an instrument that does not designate a specific payee

draft

an unconditional written order that involves three parties: The party creating the draft (the drawer) orders another party (the drawee) to pay money, usually to a third party (the payee). The most common type of draft is a check.

marketability

an unusual signature clearly will decrease the __________ of an instrument because it creates uncertainty

What happens when the promissory note is lost? Does the owner lose his right?

bill or note is not a debt; it is only primary evidence of a debt; and where this is lost, impaired or destroyed bona fide, it may be supplied by secondary evidence * * * . The loss of a bill or note alters not the rights of the owner, but merely renders secondary evidence necessary and proper

Another type of classifications

demand instruments or time instruments

Types of Negotiable Instruments

drafts, checks, notes, and certificates of deposit (CDs)

holder

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

instrument

negotiable instrument Also referred to as commercial paper.

Two classifications of instruments

orders to pay (drafts and checks) and promises to pay (promissory notes and CDs)

time draft

payable at a definite future time

time instrument

payable at a future date.

demand instrument

payable on demand—that is, it is payable immediately after it is issued and thereafter for a reasonable period of time (I.e. all checks)

sight draft (demand draft)

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.

Payable upon presentment/at sight (when a payable on demand

presentment occurs when a person brings the instrument to the appropriate party for payment or acceptance.

fixed amount/sum certain

the amount must be ascertainable from the face of the instrument. Interest may be stated as a fixed or variable rate.

cashier's checks

the bank is both the drawer and the drawee. The bank customer purchases a cashier's check from the bank by paying the amount of the check and indicating to whom the check should be made payable.

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.

Issue

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

identified person

the person "to whom the instrument is initially payable" as determined by the intent of the maker or drawer. The identified person, in turn, may transfer the instrument to whomever he or she wishes (transfer- ability of the instrument)

"Unconditional" Promise or Order to Pay

unconditional—that is, they cannot be conditioned on the occurrence or nonoccurrence of some other event or agreement. 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 (or record). 3. That the rights or obligations with respect to the promise or order are stated in another writing or record. (a mere "reference" to another writing does not make it conditional, i.e. "as per contract", "payment will be made out of another fund") Note: payment to be made from a nonexisting or future fund makes the instrument NONnegotiable.

Postdating

when a party puts a date on an instrument that is after the actual date

Antedating

when a party puts a date on an instrument that precedes the actual calendar date.

certainty

with order instruments, the person specified must be identified with _______ because the transfer of an order instrument requires the indorsement, or signature, of the payee.