Chpt 25: Negotiable Instruments

T/F: Draft can be time and sight

True -payable at a stated time after sight "payable 90 days after sight"

be signed by maker/drawer

-any symbol executed by individual -can be made with stamping device/thumbprint -can consists of any name -sometimes need parol evidence to identify -prefer to be unique -placement = unimportant, standard = lower right corner

be in writing

-oral promises create risk of fraud/difficult to determine liability 1.) writing must be on material that lends itself to permanence 2.) the writing must have portability -not explicitly stated -it not movable, not freely transferable and act as a substitute for cash MUST BE EASILY TRANSFERABLE

unconditional promise or order to pay

-terms of promise/order must be included in the writing on the face of a negotiable instrument -terms must be unconditional

bills of exchange

-used to be synonymous with commercial paper -now, only drafts and checks

2 elements that make a draft a check

1. always a demand instrument 2. drawn on a bank or savings loan

unconditionality of promise or order

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

6 elements of negotiability

1. be in writing 2. be signed by the maker/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

conditions for payable at a definite time

1. it is payable on a specified date 2. it is payable within a definite period of time (ex: 30 days) after being presented for payment 3. it is payable on a date/time readily ascertainable at the time the promise/order is issued

Instrument must be signed by

1. maker if it is a note or CD 2. drawer if it is a draft/check -if a person signs an instrument as an authorized agent for the maker/drawer, the maker/drawer has effectively signed the instrument

3 recent modifications to UCC

1. paperless checks/ wire transfer varieties 2. e-business (epal, epay) 3. area of negotiability

terms for bearer instruments

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

payee

3rd party that receives the money from the drawee

judgement rate of interest

A rate of interest fixed by statue that applies to court judgements

indorsement

A signature placed on an instrument for the purpose of transferring one's ownership rights in the instrument.

acceleration clause

Allows the payee to demand payment of the entire amount due, with interest, if a payment is missed

Jumbo CD

CD worth $100,000+

payable to order or bearer

If instrument is not payable to order or to bearer at the time it is issued or first comes into possession of holder, it is nonnegotiable

examples of writing

Yes: napkins, paper, wood No: ice, sand, cow, pig

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 o Who ever owns the bonds gets paid

negotiable instrument

a signed writing that contains an unconditioned promise or order to pay an exact amount, either on demand or at a specific future time -includes electronic records -commercial transactions are inconceivable without negotiable instruments -can function as a sub for cash or an extension of credit

promissory note

a written promise made by 1 person to pay another a specified sum -not debt, only evidence of debt

promise

to be negotiable, instrument must contain an express promise/order to pay

payable on demand or at a definite time

to determine the value of an instrument, it is necessary to know when the maker, drawee, or acceptor must pay -also need to know when the obligations of 2nd parties (indorsers) will arise

trade acceptance

type of draft that is frequently used in the sale of goods -draft orders buyer to pay a specified amount to seller

banker's acceptance

when a draft orders the buyer's bank to pay -common in international trades

parties of a check

writer of check = drawer bank on which the check is drawn on = drawee person who receives check = payee

example of draft party relationship

you (drawer) order the bank (drawee) to pay _____ (payee)

negotiable

you have a low risk of nonpayment

commercial paper

aka negotiable instrument

extension clause

allows the date of maturity to be extended into the future -reverse of acceleration clause -interval must be specified if the right to extend is given to the maker/drawer of the instrument -if the holder can extend, date does not need to be specified

Bearer instrument

an instrument that does not designate a specific payee

order instrument

an instrument that is payable 1. to the order of the identified person or 2. to an identified person or order

draft

an unconditional written order that involves 3 parties

holder

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

order

associated with 3-party instrument, such as checks, drafts, and trade acceptances -directs a 3rd party to pay the instrument as drawn -can be to 1 person, 1 or more persons, jointly or alternatively

if instrument indicates that it is not payable to an identified person

bearer instrument ex: Hulk

most common type of draft

check

cashier's check

check where the bank is the drawer and drawee you are the payee bank commits itself to paying the amount on demand -draft has bank order itself to pay specific amount to you

demand instrument example

checks

types of drafts

checks cashier's check trade acceptance banker's acceptance traveler's checks

traveler's check

checks that you pay for in advance, and if they are lost or stolen, the issuing company replaces them -not actually a check -> Traveler's Drafts -not drawn on bank, savings, or loans (off financial institutions)

short-term memory and UCC

covers negotiable instruments

contact law

covers nonnegotiable instruments

issue date

date the drawer first delivers the check to another to give rights to the check

default instrument of promissory note

demand instrument -although usually time instrument (if said explicitly)

time draft

draft payable at a definite future time -obligated by agreement/debtor-creditor relationship

sight(demand) draft

draft payable on site -when presented to drawee for payment -may be payable on acceptance

4 types of commercial paper

drafts checks promissory notes certificate of deposit (CDs)

orders to pay

drafts and checks

3 parties of draft

drawer drawee payee

"as per"

explains why this instrument is -ignore for negotiability

If says "order to the x or bearer"

go with bearer

nonnegotiable

higher risk of nonpayment -bad -doesn't mean you won't not get paid (slower, more snags)

most common promissory note

installment note

state a fixed amount of money

instrument must be stated with certainty a fixed amount to be paid and the time the instrument is payable -ensures the value of the instrument can be determined with clarity and certainty -can use interest rates -cannot use commodities (items) -foreign currency is negotiable

how negotiable instruments operate practically

instrument needs to be easily transferable without danger of being uncollectable (fund. funct)

History of negotiable instruments

law to govern from commercial necessity -Lex Mercatoria (Law Merchant) (medival) -Article 3 of UCC (requirements for the form/content, negotiation, and transfer

IOU

logically implies a promise but it is not sufficient -acknowledges the promise but not promise is actually made -satisfied with "to be paid on demand/due on demand" + this

parties of promissory note

maker = person who makes the promise to pay payee = person who receives the promise and payment

"subject to"

makes you go off face of document because it calls another document into play -nonnegotiable

types of promissory notes

mortgage note collateral note installment note balloon note judgement note certificate of deposit (CD)

payable at a definite time

must be this if not payable on demand

indications of payable on demand

nature of instrument (ex: checks) -if no time is specified and person responsible for payment must pay on the instrument's presentment

signature

nearly any symbol executed/adopted by a person with the intent to authenticate a written/electronic document

"one month after date" =

nonnegotiable

if paid to nonexistent organization

nonnegotiable

instrument based on future events =

nonnegotiable

6 factors that do not affect negotiability

o Undated instruments do not affect negotiability o Antedating/postdating does not affect negotiability o Handwritten > typewritten > printed terms o Words outweigh figures unless if words are ambiguous (twenty million > $20) (go with what takes longer to write) o When an instrument simply states "with interest" and does not specify a particular interest rate, the interest rate is the judgement rate of interest o 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 with that is nonnegotiable)

presentment

occurs when a demand to either pay/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

postdating

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

antedating

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

drawer

party creating the draft

drawee

party ordered by drawer to pay the money ex: bank

time instrument

payable at a future date

demand instrument

payable on demand -payable immediately after issuance and for a reasonable period of time thereafter

payable on demand

payable on/at sight, payable upon presentment

parties of CD

payee = depositer (you) maker = bank

parties in traveler's checks

payee = seller to whom you are giving the check drawer = org that makes the traveler's checks ex: American Express drawee = party that sells the traveler's checks to you ex: bank purchaser = party that buys the check ex: you

identified person

person to whom the instrument is initially payable as determined by the intent of the maker/drawer -can transfer the instrument to who they wish

certificate of deposit (CDs)

promissory note issued when a party deposits funds with a bank and the bank promises (maker) to repay the funds, with interest, on a certain date (time instrument) -bad investment -not best b/c awful interest rates -payee = you -time deposit

collateral note

promissory note secured by personal property (ring, items, possessions)

mortgage note

promissory note secured by real property (land, building, house)

balloon note

promissory note that pays all at the end · You don't want this one · Flip of installment note

installment note

promissory note that pays as you go

time instrument example

promissory notes

promises to pay

promissory notes and CDs

3 ways commercial paper is better than money

safety convenience credit (promissory notes)

parties in trade acceptance

seller = drawer and payee buyer to whom the credit is extended = drawee

judgement note

states that if you default, you have no excuses, and anything you own is up for collateral -avoid these, worst of all promissory notes -use only for necessities

unconditional terms

terms that cannot be conditioned on the occurrence or nonoccurrence of some event/agreement

fixed amount

the amount must be ascertainable from the face of the instrument

acceptance

the drawee's written promise to pay the draft when it comes due -instrument is accepted by writing the word "accepted" across face, followed with date of acceptance and drawee's signature

issue

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