Exam 4 - Business Law I
Fictitious Payee
A payee on a negotiable instrument whom the maker or drawer did not intend to have an interest in the instrument. Indorsements are treated as authorized indorsement under UCC.
Negotiable Instrument
A signed writing (record) that contains an unconditional promise or order to pay an exact sum on demand or at a specified future time to a specific person or order, or to bearer
Extension Clause
A clause in a time instrument that allows the instrument's date of maturity to be extended into the future.
Acceleration Clause
A clause that allows a payee or other holders of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in the payment of an installment when due.
Holder in Due Course
A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is defective.
Indorsement
A signature placed on an instrument for the purpose of transferring ownership rights in the instrument
Promissory Note
A written promise made by one person (the maker) to pay a fixed amount of funds to another person (the payee or a subsequent holder) on demand or on a specified date.
On February 15, Sara deposits $5,000 with the First National Bank. The bank would issue Sara a ______ promising to repay the $5,000, plus a 2% interest on August 15.
Certificate of Deposit
Ken Barton indorses a check, "Pay to Lars Johnson if he completes the renovation of my kitchen by June 1, 2017 [Signed] Ken Barton." What kind of indorsement is this?
Conditional Indorsement - The payment depends on the occurrence of some event specified in the indorsement
On January 16, OurTown Real Estate orders $1,000 worth of office supplies from Eastman Supply Company, with payment due in ninety days. Also on January 16, OurTown sends Eastman a draft drawn on its account with the First National Bank or Whiteacre as payment. Who is the drawer, drawee, and payee?
Drawer - OutTown Drawee - First National Bank Payee - Eastman Supply Company
Carol impersonates Donna and induces Edward to write a check payable to the order of Donna. Carol, continuing to impersonate Donna, negotiates the check to First National Bank as payment to her loan there. Who is liable for the amount of the check?
Edward is liable to First National
Acceptance
In negotiable instrument law, a drawee's signed agreement to pay a draft when it is presented.
Suzanna writes in the sand "I promise to pay $500 in the order to Jack". Why can't this be considered a negotiable instrument?
It lacks permanence. -The writing must be on a material that lends itself to permanence.
Maker
One who promises to pay a fixed amount of funds to the holder of a promissory note or a certificate of deposit.
Parker finds Dolby's checkbook lying in the street, writes out a check to himself, and forges Dolby's signature. If the bank cashes the check for Parker, who would be liable for this happening?
The bank - they are generally liable for determining whether a person's signature on the check is forged.
Drawer
The party that initiates a draft (such as a check), thereby ordering the drawee to pay.
Drawee
The party that is ordered to pay a draft or check. With a check - this is always the bank or financial institution
Shelter Principle
The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course, but who derives his or her title through an HDC, acquires the rights of an HDC
Negotiation
The transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder.
Dishonor
To refuse to pay or to accept a negotiable instrument that has been presented in a timely and proper manner
Acceptor
A drawee that accepts, or promises to pay, an instrument when it is presented later for payment.
Stephanie Mallak has received a check and wants to deposit it into her checking account at the bank. She can indorse the check "For deposit only." She may also wish to write her bank account number on the check. What type of indorsement is this?
"For Deposit" or "For Collection" Indorsement
Universal Defense
A defense that can be used to avoid payment to all holders of a negotiable instrument, including a holder in due course or a holder with the rights of a HDC. Also called a real defense.
Personal Defense
A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course or a holder with the rights of an HDC.
Check
A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of funds to the payee on demand.
Order Instrument
A negotiable instrument that is payable "to the order of an identified person" or "to an identified person or order"
Certificate of Deposit
A note issued by a bank in which the bank acknowledges the receipt of funds from a party and promises to repay that amount, with interest, to the party on a certain date.
Payee
A person to whom an instrument is made payable.
Presentment Warranty
A person who presents an instrument for payment or acceptance impliedly makes three warranties relating to good title, no alterations, and no unauthorized signatures.
Transfer Warranty
A person who transfers an instrument for consideration impliedly makes five warranties-relating to good title, authentic signatures, no alterations, defense, or insolvencies - to all subsequent transferees
Trade Acceptance
A type of draft commonly used in the sale of goods. In this draft, the seller is both the drawer and the payee. The buyer to whom credit is extended, is the drawee.
Qualified Indorsement
An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument. The notation "without recourse" is commonly used to create a qualified indorsement.
Restrictive Indorsement
An indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved.
Special Indorsement
An indorsement on an instrument that identifies the specific person to whom the indorsement intends to make the instrument payable.
Blank Indorsement
An indorsement on an instrument that specifies no indorsee. An order instrument that is indorsed in blank becomes a bearer instrument.
Trust Indorsement
An indorsement to a person who is to hold or use funds for the benefit of the indorser or a third person. Also known as an agency indorsement.
Draft
Any instrument drawn on a drawee that orders the drawee to pay a certain amount of funds, usually to a third party (the payee), on demand or at a definite future time.
Bearer Instrument
Any instrument that is not payable to a specific person, including instruments payable to the bearer or to "cash".
National Express Corporation issues a payroll check "to the order of Lloyd Sorenson." Sorenson takes the check to the bank, signs his name on the back (an indorsement), gives to the teller (a delivery), and receives cash. What did Sorenson done?
He negotiated the check to the bank.
Leah holds a demand note dated September 1 issued by Apex, Inc. a local business firm. On September 17, she demands payment, and Apex refuses (dishonoring the note). On September 22, Leah negotiates the not to Brenner, a purchaser who lives in another state. Brenner does not know and has no reason to know that the note was dishonored. What is Brenner?
Holder in Due Course
Charles writes on the side of a cow, "I promise to pay $500 to the order of Jason." Why can't this be considered a negotiable instrument?
It lacks portability. -The writing must have portability. If an instrument is not moveable, it cannot meet the requirement that is be freely transferable.
A check is made payable to Peter Rabe. He indorses the check in blank by signing his name on the back and delivers the check to Anthony Bartomo. Anthony is unable to cash the check immediately and wants to avoid any risk should he lose the check. He therefore prints "pay to Anthony Bartomo" above Peter's blank indorsement. What kind of indorsement is this?
It was a blank indorsement but he converted it into a special indorsement. - Further negotiation now requires requires Anthony's indorsement plus delivery.
Oscar writes a check on his account at People's Bank payable to Bess. Bess indorses the check in blank and cashes it at Midwest Grocery, which transfers it to People's bank for payment. What if the bank refuses to pay it?
Midwest Grocery needs to notify Bess in a timely manner to hold her liable - Proper Notice of Dishonor
Tara gives Clem, as a gift, a note that states, "I promise to pay you $100,000." Clem accepts the note. Is this enforceable? What type of defense is this?
No - there is a lack or failure of consideration Personal Defense.
An instrument states, "One year after the death of my grandfather, Jerome Adams, I promise to pay $5,000 to the order of Lucy Harmon." Is this negotiable?
No, the date on which the instrument becomes payable is uncertain.
Imposter
One who induces a maker or drawer to issue a negotiable instrument in the name of an impersonated payee. Indorsements by imposters are treated as authorized indorsements under UCC Article 3.
Bankers Acceptance
Orders the buyer's bank to pay. Often used in international trade.
On April 30, Laurence and Margaret sign a writing unconditionally promising to pay "to the order of" the First National Banks $3,000 (with 5% interest) on or before June 29. What is this an example of?
Promissory note
Insurance agents sometimes receive checks payable to them that are really intended as payment to the insurance company. The Indorsement is signed "Pay to Elvie Ling without recourse. *Signed Bridgett Cage" What kind of indorsement is this?
Qualified Indorsement - The "without recourse" relieves the agent from any liability on a check.
Tristan executes a preprinted promissory note to Sharon, without filling in the blank for a due date. What are Sharon's options?
She can leave the due date blank and the note will be payable on demand. Or she can fill in the due date and the note will be payable on the stated date.
Presentment
The act of presenting an instrument to the party liable on the instrument in order to collect payment. Also occurs when a person presents an instrument to a drawee for a required acceptance.
Robert Emerson asks his accountant, Ada Johnson, to pay some bills for his invalid wife, Sarah, while he is out of the country. He indorses the a check as follows: "pay to Ada Johnson as Agent for Sarah Emerson." What type of indorsement is this?
Trust/Agency Indorsement - allows Ada to use the funds only for the benefit of Sarah
Connor, a salesperson, asks Javier, a customer, to sign a paper. Connor says that it is a receipt for goods that Javier is picking up from the store. In fact, it is a promissory note, but Javier is unfamiliar with English and does not realize this. Even if the note is negotiated to an HDC, Javier has a valid defense against payment. What type of defense is this??
Universal Defense
Jackson Street Bistro buys its restaurant supplies from Osaka Industries. When Jackson requests supplies, Osaka creates a draft ordering Jackson to pay Osaka for the supplies within 90 days. Jackson signs the face of the draft which obligates him to pay. Can Osaka sell the supplies to another party before the 90 days is up?
Yes - this is a trade acceptance
If a note indicates that payment will be made out of the proceeds of the following year's cotton crop, is that note still negotiable?
Yes, although the payee of such a note may find the note commercially unacceptable and refuse to take it.
Crenshaw draws a check on his account at First Bank, payable to Sirah. He postdates the check by fifteen days. Can Sirah negotiate the check?
Yes, she can immediately negotiate the check. And unless Crenshaw tells the bank otherwise, the bank can charge the amount of the check to Crenshaw's account.
Most checks are preprinted "Pay to the order of" followed by a blank line, indicating an order instrument. In handwriting, Chad inserts in the blank "Anita Delgado or bearer." Does this count?
Yes, the handwritten terms will outweigh the printed form, and the check will be a bearer instrument. - Handwritten terms outweigh typewritten and printed terms. - Typewritten terms outweigh printed terms.
Marta lends $1,000 to Ruth, who makes a negotiable note promising to pay $100 per month (plus interest) for ten months. The note on the instrument permits Marta or any holder to immediately demand all the payments plus the interest owed to date if Ruth fails to pay an installment. Ruth fails to make the third payment. Can Marta accelerate the unpaid balance and make the note due and payable in full?
Yes, this is called an acceleration clause.
Alek's note reads, "The holder of this note at the date of maturity, January 1, 2017, can extend the time of payment until the following June 1 or later, if the holder so wishes." Is this note negotiable?
Yes, this is called an extension clause.