Business Law 24

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1.

What are the two types of negotiable instruments?

1. Promissory Notes (promise to pay) 2. Drafts and Checks (Order to pay) Negotiable instrument

8.

A draft in which the seller is both the drawer and payee. The draft orders the buyer to pay a specified sum of money to the seller, at a stated time in the future.

Trade Acceptance (draft) This is typically seen in sales of goods--supplier extending credit to its buyer, for example. Banker's acceptance (draft)

2.

A signed writing (or record) that contains an unconditional promise or order to pay an exact amount, either on demand or at a specific future time. In addition, it must be easily transferable without danger of being uncollectible. A draft involves three parties. What are the three?

9.

"An order to pay an exact amount"--key statement 1. Drawer-signs or makes an order to pay 2. Drawee-whom the order is made (ie: bank receives the order to make payment to...) 3. Payee-whom "payment" is ordered to
10.

A draft drawn by a creditor against his or her debtor, who must pay it at maturity. Typically, the term is short. In other words, when a draft orders the buyer's bank to pay. A draft drawn on a bank and payable on demand. There are two parties to a promissory note--a written promise by one party to pay money to another party. Identify the parties.

3.

Check (draft) 1. Maker--the person who promises to pay 2. Payee--the person to whom the promise is made to

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12.

A note made by a bank promising to repay a deposit of funds with interest on a certain date. List the requirements for negotiability.

Certificate of Deposits (CDs) (note) 1. In written form 2. Signed by the maker (note) or drawer (draft) 3. An unconditional promise or order 4. An order or promise to pay a "fixed" amount of money 5. Payable on demand or at a definite time 6. Payable to order or to bearer, unless it is a check

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4.

In a draft, the drawee must be obligated to the drawer either by an 1.___________ or 2.__________ relationship to honor the order. This draft is payable at a definite future time This draft is payable when presented for payment. Can a draft be both time and sight draft? If yes, how?

1. Agreement 2. Debtorcreditor Time Draft Sight Draft Yes. When the draft is payable at a stated time (time) after one presents it (sight).

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14.

For an instrument to be negotiable, it must contain an ________ promise (note) or order (draft) to pay

Express (must be "affirmative" and cannot imply a promise or order) Thus, on exam, always be mindful to see whether express words are used, such as "I promise to pay" or similar.

17.

Is a variable interest rate note negotiable? Does it violate the "fixed amount" requirement of negotiability? Why or why not?

No, it does not violate the fixed amount requirement because the requirement applies only the principal. Thus, even variable rate of interest--often fluctuates as a result of market conditions--can be negotiable. We just need the principal to be fixed and explicitly stated.

15.

Associated with three-party instruments, this directs a third party to pay the instrument as drawn. It must show command.

Order IE: On a typical check, the word "pay" (to the order of a payee (one who payment is made for)) is a command to the drawee bank to pay the check when presented, and thus, it is an order 1. "References" to another writing (referring to another document is allowed, but if the promise or order is subjected to another writing conditions, this is conditional) 2. Payments only out of a particular fund or source (although it appears unattractive but it does not impair unconditional status)

18.

A drawee who has accepted, or agreed to pay, an instrument when it is presented later for payment A requirement of negotiability is that the instrument must be payable on demand or at a definite time. This is very important! An instrument is payable on (1) a specified date, (2) within a definite period of time (such as 30 days), or (3) on a date or time readily ascertainable at the time the promise or order is issued. Thus, it is very important that on the note or draft (instrument), it is properly Allows a holder to demand payment of entire amount, plus any interests up to the date, if a certain event occurs without affecting negotiability.

Acceptor

19.

Dated. However, no date affects negotiability if the date is necessary to determine a definite time for payment. For example, if undated, then the statement "made payable one month after date" cannot be determined and clearly nonnegotiable. So, no date does not always mean negotiability is destroyed or impaired! Acceleration Clause IE: A note has an acceleration provision that if Martin defaults on his payment, the holder of the note or payee can demand full payment, plus any accrued interests. So, if Martin defaults, the full amount and interests will be payable in full. No, because it is allowed under the "extension clause" and the extension period is clearly and expressly stated. However, after January 1, the instrument will be a demand instrument.

16.

One requirement of negotiability is the note or draft is unconditional. In order for payment to be unconditional, payment or order CANNOT be subject to or governed by another writing, or be subject to rights or obligations stated in another writing. However, negotiability is not affected by--

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21.

"The holder of this note at the date of maturity, January 1, 2012, can extend the time of payment until the following June 1 or later, if the holder so wishes." Does this affect negotiability?

22.

Why is a freedom to transfer so essential to a negotiable instrument?

Because one of its function is to serve as a substitute to cash. Therefore, it must be transferable. "Payable to order or to bearer"

30.

Unspecified interest rate does not affect negotiability. If unspecified, the Codes provides what rate to be used?

Judgment rate (a rate of interest fixed by a statue)

23.

The payment must be _____________ at the time it is issued or first comes into the possession of the holder. Define order instrument.

24.

"Payable to the order of an identified person" or to "an identified person or order" The person must be identified with certainty.

25.

What does it mean that the maker of a note or drawer of a draft is agreeing to pay either the person specified on the instrument or whomever that person might designate? This term refers to a person in possession of an instrument that is payable to bearer or endorsed in blank with a signature only. This type of instrument can, thus, be negotiated merely by a change in possession, that is, by "delivery."

Because the identified person of an order instrument may transfer the instrument to whomever he wishes Bearer instrument Endorsed in blank-the holder's name is signed on the back without any accompanying instruction. Bearer instrument But an instrument payable to a nonexistent entity is not bearer paper

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27.

This is an instrument that does not designate a specific payee.

28.

Does post-dating or antedating an instrument affect negotiability?

No. Antedating occurs when a party puts a date on an instrument that precedes the actual calendar date

29.

On an instrument, handwritten words prevail 1._________, and 2._________ prevails __________.

1. Typewritten 2. Typewritten 3. Printed (preprinted on forms, etc.)