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Business Law > Ch. 25 Function and Creation of Negotiable Instruments > Flashcards

Ch. 25 Function and Creation of Negotiable Instruments Flashcards

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1
Q

What is a negotiable instrument?

A
  • 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
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2
Q

A negotiable instrument can function as a substitute for what or as an extension of what?

A
  • Substitute for cash

- Or extension of credit

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3
Q

A promissory note you sign to obtain an educational loan is a negotiable instrument that functions as what?

A
  • Extension of credit
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4
Q

For a negotiable instrument to operate practically as either a substitute for cash or a credit device, or both, it is essential that the instrument be what?

A
  • Easily transferable without danger of being uncollectible

- This is a fundamental function of negotiable instruments

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5
Q

The law governing negotiable instruments grew out of commercial necessity. In the medieval world, merchants developed their own set of rules, which eventually became known as the what?

A
  • Lex Mercatoria (Law Merchant)
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6
Q

The Law Merchant was later codified in England and is the forerunner of what?

A
  • Article 3 of the Uniform Commercial Code (UCC)
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7
Q

Article 3 of the UCC imposes special requirements for what?

A
  • The form and content of negotiable instruments, and also governs their negotiation, or transfer
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8
Q

Article 4 of the UCC governs what?

A
  • Governs bank deposits and collections
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9
Q

Define issue (UCC 3-105)

A
  • “the first delivery of an instrument by the maker or drawer…for the purpose of giving rights on the instrument to any person”
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10
Q

What is a demand instrument?

A

Instrument payable on demand (payable immediately after it’s issued and thereafter for a reasonable period of time)

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11
Q

What is a time instrument?

A

Instrument payable at a future date

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12
Q

Give an example of a demand instrument.

A

Checks

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13
Q

The UCC specifies what four types of negotiable instruments?

A
  • Drafts
  • Checks
  • Notes
  • CDs
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14
Q

Who is the drawer (UCC 3-103(a)(3)?

A

Person who signs or makes the order to pay

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15
Q

Who is the drawee (UCC 3-103(a)(2)?

A

Person to whom the order to pay is made

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16
Q

Who is the payee?

A

Person to whom payment is ordered

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17
Q

Who is the maker (UCC 3-103(a)(5)?

A

Person who promises to pay

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18
Q

What is a draft?

A
  • Unconditional written order that involves three parties (drawer, drawee, payee)
  • Party creating the draft (drawer) orders another party (drawee) to pay money usually to a third party (payee)
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19
Q

What is the most common type of draft?

A

Check

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20
Q

What is a time draft?

A
  • Draft payable at a definite future time
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21
Q

What is a sight draft?

A
  • Draft payable on sight

- That is, when it is presented to the drawee for payment (usually a bank or financial institution)

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22
Q

What is a sight draft also known as?

A

Demand draft

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23
Q

May a sight draft be payable on acceptance?

A

YES

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24
Q

Define acceptance.

A

The drawee’s written promise to pay the draft when it comes due

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25
Q

How is an instrument usually accepted?

A
  • Writing the word “accepted across its face”
  • Followed by date of acceptance
  • And signature of drawee
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26
Q

Can a draft be both a time and sight draft?

A

YES (payable at a stated time after sight)

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27
Q

Give an example of a time and sight draft.

A

A draft that states it is payable “x” days after sight

28
Q

For the drawee to be obligated to honor the order, the drawee must be obligated to the drawer by either what or what?

A
  • Agreement OR

- Thru a debtor-creditor relationship

29
Q

What is a trade acceptance?

A
  • Type of draft frequently used in sale of goods (draft orders buyer to pay a specified amount to seller, usually at a stated time in future)
30
Q

In a trade acceptance, who is both the drawer and payee?

A

Seller of the goods

31
Q

In a trade acceptance, who is the drawee?

A

Buyer to whom credit is extended

32
Q

When a draft orders the buyer’s bank to pay, what is it called?

A

Banker’s acceptance

33
Q

Where are banker’s acceptances commonly used?

A

International trade

34
Q

What is the writer of a check called?

A

Drawer

35
Q

What is the bank on which the check is drawn called?

A

Drawee

36
Q

What is the person to whom the check is made payable to called?

A

Payee

37
Q

Why are checks demand instruments?

A

B/c they’re payable on demand

38
Q

With cashier’s checks, who is both the drawer and drawee?

A

Bank

39
Q

How do cashier’s checks work?

A
  • Bank customer purchases cashier’s check from bank by paying the amount of the check, indicating to whom check should be made payable
40
Q

What is a promissory note?

A
  • Written promise made by one person (maker) to pay another (payee) a specified sum
41
Q

Is a promissory note a debt?

A
  • NO

- It is only the evidence of a debt

42
Q

What was the key question in the Silicon Valley Bank v. Miracle Faith World Outreach Inc. case?

A

Does the loss of a promissory note (which is only the evidence of a debt) affect the rights of the owner?

43
Q

What was the outcome in the Silicon Valley Bank v. Miracle Faith World Outreach Inc. case?

A

” A 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”

44
Q

Promissory notes are commonly assigned. What does commonly assigned mean?

A
  • Negotiated or transferred from one lender or payee to another
45
Q

Promissory notes are commonly assigned. Does assignment affect the maker’s obligation to pay the note as promised?

A

NO

46
Q

Does having a digital wallet in an iPhone entail more or fewer security risks than carrying a physical wallet with cash and credit cards?

A

More security risks (hackers in cyberspace)

47
Q

What is a collateral note?

A
  • Promissory note secured by personal property such as car
48
Q

Define collateral.

A

Property pledged as security for satisfaction of a debt

49
Q

What is an installment note?

A
  • Promissory note payable in installments (e.g. installment payments for tv over a 12-month period)
50
Q

What is a CD?

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
51
Q

In regards to CDs, who is the maker of the note?

A

Bank

52
Q

In regards to CDs, who is the depositor?

A

Payee

53
Q

CDs in small denominations (for amounts up to 100k) are often sold by what types of institutions?

A
  • Savings and loans associations
  • Savings banks
  • Commercial banks
  • Credit unions
54
Q

For an instrument to be negotiable, what requirements must it meet?

A

1) Be in writing (permanence and portability)
2) Be signed by the maker or drawer
3) Be an unconditional promise to pay 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

55
Q

Why will an unusual signature decrease the marketability of an instrument?

A

B/c it creates uncertainty

56
Q

While the location of a signature on a document is unimportant, where is it typically placed?

A

Lower right hand corner

57
Q

What is an order associated with?

A

Associated with three-party instruments such as checks, drafts and trade acceptances

58
Q

What is the term fixed amount sometimes referred to as?

A

Sum Certain

59
Q

How does the UCC define money?

A

Medium of exchange authorized or adopted by a domestic or foreign government as a party of its currency

60
Q

What was the key question in the Reger Development LLC v. National City Bank case?

A

Whether a promissory note was a demand note

61
Q

What is an acceleration clause?

A

-Allows 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 default in payment of an installment when due

62
Q

What is an extension clause?

A
  • Allows date of maturity to be extended into future
63
Q

What is a order instrument?

A
  • Instrument that is payable (1) to the order of an identified person OR (2) to an identified person or order
64
Q

What was the key question in Las Vegas Sands LLC v Nehme?

A

Whether gambling marker (a credit instrument that allows a gambler to receive tokens from a casino based on a prior credit application) was negotiable

YES

65
Q

Can an instrument be payable to a nonexistent person?

A

YES

66
Q

Can an instrument be payable to a nonexistent organization?

A

NO

67
Q

What factors do not affect negotiability?

A
  • Undated instrument

- Antedating or postdating

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