Ch. 25 Function and Creation of Negotiable Instruments Flashcards
What is a 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
A negotiable instrument can function as a substitute for what or as an extension of what?
- Substitute for cash
- Or extension of credit
A promissory note you sign to obtain an educational loan is a negotiable instrument that functions as what?
- Extension of credit
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?
- Easily transferable without danger of being uncollectible
- This is a fundamental function of negotiable instruments
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?
- Lex Mercatoria (Law Merchant)
The Law Merchant was later codified in England and is the forerunner of what?
- Article 3 of the Uniform Commercial Code (UCC)
Article 3 of the UCC imposes special requirements for what?
- The form and content of negotiable instruments, and also governs their negotiation, or transfer
Article 4 of the UCC governs what?
- Governs bank deposits and collections
Define issue (UCC 3-105)
- “the first delivery of an instrument by the maker or drawer…for the purpose of giving rights on the instrument to any person”
What is a demand instrument?
Instrument payable on demand (payable immediately after it’s issued and thereafter for a reasonable period of time)
What is a time instrument?
Instrument payable at a future date
Give an example of a demand instrument.
Checks
The UCC specifies what four types of negotiable instruments?
- Drafts
- Checks
- Notes
- CDs
Who is the drawer (UCC 3-103(a)(3)?
Person who signs or makes the order to pay
Who is the drawee (UCC 3-103(a)(2)?
Person to whom the order to pay is made
Who is the payee?
Person to whom payment is ordered
Who is the maker (UCC 3-103(a)(5)?
Person who promises to pay
What is a draft?
- 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)
What is the most common type of draft?
Check
What is a time draft?
- Draft payable at a definite future time
What is a sight draft?
- Draft payable on sight
- That is, when it is presented to the drawee for payment (usually a bank or financial institution)
What is a sight draft also known as?
Demand draft
May a sight draft be payable on acceptance?
YES
Define acceptance.
The drawee’s written promise to pay the draft when it comes due
How is an instrument usually accepted?
- Writing the word “accepted across its face”
- Followed by date of acceptance
- And signature of drawee
Can a draft be both a time and sight draft?
YES (payable at a stated time after sight)
Give an example of a time and sight draft.
A draft that states it is payable “x” days after sight
For the drawee to be obligated to honor the order, the drawee must be obligated to the drawer by either what or what?
- Agreement OR
- Thru a debtor-creditor relationship
What is a trade acceptance?
- 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)
In a trade acceptance, who is both the drawer and payee?
Seller of the goods
In a trade acceptance, who is the drawee?
Buyer to whom credit is extended
When a draft orders the buyer’s bank to pay, what is it called?
Banker’s acceptance
Where are banker’s acceptances commonly used?
International trade
What is the writer of a check called?
Drawer
What is the bank on which the check is drawn called?
Drawee
What is the person to whom the check is made payable to called?
Payee
Why are checks demand instruments?
B/c they’re payable on demand
With cashier’s checks, who is both the drawer and drawee?
Bank
How do cashier’s checks work?
- Bank customer purchases cashier’s check from bank by paying the amount of the check, indicating to whom check should be made payable
What is a promissory note?
- Written promise made by one person (maker) to pay another (payee) a specified sum
Is a promissory note a debt?
- NO
- It is only the evidence of a debt
What was the key question in the Silicon Valley Bank v. Miracle Faith World Outreach Inc. case?
Does the loss of a promissory note (which is only the evidence of a debt) affect the rights of the owner?
What was the outcome in the Silicon Valley Bank v. Miracle Faith World Outreach Inc. case?
” 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”
Promissory notes are commonly assigned. What does commonly assigned mean?
- Negotiated or transferred from one lender or payee to another
Promissory notes are commonly assigned. Does assignment affect the maker’s obligation to pay the note as promised?
NO
Does having a digital wallet in an iPhone entail more or fewer security risks than carrying a physical wallet with cash and credit cards?
More security risks (hackers in cyberspace)
What is a collateral note?
- Promissory note secured by personal property such as car
Define collateral.
Property pledged as security for satisfaction of a debt
What is an installment note?
- Promissory note payable in installments (e.g. installment payments for tv over a 12-month period)
What is a CD?
- 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
In regards to CDs, who is the maker of the note?
Bank
In regards to CDs, who is the depositor?
Payee
CDs in small denominations (for amounts up to 100k) are often sold by what types of institutions?
- Savings and loans associations
- Savings banks
- Commercial banks
- Credit unions
For an instrument to be negotiable, what requirements must it meet?
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
Why will an unusual signature decrease the marketability of an instrument?
B/c it creates uncertainty
While the location of a signature on a document is unimportant, where is it typically placed?
Lower right hand corner
What is an order associated with?
Associated with three-party instruments such as checks, drafts and trade acceptances
What is the term fixed amount sometimes referred to as?
Sum Certain
How does the UCC define money?
Medium of exchange authorized or adopted by a domestic or foreign government as a party of its currency
What was the key question in the Reger Development LLC v. National City Bank case?
Whether a promissory note was a demand note
What is an acceleration clause?
-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
What is an extension clause?
- Allows date of maturity to be extended into future
What is a order instrument?
- Instrument that is payable (1) to the order of an identified person OR (2) to an identified person or order
What was the key question in Las Vegas Sands LLC v Nehme?
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
Can an instrument be payable to a nonexistent person?
YES
Can an instrument be payable to a nonexistent organization?
NO
What factors do not affect negotiability?
- Undated instrument
- Antedating or postdating
