Chapter 25 Flashcards
Negotiable Instruments
A negotiable instrument is a signed writing that contains an UNCONDITIONAL PROMISE or order to pay an EXACT SUM of money either ON DEMAND or at an EXACT FUTURE DATE.
What type of contract is a negotiable instrument?
A formal type of contract - there are very strict form requriements
Why is it a benefit to have negotiable instruments under UCC?
UCC is a little more lenient
What are functions of negotiable instruments?
- Substitute for money
- Credit device
What is an instrument that is a substitute for money?
A check
Is an “I owe you” a negotiable instrument?
No (just an acknowledgment of debt)
Is a loan or note payable negotiable instruments?
Yes
Negotiable
Special requirements relating to form and content must be met
Negotiable instruments are governed by the _____, nonnegotiable instruments are governed by the ____________.
UCC; Common Law
Orders to pay
- Drafts
- Checks
Promises to Pay
- Notes
- CDs
Demand Instrument
- States it is payable on demand or on sight, or otherwise indicates it is payable at will of Holder; or
- Does not state any time of payment.
Time Instrument
payable at a future date. Future date that sets the due date! (be careful because sometimes there are dates but they don’t set the DUE DATE)
Drafts
Unconditional, written order involving 3 parties
On January 16, OurTown Real Estate orders $1,000 worth of office supplies from Eastman Supply Company, with payment due April 16. Also on January 16, OurTown sends Eastman a draft drawn on its account with the First National Bank of Whiteacre as payment.
In this scenario, the drawer is OurTown, the drawee is OurTown’s bank (First National Bank of Whiteacre), and the payee is Eastman Supply Company. First National Bank is obligated to honor the draft because of its account agreement with OurTown Real Estate.
What are the 3 parties of drafts?
Drawer - creates the instrument
Drawee – party who is ordered to pay the instrument
Payee – the party who gets paid on the instrument
Acceptance for Drafts
The drawee’s written promise to pay the draft when it comes due. You have to have a signature like that on all order to pay instruments.
Time Draft
Payable at a future date.
Ex: “90 days after the date”
Sight Draft
Payable upon sight
Trade Acceptance
A draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a stated time in the future. The buyer accepts the draft by signing the face of the draft, thus creating an enforceable obligation to pay the draft when it comes due. On a trade acceptance, the seller is both the drawer and the payee.
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 ninety days and sends it along with the supplies. When the supplies arrive, Jackson accepts the draft by signing its face and is then obligated to make the payment.
This signed draft is a trade acceptance and can be sold to a third party if Osaka needs cash before the payment is due. (Osaka would sell the draft through the commercial money market—the market that businesses use for short-term borrowing.)
Midwestern Style Fabrics sells $50,000 worth of fabric to D&F Clothiers, Inc., each spring on terms requiring payment to be made in 90 days. Typically, Midwestern Style draws up a trade acceptance and includes it in the shipment of fabric. The trade acceptance orders D&F to pay $50,000 to the order of Midwestern Style, ninety days hence. D&F signs and dates – thereby accepting – the instrument, and returns it to Midwestern Style. Midwestern Style can now sell the trade acceptance and immediately (or at any time before the due date) receive the cash value of the instrument (or close to the cash value – discounts are allowed). The person/entity to whom Midwestern Style sells the instrument, then holds it for 90 days (or until the due date) and presents it to D&F who is legally required to pay?
Midwestern Style is the Seller;
Midwestern Style is both the drawer (party ordering payment) and the payee (party due payment) on the trade acceptance.
D&F Clothiers is the buyer;
D&F Clothiers is the drawee (party ordered to pay) on the trade acceptance
Checks
A type of draft, still involving 3 parties
Demand instruments
What are the 3 parties of checks?
Drawer – creates the instrument
Drawee – ALWAYS a bank, savings and loan, credit union
Payee – to whom the checks are payable
What should we expect checks to be?
Cashed immediately
You owe your roommate $1,000 because they paid rent for you last month. They keep bugging you about it. You don’t get paid until the 15th. You write a check but tell them you don’t have the money until the 15th so hold onto it. The roommate goes right down to the bank and cashes the check. You get an overdraft fee…
Be prepared to pay it when you issue it (when you give the check).
Promissory Notes
Written promises between 2 parties
Payable on demand or at a definite time
On April 30, Laurence and Margaret Roberts sign a writing unconditionally promising to pay “to the order of” the First National Bank of Whiteacre $3,000 (with 5.2 percent interest) on or before June 29.
This writing is a promissory note. Laurence and Margaret Roberts are the note’s co-makers, and the First National Bank of Whiteacre is the payee.
Nadine Fuller signs a promissory note to purchase a 65-inch OLED 8K UHD television. The note, which is payable in installments over a twelve-month period, is called an…
installment note.
What are the parties in promissory notes?
Maker- the one making the promise, they are obligated to pay.
Payee- the party that gets paid.
Certificates of Deposit
Investment tool. It is a type of note, but a note issued by the bank to whoever bought the CD
On February 15, Sara Levin deposits $5,000 with the First National Bank of Whiteacre. The bank promises to repay the $5,000, plus 1.85 percent annual interest, on August 15.
Certificate of Deposit
Bearer
the bank is promising to pay anyone who presents the CD. Even if someone acquires them illegally. But, they are easily transferrable so that is a plus.
Requirements of a Negotiable Instrument
- In writing
- Signed by the Maker (note or CD) or Drawer (draft or check)
- Unconditional promise or order to pay
- Fixed amount of money
- Payable on demand or at a define time
- Payable to Order or to Bearer
Writing Requirement
- On material that lends itself to permanence
- Portable/moveable
Sand or block of ice
Not permanent, not negotiable
Can checks and notes be written on napkins, menus, tablecloths, and shirts?
Yes, courts normally will enforce negotiable instruments written on these odd types of materials.
Cullen writes on the side of a cow, “I, Cullen, promise to pay $500 to the order of Merrill.” Technically, this would meet the requirements of a negotiable instrument—except for…
portability. Because a cow cannot easily be transferred in the ordinary course of business, the “instrument” is nonnegotiable.
Signed by the Maker or Drawer Requirement
- Signed (initials, stamp, preprint, thumbprint)
- Placement of signature - irrelevant
- Burden of Proof - signature is presumed valid
- Instrument can be signed by an authorized agent
Unconditional Promise/Order to Pay Requirement
- Terms of the promise or order must be on the face of the instrument
- Promise/Order to pay must be affermative, not just an implication, and the order must be a command
- Unconditional - only unconditional promises or orders can be negotiable -> cannot be conditioned on the occurrence of an event
Sam and Odalis Groome entered into two contracts to buy a pair of alpacas from Alpacas of America, LLC (AOA). To finance the purchases, the buyers signed two notes, one for $18,750 and one for $20,250. Each note included a reference to a contract, a payment schedule, and a security agreement.
Within a few months, the Groomes stopped making payments. When AOA sued to collect the unpaid amounts, the Groomes argued that the notes were nonnegotiable because they referred to and were governed by other writings (the contracts).
Ultimately, a state appellate court ruled that the Groomes’ notes contained unconditional promises to pay and thus were negotiable
Duffy’s note promises to pay Sherman from the trust account that Duffy will establish when he receives the proceeds from his father’s estate.
This promise is conditional, and the note is nonnegotiable.
“I, CEH, owe Brazos Blind and Draperies $500.”
Not a promise to pay, but an acknowledgment of a debt.
“I, CEH, owe Brazos Blind and Draperies $500 on or before 5/15/18, IF the draperies are finished.”
Non-negotiable because of the condition.
“I, CEH, owe Brazos Blind and Draperies $500 on demand from my TD Ameritrade account.”
Not a conditional statement, it is a reference. This would be a negotiable instrument.
“I, CEH, owe Brazos Blind and Draperies $500 on demand from the sale of my car next month.”
This is a conditional statement. The sale of car is not certain.
“Fixed amount”
The amount must be ascertainable from the face of the instrument. Exact sum.
What question should you ask when looking at fixed amounts?
“could you do a calculation and know what is due on the date due?”
You can calculate interest
You would expect interest to be stated… what if the instrument does not say a specific amount of interest but it just says “with interest”.
If the instrument just says “with interest,” then you place the judgment rate of interest. Saying “with interest” doesn’t make it non-negotiable.
Judgement Rate of Interest
The rate of interest ruled on by the court. Encourages appeals to get on with it… it is a really high rate.
“of money”
The instrument is payable in a recognized form of US currency and no other promise. Bitcoin and gold are not money. Foreign currency works.
Payable on Demand Requirement
- “Payable at sight”, or
- “Payable on Presentment”
- Checks are payable on demand by definition
- If no payment is specified, then it is payable on demand
National City Bank gave Reger Development, LLC, a line of credit to finance potential development opportunities. Reger signed a promissory note requiring it to “pay this loan in full immediately upon Lender’s demand.” About a year later, the bank asked Reger to pay down the loan and stated that it would be reducing the amount of cash available through the line of credit. Reger sued, alleging that the bank had breached the terms of the note.
The court ruled in the bank’s favor. The promissory note was a demand instrument because it explicitly set forth the lender’s right to demand payment at any time. Thus, National City had the right to collect payment from Reger at any time on demand.
Payable on a Definite Time
- If not payable on demand, the time for payment must be specified on the face of the instrument
- An instrument is payable at a definite time if it states that it is payable on a specified date, within a definite period of time after being presented for payment, or on a date readily ascertainable at the time of the order or promise
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. [Signed] Jacqueline Wells.”
It is nonnegotiable. The date that the instrument becomes payable is uncertain.
Acceleration Clause
Allows the holder of a time instrument to demand payment of the entire amount due if a certain event occurs, such as default
Marta lends $1,000 to Ruth, who makes a negotiable note promising to pay $100 per month for eleven months. The note contains an acceleration provision. This provision permits Marta or any holder to immediately demand all the payments plus the interest owed to date if Ruth fails to pay an installment in any given month. Ruth fails to make the third payment.
Marta accelerates the unpaid balance, and the note becomes due and payable in full. Ruth owes Marta the remaining principal plus any unpaid interest to that date.
“Holder”
Any person in possession of a negotiable instrument that is payable to the bearer or to an identified person that is the person in possession (The holder may or may not be the payee, instruments can be transferred)
The instrument is still negotiable (under acceleration clause) because:
- You can ascertain a definite amount
- Due date
Extension Clause
(the opposite of acceleration clause) Allows maturity (due date) to be extended into the future if…
1. the extension interval is given to the maker or drawer it must be specified to be negotiable;
2. if the extention interval is given to the holder (payee originally), it need not be specified to be negotiable.
Alek executes a note that reads, “The maker has the right to postpone the time of payment of this note beyond its definite maturity date of January 1, 2026. This extension, however, shall be for no more than a reasonable time.”
A note with this language is not negotiable, because it does not satisfy the definite-time requirement. The right to extend is the maker’s, and the maker has not indicated when the note will become due after the extension.
Suppose that Alek’s note reads, “The holder of this note at the date of maturity, January 1, 2026, can extend the time of payment until the following June 1 or later, if the holder so wishes.”
This note is negotiable. The length of the extension does not have to be specified, because the option to extend is solely that of the holder. After January 1, 2026, the note is, in effect, a demand instrument.
Order Instrument
An instrument that is: payable to the order of any person therein identified; or payable to an identified person or order
“Identified person”
the person to whom the instrument is initially payable.
“Order”
means that the instrument is payable to whomever the “identified person” may later designate.
An identified person must be named with…
specificity
Payable to the order of John Smith.
Payable to John Smith or his order.
John Smith is the payee.
John Smith may designate who gets the instrument next or what happens to the instrument next. (He can cash or deposit it, but there are other things he can do with it. He could transfer it to someone else.)
Bearer Instrument
An instrument that can be collectible by anyone who is in possession of it. Does not designate a specific payee
“Bearer”
Refers to a person in possession of an instrument that is either:
1. Not payable to an “identified person”, or
2. Indorsed in blank
Payable to __________ (no identification)
Payable to cash
Payable to John Smith or Bearer
Payable to bearer
Anyone in possession (Holder) can determine what happens next with this instrument.
Amine Nehme applied for credit at the Venetian Resort Hotel Casino in Las Vegas, Nevada, and was granted $500,000 in credit. He signed a gambling marker—that is, a promise to pay a gambling debt—for $500,000. Nehme quickly lost that amount gambling. The Venetian presented the marker for payment to Nehme’s bank, Bank of America, which returned it for insufficient funds. The casino’s owner, Las Vegas Sands, LLC, filed a suit against Nehme for failure to pay a negotiable instrument.
The court held that the marker fit the UCC’s definitions of negotiable instrument and check. It was a means for payment of $500,000 from Bank of America to the order of the Venetian. It did not state a time for payment and thus was payable on demand. It was also unconditional—that is, it stated no promise by Nehme other than the promise to pay a fixed amount of money. Therefore, the marker was a negotiable instrument, and the Venetian was entitled to enforce it.
What are factors that do not affect negotiability?
- Date (unless the date is necessary to fix the time for payment)
- Postdating/antedating
- Handwritten terms outweigh typed, which overweigh pring
- Words outweigh figures
- “With Interest”
- Notation of non-negotiable
Crenshaw draws a check on his account at First Bank, payable to Sirah Imports. He postdates the check by fifteen days.
Sirah Imports can immediately negotiate the check, and, unless Crenshaw tells First 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, making them order instruments. In handwriting, Travis inserts in the blank “Anita Delgado or bearer.”
The handwritten terms will outweigh the printed form, and the check will be a bearer instrument.
Reirson issues a check payable to Reliable Appliance Company. For the amount, she fills in the number “$100” but writes out the words “One thousand and 00/100” dollars.
The check is payable in the amount of $1,000.
The note identified the principal amount of the loan as “ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS.”
Under the UCC, “if an instrument contains contradictory terms, … words prevail over numbers.”
If instruments states “with interest” but does not state how much interest, then the interest rate is…
the judgement rate of interest
Notation of non-negotiable
Check… no effect, still negotiable (the check is issued by the bank)
Any other instrument… non-negotiable
Juan Sanchez writes the following note on the back of an envelope “I Juan Sanchez, promise to pay Kathey Martin or bearer $500 on demand.” Is this a negotiable instrument?
- Written
- Signed by writting his name
- Promise to pay language
- Exact amount of money
- On demand
- Bearer
Yes, this is a negotiable instrument.
A college student, Austin Keynes, whished to purchase a new entertainment system from Friedman Electronics, Inc. Because Keynes did not have the cash to pay for the entertainment system, he offered to sign a note promising to pay $150 per month for the next six months. Friedman Electronics, eager to sell the system to Keynes, agreed to accept the promissory note, which read, “I, Austin Keynes, promise to pay to Friedman Electronics or its order the sum of $150 per month for the next 6 months.” The note was signed by Austin Keynes. A week later, Friedman Electronics, which was badly in need of cash, signed the back of the note and sold it to the First National Bank of Halston. Give the specific designation of each of the 3 parties on this note.
Maker: Austin
Payee/Endorser: Friedman
Endorsee/Holder: FNB of Halson
