Negotiable Instruments Flashcards
When do the rights to enforce an instrument arise
The rights to enforce an instrument arise after issue – the moment when the maker or drawer of the
instrument delivers the instrument for the purpose of giving rights on the instrument to any person –
UCC 3-105
Drafts and Checks: Orders to Pay or Promises to Pay
Orders to Pay
Notes and Certificates of Deposits: Orders to Pay or Promises to Pay
Promises to Pay
When are demand instruments required
demand instruments are payable on demand immediately after issuance or after a reasonable period of time,
When are time instruments required
time instrument is payable at a future date
Drafts: The creator of the draft
The drawer
Drafts: orders another party to pay money
The drawee
Drafts/Notes: third party in draft
The payee
Time Draft:
Payable at a definite future time.
Sight Draft:
Payable on sight (typically when it is presented to a bank or financial institution).
Drafts: What is a way to show acceptance
Acceptance is a drawee’s written promise to pay the draft when due. Typically acceptance is denoted by writing the word “ACCEPTED” on the draft, followed by the date
of acceptance and the signature of the drawee
Trade Acceptance:
Situation where the drawer is both the drawer and payee.
Example of what Type of Draft: Jackson Street Bistro buys its restaurant supplies from Osaka Industries. When Jackson requests supplies, Osaka creates a drat ordering Jackson to pay Osaka for the supplies within ninety day 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.
Options: Time Draft, Sight Draft, Trade Draft
Example: Jackson Street Bistro buys its restaurant supplies from Osaka Industries. When Jackson
requests supplies, Osaka creates a drat ordering Jackson to pay Osaka for the supplies within ninety
day 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.
banker’s acceptance.
When the draft orders the buyer’s bank to pay, it is called a banker’s acceptance. Banker’s
acceptances are commonly used in international trade.
Check, Notes, or Certificates of Deposits : Draft drawn on a bank and payable on demand
Check
Drawer: Notes or Drafts
Drafts
Maker: Notes or Drafts
Notes
Collateral Note:
A note that is secured by personal property, such as an automobile.
Installment Note:
A note payable in installments
Assignment of Promissory Notes:
Promissory notes are commonly assigned from one lender to
another lender. Assignment does not affect the maker’s obligation to pay the note as promised.
Draft, Check, Certificate of Deposit: Note issued when a party deposits funds with a bank, and the bank promises
to repay the funds, with interest, on a certain date. UCC 3-104(j). The bank is the maker of the note,
and the depositor the payee.
Certificate of Deposit
Can a note be written on sand or carved in a block of ice?
Hypos: Can a note be written on sand or carved in a block of ice?
No, the writing must be on material that lends itself to permanence
Can a note be written on a napkin? Shirt?
Can a note be written on a napkin? Shirt?
Yes
Can a note be written on the side of a cow?
No, the writing must also have portability. Because a cow cannot be easily transferred in the ordinary
course of business, the “instrument” is nonnegotiable.
Is a full signature on the note required from the maker/drawee? What about a thumbprint? A mark or symbol?
Hypos: Is a full signature on the note required? What about a thumbprint? A mark or symbol?
A full signature is not required – thumbprints, marks and symbols are acceptable signatures.
Does the signature need to appear in the lower right hand corner from the maker or drawee ?
Does the signature need to appear in the lower right hand corner?
No, although in many cases it does.
True/False: Requirement impacting eligibility writing
true
True False: Requirement impacting eligibility signature by maker/drawer
true
True/False: Requirement impacitng eligibility unconditional for
true
sufficient for note: I promise to pay Publix $1,000 on demand for the purchase of these
goods”
A promissory note that states: “I promise to pay Publix $1,000 on demand for the purchase of these
goods” is sufficient.
sufficient for note : “I owe you,”
However, a simple “I owe you,” which is a mere acknowledgment of a debt, is not sufficient
is express required for certificates of deposits
No express promise is required in a CD because the bank’s acknowledgment of the deposit and the
other terms of the instrument clearly indicate a promise by the bank to repay the sum of money.
Is this note 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.
If a payment is to be made from a fund that does not yet exist, the instrument is nonnegotiable.
True False: Requirement impacting eligibility fixed amount
true
is gold a fixed amount for negotiable instrument
Gold is not a medium of exchange adopted by the U.S. government, so a note made payable in gold is
nonnegotiable.
Is foreign currency a fixed amount for negotiable instrument
An instrument payable in the United States with a face amount stated in a foreign currency can be paid
in the foreign money or in the equivalent of U.S. dollars.
is cryptocurrency a fixed amount for negotiable instrument
There is no provision in the UCC for payment by cryptocurrency.
Requirement impacting eligibility payable on demand or def time
true
Ari gives Ernesto an instrument dated May 1, 2017 that indicates on its face that it is payable
on or before May 1, 2018. Negotiable?
Hypos: Ari gives Ernesto an instrument dated May 1, 2017 that indicates on its face that it is payable
on or before May 1, 2018. Negotiable? Yes.
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.” Negotiable?
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.” Negotiable?
No, the date that the instrument becomes payable is uncertain.
Acceleration Clause:
An acceleration clause allows a 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 a default in
payment of an installment when due.
Marta lends $1,000 to Ruth, who makes a negotiable note promising to pay $100 per month
for eleven months. The note contains an ___ provision. The 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. Ruth owes Marta the remaining principal plus
any unpaid interest to that date.
Option
acceleration clause
extension clause
acceleration clause
extension clause
An extension clause allows the date of maturity to be extended into the future. To
keep the instrument negotiable, the interval of the extension must be specified if the right to extend the
time of payment is given to the maker or the drawer of the instrument.
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, 2018. This extension, however, shall be for
no more than a reasonable time.” Is this note negotiable?
No, this note 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.
Example 2: Alek executes a note that reads, “The holder of this note at the date of maturity, January 1,
2018, can extend the time of payment until the following June 1 or later, if the holder so wishes.” Is
this note negotiable?
Yes, this note is negotiable, as the length of extension does not have to be specified, because the option
to extend is solely that of the holder. After January 1, 2018, the note is, in effect, a demand instrument.
Requirement impacting eligibility payable to order or to bearer
True
order instrument
is an instrument that is payable (1) to the order of an identified person or (2) to
an identified person or order
which of the following is not a bearer instrument: A bearer instrument is an instrument that does not designate a specific payee. The following
instruments indicate a bearer instrument:
“Payable to the order of bearer.”
“Payable to bearer.”
“Pay cash.”
“Pay to the order of cash.”
all induce a bearer instrument
Can an instrument be payable to a nonexistent person? How about an instrument that states:
“Payable to X”?
Yes, these are bearer instruments.
Can instrument be payable to a nonexistent organization?
No
Requirement impacting eligibility date on instruments
Undated instruments do not affect negotiability.
Requirement impacting eligibility Antedating or postdating an instrument
Factors That Do Not Affect Negotiability
Requirement impacting eligibility words and figure not matching
Words outweigh figures. Thus, a check that has the words “One thousand dollars” and a notation of
“$100” on the check is a check payable in the amount of $1,000
Requirement impacting eligibility does not specify a particular interest rate,
When an instrument simply states “with interest” and does not specify a particular interest rate, the
interest rate is the judgment rate of interest [UCC 3-112(b)]. The judgment rate of interest refers to a
rate of interest fixed by statute that applies to court judgments
Requirement impacting eligibility checks stating “nonnegotiable” or “not governed
by Article 3.” H
Factors That Do Not Affect Negotiability
Requirement impacting eligibility drafts stating “nonnegotiable” or “not governed
by Article 3.” H
Factors That Does Affect Negotiability
Requirement impacting eligibility notes “nonnegotiable” or “not governed
by Article 3.” H
Factors That Does Affect Negotiability
certificate of deposits “nonnegotiable” or “not governed
by Article 3.” H
Factors That Does Affect Negotiability
Negotiable Order Instruments:
If an instrument is an order instrument, it is negotiated by delivery with an necessary indorsement
Negotiable Bearer Instrument
If an instrument is a bearer instrument, it does not require an indorsement to be negotiated - only delivery is required
Can an indorsement be written on a separate piece of paper?
yes, this would be an allange. The paper paper must be firmly affixed to the instrument, such as with stpales. A paper firmly attached to a negotiable instrument is part of the instrument
Allange
indorsement written on a separate piece of paper
Blank Indorsement
Does not specifiy a particular indorsee and can consists of a mere signature
Special Indorsement
Contains the signature of the indorser and identifies the person to whom the indorser intends to make the instrument payable
tyoe of indorsement blank, special, qualified: Words such as “Pay to the order of Russell Clay” or “Pay to Russell Clay,” followed by the
signature of the indorser
special indorsement
type of indorsement blank, special, qualified : “Pay to [name of indorsee], without recourse.”
qualified
Qualified inforsement
an indorser who wishes to disclaim liability for the payment on the instrument in the event the drawer or maker defaults on the payment
Restrictive indorsement
requires the indorsee to comply with certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument
Example of what type of indorsement: restrictive, conditional, indorsement for deposition or collection, trust (agency): “Pay to Lars Johansen if he completes
renovation of my kitchen by June 1, 2015, [signed] Keenan Barton.”
conditional
Example of what type of indorsement: restrictive, conditional, indorsement for deposition or collection, trust (agency): ndorsements “for deposit only” or “for collection only.” T
indorsement for deposition or collection. ese indorsements have the effect
of locking the instrument into the bank collection process.
Example of what type of indorsement: restrictive, conditional, indorsement for deposition or collection, trust (agency): Raj Gupta asks his accountant, Stephanie Malik, to pay some bills for him while he is out of
the country. Gupta indorses his payroll check to Stephanie Malik “as agent for Raj Gupta.”
trust (agency). This trust
(agency) indorsement obligates Malik to use the funds only for the benefit of Gupta.
fiduciary duty
the og indorsee has a duty to use the funds only for the benefit of the indorser. This is a fiduciary duty- a duty mandated by a relationship involving trust and loyalty
can instruments payable to entities for indorsement?
A negotiable instrument can be drawn payable to an entity such as an estate, a partnership, or an org. In this situation, an authorize drpresentative of the entity can negotiate the instrument
What name should be used by indorser or payee is misspelled names
An indorsement should be identical to the name that appears on the instrument. A payee or indorsee whose name is misspelled can indorse with the misspelled name, the correct name, or both
when an instrument payable to two or more persons who is the indorser
requires the indorsement of one of the payees
“Pay to the order of Tim or Tom” who needs to indorse
the indorsement of one is required
The instrument is made payable to two ore more persons jointly who is required as indorser
is the instrument is made payable to two ore more persons jointly, all of the payees’ indorsements are necessary for the negotiation
“Pay to the order of Tim and Tom” who needs to indorse
requires the indorsement of both Tim
and Tom.
stacked payees
Parties listed in this manner – without an “and” or “or” between them
Special Type of draft that is drawn on a bank, ordering the bank to pay a fixed amount of money on demand
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check,
Check
A person engaged in the business of banking
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check,
Bank
When a bank draws a check on itself (the bank is the drawer as well as the drawee)
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check,
Cashier’s Check
Example: Blake needs to pay a moving company $8,000 for moving his household goods to his new home in another state. The moving company requests payment in the form of a cashier’s check. Blake goes to the bank (he need not have an account at the bank) and purchases a ___, payable to the moving company, in the amount of $8,000. Blake has to pay the bank $8,000 for the check, plus a small service fee. He then gives the check to the moving company.
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check, Stale Check, Postdated Check
Cashier’s Check
Advantage of Cashier’s Check: The payee need not wait to see if the check “clears” Payment is immediately credited
The payee need not wait to see if the check “clears” Payment is immediately credited
Instrument that is payable on demand, drawn on or payable on or payable at a financial institution (such as a bank), and designated as ___
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check,
Traveler’s Check
For traveler’s check when are purchaser required to sign the check
For traveler’s check purchaser required to sign the check at the time that it is purchased and again at the time that it is used
Check that has been accepted by the bank on which it is drawn. When a drawee bank certifies (accpets) a check, it immediately charges the drawer’s account with the amount of the check and transfers those funds to its own certified-check account
Options
Check, Bank, Cashier’s Check, Traveler’s Check, Certified Check,
Certified Check
Benefits of certified Check
certification prevents the bank from denying liability on the check. It is a promise that sufficient funds are on deposit and have been set aside to cover the check
Banks duty of honors check
When a banking institute provides checking services, it agrees to honor the checks written by its customers, with the usual stipulation that sufficient funds must be available in the account to pay each check. When the drawee bank wrongfully fails to honor a check, it is liabile to its customers for damages resulting from refusal to pay
Overdraft
when the bank received an item properly from its customer’s checking account but the account contains insufficient funds to cover the amount of the check, the bank has twto options. It can either dishonor the item, or it can pay the item and charge the customer’s account, thus creating an overdraft
What happens in the situation of an overdraft with a joint account?
With a joint account, the bank cannot automatically hold any joint account owner liable for payment of an overdraft. A joint account owner is not liable for an overdraft unless he or shae either signed the check or benefited from the proceeds of the check
Example Situation Joint Overdraft: Aaron and Sarah are married and have a joint bank account
Aaron and Sarah will be liable, because both are obviously benefited from having elecrtricity in their apartment
postdated/ stale check/ stop payment order : A bank may charge a ___ against a customer’s account unless the customer notifies the bank, in a timely manner, not to pay until the stated date
Options
Postdated Check, Stale Check
Postdated Check
postdated/ stale check/ stop payment order: Commercial banking practive regards a check that is presented for payment more than 6 months from its date as a ____. A bank is not obligated to pay an uncertified check presented more than six months from its date.
stale check
can a bank decide to pay a tale check if it wishes?
When receiving a stale check for payment, the bank has the option of paying ot not paying the check. If a bank pays a stale check in good faith without consulting the customer, the bank has the right to charge the customer’s account for the amount of the check.
postdated/ stale check/ stop payment order: order by a customer to her or his bank not to pay a certain check
stop payment order. The customer - drawer must have valid legal ground for issuing a stop payment order, or the holder can sue the customer- drawer for payment within reasonable time and in reasnnoable manner
verbal stop payment order valid
in most states, verbal stop payment orders are allowed. A verbal order is generally binding for only 14 calendar days
written stop payment orders valid
effective for 6 months
Forged Drawers’ Signatures General Loss Who Suffers the Loss
When a bank pays a check on which the drawer’s signature is forged, generally the bank suffers the loss
Note, however, that a bank may contractually shift to the customer the risk of forged checks created electronically or b the use of nonmanual signatures. For instances, the contract might stipulate that the customer is solely responsible for maintain security over any signature stamp.
Customer Negligence: When a customer’s negligence contribtues to a forgery, the bank normally will not be obligated to recredit the customer’s account for the amount of the check
Example: Kenneth Wulf worked for Auto-Owners Insurance Company for ten years. During that time,
Wulf opened a checking account at Bank One in the name of “Auto-Owners, Kenneth B. Wulf.” Over
a period of eight years, he deposited $546,000 worth of checks that he had stolen from Auto-Owners
and indorsed with a stamp that read “Auto-Owners Insurance Deposit Only.” When the scam was
finally discovered, Auto-Owners sued Bank One for negligence.
The insurance company claimed that the bank should not have allowed Wulf to open an account in
Auto-Owner’s name without proof that he was authorized to do so.
Example: Kenneth Wulf worked for Auto-Owners Insurance Company for ten years. During that time,
Wulf opened a checking account at Bank One in the name of “Auto-Owners, Kenneth B. Wulf.” Over
a period of eight years, he deposited $546,000 worth of checks that he had stolen from Auto-Owners
and indorsed with a stamp that read “Auto-Owners Insurance Deposit Only.” When the scam was
finally discovered, Auto-Owners sued Bank One for negligence.
The insurance company claimed that the bank should not have allowed Wulf to open an account in
Auto-Owner’s name without proof that he was authorized to do so. The Indiana Supreme Court held,
however, that the negligence of Auto-Owners (the customer) contributed substantially to its own
losses
Failure to Report Forgeries: Sometimes, the same wrongdoer forges the customer’s signature on a
series of checks. To recover for all the forged items, the customer must discover and report the first
forged check at the bank within ___ calendar days of the receipt of availability of the bank statement.
UCC 4-406(d)(2).
30
Liability Forged Indorsements
A bank that pays a customer’s check bearing a forged indorsement must recredit the customer’s account or be liable to the customer (drawer) for breach of contract
Liability: Sometimes, the same wrongdoer forges the customer’s signature on a
series of checks. To recover for all the forged items, the customer must discover and report the first
forged check at the bank within 30 calendar days of the receipt of availability of the bank statement.
UCC 4-406(d)(2).
Sometimes, the same wrongdoer forges the customer’s signature on a
series of checks. To recover for all the forged items, the customer must discover and report the first
forged check at the bank within 30 calendar days of the receipt of availability of the bank statement.
UCC 4-406(d)(2). Failure to notify the bank within 30 days discharges the bank’s liability for all
forged checks that it pays prior to notification.
Cameron issues a $500 check “to the order of Sophia Alonzo” Margo steals the check and forges Alozon’s indorsement and cashes the check. When the check reaches Camerons bank, the bank pays and debits Cameron account.
The bank must recredit Cam account for the $500 becuase it failed to carry out Cam order to pay “ to hte order of Sophia Alonzo”
Altered Check
The bank has an implicit duty to examine checks before making final payments. If it fails to detect an alteration, it is liable to its customer for the loss becuase it did not pay as the cutomer ordered
Customer negligence: A customers negligence can shift the loss when payment is made on an altered check
