Types of Negotiable Instruments Flashcards
Requirements for Negotiability
To be negotiable, an instrument must be [UCC 3-104(a)]—
1) Be in writing.
2) Be signed by the maker or drawer.
3) Be an unconditional promise 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 bearer, unless it is a check.
Parties involved in Orders to Pay
Drawer - The person who signs or makes an order to pay.
Drawee - The person to whom the order is made.
Payee - The person to whom payment is ordered.
Draft
An unconditional written order by one person to another to pay money. The drawee must be obligated to the drawer either by an agreement or through a debtor-creditor relationship to honor the order.
Time Draft
Payable at a definite future time.
Sight Draft (Demand Draft)
Payable on sight (when presented for payment). A draft payable at a stated time after sight is both a time and a sight draft.
Trade Acceptance
A draft in which the seller is both the drawer and the payee. The draft orders the buyer to pay a specified sum of money to the seller, at a stated time in the future.
Banker’s Acceptance
A trade acceptance that orders the buyer’s bank, rather than the buyer, to pay.
Check
A draft drawn on a bank and payable on demand. A cashier’s check is a draft in which the bank is both the drawer and drawee.
Forms of Orders to Pay
Checks and Drafts
Forms of Promises to Pay
Promissory Notes and Certificates of Deposit
Parties of Promises to Pay
Maker - A person who promises to pay.
Payee - A person to whom the promise.
Promissory Note
A written promise by one party to pay money to another party.
Certificate of Deposit
A note made by a bank promising to repay a deposit of funds with interest on a certain date [UCC 3-104(j)].
Writing requirement for negotiable instruments
A writing can be on anything (1) permanent and (2) readily transferable [UCC 3—103(a)(6)].
Signature requirement for negotiable instruments
A signature can be any place on an instrument and in any form (a mark or rubber stamp) that purports to be a signature and authenticates the writing [UCC 1-201(39), 3-401(b)].
Promise/Order requirement for negotiable instruments
A promise must be more than a mere acknowledgment of a debt (an IOU does not qualify; use of the words “I promise” or “Pay” qualifies) [UCC 3-103(a)(6), (9); 3-104 (a)].
Unconditionality of Promise/Order requirement for negotiable instruments
Payment cannot be conditional, and the promise or order cannot be subject to or governed by another writing. or be subject to rights or obligations stated in another writing [UCC 3-104(a). 3-106(a)].
Order/Promise to pay a fixed amount of money
A negotiable instrument must state a fixed amount to be paid when the instrument is payable, but the amount may be payable in installments. with a variable interest rate, at a stated discount, or at an exchange rate [UCC 3-104; 3-112(b)]. Only instruments payable in money (not bonds, stock. gold, or goods) are negotiable [UCC 3-104(a)(3)]. Money is a medium of exchange recognized as the currency of a government [UCC 1-201(24)].
Payable on Demand
An instrument that is payable on sight or presentment or that does not state any time for payment is payable on demand [UCC 3-108(a)]. A check is payable on demand [UCC 3-104(f)].
Payable at a Definite Time
An instrument payable on or before a stated date or within a fixed period after sight, or on a date or time ascertainable at the time the instrument is issued is payable at a definite time [UCC 3-108(b)].
Acceleration Clause
An acceleration clause allows a holder to demand payment of entire amount due if a certain event occurs. This does not affect negotiability [UCC 3-108(b)].
Extension Clause
An extension clause does not affect negotiability’ if the period of the extension is specified when the right to extend is given to the maker. If the holder has the right, no period need be specified [UCC 3-108(b)].
Order Instrument
An order instrument may be payable “to the order of an identified person” or to “an identified person or order” (the person must be identified with certainty) [UCC 23-109]. This is not required for a check [UCC 3-104(c)]. Order instruments are negotiated by delivery with indorsement [UCC 3-201(b)].
Bearer Instrument
A bearer instrument does not designate a specific payee (but an instrument payable to a nonexistent entity is not bearer paper). [UCC 3-109]: “Payable to the order of bearer,” “Pay to the order of cash,” “Pay cash.” Bearer instruments are negotiated by delivery only [UCC 3-201(b)].
Transfer by Assignment
A transfer by assignment (see Chapter 9) gives the assignee only those rights the assignor possessed. Defenses that can be raised against an assignor can normally be raised against an assignee.
Transfer by Negotiation
On a transfer by negotiation, the transferee becomes a holder and receives the rights of the previous possessor (and possibly more) [UCC 3-201(a), 3-202(b), 3-203(b), 3-305, 3-306].
Holder
A holder is a person in possession of an instrument drawn, issued. or indorsed to him or her. to his or her order, or to bearer or in blank [UCC 1-201(20)]. A holder is subject to the same defenses that could be asserted against the transferor (the party from whom the holder obtained the instrument).
