Types of Negotiable Instruments

Question 1

Requirements for Negotiability

Answer 1

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.

Question 2

Parties involved in Orders to Pay

Answer 2

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.

Question 3

Draft

Answer 3

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.

Question 4

Time Draft

Answer 4

Payable at a definite future time.

Question 5

Sight Draft (Demand Draft)

Answer 5

Payable on sight (when presented for payment). A draft payable at a stated time after sight is both a time and a sight draft.

Question 6

Trade Acceptance

Answer 6

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.

Question 7

Banker’s Acceptance

Answer 7

A trade acceptance that orders the buyer’s bank, rather than the buyer, to pay.

Question 8

Check

Answer 8

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.

Question 9

Forms of Orders to Pay

Answer 9

Checks and Drafts

Question 10

Forms of Promises to Pay

Answer 10

Promissory Notes and Certificates of Deposit

Question 11

Parties of Promises to Pay

Answer 11

Maker - A person who promises to pay.

Payee - A person to whom the promise.

Question 12

Promissory Note

Answer 12

A written promise by one party to pay money to another party.

Question 13

Certificate of Deposit

Answer 13

A note made by a bank promising to repay a deposit of funds with interest on a certain date [UCC 3-104(j)].

Question 14

Writing requirement for negotiable instruments

Answer 14

A writing can be on anything (1) permanent and (2) readily transferable [UCC 3—103(a)(6)].

Question 15

Signature requirement for negotiable instruments

Answer 15

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)].

Question 16

Promise/Order requirement for negotiable instruments

Answer 16

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)].

Question 17

Unconditionality of Promise/Order requirement for negotiable instruments

Answer 17

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)].

Question 18

Order/Promise to pay a fixed amount of money

Answer 18

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)].

Question 19

Payable on Demand

Answer 19

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)].

Question 20

Payable at a Definite Time

Answer 20

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)].

Question 21

Acceleration Clause

Answer 21

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)].

Question 22

Extension Clause

Answer 22

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)].

Question 23

Order Instrument

Answer 23

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)].

Question 24

Bearer Instrument

Answer 24

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)].

Question 25

Transfer by Assignment

Answer 25

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.

Question 26

Transfer by Negotiation

Answer 26

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].

Question 27

Holder

Answer 27

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).