Chap 26

Question 1

negotiability

Answer 1

is a legal concept that allows written instruments to be used as a readily accepted form of payments is substitution for money

Question 2

negotiable instruments closely

Answer 2

approximate cash, but are not an exact equivalent because, unlike cash, there is a risk of nonpayment of the negotiable instrument

Question 3

under common law

Answer 3

the payment of money was a contract right only of the intended payee

contract rights and obligations could not be assigned

Question 4

eventually, however, the law permitted

Answer 4

contractual rights to be assigned, giving the assignee the right to collect on the debt

this remains the law of assignments: the assignee stands in the shoes of his assignor

Question 5

negotiation means

Answer 5

theres a holder

Question 6

assignment vs negotiation

Answer 6

in an assignment, the assignee gets only the contract rights that the assignor had and is subject to the same claims as the original obligor had against the assignor

it was difficult for merchants to find people willing to accept an assignment

thus, the concept of the holder in due course is developed, allowing certain good faith transferees who give value to acquire the right to be paid, free of most of the defenses to which an assignee is subject

this made the paper marketable by the merchants

Question 7

types of negotiable instruments

Answer 7

drafts

notes

Question 8

check is a type of

Answer 8

draft

Question 9

CD is

Answer 9

promissory note issued by bank

Question 10

a draft involves 3 parties

Answer 10

the drawer (owner or controller of the money) orders a second party, the drawee (who is in possession of the money that belongs to the drawer) to pay a fixed amount to the payee

Question 11

a time draft is

Answer 11

a draft payable at a specified future date (e.g. pay to the order of pauline 30 days after the date or pay to the order of pauline 30 days after sight

Question 12

a sight draft is

Answer 12

payable on presentation to the drawee

Question 13

checks

Answer 13

a check is a specialized form of draft drawn on a bank and payable on demand. that is, upon the payees or holders request for payment

Question 14

a cashiers check

Answer 14

is a check drawn by a bank on itself to the order of the payee. in this case, the bank serves as both the drawer and the drawee

Question 15

a check is always drawn

Answer 15

on a bank and has to be payable upon demand

Question 16

notes

Answer 16

a promissory note involves two parties: the maker promises to pay to the order of a second party, the payee, a stated amount of money

a not payable at a certain definite time is referred to as a time notes( e.g. a note payable 30 days after date is a time note)

a note payable upon the request or demand of the payee or holder is a demand note

Question 17

CDs

Answer 17

a certificate of deposit is a specialized form of a promissory note, given by a bank, to pay money

the bank (the maker) acknowledges the receipt of money from a payee, and promises to repay the payee on demand or at a stated date, with interest calculated at a stated rate

Question 18

formal requirements of a negotiable instrument

Answer 18

because negotiability is a matter of form not all instruments will qualify for this special status.

Question 19

four corners rule

Answer 19

requires that the instrument contain all the elements of negotiability within the document itself

Question 20

if the instrument requires the holder

Answer 20

to look to other documents or sources to determine its terms, the instrument will be nonnegotiable

if the paper is nonnegotiable, the law of assignment applies to the transferee

Question 21

to be negotiable, an instrument must meet the following criteria

Answer 21

writing
signed by the maker of a note or a drawer of the draft
promise in the case of a note or an order to pay in the case of a draft
unconditional
fixed amount
payable on demand or at a definite time

Question 22

are there oral promissory notes?

Answer 22

no

Question 23

if drawer and payee are the same person

Answer 23

it is a trade acceptance

Question 24

writing

Answer 24

this requirement is given a broad interpretation

printing and typewriting are included, and the writing need not be on paper

since a negotiable instrument is meant to be a substitute for cash, the writing must be on something reasonably movable

an instrument written on a paper bag would qualify, however an instrument written on a building or huge billboard overlooking a freeway would not

Question 25

signed by the maker of a note or a drawer of the draft

Answer 25

may be any symbol executed or adopted by a party with the intention to validate a writing may be any word or mark used in place of a written signature, such as initials, an X or a thumbprint it can also consist of a trade name or an assumed name location of the signature must be on the face of the document, but a particular location is unimportant traditionally, however, the maker or drawer signs in the bottom right corner

Question 26

promise to pay in the case of a note or an order to pay in the case of draft

Answer 26

a negotiable instrument must contain either a promise to pay money (with a note or certificate of deposit) or an order to pay (with a draft or check)

Question 27

promise to pay

Answer 27

promises to pay must be more than mere acknowledgements that a debt exists the so called IOU is merely an acknowledgement of a debt and not a promise to pay thus, an IOU cannot be negotiable

Question 28

order to pay

Answer 28

this is a direction or command to pay it must be more than an authorization or request to pay and it must identify with reasonable certainty the person to be paid words of politeness such as "please pay" or "kindly pay" would still most likely qualify as an order, however, words such as "if you don't mind" or "if it wouldn't be too much trouble" would be ineffective as an order and thus render the instrument nonnegotiable

Question 29

unconditional

Answer 29

a promise or order to pay is unconditional if it is absolute and not subject to any contingencies or qualifications thus, a makers promise to pay "if the maker is satisfied with the quality of the painting by the contractor" would be conditional and render the instrument nonnegotiable

Question 30

reference to other agreements

Answer 30

destroys negotiability if the instrument is made subject to or governed by the terms of another agreement if another instrument is merely mentioned (such as the words in accordance with, as per, or in consideration of) does not destroy the negotiability of the instrument

Question 31

the particular fund doctrine

Answer 31

prior article 3 considered a promise to pay only out of a particular fund nonnegotiable, but revised article 3 reverses this, thus eliminating the particular fund doctrine

Question 32

fixed amount

Answer 32

you should be able to determine from the instrument itself the minimum specific amount the holder is entitled to receive the fixed amount provision refers only to the principal and not the interest, thus allowing for variable interest instruments also, the instruments provision may increase the amount of payment that can recovered under certain circumstances, such as the costs of collection and attorneys fees upon default in payment without impairing negotiability

Question 33

interest

Answer 33

may be stated in an instrument as a fixed or variable rate or amount of money it may even require reference to an external source, such as the prime rate, without destroying the negotiability of the instrument

Question 34

money

Answer 34

the term money means legal tender it must be a medium of exchange authorized or adopted by a sovereign government as part of its currency money does not include commodities of which are not sanctioned as legal tender thus, euros or yen would be money, but gold bullion would not

Question 35

no other undertaking or instrument

Answer 35

a negotiable instrument must contain a promise or order to pay money, but it may not contain an order to promise to do an act in addition to paying money, such as painting a car or delivering a bushel of wheat the UCC does allow certain additional undertakings such as furnishing or preserving collateral, waiver of certain legal protections, confession of judgement provisions (cognitive notes)

Question 36

payable on demand or at a definite time

Answer 36

a negotiable instrument must be payable on demand or at a definite time

Question 37

instrument usually says its demand

Answer 37

payable on demand

Question 38

demand

Answer 38

demand paper includes instruments payable on sight or on presentation also any instrument that does not state a time for payment, such as a check, is payable on demand

Question 39

definite time

Answer 39

time paper refers to all other instruments that are payable at a definite time but not on demand

Question 40

a definite payment date is established when the instrument is payable

Answer 40

1. at a fixed date or dates 2. at a definite period of time after sight or acceptance 3. at a time readily ascertainable at the time the promise or order is issued

Question 41

be payable to order or to bearer

Answer 41

words of negotiability must be present on the face of the instrument (not in an endorsement) at the time it is first issued or when it comes into the possession of the bearer the magic words of negotiability are to the order of or to bearer

Question 42

revised article 3 allows

Answer 42

checks that meet all requirements except the one requiring that the instrument be payable to the order of or to bearer to still be considered negotiable revised article 3 further disallows use of the word assigns

Question 43

payable to order

Answer 43

negotiable instruments are payable to the order if it is payable to the order of an identified person or to an identified person or order most checks, for example, read pay to the order of and the drawer fills in the named person

Question 44

payable to bearer

Answer 44

bearer paper, on the other hand, is a negotiable instrument that is payable to the bearer, or the holder of the instrument an instrument is defined as bearer paper if by its terms 1. it is payable to the bearer or to the order of the bearer, 2. it does not designate a specific payee (such as pay one keg of nails or pay one podium) or 3. it is payable to cash or to the order of cash

Question 45

terms and omissions and their effect on negotiability

Answer 45

dating of the instrument incomplete instruments ambiguous instruments

Question 46

certain ommited provisions or ambiguous terms may

Answer 46

cause questions about an instruments negotiability or at least may cause problems with the interpretation of the instrument accordingly, the UCC contains rules for the construction of negotiable instruments that apply to every type

Question 47

dating of the instrument

Answer 47

an instruments negotiability is not affected by the fact that it is antedated or postdated if undated, the date of issuance is used; if unissued, the date of first possession is used an undated instrument payable at a fixed time after date is not negotiable in that form, however

Question 48

incomplete instruments

Answer 48

occasionally, a party will sign a paper that is clearly intended to be an instrument, yet is incomplete because the party omitted a necessary element, such as the promise to order, the designation of the payee, the amount payable, or the time for payment such an instrument is nonnegotiable until it is completed

Question 49

ambiguous instruments

Answer 49

if doubt exists as to whether an instrument is a draft or note, the holder may treat it as either one and present it for payment to the drawee or to the person signing it if handwritten or typewritten language is inconsistent with the printed words: the handwritten words control the typewritten and the printed words; the typewritten words control the printed words. by printed, the code means terms that have been preprinted on the instrument, rather than handprinted if the amount payable is set forth on the instruments face in both figures and words, and the amounts differ, the words control the figures. if the words are ambiguous, however, the figures control the payable amount thus, an instrument containing a promise in words to at twenty four dollars would take precedence over the numerals 44 on the instrument. if the words were ambiguous, such as a promise to pay onety-one dollars, would be construed as instrument for 11 if the numerals so appeared on the instrument