Flashcards in NI ( BAR EXAM II COPY) Deck (44)
The types of commercial paper governed by Article 3 of the UCC can be divided into two basic categories:
notes and drafts
A note is:
two party instrument with a maker and payee
1) Maker: the person who signs or is identified in a note as the
person undertaking to pay (here, Max Maker)
2) Payee: the person to whom the note is payable (here, Peter Payee)
I, Max Maker, promised to pay to the order of Peter Payee the sum of One Hundred Dollars ($100)
A draft is:
a. A draft is a three party instrument.
1) Drawer: the person who signs or is identified in a draft as the person ordering payment (here, Donna Drawer)
2) Drawee: the person ordered in a draft to make payment (here, Drawee National Bank)
3) Payee: the person to whom the draft is payable (here, Patricia Payee)
When the drawee is _____, and it is _____, then the draft is a check.
payable on demand
A certificate of deposit is:
It is an acknowledgment by a bank that a sum of money has been received, and a promise by the bank to repay the sum of money.
Requirements for a negotiable instrument:
2. Signed By Maker of Drawer
4. Promise To Pay or Order To Pay
5. Fixed Amount
6. In Money
7. No Other Undertaking or Instruction
8. On Demand or at a Definite Time
9. To Order or To Bearer
Discuss the writing requirement of a negotiable instrument . . .
There is no such thing as an oral negotiable instrument. It must be something tangible. Almost always a piece of paper, but need not be (a t-shirt, a cow, a tamale, etc. -- all technically O.K.)
Discuss the signed by maker requirement of a negotiable instrument . . .
Code defines "signed" as including "any symbol executed or adopted by a party with a present intention to authenticate a writing."
a. Can be printed, stamped, written
Can be initials or thumbprint
Can be a trade name or assumed name Can appear in the body of the instrument
b. Key: Whether the party intended for that symbol to operate as her signature
T/F. The following is a negotiable instrument. Why/Why not? Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series.
Unconditional: Conditional promises are O.K. under contract law, but they destroy negotiability.
a. Maker promises to pay $100 to the order of Payee only if the Atlanta Braves win the World Series. This is not negotiable.
T/F. The following is a negotiable instrument. Why/Why not? I promise to pay $100 to the order of Payee "in accordance with" (or "as per") the contract we signed today.
It does not destroy negotiability if the instrument simply refers to another agreement.
1) Illustration: I promise to pay $100 to the order of Payee "in accordance with" (or "as per") the contract we signed today. This is negotiable. It is okay to mention the underlying contract without destroying negotiability so long as payment of the instrument is not made “subject to” or “conditioned upon” performance of the underlying contract.
T/F. The following is a negotiable instrument. Why/Why not? Assume the promise to pay is "subject to" a contract. Upon examining the contract, it is clear that it puts no conditions on the promise to pay.
This is not negotiable. The negotiability of an instrument must be clear on the face of the instrument itself. The terms of the incorporated document are irrelevant. The fact of incorporation destroys negotiability.
Article 3 specifically provides that a promise or order will not be deemed conditional merely because it:
(1) Refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration;
(2) Limits payment to a particular source or fund (e.g., AI promise to pay out of the funds received from the sale of my next wheat crop);
(3) Requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order (such conditions are common on traveler’s checks).
Promise to Pay (if _____) or Order to Pay (if _____)
T/F. An IOU is not negotiable.
T - It is not a promise to pay.
T/F. "I wish you would pay" is negotiable.
When the instrument is _____, the _____ must be able to determine _____. The requirement of a fixed amount applies ONL Y to _____; it does not apply to (or to other charges that are often included in an instrument, such as collection costs and attorneys fees).
from the instrument itself the principal amount due
T/F. A note providing for variable interest rates (e.g., 3% over prime, adjusted each six months based on then prevailing bank rates in New York City") is not negotiable.
When the instrument is payable, the holder must be able to determine from the instrument itself the principal amount due. The requirement of a fixed amount applies ONL Y to principal; it does not apply to interest (or to other charges that are often included in an instrument, such as collection costs and attorneys fees).
Discuss the "in money" requirement:
a. A promise to pay 100 bales of cotton is a non-negotiable promise.
b. Foreign money is O.K. (as long as the U.S. recognizes the currency).
No Other Undertaking or Instruction
a. A negotiable instrument must be a "_____" -- it must not be burdened with anything other than a _____. If a note contains additional undertakings or instructions, the holder is _____.
courier without luggage
simple, clean unconditional promise or order
given notice that the note is or may be conditioned on the performance of those additional undertakings or instructions
(note, there are some undertaking and instructions that the UCC allows - see other card)
The UCC does permit a number of extra undertakings or instructions. A promise or order may contain:
(1) An undertaking or power to give, maintain, or protect collateral to secure payment;
(2) An authorization or power to the holder to confess judgment or realize on or dispose of collateral;
(3) A waiver of the benefit of any law intended for the advantage or protection of the obligor (e.g., waiver of a homestead exemption, or trial by jury, or right to notice of dishonor).
Note: Also O.K. to promise to pay costs of collection and attorneys' fees.
On Demand or at a Definite Time: A holder of an instrument must be able to tell when it comes due or the instrument is non-negotiable. This doesn't mean that the instrument must be _____.
An undated instrument which specifies no time for payment is treated as _____.
an instrument payable on demand by the holder
T/F. A post dated check is not ok for purposes of the on demand or a definite time element.
T/F. This is negotiable. A note is payable on July 15, 2015, but provides that "the holder may demand payment any time prior thereto if she deems herself insecure."
Acceleration clause ok for On Demand or at a Definite Time element
A clause that permits the instrument to be extended at the option of the maker is still negotiable so long as _____. If it simply provides that it can be extended _____, it is not negotiable.
A clause that permits the instrument to be extended at the option of the _____ is negotiable, since _____.
the extension is to a further definite time stated in the instrument (e.g., “This instrument can be extended for one month after the original due date”)
at the option of the maker
the holder always has the option of giving extra time for payment
If an instrument is payable on or after a stated time or event certain to happen but uncertain as to time (e.g., “payable on my Uncle Buck’s death”), it is _____ because _____.
there is no definite time for payment
A note is payable on July 15, 2015, but provides “if my Uncle Buck dies prior to July 15, 2015, payment is due immediately upon his death.” Is this a negotiable instrument?
This is ok. This is different than ON Uncle Buck's death.
A negotiable instrument must contain certain magic words --either order language or bearer language. A writing lacking these magic words is not negotiable and is not governed by Article 3.
a. I promise to pay Paul.
b. I promise to pay to the order of Paul (or "to Paul or his order").
c. I promise to pay bearer (or "to the order of bearer" or "to Paul or bearer").
d. Pay to the order of cash.
e. Pay to the order of a bowl of soup (or a keg of nails or a Happy Birthday).
a. not negotiable
c. yes, bearer paper
d. yes, bearer paper
e. yes, its bearer paper when it otherwise indicates
its not payable to an identified person (like payable to cash)
NOTE THIS IMPORTANT EXCEPTION: A check need not contain words of negotiability. A check payable Pay John Doe is fully negotiable, is covered by Article 3, and a transferee of it can become a holder in due course.
If a writing contains a conditional promise, a statement that This Note is Negotiable would not be effective to make this writing a negotiable instrument b/c . . .
b. Parties can use a form that is a negotiable instrument and avoid negotiability by declaring, on the instrument, that it is _____ except for a _____. A declaration on a check that it is not negotiable is _____.
A writing cannot be made a negotiable instrument within Article 3 by contract or
conduct of the parties.