Test 1 Flashcards
(45 cards)
What/who is a maker,
The person who makes out the promissory note and owes the payee.
What/who is the drawer?
The one who creates the draft and and orders the drawer to pay money to the payee.
What are the seven elements of negotiability?
1) A writing
2) signed by the drawer (draft) or maker (note) with an
3) Unconditional promise (notes) or order (drafts) to pay a
4) Fixed amount of money that is
5) Payable on demand or at a definite time, is
6) Payable to order or bearer, AND
7) States no other undertaking or instruction to do any act other than the payment of money.
What are the two requirements for the element of writing on a negotiable instrument?
It must be permanent and portable
What counts as a signature?
Where must it be located?
When is it considered valid?
- any mark intended to authenticate the instrument
- anywhere on the front of the document
- presumed valid unless contested (burden of proof to contester)
What makes a promise / order unconditional?
- mere than an acknowledgment of debt
- orders specifically identify drawee
- no conditional statements on the face
- it cant be subject to an outside document (it can reference one though)
For the element of being a “fixed amount of money”, what is required?
- The principal amount due must be on the face of the instrument (interest rates, collection costs, attorney fees not relevant)
- Must be an adopted currency adopted by the U.S. or a foreign government (gold and silver don’t count)
Why is it necessary that an element of negotiable instruments is that it is payable on demand or at a definite date?
To know its
1) Present Value
2) When the obligations of secondary parties arise
3) When the statute of limitation starts to run (after this time it can’t be brought up in court)
Extension clauses do not destroy the “payable on demand or at a definite time” element: what preserves this (consider drawer/maker and holder separately)?
- If the option is with the maker/drawer then it must be specified up front
- if with the holder it can be open ended
If there is a discrepancy between pre-printed, typewritten, and/or handwritten material on a contract what is the hierarchy of preference?
Handwriting then typewritten then pre-printed
When there is a good faith disagreement about the amount owed between two parties:
What are the options to someone receiving a check that says “payment in full”, and the results?
What two exceptions protect a party from being bound by accidentally accepting the payment in full?
1) cash it and spend it lose legal right to sue for the rest of the amount owed.
2) don’t cash and sue for remaining amount.
- ———————-
1) A business can require bill disputes to be mailed to a different address than the usual payment address. This protects from the “payment in full” being hidden with many other checks that were deposited by an unknowing employee.
2) If the money cashed is returned to the sender within 90 days of cashing the check they can still sue for full payment.
What are the two types of negotiable instruments?
Promissory Notes and Drafts
What is the main purpose of having negotiable instruments?
1) to create a money substitute, and 2) to have a credit extension device.
Why are negotiable instruments better than mere assignments?
- They are easier to prove in court (they speak for themselves)
- An assignee takes the same position as the assignor, but a holder in due course (HDC) can take a better position than that of the transferor.
How does a trade acceptance work?
A drawer (company) extends credit to a customer, by ordering the drawee (customer) to pay the drawer (company), making the drawer both the drawer and the payee.
Why is a trade acceptance better than a account receivable? (3)
1- easier to prove in court, speaks for itself
2- less potential defenses to payment raisable by drawee (customer)
3- more sellable on the open market
Are checks demand or time instruments?
They are always demand instruments. It does not matter if they are post dated, they are still on demand, so the payee could cash it before the post marked date.
What does the lack of a date due for the negotiability requirement of being payable on demand or at a definite time?
The lack of a date is irrelevant unless payment somehow hinges on it (example: a “90-day note”)
In regards to negotiability what language on an instrument (except for checks) destroys the “payable to order or bearer” requirement?
What are acceptable wordings that allow negotiability?
-If it says “pay to” this destroys it, except a check where “pay to” is read to mean “pay to the order of”.
-Non-Bearer Paper: payee must be name with certainty
Bearer Paper:”Pay to the order of bearer”, “Pay to Bearer”, “Pay to the order of cash”, instruments endorsed in blank (signed with no payee specified).
What exceptions are allowed to the negotiability requirement of “no obligation other than the payment of money?” (2)
- promises to maintain collateral will not cause a problem
- waivers of protections afforded the obligor by other laws do not violate this requirement
What are the three preference levels regarding possessors of negotiable instruments (from best to worst)?
1- Holder in Due Course (HDC)
2- Holder
3- Assignee
What are the two types of “paper” that can be negotiated? What is required for these negotiable instruments to be negotiated?
- Order Paper: 1) endorsement and 2) delivery
- Bearer Paper: Just delivery (although most transferees demand signature for secondary signature liability, as they are entitled to do when they have given value)
What is the definition of a holder?
One is possession of a negotiable instrument: drawn or issued to him or…
endorsed:
- to him
- to his order
- to bearer, or
- in blank
Why is order paper safer than bearer paper?
Order paper must have a legitimate endorsement to be negotiated, whereas bearer paper just has to be delivered, so a thief could easily steal bearer paper and sell it to someone else.
