Chapter 24 - Function and Creation of Negotiable Instruments PDF

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Professor Jimmy Squyres...

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Chapter 24: Function and Creation of Negotiable Instruments Types of Negotiable Instruments     

A negotiable instrument is a signed writing containing an unconditional promise to pay an exact sum of money either on demand or at a specific time in the future Functions as a substitute for cash or extension of credit Needs to be easily transferrable without danger of being uncollectible Most negotiable instruments are paper documents, referred to as commercial paper The UCC specifies 4 types o Drafts, checks, notes and certificates of deposits o Orders to pay or promises to pay o Can also be demand instruments or time instruments

Drafts and Checks (orders to pay) 

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Unconditional order involves 3 parties: o Drawer (creator of draft) o Drawee (financial institution) o And payee Most common type of draft is a bank check Time drafts and sight drafts o Time drafts: payable certain future time o Sight draft: payable on sight. May be payable on acceptance (drawees written promise to pay the draft when due) Trade acceptances o Type of draft frequently used in the sale of goods o Trade acceptance: seller of goods is both drawer and payee

Promissory Nots 

2 party instruments o Maker (promisor) o Bearer (promise) o Can be payable at a definite time or on demand

Certificates of Deposit  

Type of note issued when a party deposits funds with a bank and bank promises to repay funds with interest on certain date Bank is maker and depositor is payee

Requirements for Negotiability 

Be in writing o Must be permanent o Must be portable

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Be signed by the maker or drawer o Any symbol executed/adopted by a person with the intent of authenticating a document (signature) o Manual or by a device (rubberstamp) o Symbol, mark, trade, or assumed name o Placement of the signature is unimportant Unconditional promise or order to pay o Promise or order – mere acknowledgment of debt is insufficient (I.O.U) o Unconditionally of the promise or order State a fixed amount of money o Cant be an open term or a range o Sum certain must be ascertainable on face of document o Interest rate may be determined by info on the face if info is readily available o Must be in currency Payable on demand or at a definite time o Specified date within definite period of time, or date readily ascertainable o Acceleration clause: allows holder to demand full payment if certain event occurs o Extension clause: the revers of an acceleration clause – allows maturity to be extended. Interval must be specified Be payable to order or bearer, unless it is a check o Order instruments: payable “to the order of” an identified person or to an “identified person or order”

Factors That Do Not Affect Negotiability    

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Omission of date Postdating or antedating Handwritten terms outweigh typewritten and preprinted terms (if your numbers contradict the written part of amount, the handwritten statement wins over the numbers) o Words outweigh figures If instrument states “with interest” but does not specify the rate, it is the judgement rate of interest Check is negatable even if there is a “nonnegotiable” not on it...