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Negotiable Instruments

Negotiable Instruments

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Negotiable Instruments

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  1. Negotiable Instruments Chapter 26

  2. Negotiable Instruments • Are formal written contracts used extensively in business transactions as a substitute for money and to extend credit. • You should be able to: • Recognize the various instruments • Recognize the distinction between the transfer of an instrument by assignment and negotiation • Verify the requirements of negotiability • Identify the parties to a note and a draft • Recognize the types of endorsements • Understand liability of primary and secondary parties • Understand the HDC concept, particularly the distinction between real and personal defenses

  3. Types of Commercial Paper • Drafts • drawer orders drawee to pay payee • time or sight • Checks - a form of a draft, drawn on a bank • Notes - written promise between 2 parties • Maker and payee • Promissory note • Time notes and demand notes • Certificates of Deposit - acknowledgment by bank of receipt of money with an engagement by bank to repay it

  4. Definition • A negotiable instrument is an “unconditional signed writing of a promise or order to pay a sum certain in money to order or bearer at a definite time or upon demand.” • Requirements for Negotiability • signed • writing • unconditional • promise or order to pay • sum certain in money • to order or bearer • at definite time or upon demand

  5. Signed Writing • Signed by maker or drawer • A writing includes printing, typing, or any other intentional reduction to a tangible form. • The writing must be on material that has a degree of permanence and is freely transferable in the ordinary course of business • Any form of signature An Agent may sign. Signature can appear anywhere.

  6. Unconditional • Must be unconditional • It will be conditional if instrument is: • Subject to or governed by an express condition • Reference to another agreement • Payment out of a particular fund is NOT a condition which would destroy negotiability.

  7. Promise or Order to Pay • A promise is a signed undertaking to pay an obligation, i.e.,”I promise” evidences a promise. • Mere acknowledgement of a debt is not a promise. • An order is a direction to pay, a request is not an order.

  8. Sum Certain in Money • Variable interest rates are okay and do not destroy negotiability • Foreign money is okay • Must be able to compute the amount from the instrument amount • Amount may vary depending on a particular formula and still be certain • Interest must be provided for in the instrument Exact amount Currency only

  9. Order paper enables a person identified in the instrument to designate the payee. Order paper allows the maker or drawer to transfer to a specific person Payable to order of Y Pay to Y or order Bearer Paper does not designate a specific payee; the maker or drawer agrees to pay anyone who presents the instrument for payment Pay bearer Pay to order or bearer Pay to Y or bearer Pay any person presenting Pay $500 Pay cash Pay to order of cash To Order or Bearer

  10. A promise or order that does not state any time of payment is payable on demand. Checks by definition are payable on demand At a fixed date readily ascertainable, payable at a definite time On lapse of a definite period after sight or acceptance Subject to rights of Prepayment Acceleration Extension at the option of the holder Extension to a further definite time at option of maker or acceptor or automatically upon or after a specified event. Payable at a Definite Time or Upon Demand