Chapter 22 Negotiable Instruments: Negotiability and Transferability

1. Chapter 22Negotiable Instruments:Negotiability and Transferability

2. Learning Objectives • What are the four types of negotiable instruments which Article 3 is concerned? Which of these instruments are orders to pay and which are promises to pay? • What are the requirements for an instrument to be negotiable? • Who whom is a bearer instrument payable? • What is a restrictive endorsement?

3. Article 3 • A negotiable instrument is a signed writing that contains an unconditional promise or order to pay an exact sum of money on demand or at a specified time to a specific person or bearer. • Can function as a substitute for money or an extension of credit.

4. Types of Instruments • Drafts and Checks (Orders to Pay) • Draft—unconditional written order that involves three parties. • Drawer (creates the draft) who • Orders the party holding the money (the Drawee) to pay money • To a Third Party (the Payee) • Time Draft • Sight Draft

5. Types of Instruments • Promissory Notes and C.D.’s (promises to pay) • Promissory Note—written promise to pay money by Maker to Payee. • C.D.—type of note. Created when party deposits money with bank who promises to pay, with interest, on a certain date.

6. Requirements for Negotiability • Must meet the following criteria: • Be in Writing • Be signed by the Maker or Drawer • Be unconditional promise or order to pay • State a fixed amount of money. • Be payable on demand or definite time • Be payable to order or bearer, unless a check.

7. Factors That Do Not Effect Negotiability • Undated or Ambiguous Terms • Postdating • Handwriting outweighs printed terms • Words outweigh numbers • Interest rate

8. Transfer of Instruments • By Assignment • Transferee is an Assignee • By Negotiation • Transfer in which the transferee becomes a holder • Negotiating Order Instruments • Negotiating Bearer Instruments

9. Indorsements • Signature with or without additional words or statements. • Required when order instruments are being negotiated. • Indorser: person who transfers by signing and delivering to another person. • Indorsee: person to whom check is indorsed and delivered.

10. Indorsements • Blank Indorsement • No particular indorsee and can consist of a mere signature. • Special Indorsement • Indicates specific person (indorsee) to whom the indorser intends to make the instrument payable. • Qualified Indorsement • Indorsement that disclaims any liability to indorsee (“without recourse”). Usually done by an agent.

11. Restrictive Indorsements • Requires indorsee to comply with certain instructions regarding funds involved. • Conditional Indorsements (based on a future event) • Indorsement for Deposit Only • Trust Indorsements