Business Law and the Regulation of Business Chapter 24: Form and Content By Richard A. Mann & Barry S. Roberts
Topics Covered in this Chapter A. Negotiability B. Types of Negotiable Instruments C. Formal Requirements of Negotiable Instruments
Negotiability Rule – invests instruments with a high degree of marketability and commercial utility by conferring upon certain good faith transferees immunity from most defenses to the instrument. n Formal Requirements – negotiability is wholly a matter of form, and all the requirements for negotiability must be met within the four corners of the instrument. n
Types of Negotiable Instruments n Orders to Pay – Drafts – involves three parties: a drawer orders a drawee to pay a fixed amount of money to a payee. – Checks – a specialized form of draft that is drawn on a bank and payable on demand; the drawer orders the drawee (bank) to pay the payee on demand (upon the request of the holder). n Promises to Pay – Notes – a written promise by a maker (issuer) to pay a payee. – Certificates of Deposit – a specialized form of note that is given by a bank or thrift association.
Draft Two years from date pay to the order of Perry Payee $50, 000 Fifty Thousand. . . Dollars To: DEBRA DRAWEE 50 Main St. Louisville, Kentucky St. Louis, Missouri May 1, 1996 (Signed) Donald Drawer DONALD DRAWER
Check No. Feb. 1 Matthew Charles 123 Anystreet Rd. Anytown, NC 21234 Pay to the order of Lilli-Marie Justin Five Hundred and no/100 HARRIS BANK 2000 12 -28 710 $500. 00 DOLLARS Rams Trust and Savings Bank Chicago, Illinois |: 071000281|: Matthew Charles 123|||456|||7|:
Note $10, 000 Albany, N. Y. April 7, 1998 Six months from date I promise to pay to the order of Pat Payee ten thousand dollars (signed) Matthew Maker
Certificate of Deposit NEGOTIABLE CERTIFICATE OF DEPOSIT The Mountain Bank Mountain, N. Y. No. 13900 June 1, 1998 THIS CERTIFIES THAT THERE HAS BEEN DEPOSITED with the undersigned the sum of $200, 000. 00 Two hundred thousand. . . . . Dollars Payable to the order of Pablo Payee on December 1, 2000, with interest only to maturity at the rate of Seven percent (7%) per annum upon surrender of this certificate properly indorsed. The Mountain Bamk By (Signature) Malcolm Maker, Vice President Authorized Signature
Formal Requirements of Negotiable Instruments n n n Writing – any reduction to tangible form is sufficient. Signed – any symbol executed or adopted by a party with the intention to validate a writing. Promise or Order to Pay – Promise to Pay – an undertaking to pay, which must be more than a mere acknowledgment or recognition of an existing debt. – Order to Pay – instruction to pay. n Unconditional – an absolute promise to pay that is not subject to any contingencies.
Formal Requirements of Negotiable Instruments n n n Reference to Other Agreements – does not destroy negotiability unless the recital makes the instrument subject to or governed by the terms of another agreement. The Particular Fund Doctrine – an order or promise to pay only out of a particular fund no longer is conditional and does not destroy negotiability. Money – Legal tender authorized or adopted by a sovereign government as part of its currency.
Formal Requirements of Negotiable Instruments n n n Fixed Amount – the holder must be assured of a determinable minimum principal payment although provisions in the instrument may increase the amount of recovery under certain circumstances. No Other Promise or Order – a promise or order to do an act in addition to the payment of money destroys negotiability. Payable on Demand or at a Definite Time – an instrument is demand paper if it must be paid upon request; an instrument is time paper if it is payable at a definite time.
Formal Requirements of Negotiable Instruments n Payable to Order or to Bearer – a negotiable instrument must contain words indicating that the maker or drawer intends that it pass into the hands of someone other than the payee. – Payable to Order – payable to the “order of” (or other words which mean the same) a named person or anyone designated by that person. – Payable to Bearer – payable to the holder of the instrument; includes instruments payable (1) payable to bearer or the order of bearer, (2) that do not specify a payee, or (3) payable to “cash” or to order of “cash. ”
Order to Pay: Draft or Check issues draft or check to Drawer orders Drawee to pay Payee presents instrument for payment
Promise to Pay: Promissory Note or Certificate of Deposit Issues note or C. D. to Maker promises to pay Payee presents instrument for payment
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