Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments Chapter 16:...

Purpose and Types of Negotiable Instruments


Chapter 16: Negotiable Instruments & IndorsementsChapter 16: Negotiable Instruments & Indorsements

Understanding Business and Personal Law

Purpose and Types of Purpose and Types of Negotiable Instruments Negotiable Instruments

Section 23.1Section 23.1

Negotiable Instruments

What You’ll Learn

How to name the parties to each type of How to name the parties to each type of negotiable instrument (pp. 506-509) negotiable instrument (pp. 506-509)





Why It’s Important

Knowing the purpose and types of negotiable Knowing the purpose and types of negotiable instruments will help you manage your instruments will help you manage your financial affairs throughout life.financial affairs throughout life.





Purposes of Negotiable Instruments Notes

Certificates of Deposit

Section OutlineSection Outline

Drafts Checks





Pre-Learning Question Pre-Learning Question

What is a negotiable instrument?





The law of negotiable instruments was The law of negotiable instruments was developed to allow people to transact developed to allow people to transact business without carrying around business without carrying around large sums of money and to purchase large sums of money and to purchase items they will pay for later.items they will pay for later.

Purpose of Negotiable Instruments Purpose of Negotiable Instruments





A A negotiable instrumentnegotiable instrument is a written is a written document giving special legal rights to document giving special legal rights to the transferee that may be transferred the transferee that may be transferred by endorsement or delivery.by endorsement or delivery.






There are two basic kinds of There are two basic kinds of negotiable instruments:negotiable instruments:


Notes (including certificates of Notes (including certificates of deposit), anddeposit), andDrafts (including checks)Drafts (including checks)






What is a note?





A A notenote (often called a promissory (often called a promissory note) is a written promise by one note) is a written promise by one person, called the person, called the makermaker, to pay , to pay money to another person, called the money to another person, called the payeepayee. .

Notes Notes





When two persons sign a note, they When two persons sign a note, they are known as comakers.are known as comakers.

Notes Notes





A demand note is payable when the A demand note is payable when the payee demands payment.payee demands payment.A time note is payable at a future A time note is payable at a future date, which is written on the face of date, which is written on the face of the note.the note.

Notes Notes





23.123.1

Demand Note Demand Note





A A certificate of deposit (CD)certificate of deposit (CD) is a is a note provided by a bank. It’s a bank’s note provided by a bank. It’s a bank’s written receipt of money and a written receipt of money and a promise to pay the money back, promise to pay the money back, usually with interest, on the due date.usually with interest, on the due date.

Certificates of Deposit Certificates of Deposit





CDs are written for a specific time CDs are written for a specific time period such as six months, one year, period such as six months, one year, two years, or five years. two years, or five years.

Banks pay higher interest on longer-Banks pay higher interest on longer-term CDs.term CDs.






The interest paid on a CD is higher The interest paid on a CD is higher than the amount paid on a regular than the amount paid on a regular savings or checking account because savings or checking account because the depositor cannot withdraw the the depositor cannot withdraw the money before the due date without money before the due date without penalty.penalty.






23.123.1

Certificate of DepositCertificate of Deposit





A A checkcheck is a draft drawn on a bank is a draft drawn on a bank and payable on demand. It is the most and payable on demand. It is the most common kind of draft in use today.common kind of draft in use today.

Checks Checks





When issuing a check, you put money When issuing a check, you put money in the bank and then order the bank to in the bank and then order the bank to pay your money to others by writing pay your money to others by writing out checks.out checks.

Checks Checks





Reviewing What You Learned

1. What is the purpose of a negotiable instrument?

Section 23.1 Assessment






It allows people to transact business without carrying around large sums of money and to purchase items they will pay for later.


Answer






2. Name the two basic kinds of negotiable instruments.







Notes, including certificates of deposit; and drafts, including checks.


Answer






3. Define the parties to each kind of negotiable instrument.







The note is a written promise by the maker to pay money to another person (payee). When two people sign a note, they are known as comakers.


Answer






A draft is an instrument in which one party, called the drawer, orders another party, the drawee, to pay money to a third party, the payee.


Answer



End of Section 23.1End of Section 23.1





What You’ll Learn

How to state the legal effect of a forged How to state the legal effect of a forged indorsement (p. 550)indorsement (p. 550)

How to discuss the warranties that you How to discuss the warranties that you make when you indorse negotiable make when you indorse negotiable instruments (p. 550)instruments (p. 550)





What You’ll Learn

How to explain the contract you make How to explain the contract you make when you indorse negotiable instruments when you indorse negotiable instruments (p. 553)(p. 553)






Understanding the types of indorsements will Understanding the types of indorsements will help you handle your finances wisely.help you handle your finances wisely.





Multiple Payees Forged Indorsements Warranties of Indorsers Contract of Indorsers







What are some different kinds of indorsements?





An instrument is indorsed when you An instrument is indorsed when you write your name on it, indicating your write your name on it, indicating your intent to transfer ownership to intent to transfer ownership to another.another.

Main Kinds of Indorsements Main Kinds of Indorsements





Regulation CC, issued by the Federal Regulation CC, issued by the Federal Reserve Board under the Competitive Reserve Board under the Competitive Banking Act, has established Banking Act, has established standards for check indorsements.standards for check indorsements.






Under the regulation, the back of a Under the regulation, the back of a check is divided into specific sections check is divided into specific sections designed to protect the indorsement of designed to protect the indorsement of the depository bank (the bank of first the depository bank (the bank of first deposit).deposit).






There are four principal types of There are four principal types of indorsements, and each fulfills a indorsements, and each fulfills a special purpose.special purpose.


Blank indorsementsBlank indorsementsSpecial indorsementsSpecial indorsementsRestrictive indorsementsRestrictive indorsementsQualified indorsements Qualified indorsements





A A blank indorsementblank indorsement consists of the consists of the signature alone on the instrument. signature alone on the instrument. This type indorsement says, in effect, This type indorsement says, in effect, “This instrument may be paid to “This instrument may be paid to anyone.” anyone.”

Blank Indorsement Blank Indorsement





25.225.2

Blank IndorsementBlank Indorsement





A A special indorsementspecial indorsement (also called (also called an indorsement in full) is made by an indorsement in full) is made by writing the words writing the words pay to the order of pay to the order of or or pay topay to followed by the name of the followed by the name of the person to whom the instrument is to person to whom the instrument is to be transferred (the indorsee) and the be transferred (the indorsee) and the signature of the indorser.signature of the indorser.

Special Indorsement Special Indorsement





When signed this way, the instrument When signed this way, the instrument remains an order instrument and must remains an order instrument and must be indorsed by the indorsee before it be indorsed by the indorsee before it can be further negotiated.can be further negotiated.






25.225.2






A A restrictive indorsementrestrictive indorsement is one in is one in which words have been added, in which words have been added, in addition to the signature of the addition to the signature of the transferor, to limit its use. An example transferor, to limit its use. An example of a restrictive indorsement is “For of a restrictive indorsement is “For deposit only.”deposit only.”

Restrictive Indorsement Restrictive Indorsement





25.225.2

Restrictive IndorsementRestrictive Indorsement





A A conditional indorsementconditional indorsement, a type of , a type of restrictive indorsement, makes the restrictive indorsement, makes the rights of the indorsee subject to a rights of the indorsee subject to a specific event or condition.specific event or condition.

Conditional Indorsement Conditional Indorsement





25.225.2

Conditional Indorsement Conditional Indorsement





A A qualified indorsementqualified indorsement is one in is one in which words have been added to the which words have been added to the signature to limit the liability of the signature to limit the liability of the indorser. indorser.

Qualified Indorsement Qualified Indorsement





The words The words without recoursewithout recourse added to added to an indorsement mean the indorser is an indorsement mean the indorser is not liable in the event the maker or not liable in the event the maker or drawer does not pay the instrument.drawer does not pay the instrument.






25.225.2







How is a check with multiple payees indorsed?





If an instrument is payable to either of If an instrument is payable to either of two payees, only one of the payees two payees, only one of the payees needs to indorse it to make it needs to indorse it to make it negotiable.negotiable.

Multiple Payees Multiple Payees





However, if an instrument is payable However, if an instrument is payable to both of two payees, both payees to both of two payees, both payees would need to indorse the check for would need to indorse the check for proper negotiation.proper negotiation.

Multiple Payees Multiple Payees





Fill in the blanks.

1.1. A _____ indorsement is one in A _____ indorsement is one in which words have been added, in which words have been added, in addition to the signature of the addition to the signature of the transferor, to limit its use.transferor, to limit its use.





ANSWERANSWER

Restrictive





2.2. A _____ indorsement is made by A _____ indorsement is made by writing the words “pay to the order writing the words “pay to the order of” followed by the name of the of” followed by the name of the person to whom the instrument is person to whom the instrument is to be transferred and the signature to be transferred and the signature of the indorser. of the indorser.





ANSWERANSWER

Special





3.3. A _____ indorsement consists of A _____ indorsement consists of the signature alone on the the signature alone on the instrument.instrument.





ANSWERANSWER

Blank






What happens if an indorsement is forged?





A forged indorsement is not valid, and A forged indorsement is not valid, and anyone who takes a forged instrument anyone who takes a forged instrument does not acquire title and is not a does not acquire title and is not a holder.holder.

Forged Indorsements Forged Indorsements





Anyone who pays an instrument on Anyone who pays an instrument on which there is a forged indorsement is which there is a forged indorsement is liable to the true owner for the amount liable to the true owner for the amount of the instrument.of the instrument.

Forged Indorsements Forged Indorsements






What warranties are made by an indorser?





Warranties of Indorsers Warranties of Indorsers

To encourage people to accept To encourage people to accept negotiable instruments from others, a negotiable instruments from others, a system of implied warranties is part of system of implied warranties is part of the law of negotiable instruments.the law of negotiable instruments.





Indorsers who receive consideration Indorsers who receive consideration for an instrument make five warranties for an instrument make five warranties to subsequent transferees of the to subsequent transferees of the instruments. instruments.






They warrant that: They warrant that:


1.1. They have good title to the They have good title to the instrument.instrument.

2.2. All signatures are genuine or All signatures are genuine or authorized. authorized.







3.3. The instrument has not been The instrument has not been altered.altered.

4.4. No defense of any party is good No defense of any party is good against the indorser. against the indorser.







5.5. They have no knowledge of any They have no knowledge of any bankruptcy proceeding that would bankruptcy proceeding that would affect the instrument.affect the instrument.






What is the contract of indorsers?





Contract of Indorsers Contract of Indorsers

Unless an indorsement states Unless an indorsement states otherwise, every indorser agrees to otherwise, every indorser agrees to pay any subsequent holder the face pay any subsequent holder the face amount of the instrument if it is amount of the instrument if it is dishonored.dishonored.






To enforce this obligation, the holder To enforce this obligation, the holder must do two things.must do two things.






1.1. He or she must present the He or she must present the instrument for payment to the maker instrument for payment to the maker or drawer when it is due. If that or drawer when it is due. If that person refuses to pay the person refuses to pay the instrument, it has been dishonored.instrument, it has been dishonored.






2.2. The holder must notify indorsers of The holder must notify indorsers of the dishonor before midnight of the the dishonor before midnight of the third full business day after the date third full business day after the date of the dishonor.of the dishonor.






1. What are the four main kinds of indorsements?







Blank, special, restrictive, qualified.


Answer






2. If an instrument is payable to both of two payees, as in the check that is payable to David and Melanie Mueller, who must indorse it?







The indorsement of both payees is necessary.


Answer






3. What are the legal effects of a forged instrument?







Anyone who takes an instrument after forgery does not acquire title and is not a holder. Anyone who pays an instrument that has been a forged is liable to the true owner.


Answer






4. List the five warranties of indorsers.







They warrant that: (1) They have title. (2) All signatures are genuine. (3) The instrument has not been altered.


Answer






(4) No defense of any party is good against the indorser. (5) They have no knowledge of any bankruptcy proceeding that would affect the instrument.


Answer






5. What two things are necessary to enforce the contract of indorsers?







(1) The holder must first present the instrument for payment to the maker when it is due. If that person refuses to pay the instrument, it is dishonored.


Answer






(2) The holder must notify indorsers of the dishonor before midnight of the third full business day after the date of the dishonor.


Answer





What You’ll Learn

How to determine if a person is a holder in How to determine if a person is a holder in due course (p. 560)due course (p. 560)

How to contrast personal defenses with How to contrast personal defenses with real defenses (p. 563)real defenses (p. 563)






Recognizing the parties and defenses to Recognizing the parties and defenses to negotiable instruments will keep you alert to negotiable instruments will keep you alert to problems regarding negotiable instruments.problems regarding negotiable instruments.





Holder in Due Course HolderValueGood FaithWithout NoticeHolder Through a Holder in Due Course






Defenses to Negotiable Instruments Personal DefensesReal Defenses







What is a holder in due course?





A A holder in due courseholder in due course is a holder is a holder who takes an instrument for value, in who takes an instrument for value, in good faith, and without notice.good faith, and without notice.

Holder in Due Course Holder in Due Course





Holders in due course are treated Holders in due course are treated more favorably than holders are.more favorably than holders are.They receive more rights in They receive more rights in negotiable instruments.negotiable instruments.This allows negotiable instruments This allows negotiable instruments to be used almost like money.to be used almost like money.

Holder in Due Course Holder in Due Course





To be a holder in due course, you To be a holder in due course, you must first be a must first be a holderholder, which means , which means that the instrument must have been that the instrument must have been issued or indorsed to you, to your issued or indorsed to you, to your order, or to bearer.order, or to bearer.

Holder Holder





A person must give value for an A person must give value for an instrument to qualify as a holder in instrument to qualify as a holder in due course. due course.

Value Value





You give You give valuevalue when you give the when you give the consideration that was agreed upon or consideration that was agreed upon or when you accept an instrument in when you accept an instrument in payment of a debt.payment of a debt.

Value Value





To be a holder in due course, the To be a holder in due course, the holder must take the instrument in holder must take the instrument in good faith.good faith.

Good Faith Good Faith





Good faithGood faith means honesty in fact and means honesty in fact and fair dealing. fair dealing.

It requires that the taker of a It requires that the taker of a negotiable instrument act honestly.negotiable instrument act honestly.

Good Faith Good Faith





To be a holder in due course, a holder To be a holder in due course, a holder must not have notice of any claim or must not have notice of any claim or defense to the instrument, or notice defense to the instrument, or notice that the instrument is overdue or has that the instrument is overdue or has been dishonored.been dishonored.

Without Notice Without Notice





A claim is an argument asserted by A claim is an argument asserted by a person claiming the instrument.a person claiming the instrument.A defense is something that is A defense is something that is asserted as a reason not to pay it.asserted as a reason not to pay it.

Without Notice Without Notice





A holder who receives an instrument A holder who receives an instrument from a holder in due course acquires from a holder in due course acquires the rights of the holder in due course, the rights of the holder in due course, even though he or she does not even though he or she does not qualify as a holder in due course.qualify as a holder in due course.

Holder Through a Holder Holder Through a Holder in Due Course in Due Course





This provision is called a This provision is called a shelter shelter provisionprovision. It is designed to permit . It is designed to permit holders in due course to transfer all of holders in due course to transfer all of the rights they have in the paper to the rights they have in the paper to others. others.






This provision does not apply to a This provision does not apply to a holder who has committed fraud or an holder who has committed fraud or an illegal act.illegal act.






26.126.1

Holder Through a Holder Holder Through a Holder in Due Coursein Due Course

Clara indorsed the

check and gave it to

her niece as a gift.

Clara’s niece is a

holder through a

holder in due course.

Brisa endorsed the

check and gave it to

Clara in payment for a

debt.

Clara is a holder in

due course.

Alfonso wrote a check

to Brisa.

Brisa is a holder.





Jerome indorses Sani’s check to Jeremy, and Jeremy indorses the check to his credit card company. Who is (are) the holder(s) in due course? Why?





ANSWERANSWER

Jeremy and the credit card company are holders in due course because they both gave value.






1. What requirements must a holder in due course meet?







Must be a holder, must give value for the instrument, must take the instrument in good faith, and must take the instrument without notice.


Answer






2. What is the difference between a personal defense and a real defense? Provide an example of each.







A personal defense can be used against a holder, but not a holder in due course. A real defense can be used against anyone.


Answer

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments Chapter 16:...

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