Chapter 19: Nature and Types of Negotiable Instruments 1

Chapter 19: Nature and Types of Negotiable Instruments 1

CHAPTER 19

Nature and Types of Negotiable Instruments

KEY POINTS IN THE CHAPTER

Negotiable instruments can be used as a substitute for money or as a means of extending credit. They consist of promises to pay (such as promissory notes and certificates of deposit) and orders to pay (such as drafts and checks). Notes have two parties (maker and payee); drafts and checks have three parties (drawer, drawee, and payee). The drawee of a check is always a bank, and the drawer is the depositor.
Negotiable instruments may be classified as either demand instruments (payable for a reasonable time after issue) or time instruments (payable at a future date).
The concept of negotiability is important when dealing with the law of negotiable instruments. If an instrument contains certain characteristics (discussed in the chapter) it can be legally transferred to another party with this party gaining the same rights and privileges as the transferring party.
Article 3 governs the law of negotiable instruments. It has made several revisions to the Negotiable Instruments Law to more accurately reflect modern business practices. Changes have been reflected in this chapter and in the remaining chapters in this Part. A number of amendments were approved in 2002, but to date they have only been adopted in a few states.
To be negotiable (legally transferable), the instrument must (1) be in writing (2) be signed by the maker or the drawer (3) contain an unconditional promise or order to pay (4) state a fixed amount of money (5) be payable on demand (or at sight) or at a definite time (6) be payable to order or to bearer, and (7) designate a drawee (in the case of a draft) with reasonable certainty.

MULTIPLE-CHOICE QUESTIONS

Circle the letter of the best answer.

1.A check is issued by the

a.maker.

b.payee.

c.drawee.

d.drawer.

2.A promissory note must contain

a.words indicating a promise to pay.

b.mention of an IOU.

c.a certificate of deposit.

d.a date.

3.The signature on a negotiable instrument must

a.be printed or stamped on the instrument.

b.be that of the maker or drawer.

c.appear in the body of the instrument.

d.appear in the lower right-hand corner.

4.A written order by one person on a second person to pay a third person is a

a.promissory note.

b.certificate of deposit.

c.draft.

d.receipt.

5.The omission of the word order or bearer on a promissory note can render it

a.voidable.

b.void.

c.negotiable.

d.nonnegotiable.

6.The term nonnegotiable means

a.void

b.not cash.

c.not readily transferable from one person to another.

d.not payable.

7.An instrument is payable on demand or at a definite time if it is payable

a.at someone’s death.

b.under a certain condition.

c.on, before, or after a specified date.

d.at a bank.

8.A check that contains the words three hundred fifty dollars and the figures $3.50 is

a.payable in the amount of $350.

b.illegal.

c.payable in the amount of $3.50.

d.void.

9.An instrument that is not payable for a fixed amount of money and thus is not negotiable if

a.it is payable in a foreign currency that is a legal currency.

b.it is payable with interest.

c.the amount in figures is omitted.

d.the person required to pay the instrument has the option to pay something in addition to money.

10.A check is

a.a written promise.

b.usually payable at a certain time.

c.payable immediately.

d.not a substitute for cash.

11.Which of the following contains the necessary words of negotiability?

a.Pay to Mary Roe.

b.Please pay Mary Roe.

c.Pay to holder, Mary Roe.

d.Pay to the order of Mary Roe.

12.Brown signed a document unconditionally promising to pay a certain sum of money on a definite day to the order of Nevarez. Nevarez is called the

a.maker.

b.payee.

c.drawer.

d.drawee.

13.A promissory note is not negotiable if it is

a.not dated.

b.payable thirty days after the death of the maker.

c.signed by two people.

d.payable thirty days after the date of the note.

14.A note or check payable in a foreign currency that is a legal currency is

a.nonnegotiable.

b.fully negotiable.

c.not payable in the dollar equivalent of that currency.

d.void.

15.If the day of issue is omitted from a note or check, its negotiability is

a.restricted.

b.voided.

c.not affected.

d.postponed.

ACTIVITY: DETERMINING NEGOTIABILITY

Indicate whether each of the following is a negotiable or a nonnegotiable instrument by circling N or NN in the column on the right.

1.An unsigned check / N NN
2.A note signed with an X / N NN
3.An instrument payable to “Bearer” / N NN
4.A promissory note payable ten days before February 8, 1993 / N NN
5.A check lacking the words “to the order of” / N NN
6.An oral promise to pay $1,000 / N NN
7.A check on which the name of the payee has been omitted / N NN
8.A signed promissory note containing the words “I promise to pay 500 pounds of scrap iron to the order of Merle Thomas” / N NN
9.A draft payable at sight / N NN
10.A draft in which the drawee’s name has been omitted / N NN

TRUE- FALSE QUESTIONS

Indicate whether each statement below is true or false by circling T or F in the column on the left.

1.TFA person to whom a negotiable instrument is transferred obtains special privileges.

2.TFA check is an instrument that is payable on demand.

3.TFThe drawee of a check is always a bank.

4.TFAn instrument that places conditions on the promise or order to pay is negotiable.

5.TFA draft is a negotiable instrument that is a written promise to pay money.

6.TFThe party who promises to pay a promissory note is called the drawee.

7.TFA promissory note need not be in writing.

8.TFA promissory note is an order to pay.

9.TFAn instrument made payable to “Myself” is considered payable to the bearer.

10.TFAn instrument that is payable “fifteen days after I paint my house” is negotiable.

SHORT- ANSWER QUESTIONS

Answer each of the following questions in the space provided.

1.What test is used to determine whether an instrument is payable in money?

______

2.What kind of writing is required for a negotiable instrument?

______

3.If the words and figures in an instrument differ, which controls?

______

4.If an instrument is made payable to cash, to whom is it payable?

______

5.What is the effect of making an instrument payable in the event of something—even something certain—happening?

______

6.How is a check different from other drafts?

______