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Types of the negotiable instruments
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BUS 116 Chap016 negotiable instruments

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BUS 116 Chap016 negotiable instruments

  1. 1. Chapter 16 Purpose and Types of Negotiable Instruments 16-1
  2. 2. Learning Objectives 1. State the purpose of a negotiable instrument. 2. Explain those negotiable instruments that contain a promise to pay money. 3. Explain those negotiable instruments that contain an order to pay money. 4. Differentiate among the different types of checks and money orders. 5. Identify the requirements of a negotiable instrument. 16-2
  3. 3. Learning Objectives (cont.) 6. Explain an assignment and a negotiation of an instrument. 7. Name and describe four kinds of indorsements. 8. Identify the implied warranties related to indorsements. 9. Explain the contract that is made when people indorse negotiable instruments. 10.Describe the legal effect of a forged indorsement. 16-3
  4. 4. Purpose of Negotiable Instruments • Merchants needed a safer and more convenient method of exchanging their gold and silver for the goods they bought. • When the merchants bought goods, instead of paying for them with gold or silver, they simply filled in a piece of paper, called a bill of exchange 16-4
  5. 5. Purpose of Negotiable Instruments • Negotiable instrument – a written document signed by the maker or drawer that contains: • an unconditional promise or order to pay a fixed amount of money • on demand or at a definite time • to the bearer or to order – promise instruments, order instruments 16-5
  6. 6. Promise Instruments • Note (promissory note) – a written promise by one party, (the maker), to pay money to the order of another party, (the payee) 16-6
  7. 7. Promise Instruments • Demand note – Payable whenever the payee demands payment • Time Note – Payable at some future time specified in the instrument • Installment note – Payable in installments at specified times 16-7
  8. 8. A Demand Note Figure 16-1 16-8
  9. 9. Promise Instruments • Certificate of deposit (CD) – An instrument containing: • An acknowledgment that a bank has received a sum of money, and • A promise by the bank to repay the sum of money – Come in a variety of time periods, higher interest usually paid for longer periods – Penalty for early withdrawal Example CD rates 16-9
  10. 10. Order Instruments • Draft (bill of exchange) – An instrument in which one party writes an instrument ordering a second party to pay money to a third party – Drawer – one who draws the draft – Drawee – one who is ordered to pay the money – Payee – one who is to receive the money 16-10
  11. 11. Order Instruments • Sight draft – payable as soon as it is presented to the drawee for payment. • Time draft – not payable until the lapse of a particular time period stated on the draft. 16-11
  12. 12. Order Instruments • Domestic bill of exchange – A draft that is drawn and payable in the United States • International bill of exchange or foreign draft – A draft that is drawn in one country but payable in another 16-12
  13. 13. Order Instruments • Check – A draft • drawn on a bank • by a drawer who has an account at the bank • is payable on demand – Is the most common form of a draft 16-13
  14. 14. Checks • Certified check – A check that is guaranteed by the bank that sufficient funds will be withheld from the drawer’s account to pay the amount stated on the check 16-14
  15. 15. Checks • Bank draft (teller’s/treasurer’s check) – A check drawn by one bank on another bank in which it has funds on deposit in favor of a third person, the payee • Cashier’s check – A check drawn by a bank upon itself, lending its credit to the purchaser of the check 16-15
  16. 16. Checks • Traveler’s check – the issuing financial institution is both the drawer and the drawee. • The purchaser signs the checks in the presence of the issuer when they are purchased. • To cash a check, the purchaser writes the name of the payee in the space provided and countersigns it in the payee’s presence. 16-16
  17. 17. Traveler’s Check 16-17
  18. 18. Checks • Money order – a type of draft that may be purchased as a substitute for a check • Instead of being drawn on an individual’s account as is a check, however, a money order is drawn on the funds of the organization that issues it (e.g., US Post Office) 16-18
  19. 19. Parties to Negotiable Instruments • • • • • • Maker or comaker – sign a note, promising to pay Drawer – signs a draft, ordering payment Issuer – either a maker or drawer of an instrument Drawee – ordered in a draft to make payment Payee – person to whom a note or draft is payable Bearer – is in possession of a negotiable instrument payable to bearer or cash 16-19
  20. 20. Parties to Negotiable Instruments • Holder – possesses a negotiable instrument issued or indorsed to that person’s order or to bearer • Indorser – indorses a negotiable instrument • Indorsee – person to whom a negotiable instrument is transferred by indorsement • Acceptor – drawee of a draft who has promised to honor the draft as presented by signing it on its face 16-20
  21. 21. 16-21
  22. 22. Requirements of Negotiable Instruments To be negotiable, instruments must: • Be in writing • Be signed by the maker or drawer • Contain an unconditional promise or order to pay • Be made out for a fixed amount of money • Can include interest • Be payable on demand or at a definite time • Except for checks, be payable to order or to bearer 16-22
  23. 23. Requirements of Negotiable Instruments • A negotiable instrument must be in writing – Printing – Typewriting – Pen/pencil writing – or any other tangible form of writing 16-23
  24. 24. Requirements of Negotiable Instruments • Must be signed by the maker or drawer • Any writing, mark, or symbol is accepted as a signature as long as it is the writer’s intent to be a signature. 16-24
  25. 25. Requirements of Negotiable Instruments • Must contain no conditions that might in any way affect its payment • Statements requiring that certain things be done or that specific events take place prior to payment make the instrument a simple contract rather than negotiable paper. • Must contain an order or promise to pay, not simply an acknowledgement (IOU) 16-25
  26. 26. Requirements of Negotiable Instruments • Must be payable in a fixed amount or sum of money. – an amount of money that is clearly known • Money – a medium of exchange adopted by a domestic or foreign government as part of its currency. 16-26
  27. 27. Requirements of Negotiable Instruments • Negotiable instruments must be made payable on demand or at a definite time. • Makes it possible to determine when the debtor or promisor can be compelled to pay. – Demand Paper – holder can require payment at any time (payable “on demand”, “on sight”, “on presentation”) – Definite-Time Paper – Payable on, before, or for a specified time period after some known date. 16-27
  28. 28. Requirements of Negotiable Instruments • Payable to Order – states that it is payable “to the order of” any person with reasonable certainty. • Payable to Bearer – states that it is payable to: • • • • bearer or the order of bearer, a specified person or bearer, cash or the order of cash, or any other indication that does not designate a specific payee. 16-28
  29. 29. Dates and Controlling Words • Omission of date of issue does not affect negotiability (date received would become date of issue) • Predating and postdating are allowed • If there are conflicting terms: • Handwritten terms > typewritten > pre-printed • Words > numerals, except when words are ambiguous 16-29
  30. 30. Transferring Instruments • Assignment – The transfer of a contract right from one person to another • Negotiable instruments can be assigned when: – Person whose indorsement is required transfers to another party without indorsing – When instrument is transferred but doesn’t meet all the requirements of negotiability – When holder of an instrument dies or goes bankrupt 16-30
  31. 31. Transferring Instruments • Negotiation – Transfer of an instrument in such form that the transferee becomes a holder • Holder – A person in possession of an instrument issued or indorsed to: • • • • that person that person’s order to bearer or in blank 16-31
  32. 32. Transferring Instruments • Order paper – To be negotiated, must be indorsed by the payee and delivered to the transferee • Bearer paper – May be negotiated by delivery alone, without an indorsement 16-32
  33. 33. The Concept of Negotiability • Negotiation gives greater rights to the transferee than assignment. • Negotiation also provides the transferee with more protection than was available to the person from whom it was received 16-33
  34. 34. Negotiation by Indorsement • An instrument is indorsed when the holder signs it, thereby indicating the intent to transfer ownership to another. • Indorsements may be written in ink, typewritten, or stamped with a rubber stamp. • May be written on separate piece of paper (rider, or allonge) and firmly affixed to the instrument. 16-34
  35. 35. Negotiation by Indorsement • Blank indorsement – Consists of the signature alone written on the instrument (no indorsee named) – Turns order paper into bearer paper, may be transferred by delivery alone – If an instrument is made payable to a person under a misspelled name or name other than their own, payee may indorse in the correct name, incorrect name, or both. 16-35
  36. 36. Blank Endorsement 16-36
  37. 37. Negotiation by Indorsement • Special indorsement (indorsement in full) – made by writing the words “pay to the order of” or “pay to”, followed by the name of the person to whom it is to be transferred (indorsee) and the signature of the indorser 16-37
  38. 38. Negotiation by Indorsement • Restrictive indorsements – limit the rights of the indorsee in some manner to protect the rights of the indorser – “for deposit only” • Conditional indorsement – type of restrictive indorsement, may be disregarded – tries to make the rights of the indorsee subject to the happening of a certain event or condition – “when he turns 21” “after he mows my lawn” 16-38
  39. 39. Restrictive Endorsements 16-39
  40. 40. Negotiation by Indorsement • Qualified indorsement – one in which words have been added to the signature that limit the liability of the indorser – “without recourse” – indorser would not be held liable if the instrument was dishonored 16-40
  41. 41. Warranties of Indorsers 1. 2. 3. 4. Indorser is entitled to enforce the instrument All signatures are authentic and authorized The instrument has not been altered The instrument is not subject to a defense of any party that can be asserted against the indorser (except qualified indorsement) 5. Indorser has no knowledge of the bankruptcy of the maker, acceptor, or drawer 16-41
  42. 42. Contract of Indorsers • Every indorser agrees to pay any subsequent holder the face amount of the instrument if it is dishonored (not paid by the maker or drawee) – Except qualified indorsement (“without recourse”) 16-42
  43. 43. Multiple Payees & Missing Indorsements • “pay to the order of Bob or Sally” – indorsement of either Bob or Sally required • “pay to the order of Bob and Sally” – indorsement of both parties required • Missing indorsements – a bank that has taken an instrument from a customer may supply an indorsement of the customer that is necessary to title 16-43
  44. 44. Unauthorized or Forged Indorsements • An unauthorized signature or indorsement is one made without actual, implied, or apparent authority. • Does not serve as the signature of the person whose name is signed – 3 exceptions • When payment is made based on a forged indorsement, tort of conversion results – the wrongful exercise of dominion and control over another’s personal property. 16-44
  45. 45. Exceptions • Imposter – someone who impersonates another person • When an instrument is issued to an imposter on the false belief that the imposter is the payee, the indorsement by any person in the name of the payee is treated as an effective indorsement. • Places the loss on the one who is in the best position to prevent it—the maker or drawer of the instrument 16-45
  46. 46. Imposter Rule Example Bob convinces Katie that he is actually Arnold Bob Katie Arnold 16-46
  47. 47. Imposter Rule Example Katie gives Bob a check made out to Arnold. “Here you go, Arnold!” “Thanks! “ (Tee hee) Bob signs Arnold’s name and cashes it. 16-47
  48. 48. Imposter Rule Example Arnold notices money missing from his account and asks Katie what’s up. ? “Wait, YOU’RE Arnold?!” Arnold wants his money back, but who is responsible for paying? 16-48
  49. 49. Imposter Rule Example Bob is nowhere to be found “See ya!” That leaves the bank or Katie Assuming the bank exercised ordinary care, the person in the best place to prevent the mistake is the drawer (Katie) “Dangit!” 16-49
  50. 50. Exceptions • No Interest Intended; Fictitious Payee • When the maker or drawer of an instrument intends the payee to have no interest in the instrument or the payee is a fictitious person, an indorsement by any person in the name of the payee is effective. 16-50
  51. 51. Padded Payrolls • When an agent or employee of the maker or drawer pads the payroll by supplying the employer with fictitious names, an indorsement by any person in the name of each fictitious payee is effective. • Places the burden of preventing this type of fraud on the party in the best position to prevent it— either the drawer (if a draft) or the maker (if a note). 16-51
  52. 52. Question? What written document contains an unconditional promise to pay a fixed amount of money on demand? A. Ledger B. Negotiable instrument C. Memo D. Note 16-52
  53. 53. Question? What is written promise by one party to pay money to the order of another party? A. Memo B. Mortgage C. Note D. Lien 16-53
  54. 54. Question? What instrument contains an acknowledgment that a bank has received a sum of money and a promise by the bank to repay the sum of money? A. Draft B. Lien C. Mortgage D. Certificate of Deposit 16-54
  55. 55. Question? What type of draft is payable as soon as it is presented to the drawee for payment? A. Site draft B. Cite draft C. Sight draft D. Celious draft 16-55
  56. 56. Question? What type of check is guaranteed by the bank that sufficient funds will be withheld from the drawer’s account to pay the amount stated on the check? A. Certified check B. Bank check C. Federal funds D. Licensed check 16-56
  57. 57. Question? What type of draft that may be purchased as a substitute for a check? A. Lien draft B. Certified draft C. Money order D. Lien order 16-57
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