Chapter 40 Negotiable Instruments
1.An agreement by a drawee to pay the money is indicated by writing "accepted" across the face of the instrument and signing it.
2.A person who draws a draft is known as a drawer, a person named in a draft who is ordered to pay money to a third person is called a drawee, a person named in a draft to whom payment is to be made is called a payee, and a drawee of a draft who signs it on the face agreeing to pay is called an acceptor.
3.A seller in one city will ship goods to a buyer in a distant city and send a trade acceptance attached to a bill of lading to a bank in the distant city. The trade acceptance orders the buyer to pay the bank an amount of money. When the buyer pays the bank, the bank will release the bill of lading, allowing the buyer to pick up the goods from the freight company.
4.In a note, a maker promises in writing to pay a sum of money to the order of a payee.
5.The most important feature of a negotiable instrument is the ability to be transferred to other people who are given greater rights than their transferors had.
6.Infancy, mental illness, illegality, duress, fraud in esse contractus, bankruptcy, unauthorized signature, and material alteration are real defenses.
7.Breach of contract, lack or failure of consideration, fraud in the inducement, lack of delivery of the instrument, and payment are personal defenses.
8.Holders in due course take instruments subject only to real defenses; they are not subject to personal defenses.
9.A blank indorsement specifies no particular indorsee and may consist of a mere signature. A special indorsement specifies the person to whose order it makes the instrument payable. A restrictive indorsement purports to prohibit further transfer of the instrument by the use of such words as "for deposit only." A qualified indorsement limits the liability of the indorser by such words as "without recourse."
10.Order paper consists of instruments that are either originally drawn or indorsed "to the order of" particular payees or indorsees and requires the indorsement of the payees to be negotiated. In contrast, bearer paper is made payable to "bearer" or to "cash" or indorsed in blank and needs no indorsement of the payee to be negotiated.
Understanding Legal Concepts
1.F, need not6.F, holder
2.F, drawer7.T
3.T8.F, qualified
4.T9.T
5.F, draft10.T
Checking Terminology
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Using Legal Language
Nathan, who owned a salad-dressing business, owed $3,000 to Olive from whom he had bought oil and vinegar on credit. Olive threatened to bring suit if Nathan did not pay her the money in thirty days. Nathan didn't have the money but was owed $3,000 by Paula and Peter, his best customers. He wrote a(n) draft ordering Paula and Peter to pay Olive $3,000 in thirty days. Nathan was the drawer, Paula and Peter were the drawees, and Olive was the payee of the instrument. Because it was payable at a particular time stated in the instrument, it was a(n) time draft rather than a(n) sight draft which is payable when presented for payment to the drawee. Olive presented the instrument to Paula and Peter for acceptance, asking them to agree to pay it when it was due. They did so, making them acceptors of the instrument. Thirty days later, Paula and Peter borrowed $3,000 from a bank and signed a(n) note, which is also called a(n) promissory note, promising to pay the money back in two years with interest. Paula was a(n) maker along with Peter, and because two of them existed, they were known as co-makers. The bank was the payee. Because of the fact that the instrument was payable at a particular time, it was called a(n) time note rather than a(n) demand note, which would have been payable on demand. Similarly, because it was to be paid in multiple payments during a period, it was a(n) installment note. Instead of giving them cash, the bank gave them a(n) check, which is the most common kind of draft. It was not a(n) certified check, because the bank did not guarantee it with special words on its face. Paula and Peter indorsed the instrument "Pay to the Order of Olive" and delivered it to her. This was a(n) special indorsement, which is sometimes called a(n) full indorsement. Olive was the indorser. She was also a(n) holder of the instrument because she had it in her possession and it was made payable to her. She indorsed it simply by signing her name on the back, which is called a(n) blank indorsement. On the way to the bank, the instrument blew out of the car window and was picked up by Max. The paper was now bearer paper because of the way it was indorsed, and Max is called a(n) bearer as well as a(n) holder of the instrument. He was not a(n) holder in due course because he had not taken the instrument for value; therefore, if he were sued on the instrument, he would be subject to personal or limited defenses in addition to real, universal, or absolute defenses such as infancy or illegality. Max returned the instrument to Olive, who deposited it in the bank and was given a(n) certificate of deposit to acknowledge its receipt.
Puzzling Over What You Learned
1 / 2
3 / 4 / O / Q
E / A / R / E / R / U
A / B
C / E / D / A
5 / C / C / E / 6 / T / A / N / C / E
A / P / L
7 / A / R / R / I
E
B
8
L / P / Y / E / F
F
9
A / T / P / U / I
E / R / I
O / E / 10
N / A / L / L / O / N / G / E
11 / P / D
M / A / K / E / R / R / P / L / D
12 / A / E / O
D
13
P / R / I / I
D / I / S / H / O / N / O / R / R
N / A / E / N / N
S
14 / W / R / E / D
D / R / A / F / T / D
O / E / O / E / O
15 / R / 16 / R
D / R / A / W / E / E / R
C
S / H / S / S
17 / 18 / E
S P / E / C / I / A / L / I / N / D O / R / S / E / M / E / NT
M / O / C / M / M
E / T / K / E / E
19 / DORS / E / ME / NT
I N / N / N
T / T / T
Caveat: Allow squares for spaces between words and punctuation (apostrophes, hyphens, etc.) when filling in crossword.
Across
- Person who is in possession of an instrument that is payable to bearer.
- The act by a drawee of writing "accepted" across the face of an instrument.
- A paper firmly affixed to a negotiable instrument for indorsements.
- A person who promises to pay money to another on a note.
13 To refuse to accept or pay a negotiable instrument when due.
- A written order by one person to another person to pay money to a third person.
- A person named in a draft who is ordered to pay money to the payee.
17. Indorsement that specifies the person to whom it is payable.
19. The signature of an indorser.
Down
- Instrument that requires the indorsement of the payee to be negotiated.
- Indorsement that limits the liability of the indorser.
- A drawee of a draft who signs it on the face, agreeing to pay it.
- Instrument that requires no indorsement of the payee to be negotiated.
- A person named in a note or a draft to whom payment is to be made.
- An indorsement specifying no indorsee; often a mere signature.
- An indorsement that specifies the person to whom it is payable.
- Person to whom a negotiable instrument is
transferred by indorsement. 12. A person who draws a draft.
- A draft drawn on a bank and payable upon demand.
- A written promise by one party to pay money to another party.