Chapter 28 KINDS OF INSTRUMENTS, PARTIES, AND NEGOTIABILITY

Definitions An instrument or piece of commercial paper is a transferable, written, signed promise or order to pay a specified sum of money. An instrument is negotiable when it contains the terms required by the UCC. The term party may refer to a natural person or to an entity, such as a corporation, an unincorporated enterprise, a government, or a bank account.

Types of Negotiable Instruments and Parties (1) Promissory Notes A certificate of deposit is classified as a promissory note. (2) Drafts (which includes checks) In addition to ordinary checks, there are also cashier’s checks and teller’s checks. A bank money order is a check even though it bears the words money order.

Promissory Note March 31, 2004 Six months after date debtor undersigned hereby promise to pay to the order of Galactic Games, Inc, three thousand six hundred dollars with interest at the rate of 10.9%. This note is secured by the video arcade games purchased with its funds. In the event of default, all sums due hereunder may be collected. Debtor agrees to pay all costs of collection including, but not limited to, attorney fees, costs of repossession, and costs of litigation. John R. Haldehand Video Arcade Inc.

Draft March 18, 1998 TO: Oriental Traders 1100 W. Clarendon Chapter 31 March 18, 1998 TO: Oriental Traders 1100 W. Clarendon Phoenix, AZ Pay to the order of Silly Putty, Inc. the sum of One thousand and no/100 dollars Accepted by: _______________ DATE: Joe Guilden Silly Putty, Inc. 3

Parties to Instruments Maker: original party on a note; promises to pay amount specified. Drawer: party who creates a draft. Drawee: party to whom a draft is addressed (i.e. bank or credit union). Payee: party named on the face of the instrument to receive payment. Drawee becomes the acceptor when it accepts responsibility to pay. Accommodation party: one whose name is added to an instrument to strengthen its collectability. Guarantor: promises to pay instrument under certain circumstances.

Types of Instruments and Parties Chapter 31 Types of Instruments and Parties Notes Maker (Borrower) Payee Certificates of Deposit Payee Maker (Bank) Draft Payee (Seller or Seller’s Bank) Drawee (Buyer) Drawer (Seller) Check Payee Drawee (Bank) Drawer (Account Holder) 1

Negotiability The instrument must: be in writing, be signed by the maker or the drawer, and contain a promise or order: of an unconditional character, to pay in money, a sum certain, on demand or at a definite time, to order or bearer. A check may be negotiable without being payable to order or bearer. If an instrument is not negotiable, it is governed by contract law.

Bearer vs. Order Paper BEARER ORDER NOT NEGOTIABLE “Pay to the bearer” Chapter 31 “Pay to the bearer” “Pay to the order of John Jones or bearer” “Pay to John Jones or bearer” “Pay to cash” “Pay to the order of cash” BEARER “Pay to the order of Thomasina Jones” “Pay to John Jones, bearer” “Pay to Thomasina Jones” (check) ORDER NOT NEGOTIABLE “Pay to Thomasina Jones” (note) 4

Other Rules Ambiguous Language: Statute of Limitations Words outrank figures. Handwriting supercedes typed or printed terms. Typewritten supercedes pre-printed terms. Statute of Limitations The UCC sets a three-year statute of limitations on most actions involving negotiable instruments. The statute is six years for suits on certificates of deposit and accepted drafts.