Chapter 22 Creation of Negotiable Instruments

Negotiable Instruments To qualify as a negotiable, the document must meet requirements established by Revised Article 3 of UCC Functions of negotiable instruments Substitute for money Credit device Record-keeping device 22-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Types of Negotiable Instruments Types of orders to pay Draft Check Types of promises to pay Promissory Note Certificate of Deposit 22-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Types of Negotiable Instruments 22-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 22.1: Time Draft 22-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 22.2: Check 22-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Types of Negotiable Instruments 22-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.3: Promissory Note 22-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.4: Certificate of Deposit 22-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Negotiable Instrument A negotiable instrument must: Be in writing Be signed by the maker or drawer Be an unconditional promise or order to pay State a fixed amount of money Not require any undertaking in addition to the payment of money Be payable on demand or at a definite time Be payable to order or to bearer 22-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Negotiable Instrument Writing Permanency requirement: A requirement of negotiable instruments that says they must be in a permanent state, such as written on ordinary paper Portability requirement: A requirement of negotiable instruments that says they must be able to be easily transported between areas 22-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Creating a Negotiable Instrument Signature requirement: States that a negotiable instrument must be signed by the drawer or maker Any symbol adopted by a party with a present intent to authenticate a writing qualifies as his or her signature If an agent is appointed, the representative’s signature binds the maker or drawer 22-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Unconditional Promise or Order to Pay Order to pay: A drawer’s unconditional order to a drawee to pay a payee Promise to pay: A maker’s unconditional and affirmative undertaking to repay a debt to a payee Promises to pay and orders to pay must be unconditional in order to be negotiable 22-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Fixed Amount of Money Fixed amount requirement: Ensures the value of the instrument can be determined with certainty Must be payable in money Applies to variable interest loans Must not require any undertaking in addition to the payment of money 22-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Payable on Demand or at a Definite Time Instruments payable on demand Created by special language Created by silence regarding payment due date Checks CDs and drafts may be demand instruments Instruments payable at a definite time Payable at definite time and date 22-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Case 22.1: Negotiable Instrument Las Vegas Sands, LLC, dba Venetian Resort Hotel Casino v. Nehme 632 F.3d 526, Web 2011 U.S. App. Lexis 492 (2011) United States Court of Appeals for the Ninth Circuit Issue Is the Venetian’s casino marker signed by Nehme a negotiable instrument under the Nevada Uniform Commercial Code? 22-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Payable on Demand or at a Definite Time Prepayment clause: Permits the maker to pay the amount due prior to the date of the instrument Acceleration clause: Allows the payee or holder to accelerate payment of the principal amount of the instrument, plus accrued interest, upon the occurrence of an event 22-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Payable on Demand or at a Definite Time Extension clause: A clause in an instrument that allows the date of maturity of the instrument to be extended to sometime in the future 22-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Nonnegotiable Contract Nonnegotiable contract: A promise or order to pay that does not meet the requirements of a negotiable instrument Not subject to Article 3 Enforced under normal contract law 22-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 22-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.