978-0134004006 Chapter 22 Lecture Note

subject Type Homework Help
subject Pages 8
subject Words 3495
subject Authors Henry R. Cheeseman

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170
The great object of the law is to encourage commerce.
Judge Chambre
I. Teacher to Teacher Dialogue
their part. If students understand that this material is frustrating to all, yet undeniably essential to
the conduct of both personal and business affairs, then you will find that they are more motivated
to learn the essentials introduced in this section.
Another teaching tool I use is the check process as the focal illustration throughout the entire
substitute for money, extension of credit, and recordkeeping. Like so many areas of specialized
human endeavors, this often sounds strange and unreasonably complex at first, but they will
hopefully develop an appreciation for the actual scope of commercial transactions carried on with
negotiable instruments.
recordkeeping, and extension of credit. Negotiable instruments are important money substitutes,
and, as such, it is critical that the elements of negotiability be identified and in place before these
documents are passed to third parties.
Another problematic misconception held by first-time students of negotiable instruments is
CREATION OF NEGIOTIABLE
INSTRUMENTS
22
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Creation of Negotiable Instruments
the last element listed: “Payable to order of bearer.” These are the two methods of negotiable
transfer allowed by Article 3. These words provide your first road signs about which direction
this instrument may take on its travels through the hands of third parties. Remember it is only a
clue to the first step. Subsequent steps in the negotiation process may convert the instrument from
II. Chapter Objectives
1. Distinguish between negotiable and nonnegotiable instruments.
2. Describe drafts and checks and identify the parties to these instruments.
instruments.
III. Key Question Checklist
Does the common law or UCC apply to your document?
How will it be classified under the UCC?
Are the elements required by the UCC in place?
1. In writing?
IV. Text Materials
Negotiable instruments, also called commercial paper, include checks and promissory notes.
Negotiable Instruments
Article 3 of the UCC establishes the standard requirements for a negotiable instrument, which are
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Chapter 22
Functions of a Negotiable Instruments Certain forms of negotiable instruments serve as a
Contemporary Environment: Revised Article 3 (Negotiable Instruments) of the UCC
Originally merchants in the Middle Ages developed their own set of rules governing commerce
Types of Negotiable Instruments
There are four kinds of negotiable instruments: drafts, checks, promissory notes, and certificates
of deposit.
Draft Drafts are three-party instruments by which a drawer orders a drawee to make a payment
to a payee. The drawee/acceptor must be obligated to pay the drawer money and should indicate
acceptance of the order by writing “Accepted,” accompanied by their name and the date on the
Trade Acceptance This is a sight draft arising when credit is extended with the sale of goods.
Check Checks are three-party instruments like drafts that are drawn on specific financial
Promissory Note Notes are unconditional written promises by a party, the maker, to pay
money to another, the payee. They may be in the form of either time or demand notes, and may
Certificate of Deposit This instrument is created by a depositor (payee) depositing money with
Creating a Negotiable Instrument
A negotiable instrument must be in writing and be signed by the maker or drawer, offering an
Writing Negotiable instruments must be in writing that is permanent and portable.
including signatures of agents.
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Creation of Negotiable Instruments
signed by authorized agents.
Unconditional Promise or Order to Pay
The instrument must contain either an unconditional promise or order to pay.
a payee.
Promise to Pay Notes must include the maker’s unconditional promise to pay. CDs do not
require an express promise to pay.
Critical Legal Thinking The UCC is using the term negotiable instrument to represent a
Fixed Amount of Money
Payable in Money Negotiable instruments must be paid in currency. Instruments payable in
other forms like gold or silver are not negotiable.
Variable Interest Rate Loan This type of loan ties interest rates to a set measure, e.g., the
Not Require Any Undertaking in Addition to the Payment of Money Negotiable
Payable on Demand or at a Definite Time
Payable on Demand Demand instruments are created by either specific language or by silence
as to when payment is due.
Payable at a Definite Time Time instruments state that the instrument is payable on or before
Case 22.1 Negotiable Instrument: Las Vegas Sands, LLC, dba Venetian Resort Hotel Casino v.
Nehme
632 F.3d 526, 2011 U.S. App. Lexis 492 (2011), United States Court of Appeals for the Ninth
Circuit
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Chapter 22
Issue: Is the Venetian’s casino marker signed by Nehme a negotiable instrument under the
Nevada Uniform Commercial Code?
Decision: Yes, the marker is a negotiable instrument and a check because it provides a
mechanism for payment of $500,000 from Bank of America to the order of the Venetian, is
instrument under Nevada law.
Ethics Questions: According to UCC 3-104(a), a negotiable instrument must, (1) Be in writing,
(2) Be signed by the maker or drawer, (3) Be an unconditional promise or order to pay, (4) State a
fixed amount of money, (5) Not require any undertaking in addition to the payment of money, (6)
Be payable on demand or at a definite time, and (7) Be payable to order or to bearer. It can be
Payment, Acceleration, and Extension Clauses These types of clauses are frequently found in
promissory notes and do not affect their negotiability.
Critical Legal Thinking Even if an instrument is not defined as a negotiable instrument
Nonnegotiable Contracts
Any promises or orders to pay that do not meet the requirements are considered nonnegotiable
contracts and are not subject to the provisions of the UCC and, along with promises or orders that
International Law: Negotiable Instruments Payable in Foreign Currency
In South Korea, the UCC expressly provides that an instrument may state that it is payable in
foreign currency [UCC 3-107].
V. Key Terms and Concepts
of an event.
Article 3 of the UCCA model code that establishes rules for the creation of, transfer of,
enforcement of, and liability on negotiable instruments.
BearerThe person in possession of the instrument is called the bearer.
Bearer instrumentA bearer instrument is payable to anyone in physical possession of the
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Creation of Negotiable Instruments
CollateralSecurity against repayment of the note that lenders sometimes require; can be a
car, a house, or other property.
Collateral noteNotes that are secured by personal property are called collateral notes.
ConditionalA promise or an order that is conditional on another promise or event is not
person who held the instrument.
DraftA three-party instrument that is an unconditional written order by one party that
orders the second party to pay money to a third party.
acceptor of a draft.
Drawer of a checkThe checking account holder and writer of the check.
Drawer of a draftThe party who writes the order for a draft.
Fixed amount requirementThe fixed amount requirement ensures that the value of the
instrument can be determined with certainty.
Holder in due courseHolder in due course (HDC) takes the instrument free of many
defenses that can be asserted against the original payee.
Money—A “medium of exchange authorized or adopted by a domestic or foreign
government.”
Mortgage noteNotes that are secured by real estate are called mortgage notes.
Negotiable instrumentA special form of contract that satisfies the requirements established
instruments to subsequent transferees.
Nonnegotiable contractFails to meet the requirements of a negotiable instrument and,
Order instrumentAn instrument is an order instrument if it is payable (1) to the order of an
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Chapter 22
demand or at a definite time.
Payable in foreign currencyThe UCC expressly provides that an instrument may state that
Payable in moneyUCC 3-104(a) provides that the fixed amount of a negotiable instrument
must be payable in money.
demand or at a definite time.
Payable to bearerThe UCC requires that negotiable instruments be either payable to order
or payable to bearer [UCC 3-104(a)(1)].
Payable to orderThe UCC requires that negotiable instruments be either payable to order or
payable to bearer [UCC 3-104(a)(1)].
Payee of a CDThe depositor (lender).
to be easily transported between areas.
Prepayment clauseA clause in an instrument that permits the maker to pay the amount due
prior to the date of the instrument.
Promise to payA maker’s (borrower’s) unconditional and affirmative undertaking to repay
a debt to a payee (lender).
the maker or drawer.
Revised Article 3A comprehensive revision of the UCC law of negotiable instruments that
reflects modern commercial practices.
Sight draftA draft payable on sight. Also called a demand draft.
SignatureThe UCC broadly defines signature as any symbol executed or adopted by a party
as his or her signature.
Small CDCDs under $100,000 are commonly referred to as small CDs.
Substitute for moneyCertain forms of negotiable instrumentssuch as checksserve as
substitutes for money.
Time draftA draft payable at a designated future date.
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Creation of Negotiable Instruments
drawee.
UnconditionalPromises to pay and orders to pay must be unconditional in order for them to
be negotiable.
Unconditional order to payA negotiable instrument must contain either an unconditional
promise to pay (note or CD) or an unconditional order to pay (draft or check).
check).
Variable interest rate loanThese loans tie the interest rate to some set measure, such as a
major bank’s prime rate or another well-known rate.

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