CHAPTER 22
PROMISSORY NOTES AND DRAFTS
Answers to Learning Objectives
1. The maker agrees to pay the note according to its terms, admits the existence of the payee, and
warrants that the payee is competent to transfer the instrument by indorsement. A bond is a written
contract obligation that contains a promise to pay a sum certain in money at a fixed or determinable
future time. A corporation, municipality, or government generally issues a bond. A collateral note is
a note secured by personal property. A real estate mortgage note is a note secured by a mortgage on
Lesson Outline
1. A promissory note is a written promise to pay money at a specified time. The two original parties to
a promissory note are the maker, the one who signs the note and promises to pay, and the payee, the
one to whom the promise is made.
4. The Uniform Commercial Code classifies a certificate of deposit as a note even though it does not
contain the word “promise.”
5. A draft is drawn and executed by the drawer in favor of the payee, who has the drawer’s authority to
collect the amount indicated on the instrument. It is addressed to the drawee, who is ordered by the
drawer to pay the amount of the instrument when the amount is demanded by the payee or some
other party to whom the payee has transferred the instrument by indorsement.
a. If a draft is drawn and payable in the United States, it is called an inland draft.
b. If it is drawn or payable outside the United States, it is called a foreign draft.
6. A sight draft is payable at sight or upon presentation by the payee or holder, while a time draft is
payable a certain time after the date, or after sight rather than at sight.
Chapter 22 Promissory Notes and Drafts
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a. The instrument should be presented at the drawee’s place of business. If there is no business, it
may be presented at the drawee’s home or wherever the drawee may be found.
b. It must be presented to the drawee or to someone authorized either by law or by contract to
accept it.
9. The usual method of accepting a draft is to write the word accepted and the drawee’s name on the
face of the instrument. An oral acceptance is not permissible.
13. A check is a draft drawn on a bank and payable on demand.
14. A check may be certified at the request of either the drawer or the holder. If it is certified at the
request of the holder, the drawer has no further liability if the check is never paid.
15. A cashier’s check is one drawn on the bank’s funds and signed by the cashier or other officer of the
bank.
16. A bank draft, or teller’s check, is a check drawn by one bank on another bank in which it has funds
on deposit.
17. A voucher check is one that has a perforated voucher attached showing why the check is drawn. It
gives a complete record of the transaction.
Comments on Cases
(p. 256) The court pointed out that in determining that the Bauders were makers of the note, the
documents said they were. It concluded that the only reasonable inference which can be drawn
from the record is that the Bauders were principal obligors of the promissory note. Borley
Storage and Transfer Co., Inc. v. Whitted, 710 N.W.2d 71 (Neb.)
84
(p. 262) The court held that because the release agreement did not clearly and unambiguously release the
bank’s right of setoff, that right survived the deed in return for a release transaction, so it was not
wrongful for the bank to stop payment on the teller’s check it erroneously issued to the
Johnsons. In re Johnson, 371 B.R. 336 (Bankr. C.D. Ill.)
(p. 265) The court pointed out that a creditor who held a note secured by a mortgage was not required to
seek a sale of the property. The creditor could seek sale via foreclosure or choose to sue the
debtor. REL Development, Inc. v. Branch Banking & Trust Co., 699 S.E.2d 779 (Ga. Ct. App.)
Answers to Questions
(Page 266)
1. The original parties to a promissory note are the maker, the one who signs the note and promises to
pay, and the payee, the one to whom the promise is made.
2. The maker of a note can he held accountable for agreeing to pay the note according to its terms,
admitting the existence of the payee, and warranting that the payee is competent to transfer the
instrument by indorsement.
transferred the instrument by indorsement.
5. A time draft payable a specified number of days after sight must be presented for acceptance
because the due date is calculated from the date of the acceptance, not from the date of the draft.
6. A trade acceptance is a draft drawn by the seller on the purchaser of goods sold and accepted by
such purchaser.
7. Presentment for acceptance of drafts that are not payable a specified time after sight is optional and
is made merely to determine the intention of the drawee and to give the paper the additional credit
strength of the acceptance.
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11. A traveler’s check differs from a cashier’s check in that it requires signature and countersignature
by its purchaser.
Answers to Case Problems
(Page 266)
1. The bank should not have to pay. The court pointed out that the duty of a person appointed to
administer a decedent’s estate is to take control of the estate’s property. Waiting almost two years to
notify the bank was too long. The UCC requires notification within one year. Jefferson State Bank v.
Lenk, 323 S.W.3d 146 (Tex.)
4. No. The court pointed out that Harris did nothing to accept the check. Before the check was received
it put a freeze on the account meaning it would not automatically accept a check up$2on presentment.
The fact that Harris accepted other checks after the account was frozen did not mean it had to accept
the M&O check. It could accept some and reject others. M&O Insulation Co. v. Harris Bank
Naperville, 783 N.E.2d 635 (Ill. App. Ct.)
6. No. The court stated that Ray’s wishes were carried out as he intended—the CD’s were redeemed so
that Betty could have access to the funds. The CD left to Louise was in her father’s name, payable to
her only on his death so the CD belonged to Ray until he died, and he could do with it as he pleased.
Louise had no claim against the bank for the value of the CD, since she was never its owner.
Gaspard v. Iberia Bank, 953 So.2d 997 (La. Ct. App.)
7. Mrs. Hagel’s testimony that she had “contacted the plaintiff’s bank” and “determined that the check
would not clear” did not establish that a proper presentment for acceptance had been made. A