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Management 3540 chapter 24 and 25


undefined, object
copy deck
Most common commercial paper
Order paper
contains an order by one person for another to pay
3 parties involved in an order paper
Drawer- person signing order paper
Drawee- Person ordered to pay
Payee- named person who is originally to be paid
order issued by drawer for a drawee to pay
Draft payable onn demand in which a bank is drawee
Promise paper
contains a promise by one party to pay another
2 parties involved in promise paper
Maker- person who promises to pay

Payee- person to whom the promise is made
Promissory note
Type of promise paper

Promise by maker to pay a sum of money to payee at a future time
Certificate of deposit
Note of bank acknowledging deposit and promising to pay at future time with interest
person in possesion of properly negotiated negotiable instrument- properly transferred from one owner to another.
6 requirements for negotiability
1. Must be an instrument in writing
2. Must be signed by maker or drawer
3. Must contain uncoditional, un-equivocal promise or order to pay
4. Must contain a sum certain in money
5. Payment must be due on demand or at definite time
6. Must be payable to order or bearer
first delivery
delivery from orginal maker or drawer to payee is sufficient to negotiate the instrument and transfer legal title. The transferee beccomes the holder.
After first delivery
bearer instrument: physical delivery alone still negotiates the instrument

Order instrument: physical delivery and a necessary endorsement by transferor negotiates the instrument
could be payee

could be indorsee- person to whom previously indorsed.
signature of a transferor, usually on the back of an instrument
Parties in an indorsement
transferor- indorser

transferee (recipient)- indorsee
Indorsement required
Indorsement is required for transfer if instrument is payable to a named payee or indorsee
Indorsement not required
If payable to bearer or indorsed in bank, indorsement not required, but transferee may request that transferor sign it. Physical delivery negotiates a bearer instrument
Multiple payees- alternative payees
Pay A or B

Either may indorse to negotiate
Multiple payees- joint payees
Pay A and B

Both must indorse to negotiate
indorser liability
Indorsers are typically secondarily liable on the instrument, that is if drawer or payee doesn't pay.

If you simply indorse, you are liable
Blank indorsement
Holder signs name only- paper becomes bearer instrument: delivery alone enough to negotiate.
Special endorsement
Payable to specific (named) person (indorsee)

Can convert bearer instrument to order instrument by special indorsement
Qualified indorsement
Indorser signs words "without recourse"

Indorser not liable if instrument not paid.
Restrictive indorsements
Restricts rights of indorsee

conditional indorsement (pay x if x delivers goods)

"For deposit only"- bank must be collection agent

Trust indorsement- "to John IN TRUST for Phillip"
Forged indorsement
Person who received tthe instrument from the forger bears the loss if the forger does not pay.
Holder in due course
A holder who takes:
-For value (pay $ or provide services)

-In good faith
Honestly believes instrument is ordinary
Inadequate consideration destroys good faith

-Without notice of defenses
that instument overdue, illegal, altered, time past or demand already made
Common law transferee
A common law transferee took no right defense greater than the transferor had
a holder in due course is free of...
-Breach of contract or warranty
-Fraud in the inducement
-Failure of consideration
Holder in due course defenses
- Fraud in the execution
- Duress
- Incapacity, Illegality
- forgery or alteration
- Discharge in bankruptcy

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