Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments Chapter 16: Negotiable Instruments & Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments What You’ll Learn How to name the parties to each type of negotiable instrument (pp )

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Why It’s Important Knowing the purpose and types of negotiable instruments will help you manage your financial affairs throughout life.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Purposes of Negotiable Instruments Notes Certificates of Deposit Section Outline Drafts Checks

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What is a negotiable instrument?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments The law of negotiable instruments was developed to allow people to transact business without carrying around large sums of money and to purchase items they will pay for later. Purpose of Negotiable Instruments

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A negotiable instrument is a written document giving special legal rights to the transferee that may be transferred by endorsement or delivery. Purpose of Negotiable Instruments

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments There are two basic kinds of negotiable instruments: Purpose of Negotiable Instruments Notes (including certificates of deposit), and Drafts (including checks)

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What is a note?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A note (often called a promissory note) is a written promise by one person, called the maker, to pay money to another person, called the payee. Notes

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments When two persons sign a note, they are known as comakers. Notes

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A demand note is payable when the payee demands payment. A time note is payable at a future date, which is written on the face of the note. Notes

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 23.1 Demand Note

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A certificate of deposit (CD) is a note provided by a bank. It’s a bank’s written receipt of money and a promise to pay the money back, usually with interest, on the due date. Certificates of Deposit

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments CDs are written for a specific time period such as six months, one year, two years, or five years. Banks pay higher interest on longer- term CDs. Certificates of Deposit

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments The interest paid on a CD is higher than the amount paid on a regular savings or checking account because the depositor cannot withdraw the money before the due date without penalty. Certificates of Deposit

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 23.1 Certificate of Deposit

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A check is a draft drawn on a bank and payable on demand. It is the most common kind of draft in use today. Checks

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments When issuing a check, you put money in the bank and then order the bank to pay your money to others by writing out checks. Checks

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 1. 1.What is the purpose of a negotiable instrument? Section 23.1 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned It allows people to transact business without carrying around large sums of money and to purchase items they will pay for later. Section 23.1 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 2. 2.Name the two basic kinds of negotiable instruments. Section 23.1 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned Notes, including certificates of deposit; and drafts, including checks. Section 23.1 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 3. 3.Define the parties to each kind of negotiable instrument. Section 23.1 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned The note is a written promise by the maker to pay money to another person (payee). When two people sign a note, they are known as comakers. Section 23.1 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned A draft is an instrument in which one party, called the drawer, orders another party, the drawee, to pay money to a third party, the payee. Section 23.1 Assessment Answer

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments End of Section 23.1

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments Section 25.2

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments What You’ll Learn How to state the legal effect of a forged indorsement (p. 550) How to discuss the warranties that you make when you indorse negotiable instruments (p. 550)

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments What You’ll Learn How to explain the contract you make when you indorse negotiable instruments (p. 553)

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Why It’s Important Understanding the types of indorsements will help you handle your finances wisely.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Multiple Payees Forged Indorsements Warranties of Indorsers Contract of Indorsers Section Outline

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What are some different kinds of indorsements?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments An instrument is indorsed when you write your name on it, indicating your intent to transfer ownership to another. Main Kinds of Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Regulation CC, issued by the Federal Reserve Board under the Competitive Banking Act, has established standards for check indorsements. Main Kinds of Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Under the regulation, the back of a check is divided into specific sections designed to protect the indorsement of the depository bank (the bank of first deposit). Main Kinds of Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments There are four principal types of indorsements, and each fulfills a special purpose. Main Kinds of Indorsements Blank indorsements Special indorsements Restrictive indorsements Qualified indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A blank indorsement consists of the signature alone on the instrument. This type indorsement says, in effect, “This instrument may be paid to anyone.” Blank Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 25.2 Blank Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A special indorsement (also called an indorsement in full) is made by writing the words pay to the order of or pay to followed by the name of the person to whom the instrument is to be transferred (the indorsee) and the signature of the indorser. Special Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments When signed this way, the instrument remains an order instrument and must be indorsed by the indorsee before it can be further negotiated. Special Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 25.2 Special Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A restrictive indorsement is one in which words have been added, in addition to the signature of the transferor, to limit its use. An example of a restrictive indorsement is “For deposit only.” Restrictive Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 25.2 Restrictive Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A conditional indorsement, a type of restrictive indorsement, makes the rights of the indorsee subject to a specific event or condition. Conditional Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 25.2 Conditional Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A qualified indorsement is one in which words have been added to the signature to limit the liability of the indorser. Qualified Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments The words without recourse added to an indorsement mean the indorser is not liable in the event the maker or drawer does not pay the instrument. Qualified Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 25.2 Qualified Indorsement

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question How is a check with multiple payees indorsed?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments If an instrument is payable to either of two payees, only one of the payees needs to indorse it to make it negotiable. Multiple Payees

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments However, if an instrument is payable to both of two payees, both payees would need to indorse the check for proper negotiation. Multiple Payees

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Fill in the blanks. 1.A _____ indorsement is one in which words have been added, in addition to the signature of the transferor, to limit its use.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments ANSWER Restrictive

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 2.A _____ indorsement is made by writing the words “pay to the order of” followed by the name of the person to whom the instrument is to be transferred and the signature of the indorser.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments ANSWER Special

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 3.A _____ indorsement consists of the signature alone on the instrument.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments ANSWER Blank

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What happens if an indorsement is forged?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A forged indorsement is not valid, and anyone who takes a forged instrument does not acquire title and is not a holder. Forged Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Anyone who pays an instrument on which there is a forged indorsement is liable to the true owner for the amount of the instrument. Forged Indorsements

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What warranties are made by an indorser?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Warranties of Indorsers To encourage people to accept negotiable instruments from others, a system of implied warranties is part of the law of negotiable instruments.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Indorsers who receive consideration for an instrument make five warranties to subsequent transferees of the instruments. Warranties of Indorsers

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments They warrant that: Warranties of Indorsers 1.They have good title to the instrument. 2.All signatures are genuine or authorized.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Warranties of Indorsers They warrant that: 3.The instrument has not been altered. 4.No defense of any party is good against the indorser.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Warranties of Indorsers They warrant that: 5.They have no knowledge of any bankruptcy proceeding that would affect the instrument.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What is the contract of indorsers?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Contract of Indorsers Unless an indorsement states otherwise, every indorser agrees to pay any subsequent holder the face amount of the instrument if it is dishonored.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Contract of Indorsers To enforce this obligation, the holder must do two things.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Contract of Indorsers 1.He or she must present the instrument for payment to the maker or drawer when it is due. If that person refuses to pay the instrument, it has been dishonored.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Contract of Indorsers 2.The holder must notify indorsers of the dishonor before midnight of the third full business day after the date of the dishonor.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 1. 1.What are the four main kinds of indorsements? Section 25.2 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned Blank, special, restrictive, qualified. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 2. 2.If an instrument is payable to both of two payees, as in the check that is payable to David and Melanie Mueller, who must indorse it? Section 25.2 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned The indorsement of both payees is necessary. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 3. 3.What are the legal effects of a forged instrument? Section 25.2 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned Anyone who takes an instrument after forgery does not acquire title and is not a holder. Anyone who pays an instrument that has been a forged is liable to the true owner. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 4. 4.List the five warranties of indorsers. Section 25.2 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned They warrant that: (1) They have title. (2) All signatures are genuine. (3) The instrument has not been altered. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned (4) No defense of any party is good against the indorser. (5) They have no knowledge of any bankruptcy proceeding that would affect the instrument. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 5. 5.What two things are necessary to enforce the contract of indorsers? Section 25.2 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned (1) The holder must first present the instrument for payment to the maker when it is due. If that person refuses to pay the instrument, it is dishonored. Section 25.2 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned (2) The holder must notify indorsers of the dishonor before midnight of the third full business day after the date of the dishonor. Section 25.2 Assessment Answer

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments End of Section 25.2

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments Section 26.1

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments What You’ll Learn How to determine if a person is a holder in due course (p. 560) How to contrast personal defenses with real defenses (p. 563)

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Why It’s Important Recognizing the parties and defenses to negotiable instruments will keep you alert to problems regarding negotiable instruments.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Holder in Due Course Holder Value Good Faith Without Notice Holder Through a Holder in Due Course Section Outline

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Defenses to Negotiable Instruments Personal Defenses Real Defenses Section Outline

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Pre-Learning Question What is a holder in due course?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A holder in due course is a holder who takes an instrument for value, in good faith, and without notice. Holder in Due Course

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Holders in due course are treated more favorably than holders are. They receive more rights in negotiable instruments. This allows negotiable instruments to be used almost like money. Holder in Due Course

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments To be a holder in due course, you must first be a holder, which means that the instrument must have been issued or indorsed to you, to your order, or to bearer. Holder

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A person must give value for an instrument to qualify as a holder in due course. Value

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments You give value when you give the consideration that was agreed upon or when you accept an instrument in payment of a debt. Value

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments To be a holder in due course, the holder must take the instrument in good faith. Good Faith

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Good faith means honesty in fact and fair dealing. It requires that the taker of a negotiable instrument act honestly. Good Faith

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments To be a holder in due course, a holder must not have notice of any claim or defense to the instrument, or notice that the instrument is overdue or has been dishonored. Without Notice

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A claim is an argument asserted by a person claiming the instrument. A defense is something that is asserted as a reason not to pay it. Without Notice

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments A holder who receives an instrument from a holder in due course acquires the rights of the holder in due course, even though he or she does not qualify as a holder in due course. Holder Through a Holder in Due Course

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments This provision is called a shelter provision. It is designed to permit holders in due course to transfer all of the rights they have in the paper to others. Holder Through a Holder in Due Course

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments This provision does not apply to a holder who has committed fraud or an illegal act. Holder Through a Holder in Due Course

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments 26.1 Holder Through a Holder in Due Course Clara indorsed the check and gave it to her niece as a gift. Clara’s niece is a holder through a holder in due course. Brisa endorsed the check and gave it to Clara in payment for a debt. Clara is a holder in due course. Alfonso wrote a check to Brisa. Brisa is a holder.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Jerome indorses Sani’s check to Jeremy, and Jeremy indorses the check to his credit card company. Who is (are) the holder(s) in due course? Why?

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments ANSWER Jeremy and the credit card company are holders in due course because they both gave value.

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 1. 1.What requirements must a holder in due course meet? Section 26.1 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned Must be a holder, must give value for the instrument, must take the instrument in good faith, and must take the instrument without notice. Section 26.1 Assessment Answer

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned 2. 2.What is the difference between a personal defense and a real defense? Provide an example of each. Section 26.1 Assessment

Understanding Business and Personal Law Purpose and Types of Negotiable Instruments Section 23.1 Negotiable Instruments Reviewing What You Learned A personal defense can be used against a holder, but not a holder in due course. A real defense can be used against anyone. Section 26.1 Assessment Answer

Purpose and Types of Negotiable Instruments Purpose and Types of Negotiable Instruments End of Section 26.1