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Know Your Endorsements!

Know Your Endorsements!

Blank Endorsements
Blank endorsements are a very basic form of endorsement, which do not involve any kind of stipulation in the endorsement. A blank endorsement is just a signature on a check or other form of negotiable instrument. Blank endorsements are commonly used all throughout both business worlds and everyday life. But blank endorsements bear with them certain clear problems, as a check endorsed with a blank endorsement becomes a bearer instrument allowing anyone to present it for payment.

Special Endorsements
Unlike blank endorsements, special endorsements do identify the party to whom the negotiable instrument is being transferred. These endorsements add another “Pay to the order of….” clause which do not affect the negotiability of the instrument.

Qualified Endorsements
Qualified endorsements are a type of endorsement used to protect the endorser from any restrictions.

Restrictive Endorsements
Restrictive endorsements are similar to special endorsements in that they include clauses in the endorsement which limit the use of those endorsements. But the difference lies in that while special endorsements simply restrict the party to whom the negotiable instrument is endorsed, restrictive endorsements provide special conditions which must be followed for the endorsement to be upheld.
The primary issue that would seem to immediately arise with endorsements of this type is that they would seem to negate one of the basic necessities of negotiable instruments. Negotiable instruments must be unconditional promises to pay, and adding conditions through a restrictive endorsement would seem to violate this aspect of negotiable instruments, making any instrument with such an endorsement non-negotiable. But this is not true, as restrictive endorsements take specific forms which are allowable under the terms of negotiable instruments.
The first form of restrictive endorsement that one might see is an endorsement which would prevent any further endorsement of that instrument. This type of endorsement would generally take the form of the phrase “Pay to [x] only,” instead of special endorsements’ more typical “Pay to [x]”. But this additional “only” does not actually add any greater effect than a special endorsement, as the person to whom it is being endorsed would actually then still be able to negotiate the instrument to other holders.
Next are conditional endorsements of the type which come to mind when thinking of ways that would violate negotiability. Adding clauses such as “Pay to [x] if she finishes painting my bathroom by January 1, 2011,” along with a signature would at first glance appear to violate the unconditional nature of negotiable instruments.
Another type of restrictive endorsement involves those endorsements made for collection or deposit only. This type of restrictive endorsement simply defines the way in which the endorsed negotiable instrument can be used and is generally only employed with relation to either collecting agents or banks. Adding the clause of “For Deposit Only” to a negotiable instrument, for example, would ensure that the instrument could only be deposited with the bank and could go to no other purpose. It furthermore would ensure that the next holder of the check after the endorser who added the “For Deposit Only” clause would have to be a bank. Adding the account number into which the check was to be deposited would also restrict the check even further.
The final type of restrictive endorsement is that of a trust endorsement, which fills a role similar to the intermediary role involved in qualified endorsements. A trust endorsement allows one person to give a negotiable instrument to another on the express conditions that this second person or party use the instrument only for the benefit of the original party.
This is the type of endorsement that would be used when having an agent perform monetary tasks on the behalf of the original endorser. The endorsee receiving the instrument would gain rights to that instrument, effectively becoming its holder, but only insofar as that endorsee uses the instrument in accordance with the restrictive endorsement. If the instrument were to be negotiated to another party, then the requirements of the trust endorsement would not transfer with the instrument unless specifically cited in the subsequent endorsement.

Transferring Order and Bearer Instruments
Negotiating a  negotiable instrument to a new holder is a process that takes its form depending upon exactly what type of negotiable instrument that particular instrument may be. A bearer instrument is easily transferred from holder to holder, as the only necessary element of being a holder for a bearer instrument is the actual physical possession of the instrument. If one holder gives a new holder the physical instrument, then holder-ship would have transferred.
For an order instrument, on the other hand, the only way to transfer the instrument to a new holder is to endorse that instrument over, whether through a blank endorsement, a special endorsement, or any other form of endorsement. 
Instruments can also be transferred by converting them from an order instrument into a bearer instrument, and vice versa. An order instrument, for example, could be converted into a bearer instrument by the introduction of a non-specific endorsement to the instrument. At that point, negotiation of the instrument would require only physically exchanging the instrument, as opposed to endorsing it over to a new holder.
A bearer instrument, on the other hand, might be modified by a special endorsement, even if it were originally a “pay to cash” instrument, thereby superseding the “pay to cash” and changing the instrument into an order instrument. The instrument could then only be negotiated to a new party through endorsement.

Endorsement Issues
There are many possible issues that might arise with any kind of endorsement, many of which likely arise from confusion regarding mistakes or slightly ambiguous terms. As an example, one of the foremost issues arising around endorsements is that of simply misspelled names on the instrument.
A misspelled name would seem to cause problems because the instrument would then appear to be made out to the incorrect individual. But the problem is easily remedied, as the intended party can actually still endorse the negotiable instrument using the misspelled name, the correct name, or even both. Common practice is actually to use both, endorsing with the misspelled name first and then listing the correct spelling beneath it.
Another problem that often arises regarding negotiable instruments is when those instruments are made payable to a larger entity, as opposed to a single individual. In such a case, when the instrument is payable to an organization, at first glance it is unclear who can endorse the instrument.
But a legally authorized representative of the organization can endorse the instrument and negotiate it, even though he or she is not technically the party to whom the instrument was made payable. This also carries truth with regard to public offices, as an instrument can be made payable to an office; the individual holding that office at any given time could then endorse that instrument.
The other main surmountable issue for negotiable instruments involves the method for dealing with alternative or joint payees. An instrument is payable “in the alternative”, and therefore, to “alternative payees,” if it is specially endorsed to two individuals or parties with the “or” conjunction used in the endorsement clause. For example, if the endorsement read, “Pay to the order of Patrick or Werner,” then Patrick and Werner are alternative payees for the instrument.
With alternative payees, only one of the two mentioned parties needs to endorse the instrument. If the instrument is instead made payable to two or more individuals or parties jointly, however, then all listed parties would have to endorse the instrument. A joint endorsement would read as follows: “Pay to the order of Patrick and Werner.” In this case, both Patrick and Werner would have to endorse the instrument. If multiple individuals or parties are mentioned, but the relationship is not specified to be either alternatively payable or jointly payable, then it defaults to being alternatively payable.
The above are common issues of confusion that may arise surrounding negotiable instruments, but all of which have a clear solution. There are other issues regarding negotiable instruments, such as theft of bearer instruments or forged or unauthorized endorsements. But these are major criminal issues, separate from the issues of confusion discussed above.

What Will Not Affect Negotiability?

What Will Not Affect Negotiability?

The first important factor that might, at
first glance, appear to affect negotiability of negotiable instruments, but is
in fact exempt under the
Uniform Commercial Code (UCC), is the date on the face of the instrument, or even
whether or not the instrument is undated. Business negotiations are often
extended proceedings and the exact date on which a negotiable instrument will
be marked may vary widely. Some might be worried that the UCC contains
provisions which would significantly concern the date attached to the
negotiable instrument
.  

Next, as business negotiations are often
lengthy, sometime
s negotiable instruments will be modified
after they are initially drawn up. This will often involve typewritten addenda
or alterations to the negotiable instrument
. Even handwritten notes make make their way
onto a given negotiable instrument. Many in business negotiations would then
worry that the negotiability of the instrument would be compromised under the
UCC. But in fact, these alterations are generally acceptable and do not
undermine the overall negotiability of the instruments. Some alterations might
affect the negotiability of the instrument, depending upon the exact content of
those notes
. 

Leaving out certain pieces of information
will likewise do nothing to prevent an instrument from being considered
negotiable. For all that business negotiations seek comprehensiveness,
sometimes information will be left out of such a negotiable instrument
s. In other instances, such information will purposely be
left out, such that those values will default to whatever is listed or
determined by the UCC.

Finally, if the negotiable instrument specifically has a note on it that
says that it is “non
negotiable” or “not governed by Article 3,” it still may
remain negotiable if it is a check. Such notes would not
affect a check’s negotiability because a check is a specifically defined form
of negotiable instrument. Any other negotiable instrument, however, might be
made non
negotiable.

Negotiating Order and Bearer Instruments

Negotiating Order and Bearer Instruments

For negotiable instruments which are payable to order, any form of negotiation requires the payee to endorse the instrument to the new holder. This would involve the payee with signature liability.
There are many different types of endorsement which can be used when transferring a payable to order negotiable instrument. Sometimes, one will endorse such an instrument while also adding instructions on how that instrument must be used. This type of endorsement would still act as a transfer of holder, but would require the new holder to act in compliance with these instructions.
Those negotiable instruments which are payable to bearer have a significantly simpler mechanism for negotiation. Instead of needing to endorse such instruments through written annotations on the instrument, one can simply hand another individual an instrument which is payable to bearer in order to endorse it. 
The holder of a payable to bearer instrument is always the bearer of that instrument, so simply changing the bearer is enough to change the holder and negotiate the instrument to another. No other form of endorsement is needed. This is simultaneously the strength and flaw of the payable to bearer instrument, as such an instrument can effectively be “negotiated” through theft or misappropriation of a purely physical nature, while payable to order instruments need endorsements to negotiate transfer, and therefore, are significantly safer forms of payment.

Understanding Promissory Note

Understanding Promissory Note

A promissory note is a form of negotiable instrument which is differentiated from drafts in its elements and function. The two primary forms of negotiable instrument are drafts and notes, with the difference being that promissory notes are promises, not orders like drafts. An order, by definition, involves three parties, while a promissory note need only involve two parties, the maker and the payee. A promissory note also serves a very different function from drafts, as promissory notes are focused on obligations and debts, instead of simply on payments.
When an individual takes out a loan, be it from a bank or another individual, promissory notes are a common way of representing that loan in official terms, such that the person taking out the loan will promise to repay the loan with whatever interest is agreed upon. This is because promissory notes are used to indicate a promise of later payment in no uncertain terms. Promissory notes do not simply indicate an obligation or a debt; they contain the clear and specific terms of monetary payment for a given debt.
Promissory notes are most often used in either business practices, as a means for a given company to obtain capital, or in real estate transactions, as a way for home purchasers to finance the transaction. The promissory note in the latter situation would likely include the amount of the loan offered for the sake of purchasing the house, along with the interest rate for that loan and the date when it might mature.
Government restriction on promissory notes is actually somewhat more stringent than one would expect, as promissory notes could actually serve the function of a rudimentary form of private currency. In their original forms, this was exactly what promissory notes did: allowing individuals to make transactions with each other without needing to resort to any form of official Government currency.
Technically, the paper money that is used all throughout modern financial transactions is actually a form of promissory note, as it is a guarantee that a Government-sanctioned bank will pay the bearer of the promissory note some amount of money on demand. This was especially true of banknotes in the time when they could be exchanged for actual gold, as they were very much promissory notes, indicating a debt of gold.
In the modern world, this is no longer the case, but banknotes and paper currency remain a form of promissory note, evidenced by nothing so much as the fact that so many transactions occur without any kind of exchange of paper money. A banknote in the modern world is, frome one point of view, a promissory note that the bank will provide the holder with a certain amount of money recorded in a bank account which the holder can then use for other transactions.

The Key Facts on Trade Acceptances

The Key Facts on Trade Acceptances

Trade acceptances are a specific type of acceptance made on a draft negotiable instrument. Trade acceptances are specifically a type of acceptance, or a promise to pay, made by a finance company. Generally speaking, trade acceptances are made when a company agrees to pay another company at some later date for an exchange of goods.
The key elements of any given trade acceptance are the draft and the acceptance. The draft, or time draft to be more specific, is the negotiable instrument itself, the document on which the drawer orders the drawee to give funds to the payee. The acceptance is the sign that the drawee has accepted the draft and agreed to pay the funds guaranteed on the date provided. Trade acceptances rely on this acceptance element in order to validate the entire negotiable instrument.
Trade acceptances are differentiated from bank acceptances in that, in a bank acceptance, the accepting party is the bank itself. This often means that on the negotiable instrument, the drawee is the bank and the bank is accepting that on a given date, it will supply money to the payee from the drawer’s account.
Trade acceptances, on the other hand, involve a finance company accepting the negotiable instrument’s terms. This means that the money will be coming from the finance company itself, and not from a bank. The finance company may secure funds from a bank separate to the negotiable instrument in order to pay for the trade acceptance, and it may provide verification of such funding in order to further support the trade acceptances it makes.
But this does not change the fact that the finance company is the one accepting the trade acceptances because the finance company will be the drawee from which funds are being drawn to pay the payee.
Trade acceptances are distinguished from other types of negotiable instruments, such as promissory notes. Promissory notes are used for entirely different purposes than trade acceptances. Promissory notes are generally drawn up by the “buyer” in a given relationship to indicate that the buyer is settling a debt from a past transaction, or that the buyer is taking out a loan and promises to eventually pay it back.  
Trade acceptances, on the other hand, are drawn up by the “seller” in order to ensure that the buyer will pay the seller at a certain point in time. Trade acceptances are also separate from other forms of negotiable instruments in that they are not entirely negotiable, as trade acceptances are not used for paying off debts or otherwise fulfilling past obligations; they deal specifically with a certain given sale.

Know Your Checks and Drafts

Know Your Checks and Drafts

Time and Sight Drafts
Drafts are a specific form of negotiable instrument which involves three parties: a drawer, a drawee, and a payee. Time and sight drafts are even more specified forms of drafts. The defining quality of these drafts is the availability of payment to the payee as established under the draft.
Time drafts only make payment available after a certain, predefined amount of time, or after certain conditions are fulfilled, or even after a combination of the two elements. Sight drafts, on the other hand, are immediately payable upon presentation of the draft to the drawee. The difference in form is significant, as sight drafts allow for quicker, easier transactions, but they also do not allow for as much regulations as do time drafts. Time drafts are often more complex, and in their complexity, allow for some forms of misuse, but they in general are more effective at protecting the seller in a given transaction.
Sight drafts are most often used in simpler transactions, often between two individuals, as opposed to business transactions between two parties. Time drafts, on the other hand, are often used in business, especially in shipping transactions in which the seller does not want to transfer ownership of shipped goods to the buyer until the buyer has made full payment for those goods. To learn more about the benefits and drawbacks of both time and sight drafts, follow the link.


Trade Acceptances
Trade acceptances are an important component of many draft-based transactions. In a draft transaction, because payment is not coming to the payee directly from the drawer, but is instead coming from the drawee, it is possible for the payee to be effectively swindled in the transaction if the draft is not accepted by the drawee. Acceptances, thus, play an important role in any such transaction, as they indicate acceptance of the transaction on the part of the paying party.
Acceptances are used almost exclusively in time draft transactions, as time drafts require the drawee to acknowledge that when the conditions stated under the time draft are fulfilled, then the drawee will transfer payment to the payee. The advantage of such acceptances is that they allow for funds which would otherwise be tied up in simply waiting for the conditions to be fulfilled to instead be liquidated and used.
Trade acceptances are differentiated from bank acceptances in that trade acceptances involve a finance company as the accepting drawee, while bank acceptances involve a bank as the drawee. To find out more about trade acceptances and their use, click the link.

Checks
Checks are one particular form of negotiable instrument with which most people are likely familiar. Specifically, checks are drafts, not promissory notes, as they involve three parties and are orders to pay, not promises to compensate. Checks are also defined under the Uniform Commercial Code as being those drafts in which the drawee is a bank. This understanding of a check is actually a modern concept, as checks in their original form existed independently of the banks and were closer to promissory notes than they were to drafts.
Banks were introduced into the system of checks in order to better validate checks, as prior to the introduction of banks, the payee of a check would have to take up actual payment with the payer of the check as opposed to an intermediary organization.  
Checks have several specific forms of their own, to further describe what types of checks might be used under the Uniform Commercial Code, but in general, checks are used less for business transactions and more for personal business, as the most common form of check is the order check, with which most check users are familiar.
Since the advent of faster, digital forms of payment and other such improvements to the banking system, such as Automatic Teller Machines, use of checks has declined, both because they are generally slower to use, and they are more costly for both the providing bank and the drawer. To find out more about the specific characteristics of checks, follow the link.

How to Use Time and Sight Drafts

How to Use Time and Sight Drafts

Two specialized forms of drafts which are often used in business dealings are time drafts and sight drafts. Each has a specific function. Sight drafts are the most familiar kind of draft, as a sight draft would be a check. The characteristics of a sight draft include those of all drafts, with the distinguishing trait that sight drafts are always payable when presented, in a manner somewhat akin to bearer instruments. This means that upon the presentation of such sight draft, the drawee would be required to immediately pay the presenter without any substantial delay.
Sight drafts are most often used for those interpersonal payments or in shipping transactions, for example, when the seller does not want the buyer to gain control of the shipment until payment has been made. In such an instance, a sight draft would ensure that the seller would have an immediately payable draft before transferring title of the goods to the buyer.
A time draft is differentiated from a sight draft by the fact that it has a set payment date some time in the future, as opposed to immediately upon presentation of the draft. A time draft does not have to be set for a specific date. It can instead be set so that it is only payable upon the fulfilment of certain conditions. The point of a time draft is to delay any form of payment until certain actions will likely have occurred.
For instance, a common form of a time draft would involve the buyer in the previous example establishing a time draft under which payment only becomes available 30 days after the shipment has arrived and the title of the goods has been transferred. The date on which the time draft becomes available for payment is the date on which it “matures”. In between the initial issuance of the time draft and its maturation date, the payee may actually take the time draft to the drawee to ensure that it is accepted.
This is, of course, only possible if the drawee is not the same party as the drawer. But if that is the case, then the drawee can “accept” the time draft, thereby accepting responsibility to make the payment to the payee when the time draft matures. This occurs frequently with time drafts involving banks. It is less likely that the average person will have much experience in dealing with, or need to use, a time draft.
Time drafts are the only type of draft used with acceptances. Acceptances are used, as in the above example, when the drawee of a draft negotiable instrument “accepts” the draft, essentially promising the payee that it will provide payment to the payee upon satisfaction of the terms in the draft. A sight draft would never require such an acceptance, however, as a sight draft would always require the drawee to pay the payee presenting the sight draft.
The only validation for payment on a sight draft is the presence of the sight draft itself. A time draft, however, with its possible conditions for the actual transfer of funds, would benefit from the use of an acceptance, as acceptances validate time drafts, ensuring that the payee will receive funds as soon as the conditions of the time draft are met.