CHAPTER XXXV.
COMMERCIAL PAPER.
Kinds and Uses.—If a man wishes to buy some commodity from another but has not the money to pay for it, he may secure what he wants by giving his written promise to pay at some future time. This written promise, or note, the seller prefers to an oral promise for several reasons, only two of which need be mentioned here: first, because it is prima facie evidence of the debt; and, second, because it may be more easily transferred or handed over to some one else.
If J.M. Johnson, of Saint Paul, owes C.M. Jones, of Chicago, a hundred dollars, and Nelson Blake, of Chicago, owes J.M. Johnson a hundred dollars, it is plain that the risk, expense, time and trouble of sending the money to and from Chicago may be avoided, and the indebtedness wiped out by J.M. Johnson ordering Nelson Blake to pay the hundred dollars to C.M. Jones. The written order to this effect, called a draft, would be sent to C.M. Jones, who would present it for payment to Nelson Blake, and upon receiving his money would turn the draft over to Blake.
To avoid the risk of being robbed, merchants and some others are in the habit of depositing each evening in a bank the receipts of the day, with the understanding that the money will be paid out, at any time, to any person whom they order it paid to. The order on the bank is called a check.
It is very easy to see that these three devices are of immense value to the commercial world; the first by rendering available future resources, and the other two by enabling payments to be made safely.
Definitions.—A note is an unconditional promise in writing, to pay a definite sum of money at a certain time to a specified person.
A draft is an order, written by one person and addressed to another, directing him to pay a definite sum of money at a certain time to a specified third party.
A check is a draft for immediate payment, drawn upon a bank or banker.
In the case of a note, the person who promises to pay is called the maker of the note; and the person named to be paid, the payee.
In the case of a draft or check, the person ordering the payment is called the drawer; the person addressed, the person drawn upon or the drawee; and the person to be paid, the payee.
Negotiability.—The payee in any of these cases may wish to transfer the paper to some other person. For instance, the holder of the note may wish to use the money before it is due, or the payee of a draft may wish to realize without going to the drawee. In either case, the desired accommodation can be secured only by selling the paper to some one else. This ability to be transferred is part of what is meant by the term negotiability.
But this liability to have to pay another person than the one named, cannot be imposed upon the maker or drawer without his consent. This he gives by inserting after the name of the payee the words "or order," or the words "or bearer." In the latter case, whoever holds the paper when it becomes due can collect upon it. In case the former words are used, the paper can be transferred only by indorsement, of which more anon.
A very important characteristic of negotiability is that it enables a person to grant to another rights which he may not himself possess. To illustrate: As between the maker and the payee, a note is a contract, and is binding only if it has all the requisites of a binding contract. Therefore, if there was no consideration, or if the note was obtained by fraud or by intimidation, the payee, knowing these facts, has no right to collect upon the note, and he could not by law compel payment. But with a third party it is different. He sees only the note, and may not— presumably does not—know anything else about the contract. To compel him before buying the note to learn all the details of its history, might be embarrassing to the parties, even where everything is all right, and would certainly delay, perhaps materially, the transfer. Therefore, to enable people to keep their business to themselves, and to facilitate transfers of commercial paper, it has seemed best not to require this investigation. The law presumes that when a person makes a transferable note, he has done so deliberately; and if loss ensues, it says that he must bear it rather than the innocent purchaser of his note.
Conditions of Negotiability.—But this peculiar protection is given, be it observed, only to an innocent purchaser. If in good faith, in the regular course of business, a person comes into possession of commercial paper, negotiable in form, not yet mature, and for which he has given a reasonable consideration, he can collect on it. On the other hand, if he has found the paper or stolen it, or if he has bought it under circumstances calculated to raise a suspicion as to right of the seller, he should not have, and will not by law receive, this privilege. Thus if a man is offered commercial paper of perfectly responsible parties at one-third its value, it would be reasonable to suppose that the person offering it had found or stolen it, and the buyer would obtain only the rights of the person from whom he bought. Or if a note past due is offered for sale, the presumption is that it is paid or that it is for some reason uncollectable, and the purchaser would buy at his peril. In other words, if there is anything on the face of the paper or in the circumstances of the case to warn the purchaser, he buys at his own risk, and secures only such rights as the vendor has.
Transfer.—Negotiable paper with the words "or bearer" is transferable by delivery alone. If made payable to some person "or order," it is transferable only by his indorsement. An "indorsement in full" consists of the signature of the payee and his order that the money be paid to a specified person. An "indorsement in blank" consists simply of the signature of the payee. The effect of the latter mode of indorsing is to make the paper payable to bearer.
Responsibility of Maker.—A note being a contract, the maker of one is responsible to the payee, as has been said, only if all the requisites of a binding contract are present. If the note is negotiable in form, he is responsible to the innocent purchaser of it.
Responsibility of Drawee.—The person drawn upon may know nothing of the draft. He cannot be made a party to a contract without his knowledge and consent. That he may have knowledge of the draft, it must be presented to him. If upon seeing it he is willing to assume the responsibility of paying it when due, he signifies his willingness by writing across the face of the draft the word "accepted," with the date of presentation and his name. The draft thereby becomes his unconditional promise, and he becomes the principal debtor, occupying the position of a maker of a note.
Responsibility of Indorser.—When a person endorses any commercial paper, he not only expresses thereby his consent to the transfer of it, but he also enters into a conditional contract with each person who may afterward come into possession of the paper, whereby he becomes responsible for its payment, if the principal debtor fails to meet his obligation. To fix responsibility upon an indorser, payment must be demanded of the principal debtor on the very day when the obligation matures, and if payment is not made notice of the fact must be sent to the indorser before the end of the following day.
Responsibility of Drawer.—Between the drawer and the payee a draft is a conditional contract, whereby the former impliedly agrees to pay the draft if the person drawn upon does not. His obligation is that of a surety or first indorser. To fix responsibility upon the drawer, the holder of the draft must promptly present it for acceptance to the person drawn upon; then, if it is not accepted, he must immediately notify the drawer.
Forged Paper.—Forgery is the fraudulent making or altering of a written instrument. One whose name is forged cannot be made responsible, since the act is not his. And since money paid under a mistake must be refunded, a person who, deceived by the skill of the forger, should pay the seeming obligation, would be entitled to get his money back.
But every person is bound to use reasonable effort to prevent forgery. Thus, if a merchant writes out a note all but the amount, and authorizes a clerk to put that in at some other time, and the clerk inserts a larger sum, any innocent purchaser can compel the merchant to pay the full amount. In some states it is held that a person who leaves space in an obligation wherein the amount can readily be raised, is bound to stand the loss caused by his negligence.
Accommodation Paper.—A man may be perfectly willing to lend a friend some money and yet be unable to do so. He may, however, in any one of several ways, make it possible for his friend to obtain the money. Thus A, wishing to accommodate his friend B, may make a note payable to B's order; or he may endorse B's note; or he may make a draft payable to B's order; or he may accept B's draft on him. By selling the paper, B secures the money desired. The implied contract between A and B is that B will pay the obligation.
In none of these cases could B compel A to pay him any money, because the contract between them lacks consideration. But A would be responsible to an innocent purchaser, because there is nothing on the face of the paper to indicate the defect. And he would be responsible even to a purchaser who knows the paper to be accommodation, because by signing he binds himself to pay if B does not, and his signature is what enables the sale to be made.
Certified Checks.—Business men make most of their payments by check. If the receiver of a check does not, for any reason, wish the money, he may deposit the check in the bank as if it were cash. If he is going away from home, or if he wishes to make a payment in some other place, he may save the expense of a draft, and make a check equally as acceptable, by getting the cashier of the bank to "certify" it, that is to state officially that the drawer has the money in the bank. This he does by writing across the face of the draft the word "Good," with his signature as cashier. When this is done the responsibility rests primarily on the bank. It occupies the position of the acceptor of a draft.
Pertinent Questions.
Two of the following are valid notes; which two? The others are not; Why? 1. March 5, 1890, I promise to pay John Smith one hundred dollars, if he is then living.—William Jones. 2. On or before March 5, 1890, I promise to pay John Smith one hundred bushels of wheat.—William Jones. 3. On March 5, 1890, I promise to pay John Smith whatever is then due him.— William Jones. 4. When he comes of age, I promise to pay John Smith one hundred dollars.—William Jones. 5. March 5, 1890, I promise to pay one hundred dollars.—William Jones. 6. One year after date, I promise to pay to John Smith one hundred dollars.—William Jones. 7. Mankato, Minn., December 11, 1888. One year after date I promise to pay John Smith one hundred dollars. 8. On the death of his father, I promise to pay John Smith one hundred dollars.—William Jones. 9. On March 5, 1890, I, William Jones, promise to pay John Smith one hundred dollars.
How many parties may there be to a note? How many, at least, must there be? As between them, must there be consideration to make it binding? Must the words "for value received" appear on the note? A note being a contract, what things are necessary to make it binding? Write two valid notes in different forms. Write a negotiable note transferable without indorsement. A note transferable by indorsement. Which is safer to carry in the pocket? Why? Which imposes the less responsibility if transferred? If you were taking a note payable to bearer, would you require the person from whom you were getting it to indorse it? A man has some non-negotiable notes; if he dies can his heir collect them? A note payable "to order" is indorsed in blank; to whom is it payable? May a note payable "to bearer" be made payable only "to order?" When does a note cease to be negotiable? Under what circumstances may a person have to pay a note which he has already paid? What is a "greenback?"
How many persons, at least, must there be to an accepted draft? When does the responsibility of the drawer begin? That of the person drawn upon? How does the acceptance of a draft affect the responsibility of the drawer? If the draft is not accepted, to whom shall the holder look for pay? Are drafts negotiable before acceptance?
Compare and contrast a note and a draft. A draft and a check. Is the bank under any obligation to the holder of an uncertified check? Does certifying a check release the drawer of it? Are checks negotiable?
What responsibility does an indorser assume in case of a note? Of an unaccepted draft? Of an accepted draft? Of a check? What does "without recourse" mean? To how many persons is the maker of a note responsible? The first indorser? The second? How can the first indorser be distinguished from the second? To whom is the second indorser not responsible?
Who are not responsible to the holder of a negotiable paper unless notified? Who are responsible without notice? What principle do you discover? When is a demand note due? A check? A time note? A sight draft? A time draft?
What should you do, and why, in the following cases:
1. When you pay a note? 2. When you make a partial payment on a note? 3. If you should lose a note? 4. If you have a note without indorsees, to render the maker responsible? 5. If you hold a note having indorsers, to render the indorsers responsible? 6. If you hold an unaccepted draft? 7. In case acceptance is refused? 8. If you hold an accepted draft? 9. If the acceptor fails to pay when the paper becomes due? 10. If you hold an uncertified check, in order to render the drawer responsible? 11. If it is indorsed, to make the indorsers responsible? 12. If you have a certified check, to make the bank responsible? 13. If you are a third indorser of a note, whom can you hold responsible in case the paper is dishonored, and how? 14. If you have a bearer note and you wish to transfer it without assuming responsibility? 15. How if it is an order note?