Business Scenario 25-4 Bearer Instruments

Facts:

Adam still writes checks to issue out funds; his checks display the words,
Pay to the order of, followed by a blank space. Typically, Adam designates a
specific amount on the check, but he does not indicate a name or anything else in
the blank space following the aforementioned phrase. Adam writes a check and
gives one to Beth. Adam writes another check, but different from the one he issued
to Beth, Adam writes the words, Carl or the bearer, on this new check.

Issue:

It is important to distinguish which of Adams two checks is a bearer instrument

and what characteristics of the said check make it a bearer instrument.

Rule:

A negotiable instrument is a means for providing funds in lieu of

cash (Clarkson, 2015). Many business entities around the world operate on
numerous types of negotiable instruments on a day-to-day basis, whether through
interacting with customers, paying salaries to their employees, paying off debts to
creditors, purchasing raw or developed materials from supplies, etc. (Clarkson,
2015). There are several types of popular negotiable instruments (Clarkson, 2015).
Two kinds include an order instrument and a bearer instrument (Clarkson, 2015).
In both cases, a negotiable instrument must have freedom of transfer at the time of
its issuance, which is critical or else it is not a negotiable instrument (Clarkson,
2015). The negotiable instrument must be payable to order or to a bearer once
the check is written or handed off to the holder (Clarkson, 2015).

An order instrument is a negotiable instrument in which it is ordered to a

specifically identified person or order as determined by the maker or drawer of the
order instrument (Clarkson, 2015). Once the identified person receives the check,
they may in turn transfer the check to anyone they please. This principle ensures
that the instrument retains its ease of transferability (Clarkson, 2015). Typically, in
order for the negotiable instrument to run, the bearer must be certainly identified,
for then the identified person has to include their indorsement of the instrument by
signing the back of the check upon receipt (Clarkson, 2015). If the designation of
an instrument is to the most beautiful woman in the world, this negotiable
instrument is invalid because no one can legally sign this moniker on the back of a
check (Clarkson, 2015).
 In contrast to the order instrument, a bearer instrument does not specify
any person or payee (Clarkson, 2015). A bearer is the payee who holds the
negotiable instrument that is payable to the bearer and can subsequently put forth
their indorsement (Clarkson, 2015). Therefore, the drawer of the bearer instrument
agrees to pay whoever possesses said instrument (Clarkson, 2015). This principle
allows a wide scope of designees on a bearer instrument; for instance, a bearer
instrument can validly pay by designating pay to cash, pay to Mr. X or bearer,
pay to the order of bearer, etc. (Clarkson, 2015). In order for the bearer
instrument to be valid, the bearer instrument must be in writing, must be signed by
the maker, must be an unconditional promise to pay, must be a fixed amount of
money, must be payable at a certain time or on demand, and must be payable to the
bearer (Clarkson, 2015).

It is important to distinguish types of negotiable instruments (Cornell,

2017). Per the Uniform Commercial Code, the bearer of the instrument may face an
overdue payment, so they must present a valid and complete instrument in front of
the courts in order to win their case (Cornell, 2017). Moreover, the bearer
instrument may be incomplete or have contradictory terms; therefore, it is
important for the designated person or the bearer to be fully aware of the terms of
the instrument (Cornell, 2017). Also, some instruments may face a statute of
limitations on their payment validity; in some cases, the statute is six years, and in
other cases, the statute is 10 years depending on the type of instrument in question
(Cornell, 2017). Other agreements may also bar or change the terms of the bearer
instrument (Cornell, 2017). Also, it is important to check the validity and
authorization of the designators signature on the check (Cornell, 2017).

Analysis:

In both cases, the checks that Adam proffers to both Beth and Carl are
valid bearer instruments. Both checks are in writing, are signed by the maker
Adam, are an unconditional promise to pay, are in a fixed amount of money, are
payable at a certain time or on demand, and are payable to the bearers, Beth and
Carl.

In this case, Beths instrument is slightly different from Carls instrument in

that Carls instrument could easily be taken as an order instrument because he was
specifically identified in the check. However, because Adam made sure to add the
clause about the bearer in the blank space, Carls instrument is indeed a bearer
instrument. In both cases, the ambiguity of the bearer of the instrument results in
the classification of both checks as bearer instruments, so both Beth and Carl, who
are in possession of their respective checks, can cash said checks for their funds.
Conclusion:

Adam issued two bearer instruments to Beth and Carl. Although the
designation that he wrote on both checks differ slightly from each other, Beth and
Carl both hold possession and are therefore the bearers of their respective checks.
It is very important for Beth and Carl to be responsible and aware of the terms of
the bearer instruments. They need to know the terms of agreement and see if there
are contradictory terms or incomplete terms that may invalidate the instrument.
They should also make sure to use the check within the statute of limitations. They
should also know their rights if they were to ever present the checks in court for
remuneration in case Adam defaults on the check and cannot make said payments.
Moreover, they need to see if there are conflicting terms of agreement that may
impede the checks usage.
References

Cornell University Law School: Legal Information Institute. Uniform Commercial

Code: Negotiable Instruments. Retrieved March 15, 2017,
from https://www.law.cornell.edu/ucc/3

Clarkson, K. W., Miller, R. L., & Cross, F. B. (2015). Partnerships and Limited
Liability Partnerships. In Business Law Text and Cases (13th ed., pp.
731). Cengage Learning.