NOTES--DRAFTS
The promissory note is a most useful kind of commercial paper, and
it is in general use in business.
If a man has not sufficient ready cash to pay for the real estate
he is about to purchase, he makes up the difference by a note,
which note is secured by a mortgage on the property.
Remember the mortgage must always be regarded as security. The
note represents the debt.
Often wholesalers take a note as part or even full payment for a
bill of goods to a retailer.
If the wholesaler needs money, he endorses these notes and putting
them in his bank draws against them, less the discount he has to
pay for the accommodation.
As has been shown, an account may be transferred and sold, but a
note is more convenient for that purpose.
AN ILLUSTRATION
As with a check the maker of a note is known as a "drawer," the
person in whose favor it is drawn is the "payee."
Notes may be written in pencil, but it is better and safer to
write with ink on good paper.
Supposing you buy a team of horses, or it may be a bill of goods,
from John Brown, for $350.
Now you have only $100 in cash. What are you to do?
Mr. Brown, knowing you to be reliable, says: "That's all right,
friend Jones. You pay me the $100 cash for which I will give you a
receipt, then I will take your note for six months, payable at my
bank."
You agree to this; pay out the money, make and deliver the note
and take the property in question, which is now yours as much as
it had been his before the transfer.
The following would be a legal form in which to make the note:
$250. Summit, N. J.
October 10, 1910.
Six months after date I promise to pay to
the order of John Brown..............
Two hundred and fifty ...... dollars,....
At the Lincoln National Bank of Summit
.......... Value received.
George Jones.
No. 1. Due April 14, 1911.
Now, if before the expiration of this note, you want to make a
payment on it of, say, $75, you take the money to Mr. Brown, who
endorses on the back of the note, "Received on the within note
$75, January 3rd.," if that be the date, and signs, "John Brown."
It may be well to remember that while a running account may be
collected at any time, the law cannot prevent the maker of a
promissory note from selling all his belongings and leaving the
country before the note is due.
DAYS OF GRACE
Notes may be "time" notes, that is where there is a specified time
for payment, or "demand" notes. The latter are collectable on
presentation.
With the time notes "three days grace" are allowed after the
expiration of the date for payment. No such favor is allowed in
the case of demand notes.
These grace days do not seem businesslike. Why not add them to the
date in the note? Well, it is a custom, quite as old as the
greater part of our laws, and so it must be observed.
Under the law a note is payable at the home or business place of
the drawer, unless otherwise specified.
INDORSING NOTES
A note secured by a mortgage has its payment guaranteed.
The usual way of securing the payment of a note given in business
is to have it endorsed with a good name across the back, as in
endorsing a check.
By writing your name across the back of another man's note you
announce to all the holders of that note that you know the maker
and that if he does not pay it you will.
In most states the indorser of a note cannot be held responsible
for payment, unless the holder notifies him, within twenty-four
hours after the note comes due, that the maker cannot or will not
pay.
If an indorsed note changes hands, each indorser is responsible to
all endorsers who follow him and also to the last holder of the
note.
If an indorser, that is, one into whose hands the note has come
after the first endorsement, should not wish to guarantee payment,
he writes before his name, "Without recourse to me."
This is known as a "qualified endorsement."
A NEGOTIABLE NOTE
Most notes are negotiable; that is because they may be sold, like
any other personal property, or the ownership may be transferred
from one person to another.
No note is negotiable that does not bear on its face, the words,
"Pay to bearer," or "Pay to the order of," followed by the payee's
name.
JOINT NOTES
When two persons sign a note they become jointly and individually
responsible for its payment.
Such persons are known as "joint makers."
If one signs his name on the back of a note before it has been
handed to the payee, he makes himself not only an endorser, but a
joint maker.
If the maker of such a note refuses to pay on the expiration of
time stated, he is liable for the amount without any notification.
DISCOUNTING NOTES
If a business man borrows from a bank on his note, he must pay for
the privilege.
Interest is a sum paid for the use of money.
Interest is reckoned as a certain percentage yearly on the
principal.
Interest on interest is called "compound interest" and is unused
in ordinary business transactions.
Instead of collecting interest when the amount borrowed on a note
is due, or deducting it from the principal in advance, it
discounts the note at the rate agreed on and pays the rest.
This is called bank discount and its rate is variable, depending
on the abundance or scarcity of money.
Money is a marketable article, and the price, like that of wheat
or cotton, is governed by supply and demand.
INTEREST ON NOTES
A note may be made payable "with interest," or not, as the parties
concerned may agree.
If nothing is said about interest in the note, no interest can be
collected.
Again a note may go into details and specify that "the interest
shall be ten per cent, payable semi-annually," provided always
that the rate shall not be higher than the legal interest of the
state.
Excessive interest is known as "usury." It invalidates all the
interest, and in some places the principal is forfeited.
When the holder of an interest note receives interest payment he
must record the date and sum on the back of the note.
PROTESTS
If a note comes due on Sunday or on a legal holiday, payment must
be made on the following day.
Holidays are appointed by the separate states.
The United States recognizes no day as a holiday, except Sunday,
and that is acknowledged through custom.
It is customary for banks to notify makers of notes held by them a
few days before time set for payment; but this is not required by
law.
If a note lies unpaid in bank the day set for payment, as soon as
the office closes for regular business the note is protested.
The protest is made before a notary public; he is usually an
employee of the bank.
In the protest formal objection is made against the breaking of
the promise, and demanding that the matter be set right by the
maker, or on his failure, by the indorser.
The indorser, who has to pay, has a claim for the amount on the
maker of the note, as he would have for money loaned or goods
sold, and he can sue to collect.
A note that is not paid within a fixed time is said to be
"outlawed."
Remember the indorser of a note must be notified within twenty-
four hours of the failure of the drawer to make good.
NOTICES
The object in protesting a note is to fix the liability on the
endorser.
If there be more than one endorser notice of protest must be sent
to all at the same time.
It is better, where possible, to serve the notices on the
indorsers in person.
The payee must also be notified.
ACCOMMODATIONS
There is a form of note sometimes used in business which is given
without any consideration on the part of the maker. This is known
as an "accommodation note."
The maker of such a note does not expect to pay it, nor does the
man in whose favor it is drawn expect to do so.
An accommodation note is an instrument by the sale of which, or
through a bank, money may be raised for immediate use.
The maker in this case is a friend who loans his name.
As there was no value received such a note could not be collected
by the payee.
But if it passes into the hands of a third party, who endorses it,
then the maker of the note can be compelled to pay.
A LOST NOTE
A note may be lost or stolen.
The losing of a note does not release the maker from payment of
the full amount on the date and at the place named.
The loser should at once notify the maker of his loss.
A man who buys, before its maturity, a lost or stolen note, may
collect the full amount from the maker, provided the note is
payable to "bearer" and no notice of the loss has been published.
When the maker of a lost note pays the amount to the original
owner, he should receive from him what is known as a "bond of
indemnity."
This bond is to secure him against paying a second time.
NOTES ABOUT NOTES
There are some things worth remembering about promissory notes.
1. Never give one if you can pay cash.
2. A note made on Sunday is worthless in some states.
3. A note given under compulsion is worthless.
4. Notes made by a drunken person, or obtained by any form of
fraud cannot be collected under law.
5. Notes bear interest only when so stated in body of note.
6. The holder of a note has a legal claim against every indorser.
7. Each indorser is responsible to every indorser who follows him.
8. Notes are valid without reference to the kind of paper, or
whether they are written with pen or pencil.
9. Losing a note does not release the maker from payment.
10. If no time is set in a note for payment, it becomes due as
soon as it is made.
11. Where a note is made in one state and is payable in another,
it is governed by the laws of the state in which it is to be paid.
12. Notes payable on demand draw no interest until after they have
been presented for payment.
13. If a note reads "with interest" and no rate is specified then
it draws the legal interest in the state in which it was made.
14. Demand notes are not entitled to days of grace.
15. If no place of payment is named in a note, it should be
presented to the maker personally in business hours.
16. The misspelling of a word or words in no way invalidates a
note.
17. If a person who cannot write makes a note his mark should be
properly witnessed.
18. The makers of a joint note must be sued jointly.
19. If the words and the figures in a note disagree, the words
take precedence.
20. A note signed by a firm may be collected from either of the
partners.
21. When a payment is made on a note secured by a mortgage, the
amount is endorsed on the note, never on the mortgage.
22. A note given by a minor is void, unless given for actual
necessities, like food and clothing.
23. If a note made by a minor is acknowledged when he comes of age
it is binding and collectible.