Chapter VI: Part II: Partnership (2)

=98. Consolidation of Corporations.= The right to exist as a corporation does not carry with it the right to combine or consolidate with other corporations. Where two or more corporations combine or consolidate, the resulting corporation is distinct from the combining corporations. The right to consolidate, like the right to exist as a corporation, is a special privilege granted by the state. Consent must be obtained from the state before a valid consolidation can be made. Most states provide by statute for the consolidation of certain corporations under certain prescribed conditions. Before a valid consolidation can be effected, the provisions of these statutes must be complied with. Some states require the payment of a consolidation tax. Others require that parallel and competing railroads cannot consolidate.

Unless the charter of the corporation permits of consolidation without the consent of all the shareholders, and unless the shareholders have by valid resolution given the directors the right to consolidate, a consolidation cannot be made over the objection of any shareholder. An attempted consolidation under these circumstances may be enjoined by a dissenting stockholder, or if the consolidation is made over his objection the resulting consolidated company is liable in damages to him.

When a consolidation has been legally made, the consolidated company is liable for the debts, and is entitled to the assets of the component corporations.

=99. Meetings and Elections of Corporations.= A corporation transacts its business through a board of managers. The shareholders or members of the corporation do not transact the business of the corporation directly, but through the governing board. In case of a corporation having a capital stock, this governing board is called the board of directors. In case the corporation has no capital stock, such as a church or charitable organization, the governing board is called the board of trustees. The charter, or statute under which corporations are formed, usually provides for annual meetings for the election of officers. If the corporation has no fixed place of meeting, notice must be given each stockholder of the place of such meeting. A corporation has no power to hold its meetings outside the state of its organization. It may employ agents to represent the corporation outside the state of its creation, but it should hold its corporate meetings within the state. If the time of holding the election of officers is fixed by statute, or by a regulation or by-laws of the corporation, the meeting should be held at that time. If for any reason a corporate election cannot, or is not held at the time designated, the old directors hold over until the new board is regularly elected.

=100. Voting at Corporate Meetings, Quorum and Proxy.= Each shareholder or stockholder of a corporation is entitled to vote at the corporate meeting for the election of officers. Usually the vote is by shares. Each shareholder is entitled to one vote for each share he holds. Some states, by statute, limit the right of a single shareholder to a certain number of votes. When this limitation is fixed, it usually limits the shareholders to one vote regardless of the number of shares held. Such a limitation, where found, is for the protection of small shareholders. Corporations keep books in which are kept the names of the shareholders. Only the persons whose names appear upon the corporation's book as shareholders are entitled to vote.

Some states provide by statute for what is known as _cumulative voting_. Instead of voting the number of shares he owns for each director, by cumulative voting a stockholder is entitled to vote for one director the number of shares he owns, multiplied by the number of directors to be elected. This is sometimes called _ticket voting_. For example, three directors are to be elected, and a shareholder holds ten shares. He may have ten votes for each director, or thirty votes for one director. This is for the protection of the small shareholder.

By _quorum_ is meant the number of votes required to constitute an election. Sometimes a quorum is based upon a majority of the number of shareholders present. In the absence of statute or corporate regulations to the contrary, this rule applies. Statutes of some states provide that a two thirds majority of the shares of the corporation shall constitute a quorum.

Most states provide by statute for voting by _proxy_. This entitles one shareholder to give another written authority to vote his shares at a corporate meeting. This right does not exist in the absence of statute. A proxy may be revoked at the will of the shareholder giving it.

=101. Stockholders of a Corporation.= The membership of a corporation is made up of the stockholders or shareholders. A corporation for profit is authorized by its charter to have a certain capitalization, or the capitalization is the total amount of the shares authorized to be issued. The charter usually requires that a certain percentage of shares subscribed be paid in before the corporation is authorized to elect directors. The charter usually provides that at least ten per cent of the capitalization be subscribed, and at least ten per cent of the amount subscribed be paid in, before directors can be elected. A stockholder is liable to the corporation on his subscription and, in the absence of any additional liability fixed by the charter, is not liable for the debts of the corporation for any amount in addition. Formerly some of the states provided by statute for double liability of stockholders. In case of insolvency of the corporation, stockholders could be required to contribute an amount equal to their subscription in addition to paying their subscription in full. Stockholders' double liability has been abolished by most states. At present a stockholder can be compelled to pay the full amount of his stock subscription, and no more.

Stockholders of national banks, corporations organized under United States laws, are liable for double the amount of their stock. Those persons are regarded as stockholders who appear as such on the books of the company. A person may become a stockholder by purchasing stock from the corporation, or by purchasing it from another stockholder. Any person legally competent to contract may become a stockholder.

=102. Certificate of Stock.= Written certificates are usually furnished shareholders, by corporations, as evidence of membership. These certificates are made transferable, in order that they may be indorsed by a shareholder, and made payable to a purchaser. When so indorsed, the purchaser is entitled to have the shares transferred on the books of the company, showing that he is a shareholder in the company. A certificate of stock does not of itself constitute ownership. It is merely evidence of ownership. A person may be a stockholder in a corporation by making a valid subscription, and by paying for the same, regardless of having received a certificate of stock. The following is a common form of stock certificate:

The Consolidated Tack Co.
Cleveland, Ohio.

Incorporated under the laws of the state of Ohio.

No. 99 No. of shares -15-

Capital stock $1,000,000.00

This certifies that John Smith is the owner of fifteen shares of $100 each of the capital stock of The Consolidated Tack Co., transferable only on the books of the company, in person or by attorney, upon surrender of this certificate properly indorsed. In witness whereof said corporation has caused this certificate to be signed by its duly authorized officers, and to be sealed with the seal of the corporation.

At Cleveland, Ohio, this 1st day of October, A. D. 1909.

Jack Brown, Tom Jenkins,
Treasurer. President.

Corporate
Seal.

Blank for transfer, on back of certificate.

For value received................ hereby sell, assign and transfer unto____________________ shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint.............. to transfer the said stock on the books of the within named corporation.

Dated................190..

___________________

In the presence of ______________________

=103. Directors of a Corporation.= The managing officers of a corporation are called directors. They are the representatives elected by the stockholders, or members of the corporation, to transact the business of the corporation. While in the absence of statutory regulations a director need not be a stockholder, practically all states require directors to be stockholders.

Directors are authorized to act as agents for the corporation in the management of the corporation's business. Their authority is limited not only by the charter of the corporation, but by the regulations, and by-laws of the corporation as well. The directors of a corporation are not authorized by virtue of their office to dispose of the entire assets of the corporation, neither can they transfer their right to act as directors to others. They have the right to purchase property, to sell and mortgage assets of the corporation within the limits prescribed by the charter, regulations and by-laws of the corporation.

The directors of a corporation must act as a board. They are not permitted to act by proxy. The majority of the entire number of directors constitutes a quorum for the purpose of doing business. They may employ agents to make and carry out contracts, and perform ministerial acts of the corporation, but cannot delegate their discretionary powers as directors. Unless provided otherwise by statute, directors must hold their meetings within the state under whose laws the corporation is created. Notice of the meeting giving the place, time and purpose must be given to all the directors before a valid meeting can be held. Directors, like agents, cannot act for their own private interests if opposed to those of their corporation. Directors who privately profit to the disadvantage of the corporation are liable in damages for such acts to the corporation. It is generally conceded that a director may contract with his corporation, if no fraud is used, and if a quorum of directors without him consents. Directors are liable to the corporation for their dishonesty or negligence.

=104. By-Laws, Rules and Regulations of a Corporation.= The by-laws of a corporation are the rules and regulations by which the corporation is governed. Sometimes a distinction is drawn between the term _by-law_, and the term _regulation_. For example, the statutes of some states provide that the stockholders may pass regulations for the government of the corporation relating to the time, place and manner of holding corporate meetings, the number of stockholders that shall constitute a quorum, the time and manner of electing directors, the duties and compensation of officers, and the qualification of officers; while the directors have the power to pass by-laws relating to the government of the corporation, not inconsistent with the charter of the corporation and the regulations. This distinction between regulations and by-laws does not seem to be generally recognized. The entire government of the corporation is generally included in the term by-laws. If the charter does not provide otherwise, the by-laws shall be passed by the stockholders rather than by the board of directors.

A resolution is not a by-law. By resolution is meant the recorded and legally passed determination of a corporation to perform some particular thing or item of business. A vote of a board of directors to make certain bids on certain contracts is an example of a resolution. By-laws must not be contrary to the corporation's charter, or to general law. They are not presumed to be known by third persons, but if third persons dealing with a corporation have actual knowledge of them, they are bound by notice of their provisions.

=105. Capital Stock of Corporations.= The capitalization of a corporation is the aggregate amount of stock it is authorized by its charter to issue. If a corporation is authorized to issue one hundred thousand dollars ($100,000.00) of stock, it is said to be capitalized at one hundred thousand dollars ($100,000.00). This does not mean that the corporation has property worth one hundred thousand dollars ($100,000.00). A corporation is usually authorized to elect directors after one tenth of its stock has been subscribed, and after one tenth of the amount subscribed is paid in. Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00), may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. It may have property worth five hundred thousand dollars ($500,000.00) and be capitalized at one hundred thousand dollars ($100,000.00) more or less, or it may be capitalized at one hundred thousand dollars ($100,000.00) and have no assets.

=106. Payment of Shares of Stock.= It may be stated as a general rule that a corporation has no authority to dispose of its stock for less than par value. If a corporation is solvent, ordinarily no objection is raised, but if the corporation becomes insolvent, creditors may complain, and force, by proper legal action, the shareholders to pay the difference between the face value of their stock and the amount actually paid.

In the absence of a statute requiring stock subscriptions to be paid in cash, there is nothing to prevent a corporation from accepting property at a fair valuation in payment of stock. The rule is usually stated to be, that shares of stock must be paid for in money or in _money's worth_. Shares of stock may be paid for in _bon‚ fide_ services. The rule by which purchasers of stock are compelled to pay the full par value either in money or money's worth applies only to those who purchase direct from the company, or who purchase from stockholders with notice that the shares have not been fully paid for. If the certificates of stock state that they are fully paid for and the purchaser has no notice otherwise, or if the purchaser does not know that the stock has not been paid for in full, he cannot be made to suffer for the act of the corporation in unlawfully issuing the stock.

=107. Calls and Assessments.= An _assessment_ may be defined to be a levy by a corporation upon a shareholder for an unpaid portion of his stock subscription; a _call_ is a notice to a shareholder of an assessment. Ordinarily, assessments may be made by call, at the direction of the directors, until the entire par value of subscriptions are paid in full. Stock cannot be assessed beyond its par value, unless so provided for by the corporate charter, or unless the subscriber so contracts.

=108. Watered Stock.= In case property or services are accepted in payment for stock at an inflated valuation, or if stock is issued as fully paid up when it is not, the stock is said to be _watered_. For example, if _A_, a promoter of a corporation, turns over options to the company, actually worth one thousand dollars ($1,000.00), and receives stock in payment, the par value of which is five thousand dollars ($5,000.00), the stock is said to be watered, and the four thousand dollars ($4,000.00) excess valuation is said to represent the amount of water in the stock.

=109. Increasing or Decreasing Capitalization.= A corporation has no power, by reason of being a corporation, to increase or decrease its capitalization. The states generally provide by statute for the increasing or decreasing of the capitalization. The corporation must comply with these statutes, before its capitalization can be changed. In case the capitalization is increased, the purchasers of such stock are subjected to pay the full face value at the instance of creditors, the same as purchasers of an original issue. That is, if a corporation is unable to pay its debts, one who has purchased direct from the company, shares of stock upon an increased capitalization, at a price below par, may be compelled by creditors to pay the difference between what he has actually paid and the par value. In case of an increase of capitalization, the present stockholders, in the absence of express statutory regulations to the contrary, are entitled to receive the increased shares in proportion to their holdings. This is usually called a _stock dividend_.

=110. Common and Preferred Stock.= Stock of a corporation may be of two kinds, common and preferred. When stock is issued by a corporation without any agreement to pay certain dividends out of the profits, or to repay the original stock investments if the corporation ceases doing business, in preference to other stock, it is called _common_ stock. Corporations are sometimes authorized by their charters to issue what is called _preferred_ stock. That is, the corporation pledges to pay a certain percent of its profits, as dividends to the preferred stockholders, before paying anything to common stockholders. If the corporation ceases doing business, preferred stockholders are first paid the amount of their subscriptions, and if any balance remains, it is paid to common stockholders. In the absence of statutory authority, probably an existing corporation has the right to issue preferred stock by the unanimous consent of all the common stockholders. This is commonly done for the purpose of raising additional funds.

=111. Dividends.= _Dividends_ is the term applied to the money distributed to shareholders, out of the profits of a corporation. The directors are usually empowered to declare dividends. A stockholder cannot compel the corporation to pay him a percentage of the profits until a dividend has been declared. After a dividend has been declared, it is regarded as a debt of the corporation in favor of the shareholder. When a dividend has been declared at the discretion of the board of directors, the preferred stockholders must first be paid the amount of their preference, and the balance must be distributed equally between the common stockholders. No partiality can be shown stockholders. They must be treated alike. Dividends can be declared only out of the profits, except when a corporation ceases doing business, in which event the property of the corporation, after paying liabilities, is distributed as dividends.

=112. Certificates of Stock not Negotiable Instruments.= A certificate of stock is merely evidence that the holder is a member of the corporation. A person may be a member of a corporation, and be entitled to the rights of a stockholder, without having a certificate of stock. Certificates are convenient as evidence of membership. Transfers of stock are usually made by filling in a blank on the back of the certificate for that purpose, by which the owner declares the transfer to the purchaser, and designates the purchaser, or someone, his attorney to present the certificate to the corporation, to have the transfer registered on the books of the company. It is the usual custom to surrender certificates to the purchaser. A corporation has a right to rely upon its books, and if a person wrongfully or fraudulently attempts to transfer a certificate of stock which he does not own, or has no right to transfer, the purchaser takes no better title than the seller had. In this particular, certificates of stock are not negotiable instruments. Negotiable instruments are good for value in the hands of innocent purchasers, who purchase before the instrument is due. As between the parties themselves, a transfer of a certificate of stock is good, but as to the corporation or creditors of the seller, the transfer is not effectual until recorded on the books of the corporation.

=113. Individual Liability of Stockholders for Debts of a Corporation.= A corporation is an artificial person having an existence in law, separate and apart from that of its members. Its profits cannot be divided until the managing agents of the corporation so decree. Its property does not belong to the members, but to the corporation itself. At one time some states provided by statute for double liability of stockholders. In case a corporation was unable to pay its debts, creditors could compel stockholders to pay to the corporation an amount equal to the par value of their stock, after paying the full face or par value of their stock. Statutes providing for double liability have quite generally been abrogated. At the present time, except in the case of national banks, corporations organized under United States law, few states provide for double liability of stockholders. If _A_ has subscribed for ten shares of stock, the par value of each share being one hundred dollars ($100.00), and pays one-half the amount of his subscription to the company, in case of insolvency of the corporation, creditors can force _A_ to pay the balance of his stock subscription, or five hundred dollars ($500.00). Even though not insolvent, the corporation can collect the balance of five hundred dollars ($500.00) from _A_ by call and assessment, and can enforce collection by suit. _A's_ subscription is a contract between himself, and the corporation. Unlike partners, stockholders are not personally responsible for the debts of the corporation of which they are members. In dealing with partnerships, a person may rely upon the personal financial worth of the individual members of the partnership. The property of the individual members may be subjected to pay the debts of the partnership. But in case of a party dealing with a corporation, he cannot rely upon the personal worth or responsibility of the members of the corporation, since the members individually are not liable for the corporation's debts. The corporation is separate and distinct from its members, and when the assets of the corporation are exhausted, the property of the individual members is not liable.

=114. Officers and Agents of a Corporation.= A corporation is an artificial person which must necessarily conduct its affairs through agents. The managing board of a corporation having a capital stock is usually called the board of directors. The managing board of a corporation having no capital stock is usually called the board of trustees. These managing boards are elected by the members of the corporation. In case the corporation is one organized for profit, the members are called stockholders or shareholders. The directors or managing board, of a corporation may delegate the performance of what are called ministerial duties. They may appoint officers and agents to assist them in the performance of their duties of a certain character. The officers of a corporation elected by the directors usually consist of a _president_, _vice-president_, _secretary_ and _treasurer_. If a corporation's business transactions are limited, practically the only duty of the president is to preside at the meeting of the board of directors. If the affairs of the corporation are many and complicated, the president is usually intrusted with many duties. The board of directors meets at stated times, authorizes and passes on certain important matters, but the duty of carrying them into execution, and of performing the routine work, falls on the president. In a corporation of large affairs, the president may pay current bills, make purchases, give notes, if necessary, make sales and give and take mortgages on property. He is often given authority to act as general manager for the corporation. In this event, he may perform all the duties connected with the general operation of the business. The vice-president has authority to perform the duties of the president during his absence or disability. It is the duty of the secretary to keep the records of the corporation. It is the duty of the treasurer to take care of the funds of the corporation. The officers of a corporation are liable to the corporation for breach of trust. They are personally liable to third persons when they exceed their authority. A corporation, through its properly appointed officers, as well as through its board of directors, may appoint subordinate agents to perform work for the corporation. The corporation is responsible for the acts of its agent, performed within the real or apparent scope of the agent's authority.

=115. Execution of Contracts and Negotiable Instruments by a Corporation.= A corporation can act only through its agents. The agents authorized to act for a corporation are the board of directors, the officers appointed by the board, or the officers. A corporation, as one of its powers, has _the right to use_ a common seal. While a corporation _commonly uses_ its seal in signing written instruments of importance, for the purpose of showing authority of its agents to enter into such contracts, a corporation need not use its seal except in those cases when it is necessary that a natural person use a seal. A corporation usually authorizes its officers to make contracts. A president and secretary, acting together, have the right to make contracts for their corporation, by reason of the general authority conferred upon them by the board of directors. The proper signature of a corporation to a written document is the name of the corporation, followed by the signature of the president as its president, and by the signature of the secretary as its secretary. For example, if the India Rubber Company is to sign a contract, the proper signature is:

The India Rubber Co.,
By John Smith, its President.
By John Jones, its Secretary.

When the signature must be acknowledged before an officer authorized to administer oaths, before it will be received for record, as in the case of a deed, the officer authorized to sign the name of the corporation to the deed may make the acknowledgment.

Negotiable instruments, such as promissory notes, drafts and checks, should be signed with the corporate name by the proper officer, as its officer. It is held, however, that by custom, a cashier of a bank may make and indorse negotiable paper in his own name, merely adding the designation _cashier_ to his signature, and by this means make the paper that of the corporation, and not incur any personal liability therefor. This is an exception to the general rule. Where a person signs as agent, he should sign the name of his principal, by himself, as agent. If he signs his own name, followed by the word, _agent_, or _president_, or whatever his office may be, he binds himself personally, and not his principal.

=116. Ultra Vires Acts.= A corporation by its charter is granted certain privileges. It has a right to act within the terms of its charter, but no right to go beyond the terms of its charter. If it performs acts beyond the terms of its charter these acts are said to be _ultra vires_. This does not mean that all the acts which may be performed by a corporation must expressly be enumerated in its charter. Corporations are created for certain purposes. They are permitted to perform all the acts necessary, and incidental to the purpose of their organization. The general laws under which a corporation is created are a part of its charter. A corporation organized to do a general banking business has no authority to sign bonds as surety for persons or corporations. Attempts to perform such acts of suretyship are beyond their power, and are _ultra vires_. _Ultra vires_ acts are unlawful, and a single stockholder may prevent, by legal action, the officers of a corporation from completing an _ultra vires_ contract. Third persons are deemed to have notice of the limitation of the powers of a corporation. They are not permitted to act in such a manner as to benefit by _ultra vires_ acts, and then escape liability on the ground that the obligation is _ultra vires_. If an _ultra vires_ contract is wholly executory on both sides, neither party can enforce it, if the other party complains by reason thereof. But one cannot accept benefits thereunder, and refuse to carry out the contract on his part. He is said to be estopped from so doing. The doctrine laid down by the last statement is disputed in some jurisdictions.

=117. Rights and Liabilities of a Foreign Corporation.= Corporations have no rights, as such, outside of the jurisdiction of the power creating them. A corporation organized under the laws of one state may be excluded from performing any of its corporate functions in another state. States may permit foreign corporations to exercise their function within their borders, if they so desire. But states cannot be compelled to recognize the corporate rights of foreign corporations. While the United States constitution provides that citizens of each state shall be entitled to all the privileges and immunities of citizens of the several states, a corporation is not a citizen within the meaning of this provision. The United States Government may employ or organize corporations to carry out its purposes. Such corporations cannot be denied the right to exercise their functions by any state. For example, the United States Constitution gives Congress the right to regulate commerce with foreign nations, among the several states, and with the Indian tribes. A corporation engaged in interstate commerce cannot be excluded by any state, in the exercise of this function. Outside these governmental agencies, each state has the right to exclude a foreign corporation from exercising any of its corporate functions within their jurisdictions. The states generally provide by statute that foreign corporations may transact business within their territory by filing with the Secretary of State a statement of their capitalization, the amount actually paid in, the nature of their business, and the names of their officers. Then, by paying a certain tax, they are permitted to maintain an office and transact business within the state thus granting them the privilege. The statutes of the various states regulating foreign corporations commonly use the term, "doing business." They prohibit foreign corporations from doing business within their borders unless they comply with their statutes. The term, "doing business," has been held to mean the maintaining an office or place of business, or manufacturing plant within a state, and does not prohibit a foreign corporation from selling goods by traveling salesmen, or from making or suing on contracts.

=118. Liability of a Corporation for its Torts and Crimes.= A corporation, as well as an individual, may commit torts and crimes. If an agent, acting within the scope of his employment, defrauds another, the corporation is liable in damages for his act. If, however, an officer or agent goes outside his employment, and commits a wrong, it is his own act, and he, personally, and not the corporation, is liable. A corporation, as well as an individual, may commit a crime for which it may be punished. It must, of course, commit the crime through its officers and agents. If a corporation is guilty of criminal negligence in failing to keep its works in repair, and persons are injured thereby, it is subject to indictment and punishment. If a corporation obstructs navigation or breaks the Sabbath, it is subject to criminal action. The usual punishment for the crime of a corporation is the payment of a fine, but the officers of a corporation may be imprisoned as well.

=119. Dissolution of Corporations.= A corporation continues to exist indefinitely, unless the period of its existence is limited by its charter, unless its charter is revoked by the power that granted it, or unless it voluntarily or by a decree of court ceases business. A corporation may forfeit its right to continue as a corporation, if it abuses its privileges, if it assumes to have powers and rights which it does not have, or if it fails to exercise its corporate functions. The latter is called _nonruser_. Most states provide by statute that corporations shall not commence business until a certain portion of its capital has been raised. If the corporation violates this provision or any provision of the statutes regulating the completion of its organization, its franchise may be revoked by the state. Most states provide by statute, a means by which a corporation may wind up its affairs. After paying its liabilities the balance of its assets may be divided ratably among its stockholders.

NEGOTIABLE INSTRUMENTS

=120. In General.= By negotiable instruments are meant those written instruments intended to circulate as money, which by their form and nature are transferred by delivery or by indorsement and delivery. The most common negotiable instruments are promissory notes, drafts and checks. Negotiable instruments are much more commonly and extensively used than money in the transaction of business. Their function is to take the place of money. Their use arose out of the scarcity of currency and facilitates the transaction of business. Their form and nature make them more desirable and practical in many respects than money itself. Negotiable instruments may readily be traced. They may be drawn in any denomination to meet any emergency. They may be indorsed in such a manner that only the person intended by the maker to receive payment can receive payment thereon. Money, on the other hand, has no particular identity. After payment it cannot be traced, nor can mistakes in amount be corrected. If lost, payment thereon cannot be stopped. If found or stolen, its possessor may receive the benefit of it without question. Negotiable instruments were devised to meet a broad and pressing demand. Usage and custom have given them characteristics to meet this demand.

=121. Negotiability.= Negotiability is the power of a written instrument to circulate as money. To be negotiable, an instrument must contain language of negotiability. The common phrases of negotiability are _Pay to the order of_, or _Pay to bearer_. Any draft, promissory note, check, or bill of exchange containing the words, _pay to the order of_, or _pay to bearer_ are known as negotiable instruments. If a negotiable instrument is made payable to bearer, it is transferable by delivery. The holder of it may pass it like money and the taker is entitled to receive payment of it when it is due. A negotiable instrument payable to the order of a designated person is payable upon the indorsement and delivery of the person to whose order it is made payable. For example, if a check is made payable to the order of John Smith, and John Smith desires to transfer it to John Jones, he writes his name, John Smith, on the back of the check, and delivers the check to John Jones. By this act, John Jones becomes the owner of the check, and may in turn transfer it, or cash it by presenting it to the bank on which it is drawn. If a check is made payable to John Smith or bearer, and if John Smith desires to transfer it to John Jones, he merely hands John Jones the check. No indorsement is necessary.

=122. Negotiability Distinguished from Assignability.= An ordinary contract or obligation not requiring personal services or discretion may be transferred by oral or written contract of assignment. For example, if _B_ purchases a barrel of flour from _A_, his grocer, to be paid for in thirty days, _A_ may assign his claim against _B_ to _C_. This may be accomplished by a verbal agreement to that effect between _A_ and _C_, or _A_ may give _C_ a written statement to the effect that he has transferred his claim against _B_ to _C_. When _B_ is notified of this assignment, he is obliged to pay _C_ the money. If for any reason the flour was not accepted by _B_, or if _B_ has a claim against _A_, _C_ can recover from _B_ only the amount _B_ owes _A_. If _B_ owes _A_ nothing, on account of the flour being of poor quality, and not accepted for that reason, or if _B_ has a claim for an equal amount against _A_, _B_ can set up this defense against _C's_ claim, and _C_ can recover from _B_ only the amount that _A_ could have recovered against _B_. In other words, in case of an assignment, all defenses that were good against the assignor are good against the assignee. In case of negotiable instruments, however, the transferee who takes the instrument before maturity for value, and without notice of any defenses, has the right to recover the full face value from the maker, regardless of defenses the maker may have against the original payee. In case of assignment, notice must be given the debtor to make the title good in the purchaser. In case of negotiability, no notice to the debtor is necessary.

A negotiable instrument may be assigned. A common example is the delivery for value, of an instrument payable to order without indorsement. The purchaser takes only the rights of a seller.

=123. Law Merchant.= The law relating to negotiable instruments is said to be based upon the _Law Merchant_. By the Law Merchant, is meant the rules and customs of merchants relating to bills and notes. At an early time, various rules were recognized by the merchants trading between different countries. Drafts or bills of exchange were given and passed current as money, without notice to the debtor of the transfer. As early as the year 1200, these customs of merchants were recognized in England. At first, they were recognized only in connection with foreign bills of exchange. By foreign bills of exchange are meant bills made or drawn by persons of one country to be paid or accepted by persons of another state or country. Originally, the rules were recognized by merchants only. The courts of England recognized and enforced these rules in actions brought on foreign bills of exchange. Gradually, these rules were recognized and enforced by all the merchants of England. They were applied to inland bills as well as to foreign. Some statutes were passed, notably one making the rules of the Law Merchant apply to promissory notes. This statute compelled the general recognition of the Law Merchant. Gradually these rules were applied to all negotiable instruments by whomever used. The customs which started between merchants of foreign countries were held applicable to all persons, and became the recognized law relating to negotiable instruments. This country adopted these rules, together with the greater part of the common law of England. At the present time, most of the states have negotiable instrument codes. These codes, for the most part, are statutory enactments of the well recognized rules of common law.

The advantage of the codes, however, is to settle disputed points by express statutory enactment. The code must be interpreted by the well settled and recognized principles of the common law. The difference between the contract formed by negotiable instruments and ordinary contracts is based upon the Law Merchant. These customs are as well recognized, and are as much a part of the law as they were when originally used by the merchants of the old world six or seven hundred years ago.

=124. Promissory Notes.= One of the most common forms of negotiable instruments is that of the promissory note. A common form of promissory note is shown in Fig. 1.

A promissory note is not necessarily a negotiable instrument. It depends upon whether it contains words of negotiability. If the note contains the words, _or order_, or, _or bearer_, or words of similar import, it is a negotiable instrument Otherwise it is not. To constitute an instrument a promissory note, it must contain certain elements. It must be signed by the party making or giving it, but it is not necessary that the signature be in any particular place. Any mark or designation intended as a signature, or by which the maker can be identified, regardless of its position on the paper, is a sufficient signature. The proper and usual method of signing negotiable instruments is at the end thereof.

A promissory note must contain an unconditional promise to pay a definite sum of money, at a certain time. If the promise to pay is conditional, the instrument does not constitute a negotiable instrument. The following instrument was sued upon:

Stratham, March, 28, 1846.

Due to order of Sophia Gordon, widow, ten thousand dollars to be paid as wanted for her support. If no part is wanted it is not to be paid.

Stephen Scanmore.

Since this was not an unconditional promise to pay, the court held it not to be a promissory note.

The time of payment of a promissory note must be certain, the amount to be paid must be specified, and the instrument must be payable in money. If the instrument is to be paid in anything other than money, it is not a negotiable instrument. An instrument must be delivered, before it has a legal existence as a promissory note. The essentials of a promissory note are also essentials of any negotiable instrument. A promissory note need not be dated, nor need it state that it is given for a consideration. By its nature it imports a consideration. The party signing the note is called the _maker_, the party to whom it is made payable is called the _payee_. If the payee transfers it by indorsement, he is called the _indorser_, and the person to whom he transfers it is called the _indorsee_.

=125. Drafts and Bills of Exchange.= The term, draft, is commonly used to designate an order from one bank or banks on another, as well as orders on third persons. Orders drawn by one person on another, payable to a third person, are known technically as bills of exchange. At present, the terms, _draft_, and _bills of exchange_ are generally used interchangeably. A draft or a bill of exchange is a written order drawn by one person on another, payable to a third person, to the order of a third person, to the drawer himself or his order, or to bearer.

A common form of draft is shown in Fig. 2.

Bills of exchange or drafts are frequently made payable at a time considerably in the future. Fig. 3 is a form of sixty-day draft. This draft is presented to the drawee, J. H. Gotrochs, and if he accepts, he writes, _accepted_, followed by his name, across the draft. His name written on a draft is sufficient acceptance.

The party drawing a bill of exchange is called the _drawer_, the party to whom it is made payable is called, the _drawee_ before acceptance, and the _acceptor_ after acceptance. The drawee may accept by signing the instrument, by stating his acceptance on a separate piece of paper, by oral acceptance, or even by conduct making apparent his intention to accept. After acceptance of a draft or bill of exchange, the acceptor is liable to pay the bill according to its terms. He is in the position of a maker of a promissory note.

=126. Checks.= A check is an order drawn on a bank or banker. It differs in some respects from an ordinary bill of exchange. It does not have to be presented for acceptance. It is presented for payment. It presupposes funds of the drawer in the hands of the bank or banker on which it is drawn. It is payable at any time after the date fixed for maturity. It need not be presented at maturity. The maker may recover damages for failure to present promptly if he is damaged thereby. For example, if _A_ gives _B_ his check on the _X_ bank, and between the date for payment of the check and the time of presentment for payment by _B_, the bank fails, _A_ may recover as damages from _B_, the amount of his loss by reason of _B's_ failure to present the check promptly. No days of grace are allowed in the payment of checks. In this particular, they differ from ordinary bills of exchange.

=127. Certification of Checks.= By certification of a check is meant a written acknowledgment on checks by an officer or authorized agent of the bank that the check will be paid when presented. In Fig. 4 is shown a common form of certification.

The words _accepted_ or _certified_, written on a check by an authorized officer or agent of a bank constitute a certification. If the _holder_ of a check has it certified he elects to hold the bank, and thereby releases the maker and prior indorsers. If the _maker_ procures the certification he is still liable thereon. When a check is certified, the bank charges it to the account of the maker, and it then becomes a debt of the bank, regardless of whether or not the maker has funds in the bank with which to meet it. This is the reason that a maker and prior indorsers of a check are released from liability thereon when a holder has it certified. By this act, the holder elects to rely upon the bank, rather than upon maker or indorsers.

=128. Bonds.= Bonds may be defined to be the promissory notes of corporations, private or governmental. They are made under the seal of the corporation issuing them. At common law, a seal destroyed the negotiability of an instrument. At the present time this is not true of bonds. Private corporations often secure their bonds by a mortgage on their entire property. This is accomplished by means of a mortgage called a _trust deed_. The mortgage is given to a trust company, or an individual, to be held for the common benefit of all the bond holders. It is not practicable to give each bond holder a mortgage. This would be inconvenient, and some bond holders could obtain preference over others. But one trust deed, covering all the assets held by a trustee for the benefit of all the bond holders, accomplishes the purpose.

Registered bonds are registered on the books of the corporation issuing them, and in case of transfer the transfer is noted on the books of the company. Other bonds contain coupons, or small promissory notes for certain amounts representing the installments of interest payable at certain times. These coupons may be cut from the bond and sold as promissory notes, or they may be cut at maturity and returned for payment.

+---------------------------------------------------------------------+ | | | No. 1. $1000.00 | | | | United States of America, | | State of Ohio. | | | | Village of X, Ohio, Improvement Bonds. | | | | Know all men by these presents that the village of X, in the | | county of Cuyahoga and state of Ohio, acknowledges itself to owe, | | and for value received hereby promises to pay to bearer, the sum | | of $1000.00 in lawful money of the United States of America, on | | the second day of January, 1920, together with interest thereon | | at the rate of 5% per annum payable semi-annually on the second | | day of July, and second day of January of each year, as evidenced | | by the coupons hereto attached, until the principal sum is paid. | | Both principal and interest are payable at the City Trust Co., | | Cleveland, Ohio, on the presentation and surrender of this bond, | | and the coupons hereto attached as they respectively mature. | | | | This bond is issued for the purpose of improving a street of the | | village of X, from the C. B. Railway to Rocky River by constructing | | and laying water mains with all necessary connections thereon, | | under and by authority of Sections 1536-281, and Sec. 2835 of | | the revised statutes of Ohio, and under and in accordance with | | resolutions of the council of the village of X, Ohio, adopted Nov. | | 4, 1908, and Dec. 2, 1908. | | | | It is hereby certified that all proceedings relating to this | | bond have been in strict compliance with said laws, statutes and | | resolutions, and all other statutes and laws relating thereto, and | | that the faith, credit, and revenues, and all real and personal | | property in the village of X, Ohio are hereby pledged for the | | payment of principal and interest hereof at maturity. | | | | This bond is one of a series of bonds of like date and effect, but | | of different amounts and maturities amounting in the aggregate to | | $3700.00. | | | | In witness whereof, the village of X has caused this bond to be | | signed by the mayor and clerk of said village, and the corporate | | seal of said village to be hereunto affixed, and the facsimile | | signature of the mayor and clerk of said village to be affixed to | | the attached coupon this second day of January, 1909. | | | | D. B. X._______________________ | | Mayor. | | | | [SEAL.] | | | | X. Y. Z._______________________ | | Clerk. | | | +---------------------------------------------------------------------+

Form of Municipal Coupon Bond.

+------------------------------------------------------------------+ | | | On the second day of July, On the second day of January, | | 1909,the village of X promises 1910, the village of X promises | | to paythe bearer at the City to pay the bearer at the City | | Trust Co.,Cleveland, Ohio, Trust Co., Cleveland, Ohio, | | twenty-fivedollars, being 6 twenty-five dollars, being 6 | | months' intereston its bond. months' interest on its bond. | | | | No. 1 dated Jan. 2, 1909. No. 2 dated Jan. 2, 1909. | | D. B. X.___________________ D. B. X.___________________ | | Mayor. Mayor. | | | | X. Y. Z.___________________ X. Y. Z.___________________ | | Clerk. Clerk. | | | | On the second day of July, On the second day of January, | | 1909,the village of X promises 1910, the village of X promises | | to paythe bearer at the City to pay the bearer at the City | | Trust Co.,Cleveland, Ohio, Trust Co., Cleveland, Ohio, | | twenty-fivedollars, being 6 twenty-five dollars, being 6 | | months' intereston its bond. months' interest on its bond. | | | | No. 1 dated Jan. 2, 1909. No. 2 dated Jan. 2, 1909. | | D. B. X.___________________ D. B. X.___________________ | | Mayor. Mayor. | | | | X. Y. Z.___________________ X. Y. Z.___________________ | | Clerk. Clerk. | | | +------------------------------------------------------------------+

Interest Coupons Attached to Municipal Bond.

Similar coupons follow for payment at intervals of 6 months until maturity of bond in 1920.

=129. Collateral and Judgment Notes.= Banks frequently require borrowers to sign collateral notes. These instruments are promissory notes, with an added agreement to the effect that certain collateral security is given the payee by the maker as security for the note. Such security is usually certificates of stock, bonds, other promissory notes, or chattel property. The collateral note contains a stipulation that upon default, the payee may sell the collateral. The following is a common form of collateral note used by banks:

$5,000.00 Cleveland, Ohio, Dec. 26, 1908.

Six months after date, I promise to pay to the order of the Fictitious Bank at its banking rooms in Cleveland, Ohio, the sum of Five thousand dollars for value received, with interest at the rate of 6% per annum. I have deposited with said bank as collateral security for the payment of this note the following property; 20 shares of stock of the Columbia Sewing Machine Co., par value $100.00 each, 2 diamond rings, 1 warehouse receipt of the City Storage Co., covering household furniture valued at $3,000.00. The value of this property is now $5,600.00. It is agreed that the payee, or his assigns, may have the right to call for additional security at any time it considers this collateral security insufficient, and on failure of the maker of this note to furnish additional security to satisfy the holder of this note, the note may be deemed payable at once at the holder's option. The holder shall also have power to accept substitutes for this collateral. Should the maker violate any of the conditions of this note, or fail to pay it when due, the holder shall have the power to sell the collateral or any substitute given therefore, at private or public sale, at any time without notice to anyone, and after deducting all legal expenses connected with the sale, and after paying the note, shall return the balance to the maker.

(Signed)
John Smith.

A judgment note contains a provision that upon default of payment, any attorney at law may appear in court and take judgment thereon by presenting the note, without observing the formalities of an ordinary suit at law. This kind of a note is also called a _cognovit_ note. The following is a common form of judgment note:

$100.00 Boston, Dec. 8, 1909. One year after date, I promise to pay to the order of John Jones the sum of one hundred dollars with interest at 6%, and I hereby authorize any attorney at law in the United States to appear before any Justice of the Peace, or in any court of record, after this note is due, and waive the service of summons, and confess judgment against me in favor of the holder of this note for the amount which shall then be due and unpaid thereon, together with interest and costs.

(Signed)
Thos. Thomas.