441. Difference between a Promissory Note and an Ordinary Debt. A promissory note differs from an ordinary indebtedness on account in that it may be sold and collected independently of any indebtedness which the payee of the note may owe to the maker of the note. In general commercial usage a man who fails to pay a note when it is due is a self-declared bankrupt, while failure to pay an ordinary account when due is only prima facie evidence of delinquency and may be explained away by disputing the debt itself, or by offering evidence that there are items which should be used as offsets of the debt. A promissory note can be disputed only by declaring that the note is a forgery, or that it was obtained by fraud. The law in regard to promissory notes should be studied in courses on commercial law.

WRITTEN EXERCISES

1. Make a note payable in a definite time and carrying a specified rate of interest.

2. Make a note not bearing interest and payable to any one who may present it for payment.

3. Indorse a note in blank.

4. Indorse a note "without recourse and explain the difference between this indorsement and the usual indorsement.

5. What is a non-negotiable note? May a negotiable note be indorsed so as to make it non-negotiable? How?

6. A note made by Chas. E. Hammond in favor of George F. Powers is indorsed as follows.

George F. Powers

Pay to Henry Ward

or order

Carl Woods

Without Recourse
Henry Ward

This indorsement show that Mr. Powers transferred the note to Carl Woods, Carl Woods to Henry Ward, and Henry Ward to some other person. Explain fully the liability which each indorser assumes.

DRILL IN FUNDAMENTALS

Find the interest on the following and check results:

CHAPTER XXVIII

PARTIAL PAYMENTS

442. If a note reads "on or before a certain date I promise to pay," then payments may be made on the note before the date named in it. Such payments are called partial payments.

443. United States Rule for Computing Partial Payments.

1. Find the amount of the note up to the date of the first payment. If this payment is sufficient to cover the interest up to that date, deduct it from the amount. The result is the new principal.

2. Using this new principal, find the amount of the note up to the date of the second payment and deduct payment as before.

3. Proceed in this manner until the final date is reached.

4. If a payment is not sufficient to cover the interest for the period next preceding, no deduction is made, but the payment is added to the next payment.

This rule has been adopted by the United States Supreme Court and is in very general use.

444. Indorsing a Note. When payment is made on a note the amount is written on the back of it. This is called indorsing the note. On a note dated Jan. 10, 1916 payments are made as follows: March 20, 1916, $1500; Aug. 10, 1916, $1000; December 1, 1916, $50. These payments are recorded on the back of the note as follows: Received on this note,

When a partial payment is made on a note the payment must be indorsed on the note itself; for otherwise the note might be sold to a third party and the full amount collected in spite of the previous part payment.

The United States Rule for computing partial payments will be most easily understood from an example.

Example. Find the amount due May 1, 1917, on a note for $ 6000, interest 6%, indorsed as on the opposite page.

We see at a glance that the $50 paid December 1, 1916 is not sufficient to cover the interest from Aug. 10 to that date. Hence the interest is computed from August 10, 1916, to May 1, 1917, and the $50 payment deducted from the amount due on the latter date.

PROBLEMS

1. A note dated May 20, 1916, for $8500 bearing interest at 6% was indorsed as follows: August 1, 1916, $500; Oct. 10, 1916, $600; Dec. 1, 1916, $1000; May 1, 1917, $4000. Find the amount due July 1, 1917.

2. Note for $500, dated May 1, 1911; interest 6%. Payments: Dec. 24, 1911, $75; June 29, 1912, $25; Aug. 22, 1912, $140; June 4, 1913, $250. What was due Jan. 1, 1914?

3. $700

Cleveland, Ohio,

August 1, 1912.

One year after date I promise to pay James Reynolds, or order, Seven Hundred Dollars with interest at 5%, for value received.

John Simpson.

Payments: Aug. 10, 1913, $250; Jan. 15, 1914, $300; Aug. 15, 1914, $150. What was due Oct. 25, 1914?

445. Compound Interest Avoided in Partial Payments. The reason that the amount is not computed and the payment deducted in case the payment is not sufficient to cover the interest to the date of payment is that compound interest is to be avoided.

There are certain more complicated questions, however, arising in this connection, the discussion of which is beyond the scope of this book. The student is referred to texts on the mathematics of investment.

446. Merchant's Rule. The following rule is often used by business men to settle indebtedness.

(a) Find the amount of the original principal to the date of final settlement.

(b) Find the amount of each payment to the date of final settlement.

(c) Add the amounts under (b) and subtract from the amount under (a). The remainder is the amount due. This is sometimes called the Merchant's Rule.

Example. A note for $4800 bearing interest at 7% and dated Oct. 7, 1915 is indorsed as follows:

Dec. 1, 1915, $200; Jan. 10, 1916, $1500; March 15, 1916, $500. Find amount due May 15, 1916, using the Merchant's Rule.

Solution. Principal Oct. 7, 1915
Interest Oct. 7, 1915 to May 15, 1916

4800

203.47

1. What is meant by partial payment? When partial payment is made on a note, how must this payment be recorded? Why?

2. How is compound interest avoided by computing according to the United States Rule?