Sec. 24. In General

An instrument is not negotiable unless it contains words of negotiability.

An instrument to be negotiable must be payable "to order" or "to bearer."

Sec. 25. When Payable To Order

"An instrument is payable to order where it is drawn payable to the order of a specific person or to him or his order."

"It may be drawn payable to the order of

1. A payee who is not maker, drawer or drawee; or

2. The drawer or maker; or

3. The drawee; or

4. Two or more payees, jointly; or

5. One or some of several payees; or

6. The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty."46

Instruments to order, customarily read "Pay to the order of John Brown" or "Pay to John Brown, or order."

It will be noticed that the person to whose order it is made may be the drawer or maker himself. In connection with this provision, one should recall the provision that "Where a note is drawn to the maker's own order it is not complete until indorsed by him."

In practice one should always use the word "order" - rather than any word intended as a synonym thereof.

46. Nego. Instru. Act, SEC. 8.

Example 22. A note payable to "A" "and assigns" was held to be not negotiable, as lacking proper words of negotiability.47

Sec. 26. When Instrument Payable To Bearer

"The instrument is payable to bearer:

1. When it is expressed to be so payable; or

2. When it is payable to a person named therein or bearer; or

3. When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; or

4. When the name of the payee does not purport to be the name of any person;

5. When the only or last indorsement is an indorsement in blank."48

An instrument payable to bearer, on account of being drawn in any of the five ways signified above, is transferable by mere delivery.

Below the various situations are discussed.

(1) When it is expressed to be so payable.

In such a case an instrument reads "Pay to bearer," and may be transferred by mere delivery, or by indorsement, general or special.

(2) When it is payable to a person named therein, or bearer.

In this case the instrument may be transferred by mere delivery, or may be indorsed generally or specially.

47. Zander v. N. Y. Security & Trust Co., 78 N. Y. S. 900.

48. Nego. Instru. Act, SEC. 9.

(3) When it is payable to the order of a fictitious or non-existing person and such fact was known to the person making it so payable.

This is a provision of the law that has caused some criticism as having dangerous possibilities. The governing idea is that if one for bookkeeping or some other purpose makes an instrument payable to a payee known to him to be nonexistent or fictitious, the instrument is really payable to any person to whom it may be transferred, and has practically the same effect as though payable to cash. But it has been pointed out that in such cases prudent persons will not take the instrument so payable until the instrument is indorsed with the name of the nominal payee.49

The criticism is that if a note is made payable to a fictitious person and is stolen and indorsed by the thief in the name of the fictitious payee, the maker becomes liable to the holder, notwithstanding the forgery, because the instrument is payable to bearer and therefore such holder need not trace his title through the forged indorsement but may disregard it, even though he supposed the payee was a real person and that such person's indorsement was essential to his title when he acquired the paper.50

(4) When the name of the payee does not purport to be the name of any person.

Instruments payable to "cash," "bills payable" or any impersonal payee are negotiable and payable to bearer, and need not have other words of negotiability.

49. Brannan Nego. Instru. Law, SEC. 9.

50. See Bartlett v. First Nat. Bk., 247 111. 490.

Example 23. A check reading "Pay to cash $1000" is negotiable, and may pass by mere delivery.

(5) When the only or last indorsement is an indorsement in blank.

If an instrument, whether payable to bearer or to order, is indorsed in blank, or if being indorsed specially the last indorsee indorses in blank, it is payable to bearer. The instrument must, however, on its face be negotiable. Mere indorsement in blank will not cure deficiencies in the instrument as originally drawn; the purpose of this provision being merely to indicate that an instrument already negotiable is payable to bearer if its only or its last indorsement is in blank.51 (Blank indorsements may be converted into special indorsements as hereafter shown.)

Example 24. An instrument is payable to John Brown, or order. Its negotiation requires indorsement by John Brown. He indorses it " Pay to William Smith, (sd) John Brown." Then its further negotiation requires the indorsement of William Smith. Suppose that William Smith indorses it in blank, that is to say, by simply writing "William Smith." Its further negotiation may be accomplished by mere delivery or, if the parties choose, by indorsement.