Commercial Paper Practice Flashcards
“I, Mary, promise to pay to the order of Paul $5,000 if he mows my lawn.”
Valid for Negotiable Instrument?
NO
WHY - This language would disqualify the writing as a NI because Mary’s payment obligation is CONTINGENT upon Paul mowing Mary’s Lawn.
RULE - promise or order to pay must be unconditional.
Express condition to pay violates the unconditional requirement
“I, Mary, promise to pay to the order of Paul $50,000 subject to the written contract between Mary and Paul dated January 1, 2013.”
Valid for Negotiable Instrument?
NO
WHY - This language would disqualify the writing as a NI because Mary’s payment obligation is SUBJECT TO the written terms in the contract dated January 1, 2013.
RULE - The promise or order to pay must be unconditional.
“I, Mary, promise to pay to the order of Paul $50,000 in accordance with the written contract between Mary and Paul dated January 1, 2013.”
Valid for Negotiable Instrument?
YES
WHY - Mere references to other documents do not make the promise or order to pay conditional.
RULE - The promise or order to pay must be unconditional.
NOTE - The key with references to other documents is that as long as the reference is there for informational purposes only, then the promise or order to pay is not a conditional one.
“I, Mary, promise to pay to the order of Paul $50,000. This payment represents a down payment on a contract for the purchase of a two- story house.”
Valid for Negotiable Instrument?
YES
WHY - Mere references to other documents do not make the promise or order to pay conditional.
RULE - The promise or order to pay must be unconditional.
NOTE - The key with references to other documents is that as long as the reference is there for informational purposes only, then the promise or order to pay is not a conditional one.
“I will pay from the proceeds of the sale of my household furniture.”
Valid for Negotiable Instrument?
YES
WHY - This language qualifies as an UNCONDITIONAL promise; the instrument remains negotiable.
RULE - A provision that payment must be from an identified fund does not render the promise conditional.
“I promise to pay to the order of Paul $50,000 on January 1, 2013. The collateral for this note is a security interest in the maker’s art collection. For rights and duties on default, see the security agreement signed this date creating a security interest.”
Valid for Negotiable Instrument?
YES
WHY - References to other records regarding rights as to collateral, prepayment, or acceleration DO NOT make the promise to pay conditional.
RULE - The promise or order to pay must be unconditional.
“I, Mary, promise to pay to the order of Paul $50,000, plus interest at a rate of 2% above the prime rate, to be measured on the date the note matures.”
Valid for Negotiable Instrument?
YES
WHY - This writing is a negotiable instrument even though the interest rate will have to be researched upon maturity date. The principal amount is fixed at $50,000, so the instrument qualifies as being payable for a fixed amount of money.
RULE
- The PRINCIPAL amount due on the instrument must be a fixed amount of money.
- Interest can be VARIABLE.
NOTE - Be aware of fact patterns in which the interest rate may not be fixed or readily ascertainable. The writing in question will still be a negotiable instrument as long as the principal amount is fixed.
“I, Mary, promise to pay to the order of Paul $50,000.”
Valid for Negotiable Instrument?
YES
WHY - Thekey phrase “to the order of” makes the writing a negotiable order instrument.
RULE - An instrument payable to a specific person requires specific language or words of NEGOTIABILITY.
“I, Mary, promise to pay Paul $50,000.”
Valid for Negotiable Instrument?
NO
WHY - This writing would NOT BE considered a negotiable order instrument because even though it is payable to a specifically identified person, it does NOT have the key phrase “to the order of” or “or his order” in the writing.
RULE - An instrument payable to a specific person requires specific language or words of NEGOTIABILITY.
“I, Mary, promise to pay bearer $50,000.”
Valid for Negotiable Instrument?
YES
WHY - This writing would still qualify as a NI even without the phrase “to the order of” because the writing is not payable to a SPECIFIC PERSON.
RULE - A Bearer Instrument requires language that does not attempt to pay a specific person
“I,Mary, promise to pay to the order of Paul or bearer $50,000”
Valid for Negotiable Instrument?
YES
WHY - would be considered a bearer instrument because it is payable both to a specifically identified person (Paul) and to bearer.
RULE - If a writing has characteristics of both an order instrument and a bearer instrument, then the writing will be treated as BEARER paper.
A check made payable to Paul that reads “pay to the order of Paul”
Valid for Negotiable Instrument?
YES
WHY - Checks are the exception to the “words of negotiability” requirement
RULE - Article 3 makes this exception simply because checks are prevalent. It would be cumbersome to distinguish between those checks that contained such language and those that did not.
“I, Mary, promise to pay to the order of Paul $50,000, to be paid on June 1, 2014. But if the Dallas Cowboys win the Super Bowl prior to June 1, 2012, then payment will be due immediately after the game.”
Valid for Negotiable Instrument?
YES
WHY - The writing remains a negotiable instrument because there is a definite due date upon which the instrument is due.
RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.
“Payable January 1, 2013, but the obligor may extend the payment date at the obligor’s discretion.”
Valid for Negotiable Instrument?
NO
WHY - The writing is not a negotiable instrument because the extended date would not be a definite time.
RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.
“Payable January 1, 2013, but the obligor may extend the payment date to January 1, 2014, at my discretion.”
Valid for Negotiable Instrument?
YES
WHY - The instrument can contain provisions allowing for the OBLIGOR (the one obligated to pay) to extend the due date, provided the extension is to a DEFINITE TIME.
RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.
