Definitions

Question 1

What source of law governs negotiable instruments?

Answer 1

Article III of the Uniform Commercial Code

Question 2

What are the two basic types of negotiable instruments?

Answer 2

notes and drafts

Question 3

What is a note?

Answer 3

a two-party negotiable instrument in which a “maker” promises to pay the “payee” a specified amount of money

Question 4

What is a draft?

Answer 4

a draft is a three-party instrument in which a “drawer” orders a “drawee” to pay the “payee” a specified amount of money

Question 5

What does “payable to bearer” mean?

Answer 5

The person in possession of the instrument is entitled to payment.

Question 6

What does “payable to order” mean?

Answer 6

Only the person identified on the instrument is entitled to payment.

Question 7

When is an instrument payable to bearer?

Answer 7

If it:

• says “payable to bearer”
• says “payable to the order of bearer”
• indicates that the person in possession is entitled to payment
• does not state a payee
• states that it is payable to cash

Question 8

When is an instrument payable to order?

Answer 8

When it says:

• payable “to the order or” an identified person, OR
• payable “to” and identified person or order

Question 9

What is a “holder”?

Answer 9

A “holder” is a person (1) in possession of an instrument that is (2) payable to bearer or payable to an identified person and the identified person is the one in possession.

Question 10

What is an “owner” of an instrument?

Answer 10

A person with a possessory interest superior to the person in actual possession or could sue the person in possession for conversion

Question 11

When can a loser of an instrument enforce the instrument?

Answer 11

(1) ENTITLEMENT
- the person was entitled to enforcement when loss of possession occurred OR
- acquired ownership of the instrument someone who was entitled to enforce the instrument when loss of possession occurred

(2) NON-TRANSFER
- the loss was not the result of transfer or lawful seizure

(3) INABILITY TO POSSESS
- cannot reasonably obtain possession because
- destroyed, whereabouts cannot be determined, or possessed by a person not amendable to service of process

Question 12

What does “delivery” mean?

Answer 12

a voluntary transfer of possession

Question 13

What does “issue” mean?

Answer 13

• the first delivery of an instrument
• by the maker or drawer
• whether to a holder or nonholder
• for the purpose of giving rights on the instrument to any person

Question 14

What does “negotiation” mean?

Answer 14

• a transfer of possession of an instrument
• whether voluntary or involuntary
• by a person other than the issuer
• to a person who thereby becomes its holder

Question 15

What does “indorsement” mean”

Answer 15

• a signature on an instrument
• other than of the maker/drawer or accepter
• plus accompanying instructions if any
• for the purpose of negotiating the instrument, restricting payment, or incurring indorser liability on the instrument

Question 16

How is the “purpose” of a signature and any accompanying instructions on an instrument other than that of the maker/drawer or acceptor determined?

Answer 16

a signature and its accompanying words is an indorsement unless:

• the words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for another purpose

Question 17

Who is a “person entitled to enforce” an instrument?

Answer 17

• the holder
• a non-holder in possession who has rights of a holder
• a loser entitled to enforce the instrument
• a person from whom a mistaken payment is recovered

A “person entitled to enforce” need not be the owner; could be a wrongful possessor.

Question 18

What does “transfer” mean?

Answer 18

• delivery (voluntary transfer of possession)
• by a person other than its issuer
• for the purpose of giving to the person receiving delivery the right to enforce the instrument
  (may or may not be negotiation)