Negotiability

Question 1

What does negotiability refer to?

Answer 1

The form of the instrument, which is determined at the time of issuance

Question 2

Why is negotiability important?

Answer 2

If it is negotiable and properly negotiated, it may reach the hands of a holder in due course and the holder in due course gets better rights than the transferor
* This means the holder in due course can get paid even if the obligor (maker/drawer) has defenses to payment under K law

Question 3

What are the elements needed for an instrument to be negotiable?

Answer 3

1. Instrument is written and signed
2. Unconditional
3. A promise to order to pay
4. A fixed amount of money (with or without interest) that:
   • Is payable to order or bearer
   • Is payable on demand or at a definite time and
   • States no unauthorized undertaking or instruction by the person promising or ordering payment

Question 4

What does the “writing” requirement for negotiability entail?

Answer 4

There needs to be a written instrument, but there aren’t any requirements concerning what it is to be written with or written on

Question 5

What does the signature requirement for negotiability ential?

Answer 5

Liberal–any symbol executed or adopted by a party with present intent to authenticate a writing (e.g., thumb print, computer generated, initials, trade or assumed name, etc.)

Question 6

What does the “unconditional promise or order to pay”

Answer 6

• A note must contain an express promise to pay (e.g., “I promise to pay”)
• A draft must contain and order to pay (e.g., “First Bank, pay . . .”)

Question 7

What would make a promise or order conditional (and therefore not negotiable)?

Answer 7

There’s a presumption that it is unconditional, but the following destroy negotiability:

• An express condition to payment
• It states that the promise or order is “subject to” or “governed by”
• The rights or obligations with respect to the proimse or order are stated in another record

Question 8

What does NOT make a promise or order conditional (i.e., doesn’t alter presumption of unconditionality)?

Answer 8

• A statement of consideration required for the payment
• Referring to another record (e.g., “as per” or “in accordance with”–compare with “subject to” or “governed by”)
• Incorporation by reference that wouldn’t hurt the holder (e.g., rights regarding collateral, right of obligor to pay early, and right of acceleration)
• Limits payment to particular fund/source
• Requires countersignature (e.g., traveler’s check) or
• Contains statement required by law that holder is subject to claims or defenses of original payee

Question 9

What is the “fixed amount” requirement for negotiability?

Answer 9

(1) Must be able to look at instrument and determine principal amount due
(2) Interest–can be fixed or variable and won’t destroy (just can’t be silent)
* Presumption of no interest

Question 10

What are the rules of “money” in negotiability (i.e., “fixed amount of money”)?

Answer 10

Any medium of exchange authorized or adopted by domestic or foreign government as part of its currency
* Cannot be payable in goods or services
* WORDS prevail over figures (i.e., “Five thousand dollars prevails over $500”)

Question 11

What is the “no other undertaking or instruction” requirement for negotiability?

Answer 11

Negotiable instruments are just promises or orders to pay money, and only three undertakings or instructions are authorized:
1. Promises to give, maintain, or protect collateral
2. Authorization or power given to holder to confess judgment or to realize on or dispose of collateral
3. Waiver of law meant to benefit obligor

Question 12

What is the “payable on demand or at definite time” requirement for negotiability?

Answer 12

• When it states it is “payable on demand” (ordinary check demand instrument because it doesn’t state a due date)
• Definite time means: (a) fixed date stated in instrument; (b) fixed period after sight or acceptance; or (c) at a time readily ascertainable when instrument is issued

Question 13

When may a date change be permitted without violating the “payable on demand or at definite time” requirement?

Answer 13

• Prepayment of instrument
• Acceleration of due date
• Provisions extending the due date at the option of the maker and extensions that are automatic on the happening of an event, if the extension is to a further definite time stated in the instrument

Question 14

What is the requirement of “contains words of negotiability?”

Answer 14

• To bearer, which happens if: (a) states it is “payable to bearer”; (b) does not name a payee; or (c) is payable to “cash” or otherwise indicates it isn’t payable to an identified person
• To order if it is payable to the order of an identified person or to identified person or order

Question 15

What if there is both order and bearer language?

Answer 15

The bearer language controls

Question 16

What is the exception of words of negotiability for checks?

Answer 16

If this is the only element of negotiability missing ofr a check, the order or bearer language requirement is waived