Negotiability

Question 1

Holder in Due Course (HDC)

Answer 1

HDC: If an instrument is negotiable, and is transferred by negotiation to someone who takes for value, in good faith, and w/o notice of any defenses or claims on the instrument.

HDC can for someone to pay on an instrument, unless for very few “real” defenses

Holder: Person in possession of an instrument with a right to enforce it.

Test for HDC:

1. Is person a holder?
2. Do they hold in due course?
   i. for value, in good faith, w/o notice

Question 2

Note

Answer 2

Promise to pay. Two parties.

1. Party promising to pay (Maker)
2. Party getting paid (Payee or Bearer)

Question 3

Draft

Answer 3

Order to pay. Three parties

1. One party (Drawer) orders another party (Drawee) to pay money to third party (Payee or Bearer
e. g. a check)

Question 4

Negotiability defined**

Answer 4

Whether something is negotiable depends on its form:

It must be:

1. Written and signed.
2. Unconditional
3. Promise or order to pay
4. Fixed amount of money (w/ or w/o interest)
   that:
   -is payable to order or bearer when issued or when first in possession of holder
   -Payable on demand or at a definite time
   -States no unauthorized undertaking or instruction by person promising or ordering payment

Question 5

Fixed Amount

Answer 5

Requiring payment in something other than money (e.g. an ounce of gold) makes an instrument NONNEGOTIABLE.
-Interest rates can be variable, or not specified.

Question 6

Unconditional

Answer 6

If it expressly states a condition, that makes it non-negotiable.
-But-
Not conditional if it:
i. refers to another writing (but not governed by it)
ii. limits payment to a particular source (just stating the consideration is fine).
iii. requires a counter signature
iv. states that holder is subject to claims or defenses of original payee

Question 7

Acceleration and Extension Clauses

Answer 7

They do not destroy negotiability.

Extensions: if to a further definite time

Question 8

No unauthorized undertaking

Answer 8

UCC permits only 3 instructions that will not affect negotiability:

1. Undertaking or power to give, maintain, or protect collateral.
2. Authorization or power given to holder to confess judgment or to realize on or dispose of collateral; and
3. A waiver of the benefit of a law that protects the obligor.

Question 9

Negotiability - Bearer Instruments

Answer 9

Negotiated by transferring possession of the instrument

Question 10

Negotiability - Order instruments

Answer 10

Transferring possession along with the identified person’s indorsement.

*Right to enforce will pass only if all necessary signatures and special indorsee’s are on instrument

Note - w/o indorsement, you’re transferring possession but is not a negotiation.

Question 11

For Value (HDC)

Answer 11

Don’t confuse value with consideration.

Ex. Taking the instrument as payment of a prior debt is value, but not consideration.

Question 12

Good faith and notice

Answer 12

Are determined at the time of negotiation or time of payment, whichever is later.

Question 13

Time of HDC

Answer 13

HDC status determined at the moment the instrument is negotiated to the holder, OR, when she gives value.
Whichever is later.