Negotiability and Negotiation

Question 1

Negotiabilitiy

Answer 1

Refers to the legal status and form of the instrument. Determined at issuance.
If a note (not check) says it’s non-negotiable it is non-negotiable. But, no express opt-in to negotiability permitted.

Question 2

Result of non-negotiable instrument

Answer 2

Regular contract

Question 3

Requirements of Negotiable instrument

Answer 3

1. Writing
2. Signed by Maker/Drawer
3. Unconditional Promise or Order to Pay (no strings)
4. To pay a fixed amount
5. Of Money
6. No other unauthorized promises or undertakings (exceptions for secured loans)
7. On demand OR at a definite time
8. (Notes only) Magic words to “Order” or to “Bearer”

Question 4

Items that make promise or order conditional (non-negotiable)

Answer 4

1. Express condition to payment

2. Promise or order “subject to” or “governed by” another record

Question 5

Items that do NOT make a promise or order conditional (can be negotiable)

Answer 5

1. Statement of consideration
2. Reference to another record (“in accordance with”)
3. Limitation of payment to a particular fund or source

Question 6

Fixed amount?

Answer 6

1. Determine principal amount due

2. Interest may be stated as (a) interest rate (b) miscellaneous types of fees or penalties

Question 7

What qualifies as “Money”?

Answer 7

1. An authorized medium of exchange adopted by an authorized government or intergovernmental organization as part of its currency
2. Foreign money
3. Not precious metals or commodities

Question 8

Exceptions to negotiability requirement of no additional promises permitted for secured loans

Answer 8

1. Promise to protect collateral
2. Confession of judgment
3. Waiver of law meant to benefit maker or borrower

Question 9

Meaning of “on demand”

Answer 9

1. express statements “on demand” or “at sight”

2. silent instrument

Question 10

Meaning of “definite time”

Answer 10

1. Date stated in instrument
2. Fixed period after sight or acceptance
3. time readily ascertainable at the time the promise or order is issued (when X dies not readily ascertainable)
4. Extensions permitted as long as not infinite

Question 11

Negotiation

Answer 11

Transfer of negotiable instrument to transferee who becomes “holder” of negotiable instrument and good title (depends on type of paper/words of negotiability used. Look to “front” of instrument)

Question 12

Method of obtaining good title to order paper

Answer 12

Negotiation through proper indorsement plus delivery

Question 13

Method of obtaining good title to bearer paper

Answer 13

Negotiation through delivery alone

Question 14

How to determine the type of paper

Answer 14

At first negotiation, look to front of instrument
At subsequent negotiations look to back of instrument
(last indorsement rule)

Question 15

Indorsements

Answer 15

A signature on a negotiable instrument by someone other than the maker, drawer or acceptor. Normally on the back of the instrument

Question 16

Blank indorsement

Answer 16

Person’s signature only

Creates bearer paper

Question 17

Special indorsement

Answer 17

Payee’s signature PLUS designation of new person to whom instrument is payable
Creates order paper

Question 18

Restrictive indorsement

Answer 18

Writing “for deposit or collection” after indorsement. Limits what may be done with the instrument