Negotiable Instruments

Question 1

What does Negotiable Instrument mean?

Answer 1

Written, transferrable item.

Question 2

Name the 2 types of NI?

Answer 2

Notes and Drafts

Question 3

What are notes?

Answer 3

It’s a 2 party instrument (maker and payee)
Involve a promise to pay
Examples: Promissory note, Certificate of Deposit

Question 4

What are Drafts?

Answer 4

It’s a 3 party instrument (drawer, drawee, payee)
Involve an order to pay
Examples: trade acceptances, checks

Question 5

What are the elements of negotiability?

SUMDO

Answer 5

Signature-maker of the note or the drawer of a draft
Unconditional promise or order to pay money
Money in a fixed amount of money- legal tender
Demand or at a definite time (Payable on)
Order of a party or to bearer

Question 6

Is consideration required for negotiable contracts?

Answer 6

No, consideration is not required, need only to have possession to enforce.

Question 7

Negotiability is determined by what?

Answer 7

Determined by the face of the instrument. Nothing on back of instrument can destroy instrument.

Question 8

How is bearer paper transferred:

Answer 8

Need only be transferred by delivery.

Holder only needs possession

Question 9

How is order paper transferred:

Answer 9

Transferred by delivery and endorsements.

Holder needs possession and necessary endorsements.

Question 10

What are special or blank endorsements?

Answer 10

Blank: usually just the endorser’s signature, create bearer paper.
Special: specifies to whom the instrument is further payable. Creates order paper.

Question 11

What are restrictive or nonrestrictive endorsements?

Answer 11

Restrictive: an attempt by endorser to restrict further negotiation. “For deposit only” “For collection” “Pay any bank”

Question 12

What are qualified or unqualified endorsements?

Answer 12

Unqualified: endorser is promising to pay the value of the instrument
Qualified: endorser is disclaiming contract liability “without recourse”

Question 13

What is a Holder in Due Course?

Answer 13

Holders in due course may have superior rights to the endorser.
Take free of all claims of ownership to the instrument
Take free of all personal defenses
Take subject to all real defenses

Question 14

What are the requirements to become a Holder in Due Course?

Answer 14

Must be a holder
Must also take the instrument for value and in good faith
Without notice of instrument being overdue, or dishonored.
No knowledge of claims of ownership or defenses to liability.

Question 15

What are the right of a Holder in Due Course?

Answer 15

Best ownership

Personal defenses cannot be used to prevent the holder in due course from collecting, but real defenses can.

Question 16

What are personal defenses?

LUV BT

Answer 16

Breach of contract
Lack of consideration
Voidable formation defenses: fraud in the inducement, mistake
Theft
Unauthorized completion

Question 17

What are real defenses?

FFAAIIDDSS

Answer 17

Fraud in the execution 
Forgery
Adjudicated insanity
material Alteration 
Infancy 
Illegality
Duress
Discharge in bankruptcy
Suretyship defenses
Statute of limitation

Question 18

What is the Shelter Rule?

Answer 18

A party who received an instrument that was once held by a holder in due course, will also receive, at least, the rights of a holder in due course.
Applies even if party does not meet the criteria to be a holder in due course.

Question 19

Generally, who was contract liability?

Answer 19

Any party’s signature that appears on the instrument has contract liability:
Maker of notes or drawers of drafts
Endorsers
Acceptors of a draft

Question 20

Who is primarily liable in a note and in a draft?

Answer 20

Maker of a note

Acceptor of a draft

Question 21

Who is secondarily liable?

Answer 21

If primary party doesn’t pay, holder may sue the primary party or seek payment from a secondary party.
Secondary parties are:
Endorsers
Drawers

Question 22

A person who endorses a check “without recourse”

Answer 22

An endorsement “without recourse” is a qualified endorsement that disclaims this contract liability. But it does not eliminate warranty liability.

Question 23

When is an instrument considered overdue?

Answer 23

A holder cannot qualify as a holder in due course if (s)he has notice that the instrument is overdue. The holder of a check has such notice if (s)he takes it 90 days after its date. A check is also overdue on the day after the day demand for payment is duly made. The date of the last negotiation is not relevant. A reasonable time for a check drawn and payable in the United States is 30 days after issue.