Negotiating/Issuing Instruments

Question 1

What does it mean to “negotiate” an instrument?

Answer 1

Pass rights of payment under that instrument to other people

Question 2

Who may negotiate an instrument?

Answer 2

only the holder can negotiate an instrument

Question 3

How do you become a holder of bearer paper?

Answer 3

You are in possession of the instrument and thus can enforce it

Question 4

How do you become a holder of order paper?

Answer 4

Possession AND identified as payee to enforce that instrument

Question 5

How do you make someone else a holder for bearer paper?

Answer 5

Simply pass possession

Question 6

How do you make someone else a holder for order paper?

Answer 6

pass possession AND endorse the instrument (sign on the back)

Question 7

What is a blank endorsement?

Answer 7

One that has a simple signature, which makes order paper into bearer paper

Question 8

What is a special indorsement?

Answer 8

Signature under instruction directing payment to a specific person (“pay to John Smith” /s/ Jason Karl) the instrument continues as order paper or becomes order paper.

Question 9

What if Jason endorses a check to “to Person A, Person B” who becomes holder?
“To Person A and Person B”?

Answer 9

Either can become holder

Both are holders

Question 10

What is a restrictive endorsement?

Answer 10

Signed endorsement under a restriction, most commonly “for deposit only” which requires money from payment for the instrument to fo into the endorser’s deposit.

Question 11

What is an anomalous endorsement?

Answer 11

It introduces a suretyship, where the endorser is not the holder. The presumption is that the non-holder signed the instrument to be a guarantor of payment of the instrument to anyone who later becomes the holder.

Question 12

How do you become a co-maker?

Answer 12

One signs a note on the front, with the clear and knowing intention of guaranteeing to lender that the note/loan will be repaid.

Question 13

What is an accommodation parties?

Answer 13

They are co-makers and suretys, and are treated as guarantors of payment-promises to pay as soon as primary obligor defaults, no need to pursue collection from primary obligor first!

Question 14

What happens to accommodation parties if note holder releases the primary obligor of the debt?

Answer 14

Release:If the note holder releases the principal obligor, it does NOT release secondary obligors (contrary to general law of suretyship)

Question 15

What happens to accommodation parties’ obligations if there was an extension, modification, or impairment of collateral to the note without their consent?

Answer 15

This would discharge the guarantor who did not consent to the modification, but only to the EXTENT that the modification causes them loss.

Question 16

A wanted a car loan, but Lender wouldn’t extend him the loan unless he found a co-sign. B agreed and added his signature under A’s signature for a promisorry note of $5000. When the not came due, A asked for an extension, and it was granted, even though he had the money at the time. B did not know about the modification. After the extension was granted, A disappeared. Does B have a defense to paying the note?

Answer 16

Yes, B as an accommodation party, who did not consent to the modification, and it was to his detriment of the full amount.