Test 1

Question 1

What/who is a maker,

Answer 1

The person who makes out the promissory note and owes the payee.

Question 2

What/who is the drawer?

Answer 2

The one who creates the draft and and orders the drawer to pay money to the payee.

Question 3

What are the seven elements of negotiability?

Answer 3

1) A writing
2) signed by the drawer (draft) or maker (note) with an
3) Unconditional promise (notes) or order (drafts) to pay a
4) Fixed amount of money that is
5) Payable on demand or at a definite time, is
6) Payable to order or bearer, AND
7) States no other undertaking or instruction to do any act other than the payment of money.

Question 4

What are the two requirements for the element of writing on a negotiable instrument?

Answer 4

It must be permanent and portable

Question 5

What counts as a signature?
Where must it be located?
When is it considered valid?

Answer 5

• any mark intended to authenticate the instrument
• anywhere on the front of the document
• presumed valid unless contested (burden of proof to contester)

Question 6

What makes a promise / order unconditional?

Answer 6

• mere than an acknowledgment of debt
• orders specifically identify drawee
• no conditional statements on the face
• it cant be subject to an outside document (it can reference one though)

Question 7

For the element of being a “fixed amount of money”, what is required?

Answer 7

• The principal amount due must be on the face of the instrument (interest rates, collection costs, attorney fees not relevant)
• Must be an adopted currency adopted by the U.S. or a foreign government (gold and silver don’t count)

Question 8

Why is it necessary that an element of negotiable instruments is that it is payable on demand or at a definite date?

Answer 8

To know its

1) Present Value
2) When the obligations of secondary parties arise
3) When the statute of limitation starts to run (after this time it can’t be brought up in court)

Question 9

Extension clauses do not destroy the “payable on demand or at a definite time” element: what preserves this (consider drawer/maker and holder separately)?

Answer 9

• If the option is with the maker/drawer then it must be specified up front
• if with the holder it can be open ended

Question 10

If there is a discrepancy between pre-printed, typewritten, and/or handwritten material on a contract what is the hierarchy of preference?

Answer 10

Handwriting then typewritten then pre-printed

Question 11

When there is a good faith disagreement about the amount owed between two parties:

What are the options to someone receiving a check that says “payment in full”, and the results?

What two exceptions protect a party from being bound by accidentally accepting the payment in full?

Answer 11

1) cash it and spend it lose legal right to sue for the rest of the amount owed.

2) don’t cash and sue for remaining amount.
- ———————-
1) A business can require bill disputes to be mailed to a different address than the usual payment address. This protects from the “payment in full” being hidden with many other checks that were deposited by an unknowing employee.

2) If the money cashed is returned to the sender within 90 days of cashing the check they can still sue for full payment.

Question 12

What are the two types of negotiable instruments?

Answer 12

Promissory Notes and Drafts

Question 13

What is the main purpose of having negotiable instruments?

Answer 13

1) to create a money substitute, and 2) to have a credit extension device.

Question 14

Why are negotiable instruments better than mere assignments?

Answer 14

• They are easier to prove in court (they speak for themselves)
• An assignee takes the same position as the assignor, but a holder in due course (HDC) can take a better position than that of the transferor.

Question 15

How does a trade acceptance work?

Answer 15

A drawer (company) extends credit to a customer, by ordering the drawee (customer) to pay the drawer (company), making the drawer both the drawer and the payee.

Question 16

Why is a trade acceptance better than a account receivable? (3)

Answer 16

1- easier to prove in court, speaks for itself

2- less potential defenses to payment raisable by drawee (customer)

3- more sellable on the open market

Question 17

Are checks demand or time instruments?

Answer 17

They are always demand instruments. It does not matter if they are post dated, they are still on demand, so the payee could cash it before the post marked date.

Question 18

What does the lack of a date due for the negotiability requirement of being payable on demand or at a definite time?

Answer 18

The lack of a date is irrelevant unless payment somehow hinges on it (example: a “90-day note”)

Question 19

In regards to negotiability what language on an instrument (except for checks) destroys the “payable to order or bearer” requirement?

What are acceptable wordings that allow negotiability?

Answer 19

-If it says “pay to” this destroys it, except a check where “pay to” is read to mean “pay to the order of”.

-Non-Bearer Paper: payee must be name with certainty
Bearer Paper:”Pay to the order of bearer”, “Pay to Bearer”, “Pay to the order of cash”, instruments endorsed in blank (signed with no payee specified).

Question 20

What exceptions are allowed to the negotiability requirement of “no obligation other than the payment of money?” (2)

Answer 20

• promises to maintain collateral will not cause a problem

- waivers of protections afforded the obligor by other laws do not violate this requirement

Question 21

What are the three preference levels regarding possessors of negotiable instruments (from best to worst)?

Answer 21

1- Holder in Due Course (HDC)
2- Holder
3- Assignee

Question 22

What are the two types of “paper” that can be negotiated? What is required for these negotiable instruments to be negotiated?

Answer 22

• Order Paper: 1) endorsement and 2) delivery
• Bearer Paper: Just delivery (although most transferees demand signature for secondary signature liability, as they are entitled to do when they have given value)

Question 23

What is the definition of a holder?

Answer 23

One is possession of a negotiable instrument: drawn or issued to him or…

endorsed:

• to him
• to his order
• to bearer, or
• in blank

Question 24

Why is order paper safer than bearer paper?

Answer 24

Order paper must have a legitimate endorsement to be negotiated, whereas bearer paper just has to be delivered, so a thief could easily steal bearer paper and sell it to someone else.

Question 25

What are the different types of endorsements? (4)

Answer 25

1) Blank
2) Special
3) Qualified
4) Restrictive

Question 26

What are the major characteristics of a blank indorsement?

Answer 26

• it specifies no particular indorsee
• it creates bearer paper out of the instrument
• the recipient can completer or convert the indorsement to order paper by adding their name

Question 27

What are the major characteristics of a special indorsement?

Answer 27

• a specific indorsee is indicated
• it creates order paper
• “pay to” in an indorsement means the same things as “pay to the order of”

Question 28

What are the major characteristics of a qualified indorsement?

Answer 28

• it is “without recourse” (the indorser is takes no responsibility if the instrument “bounces”)
• usually done when a trasferor has no interest in the instrument (ex. an attorney receiving a check for a client)

Question 29

What are the major characteristics of a restrictive indorsement?

Answer 29

-Attempt to restrict what the indrosee (receiver) can do

Question 30

What is the effect of a restrictive endorsement with conditions that prohibit further negotiation?

Answer 30

These are ignored. If an indorsement said ““pay to Al Wou only” it would be read as “pay to the order of Al Wou”

Question 31

How does a holder qualify to become a Holder in Due Course (HDC)? (3+6)

Answer 31

1- Takes for value

2- Takes in good faith

3- Without any knowledge of
a- overdueness
b- dishonor
c- defenses
d- adverse claims
e- any uncured default with respect to another instrument issued as part of the same series, or
f- such irregularities or incompleteness as to call into question the instrument’s authenticity.

Question 32

What does “knowledge” mean in the context of being a holder in due course?

Answer 32

It means knows or has reason to know, but does not include the content of public filings unless they are actually known

(having to know the public filings is called constructive knowledge)

Question 33

What happens if someone meets the knowledge requirement to be a holder in due course, but later gains knowledge that if held earlier would have disqualified him?

Answer 33

There is no retroactive disqualification, so this person still qualifies as a holder in due course (HDC)

Question 34

When considering the requirement of “taking for value” for becoming a HDC, what…

is ignored…
disqualifies you as a HDC…
are the five ways it can be given?

Answer 34

1- market discounts are ignored

2- acquiring by gift or inheritance disqualifies you

3- The five ways are
a- Performing the associated promise
b- giving an irrevocable commitment of payment
c- acquiring a security interest in the instrument
d- antecedent debt
e- giving the negotiable instrument as payment for something

Question 35

In regard to the HDC requirement of “taking in good faith”, is the focus on the trasferee or the transferor?

Answer 35

The focus is on the trasnferee

Question 36

In regard to the HDC requirement of “taking in good faith”, what is the objective standard?

Answer 36

“Honesty in fact and the observance of reasonable commercial standards of fair dealings.”

Question 37

In regard to the HDC requirement of “taking in good faith”, for what would most courts find bad faith in how the party takes an instrument?

Answer 37

if they take it in circumstances that would lead a reasonable person to suspect some impropriety

Question 38

In regard to the HDC requirement of “without knowledge” how does overdueness come into effect?

• Consider principle vs interest
• Time instruments
• Demand instruments

Answer 38

• Interest is ignored for the overdueness, and only principle is considered
• Late the day after the due date
• Late after a reasonable time has elapsed after the date of issue (90 days for domestic checks)

Question 39

In regard to the HDC requirement of “without knowledge” and “overdueness”, for time instruments how do you count days? Months?

Answer 39

• Days: don’t include day of issue, but day of payment
• Months: the earlier of 1) The same day of the future month as the day of issue or 2) the last day of that future month.

Question 40

In regard to the HDC requirement of “without knowledge” describe the concept of “no notice of dishonor”.

Answer 40

dishonor refers to the refusal of the maker or drawee to pay or accept the instrument upon presentment

ex. a bank may return a check marked NSF if there is not enough money in the account.

Question 41

In regard to the HDC requirement of “without knowledge” what is meant by “no notice of adverse claims”.

Answer 41

An adverse claim would be someone else claiming superior ownership rights to the instrument

Question 42

Is it possible for someone to have the rights of a HDC w/ out being able to personally qualify to be a HDC? If so what is this called?

Answer 42

Yes, this is the Shelter principle.

Question 43

How does the Shelter principle work?

Answer 43

It means that all those down stream from the first person to qualify as an HDC all get the rights of an HDC, even if they don’t personally qualify unless they were involved in fraud or other illegality in regard to the instrument. Those down stream from illegality will also lose HDC status.

Question 44

For the shelter principle does this include assignees?

Answer 44

yes

Question 45

What are the three major benefits of being a HDC?

Answer 45

1- Personal (or limited) defenses are not good against a HDC (real or universal defenses still are)

2- HDC’s take free of any adverse claims

3- It may have some impact on determining whether or not transfer warranty was breached.