UCC 3 Essay Examples

Question 1

$ Effect of blank checks example… essentially makes a check CASH!

Answer 1

Beth issued the $1,000 check to Tom in payment for services rendered and Tom received
the check. Tom was the holder of the check, which was properly payable to him. Tom then signed his
name to the back of the check. His mere signature was a blank indorsement and operated to turn the
check into bearer paper so that anyone in possession of the check would have good title and ability to
enforce payment. Thus, when Steve took the check from Tom’s pocket and later cashed the check, he
was able to do so. Tom cannot recover from First Bank as First Bank properly paid the check. It was
Tom’s fault for using a blank indorsement which, in effect, turned the check into cash. Likewise, Beth
cannot recover from First Bank as the bank properly paid the check.

When Beth issued the check to Tom, Beth’s underlying contract obligation to pay for the water
heater installation was suspended. Once First Bank paid the check, her obligation on the underlying
contract was discharged. Accordingly, Beth is not obligated to Tom and has no damages due to First
Bank cashing the check.

Steve: Steve is liable to Tom in common law fraud and conversion for taking the check without
authority to do so and cashing it, thereby converting Tom’s money

Question 2

$ Example of conversion and imposter rule

Answer 2

First Bank is not liable to Beth. Steve is liable to Beth in common law fraud and conversion.
First Bank: Beth will be precluded from raising the forgery of Tom’s name to the check because of
the “impostor rule.” Beth issued the check to an impostor; that is, she issued the check to Steve who
was pretending to be Tom’s employee (agent). Steve’s forgery of Tom’s name is effective and Beth is
precluded from raising the forgery in a not properly payable action against First Bank. It is Beth’s fault
for not ascertaining that Steve was actually Tom’s employee.
Steve: Steve is liable to Beth in common law fraud and conversion. Steve misrepresented his identity
and lied about additional money being owed on the water heater installation. As a result of his fraudulent behavior, Beth issued him the check, which he later cashed, thereby converting her money.

Question 3

$ Example of Insufficient Funds, Stale Check, and Stop Payment

Answer 3

CHECK PAYABLE TO MICHAEL: First Bank may argue that (i) Beth’s account is insufficient
to cover the check, (ii) the check was over six months old, and (iii) Beth issued a stop payment order.
Beth’s account had insufficient funds to cover the check. Absent an agreement otherwise, First Bank
has no obligation to pay a check which would cause Beth’s account to become overdrawn.
At the time TV Shop presented the check to First Bank, the check was more than six months old,
having been issued in December, and being presented the following July. First Bank was under no
obligation to honor a “stale” check.

Question 4

$ Example of Properly payable and bank statement rule

Answer 4

Eagle Bank is not required to credit Bjorn’s account for check no. 4009. The main issues here are
whether the check was properly payable and the effect of the bank statement rule.
Generally, a bank may charge its customer’s account for paying out on a negotiable instrument—such
as a check—only if the instrument was properly payable. A check is properly payable when it is authorized
(e.g., signed) by the customer and is in accordance with the agreement between the customer and
the bank. In this case, Bjorn did not authorize the check because he did not sign the check. Instead,
Scrub forged his signature as the drawer of the check. Thus, the check was not properly payable from
Bjorn’s account.
A bank must credit the customer’s account if it pays a check that is not properly payable, unless it
has a defense. The defense Eagle Bank will raise is the bank statement rule. The bank statement rule
requires a customer to report a forgery of the customer’s name or alteration of a check within one year
of when a bank statement was made available to the customer showing at least the check number, the
amount of the check, and the payment date. Banks are not required to provide customers with a copy
of the check itself. Here, Bank provided Bjorn with a bank statement on February 5, which showed the
check number, amount, and payment date for check no. 4009. Because Bjorn did not report the forgery
of his name on this check until March 7 (over one year from February 5), Bjorn is precluded from
asserting the forgery of his name and, thus, Eagle Bank is not required to credit his account.

Question 5

Example of properly payable, bank statement rule and negligence

Answer 5

Eagle Bank must credit Bjorn’s account for check no. 5061. As with check no. 4009, the issues here are whether this check was properly payable from Bjorn’s account and the effect of the bank statement
rule. The general rules regarding these issues discussed in (1), above, apply here as well.
In this case, Bjorn did not authorize the check to be payable to Clark Scott Reavis; instead, Bjorn
authorized the check to be payable to Clark Scott. Thus, the check was not properly payable from
Bjorn’s account. However, unlike check no. 4009, here, the bank statement rule will not provide Eagle
Bank with a defense. Eagle Bank provided Bjorn with a bank statement on January 5, and Bjorn
reported that the check was not properly payable on March 7 (less than one year from January 5).
The only other possible defense that Eagle Bank could raise is Bjorn’s negligence. A bank does not
have to recredit a customer’s account to the extent that the customer’s negligence contributed to the
bank’s loss. Here, there is no evidence of negligence by Bjorn unless Eagle Bank can prove it suffered
a loss due to Bjorn’s two-month delay in giving notice or, perhaps, because Bjorn left a blank space to
the right of Clark Scott on the payee line, which enabled Clark Reavis to add his last name. If the court
determines that Bjorn was negligent, it would apportion liability based on comparative fault.

Question 6

$ warranty claims and presentment of a forgery

Answer 6

(2) Eagle Bank may not recover from Roach Bank. The issue is whether Eagle Bank has a warranty
claim against Roach Bank for presenting a check on which the drawer’s name was forged.
As a general rule, payment on a check is final if (i) payment is made in cash, (ii) the check is settled
and there is no right to revoke the settlement, or (iii) a provisional settlement was made and the
settlement was not revoked in the time permitted (i.e., the so-called midnight deadline has passed).
However, warranty actions survive final payment.
A presenting bank, such as Roach Bank, warrants that it is entitled to enforce the check presented, the
check has not been altered, and it has no knowledge of any unauthorized signature. Here, Eagle Bank
would argue that Roach Bank breached a presentment warranty because Bjorn’s signature was not
authorized. However, such an argument will fail, because Article 3 provides that a forged signature is
treated as the valid signature of the forger. As a result, when an instrument is presented with a forged
drawer’s signature, no warranty is breached because the presenter is entitled to enforce the instrument
of the forger. Thus, although Roach Bank did not have authority to enforce the check against Bjorn
because Bjorn did not sign the check, it did have the authority to enforce Scrub’s obligation. As the
check was not altered and there is nothing in the facts to suggest Roach Bank knew about the forgery
of Bjorn’s name, neither was any other presentment warranty breached. Thus, Roach Bank is not liable
to Eagle Bank.
In addition, Roach Bank is not liable to Eagle Bank because of what is often called “the bank cannot
be too nice” rule. Roach Bank had no obligation to credit Bjorn’s account because Bjorn reported the
forgery more than one year after the statement was sent. If a bank is not required to credit a customer’s
account, it cannot credit the account anyway and then seek recovery for breach of warranty.

Question 7

$ presentment warranty claim and forgery

Answer 7

Eagle Bank may recover from Credulous Bank. The issue is whether Eagle Bank has a presentment
warranty claim against Credulous Bank for presenting a check containing an alteration and a
forged indorsement. As discussed above, a presenting bank, such as Credulous Bank, warrants that
it is entitled to enforce the check presented and that the check has not been altered. Credulous Bank
breached these warranties, as the payee’s name was changed and to be entitled to enforce the check it
needed the indorsement of Clark Scott, the payee of the check. Since Credulous Bank breached these
warranties, Eagle Bank may bring an action for damages against Credulous Bank.

Question 8

$ The note signed and delivered by John was a negotiable instrument. The issue is whether a
promissory note is negotiable when it limits the source of payment, contains a variable rate of interest
that references an outside source, permits prepayment, and contains an acceleration clause.

Answer 8

YES TO ALL!!!
The issue is whether a
promissory note is negotiable when it 
- limits the source of payment, 
- contains a variable rate of interest that references an outside source, 
- permits prepayment, and 
- contains an acceleration clause

Question 9

$Example of analysis to negotiability

Answer 9

Here, the note was negotiable because all of the following elements were satisfied.

Unconditional: A note will not be deemed conditional merely because it limits payment to a particular
source or fund or refers to prepayment. Thus, the note’s provision limiting the source of payment to
John’s savings account #20045 at State Bank does not make the note conditional. In addition, the
provision that John will not owe interest if he pays the note within nine months does not violate the
unconditional requirement, because references to prepayment are permitted. Therefore, the note is
unconditional.

Promise to pay: A promise is a written undertaking to pay money, signed by the person undertaking
to pay. Here, John stated in a signed writing, “I promise to pay to the order of Carl . . . .” Therefore, the
note contains a promise to pay.

Fixed amount of money: The principal due under a negotiable instrument must be fixed. However, it
is not necessary that the amount of interest be fixed. In addition, the interest rate need not be determinable
from the face of the instrument; it may require reference to an index or outside source.
Here, the $800 principal due under the note is a fixed amount of money. The fact that the interest rate
is to be determined “at the discount rate set by the Federal Reserve in effect at the time of payment”
does not make the note nonnegotiable, because interest may be determined by reference to an outside
source. In addition, John’s statement that no interest is due if he pays the note within nine months is
actually a statement that the interest rate is 0% for the first nine months if paid within that time. This
also does not violate the fixed amount requirement, because a variable interest rate is permitted. Therefore,
the note is for a fixed amount of money.

Order or bearer language: Here, John’s note is payable “to the order of Carl.”

Definite time: An instrument is payable at a definite time if it is payable on a fixed date or at a time
that is readily ascertainable on issuance. Any clause that accelerates the time of payment upon the
occurrence of an event or at the option of the maker or holder is permissible.
Here, John’s note is payable “within one year of the date of this note.” The note is dated February 1,
1999, so within one year would mean the note is payable on or before February 1, 2000. The fact that
John reserved the right to pay early “at any time” within one year does not violate the definite time
requirement, because acceleration clauses are permitted. Therefore, the note is payable at a definite time.

No unauthorized undertaking or instruction: The note does not contain any other undertakings or
instructions. John is not agreeing to do anything other than pay money. Therefore, John’s note was negotiable.

Question 10

$ example of

John’s first defense—that Anna cannot enforce the note because Carl misrepresented the
amount of damages—has no merit. The first issue is whether Anna qualifies as a holder in due course.

Answer 10

Under the UCC, a holder in due course is a holder who takes an instrument (i) for value, (ii) in
good faith, and (iii) without notice that the instrument is overdue, has been dishonored, contains an
unauthorized signature or alteration, or is subject to any claim or defense.
Here, Anna qualifies as a holder in due course because all of the following elements are satisfied:
Holder: A transferee of an instrument is a holder if she has possession and a right to enforce the
instrument. Here, Carl sold the note to Anna and indorsed it, giving Anna the right to enforce the note.
Therefore, Anna is the current holder of the note.
Pays value: The value given in exchange for an instrument need not equal the face amount of the instrument.
As long as the full price agreed upon has been given, full value has been paid. Here, Anna paid
Carl $700 cash for John’s $800 note. Thus, Anna paid value for the note.
Good faith: Good faith means honesty in fact and observance of reasonable commercial standards of
fair dealing. A discount from the face amount of an instrument, by itself, does not indicate bad faith.
Nothing in the facts suggests that Anna’s good faith is in dispute. Even though Anna purchased the
note at a discount, she was “unaware of the circumstances surrounding the making of the note.” Thus,
Anna acted with good faith.
Without notice: Here, Anna had no notice of any of the circumstances surrounding the making of the
note. Furthermore, the note was genuine and unaltered. Therefore, Anna qualifies as a holder in due
course.

Question 11

$ example of

The second issue is whether fraud in the inducement is an effective defense against a holder in due
cour

Answer 11

Under the UCC, fraud may be asserted against a holder in due course only if it induced the obligor to
sign an instrument without knowing its character or essential terms. Any other type of fraud, such as
fraud in the inducement, is considered a “personal defense,” which cannot be asserted against a holder
in due course.
Here, Carl misrepresented the amount of damages to the automobile as being $800 instead of $500,
and John issued him a promissory note in that amount. Because John still knew he was signing a
promissory note for $800, Carl’s misrepresentation is considered fraud in the inducement and not real
fraud. Because fraud in the inducement is a personal defense, it will be ineffective against Anna, a
holder in due course.

Question 12

$ example of

John’s second defense—that the applicable statute of limitations bars enforcement of the note—
also has no merit. The issue is whether the statute of limitations will bar enforcement of a note when a
lawsuit to enforce it is brought five years and five months after the note’s due date.

Answer 12

Under the UCC, the statute of limitations for enforcing a note is six years from the due date (not the
date of issue). Here, the note was due February 1, 2000. Anna filed suit on July 1, 2005, within six
years of the due date. Thus, John’s defense that the statute of limitations bars enforcement will fail.

Question 13

$
John’s third defense—that the note was void from the time of its making because it was executed
under duress—lacks merit as well. The issue is whether a note signed under the threat of prosecution for
theft voids the note at the time of its making.
In a contract, duress occurs when one party acts

Answer 13

In a contract, duress occurs when one party acts involuntarily. If the duress rises to such a degree as to
void the underlying obligation under state law (e.g., an instrument is signed at gunpoint), then duress is
a real defense, which may be asserted against a holder in due course.
Here, Carl threatened to have John’s son, Sam, prosecuted for theft unless John paid the $800 note.
Because of the threat, John signed and delivered the note to Carl. Carl’s threat, however, is not sufficient
duress to void John’s underlying obligation. Rather, Carl’s actions would make the note merely
voidable, which makes duress only a personal defense. Therefore, John’s duress defense cannot be
asserted against a holder in due course and thus will fail as against Anna.

Question 14

Negotiability sample:

Answer 14

John’s check was negotiable. The notation on the check that it was “nonnegotiable” does not make
a check nonnegotiable if the check meets all the requirements of negotiability. John’s check satisfies
the requirements of negotiability because (i) the check was written, (ii) John signed the check, (iii) the
check contained an unconditional order to pay a fixed amount of money ($500), (iv) John imposed no
other undertaking or instruction, (v) the check was payable at a definite time (January 15), and (vi) the
check contained words of negotiability (“payable to the order of Carol”).

Question 15

Example:

a drawer is obligated to pay on a check
according to its terms at the time it was issued even is she paid less for it

Answer 15

John: John is liable to Susan for $500 on his contract as the drawer of the check. Susan timely
presented the check, and Big Bank dishonored the check. Susan may recover the full amount of the
check, even though she paid only $350 for the check, because a drawer is obligated to pay on a check
according to its terms at the time it was issued.

Question 16

Example of indorsers contract

Answer 16

Carol and Robert: Carol and Robert are liable to Susan for $500 on their contracts as indorsers of
the check (Susan is, of course, entitled to only one recovery). Susan presented the check within 30
days of their indorsements and Big Bank dishonored the check. Carol’s and Robert’s liability will
be discharged, however, if they do not receive notice of Big Bank’s dishonor within 30 days of the
dishonor.
Susan is entitled to recover the full amount of the check ($500) even though she paid only $350 for the
check. The contract of an indorser is to pay the amount of the instrument according to its terms at the
time it was indorsed.

Question 17

example of a qualified endorsement

Answer 17

Fred: Fred is not liable to Susan because his “without recourse” indorsement prevents Fred’s indorsement
from creating contract liability.

Question 18

Post dating a check

Answer 18

John does not have a cause of action against Big Bank. Big Bank is not responsible for paying
the postdated check before its stated date because John did not give Big Bank notice of the postdating.
A bank is liable to its customer for paying a postdated check before the specified date only if the
customer gives the bank notice that describes the check with reasonable certainty

Question 19

properly payable and forgery

Andy will bear the loss on the $25,000 check. The issue is whether Andy can
recover $25,000 from Busy Bank by proving that the check was not properly payable because of
Jackson’s forgery of Vincent’s name.

Answer 19

Andy must prove that Busy Bank paid this check improperly. Despite the forged indorsement of
Vincent’s name, Andy will not be able to assert the forgery against Busy Bank because of the
“impostor rule.” Assuming Busy Bank acted in good faith when it paid the check (the question contains
no facts to the contrary), Andy is precluded from raising the forgery because it is legally Andy’s fault
for accepting Jackson’s assertion that Jackson was Vincent. Jackson’s impersonation of Vincent and
Andy’s act of issuing the check to Vincent enabled Jackson (or anyone else) effectively to indorse the
check in favor of Busy Bank or anyone else who pays the instrument or takes it for value or collection
in good faith.

Question 20

$ forgery but check

Answer 20

Busy Bank will bear the loss on the $5,000 check. The two main issues are
whether Andy can recover $5,000 from Busy Bank by proving that that check was not properly payable
from his account because his signature as the drawer of the check was unauthorized and, if so, whether
Busy Bank may pass on this liability to Midway Bank.

Question 21

Negligence, bank statements, reporting lost checkbook, industry custom

Answer 21

(1) Local Bank’s defenses: Local Bank might raise the negligence and bank statement rule defenses
to Albert’s demand to credit his account. The issue is whether the check was properly payable from
Albert’s account.
The drawee bank is generally liable for paying a check on which a drawer customer’s name is forged
because a check containing a forged drawer’s signature is not properly payable. However, Local Bank
may raise several defenses to Albert’s demand.
Local Bank may claim that Albert failed to exercise ordinary care and this failure contributed to the
forgery. Local Bank may claim that Albert should have obtained the checkbook from Jane before
she left and noticed that the checkbook was missing in a timely manner. Jane took the checkbook
in September and months went by before he realized it was gone. Albert may then assert that Local
Bank was also negligent in paying a check on which the forgery was obvious even though it followed
industry standards. The trier of fact could determine that both Albert and Local Bank were negligent
and allocate the loss between them.
Local Bank may claim that Albert did not report the forgery in a timely manner. Albert has a duty to
examine his bank statements in a timely manner and give prompt notice of any unauthorized payment.
Albert waited over a month from the time he received the statement to report the forgery. Local Bank
may be able to bring forth evidence that if Albert had reported the forgery sooner, it could have recovered
the money from Jane. It may be difficult for Local Bank, however, to show that it actually suffered
a loss because of this relatively short delay.

Question 22

contract defense of no consideration is not a real defense (personal defense)

Answer 22

Albert is liable to Supplier on the $1,500 promissory note. The
issue is whether Albert’s contract defense of failure of consideration against Danny for not networking
his computers relieves him of his obligation as the maker of the note.
Albert will not be able to raise the contract defense of failure of consideration if Supplier qualifies as a
holder in due course (“HDC”) by satisfying the following requirements of HDC status: be a holder, pay
value, act in good faith, and have no notice of problems with the instrument. Danny indorsed the note
to Supplier making Supplier a holder, and the note is authentic. Supplier satisfies the value requirement
because past consideration is deemed to be value and Supplier took the note in satisfaction of a prior
debt. The facts do not place Supplier’s good faith or notice into issue as the facts indicate Supplier had
no knowledge of the dispute between Albert and Danny.
Failure of consideration is not an effective defense against a holder in due course. Accordingly, because
Supplier qualifies as an HDC, Albert is liable on this note.

Question 23

defenses against a NON-HDC

Answer 23

Albert’s liability to Ned: Albert is not liable to Ned on the $500 promissory note. The issue is
whether Albert’s contract defense of failure of consideration against Danny for not networking his
computers relieves him of his obligation as the maker of the note.
Albert will be able to raise the contract defense of failure of consideration because Ned does not
qualify as an HDC. Ned must pay value to be an HDC. Instead, Ned received the note as a birthday
gift. Accordingly, Albert may raise his defense of failure of consideration and escape liability on this
note.

Question 24

how to argue notice of problems with the note and HDC status and defenses

Answer 24

1) The issue is whether Karl’s knowledge about the defense Graphics has to payment of the note issued
to Supply prevents Bank from acquiring holder in due course status when Bank purchased the note
approximately one hour later. The maker of the note, Graphics, has a defense to the payment of the
note—the paper that Supply delivered was damaged. However, if Bank qualifies as a holder in due
course, Bank may recover on the note for the $500 face value because a holder in due course takes free
of personal defenses such as failure of consideration and breach of warranty. The element of holder
in due course status at issue is whether Bank was without notice of Graphics’s defense at the time it
bought the note.
A court is highly unlikely to hold that Karl’s knowledge of the problems with the duplicating paper
acquired at noon during a seemingly social lunch would be notice to Eli, who purchased the note for
Bank at 1:00 p.m. To be effective, notice must be received at a time and in a manner that gives “a
party” a reasonable opportunity to act on it. Notice received by an organization such as Bank is effective
for a particular transaction from the time it is brought to the attention of the individual conducting
that transaction (i.e., Eli) or from the time it would have been brought to the individual’s attention if
the organization had exercised due diligence. Due diligence does not require Karl to communicate the
information received from Joe unless the communication is part of Karl’s regular duties or Karl had
reason to know that Supply would attempt to sell the note to bank within a matter of minutes. Absent
facts to show that Karl’s duties included a duty to immediately notify Bank or Eli anytime Karl learned
of a possible defense to a note, even when not “on the job,” or that Karl knew Bank had a common
practice of purchasing Supply’s notes, Bank will be able to qualify as a holder in due course despite
Karl’s knowledge of Graphics’s defense to the note.

Question 25

Agent liability on a note, discount, good faith, not overdue, knowledge/notice of personal defense

Answer 25

(2) Joe is liable to Bank on the promissory note, assuming that Bank qualifies as a holder in due course
and Bank had no notice that Joe signed merely as an agent. Joe appears to be Graphics’s authorized
agent as he had authority to sign documents binding Graphics. Joe signed the note only with his own
name. Because Joe’s signature did not unambiguously show that it was made on behalf of Graphics,
even if the note did identify Graphics as the principal, Joe is potentially personally liable on the note.
Joe’s liability depends on whether Bank qualifies as a holder in due course.
It appears that Bank qualifies as a holder in due course. The note appears to be negotiable and properly
negotiated to Bank when Supply endorsed the note to Eli. The instrument is authentic. Bank gave
value, even though it paid $350 for a note worth $500. Notes are commonly traded at amounts different
from their face values, and the difference in value (a 30% discount) is not so great as to place Bank’s
good faith (honesty in fact and observance of reasonable commercial standards of fair dealing) into
question. The note was not overdue (purchased on May 6, due on May 30). Finally, as discussed in part
(1), Joe’s discussion with Karl is unlikely to have placed Bank on notice that Graphics had a defense
to payment. Accordingly, Bank is a holder in due course and may recover from Joe unless Bank had
actual notice of the representative nature of Joe’s signature when Bank purchased the note.
Note, however, that if Bank did not qualify as a holder in due course, Joe could escape personal
liability by showing that Supply did not intend Joe to be personally liable on the note.

Question 26

signing as agent on a company check

Answer 26

(3) Joe is not liable on the check to Utility. Unlike the rule for notes discussed in part (2), an agent such
as Joe is not personally liable on a check as long as the check contains the principal’s name, even if the agent does not indicate that he is signing as an agent. The facts state that it was a “company check,”
and thus it is highly likely that the check contained the name of Graphics, Inc. Accordingly, Joe is not
personally liable on the check.

Question 27

Negotiability of note from Homer: Yes all meet elements

Answer 27

Negotiability of note from Homer: When Eddie took the Note from Homer, the Note was
negotiable. At issue is whether an instrument complies with Article 3 of the UCC.
Whether an instrument is negotiable depends on whether it meets the formal requisites of negotiability
listed in Article 3 of the UCC. A negotiable instrument means an unconditional promise or order to pay
a fixed amount of money that is payable to order or to bearer on demand or at a definite time and does
not state any unauthorized undertaking or instruction by the person promising or ordering payment.
Here, the note was negotiable because it met the elements of negotiability as outlined below.
a. Unconditional: A note that limits payment to a particular fund or source is not conditional. Thus,
Homer’s limiting payment to his savings account at Credit Union does not make the note conditional.
b. Promise to pay: A note must contain a promise to pay. A promise is a written undertaking to pay
money, signed by the person undertaking to pay. Here, Homer signed a typed promissory note,
promising to pay $20,000 plus interest to Eddie.
c. Fixed amount of money: To be negotiable, the principal due under the instrument must be fixed. It
is not necessary that the amount of interest be fixed; a variable interest rate or indexed rate may be
used. The interest rate need not be determinable from the face of the instrument and may require
reference to information not contained in the instrument. Here, the Note states a specific amount
of money (i.e., $20,000). The indication of interest and the determination of that interest by reference
to an outside source (i.e., Reliable Financial Quotes) does not negatively impact negotiability.
d. Payable to order or to bearer: To be negotiable, an instrument must be payable to order or bearer.
Order paper is payable only to the person named or his order. Here, the Note recited that it was
“payable to the order of Eddie.”
e. On demand or at a definite time: To be negotiable, an instrument must be payable on demand or
at a definite time. An instrument is payable at a definite time if it is payable on a fixed date. The
time stated may be subject to extension to a further definite time at the option of the maker. Here,
the Note states a definite time for payment, “one year from its date,” and Homer’s ability to extend
the due date is limited to another definite time, two years.
f. No unauthorized undertakings: No unauthorized undertakings or instructions are present here.

Question 28

Negotiability of note from Eddie: When an indorsement of a negotiable note transfers it based on a conditional promise is OKAY because…

Answer 28

Negotiability of note from Eddie: When Stella took the Note from Eddie, it was a negotiable
instrument. At issue is whether a note with a conditional indorsement is negotiable.
Negotiability is determined at issuance (i.e, when Homer issued the Note to Eddie). As discussed
above, the Note was negotiable when issued by Homer. Nothing that is subsequently done to an instrument
can change its negotiability status. An indorsement stating a condition to payment is ineffective to
condition payment. Thus, Eddie’s attempt to condition payment on Stella finishing painting his house
does not negatively impact the negotiability of the Note. Additionally, words of negotiability (e.g., “pay
to the order of . . . ”) are not required in an indorsement. Thus, the fact that Eddie’s indorsement did
not use order or bearer language is irrelevant. Finally, the value given in exchange for an instrument
need not be equivalent to the face amount of the instrument. Thus, the fact that Stella paid $15,000 for
the Note when its face value is $20,000 is of no consequence to the Note’s negotiability.

Question 29

At issue is the interest rate an obligor must pay where the outside source that must be
consulted to determine the rate is unavailable

Answer 29

Interest: Homer is obligated to pay interest at either the prime rate or the current Florida
judgment rate. At issue is the interest rate an obligor must pay where the outside source that must be
consulted to determine the rate is unavailable.
As discussed above, an interest rate may require reference to information not contained in the instrument.
Here, Homer specified that interest was the prime rate as published in Reliable Financial Quotes
(“RFQ”). RFQ, however, had ceased publishing six months before Homer signed the Note. Where
an interest rate is not ascertainable by the outside source referenced, evidence is needed to determine
the obligor’s intent. Here, Homer could have intended interest to be the prime rate and merely picked
RFQ as a place in which it could be found, in which case the parties could look to another source to
ascertain the prime rate. On the other hand, he could have intended interest to be the rate published
in this specific magazine. Finally, it is also possible that Homer knew the magazine was out of print
and included this reference to make it appear that he was going to pay interest when in reality he knew
there was no magazine in which to look up the rate. If intent of the obligor cannot be determined, the
Code provides an alternate remedy. When a note provides for interest that cannot be ascertained from
the description, the judgment rate will be implied. Thus, if a court cannot determine Homer’s intent, it
will apply the current judgment rate in Orlando, Florida.

Question 30

Where an instrument contains contradictory terms, handwritten terms prevail over
typewritten terms.

Answer 30

(4) Due date: The Note is presently due on May 30, 2010, but Homer may still exercise his right to
extend the due date to May 30, 2012. At issue is the due date of a note where two different dates are
stated on the instrument.
Here, the Note indicates that it is due “one year from its date” but contains two dates. The typed
date on the Note is May 26, 2009, but when Homer signed the Note, he wrote “date: 5/30/09” next
to his signature. Where an instrument contains contradictory terms, handwritten terms prevail over
typewritten terms. Thus, because Homer handwrote 5/30/09, the Note is due one year from that date,
i.e., date of the Note for an additional two years on or before the original due date of the Note. Thus, if
Homer exercises his right to extend the date on or before May 30, 2010, the Note will be due on May
30, 2012.

Question 31

conversion

july 2017

Answer 31

Next, Carlos can try to claim under the contract obligations of the check that First Bank was not permitted to honor the check. He may claim a “not properly payable action” against First Bank and will argue that the check was improperly converted. Conversion is a remedy permitted by the courts for an indorser who was entitled to payment but did not receive the payment. Conversion is the substantial interference of one’s property. However, with conversion, the indorser must have actual possession over the check. If Carlos never received the check, he does not have a proper conversion action against First Bank. It does not suffice that he only claim conversion but not actually receive the action.
Carlos may try to argue unjust enrichment or argue restitution (to disgorge ill-gotten gains) against Debbie for maintaining the 75 percent that was for Carlos under contract theories of remedies.

Question 32

and versus or

Answer 32

Please note the rules above. As discussed above, the draft transaction involves three parties. It is also possible that a draft such as a check requires two payee signatures. If the check, which is presumably an order paper, requires two payee signatures, the note is not payable unless both signatures are present. If the check states that it is payable to bearer paper, then it is freely negotiable and the signature of the payee can be anyone. When a check indicates that there are two payees, it is permissible, and the check is held by the payees as tenants in common. In fact, if the check states how the payment should be divided up (for example, it states that it should be 25% to Debbie and 75% to Carlos), it will not be valid.
Here, the check is order paper because it is payable to “Debbie Debtor, Carlos Consignor.” Carlos will argue that First Bank required his signature prior to permitting Debbie from cashing the check. A check that is a personal check and is made payable to two payees requires BOTH signatures unless the draft indicates that the signature is for “or.” He will argue that his signature was required and as a result, it was not “properly payable” There is a properly payable action when the check was fraudulently conveyed by either forgery or alteration. Here, although there is neither, the check required his signature as the consignor. First Bank will argue that the fact that there was a comma rather than an “AND” indicated that only Debbie’s signature was required. As a result, if First Bank can prove that only Debbie’s signature was required because it was an “or” for the indorsement signatures rather than an “and”, then Carlos will have no claim against First Bank. However, Carlos has a stronger argument that his signature was required.

Question 33

Not negotiable, not an HDC, argue contract law and assignable, gratuitous assignment.
Feb 2016

Answer 33

Finally, Nephew would not be a holder in due course even if this note had been negotiated. A holder in due course (HDC) is a person who takes an instrument for value, in good faith and without notice of any claims or defenses. Good faith is defined as honesty in fact and observance of commercial standards of fair dealing. Nephew did not give value, so he cannot be an HDC. Instead, he is merely a donee.
As a result we look to Nephew’s rights in contract. The promissory note, because it isn’t negotiable, would be governed by the common laws of contract. All contracts are assignable, unless they state otherwise. Broker’s gift of the note to his nephew was merely a gratuitous assignment. Note that it is unclear whether Broker successfully assigned note to nephew. Note is payable “to the order of Broker.” Thus, it is order paper. Broker could have endorsed it specifically to nephew (in which case it would have continued to be order paper) or could have endorsed it in blank (making it bearer paper. This would have been relevant had it been a negotiable instrument. Since it is not, it appears that Broker merely assigned his rights to receive payment under the note to nephew.
A third party assignee is entitled to enforce a contract. However, Sam will have available to him all defenses he would have available against Broker.

Question 34

personal defense ideas

Answer 34

Sam’s most likely defense that he would assert would be fraud in the inducement, a personal defense. We know that Sam lives in a nursing home, so depending on his mental state, he may also have a defense of incapacity. Finally, Sam may argue that the note was unconscionable or that he signed under duress. Each of these is discussed in turn. Each of them is a personal defense.
Finally, he may argue a unilateral mistake of fact if he didn’t fully understand the nature or risk of the investment. Although unilateral mistake of fact is not generally a defense, it may be invoked when one party to a contract has a superior knowledge about the contract matter and actively conceals such knowledge from the innocent party.
If Sam is successful in arguing unconscionability, he may also raise the equitable defense of unclean hands on the basis that Broker coerced him into signing the note.
Sam will likely seek a remedy of recession, and possibly restitution for any loss suffered.