Chapter 26

Question 1

Negotiation

Answer 1

The transfer of an instrument in such form that the transferee becomes a “holder”

Question 2

Negotiating Order Paper - 2 Requirements

Answer 2

1. Sign it (endorsement)
2. Deliver it to the person you are selling it to

Question 3

Negotiating Bearer paper - 1 requirement

Answer 3

1. Deliver it…signature not required

Question 4

A Common Law assignment occurs when:

Answer 4

1. a non-negotiable instrument is transferred to a third party; or
2. a negotiable instrument is transferred improperly

Question 5

Indorsement

Answer 5

A signature placed on an instrument for the purpose of transferring ownership rights in the instrument.

Question 6

Indorser

Answer 6

The one who writes the indorsement

Question 7

Indorsee

Answer 7

A person to whom a negotiable instrument is transferred by indorsement

Question 8

Indorsement is usually on the back of the instrument but…

Answer 8

can be on a separate piece of paper attached to the instrument called an allonge.

Question 9

Blank Indorsements

Answer 9

An indorsement that specifies no particular indorsee and can consist of a mere signature. An order instrument that is indorsed in blank becomes a bearer instrument.

Question 10

A blank indorsement converts…

Answer 10

order paper to bearer paper

Question 11

What is an example of a blank indorsement?

Answer 11

“Signed Jefferson Jones”

Question 12

Special Indorsements

Answer 12

An indorsement on an instrument that indicates the specific person to whom the indorser intends to make the instrument payable—that is, it names the indorsee.

Question 13

What is the result of special indorsements?

Answer 13

They maintain the order paper nature and the identified payee gets to identify what happens with the check next.

Question 14

What is an example of a special indorsement?

Answer 14

“Pay to William Hunter, signed Jefferson Jones”

Question 15

Most indorsements are…

Answer 15

unqualified.

Question 16

What is an unqualified indorsement?

Answer 16

Implies the indorser will pay the holder or any subsequent indorser, the amount of the instrument in the event the drawer or maker defaults

Question 17

How is a qualified indorsement created?

Answer 17

When the words “without recourse” are added to any of the other indorsements.

Question 18

What are qualified indorsements used for?

Answer 18

To limit liability of the indorser

Question 19

“Pay to William Hunter without recourse, signed Jefferson Jones.”

Answer 19

qualified, special indorsement

Question 20

“Without recourse, signed Jefferson Jones”

Answer 20

blank, qualified indorsement

Question 21

What is the result of a qualified indorsement?

Answer 21

Maintain the order paper nature

Question 22

Restrictive Indorsements

Answer 22

Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. A restrictive indorsement does not prohibit the further negotiation of the instrument.

Question 23

Restrictive Indorsements require the indorsee to comply with certain instructions regarding…

Answer 23

the funds involved

Question 24

What is an example of a restrictive indorsement?

Answer 24

“For deposit only…signed Jefferson Jones” Deposit into his account. If you want to be even more clear, include the account number.

Question 25

How do you convert order paper to bearer paper?

Answer 25

Blank indorsement

Question 26

How do you convert bearer paper to order paper?

Answer 26

Special indorsement

Question 27

What happens if the name on instrument is misspelled or incorrect?

Answer 27

The indorsement can be the incorrect name as in the instrument, or the correct name, or both

Question 28

Marley Ellison receives a check payable to the order of Mary Ellison.

Answer 28

She can indorse the check either “Marley Ellison” or “Mary Ellison.”

Question 29

A negotiable instrument can be drawn payable to an entity such as an estate, a partnership, or an organization. In this situation, who can negotiate the instrument?

Answer 29

An authorized representative of the entity can negotiate the instrument.

Question 30

A check states “Pay to the order of the Red Cross.” Who can negotiate the check?

Answer 30

An authorized representative of the Red Cross

Question 31

Alternate payees

Answer 31

OR (either have to sign)

Question 32

Joint payees

Answer 32

AND (both have to sign)

Question 33

Rear-ended by 3 college kids. Insurance company will only send a check addressed to Hailey and Body Shop, or Hailey and Bank. The check was to Hailey AND Body Shop (both parties had to sign).

Answer 33

Hailey and Body Shop are joint payees

Question 34

When a drawer gives one alternative or joint payee a check, the drawer’s obligation on the check to other payees is suspended. The payee who has possession of the check holds it for the benefit of all of the payees.

Answer 34

The drawer has no obligation to make sure that the funds are allocated or distributed among the joint payees.

Question 35

A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: “For rent paid, [signed] Jordan.” Jordan’s landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm trees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: “Pay to Better-Garden Nursery, without recourse, [signed] Deborah.” Better-Garden Nursery sends the check to its bank indorsed “For deposit only, [signed] Better-Garden Nursery.”

Classify each of these indorsements.

Answer 35

“For deposit only”: restrictive
“Pay to BGN without recourse”: qualified special
“For rent paid”: memo, really all you have is a signature… blank

Question 36

A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan. Jordan owes his landlord $500 in rent and transfers the check to his landlord with the following indorsement: “For rent paid, [signed] Jordan.” Jordan’s landlord has contracted to have Deborah do some landscaping on the property. When Deborah insists on immediate payment, the landlord transfers the check to Deborah without indorsement. Later, to pay for some palm trees purchased from Better-Garden Nursery, Deborah transfers the check with the following indorsement: “Pay to Better-Garden Nursery, without recourse, [signed] Deborah.” Better-Garden Nursery sends the check to its bank indorsed “For deposit only, [signed] Better-Garden Nursery.”

Was the transfer from Jordan’s landlord to Deborah, without indorsement, an assignment or a negotiation? Explain.

Answer 36

Landlord to Deborah. The check in the landlord’s possession is bearer. To properly negotiate a bearer instrument you have to deliver, and that is what happened. The check was delivered to Deborah. It is a negotiable instrument.

Question 37

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Is the check a bearer instrument or an order instrument?

Answer 37

Bearer when it was issued “payable to cash”

Question 38

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Did Jerrod’s delivery of the check to Amber constitute a valid negotiation? Why or why not?

Answer 38

Yes because it was a bearer instrument, delivery is all we have to do (doesn’t matter that it is dishonest/illegal)

Question 39

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

What type of indorsement did Amber make?

Answer 39

Restrictive

Question 40

Bertram writes a check for $200 payable to “cash.” He puts the check in his pocket and drives to the bank to cash the check. As he gets out of his car in the bank’s parking lot, the check slips out of his pocket and falls to the pavement. Jerrod walks by moments later, picks up the check, and later that day delivers it to Amber, to whom he owes $200. Amber indorses the check “For deposit only, [signed] Amber Dowel” and deposits it into her checking account.

Does Bertram have a right to recover the $200 from Amber? Explain.

Answer 40

No Bertram does not have the right to get the money back from Amber. Negotiable Instruments law would make it hard to recover from Jerod too.

Question 41

Holder

Answer 41

A Holder has the status of an assignee – he obtains only those rights that the transferor had and is subject to the same defenses as the transferor.

Question 42

Holder in Due Course (HDC)

Answer 42

A holder (possession of negotiable instrument) who also meets 3 additional requirements:
1. Take an instrument
2. Take in good faith
3. Take without notice of a defect

Question 43

An HDC takes the instrument free of…

Answer 43

most defenses and claims asserted by the party with the obligation to pay

Question 44

Shanna Morrison buys a BMW X3 SUV for her business from Heritage Motors in Irvine, California, signing a promissory note for $50,000 as part of the deal. Heritage negotiates the note to Apollo Financial Services, which promises to pay Heritage for it in six months. During the next two months, Morrison has significant problems with the SUV and sues Heritage for breach of contract. She also refuses to make further payments on the note.

Answer 44

Whether Apollo can hold Morrison liable on the note depends on whether it has met the requirements for HDC status. If Apollo has met these requirements and thus has HDC status, it is entitled to payment on the note. If Apollo has not met the requirements, it has the status of an ordinary holder, and Morrison’s defense against payment to Heritage will also be effective against Apollo.

Question 45

What is the prerequisite for HDC Status?

Answer 45

Must first be a Holder of a negotiable instrument.

Question 46

Requirements for HDC Status

Answer 46

1. Must take the instrument for value
2. Taking in good faith
3. Taking without notice of a defect

Question 47

Zon owes Dwyer $2,000 on a past-due account. Zon negotiates a $2,000 note signed by Gordon to Dwyer. If Dwyer accepts it to discharge the overdue account balance…

Answer 47

Dwyer has given value for the instrument.

Question 48

Justin issued a $5,000 negotiable promissory note to Paige. The note is due six months from the date issued. Paige needs cash and does not want to wait until the maturity date to collect. She negotiates the note to her friend Lexi, who pays $2,000 in cash and writes Paige a check—a negotiable instrument—for the balance of $3,000.

Answer 48

Lexi has given full value for the note by paying $2,000 in cash and issuing Paige a check for $3,000.

Question 49

In a few situations, the holder may pay for the instrument but not acquire HDC status.

Answer 49

1. when the instrument is purchased at a judicial sale, such as a bankruptcy or creditor’s sale, the holder will not be an HDC
2. if the instrument is acquired as a result of taking over a trust or estate (as administrator), or as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder

Question 50

Value does not equal…

Answer 50

consideration

Question 51

A promise of payment or performance in the future (executory promise) is value only to the extent that…

Answer 51

payment or performance has been made

Question 52

I make a promise to do something now or in the future, consideration. If I make a promise to do something in the future, there is no value…

Answer 52

I have to actually perform

Question 53

Do discounts affect the HDC status?

Answer 53

Discounts happen, they don’t affect HDC status

Question 54

A holder has “taken the instrument for value” if it has done any of the following things:

Answer 54

1. By performing the promise for which the instrument was issued or transferred.
2. By acquiring a security interest or other lien in the instrument (other than a lien obtained by a judicial proceeding). Notes can be collateral.
3. By taking an instrument in payment of, or as security for, an antecedent (preexisting) claim. Past debt. Not consideration – but it is value. Cancelling debt owed in exchange for note.
4. By giving a negotiable instrument as payment. Mary writes a check and pays cash. Another instrument and cash.

Question 55

Are gifts and inheritance value?

Answer 55

No, they are gifts

Question 56

If you are not a HDC when issues arise, you cannot defend. Mary owes $6,000. She pays $3,000 today and will pay $3,000 in 60 days. At that time, Mary is not a Holder in Due Course. There is not value. When will she be a HDC?

Answer 56

She will be a HDC when she pays the second $3,000.

Question 57

Good faith

Answer 57

This means that the holder must have acted honestly in the process of acquiring the instrument.

Question 58

Who does “taking in good faith” apply to?

Answer 58

ONLY the holder

Question 59

What are the guidelines on the determination of good faith?

Answer 59

There are no clear guidelines exist on determination of good faith

Question 60

Cassandra Demery worked as a bookkeeper at Freestyle until the owner, Clinton Georg, discovered that she had embezzled more than $200,000. Georg fired Demery and demanded repayment. Demery went to work for her parents’ firm, Metro Fixtures, where she had some authority to write checks. Without specific authorization, she wrote a check for $189,000 to Freestyle on Metro’s account and deposited it in Freestyle’s account. She told Georg that the check was a loan to her from her family.

When Metro discovered Demery’s theft, it filed a suit against Georg and Freestyle. Freestyle argued that it had taken the check in good faith and was an HDC.

Answer 60

The Colorado Supreme Court agreed. Demery was the wrongdoer. She had the authority to issue checks for Metro, and Georg had no reason to know that Demery had lied about this check. Therefore, Freestyle was an HDC, and Metro would bear the loss.

Question 61

Notice

Answer 61

A person knows or has reason to know of a defect.

Question 62

Defects

Answer 62

1. It is overdue.
2. It has been dishonored.
3. It is part of a series in which at least one instrument has an uncured (uncorrected) default.
4. It contains an unauthorized signature or has been altered.
5. There is a defense against the instrument or a claim to the instrument.
6. The instrument is so incomplete or irregular as to call into question its authenticity.

Question 63

Dishonored instruments

Answer 63

The party who is required to pay has refused to pay (the drawee…for check/draft) (the maker…for note).

Question 64

Lucinda Gonzalez holds a demand note dated September 1 on Apex, Inc., a local business firm. On September 17, she demands payment, and Apex refuses (that is, dishonors the instrument). On September 22, Gonzalez negotiates the note to Brenner, a purchaser who lives in another state.

Answer 64

Brenner does not know, and has no reason to know, that the note has been dishonored. Because Brenner is not put on notice, Brenner can become an HDC.

Question 65

Unauthorized signature or instrument has been altered

Answer 65

Forged signature or altered instrument. It has to be a forgery that a reasonable person would be able to recognize as a forgery. Same with an alteration.

Question 66

Instrument is so irregular or incomplete to make authenticity suspect.

Answer 66

Missing something really important (missing a dollar amount or makers signature).

Question 67

James Wu, knowing that the note he has taken has a forged indorsement, presents it to the maker for payment. The maker refuses to pay on the ground of breach of the underlying contract. The maker can assert this defense against Wu even though Wu had no knowledge of the breach.

Answer 67

Wu’s knowledge of the forgery prevents him from being an HDC in any circumstances.

Question 68

Peyton asks Brittany to buy a textbook for him when she goes to the campus bookstore. Peyton writes a check payable to the campus store, leaves the amount blank, and tells Brittany to fill in the price of the textbook. The cost of the textbook is $85. If Brittany fills in the check for $150 before she gets to the bookstore, the bookstore cashier sees only a properly completed instrument.

Answer 68

Therefore, because the bookstore had no notice that the check was incomplete when it was issued, the bookstore can take the check for $150 and become an HDC.

Question 69

Losses that result from well-crafted forgeries usually fall on the party to whom the forger transferred the instrument (assuming, of course, that the forger cannot be found).

Answer 69

Typically, this means the bank that accepts a check despite evidence on the check’s face that it is irregular will bear the loss if the check later turns out to be forged.

Question 70

Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000.

The first group will determine whether the bank qualifies as a holder in due course and, if so, for what amount?

Answer 70

1. The bank gives value – the $4,850 (discount is irrelevant)
2. The bank acts in good faith
3. The bank acted without notice of a defect
   So… the bank is a holder in due course.

Question 71

Celine issues a ninety-day negotiable promissory note payable to the order of Hayden. The amount of the note is left blank, pending a determination of the amount that Hayden will need to purchase a used car for Celine. Celine authorizes any amount not to exceed $2,000. Hayden, without authority, fills in the note in the amount of $5,000 and thirty days later sells the note to First National Bank of Oklahoma for $4,850. Hayden does not buy the car and leaves the state. First National Bank has no knowledge that the instrument was incomplete when issued or that Hayden had no authority to complete the instrument in the amount of $5,000.

The second group will decide what would have happened if Hayden had sold the note to a stranger in a bar for $500. Would the stranger qualify as a holder in due course? Explain.

Answer 71

1. Value
2. Looks like bad faith
3. The stranger in the bar should have questioned why Hayden is selling a $5,000 for $500..
   The stranger would not qualify in due course.
   Unauthorized completion of an incomplete instrument. The bank is a HDC. The bank is trying to collect $5,000 from Celine. Celine will probably argue that she doesn’t have to pay anything. Personal defense – have no affect on HDC and the bank collect the full $5,000 anyway. “unauthorized completion of incomplete instrument”

Question 72

Shelter Principle - Holders through HDC

Answer 72

Holders can get HDC privilege if instrument is acquired from an HDC. “if I’m a HDC I shelter the next owner’s status by me being a HDC.”

Question 73

What are limitations to the shelter principle?

Answer 73

If a Holder disqualifies as an HDC and then reacquires the instrument after an HDC, still not HDC.

Question 74

Matthew and Carla collaborate to defraud Dina. Dina is induced to give Carla a negotiable note payable to Carla’s order. Carla then specially indorses the note for value to Ling, an HDC. Matthew and Carla split the proceeds. Ling negotiates the note to Stuart, another HDC. Stuart then negotiates the note for value to Matthew.

Answer 74

Matthew, even though he obtained the note through an HDC, is not a holder through an HDC because he participated in the original fraud and can never acquire HDC rights in this note.