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FL Contracts & UCC3 Bar Exam 2020 > Commercial Paper Practice > Flashcards

Flashcards in Commercial Paper Practice Deck (32)
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1

“I, Mary, promise to pay to the order of Paul $5,000 if he mows my lawn.”

Valid for Negotiable Instrument?

NO

WHY - This language would disqualify the writing as a NI because Mary’s payment obligation is CONTINGENT upon Paul mowing Mary's Lawn.

RULE - promise or order to pay must be unconditional.

Express condition to pay violates the unconditional requirement

2

“I, Mary, promise to pay to the order of Paul $50,000 subject to the written contract between Mary and Paul dated January 1, 2013.”

Valid for Negotiable Instrument?

NO

WHY - This language would disqualify the writing as a NI because Mary’s payment obligation is SUBJECT TO the written terms in the contract dated January 1, 2013.

RULE - The promise or order to pay must be unconditional.

3

“I, Mary, promise to pay to the order of Paul $50,000 in accordance with the written contract between Mary and Paul dated January 1, 2013.”

Valid for Negotiable Instrument?

YES

WHY - Mere references to other documents do not make the promise or order to pay conditional.

RULE - The promise or order to pay must be unconditional.

NOTE - The key with references to other documents is that as long as the reference is there for informational purposes only, then the promise or order to pay is not a conditional one.

4

“I, Mary, promise to pay to the order of Paul $50,000. This payment represents a down payment on a contract for the purchase of a two- story house.”

Valid for Negotiable Instrument?

YES

WHY - Mere references to other documents do not make the promise or order to pay conditional.

RULE - The promise or order to pay must be unconditional.

NOTE - The key with references to other documents is that as long as the reference is there for informational purposes only, then the promise or order to pay is not a conditional one.

5

“I will pay from the proceeds of the sale of my household furniture.”

Valid for Negotiable Instrument?

YES

WHY - This language qualifies as an UNCONDITIONAL promise; the instrument remains negotiable.

RULE - A provision that payment must be from an identified fund does not render the promise conditional.

6

“I promise to pay to the order of Paul $50,000 on January 1, 2013. The collateral for this note is a security interest in the maker’s art collection. For rights and duties on default, see the security agreement signed this date creating a security interest.”

Valid for Negotiable Instrument?

YES

WHY - References to other records regarding rights as to collateral, prepayment, or acceleration DO NOT make the promise to pay conditional.

RULE - The promise or order to pay must be unconditional.

7

“I, Mary, promise to pay to the order of Paul $50,000, plus interest at a rate of 2% above the prime rate, to be measured on the date the note matures.”

Valid for Negotiable Instrument?

YES

WHY - This writing is a negotiable instrument even though the interest rate will have to be researched upon maturity date. The principal amount is fixed at $50,000, so the instrument qualifies as being payable for a fixed amount of money.

RULE
- The PRINCIPAL amount due on the instrument must be a fixed amount of money.

- Interest can be VARIABLE.

NOTE - Be aware of fact patterns in which the interest rate may not be fixed or readily ascertainable. The writing in question will still be a negotiable instrument as long as the principal amount is fixed.

8

“I, Mary, promise to pay to the order of Paul $50,000.”

Valid for Negotiable Instrument?

YES

WHY - Thekey phrase “to the order of” makes the writing a negotiable order instrument.

RULE - An instrument payable to a specific person requires specific language or words of NEGOTIABILITY.

9

“I, Mary, promise to pay Paul $50,000.”

Valid for Negotiable Instrument?

NO

WHY - This writing would NOT BE considered a negotiable order instrument because even though it is payable to a specifically identified person, it does NOT have the key phrase “to the order of” or “or his order” in the writing.

RULE - An instrument payable to a specific person requires specific language or words of NEGOTIABILITY.

10

“I, Mary, promise to pay bearer $50,000.”

Valid for Negotiable Instrument?

YES

WHY - This writing would still qualify as a NI even without the phrase “to the order of” because the writing is not payable to a SPECIFIC PERSON.

RULE - A Bearer Instrument requires language that does not attempt to pay a specific person

11

“I,Mary, promise to pay to the order of Paul or bearer $50,000”

Valid for Negotiable Instrument?

YES

WHY - would be considered a bearer instrument because it is payable both to a specifically identified person (Paul) and to bearer.

RULE - If a writing has characteristics of both an order instrument and a bearer instrument, then the writing will be treated as BEARER paper.

12

A check made payable to Paul that reads “pay to the order of Paul”

Valid for Negotiable Instrument?

YES

WHY - Checks are the exception to the “words of negotiability” requirement

RULE - Article 3 makes this exception simply because checks are prevalent. It would be cumbersome to distinguish between those checks that contained such language and those that did not.

13

“I, Mary, promise to pay to the order of Paul $50,000, to be paid on June 1, 2014. But if the Dallas Cowboys win the Super Bowl prior to June 1, 2012, then payment will be due immediately after the game.”

Valid for Negotiable Instrument?

YES

WHY - The writing remains a negotiable instrument because there is a definite due date upon which the instrument is due.

RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.

14

“Payable January 1, 2013, but the obligor may extend the payment date at the obligor’s discretion.”

Valid for Negotiable Instrument?

NO

WHY - The writing is not a negotiable instrument because the extended date would not be a definite time.

RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.

15

“Payable January 1, 2013, but the obligor may extend the payment date to January 1, 2014, at my discretion.”

Valid for Negotiable Instrument?

YES

WHY - The instrument can contain provisions allowing for the OBLIGOR (the one obligated to pay) to extend the due date, provided the extension is to a DEFINITE TIME.

RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.

16

“Payable on January 1,2013. But if Uncle Sal dies before that date, the instrument shall be due January 1, 2014.”

Valid for Negotiable Instrument?

YES

WHY - The instrument can also contain automatic extensions upon a specified event as long as the date is extended to another DEFINITE TIME.

RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.

17

The writing provides that “payable upon the death of my father.”

Valid for Negotiable Instrument?

NO

WHY - Payment date must be readily ascertainable. This is not a negotiable instrument because although the father is certain to die at some point, the exact date of that death is not readily ascertainable.

RULE - An instrument is payable at A DEFINITE TIME when the instrument’s payee or holder can present the negotiable instrument AT A FUTURE TIME that is clear or readily ascertainable.

18

“I,Mary, promise to pay to the order of Paul $50,000 on January 1, 2013, and I promise to bake Paul an apple pie on that same date.”

Valid for Negotiable Instrument?

NO

WHY - The writing in question is not a negotiable instrument because the writing obligates Mary to pay money ($50,000) and to BAKE PIE.

RULE - The writing must commit the obligor to one legal obligation and nothing else: The obligation to PAY MONEY.

19

A note contains the provision“Maker shall provide additional collateral securing the note if the present collateral’s fair market value falls below [X] dollars.”

Valid for Negotiable Instrument?

YES

WHY - This additional undertaking is permissible.

RULE - Additional undertaking exceptions:
1) Promises or orders concerning COLLATERAL

2) Provisions that allow holder to procure JUDGMENT

20

Paul is in possession of a negotiable promissory note that is “payable to bearer.” The note was issued to Paul from Mary. Paul takes the note and gives it to Harry without making any indorsement on the back of the instrument.

Valid for Negotiable Instrument?

YES

WHY - Paul’s transfer was a proper negotiation because Paul was in possession of BEARER PAPER. When the instrument is a bearer instrument, transfer of possession is all that is required to negotiate the instrument.

RULE - To negotiate a bearer instrument – Requires transfer of POSSESSION only

21

Paul receives a check payable to Paul. Paul signs the same check on the back “Pay Harry if he mows my
lawn /s/ Paul.”

Valid for Negotiable Instrument?

YES

WHY - This restrictive language is not a condition to payment for Harry. Harry would be entitled to enforce payment regardless of whether Harry mowed Paul’s lawn.

RULE - Payable jointly – Requires BOTH payees to indorse for a valid negotiation

22

An instrument payable “to the order of Paul and Perry”

Valid for Negotiable Instrument?

YES BUT BOTH PAUL AND PERRY must indorse the instrument before negotiating.

WHY - Payable jointly – Requires BOTH payees to indorse for a valid negotiation

RULE - To negotiate an ORDER instrument – Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

23

An instrument payable “to the order of Paul or Perry”

Valid for Negotiable Instrument?

YES BUT EITHER PAUL OR PERRY must indorse the instrument before negotiating.

WHY - Payable severally – Either party can sign the instrument for a valid negotiation.

RULE -To negotiate an ORDER instrument – Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

24

Paul is in possession of a negotiable promissory note that is payable to Paul. Paul takes the note and writes on the back “Pay to Harry /s/ Paul.” Paul then transfers the note to Harry.

Valid for Negotiable Instrument?

YES

WHY - This type of indorsement is called a SPECIAL indorsement.

Paul’s transfer of possession to Harry was a proper negotiation because Paul INDORSED the instrument and then he transferred it to Harry.

At this point, Harry is the ONLY person who has legal rights to the instrument.

Only Harry can present the note for payment or further negotiate it.

RULE - To negotiate an ORDER instrument – Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

25

Paul is in possession of a negotiable promissory note that is payable to Paul. Paul indorses it on the back “/s/ Paul.” Paul then gives the note to Harry.

Valid for Negotiable Instrument?

YES

WHY - This type of indorsement is a BLANK indorsement.

A Blank indorsement is one NOT made to a SPECIFIC person

Paul’s transfer of possession to Harry was a proper negotiation because he indorsed the instrument and then transferred it to Harry.

RULE - To negotiate an ORDER instrument – Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

26

Paul is in possession of a negotiable promissory note that is payable to Paul. Paul takes the note and indorses it on the back “Without Recourse /s/ Paul.” Paul then gives the note to Harry.

Valid for Negotiable Instrument?

YES

WHY - QUALIFIED indorsement is used to limit one’s LIABILITY on an instrument.

Signing the instrument in this fashion absolves Paul of any potential liability on the instrument.

RULE - To negotiate an ORDER instrument – Requires transfer of ORDER PAPER PLUS a proper INDORSEMENT of the instrument before transfer.

27

Out of sheer gratitude for Harry’s precious friendship, Paul gives Harry a promissory note that has a face value of $50,000.


Is Harry an HDC?

NO

WHY - A gift is not value. Harry did not give value

RULE - A HDC must give, do or forgive something of VALUE.

28

In exchange for a negotiable promissory note received from Mary, Harry promises to mow Mary’s lawn.

Is Harry an HDC?

NO

WHY - Unexecuted promises to perform are not value.

Harry will not be deemed to have given value until he actually PERFORMS the promised act, which is mowing the lawn.

RULE - A HDC must give, do or forgive something of VALUE.

29

In exchange for a negotiable promissory note with a face value of $50,000, Harry pays Paul $40,000. The note will mature 12 months from the date of issue.

Is Harry an HDC?

YES

WHY - Paying less than the note’s full face value is okay.

Harry will be deemed to have given value for the instrument.

RULE - A HDC must give, do or forgive something of VALUE.

30

In exchange for a negotiable promissory note with a face value of $50,000, Harry agrees to pay Paul $40,000; $20,000 the day Paul negotiates the note, and an additional $20,000 five months from that date. The note will mature 12 months from the negotiation date.

Is Harry an HDC?

YES FOR 25K

WHY - Partial performance = partial HDC rights

On the date Paul negotiates the note, Harry has rights as an HDC for $25K ($20,000/$40,000 x $50,000) as Harry has paid half of the agreed-upon consideration.

RULE - A HDC must give, do or forgive something of VALUE.