Negotiable Instruments

Question 1

What are the requirements for a NEGOTIABLE INSTRUMENT?

Answer 1

1. UNCONDITIONAL
2. PROMISE OR ORDER TO PAY
3. a FIXED AMOUNT of money:
   A. Payable to ORDER OR BEARER
   B. Payable ON DEMAND or AT A DEFINITE TIME
   C. States no UNAUTHORIZED UNDERTAKING OR INSTRUCTION

Question 2

Does stopping payment on a check avoid an obligation?

Answer 2

No, it merely DELAYS PAYMENT

Question 3

What is a HOLDER IN DUE COURSE of a check?

Answer 3

One who takes ITEM:

1. for VALUE,
2. in GOOD FAITH,
3. W/O NOTICE

Question 4

Can HDC status change by subsequent notice?

Answer 4

No. Status is defined when holder accepts the check in exchange for value/work.

Question 5

What is the SHELTER doctrine?

Answer 5

States that a party that doesn’t qualify for HDC status can assert the rights of the HDC as long as the party is not personally engaged in wrongdoing affecting the instrument.

Question 6

Does a promissory note secured by a stream of income cause the note to be treated as a secured transaction?

Answer 6

No –> the commercial paper provisions of the UCC apply to promissory notes over the secured transaction provisions

Question 7

Can a promise to pay be contingent on the happening of another thing?

Answer 7

No, must be either ON DEMAND or at a SPECIFIC DATE IN THE FUTURE

Question 8

Must the interest rate of a negotiable instrument be specified?

Answer 8

No, but PRINCIPAL AMOUNT MUST BE FIXED.

Question 9

What happens when interest rate is not fixed?

Answer 9

If the amount of interest can’t be ascertained from the description, use J’MENT RATE in effect at time interest first accrues (6%).

Question 10

Can the promise to pay be contingent on the happening of another event?

Answer 10

No, must be UNCONDITIONAL.

Question 11

What is a HOLDER?

Answer 11

A person in possession of an instrument w/ the right to enforce the instrument.

Instrument must be payable to BEARER or to the person IN POSSESSION and FREE OF FORGERY.

Question 12

When is a holder IN DUE COURSE?

Answer 12

Holder must have taken:

1. for VALUE
2. in GOOD FAITH
3. WITHOUT NOTICE

Question 13

What is an ACCOMMODATION PARTY? Is accommodation party entitled to the collateral upon paying the debt?

Answer 13

1 who signs a note for the PURPOSE OF INCURRING LIABILITY without being a DIRECT BENEFICIARY of the value given.

Yes, he is entitled to the collateral upon paying the debt.

Question 14

Is an ACCOMMODATION PARTY obligated to pay the instrument?

Answer 14

Yes, even if he receives no CDN.

Question 15

Is accommodation party obligated to pay even if the person enforcing the obligation knows of the accommodation?

Answer 15

Yes

Question 16

What is the exception to the gen’l rule that accommodation party is obligated to pay even if person enforcing the obligation knows of the accommodation?

Answer 16

Accommodation party is DISCHARGED to the extent that the person entitled to enforce the obligation IMPAIRS THE COLLATERAL securing the obligation.

Ex: when Cr’or fails to perfect its security interest (that IMPAIRS THE COLLATERAL)

Question 17

What’s gen’l rule re when HDC can enforce an instrument (real DEF vs. personal)?

Answer 17

HDC can enforce subject ONLY TO REAL DEFENSES.

HDC takes free of PERSONAL defenses and claims.

Question 18

Who can real defenses be asserted against?

Answer 18

Against both HDC and non-HDC transferees of a questioned instrument

Question 19

What are the REAL DEFENSES?

Answer 19

Forgery 
Fraud
Alteration of Instrument
Incapacity to K
Infancy
Illegality
Duress
Discharge in Insolvency Proceedings
Statute of Limitations
Accommodation 
Discharges Known to HDC

[FAIDS]

Question 20

What’s the gen’l rule re who may be held liable b/c their name appears on an instrument? Must they have signed?

Answer 20

Generally, no one may be held liable unless her signature (or sig of auth’d rep) is on instrument.

Question 21

If an instrument contains contradictory terms, what prevails between WORDS VS. NUMBERS?

Answer 21

Words

Question 22

If an endorsement/signature limits payment to a particular person or prohibits further transfer, is that effective to limit transfer?

Answer 22

No. It’s still a negotiable instrument.

Question 23

If an instrument does not provide for interest, will it include interest?

Answer 23

NO –> it must specify that interest is to be paid (though not necessarily the amount)

Question 24

When a co-signor adds “guarantor OF COLLECTION” (as opposed to “all amounts due”), is he obligated to pay?

Answer 24

Only if 1. J’ment returned unsatisfied,

2. other party is INSOLVENT,
3. other party CAN’T BE SERVED W/ PROCESS,
4. it’s OTHERWISE APPARENT payment can’t be obtained