COMMERCIAL PAPER
PROBLEMS
I. NEGOTIABILITY (Chap. 1)
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The Negotiability Concept
A. Writing
B. Signed
PROBLEM: 1
When law student Portia Moot went to buy a used car from a man who sold it through the newspaper, the seller told her he refused to take her personal check, demanding instead a cashier’s check payable to his order. Portia went to Octopus National Bank and paid the bank the amount required, and the bank then issued the cashier’s check, with Portia’s car seller being named as payee. The bank gave the check to Portia, and she in turn handed it over to the payee. What is the name that the Code gives to Portia in this situation?
§ 3-103(a)(15): “Remitter” means a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser. Here Portia is a remitter in that she purchased a cashier’s check from ONB who issued it to her but was payable to the car seller.
Class Notes:
· Cashier check, certified checkà bank is drawer and drawee
· Personal checkàPortia is drawer and bank is drawee
PROBLEM: 2
Texas Millionaire Howard Chaps signs all of his checks with a small branding iron that prints a fancy “X” on the signature line. Are his checks negotiable?
§1-201(37): “Signed” includes any symbol executed or adopted with present intention to adopt or accept a writing. Comments: A complete signature is not necessary. It may be printed, stamped or written; it may be by initials or by thumbprint; it may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. The question is always whether the symbol was executed or adopted by the party with the present intention to adopt or accept the writing. Yes, the checks are negotiable if Chap by use of the symbol had the present intent of adopting or accepting the writing.
PROBLEM: 3
Walter Capitalist is the sole proprietor of the Capitalist Company. He signs all of the store’s checks by writing “Capitalist Company” on the drawer’s line, but the checks are drawn on his personal checking account at the Octopus National Bank. Can the bank treat the check as if Walter had signed his own name?
§3-401(b): Signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing. Yes, because a signature may be made by the use of any name including a trade name. Here, Walter used a trade name.
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C. Unconditional Promise or Order
PROBLEM: 4
Are the following notes negotiable?
1. “(Date”, I promise to pay bearer $500, subject to the contract I signed with Honest John today, (Signature)”. §3-106(a)(ii): a promise or order is unconditional unless it states that the promise or order is subject to or governed by another record. No: here the promise is not unconditional because it states that it is subject to the contract that was signed w/Honest. Therefore it is not negotiable.
2. “(Date)”, I promise to pay bearer $500 as per contract I signed today with Honest John, (Signature).” §3-106(a)last sentence: A reference to another record does not of itself make the promise or order conditional. Yes; here the promise makes a mere reference to another record which does not make the promise conditional. Therefore it is negotiable.
3. “(Date), I promise to pay bearer $500 on January 1, 2010. For rights as to prepayment and acceleration, see the contractsigned September 25, 2005 between the maker and the payee. (Signature).” 3-106(b)(i): A promise or order is not made conditional (i) by a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration. Yes; here the promise merely references another document in regards to the rights as to prepayment and acceleration. Therefore it is negotiable.
PROBLEM: 5
Whenever it mails out a check, the Adhesion Insurance Company marks it “Void After 90 days.” Is such an instrument technically negotiable? Yes. This language Void After 90 days does not destroy negotiability however if the 90 days expire, the instrument will not be negotiable.
PROBLEM: 6
The promissory note contained this clause: “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 day creating the security interest.” Does this clause destroy negotiability?
§3-106(b)(i) A promise or order is not made conditional by a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration. Comments: Most notes are secured by collateral and are subject to acceleration in the event of default or are subject to prepayment. A statement of rights and obligations concerning collateral, prepayment, or acceleration does not prevent the note from being an instrument if the statement is in the note itself. It does not have to be included in the note but rather a reference to an accompanying loan agreement, security agreement or mortgage for that statement is ok. No: this clause represents a statement of rights and obligations concerning collateral, prepayment. It does not prevent the note from being an instrument because it is in the note itself. This is a permissible clause; therefore it does not destroy negotiability.
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D. Fixed Amount of Money
PROBLEM: 7
The promissory note stated that the rate of interest was “2% above the prime rate as of the date of maturity.” The prime rate is the interest charged by banks to their best customer and can be ascertained by reference to financial publications. Does the fact that the holder of the note has to consult sources outside of the instrument in order to calculate the interest destroy negotiability?
§3-112(b): Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument. If an instrument provides for interest, but the amount of interest payable cannot be ascertained from the description, interest is payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues. No:. Because the amount of interest stated required the holder to refer to information not contained in the instrument does not destroy negotiability. You can have an instrument that refers to interest which may be fixed or variable. A negotiable instrument doesn’t have to have interest. However, if you can’t determine interest, you can use the judicial rate.
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E. Courier W/O Luggage Requirement
PROBLEM: 8
Do the following clauses in an otherwise negotiable promissory note destroy negotiability?
(a) “Maker agrees that signing this note also indicates acceptance of the contract of sale for which it is given.” §3-104(a)(3): negotiable instrument means an unconditional promise or order to pay a fixed amount of money, with or w/o interest or other charges in the promise or order if the promise does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. Yes: here, this note is not negotiable because the clause is a promise to do another undertaking which is the acceptance of another contract of sale. Therefore it destroys negotiability.
(b) “Maker agrees and promises that if the holder of this note deems himself insecure at any time, he may so inform the maker, who will then supply additional collateral in an amount and kind to be specified by the holder.” §3-104(a)(3)(i): the promise or order may contain an undertaking or power to give, maintain, or protect collateral to secure payment. §1-309: term that provides that a party may accelerate payment or performance or require collateral or additional collateral “at will” or when the party “deems itself insecure” or similar words, means that the party has this power only if the party in good faith believes that the prospect of payment or performance is impaired. The burden is only the party against which the power has been exercised. No; here the insecurity clause will be effective if exercised in good faith and therefore does not destroy negotiability.
(c) “Maker agrees to let the holder select an attorney for the maker; at any time the holder directs, said attorney is hereby given the authority to confess judgment against the maker in any appropriate court.” §3-104a(3)(ii): the promise must not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. The promise or order may contain an authorization or power to the holder to confess judgment or realize on or dispose of collateral. Yes;a holder can confess judgment; however, giving the holder the power to select attorney for maker destroys negotiability because it represent another undertaking.
(d) On the front of a check: “By cashing this check, the payee agrees that the drawer has made payment in full of the debt drawer owed payee as a result of the purchase of a 2002 Ford, made on January 24, 2002.” §3-311(a) If a person against whom a claim is asserted proves that (i) the instrument was tendered in good faith, (ii) the amount of the claim was unliquidated (damages not specified) or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, then the claim is d/c if the person proves that the instrument or written communication contained a statement that the instrument was tendered as full satisfaction of the claim. No; If there is a bona fide dispute and the claim was for unliquidated damages and the instrument was tendered in good faith, this would not destroy negotiability.
Class Notes:
· Unliquidated damagesàdamages are unspecified
· Liquidated damagesàdamages are set.
· If liquidated claim and you submit a check for less than the liquidated amount saying “I’m released” does this d/c obligation? No; only when it unliqudated damages and there’s bona fide dispute. (so if its unliquidated damages and there’s a bona fide dispute, you can tender an instrument in good faith w/statement saying “payment in full”)
(e) “Maker hereby grants the payee a security interest in the collateral described below.” §3-104(a)(3)(i) the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment. Yes. This is a permissible undertaking. The granting of security in this case is the same as protecting collateral to secure payment. Therefore the granting of security does not destroy negotiability.
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F. Payable On Demand or at a Definite Time
PROBLEM 9
Do the following clauses in a promissory note destroy negotiability?
(a) “Payable 30 days after sight.” §3-108(b) A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued. No; here, sight means payable on demand. Therefore sight does not destroy negotiability.
(b) “Payable in 11 successive monthly installments of $2,414.92 each and in a final payment of $2,415.03 thereafter. The first installment being payable on the ___ day of ____, 20__, and the remaining installments on the same date of each month thereafter until paid.” The blanks were not filled in. §3-115 (a): Incomplete instrument is a signed writing, the contents of which show at time of signing that it is incomplete but that the signer intended that it is to be completed by the addition of words or numbers. (c) if words or numbers are added to an incomplete instrument w/o authority of the signer, there is an alteration of the incomplete instrument. Here the when the blanks are not filled in it’s not for a definite time or date and it’s not payable on demand. Therefore it’s not negotiable until the blanks are filled in. The blanks can be filled in by someone else, if it is the signer intent for the blanks to be filled in. This is a technically that can be corrected. However, if the signer does not intend for this to be done, then the incomplete instrument is considered to have been altered.
(c) “Payable on November 8, 2010, but the holder may demand payment at any time prior thereto if he deems himself insecure.” §1-309: term that provides that a party may accelerate payment or performance or require collateral or additional collateral “at will” or when the party “deems itself insecure” or similar words, means that the party has this power only if the party in good faith believes that the prospect of payment or performance is impaired. The burden is only the party against which the power has been exercised. No;here there’s a definite date but the second clause serves as an acceleration clause. This does not destroy negotiability.
(d) “Payable when the sun comes up tomorrow.” § 3-108(b): A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued. Yes; here it’s not a fix time; it’s not payable on demand; not a time that’s readily ascertainable. The language is indefinite therefore it’s not negotiable.
(e) “Payable on November 8, 2010, but if my potato crop fails that year; payment shall be extended until November 8 of the following year.” § 3-108(b)(iv): A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of an extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event. No; you can extend time to another definite date. Therefore it is negotiable b/c the clause “if my potato crop fails then… sounds like a condition but because it was extended to another definite date of 11/8/11, it’s ok and does not destroy negotiability.
(f) “Payable on November 8, 2010 but the maker hereby reserves the option to extend the time of payment until he can pay without serious financial hardship.”3-108(b)(iv): A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of an extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event. Yes:here, although there’s a definite date, the fact that the maker has reserved the option to extend payment to an unspecified date is not a definite time and therefore negotiability has been destroyed.
(g) “Payable 120 days after my rich uncle Al dies.”§ 3-108(b): A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued. Yes;here, the instrument is not negotiable b/c it is contingent upon Al’s death. It is not readily ascertainable when Al will die.
(h) “Payable 100 years from today, but if my rich uncle Al dies before this note is due, it shall become payable 10 days after distribution of his estate is made to his heirs.”
§ 3-108(b)(ii) A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of acceleration. No; here, the clause “payable 100yrs from today” is a definite date; the clause “but …” act as an acceleration clause. Therefore it is negotiable.
(i) “Payable on my next birthday.” § 3-108(b): A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued. Yes; here it is not negotiable because the person’s birthday is not readily obtainable. Therefore it destroys negotiability. (if a specific would have indicated it would have been ok)
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F. Payable to Bearer or to Order
PROBLEM: 10
bearer paper n. negotiable instrument (e.g. a bond) which is payable to whoever has possession (is the bearer).
Do the following clauses in a promissory note create bearer paper?
(a) “Pay to John Smith.” §3-109(a)(3): a promise or order is payable to bearer if it states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person. No; here the promise indicates that its payable to an identified person John Smith. Therefore its not bearer paper.
Cant say its payable to a person!!!
(b) “Pay to the order of John Smith or bearer.” §3-109(a)(1): a promise or order is “payable to bearer if it states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment. Yes; here the promise states that it is payable to the order of bearer. Therefore, it is bearer paper. SO I GUESS ITS OK TO SAY A PERSONS NAME AND BEARER!!
(c) “Pay to bearer.” §3-109(a)(1): a promise or order is “payable to bearer if it states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment. Yes; here the promise states that it is payable to bearer. Therefore it it bearer paper.
(d) “Pay to the order of cash”§3-109(a)(3): a promise or order is payable to bearer if it states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person. Yes; here the promise states that it is payable to order of cash. Therefore it is bearer paper.
(e) “Pay to a Merry Christmas.” §3-109(a)(3): a promise or order is payable to bearer if it states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person. Yes; here the promise is unidentified person so therefore it is bearer paper. It doesn’t have to have the language “Bearer” as long as it is an unidentified person. However, if the person in possession of the instrument is named Merry Christmas and can prove it then an argument can be made that the promise indicates and identified person.
PROBLEM: 11
Do the following clauses create order or bearer paper, or do they make the instrument non-negotiable for failure to create either.”
(a) “Pay to the order of (blank).” As long as it is blank, then it’s non-negotiable. However, once the blanks are filled in it will be either bearer or order. Remember signer must intend that the instrument to be completed by the a
rty, Cornucopia Grocery. When the latter tried to cash the check at the drawee bank, the bank alerted Laura, and she arrived at the bank immediately. Can she retrieve the check from Cornucopia Grocery? §3-306: a person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument. If Laura wants to retrieve the check, she has a right to file a claim of a property or possessory right in a court of competent jurisdiction. WHAT RECOURSE WOULD THE BANK HAVE???
PROBLEM: 17
Assume that on receiving her paycheck, Laura Lawyer (from Problem 16) had signed her name to the back of the instrument, which was then blown out a window and landed at the feet of a criminal, Harry Thief. Harry took the check down to Cornucopia Grocery and told the manager that he (Harry) was Lance Lawyer, Laura’s father, and asked the manager to cash it for him. The manager made Harry endorse the instrument (reason: to make Harry contractually liable thereon–§3-415(a), so Harry wrote “Lance Lawyer” under Laura’s endorsement. Is Cornucopia Grocery a holder? Yes; when Laura blanked indorsed the check it became bearer paper so therefore anyone who finds it can cash it. Therefore, Cornucopia is now a holder.
PROBLEM: 18
Assume that Laura (from Problem 16) wanted to endorse the instrument over to her mother, so on the back she wrote “Pay to Lilly Lawyer” and then signed her own name. Thus indorsed, the instrument was blown out a window, and Harry Thief found it. He endorsed “Lilly Lawyer” under Laura’s name and transferred the check to Cornucopia Grocery. Is Cornucopia Grocery now a holder? §3-205(a): If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a special indorsement.” When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. No; b/c its order paper thru special indorsement, the only person who can cash it is Lilly Lawyer.
PROBLEM: 19
Laura (again from Problem 16) never had a course in commercial paper, so when she received her paycheck, she simply wrote her name on the back and mailed the check to her mother. Her mother (who had had a commercial paper course) needed for some reason to hold onto the check for a week before cashing it, so she wrote “Pay to Lilly Lawyer” above Laura’s endorsement. Has the check now become order paper requiring the mother’s endorsement for further negotiation? §3-205(c): The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, words identifying the person to whom the instrument is made payable. Yes; when Laura signed her name on the check she executed a blank indorsement. When Lilly wrote above Laura’s name “Pay to Lilly” she identified to whom the instrument was made payable; thus Lilly executed a special indorsement. At this point, the check was converted into order paper. Lilly’s signature will be required if she desires to negotiate the check any further.
III. HDC (Chap.3)
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A. Holder
B. For Value
PROBLEM 20
Joe Lunchpail arrived home one day to find a note from his wife stating that she was divorcing him and that he should get a lawyer. Since he had just been paid that day, he took his paycheck down to the law office of Nathan Novice and endorsed it over to Nathan in return for the latter’s promise to represent Joe in his divorce. Later that evening, Joe’s wife sent the sheriff to seize his paycheck. Joe laughingly referred the sheriff to his attorney. Can the sheriff succeed in wresting the check from Nathan’s hands? §3-306: a person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument. §3-303(a)(1): An instrument is issued or transferred for value if the instrument is issued or transferred for a promise of performance, to the extent the promise has been performed. Here, the wife has a right to file a claim of property or possessory right in the instrument if she wants to recover it from Nathan. However, when Joe indorsed the check over to Nathan, Nathan became a holder of the instrument. Nathan will probably claim HDC status in order to take free of the wife’s claim to the instrument. Nathan will have to establish that he took the check for value. The consideration for the check was Nathan’s promise of representation in the pending divorce case. Since the check was transferred in exchange for a promise of performance this will be considered as value. Therefore, Nathan has given value for the instrument; he took it in good faith and was unaware of the wife’s claim to the instrument. Nathan will more than likely qualify as HDC but only to the extent that he has performed services. As such he will take the instrument free of the wife’s claim.
PROBLEM 21
Zach Taylor bought a car for his business from Fillmore Motors, signing a promissory note for $23,000 payable to Fillmore. Fillmore sold the note to the Pierce Finance Company for $22,800, a $200 discount. The car fell apart, and Zach refused to pay. Is the finance company (assuming good faith and lack of notice) a HDC for $23,000 or $22,800? The finance co is HDC for the full amount because they gave value. The code doesn’t specify how much value has to be given. Unless value is so small that you can say that it was a gift.
If Millard Fillmore, the owner of Fillmore Motors, owed his mother $21,000 and gave her the note with the understanding that the extra $2,000 was a Mother’s Day gift, would the mother be a holder in due course for the full amount? §3-303(a)(1): An instrument is issued or transferred for value if the instrument is issued or transferred for payment of, or as security for, an antecedent claim against any person, whether or not the claim is due. Here, the mother is HDC only to the extent that value was given (21,000). Mother has an antecedent claim to the extent of 21,000 the remaining was intended as a gift.
PROBLEM 22
Tom Winker tricked old Mrs. Nodding into writing a check payable to Tom (she thought he was the agent for a local charity). The check for $1,000 was drawn on her bank, the First County Bank. Tom took the check to his bank, the Last National Bank, and after indorsing it, put it in his checking account. Last National Bank sent the check to the First County Bank for payment, but by the time it got there Mrs. Nodding had stopped payment so that the check was dishonored and returned to Last National. Is Last National Bank a holder in due course? This question will be important if Tom has skipped town and Last National decides to sue Mrs. Nodding. §4-211: In determining its status as a HDC, a bank has given value to the extent it has a security interest in an item, if the bank otherwise meet other HDC requirements. Here the bank would have given value if Tom would have w/d the $1,000 from the bank; or if the funds were credited to some outside obligation (i.e. Tom wrote a check) or if the bank used the funds to pay for an obligation that Tom owed the bank. LNB is a holder in due course when they allowed the funds to be withdrawn to the extent of the amount withdraw against the deposit.
