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Commercial Transactions
University of Dayton School of Law
Hallinan, Charles G.

Is the instrument properly negotiable?
1.      in writing
2.      signed by the maker/drawer
3.      unconditional promise or order
4.      must state a fixed amount
5.      must be on demand or at a definite time
6.      must state “pay to the order of” or “pay to bearer”
7.      must be free from unauthorized promises
Is the instrument in the possession of a holder?
1.      Does the person have possession of the instrument?
a.       No – no holder
b.      Yes – move on
2.      Is the instrument a bearer instrument?
a.       No – move on
b.      Yes – holder
3.      Is the person in possession the named payee (order must be authorized and valid by the previous holder)?
a.       Yes – holder
b.      No – move on
4.      Are all necessary signatures on the instrument genuine?
a.       Yes – holder
b.      No – no holder
Has the instrument passed through the process of negotiation?
1.      The person receiving the note must be a holder (see above)
2.      With a bearer note, negotiation is made simply by transferring possession of the note
3.      With an order note, negotiation is made by transferring possession of the note and indorsement of the holder
Underlying Rules of Liability
1.      Generally, the person entitled to enforce the instrument is the holder of the instrument at that moment (§3-301). However see §3-309.
2.      Did the person, or his agent, sign the instrument?
a.       If no – then he/she is not liable.
b.      If yes – move on
3.      What is the role of the party (issuer, maker, acceptor, drawer, or indorser)?
a.       Drawee’s obligation – a drawee, who does not accept the instrument, has no obligation under the instrument
                                                   i.      If the drawee accepts the instrument, he is an acceptor; see acceptor’s obligation
b.      Maker’s obligation – pay the note according to its terms (no notice or presentment)
c.       Acceptor’s obligation – pay the draft according to its terms, or changed terms
                                                   i.      Acceptance occurs from a signed agreement to pay the draft
d.      Drawer’s obligation – with an unaccepted draft, a drawer must pay the draft according to its terms at the time of issuance or at the time it first came into possession of a holder (must have notice of dishonor with presentment)
                                                   i.      If accepted by a bank, the drawer is discharged.
                                                 ii.      If draft is accepted by a

arate K).
4.      Guarantee of Collection v. Guarantee of Payment
a.       Guarantee of Collection
                                                   i.      If a K guaranteeing a note is one for collection, rather than payment, there must first be an effort to collect from, or a showing of insolvency of, the maker of the note before the guarantor may be sued.
                                                 ii.      With a guarantee collection of the instrument, the guarantor must pay only if:
1.      Execution against the principal has been returned unsatisfied
2.      The principal is insolvent
3.      The principal cannot be served, or
4.      If payment cannot be obtained from the principal
b.      Guarantee of Payment
                                                   i.      Must be clearly unambiguous (if it just says guarantee, then it is presumed a guarantee of collection)
With a guarantee of payment, the guarantor may be sued at once, and liability is not dependent upon prosecution of the principal