Deck 21: Essentials of Negotiability

Question 1

State the seven requirements of negotiability.

Answer 1

Negotiable instrument
Negotiable instrument basically refers to the document which guarantees the payment pertaining to specific amount of money at a set time period, either on demand or the document with the name of the payer. Thus it can be used by the other part to extract money from the person who owes the money. Therefore, different type of negotiable instruments is signed checks, notes payable, pay orders etc.
In this case, in order to make the instrument enforceable and valid underlying the parties involved in it, there are seven requirements which need to be met that are shown below:
1. The instrument is required to be signed by all the parties involved in it and should be in writing.
2. There should exist a promise to pay or order to pay underlying the instrument.
3. There should exist unconditional promise or order underlying the instrument.
4. A fixed sum of money which is required to be paid must be mentioned in the instrument.
5. The payment against the instrument must be paid in definite or fixed tome or on demand.6. The payment must be payable underlying the instrument to the bearer or to the order of payee.7. The drawee or the payee should be designated with specified certainty unless the payable against the instrument is required to be made to the bearer.

Question 2

Sondra and Neil Kumaraperu owned a private day-care center and preschool. The preschool maintained a checking account and an operating account, but only Neil and Ranjini Niyarapola (a former owner) were on the signature cards. After Neil's death, Sondra discovered that the school's director had inadvertently deposited a check for the operating account into the checking account. So she wrote a check out to herself, signed Niyarapola's name, and deposited it into the operating account. Was the check issued?

Answer 2

Checking account:
Accounts maintained by financial institutions which are created for the purpose of making withdrawals and deposits.
Operating account:
Operating account offers all the flexibility of a checking account and at a lesser cost than the checking account.
Issue and delivery requirements:
In order to be eligible for a holder in due course the defendant has to fulfill the issue and delivery requirements.
The instrument has to be handed over physically to the bearer and it should be intentionally transferred to the party.
To prove that both the instrument should be in the possession of the bearer and the note should be indorsed by maker.
In this case, the check has to be treated as an issue because it fulfills both the "Issue" and the "Delivery" requirements.
Due to the reason that check is in the possession of S and the check is indorsed by the maker and S herself. An indorsement does not need signature but even writing the name is also accepted as an indorsement.
Therefore, it can be treated that the check has been issued to S.

Question 3

In what way may the signature on a negotiable instrument be placed on the instrument, and what may it consist of?

Answer 3

The signature has to be placed on the instrument so that the intent of the promisor to be bound is clear. Usually the place for the signature is in the lower right-hand corner, but the form of the signature and its location is totally immaterial if it is known that the signature is intended.It may be stamped, printed, hand-written or typed. It might consist of a mark, symbol, name or any trade name. However it should be on the instrument, not on a separate paper attached.

Question 4

Lois and Jeffrey Arnold owned their home jointly. Jeffrey executed a promissory note for $128,000 to Advantage Bank (Advantage) using the home as collateral. Lois did not sign the note. Both Arnolds signed a mortgage of the home to Advantage. When Jeffrey died, title to the home immediately vested in Lois. There was default on the loan, and Advantage tried to foreclose on the mortgage. Lois asked the court to prevent the foreclosure arguing that Advantage could not enforce the note against her, so it could not enforce the mortgage. Was Lois liable on the note?

Question 5

Must a draft contain the word "order" to be negotiable?

Question 6

On a Thursday, Deborah Wallace went to Morris Murdock Travel to buy airline tickets. Because she did not have a credit card, Wallace had to pay cash. She told Murdock she did not have the money to cover the tickets in her account, but would have it the next Tuesday, and asked Murdock to take a postdated check. Wallace delivered to Murdock a check that was not postdated but dated the previous day. Murdock held the check until Tuesday, but it bounced, and Wallace was charged with issuing a bad check. Wallace argued the instrument was not a check. Did predating the check destroy negotiability?

Question 7

What does it mean for the order or promise in an instrument to be unconditional?

Question 8

Hartford Packing Company Inc. (Hartford) bought tomatoes from Luellen Farms Inc. (LFI). Hartford owed LFI $225,000 for tomatoes. John Jackson, the owner and president of Hartford, signed a note for the amount to memorialize the debt. A month later, Hartford went out of business, leaving $170,000 unpaid on the note. The note stated it was in renewal of a note described in a specific mortgage. It also said, "All covenants and agreements in said mortgage contained shall apply to this renewal note." There was no such mortgage. LFI sued Hartford and Jackson personally for payment of the note. For Jackson to have personal liability, the note had to be negotiable. Was it?

Question 9

Does a reference in an instrument to a separate agreement make the order or promise conditional? Explain.

Question 10

Edward Saunders sold real property to 2107 Brandywine, LLC and 2109 Brandywine, LLC (Brandywine), and they executed a promissory note requiring monthly payments. Brandywine tendered payments to Saunders during his lifetime. Four years later, Saunders died. Brandywine knew of the death, and Saunders's girlfriend, Francina Mitchell, told Brandywine's principal, Frederic Harwood, that she was the personal representative of the estate, and the remaining note payments were to be delivered to her. Brandywine tendered twenty monthly payments on the note to Mitchell, by checks payable to Saunders. Mitchell deposited them in an account at Provident Bank, which she and Saunders had held jointly. Calvin Jackson was appointed personal representative of Saunders's estate, and he claimed the estate never received payments due under the note. Brandywine filed a lawsuit to determine its liability under the note. Should the checks Brandywine issued after Saunders's death count as payments on the note?

Question 11

In order to be negotiable, must an instrument be payable in American money? Explain.

Question 12

Gary Vaughn executed a document stating that Fred and Martha Smith were loaning him $9,900. With regard to when the loan was to be repaid, the document stated, "when you can." About eighteen months later, the Smiths sued Vaughn for the entire amount, contending that the document was a note payable on demand and that it was a negotiable instrument. Was the document a negotiable note?

Question 13

Give two examples of provisions in an instrument that do not destroy negotiability even though they would change the amount to be paid.

Question 14

Explain the difference between negotiation of an instrument that is payable to order and one that is payable to bearer.

Question 15

Give two examples of wording on a negotiable instrument that makes it a bearer instrument.

Question 16

Mohammed Najar executed a note payable to Argent Mortgage Company, LLC (Argent), and secured the note with a mortgage on his house. The note included a provision that required Najar to give the Bank written notice if he wanted to prepay the loan, as well as a "safe harbor" provision stating that if the amount of interest listed were later determined by a court to be usurious, any excess interest collected would be applied to principal. Argent assigned the note to Deutsche Bank National Trust Co. (Bank). Najar failed to make payments on the note, and the Bank began foreclosure on the mortgage. Najar claimed in court that the prepayment and usury clauses on the note were "other undertakings" under the UCC, thus making the note nonnegotiable. Was the note a negotiable instrument?

Question 17

What are the consequences of blanks in a negotiable instrument?