Deck 22: Promissory Notes and Drafts

Question 1

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?

Answer 1

Duties of the bank:
A bank has to perform certain duties such as checking for accuracy of the signatures and checking the account for sufficient balance of funds.
In case a bank fails to do any of the above it is considered as a breach towards the customer and the bank will be liable for the same.
Also, a bank has the responsibility to pay its customers and honor their instruments as long as the instruments are valid.
In this case, the bank is not liable for payment of the checks because banks have the fiduciary duty to pay its clients.
In this case, the responsibility of checking for authorized signatory lies with the C Skills and with the bank and thus the bank cannot be responsible.
Also, banks do have the duty to honor instruments for payment as long as they are valid instruments.
Therefore, the bank is not liable for making payment.

Question 2

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

Answer 2

Drafts
The draft is being executed or drawn by the drawer to the payee who possesses the authority of the drawer to collect the payment mentioned on the negotiable instrument. The instrument should be duly signed by either the indorser or by the drawer. The draft is being given to the drawee that is authorized by the drawer to collect the payment against the instrument.
In this case, sight drafts refer to the instruments that are generally used in shipping transaction or for making interpersonal payments. When the seller is not willing to pass the control of the goods before the receipt of payment it is known as sight drafts. A sight draft is usually taken into consideration when the seller before transferring the title of goods requires immediately payable draft. It requires the drawee to make immediate payment to the presenter or bearer upon the presentment of the draft without any delay. Since check is also an instrument which is required to be paid upon its presentment, hence, it is ascertained that check is a sight draft.

Question 3

Who are the original parties to a promissory note? Explain.

Answer 3

Promissory Note:
A promissory note is a negotiable instrument through which one person promises to pay a certain sum of money to another that is not dependent on alternate sources of funds or future profits. The denomination must be a nationally recognized medium of exchange that is accepted where the payment is made.The terms for payment may be on demand or over a certain period and must be unconditional. A promissory note is written so that the payment is due at a specific time. Only at the time of due payment can a suit be filed for nonpayment.
Promissory notes are typically used to obtain goods and services on credit or to borrow money. Under the UCC § 3-605 , a promissory note may not be canceled by an oral statement.
Although a promissory note is a promise to pay, the word promise is not necessary in the description, however; a description of the promise to pay is required.
In addition, a note that references consideration does not destroy negotiability. A note that is subject to another agreement is conditional and makes the note nonnegotiable. While a note is nonnegotiable, it may still be binding on the parties.
Legal Reasoning:
Therefore, the original parties to a promissory note are the maker and the payee.

Question 4

What is the effect of the certification of a check?

Question 5

Gaby Gonzalez obtained two CDs at Second Federal Savings and Loan Association (Second) with her daughter, Juana Martinez, as beneficiary. Right before Gonzalez died, she told her cousin, Rafael Gonzalez, where to find her CDs. The CDs had a line through Martinez's name and Rafael Gonzalez's name added in the section for beneficiary with the notation, "REVISED BENEFICIARY... RC." After Gaby's death, Rafael withdrew some funds to pay funeral expenses and legal fees from one of the CDs. Several years later, Rafael discovered that Second had paid the CDs to Hector Gonzalez, who was the administrator of Martinez's estate. Rafael sued Second, claiming as the beneficiary that it should have paid him. Who was entitled to the proceeds of the CDs?

Question 6

How does a traveler's check differ from a cashier's check?

Question 7

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

Question 8

What is the duty and potential liability of a bank that refuses to pay a depositor's check?

Question 9

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 10

What are the differences among a bond, a collateral note, a real estate mortgage note, a debenture, and a certificate of deposit?

Question 11

M O insulation was hired by Quality Insulation to install some insulation. Quality had a line of credit through a promissory note with Harris Bank Naperville. Quality had not complied with its payment schedule, so Harris declared the loan to be in default and immediately due and payable. On September 23, Quality paid M O by check for $76,000 which M O deposited in its bank. On September 24, Harris placed an administrative hold or "freeze" on Quality's account. The same day, M O's $76,000 check was presented for payment. On the 25th, Quality's account had sufficient funds to pay the check, but Harris returned it for insufficient funds. Harris subsequently honored checks totaling $23,700 on the account. M O sued Harris. Harris claimed it had never accepted the check. Had it?

Question 12

What does the drawee of a draft do?

Question 13

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 14

Why must a time draft payable a specified number of days after sight be presented for acceptance?

Question 15

Diagnosed with terminal cancer, Ray Comeaux executed a handwritten will bequeathing five certificates of deposit (CDs) to four of his children and one grandchild. The CD bequeathed to his daughter, Louise, was payable to her on Ray's death. Three months later, he asked two of his sons, Michael and Rodney, to close out the CDs and put the proceeds in a checking account for the benefit of his wife, Betty. Michael and Rodney went to the bank, where they were told they could redeem their own CDs; however, Ray would have to sign the CDs made out in his name. Michael and Rodney gave Ray the CDs and told him they needed to be indorsed. Ray told Michael to have Betty sign his name, as he was physically unable to do so. Michael, Rodney, and Betty were all in the room when Ray made this request, and all were present when Betty signed the documents for Ray. Michael and Rodney returned to the bank, where all five CDs were redeemed, and the proceeds placed in a checking account. Ray died two months later. After Ray died, Louise went to the bank to redeem the CD. When she was unable, she sued the bank, alleging it should not have redeemed the CD. Was she correct?

Question 16

What is a trade acceptance?

Question 17

Carter Petroleum Products Inc. sold fuel products to Highway 210, LLC. Brotherhood Bank Trust Company issued a letter of credit, No. 2001-270, for $175,000 available by Carter's draft at "sight" on the account of Highway 210. It stated "all draft(s) drawn under and in compliance with the terms of this credit will be duly honored... if presented at this office in Shawnee, KS, no later than June 26." Hal O'Donnell, Carter's credit manager, delivered a sight draft to the bank for payment on June 26. The draft stated: "Pursuant to the terms stated in the Letter of Credit # 2001-270... Carter, hereby exercises its option to draw against said Brotherhood Bank and Trust Company's Letter of Credit in the amount of $175,000 due to non-payment of invoices." O'Donnell arrived at the bank just after 5 p.m., and the lobby was locked. After O'Donnell knocked on the door, he was admitted to the lobby. He indicated he was there to see Ward Kerby, the assistant vice president. O'Donnell handed Kerby the draft request, letter of credit, and unpaid Carter invoices to Highway 210. The draft request was stamped received on June 26. The drive-through window at the bank was still open. The bank dishonored Carter's draft request because it was presented after regular banking hours on the date the letter of credit expired. Carter sued the bank. Was the presentment proper?

Question 18

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

Question 19

After Mickey Marcus died, Melvyn Spillman presented fraudulent documents purporting to give him control of Marcus's estate to Jefferson State Bank, where Marcus had an account. Spillman withdrew most of the money in the account. More than three years after Marcus's death, the court appointed Christa Lenk, who knew of Spillman's fraud, to administer Marcus's estate. Presumably unaware of Lenk's appointment, the bank never informed her of Marcus's account or sent statements to her. Although she knew of the account at least five months after her appointment, she did not contact the bank for more than a year after that.When she demanded the amount Spillman had withdrawn, the bank refused, and she sued the bank. Should the bank have to pay?

Question 20

In what way does a drawee accept a draft?