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Chapter Four: Negotiable Instruments
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7. (E) To be negotiable a draft must be signed by the drawer, be unconditional, be payable in a certain sum of money, be payable to order or bearer and be payable on demand or at a definite time. This draft meets all five requirements.
8. (A) A blank endorsement is a signature without endorsing to a specified party. A blank endorsement makes the instrument bearer paper. M. West endorsed with a mere signature and did not endorse to a specified party.
Thus, it is bearer paper.
9. (H) A special endorsement is an endorsement to a specified party and makes the instrument order paper.
Keeton endorsed to a specified party ("Pay to C. Larr") and thus, it is order paper.
10. (A) A blank endorsement is a signature without endorsing to a specified party. A blank endorsement makes the instrument bearer paper. Larr did not endorse the instrument to a specified party, thus it is bearer paper.
11. (B) A blank endorsement is a signature without endorsing to a specified party. M. West endorsed with a mere signature and did not endorse to a specified party. Thus, it is a blank endorsement.
12. (J) A special endorsement is an endorsement to a specified party. Keeton endorsed to a specified party ("Pay to C. Larr"). Thus, it is a special endorsement.
13. (I) A qualified endorsement endorses with the words "without recourse." Larr endorsed with the words
"without recourse." Thus, it is a qualified endorsement.
ANSWER 3
1. (F) The instrument is a promissory note because it is a two party deal whereby Alice Long promises to pay to the order of Mark Eden ("the undersigned promises to pay").
2. (C) The instrument is a draft because it is a three party deal whereby Patricia Rite is ordering Henry Gage to pay to the order of Edward Tharp. It is not a check because a check is a type of a draft drawn on a bank and payable on demand. The drawee, Henry Gage, is not a bank.
3. (D) To be negotiable a note must be signed by the maker, be unconditional, be payable in a certain sum of money, be payable to order or bearer and be payable on demand or at a definite time. This note meets all five requirements.
4. (D) To be negotiable a draft must be signed by the drawer, be unconditional, be payable in a certain sum of money, be payable to order or bearer and be payable on demand or at a definite time. This draft meets all five requirements.
5. (A) A blank endorsement is a signature without endorsing to a specified party. Mark Eden endorsed with a mere signature and did not endorse to a specified party. Thus, it is a blank endorsement.
6. (G) A qualified endorsement endorses with the words "without recourse". Ferry endorsed with the words
"without recourse." Thus, it is a qualified endorsement.
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ANSWER 4
a. Williams' first claim that the promissory note is negotiable is incorrect. The note is nonnegotiable because:
x It is not payable at a definite time or on demand because payment is not required until two weeks after an event, the occurrence of which is uncertain.
x The note is only payable out of the proceeds of the resale of the computer components making the promise to pay the note conditional. This is referred to as the "particular fund doctrine."
Williams' second claim that it is a holder in due course is incorrect. Although Williams is a holder of the instrument, it cannot be a holder in due course because the instrument is nonnegotiable.
Williams' third claim that Helco cannot raise Jason's misrepresentation as a defense to payment of the note is incorrect. This defense is a personal defense and would not be valid against a holder in due course. Williams only has the rights of an assignee of the Helco note. It has no better rights than Jason. Thus, Helco can raise Jason's misrepresentation as a defense.
b. Grover is incorrect in refusing to pay its note. Williams took the note with notice of Grover's defense and, therefore, could not be a holder in due course in its own right. Williams took the note from Oliver, who was a holder in due course. Therefore, under the "shelter provision" of the UCC Commercial Paper Article, Williams has the rights of a holder in due course even though it does not qualify as one. As a result, Williams did not take the note subject to Grover's defense even though Williams was aware of it.
c. Williams will be unable to collect from Oliver in the event Grover is not required to pay the note. Oliver was unaware of the claims of Grover, its endorsement was without recourse and violated no transfer warranties.
Therefore, Williams does not have any right to recover from Oliver.
ANSWER 5
Rustic's first claim, that its security interest is superior to National's is incorrect. Rustic's security interest was perfected at the time it filed its financing statement, February 9, 1992, because it was a purchase money security interest in inventory. National filed its financing statement on February 7, 1992; therefore, National's security interest was perfected before, and is superior to, Rustic's security interest.
Rustic's second claim, that Karry purchased the lathe subject to Rustic's security interest, is incorrect. Karry, as a buyer in the ordinary course of Friendly's business, purchased the lathe free of any security interest given by Friendly. The fact that Karry was aware of Rustic's security interest does not affect this conclusion.
Karry's first claim, that the note is nonnegotiable, is incorrect. For a promissory note to be negotiable, it must be payable on demand or at a definite time. An instrument is payable on demand when it states that it is so payable, or when it provides no specific time for payment. Therefore, the note would be considered payable on demand.
Also, Karry's promissory note is negotiable despite the reference to the sales invoice because the reference does not make the note subject to the sales contract; rather, the reference only notes the existence of the invoice.
Karry's second claim, that Abcor has no rights to Karry's note because Friendly did not endorse it, is incorrect. The note is a bearer instrument because it is made payable to Friendly or bearer. Bearer instruments may be negotiated by delivery of the instrument alone.
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Karry's third claim, that Abcor took the note subject to Karry's dispute with Friendly, is incorrect. Karry's dispute with Friendly was a personal defense to Karry. Even though Abcor took the note knowing of Karry's dispute and, therefore, could not ordinarily be a holder in due course, Abcor did take the note from Queen, which was a holder in due course. Under the "shelter provision" of the UCC Commercial Paper Article, Abcor has the rights of a holder in due course even though it does not qualify as one. As a result, Abcor did not take the note subject to Karry's personal defense, despite knowing of Karry's claim.
ANSWER 6
Hillcraft's first assertion, that the note is nonnegotiable because it references the license agreement and is not payable at a definite time or on demand, is incorrect. The note is negotiable despite the reference to the license agreement because it does not make the note subject to the terms of the agreement; rather, the reference is regarded only as a recital of its existence.
Also, Hillcraft's right to extend the time for payment does not make the note nonnegotiable because the extension period is for a definite period of time.
Hillcraft's second assertion, that River Oaks is not a holder in due course (HDC) because it received the note as security for an existing debt and, therefore, did not give value for it, is incorrect. Under the UCC Commercial Paper Article, a holder does give value for an instrument when it is taken in payment of, or as a security for, an antecedent claim.
Hillcraft's third assertion, that River Oaks is not an HDC because River Oaks was aware of Alexco's alleged breach of the license agreement, is correct. If a holder of a note is aware of a dispute when it acquires the note, that holder cannot be an HDC because it took with notice.
Hillcraft's fourth assertion, that it can raise the alleged breach by Alexco as a defense to payment of the note, is incorrect. Even though River Oaks is not an HDC under the UCC "shelter provision," it is entitled to the protection of an HDC because it took the instrument from First Auto, which was an HDC. Therefore, River Oaks did not take the note subject to Hillcraft's defense based on the alleged breach by Alexco. Hillcraft's defense is considered a personal defense and can only be used by Hillcraft against Alexco.
Hillcraft's fifth assertion, that River Oaks has no right to the note because it was not endorsed by Alexco, is incorrect. River Oaks acquired rights to the Hillcraft note without Alexco's endorsement because the note was a bearer instrument as a result of it being payable to "Alexco Company or bearer." A bearer instrument can be negotiated by delivery alone.
Hillcraft's final assertion, that the maximum amount Hillcraft would owe under the note is $4,000, plus accrued interest, is correct. If there is a conflict between a number written in numerals and also described by words, the words take precedence. Therefore, Hillcraft's maximum potential principal liability is $4,000 under the note.
ANSWER 7
a. Checks paid to fictitious payees. Hex will bear the ultimate loss on these items (the fictitious or non-existent
"employees" and the fictitious suppliers). As a general rule, forged signatures of drawers and forged endorsements are real defenses which are valid even against a holder in due course. However, when some of these activities are engaged in by the employees of an employer-drawer of the checks, a different rule is applied. Essentially, this rule negates these real defenses in certain cases thereby shifting the loss to the employer-drawer. The key rule is contained in the Uniform Commercial Code's Article on Commercial Paper which deals with "Impostors; Signature of Payee." In essence, this rule makes the endorsement or signature of the agent or employee of the drawer (Hex)
"effective" where the agent has supplied the drawer the name of the payee intending the latter to have no such interest.
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Insofar as Omega is concerned, it will be treated as if it had honored valid orders to pay and need not refund to Hex the amounts it paid. The orders are valid since the forged endorsements are not treated as unauthorized.
b. Checks which contain the forged signature of the treasurer. From the facts it is apparent that the treasurer had the authority to sign checks and not the assistant treasurer or head of payroll. Thus, the forging of the treasurer's signature was an "unauthorized signature" under the UCC.
As to these checks, the UCC provides that such signatures are wholly inoperative since the guilty parties had no authority to sign the treasurer's or any other authorized party's name as the drawer on behalf of Hex.
As between Hex and Omega, there is an obligation on the part of the bank to know the signatures of its drawer-depositors. Since Omega has paid the items it cannot recoup the loss from Hex. However, the bank has two possible ways to escape liability to Hex. First, it can resort to the UCC section which imposes upon a customer to whom items (checks) are returned, a duty to exercise reasonable care and promptness in discovering and reporting unauthorized signatures. Another possibility is to establish negligence on the part of Hex which substantially contributed to the forgeries. Unless the bank can demonstrate that one of these exceptions apply, it will bear the loss.
ANSWER 8
To:
From:
I have identified and explained the issues and offer my conclusions on the legal issues pertaining to the attached note.
x Is Crane a holder in due course?
Crane is a holder in due course because Crane took a negotiable note for value, in good faith, and without knowledge of any defenses by the maker. The later disclosure that Oval has a personal defense against Jones does not affect that status as a holder in due course.
x Will Crane be able to collect from Jones?
Crane should be able to collect from Oval because Oval’s defense is personal and a holder in due course is not subject to personal defenses.
x Will Crane be able to collect from Jones?
Crane should be able to collect from Jones despite Jones’ qualified indorsement (without recourse) of the note.
Jones was aware of Oval’s defense of fraud at the time Jones indorsed the note to Crane. This knowledge is a breach of the implied transfer warranty against defenses. Accordingly, Jones’ qualified indorsement does not prevent Crane from collecting the note from Jones.