ANSWERS TO PROBLEMS
1. State whether the following provisions impair or preclude negotiability, the instrument
in each instance being otherwise in proper form. Answer each statement with either
“Negotiable” or “Nonnegotiable” and explain why.
a. A note for $2,000 payable in twenty monthly installments of $100 each that provides
the following: “In case of death of maker, all payments not due at date of death are
canceled.”
b. A note stating, “This note is secured by a mortgage on personal property located at
351 Maple Street, Smithton, Illinois.”
c. A certificate of deposit reciting, “June 6, 2014, John Jones has deposited in the
Citizens Bank of Emanon, Illinois, Two Thousand Dollars, to the credit of himself,
payable upon the return of this instrument properly indorsed, with interest at the rate
of 6 percent per annum from date of issue upon ninety days’ written notice. (Signed)
Jill Crystal, President, Citizens Bank of Emanon.”
d. An instrument reciting, “IOU, Mark Noble, $1,000.00.”
e. A note stating, “In accordance with our contract of December 13, 2013, I promise to
pay to the order of Sam Stone $100 on March 13, 2014.”
f. A draft drawn by Brown on the Acme Publishing Company for $500, payable to the
order of the Sixth National Bank of Erehwon, directing the bank to “Charge this draft
to my royalty account.”
g. A note executed by Pierre Janvier, a resident of Chicago, for $2,000, payable in Swiss
francs.
h. An undated note for $1,000 payable “six months after date.”
i. A note for $500 payable to the order of Ray Rodes six months after the death of Albert
Olds.
j. A note of $500 payable to the assigns of Levi Lee.
k. A check made payable “to Ketisha Johnson.”
Answer: Form of Commercial Paper.
(a) Non-negotiable. Payment is contingent upon the maker continuing to live during the
20 months during which the installments are payable. The contingency is always present
during the 20 months that a lesser amount would be payable in the event of the death of
the maker. U.C.C., Section 3-104(a).
2. State whether the following provisions in a note impair or preclude negotiability, the
instrument in each instance being otherwise in proper form. Answer each statement with
either “Negotiable” or “Nonnegotiable” and explain why.
a. A note signed by Henry Brown in the trade name of the Quality Store.
b. A note for $850, payable to the order of TV Products Company, “If, but only if, the
television set for which this note is given proves entirely satisfactory to me.”
c. A note executed by Adams, Burton, and Cady Company, a partnership, for $1,000,
payable to the order of Davis, payable only out of the assets of the partnership.
d. A note promising to pay $500 to the order of Leigh and to deliver ten tons of coal to
Leigh.
e. A note for $10,000 executed by Eaton payable to the order of the First National Bank
of Emanon, in which Eaton promises to give additional collateral if the bank deems
itself insecure and demands additional security.
f. A note reading, “I promise to pay to the order of Richard Roe $2,000 on January 31,
2014, but it is agreed that if the crop of Blackacre falls below ten bushels per acre for
the 2013 season, this note shall be extended indefinitely.”
g. A note payable to the order of Ray Rogers fifty years from date but providing that
payment shall be accelerated by the death of Silas Hughes to a point of time four
months after his death.
h. A note for $4,000 calling for payments of installments of $250 each and stating, “In
the event any installment hereof is not paid when due, this note shall immediately
become due at the holder’s option.”
i. An instrument dated September 17, 2014, in the handwriting of John Henry Brown,
which reads in full: “Sixty days after date, I, John Henry Brown, promise to pay to the
order of William Jones $500.”
j. A note reciting, “I promise to pay Ray Reed $100 on December 24, 2014.”
Answer: Form of Commercial Paper.
(a) Negotiable. A negotiable instrument must be signed by the maker or drawer. Section
3-104, U.C.C. Section 3-401 provides: “A signature may be made . . . by use of any
name, including a trade or assumed name . . . by a person with present intention to
authenticate a writing.” A signature may be made in any name, including any trade or
assumed name, however false and fictitious, which is adopted for the purpose.
3. On March 10, Tolliver Tolles, also known as Thomas Towle, delivered to Alonzo Craig
and Abigail Craig the following instrument, written by him in pencil:
For value received, I, Thomas Towle, promise to pay to the order of Alonzo Craig or
Abigail Craig One Thousand Seventy-Five ($1,000.75) Dollars six months after my
mother, Alma Tolles, dies with interest at the rate of 9 percent from date to maturity
and after maturity at the rate of 93/4 percent. I hereby waive the benefit of all laws
exempting real or personal property from levy or sale.
Is this instrument negotiable? Explain.
Answer: Form of Commercial Paper. Non-negotiable. (See f, below).
(a) The fact that Tolles also uses an assumed name is immaterial. Section 3-401(b) of the
U.C.C. provides: A signature is made by use of any name, including any trade or
assumed name.
4. Henry Hughes, who operates a department store, executed the following instrument:
$2,600 Chicago, March 5, 2014
On July 1, 2014, I promise to pay Daniel Dalziel, or order, the sum of Twenty-Six
Hundred Dollars for the privilege of one framed advertising sign, size 24 36
inches, at one end of each of two hundred sixty motor coaches of the New Omnibus
Company for a term of three months from May 15, 2014.
Henry Hughes
Is this instrument negotiable? Explain
Answer: Unconditional. Negotiable. The mere fact that the consideration for which a
promissory note is given is recited in it, although it may appear thereby that it was given
for or in consideration of an executory contract, or promise on the part of the payee, will
5. Paul agreed to lend Marsha $500. Thereupon Marsha made and delivered her note for
$500 payable to Paul or order “ten days after my marriage.” Shortly thereafter Marsha
was married. Is the instrument negotiable? Explain.
6. For the balance due on the purchase of a tractor Henry Brown executed and delivered to
Jane Jones his promissory note containing the following language:
January 1, 2014, I promise to pay to the order of Jane Jones the sum of $7,000 to be
paid only out of my checking account at the XYZ National Bank of Pinckard, Illinois,
in two installments of $3,500 each, payable on May 1, 2014, and on July 1, 2014,
provided that if I fail to pay the first installment on the due date, the entire sum shall
become immediately due.
(Signed) Henry Brown
Is the note negotiable? Explain.
Answer: Particular Fund Doctrine. Negotiable. Revised Article 3 eliminates the particular
fund doctrine.
Two other points should be discussed:
7. Sam Sharpe executed and delivered to Don Dole the following instrument:
Knoxville, Tennessee May 29, 2014
Thirty days after date I promise to pay Don Dole or order Five Thousand Dollars. The
holder of this instrument shall have the election to require the assignment and delivery
to him of my 100 shares of Brookside Iron Works Corporation stock in lieu of the
payment of Five Thousand Dollars in money.
(Signed) Sam Sharpe
Is this instrument negotiable? Explain.
Answer: Fixed Amount in Money. The instrument is not negotiable. An option to require
8. Explain whether the following instrument is negotiable.
March 1, 2014
One month from date, I, James Jimson, hereby promise to pay Edmund Edwards: Six
Thousand, Seven Hundred Fifty ($6,750.00) Dollars, plus 8 ¾ % interest. Payment for
cutting machines to be delivered on March 15, 2014.
James Jimson
Answer: Fixed Amount in Money. Negotiable. The instrument provides a promise to pay a
9. Broadway Management Corporation obtained a judgment against Briggs. The note on
which the judgment was based reads in part: “Ninety Days after date, I, we, or either of
us, promise to pay to the order of Three Thousand Four Hundred Ninety Eight and
45/100———Dollars.” (The underlined words and symbols were typed in; the
remainder was printed.) There are no blanks on the face of the instrument, any unused
space having been filled in with hyphens. The note contains clauses permitting
acceleration in the event the holder deems itself insecure and authorizes judgment “if
this note is not paid at any stated or accelerated maturity.” Explain whether the note is
negotiable order paper.
Answer: Payable to Order or to Bearer. Judgment for Briggs—this is not negotiable order
10. Sandra and Thomas McGuire entered into a purchase and sale agreement for “Becca’s
Boutique” with Pascal and Rebecca Tursi. The agreement provided that the McGuires
would buy the store for $75,000, with a down payment of $10,000 and the balance of
$65,000 to be paid at closing on October 5, 2014. The settlement clause stated that the
sale was contingent upon the McGuires’ obtaining a Small Business Administration loan
of $65,000. On September 4, 2014, Mrs. McGuire signed a promissory note in which the
McGuires promised to pay to the order of the Tursis and the Green Mountain Inn the
sum of $65,000. The note specified that interest payments of $541.66 would become due
and payable on the fifth days of October, November, and December 2014. The entire
balance of the note, with interest, would become due and payable at the option of the
holder if any installment of interest was not paid according to that schedule.
The Tursis had for several months been negotiating with Parker Perry for the purchase of
the Green Mountain Inn in Stowe, Vermont. On September 7, 2014, the Tursis delivered
to Perry a $65,000 promissory note payable to the order of Green Mountain Inn, Inc.
This note was secured by transfer to the Green Mountain Inn of the McGuires’ note to the
Tursis. Subsequently, Mrs. McGuire learned that her Small Business Administration loan
had been disapproved. On December 5, 2014, the Tursis defaulted on their promissory
note to the Green Mountain Inn. On June 11, 2014, PP, Inc., formerly Green Mountain
Inn, Inc., brought an action against the McGuires to recover on the note held as security
for the Tursis’ promissory note. Discuss whether the instrument is negotiable.
Answer: Payable at a Definite Time. This Promissory note is not a negotiable instrument
within U.C.C. Article 3. The note is not payable on demand or at a definite time because
11. On September 2, 2008, Levine executed a mortgage bond under which she promised to
pay the Mykoffs a preexisting obligation of $54,000. On October 14, 2014, the Mykoffs
transferred the mortgage to Bankers Trust Co., indorsing the instrument with the words
“Pay to the Order of Bankers Trust Company Without Recourse.” The Lincoln First
Bank, N.A., brought this action asserting that the Mykoffs’ mortgage is a nonnegotiable
instrument because it is not payable to order or bearer; thus it is subject to Lincoln’s
defense that the mortgage was not supported by consideration because an antecedent
debt is not consideration. Is the instrument payable to order or bearer? Discuss.
Answer: Payable to Order or Bearer. The instrument is not payable to order or bearer.
Antecedent debt is sufficient consideration to support a negotiable instrument, but not a
12. Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument
was a restriction stating that the note could not be transferred, pledged, or otherwise
assigned without Horne’s written consent. As part of the same transaction between
Horne and Clark, Horne gave Clark a separate letter authorizing Clark to pledge the
note as collateral for a loan of $50,000 that Clark intended to secure from First State
Bank. Clark did secure the loan and pledged the note, which was accompanied by
Horne’s letter authorizing Clark to use the note as collateral. First State contacted
Horne and verified the agreement between Horne and Clark as to using the note as
collateral. Clark defaulted on the loan. When First Bank later attempted to collect on
the note, Horne refused to pay, arguing that the note was not negotiable as it could not
be transferred without obtaining Horne’s written consent. This suit was instituted. Is the
instrument negotiable? Explain.
Answer: Payable to Order or Bearer. Judgment for First State Bank, even though the note
in question is not a negotiable instrument. In order for a note to be classified as a
13. The Society National Bank (Society) agreed in a promissory note to lend U.S.A.
Diversified Products, Inc. (USAD) up to $2 million in the form of an operating line of
credit upon which USAD could make draws of varying amounts. The outstanding
balance was to be paid on April 30 of the following year. USAD defaulted on the line of
credit, and Society filed a complaint against USAD. Is the promissory note negotiable?
Explain.
Answer: Fixed Amount in Money. The line of credit is not a negotiable instrument. This
problem is based on the case Yin v. Society National Bank Indiana, Court of Appeals of
ANSWERS TO “TAKING SIDES” PROBLEMS
Holly Hill Acres, Ltd., executed and delivered a promissory note and a purchase money
mortgage to Rogers and Blythe. The note provided that it was secured by a mortgage on
certain real estate and that the terms of that mortgage “are by this reference made a part
hereof.” Rogers and Blythe then assigned the note to Charter Bank, and the bank sought
to foreclose on the note and mortgage. Holly Hill Acres refused to pay, claiming that the
note was not negotiable and therefore subject to the defense that Holly Hill Acres had
been defrauded by Rogers and Blythe.
(a) Present the position that the note is a negotiable instrument.
(b) What is the position that the note is nonnegotiable?
(c) Is the note negotiable or nonnegotiable? Explain
ANSWER:
(a) Many notes state that they are secured by a mortgage and this is an important part of
commercial real estate law. There is nothing in such a provision that destroys the
negotiability of a note.