ANSWERS TO PROBLEMS
1. Roy Rand executed and delivered the following note to Sue Sims: “Chicago, Illinois,
June 1, 2014; I promise to pay to Sue Sims or bearer, on or before July 1, 2014, the sum
of $7,000. This note is given in consideration of Sims’s transferring to the undersigned
title to her 2006 Buick automobile. (signed) Roy Rand.” Rand and Sims agreed that
delivery of the car be deferred to July 1, 2014. On June 15, Sims sold and delivered the
note, without indorsement, to Karl Kaye for $6,200. What rights, if any, has Kaye
acquired?
Answer: Transfer and Negotiation. Kaye has become a holder of the note. The note is
negotiable in form.
The fact that Sims had not indorsed the note does not preclude Kaye’s becoming a holder.
2. Lavinia Lane received a check from Wilmore Enterprises, Inc., drawn on the Citizens
Bank of Erehwon, in the sum of $10,000. Mrs. Lane indorsed the check “Mrs. Lavinia
Lane for deposit only, Account of Lavinia Lane” and placed it in a “Bank by Mail”
envelope addressed to the First National Bank of Emanon, where she maintained a
checking account. She then placed the envelope over a tier of mailboxes in her apartment
building along with other letters to be picked up by the postman the next day.
Flora Fain stole the check, went to the Bank of Omaha, where Mrs. Lane was unknown,
represented herself to be Lavinia Lane, and cashed the check. Has Bank of Omaha taken
the check by negotiation? Why or why not?
Answer: Restrictive Indorsements. No. Lavinia Lane’s indorsement is a restrictive
indorsement. Section 3-206 permits further negotiation but the transferee must comply
3. For each of the following indorsements indicate (a) the type of indorsement and whether
the indorsement is (b) blank or special, (c) restrictive or nonrestrictive, and (d) qualified
or unqualified:
(a) “Pay to Monsein without recourse.”
(b) “Pay to Allinore for collection.”
(c) “I hereby assign all my rights, title, and interest in this note to Fullilove in full.”
(d) “Pay to the Southern Trust Company.”
(e) “Pay to the order of the Farmers Bank of Nicholasville for deposit only.”
Answer: Indorsements.
(a) Special, non-restrictive and qualified. The fact that words of negotiability are not
used in the indorsement is immaterial. The U.C.C. requires that such words be used in
4. Explain whether each of the following transactions results in a valid negotiation:
(a) Arnold gives a negotiable check payable to bearer to Betsy without indorsing it.
(b) Golden indorses a negotiable, promissory note payable to the order of Golden, “Pay
to Chambers and Rambis, (signed) Golden.”
(c) Porter lost a negotiable check payable to his order. Kersey found it and indorsed the
back of the check as follows: “Pay to Drexler, (signed) Kersey.”
(d) Thomas indorsed a negotiable promissory note payable to the order of Thomas,
“(signed) Thomas,” and delivered it to Sally. Sally then wrote above Thomas’s signature,
“Pay to Sally.”
(e) Margarita issued to Poncho a negotiable promissory note payable to the order of
Poncho. Poncho indorsed the note “Pay to Randy only, (signed) Poncho” and sold it to
Randy. Randy then sold the note to Stephanie after indorsing it “Pay to Stephanie,
(signed) Randy.”
5. Alpha issues a negotiable check to Beta payable to the order of Beta in payment of an
obligation Alpha owed Beta. Beta delivers the check to Gamma without indorsing it in
exchange for 100 shares of General Motors stock owned by Gamma. How has Beta
transferred the check? What rights, if any, does Gamma have against Beta?
6. Simon Sharpe executed and delivered to Ben Bates a negotiable promissory note payable
to the order of Ben Bates for $500. Bates indorsed the note, “Pay to Carl Cady upon his
satisfactorily repairing the roof of my house, (signed) Ben Bates,” and delivered it to
Cady as a down payment on the contract price of the roofing job. Cady then indorsed the
note and sold it to Timothy Tate for $450. What rights, if any, does Tate acquire in the
promissory note?
7. Debbie Dean issued a check to Betty Brown payable to the order of Cathy Cain and Betty
Brown. Betty indorsed the check, “Payable to Elizabeth East, (signed) Betty Brown.”
What rights, if any, does Elizabeth acquire in the check?
8. Marcus issues a negotiable promissory note payable to the order of Parish for the
amount of $3,000. Parish raises the amount to $13,000 and negotiates it to Hilda for
$12,000.
(a) If Hilda is a holder in due course, how much can she recover from Marcus? How
much from Parish? If Marcus’s negligence substantially contributed to the making of the
alteration, how much can Hilda recover from Marcus and Parish, respectively?
(b) If Hilda is not a holder in due course, how much can she recover from Marcus? How
much from Parish? If Marcus’s negligence substantially contributed to the making of the
alteration, how much can Hilda recover from Marcus and Parish, respectively?
Answer: Material Alteration. (a) Since a payee is a holder (Section 1-201(20)) his
fraudulent and material alteration discharges any party whose obligation is thereby
9. On December 2, 2014, Miles executed and delivered to Proctor a negotiable promissory
note for $1,000, payable to Proctor or order due March 2, 2015, with interest at 14
percent from maturity, in partial payment of a printing press. On January 3, 2015,
Proctor, in need of ready cash, indorsed and sold the note to Hughes for $800. Hughes
paid $600 in cash to Proctor on January 3 and agreed to pay the balance of $200 one
week later, namely, on January 10. On January 6, Hughes learned that Miles claimed a
breach of warranty by Proctor and, for this reason, intended to refuse to pay the note
when it matured. On January 10, Hughes paid Proctor $200, in conformity with their
agreement of January 3. Following Miles’s refusal to pay the note on March 2, 2015,
Hughes sues Miles for $1,000. Is Hughes a holder in due course? If so, for what amount?
Answer: Holder in Due Course: Value. Decision for Hughes. Section 3-303 of the U.C.C.
provides: An instrument is issued or transferred for value to the extent that the agreed
10. Thornton fraudulently represented to Daye that he would obtain for her a new car to
be used in Daye’s business for $17,800 from Pennek Motor Company. Daye thereupon
executed her personal check for $17,800 payable to the order of Pennek Motor Company
and delivered the check to Thornton, who immediately delivered it to the motor company
in payment of his own prior indebtedness. The motor company had no knowledge of the
representations made by Thornton to Daye. Pennek Motor Company now brings an
action on the check which was not paid against Daye, who defends on the ground of
failure of consideration. Is Pennek subject to this defense? Explain.
Answer: Payee as Holder in Due Course. Decision for Pennek Motor Company. Section
3-302(comment 4) of the U.C.C. provides that a payee may be a holder in due course.
The check was complete when Pennek Motor Company received it from Thornton, and
11.Adams, who reads with difficulty, arranged to borrow $2,000 from Bell. Bell prepared a
note, which Adams read laboriously. As Adams was about to sign it, Bell diverted
Adams’s attention and substituted the following paper, which was identical to the note
Adams had read except that the amounts were different:
On June 1, 2014, I promise to pay Ben Bell or order Twelve Thousand Dollars with
interest from date at 16 percent. This note is secured by certificate No. 13 for 100
shares of stock of Brookside Mills, Inc.
Adams did not detect the substitution, signed as maker, handed the note and stock
certificate to Bell, and received from Bell $2,000. Bell indorsed and sold the paper to
Fore, a holder in due course, who paid him $11,000. Fore presented the note at maturity
to Adams, who refused to pay. What are Fore’s rights, if any, against Adams?
Answer: Fraud in the Execution. Although the note is negotiable (the fact that it appears
to be undated does not affect its negotiable character), Fore can only recover from Bell
12. On January 2, 2014, seventeen year-old Martin paid $2,000 for a used motorboat to
use in his fishing business, after Dealer’s fraudulent misrepresentation of the condition of
the boat. Martin signed an installment contract for $1,500, and gave Dealer the
following instrument as down payment:
Dated: 2014
I promise to pay to the order of Dealer, six months after date, the sum of $500 without
interest. This is given as a down payment on an installment contract for a motorboat.
(signed) Martin
Dealer, on July 1, sold his business to Henry and included this note in the transaction.
Dealer indorsed the note in blank and handed it to Henry, who left the note in his office
safe. On July 10, Sharpie, an employee of Henry, without authority, stole the note and
sold it to Bert for $300, indorsing the note “Sharpie.” At the time, in Bert’s presence,
Sharpie filled in the date on the note as February 2, 2014. Bert demanded payment from
Martin, who refused to pay. What are Bert’s rights against Martin?
Answer: Notice an Instrument is Overdue. Incomplete Instrument. Ordinarily, the failure
to date an instrument does not impair its negotiability except where the due date is made
13. McLaughlin borrowed $10,000 from Adler, who, apprehensive about McLaughlin’s
ability to pay, demanded security. McLaughlin indorsed and delivered to Adler a
negotiable promissory note executed by Topping for $12,000 payable to McLaughlin’s
order in twelve equal monthly installments. The note did not contain an acceleration
clause, but it recited that the consideration for the note was McLaughlin’s promise to
paint and shingle Topping’s barn. At the time McLaughlin transferred the note to Adler,
the first installment was overdue and unpaid. Adler was unaware that the installment had
not been paid. Topping did not pay any of the installments on the note. When the last
installment became due, Adler presented the note to Topping for payment. Topping
refused upon the ground that McLaughlin had not painted or shingled her barn.
What are Adler’s rights, if any, against Topping on the note?
Answer: Holder in Due Course Status. Judgment for Adler against Topping for $10,000.
When Adler obtained the negotiable promissory note as security for repayment of his
$10,000 loan to McLaughlin, he became a holder in due course of this note. The note is
14. Adams, by fraudulent representations, induced Barton to purchase one hundred
shares of the capital stock of the Evermore Oil Company. The shares were worthless.
Barton executed and delivered to Adams a negotiable promissory note for $5,000, dated
May 5, in full payment for the shares, due six months after date. On May 20, Adams
indorsed and sold the note to Cooper for $4,800. On October 21, Barton, having learned
that Cooper now held the note, notified Cooper of the fraud and stated he would not pay
the note. On December 1, Cooper negotiated the note to Davis who, while not a party,
had full knowledge of the fraud perpetrated on Barton. Upon refusal of Barton to pay the
note, Davis sues Barton for $5,000. Is Davis a holder in due course or, if not, does he
have the rights of a holder in due course? Explain.