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in whole or in part.
CHAPTER 12
THE FUNCTION AND CREATION
OF NEGOTIABLE INSTRUMENTS
in whole or in part.
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 3
in whole or in part.
4A. Why might a debtor such as Reger Development agree to a note that includes a
term making it payable on demand? A debtor might agree to a note that includes a term
making it payable on demand because the debtor might not otherwise be able to obtain the
funds represented by the note. In other words, the debtor might present more risk of default to a
party entitled to enforce the note. A debtor who is eligible for, or who can negotiate, a note that
is payable at a definite time in the future might present less financial risk to the party who can
enforce the note.
Of course, as seems to have occurred in this case, a debtor might simply execute a
contract and agree to pay a note without carefully reading all of the terms. Only later, when a
demand for payment of the note is made by or on behalf of a person entitled to enforce the
instrument, might the debtor become aware of the demand term.
CASE 12.3— QUESTIONS (PAGE 232)
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that the marker had stated “Payable to the order of the Venetian.” Could the
casino have transferred it for collection? If so, how? Yes, the casino could have transferred
the marker if it had been “Payable to the order of the Venetian.” This term would have made the
item an order instrument. In an order instrument, the person specified must be identified with
certainty because the transfer of the item requires the indorsement, or signature, of the payee.
An indorsement is a signature placed on the instrument, such as on the back of a check, for the
purpose of transferring the payee’s rights in it. Thus, the casino could have transferred this
marker for collection by adding its indorsement to the instrument.
THE ECONOMIC DIMENSION
What is the advantage to the Venetian of the holding that Nehme’s marker is a negotiable
instrument? A negotiable instrument is easily transferable without the danger of its being
uncollectible. This is the fundamental function of a negotiable instrument. The advantage to the
Venetian in this case of the holding that Nehme’s marker is negotiable is the ease with which
the casino could present it to Nehme’s bank for payment.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Type of instrument
Durbin’s note was a promissory note—a written promise made by one person (the maker of the
promise to pay) to another (usually a payee). This instrument is, as defined, a promise to pay..
2A. Rate of interest
Negotiable instruments must state with certainty a fixed amount of money to be paid at any time
the instrument is payable. The term fixed amount means an amount that is ascertainable from
4 UNIT THREE: NEGOTIABLE INSTRUMENTS
in whole or in part.
the face of the instrument. A note payable with a certain percent of interest meets the
requirement of a fixed amount because its amount can be determined at the time it is payable or
at any time thereafter. The rate of interest may be determined with reference to information that
is not contained in the instrument if the information is readily determined by reference to a
source, including a statute, described in the instrument.
3A. Transfer to a holder
Only a transfer by negotiation can result in a party who obtains an instrument receiving the
rights of a holder. Thus, for the government to be a holder, the note would have to have been
transferred by negotiation.
4A. Failure of consideration
The consideration that Durbin received in exchange for his promise to pay consisted of the
funds that he was paid when he signed the note, not the quantity or quality of the education that
the school provided, or failed to provide, which Durbin bought with those funds.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Congress should pass a law disallowing all negotiable instruments that are not
written on paper. Those who are in favor of this position are fighting against today’s tendency
to reduce the use of paper and do everything electronically.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Sasha owes $600 to Yale, who asks Sasha to sign an instrument for the debt.
Suppose that each of the following is included on that instrument: “I.O.U. $600,” “I
promise to pay $600,” and an instruction to Sasha’s bank stating, “I wish you would pay
$600 to Yale.” Which of these phrases would prevent the instrument’s negotiability?
Why? A statement that “I.O.U.” money (or anything else) or an instruction to a bank stating, “I
wish you would pay,” would render any instrument nonnegotiable. To be negotiable, an
instrument must contain an express promise to pay. An I.O.U. is only an acknowledgment of
indebtedness. An order stating, “I wish you would pay,” is not sufficiently precise.
2A. Marit worked for Town & Garden, a landscape design service, owned by Donald.
Marit signed a note payable to Donald to become a co-owner of Town & Garden. The
note, which was undated, required installment payments, but Donald never asked for
them. Is Marit’s note a demand note? Explain. Yes. Instruments that are payable on demand
may state “Payable on demand.” The nature of an instrument may indicate that it is payable on
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 5
in whole or in part.
demand. If no time for payment is specified, then the instrument is also payable on demand.
Here, the note required installments but did not state a date for their payment. That Donald did
not make a demand for payment did not affect this characteristic of the note.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
12-1A. Negotiable instruments
(Chapter 12—Page 227)
(c) The note is not payable at a definite time, as the note is undated; therefore, the end of
the six-month period is uncertain.
106(b)(ii), but would render it nonnegotiable under unrevised Article 3 [UCC 3–105(2)(b)].
12-2A. Negotiability
(Chapter 12—Page 227)
(d) State a fixed amount of money.
(e) Be payable on demand or at a definite time.
handwriting) appears in the body of the instrument. The instrument’s payment is not conditional
and contains Juan Sanchez’s definite promise to pay. In addition, the sum of $100 is both a
12-3A. Promissory notes
(Chapter 12—Page 222)
in whole or in part.
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 7
in whole or in part.
may be payable on demand or at a definite time. It may name a specific payee or be payable to
bearer. But the promise must be an undertaking to pay and must be more than a mere
acknowledgment of an obligation.
Here, the instrument complies with the requirements of negotiability. It is a promise by
Scotto (the maker) to pay Vinueza (the payee) a specified sum—$2,970. It is does not contain a
definite repayment date, which means that it payable on demand, and it names a specific payee
(Vinueza). More than a mere acknowledgment of an obligation, the promise is an undertaking to
pay. In the facts set out in this problem, Vinueza—the payee on the note and the plaintiff in the
suit—is most likely to prevail. The reason is that she has the note as evidence of the promise to
pay, and Scotto, the maker of the note and the defendant in the suit, admitted that he borrowed
the money. His contention that he paid the note is not supported by any proof. In the actual case
on which this problem is based, the court concluded that the plaintiff proved she was owed
$2,970 from the defendant. The court also found that she did not prove she was owed an
additional $630, as she claimed. The defendant, who failed to show that he paid the loan, was
ordered to pay $2,970 to the plaintiff.
in whole or in part.
in whole or in part.
in whole or in part.
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 3
in whole or in part.
4A. Why might a debtor such as Reger Development agree to a note that includes a
term making it payable on demand? A debtor might agree to a note that includes a term
making it payable on demand because the debtor might not otherwise be able to obtain the
funds represented by the note. In other words, the debtor might present more risk of default to a
party entitled to enforce the note. A debtor who is eligible for, or who can negotiate, a note that
is payable at a definite time in the future might present less financial risk to the party who can
enforce the note.
Of course, as seems to have occurred in this case, a debtor might simply execute a
contract and agree to pay a note without carefully reading all of the terms. Only later, when a
demand for payment of the note is made by or on behalf of a person entitled to enforce the
instrument, might the debtor become aware of the demand term.
CASE 12.3— QUESTIONS (PAGE 232)
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that the marker had stated “Payable to the order of the Venetian.” Could the
casino have transferred it for collection? If so, how? Yes, the casino could have transferred
the marker if it had been “Payable to the order of the Venetian.” This term would have made the
item an order instrument. In an order instrument, the person specified must be identified with
certainty because the transfer of the item requires the indorsement, or signature, of the payee.
An indorsement is a signature placed on the instrument, such as on the back of a check, for the
purpose of transferring the payee’s rights in it. Thus, the casino could have transferred this
marker for collection by adding its indorsement to the instrument.
THE ECONOMIC DIMENSION
What is the advantage to the Venetian of the holding that Nehme’s marker is a negotiable
instrument? A negotiable instrument is easily transferable without the danger of its being
uncollectible. This is the fundamental function of a negotiable instrument. The advantage to the
Venetian in this case of the holding that Nehme’s marker is negotiable is the ease with which
the casino could present it to Nehme’s bank for payment.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Type of instrument
Durbin’s note was a promissory note—a written promise made by one person (the maker of the
promise to pay) to another (usually a payee). This instrument is, as defined, a promise to pay..
2A. Rate of interest
Negotiable instruments must state with certainty a fixed amount of money to be paid at any time
the instrument is payable. The term fixed amount means an amount that is ascertainable from
4 UNIT THREE: NEGOTIABLE INSTRUMENTS
in whole or in part.
the face of the instrument. A note payable with a certain percent of interest meets the
requirement of a fixed amount because its amount can be determined at the time it is payable or
at any time thereafter. The rate of interest may be determined with reference to information that
is not contained in the instrument if the information is readily determined by reference to a
source, including a statute, described in the instrument.
3A. Transfer to a holder
Only a transfer by negotiation can result in a party who obtains an instrument receiving the
rights of a holder. Thus, for the government to be a holder, the note would have to have been
transferred by negotiation.
4A. Failure of consideration
The consideration that Durbin received in exchange for his promise to pay consisted of the
funds that he was paid when he signed the note, not the quantity or quality of the education that
the school provided, or failed to provide, which Durbin bought with those funds.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Congress should pass a law disallowing all negotiable instruments that are not
written on paper. Those who are in favor of this position are fighting against today’s tendency
to reduce the use of paper and do everything electronically.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Sasha owes $600 to Yale, who asks Sasha to sign an instrument for the debt.
Suppose that each of the following is included on that instrument: “I.O.U. $600,” “I
promise to pay $600,” and an instruction to Sasha’s bank stating, “I wish you would pay
$600 to Yale.” Which of these phrases would prevent the instrument’s negotiability?
Why? A statement that “I.O.U.” money (or anything else) or an instruction to a bank stating, “I
wish you would pay,” would render any instrument nonnegotiable. To be negotiable, an
instrument must contain an express promise to pay. An I.O.U. is only an acknowledgment of
indebtedness. An order stating, “I wish you would pay,” is not sufficiently precise.
2A. Marit worked for Town & Garden, a landscape design service, owned by Donald.
Marit signed a note payable to Donald to become a co-owner of Town & Garden. The
note, which was undated, required installment payments, but Donald never asked for
them. Is Marit’s note a demand note? Explain. Yes. Instruments that are payable on demand
may state “Payable on demand.” The nature of an instrument may indicate that it is payable on
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 5
in whole or in part.
demand. If no time for payment is specified, then the instrument is also payable on demand.
Here, the note required installments but did not state a date for their payment. That Donald did
not make a demand for payment did not affect this characteristic of the note.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
12-1A. Negotiable instruments
(Chapter 12—Page 227)
(c) The note is not payable at a definite time, as the note is undated; therefore, the end of
the six-month period is uncertain.
106(b)(ii), but would render it nonnegotiable under unrevised Article 3 [UCC 3–105(2)(b)].
12-2A. Negotiability
(Chapter 12—Page 227)
(d) State a fixed amount of money.
(e) Be payable on demand or at a definite time.
handwriting) appears in the body of the instrument. The instrument’s payment is not conditional
and contains Juan Sanchez’s definite promise to pay. In addition, the sum of $100 is both a
12-3A. Promissory notes
(Chapter 12—Page 222)
in whole or in part.
CHAPTER 12: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 7
in whole or in part.
may be payable on demand or at a definite time. It may name a specific payee or be payable to
bearer. But the promise must be an undertaking to pay and must be more than a mere
acknowledgment of an obligation.
Here, the instrument complies with the requirements of negotiability. It is a promise by
Scotto (the maker) to pay Vinueza (the payee) a specified sum—$2,970. It is does not contain a
definite repayment date, which means that it payable on demand, and it names a specific payee
(Vinueza). More than a mere acknowledgment of an obligation, the promise is an undertaking to
pay. In the facts set out in this problem, Vinueza—the payee on the note and the plaintiff in the
suit—is most likely to prevail. The reason is that she has the note as evidence of the promise to
pay, and Scotto, the maker of the note and the defendant in the suit, admitted that he borrowed
the money. His contention that he paid the note is not supported by any proof. In the actual case
on which this problem is based, the court concluded that the plaintiff proved she was owed
$2,970 from the defendant. The court also found that she did not prove she was owed an
additional $630, as she claimed. The defendant, who failed to show that he paid the loan, was
ordered to pay $2,970 to the plaintiff.
in whole or in part.
in whole or in part.
