978-1285860381 Chapter 25 Solution Manual Part 1

subject Type Homework Help
subject Pages 6
subject Words 2742
subject Authors Jeffrey F. Beatty, Susan S. Samuelson

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Suggested Additional Assignments
Writing Exercise
Ask students to write their own mystery story modeled on the vignette that opens the chapter. This
exercise will help them consolidate their grasp of the material in the chapter. In class, ask them to break
into groups and share their stories with the group. They will then select the best story from their group to
read aloud to the class.
Research: Indorsements
Ask students to look at the checks that have been returned with their bank statements and find as many
different types of indorsements as they can: blank, special, or restrictive. Ask them to bring photocopies
of the indorsements to class.
Chapter Overview
Chapter Theme
This chapter lays the foundation for the three chapters on negotiable instruments. Students will learn the
important fundamentals: the types of negotiable instruments, the concept of negotiability, and the rights of
a holder in due course.
Quote of the Day
“A negotiable bill or note is a courier without luggage.” –John B. Gibson, Overton v. Tyler, 3 Pa. 346, 347
(1846).
Commercial Paper
Commercial paper is a contract to pay money. It is used as a substitute for money or a loan of money.
The fundamental “rule” of commercial paper is:
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as
(1) the paper is negotiable;
(2) it has been negotiated to the possessor;
(3) the possessor is a holder in due course; and
(4) the issuer cannot claim any of a limited number of “real” defenses.
The Role of Commercial Paper
Students use commercial paper all the time, without realizing its legal name. Everyone in the class will
have written or received a check at some point.
Question: What types of commercial paper have you used in the last month?
Question: Have you ever signed a promissory note? For what purpose?
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Types of Negotiable Instruments
There are two kinds of commercial paper: negotiable and non-negotiable instruments.
A note (also called a promissory note) is your promise that you will pay money. A promissory note is used
in virtually every loan transaction, whether the borrower is paying for a multimillion dollar company, a
TV, or college tuition.
A draft is an order directing someone else to pay money for you. A check is the most common form of a
draft—it is an order telling a bank to pay money. In a draft three people are involved: the drawer orders
the drawee to pay money to the payee.
Negotiability
Quote of the Day
“A negotiable bill or note is a courier without luggage.”
Question: What does the Code require to create a negotiable instrument?
Answer: UCC §3-104(a) states that to be negotiable an instrument must:
Be in writing
Be signed by the maker or drawer
Contain an unconditional promise or order to pay
State a definite amount of money
Be payable on demand or at a definite time, and
Be payable to order or to bearer.
Question: Why are these requirements essential for negotiability?
Question: Why is a negotiable instrument like a courier without luggage?
Answer: The possessor of non-negotiable commercial paper has the same rights as the person who
Question: Is the quote completely accurate?
Answer: No, because the holder of a negotiable bill is subject to both personal and real defenses
Interpretation of Ambiguities
When the terms in a negotiable instrument contradict each other, three rules apply:
Words take precedence over numbers.
Handwritten terms prevail over typed and printed terms.
Typed terms win over printed terms.
You Be the Judge: Blasco v. Money Services Center1
Facts: Christina Blasco entered into a “payday loan” with Money Services Center (MSC). MSC loaned
Blasco $500 and return Blasco left MSC with a signed check for $587.50 which it promised not to cash
1 2006 Bankr. LEXIS 2899, United Stated Bankruptcy Court for the Northern District of Alabama, 2006.
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for two weeks. (Note that Blasco is laying 17.5% interest for a two-week loan, which is an annual
compounded rate of 6500%.)
Before MSC could cash the check, Blasco filed for bankruptcy. Although MSC knew this, it
deposited the check. It is illegal for creditors to attempt to collect a debt once a debtor has filed for
bankruptcy, but creditors are entitled to payment on negotiable instruments.
The numerical amount on Blasco’s check was $587.50, but the amount written in words was “five
eighty-seven and 50/100 dollars.” Did the words mean “five hundred eighty-seven” or “five thousand
eighty-seven”? Was the check negotiable despite this ambiguity?
You Be The Judge: Was this check a negotiable instrument? Was it for a definite amount?
Holding: Yes, the note was negotiable, it was for a definite amount. According to the court, to determine
whether the check was a negotiable instrument, it must state a promise to pay a definite amount of money.
The numerical amount of the check was “$ 587.50”, but the amount stated in words was “five
eighty-seven and 50/100 dollars.” For the words to prevail over the numbers, the two have to be
contradictory. The words “five eighty-seven and 50/100 dollars” did not contradict the numbers $587.50;
the numbers clarified the ambiguity in the words.
Question: To be negotiable, what must a note look like?
Answer: It must:
Be in writing
Question: Was this note in writing?
Question: Was it signed by Blasco?
Question: Did it contain an unconditional promise or order to pay?
Question: Presumably Blasco knew the amount of the check, after all she wrote it. Why then did she
sue saying the check was not negotiable?
Negotiation
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as (1) the
paper is negotiable, (2) it has been negotiated to the possessor, (3) the possessor is a holder in due course,
and (4) the issuer cannot claim any of a limited number of real defenses. Negotiation means that an
instrument has been transferred to the holder by someone other than the issuer.
NEGOTIATED PAPER CONSEQUENCES
Issuer (maker or
drawer)
Payee or drawee Holder (possessor)
Note or draft
Received from issuer,
later transferred to
Issuer liable to holder
regardless of any
claims it has against
payee or drawee
NON-NEGOTIATED PAPER
Issuer (maker or Payee or drawee
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drawer)
Note or draft Received from issuer
Issuer’s liability
subject to any claims
it has against payee or
drawee
Negotiation
To be negotiated, order paper must first be indorsed and then delivered to the transferee by someone other
than the issuer. Bearer paper must simply be delivered to the transferee; no indorsement is required.
Question: What are the differences between order paper and bearer paper?
Answer: Bearer paper is like cash. No indorsement is necessary and any holder is eligible to be a
Research: Indorsements
If students undertook the indorsements research, copy some samples on the board and ask students to
identify the different types.
Holder in Due Course
A holder in due course has an automatic right to receive payment for a negotiable instrument unless the
issuer can claim a limited number of real defenses. In other words, a holder in due course has a greater
probability of being paid than a mere holder—a fact that gives negotiable instruments tremendous value
and fuels market demand for them.
Question: What are the requirements for a holder in due course?
Question: Why are holders in due course entitled to this special treatment?
Answer: The theme throughout this chapter is that an instrument has little value unless the holder
can be reasonably sure she will be paid. An innocent holder, who has no reason to believe there is
Additional Case: Rosenbaum v. Bulow2
Facts: Maude Rosenbaum wanted to post bail to get out of prison. Harvey Bowen agreed to post bail of
$7,500 in return for a $7,500 promissory note signed by Rosenbaum and secured by her house. Bowen
was not a licensed bondsman and therefore, under state law, was not entitled to any payment for posting
bail. To solve this problem, Bowen asked Rosenbaum to sign a second note to his niece’s husband, W. F.
Bulow (who was not a bondsman, either).
Issues: Did Bulow give value for the promissory note? Did he act in good faith?
22 1997 Bankr. LEXIS 555 United States Bankruptcy Court for the Eastern District of North Carolina,
1997
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Holding: Bulow cannot collect on the note. At best, Bowen was trying to make a gift to Bulow of his
illegally obtained profit. Bulow did not give value to Rosenbaum. Nor did Bulow act in good faith. He
could not have believed that Rosenbaum simply wanted to make a gift to him of $7,500. If he did not
already know why she was signing the note to him, he should have investigated.
Question: What did Rosenbaum and Bowen agree to do?
Question: What does “secured by her house” mean?
Question: Is this arrangement fair?
Answer: No. As long as Rosenbaum returns to prison when ordered by the court, Bowen will get his
Question: Is this arrangement with Rosenbaum legal?
Question: Why did Rosenbaum agree to Bowen’s deal?
Question: Why did Bowen ask Rosenbaum to sign a second note to Bulow?
Question: Could Bulow enforce the second note?
Question: Why hadn’t he given value?
Question: Why hadn’t he acted in good faith?
Question: Both Bowen and Rosenbaum were wrong. She reneged on the deal; he illegally accepted
a bond fee. Why should Rosenbaum win?
Notice of Outstanding Claims or Other Defects
In certain circumstances, a holder is on notice that an instrument has an outstanding claim or other defect.
Case: Hartford Accident & Indemnity Co. v. American Express Co.2
Facts: Stratford Skalkos was a manager at Avon Products. He issued Avon checks to pay his personal
debts. So that no one in the company would know what he was doing, he disguised the name of the
payees. For example, to pay his American Express bill, he issued an Avon check to “Amerex Corp.”
Avon sued the recipients of the checks, demanding that the funds be returned. The trial court ruled
against Avon and granted defendants’ motion for summary judgment, concluding that defendants were
holders in due course and thus took the checks free of any claims or defenses. Avon appealed.
Issue: Were the defendants holders in due course?
2 74 N.Y.2d 153, 542 N.E.2d 1090, 1989 N.Y. LEXIS 881 New York Court of Appeals, 1989
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Holding: American Express and the others were holders in due course. There was no reason why they
should have been suspicious simply because Skalkos was paying his bills with company checks. Many
companies pay entertainment and other expenses for their employees. Therefore, American Express was
not “on notice of any claims or disputes”.
Question: Is this a fair result?
Answer: As the court observed, Avon was the company that (1) had hired a dishonest employee and
Question: Should American Express have been on notice when it received checks payable to
Amerex? Similarly, should the Metropolitan Opera Company have wondered why it got checks made
out to “Metropolitan Oprtg. Co.?”
Additional Example
A financial columnist for the Chicago Tribune received this question from a reader:
I received a promissory note and accompanying letter (copies enclosed). The letter attests to the
legitimacy and negotiability of the note, which is for $1 million. Is this really a valid document? Can I
convert this to cash before the maturity date? 3
The note was for one million dollars, payable 20 years later.
Question: If you received such a promissory note in the mail, what difficulties might you have in
enforcing it? Are you a millionaire?
Answer: First, the person who signed the note does not have to pay you anything for 20 years. Even if
Third, suppose you sell the note to a third party. The buyer would argue that she can enforce the note
because she has given value and is, therefore, a holder in due course. The maker of the note would claim,
3 “Promises, Promises! But Will They Make You a Millionaire?” by Phil Vettel, Chicago Tribune, Feb.
24, 1985, p. 2.

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