581
Chapter 24
The Function and Creation
of Negotiable Instruments
See Separate Lecture Outline System
INTRODUCTION
Because the holder of a negotiable instrument may enjoy greater rights than the holder of a nonnegotiable instrument, it
is important for your students to understand the distinctions between these types of instruments. A negotiable instrument has
two functions—as a substitute for money and as a credit device. To fulfill these functions, an instrument must be easily
transferable and collectible. This chapter examines the essential features of various instruments that qualify as negotiable and
the roles and responsibilities of the parties who create these instruments. Also, this chapter discusses the requirements for a
negotiable instrument, and some of the omissions and terms that do not affect an instrument’s negotiability.
582 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 24.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
Negotiability & Transferability: Indorsing Checks—I thought bearer instruments didn’t need indorsements. Why do
banks always make you indorse checks made out to cash, which are bearer instruments?—Banks require all checks,
Also, it is more efficient and safer for a bank to have a policy requiring indorsement of all checks rather than for tellers
to make individual assessments of whether checks are order or bearer instruments.
and needs to pay for booth space at a trade show. They discuss whether they can use a vendor contract as security for
a loan.
CHAPTER OUTLINE
I. Types of Negotiable Instruments
When an instrument is negotiable, UCC Article 3 governs its transfer. To qualify as negotiable, an instrument must
meet the requirements imposed by UCC 3–103.
A. DRAFTS AND CHECKS (ORDERS TO PAY)
A draft (bill of exchange) is an unconditional written order.
2. Trade Acceptances
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 583
3. Checks
A check is a draft, drawn on a bank and payable on demand.
B. PROMISSORY NOTES (PROMISES TO PAY)
A promissory note (or simply note) is a written promise between two parties. Notes are used in a number of
credit transactions and often bear the name of the transaction involved.
C. CERTIFICATES OF DEPOSIT (PROMISES TO PAY)
A certificate of deposit (CD) is a type of note issued by a bank.
ANSWER TO VIDEO QUESTION LTR. A
Who is the maker of the promissory note discussed in the video? A promissory note is a promise made by one
person (the maker of the promise) to another (the payee). In the video, the note is payable to Onyx Advertising. Thus,
Onyx is the payee, and Vexnet (the party who will owe money upon the completion of advertising campaign) is the
maker.
BASIC TYPES OF NEGOTIABLE INSTRUMENTS
INSTRUMENTS
CHARACTERISTICS
PARTIES
Orders to Pay
Draft
An order by one person to another
person or to bearer.
Drawer—the person who signs or makes
the order to pay.
Check
A draft drawn on a bank and payable on
demand.a Checks include:
bank that requires, as a condition to
payment, a countersignature by a
person whose signature appears on
the instrument.
Drawee—the person to whom the order
to pay is made.
584 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Promises to Pay
Promissory note
A promise by one party to pay money
to another party or to bearer.
Maker—the person who promises to
pay.
Payee—the person to whom the promise
is made.
a. Under the UCC, “banks” include savings banks, savings and loan associations, credit unions, and trust companies.
b. A holder is the person who, by the terms of a negotiable instrument, is legally entitled to payment on it.
ENHANCING YOUR LECTURE—
THE NEGOTIABILITY OF CHECKS IN OTHER NATIONS
For many people in the United States, checks are the ultimate negotiable instrument. After all, our parents and
grandparents negotiated checks for decades. Checks have a long history of being accepted the “same as cash” at most
locations in the United States. In other countries, however, checks are used less frequently and sometimes are not
even negotiable.
WHERE CHECKS ARE RARELY USED
In some European nations, such as Austria, Germany, and the Netherlands, checks are now rarely used. Direct
bank transfers and electronic payments (both of which will be discussed in Chapter 27) have replaced checks in these
countries. The European Union has a low-cost electronic payment system that is much faster and more efficient than
the systems available in the United States. This fact—as well as the increase in identity theft and financial crimes—has
contributed to the abandonment of checks worldwide. In most European countries, the majority of recurring monthly
bills are paid automatically—an automatic payment from customers’ bank accounts directly to the billing companies’
bank accounts. For example, few Europeans write checks for phone bills, electric and gas bills, and mortgage
payments.
In the United Kingdom (U.K.), where checks have been used even longer than here, checks are rapidly becoming a
the second largest British supermarket chain and a subsidiary of Wal-Mart, announced that it will not accept checks as
a means of payment in the future (beginning in the London area). Similarly, the largest pharmacy chain in the United
Kingdom (Boots) is also phasing out checks as a payment method. British utility companies are also discouraging the
use of checks by charging higher prices to customers who pay by check.
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 585
CHECKS, WHEN USED, ARE OFTEN NONNEGOTIABLE
Even in those nations where checks are still used, however, they are not actually negotiable. In France, for
example, although a segment of the population still uses checks, the payee named on a check cannot endorse the
check to a third party. Moreover, the payee on the check cannot walk into any bank in France and cash the check as a
payee can in the United States—in France, a check can only be deposited in into an account at the bank. More and
More shops in France no longer accept check payments at all.
FOR CRITICAL ANALYSIS
What are the disadvantages of not being able to endorse checks to other parties?
II. Requirements for Negotiability
For an instrument to be negotiable, it must (1) be in writing, (2) be signed by the maker or the drawer, (3) be an
unconditional promise or order to pay, (4) state a fixed amount of money, (5) be payable on demand or at a definite
time, and (6) be payable to order or to bearer, unless it is a check.
ENHANCING YOUR LECTURE—
WHAT IS A NEGOTIABLE INSTRUMENT?
The UCC leaves a lot of room for imagination when it comes to negotiable instruments. Bearer instruments, for
example, need not always be written to “cash” or to “bearer.” They can be written to “Merry Christmas” or “Happy
New Year” or just about any nonexistent or inanimate object. Even more extraordinary is the UCC’s lack of specificity
as to the form of a negotiable instrument. When we think of a check, for example, we normally envision a preprinted
form with the “normal” terms and phrases on it, such as the bank’s name and address and “Pay to the order of.” The
UCC, however, says nothing to indicate that negotiable instruments must be typed or printed or placed on any specific
kind of material. The UCC stipulates only that a negotiable instrument must be in writing, the writing must lend itself to
permanence, and the writing must be freely transferable (movable).
THE BOTTOM LINE
notes have been written on napkins, menus, tablecloths, shirts, and a variety of other materials—including a tractor
fender, an eggshell, a watermelon, underwear, and a tamale.
586 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
B. SIGNATURES
For an instrument to be negotiable, it must be signed by the maker if it is a note or by the drawer if it is a draft
[UCC 3–103(a)(3)].
1. Signature Requirements
2. Placement of the Signature
The location of the signature on the document is unimportant. A handwritten statement such as “I, Jane
Doe, promise to pay to the order of John Doe” can constitute Jane’s signature.
C. UNCONDITIONAL PROMISE OR ORDER TO PAY
1. Promise or Order
To be negotiable, an instrument must contain an express order or promise to pay [UCC 3–104(a)]. An I.O.U.
2. Unconditionality of Promise or Order
Only unconditional promises or orders are negotiable [UCC 3–104(1)(b)]. Reference to another agreement
or to the security for the instrument does not affect negotiability. An instrument is negotiable even if its
payment is to be made only out of a particular fund [UCC 3–106(b)(ii)].
D. A FIXED AMOUNT OF MONEY
To be negotiable, an instrument must state with certainty a fixed amount of money to be paid when the
instrument is payable [UCC 3–104(a)].
ANSWER TO VIDEO QUESTION LTR. B
Does the note contain an unconditional promise or order to pay? No. The terms of the promissory note indicate
1. Fixed Amount
To be fixed, an amount must be ascertainable from the face of an instrument. The amount of interest or its
rate may be determined with reference to information not contained in the instrument but ascertainable
from a formula or source described in the instrument [UCC 3–112(b)]. Variable interest rate notes are
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 587
ADDITIONAL BACKGROUND—
The Negotiability of Variable Rate Notes
Adjustable interest rate notes—with, for example, the interest rate tied to the rate of interest on U.S. Treasury
securities—have been in routine use since 1980. Before the revisions to Article 3, however, if such notes came before
courts for determinations regarding their negotiability, there was no certainty as to how a particular court would rule.
In some cases, courts concluded that such notes were not negotiable. Commercial practices had changed much since
render variable rate notes negotiable.
2. Payable in Money
Money is “a medium of exchange authorized or adopted by a domestic or foreign government as a part of
its currency” [UCC 1–201(24)].
E. PAYABLE ON DEMAND OR AT A DEFINITE TIME
1. Payable on Demand
Instruments payable on demand include those that contain the words “payable at sight” or “payable upon
presentment,” those that say nothing about when payment is due, and checks [UCC 3–104(f)].
CASE SYNOPSIS—
Case 24.1: Reger Development, LLC v. National City Bank
National City Bank lent money to Reger Development, LLC to fund potential development opportunities in Illinois.
The loan took the form of a line of credit, which was structured as a promissory note, under an agreement that
required Reger to “pay this loan in full immediately upon Lender’s demand.” When the bank asked Reger to pay down
some of the loan, however, the borrower—who was not in default—filed a suit in an Illinois state court against the
bank, alleging breach. The case was removed to a federal court, which dismissed the complaint on the bank’s motion.
Reger appealed.
The U.S. Court of Appeals for the Seventh Circuit affirmed. The court cited “the repeated, explicit contract
change the nature of the arrangement. “The language merely reinforces National City’s right to collect scheduled
588 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
………………………………………………………………………………………………………………………………..
Notes and Questions
Why is it necessary to know when payment on an instrument is required? Time of payment is needed (1) to
determine the value of an instrument, (2) to know when secondary parties will be obligated for its payment, (3) to
calculate the amount and timing of interest payments, and (4) to ascertain the tolling of the statute of limitations.
ANSWERS TO QUESTIONS AT THE END OF CASE 24.1
1. In its opinion, the court pointed out that “the duty to act in good faith does not apply to lenders seeking payment
on demand notes.” Why is this? By its very nature, a demand instrument allows the holder to demand payment at any
instrument. Allowing good faith to apply to such transactions would be contrary to the fundamental function of
negotiable instruments, which is to be easily transferable without danger of being uncollectible.
2. If National City had demanded “payment of the line” instead of just indicating that there was a possibility it might
do so in the future, would the outcome of this case be any different? Explain. The outcome of the case would be the
Reger Development at any time.
2. Payable at a Definite Time
3. Acceleration Clause
Instruments that include acceleration clauses are negotiable.
CASE SYNOPSIS—
Case 24.2: Foundation Property Investments, LLC v. CTP, LLC
In 2004, CTP, LLC, bought a truck stop in Kansas. As part of the deal, CTP borrowed $96,000 from Foundation
Property Investments, LLC, under a note that provided for monthly payments of $673.54 between June 1, 2004, and
June 1, 2009. On default in any payment “the whole amount then unpaid shall become immediately due and payable at
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 589
the option of the holder without notice.” In October 2004, CTP began making late payments. In July 2005, Foundation
demanded full payment of the note and, when it was not forthcoming, filed a suit in a Kansas state court against CTP.
CTP asserted that Foundation had waived its right to accelerate the note by its acceptance of late payments. The court
issued a summary judgment in Foundation’s favor. CTP appealed.
the note in full. It would be inequitable to permit Foundation to accelerate the entire note without Foundation first
giving notice to CTP that Foundation would no longer accept late payments.”
………………………………………………………………………………………………………………………………..
Notes and Questions
Foundation was a 40 percent owner of CTP when it executed the note. CTP entered into a management agreement
with Foundation Properties Corp. (FPC), One of FPC’s duties was to make payments on the note to Foundation on
behalf of CTP. The sole members of both Foundation and FPC were Brian Warren and Philip Brooks. In other words,
Warren and Brooks were responsible for paying themselves on the note. They had made six late payments by March
2005, when CTP terminated the management agreement. CTP bought out Foundation’s interest in July—the same
month that Foundation tried to accelerate the note on the basis that the payments had been late.
If Foundation had allowed only two payments to be late before exercising the note’s acceleration clause, would
this have been enough for a ruling in its favor? Possibly, and possibly not. The court stated, “It cannot be said as a
matter of law that two consecutive instances of the acceptance of overdue payments, or any other definite number,
will always preclude the seller from insisting upon a forfeiture on account of a failure to meet the next payment when
due; but neither can it be said as a matter of law that such result can never follow from so few as two instances of the
kind.”.
withdrawn its waiver? Yes. “A noteholder who repeatedly accepts late installments will be held to have waived the
right to accelerate the debt on that ground unless the payor is first notified that prompt payment will be required in
590 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
of time (such as ninety days), or (3) on a date or time readily ascertainable at the time the promise or order is issued
the note is payable within a certain time period. The only remaining possibility is that the date or time of payment is
readily ascertainable at the time the promise was made. According to Ray, the note states that it is payable on
ANSWER TO “THE E-COMMERCE DIMENSION” QUESTION IN CASE 24.2
If Foundation had sent CTP an e-mail threatening to accelerate the note each time CTP’s payment was late, would
court could have cited the e-mail as proof that the holder had not waived its right to exercise the acceleration clause.
ANSWER TO “THE GLOBAL DIMENSION” QUESTION IN CASE 24.2
Suppose that Foundation was an entity based outside the United States. Could it have successfully claimed, in
attempting to enforce the acceleration clause, that it had not given CTP notice because it was not aware of Kansas law?
4. Extension Clause
Instruments that include extension clauses are negotiable when the right to extend is given to the maker, if
the interval of the extension is specified. If only the holder of the instrument can extend it, the maturity
date does not have to be specified.
ANSWER TO VIDEO QUESTION LTR. B
Is the note in the video payable on demand or at a definite time? A negotiable instrument must “be payable on
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 591
F. PAYABLE TO ORDER OR TO BEARER
1. Order Instruments
2. Bearer Instruments
A bearer instrument does not designate a specific payee [UCC 3–109(a)]. A bearer is a person in possession
of an instrument that is payable to bearer or indorsed in blank [UCC 1–201(5); 3–109(a), (c)].
3–115.”
In a case decided in 1992, the Court of Appeals of Kentucky held that a note with the name of the payee left blank
was not a bearer instrument. In 1984, Aubrey and Jessie Davis were married. Aubrey allegedly gave his mother, Eva
Davis, a note for $12,000 as payment for property in 1985. Aubrey died in 1987, Eva in 1988. Darrell Davis (Aubrey’s
son by a previous marriage), claimed that Eva had given him the note. The note had been written on a preprinted bank
form, but the bank’s name was scratched out, as was the town. The note had been dated and signed by Aubrey, but no
payee was indicated. Darrell sought payment from Jessie, alleging that he was the holder of a bearer instrument.
Jessie refused to pay, claiming that Darrell had no ownership rights in the note. She also claimed that the note could
not be enforced because it had been materially altered. The trial court held that the note was a bearer instrument
and granted summary judgment for Darrell. Jessie appealed.
The state intermediate appellate court reversed. The court pointed out that UCC 3–111 describes a bearer
instrument as “[a]n instrument * * * payable to bearer [that] by its terms it is payable to (a) bearer or the order of
bearer; or (b) a specified person or bearer; or (c) ‘cash’ or the order of ‘cash,’ or any other indication which does not
these definitions. The instrument was incomplete and could not be enforced until it was completed. Because there
was no indication that Aubrey had authorized anyone to complete the note, the note was unenforceable [Davis v.
Davis, 838 S.W.2d 415 (Ky.App. 1992)].
Would the result in this case have been different if it had been decided under revised Article 3? Probably not. The
phrasing of UCC 3–111 (the section under which the Davis case was decided) is not distinctly different from the
phrasing of UCC 3–109—revised Article 3’s related section, which states in part that “[a] promise or order is payable to
592 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
terminology of each type of instrument. Students may also be selected to play the roles of drawer, drawee, payee,
bearer if it: states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in
possession of the promise or order is entitled to payment; does not state a payee; or states that it is payable to or to
the order of cash or otherwise indicates that it is not payable to an identified person.”
III. Factors That Do Not Affect Negotiability
Factors not affecting negotiability include —
• The fact that an instrument is undated, unless the date of an instrument is necessary to determine a definite time
for payment [UCC 3–113(b)].
• Postdating or antedating an instrument [UCC 3–113(a)].
• Handwritten terms (in fact, handwritten terms control typewritten and printed terms, and typewritten terms
control those that are printed [UCC 3–114].
ANSWER TO VIDEO QUESTION LTR. 4
If the note does not meet the requirements of negotiability, can Onyx assign the note to the bank in exchange for
cash? Yes. Onyx can probably assign its rights under the note to the bank as long as there was no clause in the contract
prohibiting assignment. The bank, of course, may choose not to accept an assignment because the bank, as an
money.
TEACHING SUGGESTIONS
1. Because many students find it difficult to distinguish among the various forms of instruments, a small packet of
blank forms consisting of sample drafts, checks, notes, and certificates of deposit can be assembled and passed out to
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 593
maker, etc. (depending on the type of instrument being considered), to dramatize how each instrument is typically
used.
2. The drafters of the UCC do not create rules out of thin air, but attempt to codify existing business practices. For
this reason, students should be reminded that even if they are not pursuing the study and application of business law
any further than this class, the requirements of negotiability are important and have a practical application. Students
may find it most helpful simply to memorize these requirements.
Cyberlaw Link
Which requirements of negotiability seem unnecessary for an online transaction?
DISCUSSION QUESTIONS
1. What is a certificate of deposit? A certificate of deposit (CD) is an acknowledgment by a bank of the receipt of money with
2. What is a bearer? A bearer is any person who has physical possession of an instrument that either is payable to anyone
3. What are some of the practical limitations concerning the writing evidencing a negotiable instrument and the substance
on which it is placed? The writing must be on material that lends itself to permanence. Paper satisfies the necessary
4. What sort of signature is required by the UCC to create a negotiable instrument? UCC 1–201(39) defines the word
“signed” as including “any symbol executed or adopted by a party with present intention to authenticate a writing.” According
5. Must a negotiable instrument contain a promise or order to pay? Yes. All negotiable instruments must contain an express
6. When may reference to other agreements be made in a negotiable instrument without destroying its negotiability? Mere
7. What is an acceleration clause? An acceleration clause allows a payee or other holder of a time instrument to demand
8. What is a bearer instrument? A bearer instrument is one that does not designate a specific payee. The maker or a drawer
of a bearer instrument agrees to pay anyone who presents the instrument for payment; such instruments are completely
ACTIVITY AND RESEARCH ASSIGNMENTS
1. The use of a negotiable instrument as both a cash-substitute and a credit instrument is not a recent innovation.
Negotiable instruments in one form or another have been around since the Middle Ages when merchants, for reasons of
convenience and safety—as well as legal considerations—used it to finance and conduct their affairs. Ask the class to examine
the factors that originally gave rise to the need for negotiable instruments, and to assess whether these factors are still
relevant. Are there other factors that can better explain the continued growth in the use of negotiable instruments?
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 595
Footnote 8: John Stathis’s granite countertop business was organized as Granite Depot, LLC, with Stathis owning 80
percent of the firm and employee Patrick Gowin holding the other 20 percent. Gowin’s capital contribution to the firm was
$12,500, for which he signed a note. Stathis told Gowin “not to worry about [the note], the company would take care of it.”
Gowin made no payments on it, and Granite Depot made no demands for payment. When Gowin quit his job, Stathis eliminated
Gowin as a member for failing “to make his required contribution.” Gowin filed a suit in a Virginia state court against Granite
Did Gowin’s delivery of the note to Granite Depot meet his capital contribution requirement without further payment?
Why or why not? The Virginia Supreme Court agreed with Gowin that his delivery of the note qualified him for membership in
the LLC but rejected the proposition that the delivery eliminated his liability on the note. The court explained, “A provision in an
operating agreement allowing a member’s promissory note to satisfy the capital contribution requirement is an accommodation
that allows a person to become a member before paying the full amount of the required capital contribution to the company at
the moment of membership. The failure to pay the promissory note in accord with its terms, however, would be a failure to
meet the capital contribution requirements.” Thus “[t]he delivery of the Note did not relieve Gowin of his obligation to pay the
capital contribution he was required to make.”
Why didn’t the court hold that Granite Depot was bound to Stathis’s oral waiver of Gowin’s obligation on the note? State
statutes require that a limited liability company member’s obligation to make a capital contribution “may be compromised only
by consent of all the members.” This could occur “outside the context of a meeting only when the requisite number of members
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the primary functions of negotiable instruments? A negotiable instrument has two functions—to serve as a
substitute for money and as a credit device. Debtors sometimes use currency, but for convenience and safety they often use
596 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
negotiable instruments as a cash-substitute. Using a check to pay a debt is one example of how a negotiable instrument is used
as a cash-substitute. Drafts, promissory notes, and certificates of deposit that are payable either on demand or on some
specified date in the future are other examples of negotiable instruments that may be used in place of cash.
2. What are the requirements for an instrument to be negotiable? For an instrument to be negotiable, it must meet the
following requirements: (1) be in writing, (2) be signed by the maker or the drawer, (3) be an unconditional promise or order to
pay, (4) state a fixed amount of money, (5) be payable on demand or at a definite time, and (6) be payable to order or to bearer,
unless it is a check.
REVIEWING—
THE FUNCTION AND CREATION
OF NEGOTIABLE INSTRUMENTS
Robert Durbin, a student, borrowed funds from a bank for his education and signed a promissory note for its
repayment. The bank lent the funds under a federal program designed to assist students at postsecondary institutions.
Under this program, repayment ordinarily begins nine to twelve months after the student borrower fails to carry at
least one-half of the normal full-time courseload at his or her school. The federal government guarantees that the note
will be fully repaid. If the student defaults on the repayment, the lender presents the current balance—principal,
interest, and costs—to the government. When the government pays the balance, it becomes the lender, and the
collect the amount due. Ask your students to answer the following questions, using the information presented in the
1. Using the categories discussed in the chapter, what type of negotiable instrument was the note that Durbin signed
(an order to pay or a promise to pay)? Explain. Durbin’s note was a promissory note—a written promise made by one
2. Suppose that the note did not state a specific interest rate but instead referred to a statute that established the
maximum interest rate for government guaranteed school loans. Would the note fail to meet the requirements for
negotiability in that situation? Why or why not? Negotiable instruments must state with certainty a fixed amount of
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 597
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.
3. For the government to be a holder, which method must have been used to transfer the instrument from the bank
to the government? Only a transfer by negotiation can result in a party who obtains an instrument receiving the rights
4. Suppose that in court, Durbin argues that because the school closed down before he could finish his education,
there was a failure of consideration; he did not get something of value in exchange for his promise to pay. Assuming
that the government is a holder of the promissory note, would this argument likely be successful against it? Why or
why not? 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.
DEBATE THIS:
An amendment the 2010 health care reform bill eliminates privately provided student loans guaranteed by the
federal government. Now all student loans come directly from the government. Students will benefit. Yes, students
will be better off because unscrupulous lending institutions have reaped excessive profits because of the federal
government guarantees on student loans.
is going to be higher than in the past.