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CHAPTER 24
THE FUNCTION AND CREATION
OF NEGOTIABLE INSTRUMENTS
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 24.1—QUESTIONS (PAGE 470)
1A. 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 time from the appropriate party. Good faith plays no role in this
transaction. If a holder’s right to payment was conditioned on good faith (either of the holder or of the
2A. 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
CASE 24.2—QUESTIONS (PAGE 473)
THE E-COMMERCE DIMENSION
If Foundation had sent CTP an e–mail threatening to accelerate the note each time CTP’s payment was
late, would this have been sufficient to support the holder’s eventual demand for full payment? Why or
208 UNIT FIVE: NEGOTIABLE INSTRUMENTS
why not Yes, this would have been enough to support Foundation’s later demand for full payment, in
acceleration of the note, because the court could have cited the e-mail as proof that the holder had not
waived its right to exercise the acceleration clause. No, this would not have been enough to support the
attempted exercise of the note’s acceleration clause, because accepting a series of ten consecutive late
payments, out of a total of sixteen, establishes a course of dealing to overlook the stated due dates.
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 the face of
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.
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 209
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE
END OF THE CHAPTER
An amendment the 2010 health care reform bill eliminates privately provided student loans
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
24-1A. Negotiable instruments
(Chapter 24—Page 466)
The note is nonnegotiable for the following reasons:
(a) The note is not signed by the maker, Sabrina Runyan.
(b) The maker did not make a definite promise to pay but merely acknowledged that a debt was
owed to Leo Woo.
(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.
24-2A. QUESTION WITH SAMPLE ANSWER: Negotiability
For an instrument to be negotiable, it must meet the following requirements:
(a) Be in writing.
(b) Be signed by the maker or drawer.
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The instrument in this case meets the writing requirement in that it is handwritten and on something
24-3A. Promissory notes
(Chapter 24—Pages 464–466 & 473)
24-4A. Bearer instruments
(Chapter 24—Pages 473–474)
24-5A. Negotiability
(Chapter 24—Page 467)
Triffin filed a motion for summary judgment, which the court granted. On Hauser Co.’s appeal, the state
intermediate appellate court affirmed, holding that “the eighteen checks meet the definition of a
negotiable instrument. Each check is payable to a bearer for a fixed amount, on demand, and does not
state any other undertaking by the person promising payment, aside from the payment of money. In
addition, each check appears to have been signed by Mr. Hauser, through the use of a facsimile stamp,
24-6A. Negotiability
(Chapter 24—Pages 467–468)
The court ruled in favor of the Andersons. Hildebrandt appealed to a state intermediate appellate court,
which reversed this judgment and remanded the case for the entry of a judgment in Hildebrandt’s favor.
The appellate court pointed out that “no condition appears on the face of the note, and nothing in the
record supports the conclusion that the note was conditional. Therefore, the promissory note was a
‘negotiable instrument.’ ” The court added that “[t]he only evidence offered was [Harvey’s] testimony
24-7A. Cashier’s checks
(Chapter 24—Page 464)
First Union would most likely have to pay the amount of the cashier’s checks to Acevedo. First Union be–
24-8A. CASE PROBLEM WITH SAMPLE ANSWER: Negotiability
The court issued a judgment in favor of Babcock and Honest Air, based in part on a determination that
the RISC was a negotiable instrument. GMAC appealed to a state intermediate appellate court, which
concluded that the RISC was not a negotiable instrument. The appellate court pointed out that under
24-9A. A QUESTION OF ETHICS: Promissory notes
(a) Both the court in which Fifth Third Bank filed its suit and the state intermediate appellate
court to which the bank appealed ruled in Jones’s favor. Both courts found evidence to support the
existence of a cashier’s check or other certified check, citing some of the facts set out in the problem.
Both courts also determined that the check discharged Jones’s note in full.
The trial court found “that it is substantially more likely than not that the check was either a
cashier’s check or . . a certified check.” The court ruled that the bank’s receipt of the check discharged
Jones’s debt “to the same extent as if the envelope had been full of bills—cash.” The court also decided
that “it is more likely than not” that the check had been for at least the full amount of a payoff and
entered a judgment in Jones’s favor, terminating the foreclosure proceeding.
(b) As indicated by the facts stated in the problem, the bank lost the check in dispute here
without having recorded the identity of the drawee, the indorsers if any, the drawer bank, or the
amount. It would seem disingenuous, if not unethical, for the bank to assert these failures on its part as
proof that its “internal administrative actions were still pending.” If this circumstance were held to
support a result in the bank’s favor, sloppy bookkeeping would become the standard for financial
institutions.
The appellate court concluded that the check was “taken for” Jones’s obligation “without regard
to the bank’s internal procedures.” The court reasoned in part that “the taking for an obligation occurs
simultaneously with the giving of the payment. This interpretation corresponds with the plain meaning
of the verb ‘take,’ which is ‘[t]o obtain possession or control.’ ”
The court also pointed out that “certified or bank checks are the equivalent of cash in satisfying
the underlying obligation. There is [nothing] to support the proposition that a bank has not taken cash
when internal administrative actions are pending or that the risk of loss of cash lies with the payor.”
CHAPTER 24: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 213
ANSWER TO VIDEO QUESTION NO. 24–10
Negotiable Instruments
(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.
(b) Is the note in the video payable on demand or at a definite time? A negotiable instrument
must “be payable on demand or at a definite time” [UCC 3–104(a)(2)]. A note is payable on
demand if the maker must pay it at the will of the holder (on presentment). This note is not
payable on demand because Onyx cannot present it to Vexnet for payment. If an instrument is
not payable on demand, to be negotiable it must be payable at a definite time. An instrument is
payable at a definite time if it states that it is payable (1) on a specified date, (2) within a definite
period of time (such as ninety days), or (3) on a date or time readily ascertainable at the time the
whether the date was ascertainable at the time of the original promise. Here, one could not tell
at the time of the promise when the advertising campaign would be complete, so the note is not
payable at a definite time.
(c) Does the note contain an unconditional promise or order to pay? No. The terms of the
promissory note indicate that the maker’s promise to pay is expressly conditioned on Onyx’s
completion of the advertising campaign. In order for an instrument to be negotiable, it cannot be
conditioned on the occurrence or nonoccurrence of some other event or agreement [UCC 3–
104(a)]. Because this promise is conditional, the instrument is nonnegotiable.
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(d) If the note does not meet the requirements of negotiability, can Onyx assign the note
(assignment was discussed in Chapter 16) to the bank in exchange for cash? Yes. Onyx can