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Business Law Chapter 25 Homework Because The Instrument Payable Demand And Bearer

Page Count
9 pages
Word Count
4535 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
CHAPTER 25
NEGOTIABLE INSTRUMENTS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATECRITICAL THINKING
Does having a digital wallet in an iPhone, Android-based phone, or other smartphone
entail more security risks than carrying a physical wallet? Explain. Obviously consumers
worry about losing their smartphones and potentially having their eWallet “cleaned out.”
Actually, losing a smartphone might be better than losing an actual wallet or having it stolen. All
smartphones and their apps can be password protected. Moreover, security elements are built
in to each phone’s chips. It is relatively easy to remotely shutdown a digital wallet if necessary.
Finally, people are going to notice a missing smartphone usually faster than they notice a
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 25.1CRITICAL THINKING
LEGAL ENVIRONMENT
Wong testified that he had looked for the note at a third-party storage facility. If the note
had been found there, would it mean that the note had been “transferred” to the facility,
making the storage company the holder of the instrument? Explain. No, moving notes and
other negotiable instruments to a third-party storage facility is not a “transfer” for negotiability
purposes. Thus, storing an instrument with a third-party does not make the storage company the
“holder” of the instrument except, of course, in the literal, physical sense of the word.
2 UNIT FIVE: NEGOTIABLE INSTRUMENTS
TECHNOLOGICAL
If a note is the best primary evidence of the existence of a debt, what might be the best
evidence of the amount of the debt and the interest calculation? The lender’s records of
the debt are the best evidence of the amount of the debt and the interest calculation. And there
should be a witness who is familiar with the records not only as a user but also as someone with
a working acquaintance of the methods by which the records are made to testify about them.
CASE 25.2LEGAL REASONING QUESTIONS
1. The lower court concluded that the note was non-negotiable and dismissed the bank’s
attempt to enforce it. Was this an error? Yes, the lower court in the OneWest case
committed an error when it concluded that the bank could not maintain its action simply because
it possessed a non-negotiable note.
Promissory notes are commonly assigned from one lender, or payee, to another.
Assignment does not affect the maker’s obligation to pay the note as promised. Thus, generally,
the assignee of a non-negotiable note takes it with all of the rights that the assignor had to
enforce it, and subject to all of the defenses that the debtor had against the assignor at the time
of the assignment. An assignee may not be a holder in due course, and so other defenses may
apply, but the assignee may still be able to enforce a non-negotiable instrument.
In this case, the defendants signed a note that contained an acceleration clause and a
2. Suppose that the note in this case had stated, “The terms of the mortgage are by this
reference made a part hereof.” Would the result have been different? If the note in the
OneWest case had stated, “The terms of the mortgage are by this reference made a part
hereof,” the result might not have been differentthe negotiability of the note would not have
affected the bank’s ability to enforce it—but the appellate court’s conclusion about the
negotiability would likely have been different.
Here, three borrowers signed a note that included a reference to a mortgage, which
describes how and under what conditions” acceleration may be invoked. The payee assigned
the note to OneWest Bank. When the debtors defaulted on the payments, the bank asked a
state court to enforce the note. The defendants responded that the note’s reference to the
3. How did the fact that “the promissory note in this case contains language that is
standard in mortgage notes across the country” affect the court’s reasoning? As the
court in the OneWest case pointed out, “the promissory note in this case contains language that
is standard in mortgage notes across the country.” This is a reference to “Section 11” in the note
at issue in this case (and at issue in at least one other case cited by the court).
When identical language is used in notes, or any commonly used documents, courts can
CASE 25.3CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that the note had described the amount of the loan as “ONE MILLION SEVEN
HUNDRED THOUSAND AND NO/100 ($1,007,000.00) DOLLARS.” What would have been
the result? In the circumstances set out in the question, the Charles R. Tips Family Trust would
have been liable to PB Commercial, LLC (PBC) for $230,289the difference between
$1,700,000 and $1,469,711.
If the note had described the amount of the loan as “ONE MILLION SEVEN HUNDRED
THOUSAND AND NO/100 ($1,007,000.00) DOLLARS,” the words would have conflicted with
the note’s numerals by the same amount as in the facts of the case$693,000. But the parties’
positions with respect to this amount would have been reversed. According to UCC 3114,
4 UNIT FIVE: NEGOTIABLE INSTRUMENTS
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 the instrument. A note payable with a certain percent of interest meets the
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
AT THE END OF THE CHAPTER
1A. Sasha owes $600 to Dale, who asks Sasha to sign an instrument for the debt.
Consider each of the follow9ing alternatives for the wording on that instrument.
(a) I.O.U. $600.”
(b) “I promise to pay $600.”
CHAPTER 25: NEGOTIABLE INSTRUMENTS 5
(c) An instruction to Sash’s bank stating, “I wish you would pay $600 to Dale.”
Which of these phrases would prevent the instrument’s negotiability? 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
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
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
25-1A. Negotiable instruments
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.
25-2A. 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.
(c) Be an unconditional promise or order.
(d) State a fixed amount of money.
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
quirement of being signed by the maker, as Juan Sanchez’s signature (his name in his
handwriting) appears in the body of the instrument. The instrument’s payment is not conditional
25-3A. Promissory notes
The instrument is a promissory note, which is a twoparty instrument. The two parties to a
promissory note are the maker and the payee. In this case, Keynes, the buyer, is the maker of
the promissory note; Friedman Electronics, Inc., is the payee. First National Bank of Halston,
an indorser, and the bank became an indorsee.
25-4A. Bearer instruments
Both of these instruments are bearer instruments. If a drawer signs a check printed “Pay to the
order of” followed by a blank in which the drawer does not write anything, the check is a bearer
instrument. A check printed “Pay to the order of” and on which the drawer inserts in the blank
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
255A. Negotiability
For an instrument to be negotiable under UCC 3104, 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. Applying these principles to the
facts in this problem, all of the requirements to establish the instrument as negotiable are met:
(5) the instrument does not include a definite repayment date, which means that it is payable on
demand; and (6) the instrument is payable to Vinueza.
A writing that complies with the requirements of negotiability is a promissory note if it is a
promise by one person (the maker) to pay another (usually a payee) a specified sum. The note
may be payable on demand or at a definite time. It may name a specific payee or be payable to
CHAPTER 25: NEGOTIABLE INSTRUMENTS 7
(Vinueza). More than a mere acknowledgment of an obligation, the promise is an undertaking to
pay. In the facts set out in this problem, Vinuezathe payee on the note and the plaintiff in the
suitis 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
256A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWERPayable on demand or at a
definite time
No. Novel is not correct. The instrument is a note, and Novel is bound to pay it. For an
instrument to be negotiable under UCC 3104, 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. When no time for payment is stated on an
257A. Bearer instruments
Yes, U.S. Bank can enforce payment of the note. A bearer instrument is an instrument that does
not designate a specific payee, according to UCC 3109(a). The term bearer refers to a person
in possession of an instrument that is payable to bearer or indorsed in blank (that is, indorsed
with a signature only) under UCC 1201(5), and 3109(a) and (c). This means that the maker or
drawer agrees to pay anyone who presents the instrument for payment.
In this problem, Encore Credit Corp., in whose favor Gaitan signed the note to obtain the
funds to buy the house, indorsed the note in blank. This made it payable to the bearer, and the
258A. Payable to order or to bearer
Yes, U.S. Bank could successfully argue that although it did not physically possess the note at
issue in these facts, the bank constructively possessed it. A bearer instrument is an instrument
that does not designate a specific payee. A bearer is a person in possession of an instrument
that is payable to bearer or indorsed in blank. Under a bearer instrument, the maker or drawer
agrees to pay anyone who presents it for payment.
In this problem, Caraccia (the maker) signed a note and mortgage in favor of VirtualBank.
The payee indorsed the note in blank, making it bearer paper, and transferred possession to
Bank of America. Bank of America transferred the note to U.S. Bank, which gave it back to Bank
of America to collect Caraccia’s payments on it on behalf of U.S. Bank. Caraccia defaulted, and
U.S. Bank sought to enforce the note and foreclose on the property. Caraccia contended that
25-9A. A QUESTION OF ETHICSPromissory 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.
CHAPTER 25: NEGOTIABLE INSTRUMENTS 9
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.’
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
2510A. Requirements for negotiability
(a) The contention in Stathis’s favor is stated in the questionGowin did not own any
interest in the business because he never paid the $12,500 note. Stathis’s oral waiver was
arguably not enough to relieve Gowin of the obligation to pay the amount of the note to the
countertop business. The parties should have put the waiver in writing.
(b) Gowin’s argument is correct. The termination of his interest was improper because
compliance with the dates on the note was impossible, given that it was not signed until months

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