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1
CHAPTER 25
NEGOTIABLE INSTRUMENTS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATE—CRITICAL 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.”
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 25.1—CRITICAL 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,
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
CASE 25.2—LEGAL 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,
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
CHAPTER 25: NEGOTIABLE INSTRUMENTS 3
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
CASE 25.3—CRITICAL 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 $230,289—the difference between
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
3A. Transfer to a holder
Only a transfer by negotiation can result in a party who obtains an instrument receiving the
4A. Failure of consideration
The consideration that Durbin received in exchange for his promise to pay consisted of the
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
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.
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.
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
25-3A. Promissory notes
The instrument is a promissory note, which is a two–party 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
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
25–5A. Negotiability
For an instrument to be negotiable under UCC 3–104, it must meet the following requirements:
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
bearer. But the promise must be an undertaking to pay and must be more than a mere
acknowledgment of an obligation.
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, Vinueza—the payee on the note and the plaintiff in the
25–6A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Payable 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 3–104, 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
25–7A. 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 3–109(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
8 UNIT FIVE: NEGOTIABLE INSTRUMENTS
25–8A. 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.
25-9A. 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.
(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
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
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
25–10A. Requirements for negotiability
(a) The contention in Stathis’s favor is stated in the question—Gowin did not own any
(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
