A. Negotiability and Liquidity

B. A Typical Transaction

Figure 25.1 - Sample Negotiable Draft

C. The Negotiability Requirements

Figure 25.2 - The Players in a Negotiable Draft Transaction

1. The Promise or Order Requirement

Figure 25.3 - The Negotiability Requirements

2. The Unconditional Requirement

DBA Enterprises, Inc. v. Findlay

3. The Money Requirement
4. The Fixed Amount Requirement

Nagel v. Cronebaugh

5. The Payable-to-Bearer-or-Order Requirement
6. The Demand or Definite Time Requirement
7. The No Extraneous Undertakings Requirement

Problem Set 25

Figure 25.1
Sample Negotiable Draft
EPS | GIF (small) | GIF (large)

Figure 25.2
The Players in a Negotiable Draft Transaction
EPS | GIF | WMF

Figure 25.3
The Negotiability Requirements
EPS | GIF | WMF | TXT

Try the suggestions page on how best to use these figures.

Problem Set 25

25.1. Jodi Kay (your long-standing client from CountryBank) has started work on a project to sell a number of the bank’s less desirable miscellaneous assets. The first item that comes to hand is a corporate bond issued by HAL Corp., in the following (standard) form:

HAL Corp.
Albany, New York
8 percent Bond
Due January 1, 2020

For value received, HAL Corp., a New York corporation (the “corporation”), promises to pay to Mark Henry, or registered assigns, on January 1, 2020, the principal sum of $1,000 in lawful money of the United States of America. The Corporation further promises to pay interest on the principal sum from January 1, 1990, at the rate of 8 percent per annum in lawful money of the United States of America. Interest will be paid semiannually on July 1 and January 1 of each year after January 1, 1990, until the principal sum hereof has been paid or provision for its payment has been made.
The principal of this Bond will be payable at the principal office of the Corporation (or at whatever other place may be designated in writing by the Corporation from time to time) upon the presentation and surrender hereof. The semiannual interest payments will be mailed to the registered holder hereof at the address last furnished in writing to the Corporation.
This bond is registered both as to principal and interest and is transferable only on the books of the Corporation by the presentation and surrender hereof accompanied by an assignment form duly completed and executed by the registered holder hereof or a duly authorized attorney.
IN WITNESS WHEREOF, the Corporation has caused this Bond to be signed by its duly authorized officers on January 1, 1990.

Trying to determine exactly what she can say about it, she faxes you a copy of the bond with a cover sheet asking you to get back to her as soon as possible. She is trying to fill out a form that requires her to state whether each asset is a negotiable instrument. Does the bond qualify? UCC §§ 3-104(a), 3-109.

25.2. Pleased with your thoughtful advice in Problem 25.1, Jodi faxes you another one. This time it’s the Promissory Note set out in Assignment 15. What is your opinion? UCC §§ 3-103(a)(9), 3-104(a), 3-106(a), 3-108, 3-109, 3-112(b).

25.3. Late in the evening, Jodi calls to tell you that she has “just one more” for you to look at. She tells you that she has a cache of several hundred home mortgage notes, all of which are on identical forms. She faxes you the form, which appears to be the standard form promulgated by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. It includes the following provisions:

4. BORROWER’S RIGHT TO PREPAY
I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a “prepayment.” When I make a prepayment, I will tell the Note Holder in writing that I am doing so. . . .

10. UNIFORM SECURED NOTE . . .  In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (the “Security Instrument”), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note. That Security Instrument describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note.

Do those provisions prevent the home-mortgage notes from being negotiable? UCC §§ 3-104(a), 3-106, 3-108.

24.4. Ben Darrow (your rural banker friend) calls you to ask about an unusual item that has landed on his desk. This morning’s ATM deposits included a $12,000 check where the drawer (Carol Long) had crossed out the printed words “to order of” and written in pen “only to.” The result is that the check states: “Pay only to Jasmine Ball.” It appears from the back of the check that Ball cashed the check at Ovco Drugs in downtown Matacora. Ovco Drugs, in turn, deposited the check into its account at First State Bank of Matacora (Darrow’s bank). Darrow wants to know if the check is valid and any advice you have as to what he should do. He tells you that Long is a valued customer, so he does not want to do anything wrong. UCC §§ 3-104(c), 4-301(a).

24.5. An old law-school classmate of yours named Doug Kahan works for the Internal Revenue Service (IRS). While you are reminiscing with him one afternoon, he asks you about a funny incident that came up the preceding week. He tells you that he’s always heard stories about taxpayers mailing in their payments written on shirts, the “shirt off their back,” as it were. Because he had never seen such a thing in all his years at the IRS, he has dismissed those tales as nothing but a common urban myth. This week, however, he received just such a package: a box including a (somewhat worn) white dress shirt, with the following written in black ink across the back of the shirt: “Pay to the order of the Internal Revenue Service $150,000.” The taxpayer had scrawled its signature below that sentence and written “SecondBank” and a series of numbers to the left of the signature. Those numbers appear to identify the taxpayer’s account at SecondBank.

Doug’s assistant took the shirt to a branch of SecondBank a few blocks away. SecondBank, however, refused to honor the shirt-check. It acknowledged that the taxpayer had an account at SecondBank, that the shirt properly identified the taxpayer’s account number, and that the account contained funds adequate to cover the specified payment. The bank explained, however, that it had a policy of honoring checks only if they were written on forms supplied by the bank.

Doug is frustrated, because he has been attempting to collect payment from that particular taxpayer for several years. He tells you that the shirt-check story he’s heard always ended with the statement that the shirt is a valid instrument. Is that right? If so, doesn’t the bank have to pay it? What do you tell him? UCC §§ 3-103(a)(6), 3-104(a), 3-104(e), 3-104(f), 3-108(a), 3-408.

Assignment Update