Dynamic business law 4e kubasek 4e CH26

Chapter 26 Hypothetical Case 1• On November 1, Paula Aldridge presents a check for $1,250 to Daniel Carrier in payment for a debt she owes him.. Is Paula Aldridge's bank legally obliga

Chapter 26

Negotiable Instruments: Negotiability and Transferability

Overview

Chapter 26 Hypothetical Case 1

• On November 1, Paula Aldridge presents a check for $1,250 to Daniel Carrier in payment for a debt she

owes him The check is dated November 15 Aldridge postdates the check because she currently has

insufficient funds in her account; however, she expects direct deposit of her payroll check from her

employer on November 14 The amount of her payroll check will be more than sufficient to account for the

$1,250 check she presents to Carrier

• Is Daniel Carrier legally obligated to refrain from cashing Aldridge's check until November 15? Is Paula

Aldridge's bank legally obligated to refrain from processing the check if Carrier presents it for payment

before November 15?

Chapter 26 Hypothetical Case 2

• Glenn Porter, a staunch Republican, owes Harry O'Donnell, a Democrat, $1,000 for 50 expensive cigars that O'Donnell sold him In return for the

cigars, Porter issued a promissory note with the following language: "I, Glenn Porter, promise to pay to the order of Harry O’Donnell the sum of one

thousand and no/100 dollars, due and payable on November 9, 2016 Signed, Glenn Porter." At the bottom of the promissory note, Porter included

the following language: "This promissory note is invalid if a Republican wins the United States presidential election on November 8, 2016." O’Donnell

neglected to notice the statement at the bottom of the note

November 8, 2016 arrived, and Republican Sarah Monee became the forty-fifth president of the United States On November 9, O'Donnell

approached Porter with the promissory note, and requested to be paid the $1,000 face value of the note Glenn replied, "Gotcha, Harry! I don't owe

you one red cent Look at what I wrote on the bottom of the note!" O'Donnell was not the confrontational type, but he still felt that Porter was

legally obligated to pay the $1,000

• Is this promissory note a negotiable instrument? If it is not, is Glenn Porter not obligated to pay Harry O'Donnell the $1,000?

Negotiable Instruments

• Negotiable instrument: Substitute for cash; written document containing signature

of creator that makes unconditional promise or order to pay sum certain in money,

either on demand or at a definite time

• Note: Promise by maker to pay a payee

• Example: Certificate of deposit

• Draft: Order by drawer to a drawee to pay a payee

• Example: Check

Why Do We Need

Negotiable Instruments?

Demand Instrument Versus

Time Instrument

Types of Checks

• Check: Special draft that orders a bank (the drawee) to pay a specified sum of money to the

payee from the drawer's account.

• Cashier's check: Draft with respect to which the drawer and drawee are the same bank or

branches of same bank

• Traveler's check: Payable on demand, drawn on or payable at or through bank, designated by term

"traveler's check" or similar, requires countersignature

• Certified check: Accepted by bank on which it is drawn

Requirements For Negotiability

Order Versus Bearer Paper

• Order paper: Specific payee named on instrument

• Classic example: "Pay to the order of John Smith"

• Bearer paper: Instrument payable to possessor

• Bearer paper treated like cash

• Endorsing order instrument converts instrument into bearer paper

• Instruments payable to no one, to "X", or to "cash" are considered bearer paper

Words of Negotiability

created for the purpose of being transferred

• To the order of

• Pay to bearer

• Pay to [name] or bearer

• Pay to cash

• Pay to the order of cash or bearer

Chapter 26 Hypothetical Case 3

• Tom LaRue and Ron Zell are avid football fans; LaRue is a rabid Pittsburgh Ironmen supporter, and Zell's favorite team is the Dallas Cattle Ranchers

The two teams are bitter rivals and are scheduled to play during Week 4 of the 2016 United Football League (UFL) schedule

Before the season starts, LaRue and Zell wager that their respective teams will win in the Ironmen–Cattle Ranchers clash LaRue presents $500 in

cash to secure the bet, and Zell produces a written IOU that states: "In the event that the Pittsburgh Ironmen defeat the Dallas Cattle Ranchers in

Week 4 of the 2016 UFL season, I promise to pay the sum of five hundred and no/100 dollars to Tom LaRue Signed, Ron Zell."

In Week 3 of the UFL season, LaRue endorses and transfers the Zell IOU to Kenneth Russell as payment for a $250 bet he lost to Russell (Russell's

favorite team, the Oakland Swashbucklers, defeated LaRue's Ironmen in Week 3.) In Week 4, the Ironmen defeat the Cattle Ranchers

• Can Russell recover the $500 face amount of the IOU from Zell?

Chapter 26 Hypothetical Case 4

• Rita Dayton borrowed $1,000 from her friend, Nora Hayworth At the time of the loan,

Dayton wrote up a document that stated, “On December 30, 2016, Rita Dayton will pay to

the order of Nora Hayworth the sum of $500 and a promise of 50 hours of babysitting.”

Hayworth thought the note was funny; Dayton thought the note was a negotiable

instrument.

• Is Dayton right? Is this document a negotiable instrument? Explain your answer.