BUL 3350 Exam 2

transferor

the person from whom title or ownership to property moves

bearer

person in possession of the writing (the paper or instrument) that presents it to someone else

Bond fraudulently induced Teal to make a note payable to Wilk, to whom Bond was indebted. Bond delivered the note to Wilk. Wilk negotiated the instrument to Smith, who purchased it with knowledge of the fraud and after it was overdue. If Wilk qualifies as a holder in due course, which of the following statements is true? a. Smith has the standing of a holder in due course through Wilk. b. Teal can successfully assert the defense of fraud in the inducement against Smith. c. Smith personally qualifies as a holder in due course. d. Teal can successfully assert the defense of fraud in the inducement against Wilk.

Answer (A) is correct. A person who takes through a holder in due course (HDC) acquires the rights of an HDC unless the transferee engaged in fraud or illegality affecting the instrument (UCC 3-203). This rule is the "shelter principle." Smith was not a party to the fraud. Thus, Smith can assert the rights of Wilk, the HDC.

Ed Johnson lost a check that he had received for professional services rendered. The instrument on its face was payable to Johnson's order. He had endorsed it on the back by signing his name and printing "for deposit only" above his name. Amy found the check. Which of the following is true? a. A nonbank party who purchases the instrument commits a tort unless the amount paid is received by the endorser or applied consistently with the endorsement. b. The endorsement is a blank endorsement, and a holder in due course who cashed it for Amy would prevail. c. The endorsement prevents further transfer or negotiation by anyone. d. If Amy simply signs her name beneath Johnson's endorsement, the instrument becomes bearer paper, and a holder in due course would take free of the restriction.

Answer (A) is correct. A restrictive endorsement "for deposit only" puts the burden on most subsequent transferees to comply with the endorsement or to be certain that the endorsement has already been complied with. A person other than a bank, a depository bank (the first bank to receive a check for payment), or a bank that takes the instrument for immediate payment over the counter commits the tort of conversion unless the amount paid is received by the endorser or applied consistently with the endorsement. Conversion is treating personal property in a manner that is completely inconsistent with the rights of the true owner. However, banks later in the collection process are usually exempt from the requirement (UCC 3-206). Hence, a nonbank purchaser of Johnson's check is required to act consistently with the endorsement. (S)he must deposit the check only in Johnson's bank account.

When a buyer is in breach of a contract for the sale of goods, the seller may withhold delivery. Which of the following is true? a. When the breach regarding one installment substantially impairs the value of the whole contract, all undelivered goods may be withheld. b. The seller who withholds delivery may not proceed with other remedies. c. The breach justifying withholding delivery of all undelivered goods need not go to the whole contract. d. Withholding delivery is no longer available once goods are in the hands of a carrier even though the shipping term is FOB destination.

Answer (A) is correct. A seller may withhold delivery of all the undelivered goods if the buyer breaches the contract as a whole. A breach of the whole contract occurs if default on any installment substantially impairs the value of the whole contract (UCC 2-612). The breach may be by wrongful rejection of an installment, revoking acceptance, not paying when due, repudiating, etc. (UCC 2-703).

If an instrument does not meet one of the requirements of negotiability, a. It will usually be transferable. b. It will be worthless. c. It will not be assignable. d. An innocent transferee will nevertheless take free of the issuer's personal defenses.

Answer (A) is correct. If a required element of negotiability is not present, special protections provided by the law are not available. Nevertheless, the contract right embodied in the nonnegotiable instrument will usually be transferable because most contract rights, especially the right to receive money, are assignable. But the assignee will take no better right than that held by his/her assignor.

There are several legally significant differences between a negotiable instrument and a contract right, and the transfer of each. Which of the following statements is true? a. A negotiable instrument is deemed prima facie to have been issued for consideration, whereas a contract right is not. b. The transferee of a negotiable instrument and the assignee of a contract right take free of most defenses. c. Neither can be transferred without a signed writing or by a delivery. d. The statute of frauds rules apply to both.

Answer (A) is correct. Lack of consideration is a personal defense that is not available against a holder in due course of a negotiable instrument or one who has the rights of a holder in due course. However, an obligor on a contract right may assert such a defense.

Badger Corporation sold goods to Watson. Watson has arbitrarily refused to pay the purchase price. Under what circumstances will Badger not be able to recover the price if it seeks this remedy instead of other possible remedies? a. If Watson refused to accept delivery and the goods were resold in the ordinary course of business. b. If Watson accepted the goods but seeks to return them. c. If the goods sold were destroyed shortly after the risk of loss passed to the buyer. d. If the goods were identified to the contract, and Badger made a reasonable effort to resell them at a reasonable price but was unable to do so.

Answer (A) is correct. The seller cannot recover the price if the goods have been resold. In that event, Badger's damages would be measured by the difference between the contract price and the resale price, plus any incidental damages, minus expenses saved (UCC 2-706).

On February 15, Mazur Corp. contracted to sell 1,000 bushels of wheat to Good Bread, Inc., at $6.00 per bushel, with delivery to be made on June 23. On June 1, Good advised Mazur that it would not accept or pay for the wheat. On June 2, Mazur sold the wheat to another customer at the market price of $5.00 per bushel. Mazur had advised Good that it intended to resell the wheat. Which of the following statements is true? a. Mazur can successfully sue Good for the difference between the resale price and the contract price. b. Mazur can resell the wheat only after June 23. c. Good can retract its anticipatory breach at any time before June 23. d. Good can successfully sue Mazur for specific performance.

Answer (A) is correct. Under UCC 2-610, when either party repudiates a future performance the loss of which will substantially impair the value of the contract to the other party, the possibilities are to (1) await performance for a commercially reasonable time, (2) resort to any remedies for breach available to a buyer (UCC 2-711) or a seller (UCC 2-703), and (3) suspend performance. Hence, an aggrieved seller may resell the goods and sue the buyer for the difference between the resale price and the contract price (UCC 2-703 and 2-706).

Alfredo promises to rebuild the engine in Ernesto's Maserati in exchange for Ernesto's negotiation to him of a promissory note in the amount of $5,000.00. If Alfredo never rebuilds the engine, a. He cannot qualify as a holder in due course. b. The maker of the note will sue Alfredo for lack of consideration. c. The maker of the note will sue Ernesto for lack of consideration. d. He still qualifies as a holder in due course

Answer (A) is correct. Under UCC 3-303, the value requirement is met (1) to the extent a promise has been performed; (2) if the transferee acquires a security interest or other nonjudicial lien on the instrument; (3) if the issuance or transfer of the instrument is in payment of, or as security for, an existing obligation of any person, whether or not due; (4) if the issuance or transfer is for another negotiable instrument; or (5) if the issuance or transfer is in exchange for an irrevocable commitment to a third person. Future consideration, such as an executory contractual promise, does not constitute value.

On April 5, Anker, Inc., furnished Bold Corp. with Anker's financial statements dated March 31. The financial statements contained misrepresentations indicating that Anker was solvent when it was insolvent. Based on Anker's financial statements, Bold agreed to sell Anker 90 computers, "FOB -- Bold's loading dock." On April 14, Anker received 60 of the computers. The remaining 30 computers are in the possession of the common carrier and in transit to Anker. On April 28, if Bold discovered that Anker was insolvent, then with respect to the computers delivered to Anker on April 14, Bold may a. Reclaim the computers upon making a demand. b. Reclaim the computers irrespective of the rights of any subsequent third party. c. Not reclaim the computers because 10 days have elapsed from their delivery. d. Not reclaim the computers because it is entitled to recover the price of the computers.

Answer (A) is correct. When the seller discovers that the buyer has received goods on credit while insolvent, (s)he may reclaim the goods upon demand made within 10 days after the receipt. But if misrepresentation of solvency has been made to the seller in writing within 3 months before delivery, the 10-day limitation does not apply (UCC 2-702). No other remedies are permitted with respect to goods successfully reclaimed.

On September 10, Bell Corp. entered into a contract to purchase 50 lamps from Glow Manufacturing. Bell prepaid 40% of the purchase price. Glow became insolvent on September 19 before segregating, in its inventory, the lamps to be delivered to Bell. Bell will not be able to recover the lamps because a. Bell is regarded as a merchant. b. The lamps were not identified to the contract. c. Glow became insolvent fewer than 10 days after receipt of Bell's prepayment. d. Bell did not pay the full price at the time of purchase.

Answer (B) is correct. A buyer may recover goods from an insolvent seller if the goods have been identified to the contract, the seller became insolvent within 10 days of receipt of the first installment of the price, and tender of any unpaid portion of the price is made and kept open (UCC 2-502). If the lamps have not been identified to the contract, Bell cannot obtain them.

A trade acceptance usually a. Is an order to deliver goods to a named person. b. Provides that the drawer is also the payee. c. Is not regarded as a negotiable instrument under the UCC. d. Must be made payable "to the order of" a named person.

Answer (B) is correct. A trade acceptance is a special form of negotiable instrument known as a time draft used by sellers as a way to extend credit to buyers of their goods. The seller draws a draft ordering the buyer to pay the seller at some time in the future. The seller is thus both drawer and payee of a trade acceptance.

Under the negotiable instruments article of the UCC, in a nonconsumer transaction, which of the following are real defenses available against a holder in due course? a. Material Alteration: No Discharge in Bankruptcy: Yes Breach of Contract: Yes b. Material Alteration: Yes Discharge in Bankruptcy: Yes Breach of Contract: No c. Material Alteration: No Discharge in Bankruptcy: No Breach of Contract: Yes d. Material Alteration: Yes Discharge in Bankruptcy: No Breach of Contract: No

Answer (B) is correct. Material alteration is a real defense to the extent of the alteration. Bankruptcy also is a real defense. However, breach of contract is a personal defense (UCC 3-305).

Under the Negotiable Instruments Article of the UCC, which of the following statements is true regarding the requirements for an instrument to be negotiable? I. The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay. II. The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

Answer (B) is correct. Negotiability is strictly a matter of form. If an instrument is drafted in a specific form, it is a negotiable instrument. To be negotiable, an instrument must be a writing that is signed by the person undertaking to pay or the person giving the instruction to pay. It also must (1) contain an unconditional promise or order to pay a fixed amount of money, (2) be payable on demand or at a definite time, (3) be payable to bearer or to order at the time the instrument is issued or first comes into possession of a holder, and (4) not state any other undertaking or instruction by the person promising or ordering payment.

Lazur Corp. entered into a contract with Baker Suppliers, Inc., to purchase a computer from Baker. Lazur is engaged in the business of selling computers to the general public. The contract required Baker to ship the goods to Lazur by common carrier pursuant to the following provision in the contract: "FOB - Baker Suppliers, Inc., loading dock." Assume that Lazur refused to accept the computer even though it was in all respects conforming to the contract and that the contract is otherwise silent. Under UCC Article 2, a. Baker can successfully sue for specific performance and make Lazur accept and pay for the word processor. b. Baker may resell the word processor to another buyer. c. Baker must sue for the difference between the market value of the word processor and the contract price plus its incidental damages. d. Baker cannot successfully sue for consequential damages unless it attempts to resell the word processor.

Answer (B) is correct. Resale of the goods and recovery of damages is a seller's remedy. After the buyer's breach, the resale in good faith and in a commercially reasonable manner permits the seller to recover the difference between the resale price and the contract price, plus any incidental damages allowed under UCC 2-710, minus expenses saved.

Under UCC Article 2, which of the following legal remedies would a buyer not have when a seller fails to transfer and deliver goods identified to the contract? a. Suit for specific performance. b. Suit for punitive damages. c. Purchase substitute goods (cover). d. Recover the identified goods (capture).

Answer (B) is correct. The buyer's basic remedy when the seller fails to deliver goods is the right to sue for monetary damages. The UCC generally does not provide for an aggrieved party to recover punitive damages.

Under UCC Article 2, a plaintiff who proves fraud in the formation of a contract may a. Elect to rescind the contract and need not return the consideration received from the other party. b. Be entitled to rescind the contract and sue for damages resulting from the fraud. c. Be entitled to punitive damages provided physical injuries resulted from the fraud. d. Rescind the contract even if there was no reliance on the fraudulent statement.

Answer (B) is correct. UCC 2-721 provides that rescission for fraud does not bar a claim for damages or another remedy.

To negotiate an instrument payable to bearer, one must a. Transfer possession of, and endorse, the instrument. b. Transfer possession of the instrument. c. Endorse the instrument. d. Endorse and transfer possession of the instrument with consideration

Answer (B) is correct. Under UCC 3-201, negotiation is the voluntary or involuntary transfer of possession of an instrument (other than by the issuer) to a holder. If the instrument is payable to an identified person, it is negotiated by transfer of possession and endorsement by the holder; if the instrument is payable to bearer, it is negotiated by transfer of possession alone.

To be negotiable, an instrument must be written and signed. Which of the following is true? a. A drawee's signature is required for the negotiability of a draft. b. A signature may be any symbol intended by a party to authenticate a writing. c. A signature must be handwritten. d. A signature must be placed at the end of the instrument.

Answer (B) is correct. Under UCC 3-401, "A signature may be made (1) manually or by means of a device or machine, and (2) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing."

Kirk Corp. sold Nix an Ajax freezer for $490. The contract required delivery to be made by June 23. On June 12, Kirk delivered a Sure freezer to Nix. Nix immediately notified Kirk that the wrong freezer had been delivered and indicated that the delivery of a correct freezer would not be acceptable. Kirk wishes to deliver an Ajax freezer on June 23. Which of the following statements is true? a. Kirk may deliver the freezer on June 23 without further notice to Nix. b. Kirk may deliver the freezer on June 23 if it first reasonably notifies Nix of its intent. c. Nix must accept the nonconforming freezer but may recover damages. d. Nix may always reject the Sure freezer and refuse delivery of an Ajax freezer.

Answer (B) is correct. When a buyer rejects delivery for nonconformity and the time for performance has not expired, the seller can notify the buyer of his/her intent to cure and then deliver within the contract period (UCC 2-508). Accordingly, Kirk can promptly notify Nix and make a conforming delivery by June 23.

On April 5, Anker, Inc., furnished Bold Corp. with Anker's financial statements dated March 31. The financial statements contained misrepresentations indicating that Anker was solvent when it was insolvent. Based on Anker's financial statements, Bold agreed to sell Anker 90 computers, "FOB -- Bold's loading dock." On April 14, Anker received 60 of the computers. The remaining 30 computers are in the possession of the common carrier and in transit to Anker. With respect to the remaining 30 computers in transit, which of the following statements is correct if Anker refuses to pay Bold in cash, and Anker is not in possession of a negotiable document of title covering the computers? a. Bold may stop delivery of the computers to Anker. Their contract is void because Anker furnished false financial statements. b. Bold may stop delivery of the computers to Anker despite the passage of title to Anker. c. Bold must deliver the computers to Anker on credit because Anker has not breached the contract. d. Bold must deliver the computers to Anker because the risk of loss passed to Anker.

Answer (B) is correct. When an unpaid seller discovers the buyer is insolvent, it may stop any goods in transit (UCC 2-705). This right may be exercised even when the shipping terms are FOB shipping point and title and risk of loss have passed to the buyer. Once the goods are stopped, Bold may refuse to deliver except for cash (UCC 2-702). If Anker pays cash, including payment for all goods previously delivered, Bold will have no reason to withhold delivery. If the buyer breaches before delivery (e.g., fails to pay an installment or commits fraud), any stoppage in transit must be by carload, truckload, or planeload.

A $5,000 promissory note payable to the order of Neptune is discounted to Chill Bane by blank endorsement for $4,000. Brutus King steals the note from Bane and sells it to Melinda Ott, who promises to pay King $4,500. After paying King $3,000, Ott learns that King stole the note. Ott makes no further payment to King. Ott is a. A holder in due course to the extent of $5,000. b. An ordinary holder to the extent of $4,500. c. A holder in due course to the extent of $3,000. d. An ordinary holder to the extent of $0.

Answer (C) is correct. To be an HDC, a holder must take for value. An unsecured promise to pay does not constitute value given for a negotiable instrument (another promissory note or draft would constitute value). Prior to receiving notice of a defense against the instrument, Ott has given value to the extent of $3,000 and is an HDC only to that extent.

Mix Clothing shipped 300 custom suits to Tara Retailers. The suits arrived on Thursday, earlier than Tara had anticipated and on an exceptionally busy day for its receiving department. They were perfunctorily examined and sent to a nearby warehouse for storage until needed. On the following day, upon closer examination, it was discovered that the quality of the linings of the suits was inferior to that specified in the sales contract. Which of the following is true insofar as Tara's rights are concerned? a. Tara must retain the suits because it accepted them and had an opportunity to inspect them upon delivery. b. Tara had no rights if the linings were of merchantable quality. c. Tara can reject the suits upon subsequent discovery of the defects. d. Tara's only course of action is rescission.

Answer (C) is correct. A buyer has the right to inspect the goods at any reasonable place and time and in any reasonable manner (UCC 2-513). Tara did not have a reasonable opportunity to inspect on the day of the delivery. A buyer may reject nonconforming goods within a reasonable time if the seller is properly notified (UCC 2-602). Also, a buyer who has accepted goods may revoke acceptance within a reasonable time if the acceptance was reasonably induced by the difficulty of discovery (UCC 2-608).

An instrument complies with the requirements for negotiability contained in the UCC article on negotiable instruments. The instrument contains language expressly acknowledging the receipt of $40,000 by Mint Bank and an agreement to repay principal with interest at 11% 6 months from date. The instrument is a. A banker's acceptance. b. A banker's draft. c. A negotiable certificate of deposit. d. A nonnegotiable instrument because of the additional language.

Answer (C) is correct. A certificate of deposit (CD) is an acknowledgment by a bank of receipt of money with an engagement to repay it. The bank is the maker, and the payee is the depositor. Although a CD is essentially a note, it is separately classified because certain laws apply to CDs but not to other notes.

To the extent that a holder of a negotiable promissory note is a holder in due course, (s)he takes the note free from which of the following defenses? a. Minority of the maker if it is a defense to enforcement of a contract. b. Forgery of the maker's signature. c. Nonperformance of a condition precedent. d. Discharge of the maker in bankruptcy.

Answer (C) is correct. A holder in due course ordinarily takes an instrument free of all personal defenses, but the holder in due course is still subject to real defenses. Traditional contract defenses, such as nonperformance of a condition precedent, are usually personal defenses and thus not valid against a holder in due course.

For a person to be a holder in due course of a promissory note, a. The note must be payable in U.S. currency to the holder. b. The holder must be the payee of the note. c. The note must be negotiable. d. All prior holders must have been holders in due course.

Answer (C) is correct. A holder is a person in possession to whom an instrument has been negotiated. An HDC is a holder of a negotiable instrument that, when issued or negotiated to the holder, does not "bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity." Furthermore, an HDC must take the instrument for value, in good faith, and without notice of certain disqualifying conditions. These include that the instrument (1) is overdue; (2) has been dishonored; (3) is part of a series of instruments, one of which is in uncured default with respect to payments; (4) contains an unauthorized signature or has been altered; (5) is subject to a claim of a property or possessory right; and (6) is subject to any claim in recoupment (UCC 3-302).

A lessor of goods may be in rightful possession of the leased goods after a default by the lessee. In this circumstance, a lessor a. Is accountable to the lessee for any profit on any disposition of the goods by the lessor. b. Who sells the goods is not entitled to damages. c. May dispose of the goods by a lease agreement and recover damages. d. May lease the goods to a new lessee who will take subject to the rights of the original lessee

Answer (C) is correct. A lessor in possession of the leased goods after the lessee's default may lease to a third party. If this agreement is in good faith, commercially reasonable, and substantially similar to the original lease, the lessor may recover (1) accrued and unpaid rent up to the beginning of the new lease, (2) any excess of the present value of the total rent on that date over the present value of the rent under the new lease, and (3) incidental damages minus expenses saved (UCC 2A-527).

A client has an instrument that contains certain ambiguities or deficiencies. In construing the instrument, which of the following is false? a. If there is doubt whether the instrument is a draft or a note, the holder may treat it as either. b. Handwritten terms control typewritten and printed terms, and typewritten terms control printed terms. c. An instrument that does not state any time of payment is not negotiable. d. That the instrument is antedated will not affect the instrument's negotiability.

Answer (C) is correct. A promise or order is payable on demand if it does not state any time of payment. A negotiable instrument is, among other things, payable on demand or at a definite time (UCC 3-108).

Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument "for deposit only" is an example of what type of endorsement? a. Blank. b. Qualified. c. Restrictive. d. Special.

Answer (C) is correct. A restrictive endorsement attempts to restrict or further limit the negotiation of an instrument. An endorsement "for deposit only" locks the instrument into the banking system for deposit and restricts the negotiation of the instrument.

Dara bought an automobile needing repairs from Chevalier Motors, Inc. (CMI). CMI promised to repair it, but 1 month later had not yet completed the repairs. Dara was using the car anyway (1 month after purchase) when a fire in the dashboard rendered the vehicle inoperable. Dara returned the automobile immediately and orally informed a representative of CMI that she was demanding the purchase price. Dara sent a written notice of rescission 3 months later and filed suit 3 months after that. Who will most likely prevail, and what is the legal theory that best supports the result? a. CMI, because Dara accepted goods she knew to be nonconforming. b. CMI, because Dara did not revoke her acceptance within a reasonable time. c. Dara, because she made a justifiable revocation of acceptance. d. Dara, because she made a rightful rejection.

Answer (C) is correct. Dara decided to take the goods despite their nonconformity and thus accepted them (UCC 2-606). A buyer may revoke acceptance, however, if certain conditions are met. (1) The goods are nonconforming; (2) the nonconformity substantially impairs their value; and (3) (a) the buyer knew of the nonconformity and acted on the reasonable assumption it would be cured, but it was not seasonably cured; or (b) (s)he did not know, and acceptance was reasonably induced either by the difficulty of discovery or by the seller's assurances. Moreover, revocation is made within a reasonable time (UCC 2-608).

Silver Corp. sold 20 tons of steel to River Corp. with payment to be by River's check. The price of steel was fluctuating daily. Silver requested that the amount of River's check be left blank so that Silver could fill in the current market price. River complied with Silver's request. Within 2 days, Silver received River's check. Although the market price of 20 tons of steel at the time Silver received River's check was $80,000, Silver filled in the check for $100,000 and negotiated it to Hatch Corp. Hatch took the check in good faith, without notice of Silver's act or any other defense, and in payment of an existing obligation. River will a. Not be liable to Hatch, because the check was materially altered by Silver. b. Not be liable to Hatch, because Hatch failed to give value when it acquired the check from Silver. c. Be liable to Hatch for $100,000. d. Be liable to Hatch, but only for $80,000.

Answer (C) is correct. Hatch took after proper negotiation, in good faith, without notice of the unauthorized completion, and for value (payment of an existing obligation). Mere knowledge that an incomplete instrument has been completed is not notice of a defense. Accordingly, Hatch is a holder in due course, and River is liable for the amount of the check as completed.

Devold Manufacturing, Inc., contracted to sell to Hillary Company 3,000 CB radios at $30 each. After delivery of the first 500 radios, a minor defect was discovered, which Hillary incurred costs to correct. Hillary sent Devold a signed memorandum indicating that it would relinquish its right to recover the costs to correct the defect, provided that the remaining radios were in conformity with the terms of the contract and the delivery dates were strictly adhered to. Devold met these conditions. Shortly before the last shipment of radios arrived, Hillary notified Devold that it was not bound by the prior generous agreement and would sue Devold for damages. In the event of litigation, a. Devold will lose in that Hillary's relinquishment of its rights was not supported by a consideration. b. Devold will win in that the defect was minor and the substantial performance doctrine applies. c. Hillary will lose in that the memorandum constituted a waiver of Hillary's rights. d. Hillary will win in that there was a failure to perform the contract, and Hillary suffered damages as a result.

Answer (C) is correct. Hillary waived its rights under the contract. Under UCC 1-107, any claim or right arising out of a breach may be discharged without consideration by means of a written waiver signed and delivered by the aggrieved party. The waiver cannot be retracted because it affected an executed (completed) part of the contract. UCC 2-209 permits retraction of a waiver only if it affects an executory portion of a contract.

The status of a holder in due course as opposed to a mere holder of a negotiable instrument a. Is of little consequence as a practical matter. b. Eliminates the presentment requirement. c. Allows the holder in due course to overcome certain defenses that cannot be overcome by a mere holder. d. Allows the further negotiation of the instrument.

Answer (C) is correct. Real defenses are good against both holders and holders in due course; personal defenses are good against holders but not against holders in due course.

Bush Hardware ordered 300 Ram hammers from Ajax Hardware. Ajax accepted the order in writing. On the final date allowed for delivery, Ajax discovered it did not have enough Ram hammers to fill the order. Instead, Ajax sent 300 Strong hammers. Ajax stated on the invoice that the shipment was sent only as an accommodation. Which of the following statements is true? a. Ajax's note of accommodation cancels the contract between Bush and Ajax. b. Bush's order can be accepted only by Ajax's shipment of the goods ordered. c. Ajax's shipment of Strong hammers is a breach of contract. d. Ajax's shipment of Strong hammers is a counteroffer, and no contract exists between Bush and Ajax.

Answer (C) is correct. Shipment of a brand different from that stipulated in the contract was a breach of the contract (UCC 2-601). Bush may accept the goods despite their nonconformity, rightfully reject them, or resort to any of the buyer's other remedies under the UCC. UCC 2-206 and 2-508, allowing accommodation shipments and the ability to cure, are not applicable because a cure must be made within the time for performance in most cases.

Cynthia purchased a machine from VCR, Inc., for use in her home. She gave a small down payment and executed a promissory note for the balance. VCR negotiated the note to the Finley Company, which gave value, acted in good faith, and had no notice of any defense against or claim to the note. Subsequently, Cynthia was able to assert a defense of failure of consideration against VCR. If the note did not contain the notice required by the FTC, a. Finley is not treated as a holder in due course. b. Finley cannot recover from VCR. c. Finley will prevail against Cynthia. d. VCR will prevail against Cynthia.

Answer (C) is correct. Subsequent holders of a negotiable instrument issued by a consumer for the purchase of goods are given notice of defenses by a statement required to be printed on all commercial paper to which this rule applies. Failure to include the notice is illegal as an unfair trade practice but has the effect of freeing a holder in due course from personal defenses. Accordingly, the omission would allow Finley to prevail against Cynthia absent any real defense.

Tim Teff entered Al Archer's office and stole some radios and Archer's wallet containing identification. Subsequently, representing himself as Archer, Teff induced Bob Bane to purchase one of the stolen radios for a fair price. Bane gave Teff his check made out to Archer. Teff endorsed the check "Pay to the order of Crown, Archer" and transferred it to Cal Crown for cash in the amount of the check. Crown endorsed the check "Pay to the order of Fox, Crown" and transferred the check to Fred Fox to be applied to his account. Bane's check was a. Void from the beginning. b. Bearer paper when Crown took it. c. Order paper initially and negotiated by Teff to Crown. d. Nonnegotiable absent a valid endorsement by the real Archer

Answer (C) is correct. The check was initially order paper because it was payable to the order of Archer, as opposed to bearer or cash (UCC 3-109). It was negotiated by Teff to Crown when Teff fraudulently endorsed it with Archer's name and delivered it to Crown (UCC 3-201).

Mary issued an instrument in which she directed the Doe State Bank to pay to the order of Rhonda a fixed amount of money 30 days after sight. The instrument was presented, and Doe gave its signed undertaking to pay on the due date. Doe State Bank is a. The drawer. b. The payee and the maker. c. Both the drawee and the acceptor. d. Both the drawer and the acceptor.

Answer (C) is correct. The instrument is a draft because it contains an order by the drawer (Mary) to a drawee (Doe) to pay money to a payee (Rhonda). A person, usually a drawee, who agrees to pay the draft is an acceptor. Ordinarily, this agreement is signified by writing "accepted" on the instrument along with the date and a signature. Doe is therefore a drawee and an acceptor.

Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC? a. A bill of lading. b. A warehouse receipt. c. A certificate of deposit. d. An investment security.

Answer (C) is correct. UCC Article 3 regulates negotiable instruments. The article includes four kinds of negotiable instruments: drafts, checks, promissory notes, and certificates of deposit. Negotiable instruments are formal written contracts used extensively in business as a substitute for money and as a method to extend credit. Every negotiable instrument governed by Article 3 contains an unconditional promise or order to pay money. Other forms of negotiable contracts, such as bills of lading, warehouse receipts, and investment securities, do not order or promise payment of money and are governed by UCC Articles 7 and 8, respectively, and not by UCC Article 3. A certificate of deposit (CD) is a specialized form of promissory note in which a bank acknowledges a receipt of money and promises to repay the money with interest in the future.

Eli contracted to buy 600 bales of No. 1 quality cotton from Whitney. The contract provided that Eli would make payment prior to inspection. The 600 bales were shipped, and Eli paid Whitney. Upon inspection, however, Eli discovered that the cotton was No. 2 quality. Eli returned the cotton to Whitney and demanded return of the payment. Whitney refused on the ground that there is no difference between No. 1 quality cotton and No. 2 quality cotton. What is Eli's remedy for the nonconforming cotton? a. Specific performance. b. Damages measured by the difference between the value of the goods delivered and the value of conforming goods. c. Damages measured by the price paid plus the difference between the contract price and the cost of buying substitute goods. d. None. Eli waived any remedies by agreeing to pay before inspection.

Answer (C) is correct. Under UCC 2-711 and 2-712, a buyer who has rightfully rejected goods after having prepaid the purchase price may recover as much of the price as has been paid and also use the cover remedy. To cover is to make a timely, good-faith purchase of substitute goods and have as damages the difference between the contract price and the cost of the substitutes.

An instrument will be negotiable only if it contains an order or promise to pay. Accordingly, an instrument is negotiable if it a. Authorizes payment to an identified person. b. Acknowledges an obligation. c. Omits the word "promise" but states an undertaking to pay. d. Omits the word "order" but states a request to pay.

Answer (C) is correct. Under UCC 3-103, a promise is a written undertaking to pay money signed by the person undertaking to pay. It must be more than an acknowledgment of an obligation. The word "promise" need not be used, however.

A provision in a contract for the sale of goods providing that the seller may accelerate payment at will when (s)he deems him/herself insecure a. Is void as against public policy and ignored in determining contract rights. b. Makes the agreement illusory and prevents contract formation. c. Gives the seller a preferred creditor's status. d. Is enforceable subject to the good faith belief of the seller.

Answer (D) is correct. A clause providing that a seller may accelerate payment or performance "at will" when (s)he deems him/herself insecure is construed to mean it will only be exercised if the seller, in good faith, believes payment or performance is impaired (UCC 1-208).

A purchaser of a negotiable instrument payable on demand would least likely be a holder in due course if, at the time of purchase, the instrument is a. Purchased at a discount. b. Collateral for a loan. c. Payable to bearer on demand. d. Overdue by 3 weeks

Answer (D) is correct. A holder usually cannot qualify as an HDC if (s)he has notice that the instrument is overdue. Under UCC 3-304, a demand instrument is overdue on the earliest of the following: (1) on the day after demand is duly made; (2) if the instrument is a check, 90 days after its date; or (3) if it is not a check, when it has been outstanding for a period of time after its date that is unreasonably long in the circumstances.

A secured promissory note is nonnegotiable if it provides that a. Additional collateral must be tendered if there is a decline in market value of the original collateral. b. Upon default, the maker waives a trial by jury. c. The maker is entitled to a 5% discount if the note is prepaid. d. It is subject to the terms of the mortgage given by the maker to the payee.

Answer (D) is correct. A negotiable instrument must include an unconditional promise or order to pay. When a promise or order is subject to the provisions of another writing, it is conditional (UCC 3-106). A conditional instrument is nonnegotiable because the rights of a holder cannot be ascertained with reasonable certainty from its face. A note that is subject to the terms of a mortgage violates this requirement and is rendered nonnegotiable.

Cara Fabricating Co. and Taso Corp. agreed orally that Taso would custom manufacture a compressor for Cara at a price of $120,000. After Taso completed the work at a cost of $90,000, Cara notified Taso that the compressor was no longer needed. Taso is holding the compressor and has requested payment from Cara. Taso has been unable to resell the compressor for any price. Taso incurred storage fees of $2,000. If Cara refused to pay Taso and Taso sues Cara, the most Taso will be entitled to recover is a. $92,000 b. $105,000 c. $120,000 d. $122,000

Answer (D) is correct. A seller may recover the contract price ($120,000) and any incidental damages ($2,000) if circumstances reasonably indicate that an effort at resale would be unsuccessful (UCC 2-709). Because the machine was made-to-order and not adaptable to others' use, Pine should be successful in recovering the price. After recovery of the price, seller would be holding the machine for buyer.

Anna Karr transferred a negotiable instrument payable to her order in exchange for value to John Watson. Karr did not endorse the instrument. As a result of the transfer, Watson a. Obtains such rights as the transferor had in all cases. b. Can become a holder only if the instrument is endorsed and possession is transferred at the same time. c. Is presumed to be the owner of the instrument because she gave value. d. Is entitled to an unqualified endorsement by Karr.

Answer (D) is correct. Because Watson received the instrument from Karr for value, Watson has a specifically enforceable right to Karr's cooperation in negotiating that instrument absent an agreement to the contrary (UCC 3-203). Thus, Watson has a right to Karr's unqualified endorsement of the instrument.

Eagle Corporation solicited bids for various parts it uses in the manufacture of jet engines. Eagle received six offers and selected the offer of Sky Corporation. The written contract specified a price for 100,000 units, delivery on June 1 at Sky's plant, with payment on July 1. On June 1, Sky had completed a 200,000 unit run of parts similar to those under contract for Eagle and various other customers. Sky had not identified the parts to specific contracts. When Eagle's truck arrived to pick up the parts on June 1, Sky refused to deliver claiming the contract price was too low. Eagle was unable to cover in a reasonable time. Its production lines were in danger of shutdown because the parts were not delivered. Eagle would probably a. Have as its only remedy the right of replevin. b. Have the right of replevin only if Eagle tendered the purchase price on June 1. c. Have as its only remedy the right to recover dollar damages. d. Have the right to obtain specific performance.

Answer (D) is correct. If the goods are unique and monetary damages are not an adequate remedy, the courts may order specific performance of the sales contract. Under the UCC, specific performance is available whenever the subject matter of the sales contract is unique and "in other proper circumstances" (UCC 2-716). Although specific performance is thus not usually available for ordinary goods, courts have found facts such as those in the question to be "other proper circumstances" for ordering it.

Anton promised to pay Beta $10,000 in exchange for an automobile. Accordingly, Anton executed a contract and delivered it to Beta. Beta then transferred the contract to Carl for value. When Beta failed to perform, Anton refused to pay. If Carl sues Anton, a. Carl will win because he stepped into the shoes of the assignor. b. Anton will win because the contract is not transferable. c. Anton will win even if the contract is instead a negotiable instrument. d. Carl will win if the contract is instead a negotiable instrument and the requirements of Article 3 of the UCC are complied with.

Answer (D) is correct. Most contract rights are assignable, and an assignee takes subject to all defenses assertable against his/her assignor. But the taker of a negotiable instrument who conforms to the holder-in-due-course rules of Article 3 of the UCC is not subject to such personal defenses as failure of consideration. Thus, certain good-faith transferees for value of negotiable instruments are protected from the effects of disputes between the original contracting parties.

Jean bought a radio for $280 from Ace Appliances. Jean signed a promissory note (that stated the holder is subject to all defenses of the maker) and a purchase contract to cover the entire purchase price. The television proved defective so Jean returned it to Ace. One week later, Moe Finance Company demanded the first payment on the promissory note, which it had purchased from Ace without any knowledge that the television was defective. a. As a holder in due course, Moe Finance is entitled to payment from Jean because it took free of contractual defenses. b. Jean must seek reimbursement from Ace Appliances for the amount he has to pay to Moe Finance. c. Jean's liability is not determined by having signed a promissory note instead of a check. d. Jean cannot be held liable on the promissory note even if Moe Finance qualifies as a holder in due course under Article 3 of the UCC.

Answer (D) is correct. The Federal Trade Commission has issued a regulation protecting consumers who purchase goods in exchange for an installment obligation. Under the regulation, the note is to contain a notice stating that the holder is subject to all claims and defenses of the debtor. This notice prevents a holder of the promissory note from obtaining the rights of a holder in due course. The consumer can thereby assert his/her contractual defenses against such a holder and avoid having to sue the seller separately.

One of the underlying purposes of the UCC is to permit the parties to exercise considerable contractual freedom. With regard to contractual modification or limitation of remedy, however, this freedom is circumscribed. Which is the true statement about the parties' ability to agree about remedies for breach of their contract for the sale of goods? a. If the parties have limited the remedies available for breach of their contract and unforeseen circumstances cause the limited remedy to fail of its essential purpose, the injured party must adhere to his/her bargain. b. The limitation of consequential damages for injury to the person in the case of consumer goods and for commercial loss is prima facie unconscionable. c. The parties may limit the remedies afforded by the UCC but may not agree to remedies in addition to those provided. d. The damages for breach by either party may be liquidated in the agreement.

Answer (D) is correct. The UCC recognizes that it is efficient for parties to agree on remedies for breach and avoid the trouble, expense, and uncertainty of litigation. Under UCC 2-718, damages may be liquidated or specified in the agreement as long as such damages are reasonable in the circumstances.

Under the negotiable instruments article of the UCC, which of the following circumstances would prevent a promissory note from being negotiable? a. An extension clause that allows the maker to elect to extend the time for payment to a date specified in the note. b. An acceleration clause that allows the holder to move up the maturity date of the note in the event of default. c. A note that is signed on behalf of the maker by a person having a power of attorney. d. A clause that allows the maker to satisfy the note by the performance of services or the payment of money.

Answer (D) is correct. To be negotiable, a note must be payable in money and only in money. A note that allows the maker to pay by performing services is not negotiable (UCC 3-104).

A person who endorses a check "without recourse" a. Has the same liability as an accommodation endorser. b. Negates his/her liability only insofar as prior parties are concerned. c. Modifies the warranty to his/her transferee. d. Does not promise or guarantee payment of the instrument upon dishonor even if there has been a proper presentment and proper notice has been given.

Answer (D) is correct. Under UCC 3-415, unless otherwise specified (such as by words like "without recourse"), every endorser engages that, upon dishonor and any necessary notice of dishonor, (s)he will pay the amount due according to the instrument's terms when it was endorsed. The obligation is owed to a person entitled to enforce the instrument or to a subsequent endorser that paid the instrument. An endorsement "without recourse" is a qualified endorsement that disclaims this contract liability. But it does not eliminate warranty liability

ambiguous instruments

If doubt exists as to whether an instrument is a draft or a note, the holder may treat it as either one and present it for payment to the drawee or to the person signing it. If handwritten or typewritten language is inconsistent with the printed words: The handwritten words control the typewritten and the printed words; the typewritten words control the printed words. If the amount payable is set forth on the instrument's face in both figures and words, and the amounts differ, the words control the figures. If the words are ambiguous, however, the figures control the payable amount.

incidental damages (of the buyer)

a buyer's incidental damages provide reimbursement for the buyer who incurs reasonable expenses in handling rightfully rejected goods or in effecting cover. incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach

cashier's check

a check drawn by a bank upon itself to the order of a named payee.

indorsements with ineffective restrictions

a conditional indorsement is one by which the indorser makes the rights of the indorsee subject to the happening or nonhappening of a specified event.

trade acceptance

a form of a time draft that is frequently used as a credit device in commercial truncations. this is a tine draft, drawn by the seller (drawer) on the buyer (drawee), that names the seller or some third party as the payee.

antecedent debt

a holder gives value when she takes an instrument in payment of or as security for an antecedent debt.

in a nonconsumer transaction

a holder in due course takes the instrument (1) free from all claims on the part of any person and (2) free from all defenses of any party with whom he has not dealt, except for a limited number of defenses that are available against anyone including a holder in due course.

negotiability

a legal concept that makes written instruments more freely transferrable and therefore a readily accepted form of payment in substitution for money

no other undertaking or instruction

a negotiable instrument must contain a promise or order to pay money, but it may not "state any other undertaking or instruction by that person promising or ordering payment to do any act in addition to the payment of money" the code sets out a list of terms and provisions that may be included in the instruments without adversely affection negotiability. amount those are: - an undertaking or power to give, maintain, or protect collateral in order to secure payment - an authorization or power to confess judgement on the instrument - an authorization or power to sell or dispose of collateral upon default - a waiver of the benefit of any law intended for the advantage or protection of the obligor

negotiations subject to rescission

a negotiation is valid even though the transaction in which it occurs is voidable or even void. in all of these instances, the transferor loses al lights in the instrument until he regains possession of it. his right is valid against the immediate transferee and all subsequent holders, but not against a holder in due course or a person paying the instrument in good faith and without notice

signed

a note or certificate of deposit must be signed by the maker, a draft or check must be signed by the drawer.

holder

a person who is in possession of an instrument drawn, issued, or indorsed to him or his oder or to bearer or in blank the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession

transferee

a person who receives property after being transferred

unconditional

a promise or order to pay is unconditional if it is absolute and not subject to any contingencies or qualifications. a promise or order to pay is unconditional unless it states: 1. that there is an express condition to payment, 2. that the promise or order is subject to or governed by another writing, or 3. that rights or obligations concerning the order or promise are stated in another writing.

notes

a promissory note is an instrument involving two parties in two capacities. one party, the maker, promises to pay a second party, the payee, a stated sum of money, either on demand (demand note) or at a stated future date (time note).

to stop delivery of the goods (seller remedy)

a seller who discovers that the buyer is insolvent may stop any delivery. if the buyer is not insolvent but repudiates or other wise breaches the contract, the seller may stop carload, truckload, planeload, or larger shipments.

indorsement

a signature other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (1) negotiation the instrument, (2) restricting payment of the instrument, or (3) incurring indorser's liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an endorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than endorsement

check

a specialized form of draft, namely, an order to pay money drawn on a bank and payable on demand. parties involved n three distinct capacities: the drawer, who orders the drawee, a bank, to pay the payee on demand. checks are by far the most widely used form of negotiable instruments.

personal defenses

all other defenses that might be asserted in the case of any action for breach of contract; includes: - lack of consideration - failure of consideration - fraud in the inducement - illegality that does not render the transaction void - duress, undue influence, mistake, missrepresentation, etc

obligation-oriented seller remedies

allows the seller to avoid his obligation under the contract. remedies include: - cancel the contract

replevin

an action at law to recover from a defendant's possession specific goods that are unlawfully withheld from the plaintiff.

executory promise

an executory promise, though clearly valid consideration to support a contract, is not the giving of value to support holder in due course status because such a promise has yet to be performed.

the fictitious payee rule

an indorsement by any person in the name of the named payee is effective if an agent of the maker or drawer has supplied her with the name of the payee for fraudulent purposes

the impostor rule

an indorsement of an impostor or of any other person in the name of the named payee is effective if the impostor has induced the maker or drawer to issue the instrument to him using the name of the payee

payable to bearer

an instrument fulfills the requirements of being payable to bearer if it: - states it is payable to bearer or the order of bearer, - does not state a payee or - states it is payable to "cash" or to the order of "cash"

payable to order

an instrument is payable to order if it is payable: - to the order of an identified person, or - to an identified person or order

the particular fund doctrine

an order or promise to pay only out of a particular fund no longer is conditional and does not destroy negotiability.

statute of limitations

any action for breach of a sales contract must be begun within four years after the cause of action has accrued. they parties may reduce that period to not less than one year. in a sale, they may not extend this period. Article 2A doesn't include this limitation.

signature

any symbol a party executes or adopts with the present intention to authenticate a writing. moreover, it may consist of any word or mark used in place of a written signature.

restrictive indorsements

attempts to restrict the rights of the indorsee in some fashion. it limits the purpose for which the proceeds of the instruments can be applied

real defenses

available against all holders, including holders in due course; includes: - Infancy - Void Obligations - Fraud in the Execution - Discharge in Insolvency Proceedings - Discharge of Which the Holder Has Notice - Unauthorized Signature - Fraudulent Alteration

reference to other agreements

does not destroy negotiability unless the recital makes the instrument subject to or governed by the terms of another agreement.

negotiable instruments that contain orders or directions to pay money

drafts and checks

types of negotiable instruments

drafts, checks, notes, and certificates of deposit

certificates of deposit

frequently called CD, is a specialized form of promise to pay money given by a bank. a certificate of deposit is a written acknowledgement by a bank of the receipt of money that it promises to replay. the issuing party, the maker, which is always a bank, promises to pay a second party, the payee, who is named in the CD.

good faith

honesty in fact and the observance of reasonable commercial standards of fair dealing

negotiation of bearer paper

if an instrument is payable to bearer, it may be negotiated by transfer of possession alone. because bearer paper (an instrument payable to a bearer) runs to whoever is in possession of it, a finder or a thief of bearer paper would be a holder even though he did not receive possession by voluntary transfer. because a bearer instrument is negotiated by mere possession, it is comparable to cash

negotiation of order paper

if the instrument is order paper (an instrument payable to an order) both (1) transfer of its possession and (2) its indorsements (signature) by the appropriate parties are necessary for the transferee to become a holder. requires a VALID indorsement by the person to whose order the instrument is payable. (Imposter rule and fictitious payee rule are exceptions whereby Order paper can be negotiated without a valid indorsement).

payable at a definite time and on demand

if the instrument payable at a fixed date, also provides that it is payable on demand made before the fixed date, it is still a negotiable instrument.

to resell the goods and recover damages (seller remedy)

if the resell is made in good faith and is commercially reasonable, the seller may recover from the buyer the different between the contract price and the resale price plus any incidental damages minus expenses saved because of the buyer's breach. in a lease, the comparable recovery is the difference between the present values of the old rent due under the original lease and the new rent due under the new lease. a resale maybe public or private and the goods may be sold in units or parcels. the goods resold must be identified except in cases of anticipatory repudiation.

to recover incidental damages (seller remedy)

in addition to recovering damages for the difference between the contract price and the resale price, recovering damages for nonacceptance or repudiation, or recovering the price, the seller may in the same action recover her incidental damages in order to recoup expenses she reasonably incurred as a result of the buyer's breach.

to recover incidental damages (buyer remedy)

in addition to remedies such as covering, recovering damages for nondelivery or repudiation, or recovering damages for breach in regard to accepted goods, including breach of warranty, the buyer may recover incidental damages.

reclaim the goods on the buyer's insolvency (seller remedy)

in addition to the right of an unpaid seller to withhold and stop delivery of the goods, he may reclaim them from an insolvent buyer by demand upon the buyer within ten days after the buyer has received the goods. where, however, the buyer has committed fraud by misrepresenting her solvency to the seller in writing within three months prior to delivery of the goods, the tend ay limitation does not apply. upon reclaiming the goods from an insolvent buyer, the seller is excluded from all other remedies with respect to those goods

incomplete instruments

instruments are not negotiable until completed.

payable at a definite time

instruments payable at a definite time are called time paper. a promise or order is payable at a definite time if it is payable: - at a fixed date or dates - at a definite period of time after sight or acceptance, or - at a time readily ascertainable at the tie the promise or order is issued

drafts

involve three parties, each in a distinct capacity. one party, the drawer, orders a second party, the drawee to pay a fixed amount of money to a third party, the payee. thus the drawer "draws" the draft on the drawee. the drawee is usually a person or an entity that either is in possession of money belonging to the drawer or owes money to him.

negotiation

is a special transfer that may allow the transferee to take free of personal defenses. It is "a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder" (negotiation cannot occur unless the document is in negotiable form).

specific performance

is an equitable remedy compelling the party in breach to perform the contract according to its terms. at common law, specific performance is available only if legal remedies are inadequate. the code not only has continued the availability of specific performance but also has sought to encourage a more liberal attitude towards its use

order to pay

is an instruction to may. it must be more than an authorization or request and must identify with reasonable certainty the person to be paid. the usual way to express an order to pay is by use of the word "pay." this must be included in drafts and checks.

promise to pay

is an undertaking and must be more than the mere acknowledgement or recognition of an existing obligation or debt. this must be included in notes and certificates of deposit.

payable to order and to bearer

is payable to bearer

money

legal tender authorized or adopted by a sovereign government as part of its currency

payable on demand

means that money owed under the instrument must be paid upon the holder's request. demand paper has always been considered sufficiently certain as to time of payment to satisfy the requirements of negotiability because it is the person entitled to enforce the instrument who makes the demand and who thus sets the time for payment.

indorsements for deposit or collection

most frequently used form of restrictive indorsements is that designed to place the instrument in the banking system for deposit or collection. effectively limits further negotiation to those consistent with its limitation and binds (1) all nonbanking persons, (2) a depository bank that purchases the instrument or takes it for collection, and (3) a payor bank that is also the depository bank or that takes the instrument for immediate payment over the counter from a person other than a collecting bank

negotiable instruments to have the full benefit of negotiability

not only must meet the requirements of negotiability but also must be acquired by a holder in due course.

negotiable instruments that involve promises to pay money

notes and certificates of deposit

remedies of the seller if the buyer fails to make payment

obligation-oriented: - cancel goods-oriented: - withhold delivery of goods - stop delivery of goods - identify conforming goods to the contract - reclaim goods upon buyer's insolvency money-oriented: - resell and recover damages -recover difference between unpaid contract and parker prices or lost profits -recover price

remedies of the seller if the buyer repudiates

obligation-oriented: - cancel goods-oriented: - withhold delivery of goods - stop delivery of goods - identify conforming goods to the contract money-oriented: - resell and recover damages -recover difference between unpaid contract and parker prices or lost profits -recover price

remedies of the seller if the buyer wrongfully rejects goods

obligation-oriented: - cancel goods-oriented: - withhold delivery of goods - stop delivery of goods in transit - identify conforming goods to the contract money-oriented: - resell and recover damages -recover difference between unpaid contract and parker prices or lost profits -recover price

remedies of the seller if the buyer wrongfully revokes acceptance

obligation-oriented: - cancel goods-oriented: - withhold delivery of goods - stop delivery of goods in transit - identify conforming goods to the contract money-oriented: - resell and recover damages -recover difference between unpaid contract and parker prices or lost profits -recover price

transfer

of an instrument occurs when a person other than its issuer of a negotiable instrument in such a manner that the transferee becomes a holder.

cancellation

one party's putting an end to the contract by reason of a breach by the other. the obligation of the canceling party for any future performance under the contract is discharged, although she retains any remedy for breach of the whole contract or any unperformed balance.

time draft

payable at a specified future date

sight draft

payable on demand

formal requirements of indorsements

place of indorsement - an indorsement must be written on the instrument or on a paper called an allonge, affixed to the instrument. an allonge may be used even if the instrument contains sufficient space for the indorsement incorrect or misspelled indorsements - if an instrument is payable to a payee or indorsee under a misspelled name or a name different from that of the holder, the holder may require the indorsement in the name stated or in the holder's correct name or both.

writing

printing, typewriting, handwriting, or any other intentional tangible expression is sufficient to satisfy this requirement. most negotiable instruments are written on paper, but this is not required

unqualified indorsement

promise they will pay the instrument according to its terms at the time of their indorsement to the holder or to any subsequent indorser who paid it. guarantees payment of the instrument if certain conditions are met one that imposes liability on the indorser

money-oriented seller remedies

provide the seller with the opportunity to recover monetary damages. remedies include: - resell the goods and recover damages - recover damages for nonacceptance of the goods or repudiation of the contract - recover the price - recover incidental damages

goods-oriented seller remedies

related to the seller's exercising control over the goods. remedies include: - withhold delivery of the goods - stop delivery of the goods by a carrier or other bailee - identify to the contract conforming goods non already identified - reclaim the goods on the buyer's insolvency

obligation-oriented buyer remedies

remedies include: - to cancel the contract

goods-oriented buyer remedies

remedies include: - to recover identified goods if the seller is insolvent, or - to replevy the goods, or - to sue for specific performance - to enforce a security interest in the goods

money-oriented buyer remedies

remedies include: - to recover payments made - to cover - to recover damages for nondelivery - to recover damages for breach of warranty - to recover incidental damages - to recover consequential damages

fixed amount

revised article 3 applies the fixed amount requirement only to the principal. thus, the fixed amount portion does not apply to interest or to other charges, such as collection fees or attorney's fees. negotiability of an instrument is not affected by the inclusion or omission of a stated rate of interest. if no interest rate is stated, then it is payable without interest.

special indorsement

specifically identifies the person to whom or to whose order the instrument is to be payable. words of negotiability "pay to order or bearer" are not required in an indorsement.

the law of assignments

the assignee stands in the shoes of his assignor

to recover consequential damages (buyer remedy)

the buyer may recover consequential damages resulting from the seller's breach, including (1) any loss resulting from the buyer's requirements and needs of which the seller at the time of contracting had reason to know and which the buyer could not reasonably prevent by cover or otherwise, and (2) injury to person or property proximately resulting from any breach of warranty.

seller's default

the buyer's remedies arise where the seller fails to make delivery or repudiates the contract, or where the buyer rightfully rejects or justifiably revokes acceptance of goods tendered or delivered due to them being nonconforming

to recover the price (seller remedy)

the code permits the seller to recover the price plus incidental damages only in 3 situations: (1) where the buyer has accepted the goods; (2) where conforming goods have been lost or damaged after the risk of loss has passed to the buyer; and (3) where the goods have been identified to the contract and there is no ready market available for their resale at a reasonable price.

modification or limitation of remedy by agreement

the contract between the parties may expressly provide for remedies in addition to those in the Code, or it may limit or change the measure of damages recoverable for breach.

formal requirements of negotiable instruments

the instrument must contain within its "four corners" all the information returned to determine negotiability. indorsements cannot create or destroy negotiability. to be negotiable the instrument must: 1. be in writing 2. be signed 3. contain a promise or order to pay 4. be unconditional 5. be for a fixed amount 6. be for money 7. contain no other undertaking or instruction 8. be payable on demand or at a definite time, and 9. be payable to order or to a bearer

value

the law requires a holder in due course to give value. value for purposes of negotiable instruments is defined as: - timely performance of legal consideration (which excludes executory promises); - acquisition of a security interest in or a lien on the instrument; - taking the instrument in payment of or as security for an antecedent debt; - giving a negotiable instrument; or - giving an irrevocable commitment to

dating of the instrument

the negotiability of an instrument is not affected by the fact that is is antedated, or postdated. if the interment is undated, its date is the date of its issuance if it is unissued, its date is the date it first comes into the obsession of a holder

terms and omissions and their effect on negotiability

the negotiability of an instrument may be questioned because of an omission of certain provisions or because of ambiguity. problems may also arise on connection with the interpretation of an instrument, whether or not negotiability is called into question

liquidation or limitation of damages

the parties may specify the amount or measure of damages that may be recovered in the event of a breach if the amount is reasonable.

limitations upon holder in due course rights

the preferential position of a holder in due course has been severely limited by FTC rule that applies to consumer credit contractsL under this rule, a transferee of consumer credit contracts cannot take as holder in due course.

lost profit

the profit, including reasonable overhead that the seller would have realized from full performance by the buyer plus any incidental damages, less any expenses saved because of the buyer's breach

to cancel the contract (seller remedy)

the seller may cancel the contract with respect to the goods directly affected. if the breach is of an installment contract and it substantially impairs the whole contract, the seller may cancel the whole contract.

to recover damages for nonacceptance or repudiation (seller remedy)

the seller may recover damages from the buyer equal to the difference between the unpaid contract price and the market price at the time and place of tender of the goods, plus incidental damages, less expenses saved because of the buyer's breach. this remedy is an alternative to the remedy of reselling the goods. in a lease the comparable recovery is the difference between the present vales of the old rent due under the original lease and the market rent. if the difference between the contract price and the market price will not place the seller in as good a position as performance would have, then the measure of damages is the lost profit

buyer's default

the seller's remedies are triggered by the buyer's actions in wrongfully rejecting or revoking acceptance of the goods, in failing to make payment due on or before delivery, or in repudiating the contract.

the shelter rule

the transferee of an instrument acquires the same rights in the instrument as the transferor had. therefore, even a holder who does not comply fully with the requirements for being a holder in due course nevertheless acquires all the rights of a holder in due course if some previous holder of the instrument had been a holder in due course.

a payee may be a holder in due course

this doe snot mean that a payee automatically is a holder in due course but that he may be one of he satisfies all the requirements for such status

to identify goods to the contract (seller remedy)

this enables the seller to exercise the remedy of resale of goods. the seller may resell any unfinished goods demonstrably intended to fulfill the particular contract. the seller may either complete the manufacture of unfinished goods and identify them to the contract or cease their manufacture and resell the unfinished goods for scrap or salvage value.

indorsements in trust

this is where the indorser creates a trust for the benefit of himself or others. effectively require the indorsee to pay or apply all funds in accordance with the indorsement.

payee

this person who money is to be paid to

incidental damages (of the seller)

to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach

requirements of a holder in due course

to become a holder in due course a transferee must - 1. be a holder of a negotiable instrument; 2. take it for value; 3. take it in good faith; and 4. take it without notice: (a) that is overdue or has been dishonored or, (b) that the instrument contains an unauthorized signature or alteration, (c) that any person has any defense against or claim to it; and 5. take it without reason to question its authenticity due to apparent evidence of forgery, alteration, incompleteness, or other irregularity

lack of notice

to become a holder in due course, a holder must also take the instrument without: - Notice an Instrument Is Overdue - time paper is overdue after its stated date; demand paper is overdue after demand is made or after it has been outstanding for an unreasonable period of time - Notice an Instrument Has Been Dishonored - dishonor is the refusal to pay or accept an instrument when it becomes due - Notice an Instrument Has Been Forged or Altered - Notice of a Claim or Defense - a defense protects a person from liability, while a claim is an assertion of ownership

words of negotiability

to the order of or to bearer

to recover damages for breach in regards to accepted goods (buyer remedy)

when the buyer accepts nonconforming goods and has timely notified the seller of the breach of contract, the buyer is entitled to recover from the seller the damages resulting in the ordinary course of events from the seller's breach, as determined in any reasonable manner. where appropriate, the buyer may also recover incidental and consequential damages. in the event of breach of warranty, the measure of damages is the difference at the time and place of acceptance between the value of the goods that have been accepted and the value that the goods would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. Article 2A has a comparable provision, except the recover is for the present value of the difference between the value of the use of the goods accepted and the value if they had been as warranted for the lease term.

to enforce a security interest in the goods (buyer remedy)

when the buyer rightfully rejects goods or justifiably revokes acceptance due to nonconforming goods, the buyer may hold such goods and resell them in the same manner as an aggrieved seller may resell goods. in the event of a resale, the buyer is accountable to the seller for any amount of the net proceeds of the resale that exceeds the amount of his security interest

to withhold delivery of the goods (seller remedy)

when the contract calls for installments, any breach of an installment that impairs the value of the whole contract will permit the seller to withhold the entire underlined balance of the goods. in addition, upon discovery of the buyer's insolvency, the seller may refuse to deliver the goods except for cash, including payment for all goods previously delivered under the contract.

to recove damages for nondelivery or repudiation (buyer remedy)

when the seller breaches in any way, the buyer is entitled to recover damages form the seller equal to the difference between the market price at the time when the buyer lean red of the breach and the contract price, together with incidental and consequential damages, less expenses saved because of the seller's breach in a lease, the comparable recovery is the difference between the present values of the market rent and the old rent due under the original lease.

to cover and recover damages (buyer remedy)

when the seller breaches in any way, the buyer may protect himself by obtaining cover. cover means that the buyer may in good faith and without unreasonable delay proceed to purchase needed goods or make a contract to purchase such goods in substitution of those due under the contract from the seller. in a lease, the lessee may purchase or lease substitute goods upon making a reasonable contract of cover, the buyer may recover from the seller the difference between the cost of cover, and the contract price, plus any incidental and consequential damages, less expenses saved because of the seller's breach. in a lease, the comparable recovery is the difference between the present values of the new rent due under the new lease and the old rent due under the original lease.

to recover payments made (buyer remedy)

when the seller breaches in any way, the buyer may recover as much of the price as he has paid. under article 2A, the lessee may recover so much of the rent and security as has been paid and is just under the circumstance

to sue for replevin (buyer remedy)

when the seller fails to deliver or the seller repudiates, the buyer may maintain against the seller an action for replevin for goods that have been identified to the contract if the buyer after a reasonable effort is unable to effect cover for such goods. article 2 also provides the buyer with the right to replevin if the goods have been shipped under reservation of a security interest in the seller and satisfaction of this security interest has been made or tendered.

to recover identified goods upon the seller's insolvency (buyer remedy)

when the seller fails to deliver or the seller repudiates, the code gives the buyer a right which does not exist at common law to recover from an insolvent seller the goods in which the buyer has a special property interest and for which he has paid part or all of the price. this right exists where the seller, who is in possession or control of the goods becomes insolvent within ten days after receiving the first installment of the price. to exercise it, the buyer must tender to the seller any unpaid portion of the price. if the special property interest exists by reason of an identification made by the buyer, he may recover the goods only if they conform to the contract for sale.

to sue for specific performance (buyer remedy)

when the seller fails to deliver or the seller repudiates, they may sue for specific performance

security interest

where an instrument is given as security for an obligation, the lender is regarded as having given value to the extent of his security interest.

to cancel the contract (buyer remedy)

where the seller breaches in any way, the buyer may cancel the contract with respect to any goods involved; and if the breach by the seller concerns the whole contract, the buyer may cancel the whole contract. the buyer must give notice then he is excused from further performance

holder in due course

whereby certain good faith transferees who gave value acquired the right to be paid, free of most of the defenses to which an assignee would be subject. by reason of this doctrine, a transferee of a negotiable instrument could acquire greater rights than his transferor, whereas an assignee would acquire only the rights of his assignor.

blank indorsement

which specifies no indorsee, may consist solely of the signature of the indorser or her authorized agent. such an indorsement converts order paper into bearer paper and leaves bearer paper as bearer paper

qualified indorsement

without recourse indorsement, limits liability of the indorser