Smith and Roberson’s
Business Law 17e Richard
Mann, Barry Roberts
(Instructor's Manual All
Chapters, 100% Original
Verified, A+ Grade)
Part 2: Ch 26-50: Page 2-805
Part 1: Ch 1-25: Page 806-1540
, Part 2
PART FIVE: Negotiable Instruments 1
Part Five: Negotiable Instruments
CONTENTS
Chapter 26 Form and Content
Chapter 27 Transfer and Holder in Due Course
Chapter 28 Liability of Parties
Chapter 29 Bank Deposits, Collections, and Funds Transfers
ETHICS QUESTIONS RAISED IN THIS PART
1. Should a customer have the right to stop payment on a check? If so, under what circumstances? Who should
bear the expense of a stop payment order: Why?
2. Who should bear the loss for a forged check–the bank or the account holder? Why? What should be the
determining factor(s) in deciding who should bear the risk of loss?
3. What obligations does a bank have to inform its customers of their rights as a depositor? What obligations
does a customer have to inform himself of his rights?
4. What essential services should a bank or other financial institution provide for its customers? Should banks
be allowed to charge small customers more for financial services than they charge large customers?
5. Should a bank be allowed to "hold" deposited checks before making the funds available to their depositors?
If the bank is allowed to "hold" the checks, should the bank be allowed to profit by counting the deposited
checks on their books while refusing to allow the customer the use of the funds for check writing purposes?
6. Why would the banks prefer automatic funds transfer over the use of checks? Does a customer who uses
automatic funds transfer have the same protections as one who uses a checking account to write checks?
What happens if the bank makes a mistake? Who is responsible?
7. Futurists like to talk about a future cashless, checkless society. What ethical issues are raised by a society
that operates without cash or checks?
8. From an ethical perspective, is it fair for a holder in due course to protect himself from personal defenses
such as failure of consideration or fraud in the inducement? Why?
9. Home mortgage notes are sold on national exchanges similar to the New York Stock Exchange. Does the
lending bank have any obligations to the maker of a mortgage note in this regard? Does a large financial
institution that holds home mortgage notes have any ethical obligations to the people who made the notes?
ACTIVITIES AND RESEARCH PROBLEMS
1. Has your state adopted Revised Article 3? If so, why? If not, why not?
2. Visit a local bank to see first-hand how the check collection process works, or have someone from the bank
visit the class to tell about the process.
3. Have students bring copies of the customer agreements from their own banks and compare the provisions of
these agreements. Discuss the obligations of the bank and of the customer. Are the provisions in these
agreements in accordance with the provisions in the UCC?
4. Research the role of the Federal Reserve Banks in the check collection system? How important is the
Federal Reserve to this system?
5. Research cases in your state involving holders in due course. Do any of these cases involve “unfair” results?
Then discuss the policy reasons behind maintaining special protections for holders in due course. Has the
FTC’s holder in due course rule had any effect on frauds committed upon consumers?
© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
protected website or school-approved learning management system for classroom use.
,CHAPTER 26 FORM AND CONTENT 2
Chapter 26
FORM AND CONTENT
Negotiability [24-1] Fixed Amount [24-3e]
Development of Law of Negotiable Instruments [24-1a] Money [24-3f]
Assignment Compared with Negotiation [24-1b] No Other Undertaking or Instruction [24-3g]
Types of Negotiable Instruments [24-2] Payable on Demand or at a Definite Time [24-3h]
Drafts [24-2a] Demand
Checks [24-2b] Definite Time
Notes [24-2c] At a Definite Time and On Demand
Certificates of Deposit [24-2d] Payable to Order or to Bearer [24-3i]
Formal Requirements of Negotiable Instruments [24-3] Payable to Order
Writing [24-3a] Payable to Bearer
Signed [24-3b] Terms and Omissions and Their Effect
Promise or Order to Pay [24-3c] on Negotiability [24-3j]
Promise to Pay Dating of the Instrument
Order to Pay Incomplete Instruments
Unconditional [24-3d] Ambiguous Instruments
Reference to Other Agreements
The Particular Fund Doctrine
Cases in This Chapter
Heritage Bank v. Bruha Cooperatieve Centrale Raffeisen-Boerenleenbank
NationsBank of Virginia, N.A. v. Barnes B.A. v. Bailey
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
• Describe the concept and importance of negotiability.
• Identify and describe the types of negotiable instruments involving an order to pay.
• Identify and describe the types of negotiable instruments involving a promise to pay.
• List and explain the formal requirements that an instrument must meet to be negotiable.
• Explain the effect on negotiability of an instrument’s (1) being undated, antedated, or postdated;
(2) lack of completion; and (3) ambiguity.
TEACHING NOTES
The term "negotiable instruments" (instruments) refers to checks, drafts, checks, promissory notes and
certificates of deposit. For a number of reasons, payment by noncash means is preferable in many
transactions. Noncash payments take two forms: paper (checks and drafts) and electronic (debit cards,
credit cards, automated clearinghouse [ACH], and prepaid cards).
© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
protected website or school-approved learning management system for classroom use.
, CHAPTER 26 FORM AND CONTENT 3
By number of transactions, electronic payments now exceed three-quarters of all noncash payments while
payments by check are now less than one-quarter of all noncash payments.
By value, electronic payments constitute about 55 percent of all noncash payments while checks represent
45 percent of all noncash payments. More specifically, in the United States in 2009, the number of checks
paid was approximately 24.5 billion with a value of approximately $32 trillion. Although by number of
transactions, debit cards are now the most used noncash payment in the United States, by value, debit card
payments amount to only 2 percent of all noncash payments.
The financing or credit function of negotiable instruments is indispensable.
• promissory notes are used extensively in financing sales of goods
• corporations fund their operating expenses or current assets by issuing commercial paper in the
form of short-term promissory notes
• corporations obtain long-term financing by issuing long-term promissory notes (bonds)
• promissory notes (mortgages) are also used in financing sales of real estate
• a certificate of deposit (CD) is a promissory note issued by a bank and is used by many individuals
as a type of deposit account that typically offers a higher rate of interest than a regular savings
account
In 1990, the American Law Institute and the National Conference of Commissioners on Uniform Laws
approved a Revised Article 3 to the Uniform Commercial Code (UCC). Named “Negotiable Instruments,”
the new Article maintains the basic scope and content of prior Article 3 (Commercial Paper). In 2002, the
American Law Institute and the Uniform Law Commission completed updates to Articles 3 and 4. All
States except New York have adopted the 1990 version of Article 3 and at least ten States have adopted the
2002 version. This part of the text will discuss the 1990 version of Revised Article 3 but will also point out
the major changes from prior Article 3. The 1990 version of Revised Article 3 is presented in Appendix B.
*** Chapter Outcome ***
Discuss the concept and importance of negotiability.
26-1 NEGOTIABILITY
Negotiability is a legal concept that allows written instruments to be used as a readily accepted form of
payment in substitution for money; it defines the way in which rights and obligations are assigned in the
area of negotiable instruments.
26-1a Development of Law of Negotiable Instruments
Under common law, and as far back as the Middle Ages, the payment of money was a contract right only of
the intended payee; contract rights and obligations could not be assigned.
Eventually, however, the law permitted contractual rights to be assigned, giving the assignee the right to
collect on the debt, and making the assignee subject to all the defenses available to the obligor. This
remains the law of assignments: the assignee stands in the shoes of his assignor.
Merchants involved in the flourishing trade of the time still wanted more reform, because it was difficult to
find people willing to accept an assignment. Thus, the concept of the holder in due course developed,
allowing certain good faith transferees who give value to acquire the right to be paid, free of most of the
defenses to which an assignee is subject.
26-1b Assignment Compared with Negotiation
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in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
protected website or school-approved learning management system for classroom use.
