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Business Law

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State whether the following provisions in a note impair or preclude negotiability, the instrument in each instance being otherwise in proper form. Answer each statement with either “Negotiable” or Nonnegotiable” and explain why.

A. A note signed by Henry Brown in the trade name of the Quality Store.
Nonnegotiable, no fixed amount.
B. A note for $850, payable to the order of TV Products Company, “If, but only if, the color television set for which this note is given proves entirely satisfactory to me.”
Nonnegotiable, has a condition on it.
C. A note executed by Adams, Burton, and Cady Company, a partnership, for $1,000, payable to the order of Davis, payable only out of the assets of the partnership.
Nonnegotiable, must be for cash (unless by asset they refer to cash, then negotiable)
D. A note promising to pay $500 to the order of Leigh and to deliver ten tons of coal to Leigh.
Nonnegotiable, contains additional undertaking.
E. A note for $10,000 executed by Eaton payable to the order of the First National Bank of Emanon, in which Eaton promises to give additional collateral if the bank deems itself insecure and demands additional security.

F. A note reading, “I promise to pay to the order of Richard Roe $2,000 on January 31, 2013, but it is agreed that if the crop of Blackacre falls below ten bushels per acre for the 2012 season, this note shall be extended indefinitely.”

Nonnegotiable, has conditions.
G. A note payable to the order of Ray Rogers fifty years from date but providing that payment shall be accelerated by the death of Silas Hughes to a point of time four months after his death.
H. A note for $4,000 calling for payments of installments of $250 each and stating, “In the event any installment hereof is not paid when due, this note shall immediately become due at the holder’s option.”

Nonnegotiable, has conditions.
I. An instrument dated September 17, 2012, in the handwriting of John Henry Brown, which reads in full: “Sixty days after date, I, John Henry Brown, promise to pay to the order of William Jones $500.”

J. A note reciting, “I promise to pay Ray Reed $100 on December 24, 2011.”
Nonnegotiable, does not have words “to the order of”.

9. On December 2, 2012, Miles executed and delivered to Proctor a negotiable promissory note for $1,000, payable to Proctor or order, due March 2, 2013, with interest at 14 percent from maturity, in partial payment of a printing press. On January 3, 2013, Proctor, in need of ready cash, indorsed and sold the note to Hughes for $800. Hughes paid $600 in cash to Proctor on January 3 and agreed to pay the balance of $200 one week later, namely, on January 10. On January 6, Hughes learned that Miles claimed a breach of warranty by Proctor and, for this reason, intended to refuse to pay the note when it matured. On January 10, Hughes paid Proctor $200, in conformity with their agreement of January 3. Following Miles’s refusal to pay the note on March 2, 2013, Hughes sues Miles for $1,000. Is Hughes a holder in due course? If so, for what amount?

Hughes is a holder in due course, but only up until the point in which he learned of the breach of warranty, and therefore is entitled to $600, the amount they had put into the note at the time.

10. Thornton fraudulently represented to Daye that he would obtain for her a new car to be used in Daye’s business for $17,800 from Pennek Motor Company. Daye thereupon executed her personal check for $17,800 payable to the order of Pennek Motor Company and delivered the check to Thornton, who immediately delivered it to the motor company in payment of his own prior indebtedness. The motor company had no knowledge of the representations made by Thornton to Daye. Pennek Motor Company now brings an action on the check that was not paid against Daye, who defends on the ground of failure of consideration. Is Pennek subject to this defense? Explain.

Pennek is a holder in due course and is not subject to the defense because of it being a personal defense. Daye could have prevented this by making the check for Thornton nonnegotiable, preventing Thornton from turning the check over to Pennek.

11. Adams, who reads with difficulty, arranged to borrow $2,000 from Bell. Bell prepared a note, which Adams read laboriously. As Adams was about to sign it, Bell diverted Adams’s attention and substituted the following paper, which was identical to the note Adams had read except that the amounts were different: On June 1, 2012, I promise to pay Ben Bell or order Twelve Thousand Dollars with interest from date at 16 percent. This note is secured by certificate No. 13 for 100 shares of stock of Brookside Mills, Inc. Adams did not detect the substitution, signed as maker, handed the note and stock certificate to Bell, and received from Bell $2,000. Bell indorsed and sold the paper to Fore, a holder in due course, who paid him $11,000. Fore presented the note at maturity to Adams, who refused to pay. What are Fore’s rights, if any, against Adams?

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