1. Your CPA firm was engaged to audit ABC Corporation. During the audit you exam
ID: 2423487 • Letter: 1
Question
1. Your CPA firm was engaged to audit ABC Corporation. During the audit you examined the following instrument:
Smith, Inc. February 1, 2010
Mesa, Arizona
Six years after date Smith, Inc. will pay to: Harry Paul the sum of $1,000,000.00,
One million dollars & no/100, plus the prime rate of interest per year.
Smith, Inc.
signature of
s/James Smith
PAYABLE AT CREDIT BANK
Main Street
Mesa, Arizona
Re: Building Purchase from Harry Paul
Secured by Mortgage dated February 1, 2010
ABC purchased the instrument from Paul for $700,000 on February 15, 2013. ABC received the instrument with Paul’s signature on the back. On February 8, 2016 ABC took the instrument to Choice Credit which refused to pay the $1,000,000 plus interest. This was done in accordance with directions from James Smith who claims that the building purchased by Smith, Inc. from Paul had a defective foundation and was slowly sinking into the ground.
Required: Discuss the following, setting forth reasons for your conclusions:
(20) 1. What type of instrument is the above? Identify all of the parties to the instrument?
Is the instrument negotiable commercial paper? Discuss and evaluate
ALL elements of negotiability.
(10) 2. Assuming the instrument is negotiable, what rights does ABC have
against each of the other parties? Discuss your answer fully, including what
ABC should do to protect its interests.
(5) 3. Assume the instrument is not negotiable. What is the legal effect of the
transfer by Paul to ABC? What rights would ABC then have?
(5) 4. State the reasons for and against the existence of the “holder in due
course” doctrine. What limitations have been placed on this doctrine?
Smith, Inc. February 1, 2010
Mesa, Arizona
Six years after date Smith, Inc. will pay to: Harry Paul the sum of $1,000,000.00,
One million dollars & no/100, plus the prime rate of interest per year.
Smith, Inc.
signature of
s/James Smith
PAYABLE AT CREDIT BANK
Main Street
Mesa, Arizona
Re: Building Purchase from Harry Paul
Secured by Mortgage dated February 1, 2010
Explanation / Answer
1. The above instrument is negotiable instrument.
Parties, Smith, Paul and ABC Inc.
2Rights, Drawee can hold and encash the document,
He can endorse this to others, Discount and encash from Banks
3. If it is not a negotiable instrument ABC can file a suite against Paul for default only if the above is a valid written agreement.
4The Holder in Due Course (HDC) doctrine is a rule in commercial law that protects a purchaser of debt, where the purchaser isassigned the right to receive the debt payments. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.
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