QUESTION: Batz Corporation executed the following writing: \"Batz Corporation pr

Question

QUESTION:

Batz Corporation executed the following writing: "Batz Corporation promises to pay Podunk Journal, $500 on demand. Charge to Advertising Expense. Dated this 15th day of June, 2017. /signed/ Sam Shrimp, Treasurer, Batz Corporation." Is this instrument negotiable?

Chapter 28 NOTES:

     Negotiable instruments are a sub-category of commercial paper. There are 2 main types of commercial paper – notes and drafts. They may be either negotiable or non-negotiable. Notes are 2 party instruments that serve to create money. The key term in the instrument is the term “promise”. The 2 parties are the maker (the one borrowing the money and making the promise to pay it back) and the payee (the one lending the money and receiving re-payment). Drafts are 3 party instruments that serve as a substitute for money. The key term is the word “order”. The three parties are the drawer (the one making the order to draw money from his account), the drawee (the one receiving the order) and the payee (the one who will receive the drawer’s money from the drawee). The best example of a draft is a check.   A check is a special form of draft where the drawee is always a bank and the instrument is payable on demand. One who signs an instrument just to give it strength is called an accommodation party. Usually, they are accommodation makers who are liable just as any other maker even though they did not receive the loan. At common law these were called “co-signers”. If they just sign their name, they are primarily liable and are known as a surety. If they add the term “collection guaranteed”, then they are secondarily liable and are known as a guarantor.

   The distinction between negotiable and non-negotiable instruments is important if the instruments get transferred. If an instrument is non-negotiable and it is transferred, it is just like a common law contractual assignment. Anyone receiving the instrument would take subject to all defenses that were good against the transferor. If the instrument is negotiable, it is properly negotiated and the transferee is a holder in due course, then the rule changes and the HIDC takes free of most defenses that would be good against the transferor. The next 2 chapters will focus on the last 2 steps while the rest of this chapter will focus on the definition of a negotiable instrument.

     UCC 3-103 requires an instrument be signed to be negotiable. UCC 3-401 allows that signature to be by an agent and is fairly liberal in regard to what constitutes a signature. UCC 3-104(a) lists 6 other requirements that an instrument must meet to be negotiable.

The instrument must contain an unconditional promise or order. 3-106 elaborates on this requirement. Subsection (b) allows for an instrument (usually a check) to reference a particular account from which payment is to come and still be an unconditional order.     

The instrument must refer to a “fixed amount”. This can be with or without interest. If with interest, it can be expressed as a fixed or variable rate.

The instrument must be payable in money. 3-107 provides that if foreign currency is used, the instrument can be paid in either that currency or dollars.

The instrument must be payable to “order” or “bearer”. To be bearer paper, the instrument must use that term or not list a specific payee, such as putting “cash” in the payee blank. To be order paper, the instrument must use that word. For example, “pay to the order of John Jones” or “pay to John Jones or order”. An instrument that says, “pay to Podunk Journal” is non-negotiable for lack of the term “order”.

The instrument must be payable on demand or at a definite time. It is a demand instrument if there is no time for payment specified or payment is based upon “sight”. There is a definite time if the instrument uses a fixed date or fixed period of time after a fixed date or sight. The instrument that has a fixed date to start with is still considered to have a fixed date even if it includes rights of prepayment, acceleration or extension.

The instrument must contain no other promises or orders other than the one to pay a fixed amount of money unless authorized by 3-104(a)(3). The most common of these is the promise to give, maintain, or protect collateral. Most loans are secured and covered with a security agreement in addition to the note. However, the parties may wish to address collateral in the note as well. This section allows that to take place and not affect negotiability. We will talk more about security agreements in Chapter 34.

Explanation / Answer

This instrument is not negotiable though it falls under the category of 'to be payable on demand'. Here Batz corporation is making a promise to Podunk Journal to pay a fixed sum of $500 on demand by the holder but mentioning to be charged to advertising expense is making it conditional whereas for an instrument to be negotiable it has to be unconditional.

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