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 Pauls 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?