As commerce and trade developed, people moved beyond exclusive reliance on barter to the use of money and then to the use of substitutes for money. The term commercial paper encompasses substitutes in common use today such as checks, promissory notes, and certificates of deposit.

STEP ONE:

ASSIGNED READING:Read Chapters 38, 39 and 40 of Law for Business (Barnes, 2012).

STEP TWO:

BACKGROUND:

The promissory note is the simplest form of commercial paper; it is simply a promise to pay money. A promissory note is a two-party instrument in which one person (known as the maker) makes an unconditional promise in writing to pay another person (the payee), a person specified by that person, or the bearer of the instrument, a fixed amount of money, with or without interest, either on demand or at a specified, future time.

HYPOTHETICAL:

Frank agrees to build a garage for Sarah for $25,000.Sarah offers to sign either a contract showing her obligation to pay Frank $25,000 or a negotiable promissory note for $25,000 payable to the order of Frank.

QUESTION:

Would you advise Frank to ask for the contract or the promissory note? Explain.

STEP THREE:

BACKGROUND:

Liability on negotiable instruments flows from signatures on the instruments as well as actions taken concerning them. It can arise from the fact that a person has signed a negotiable instrument or has authorized someone else to sign it. The liability depends on the capacity in which the person signs the instrument. Liability also arises from (1) transfer or presentment of an instrument, (2) negligence relating to the issuance, alteration, or endorsement of the instrument, (3) improper payment, or (4) conversion.

HYPOTHETICAL:

Terance Fitzgerald drew a check for $4,000 payable to New Look Auto Trim and Upholstery and delivered it to Yuvonne Goss and Benii Arrazza, the owners of New Look. Goss and Arrazza each endorsed the check in blank and deposited it in Goss's personal account at the Cincinnati Central Credit Union. When the credit union presented the check to Fitzgerald's bank, the check was dishonored for insufficient funds. The credit union then demanded that Goss and Arrazza honor the check.

QUESTION:

Are Goss and Arrazza obligated to make the check good to the credit union?