Chat with AIExam 23: Negotiable Instruments: Transfer and Liability
Equity Credit Company has in its possession an instrument dated May 1, 2017. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2018," for $5,000. In the upper left corner is an address for Greater Metro Development Corporation-10 Corporate Park Avenue, Chicago, Illinois-and in the lower right corner is the signature of "Hilltop Investments, Inc., By Ida, President." In the lower left corner is stamped "ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2017." On the back is the signature of "First Choice Moving & Storage Company by Kathleen, President." Who, if anyone, is primarily liable on this instrument on May 1? On May 5? Who, if anyone, is secondarily liable on this instrument?
(78) 
VerifiedNo one is primarily liable on this instrument on May 1. On May 5, Greater Metro is primarily liable. First Choice and Hilltop Investments are both secondarily liable.
This instrument is a draft, and it is negotiable. It meets all of the requirements for negotiability: it is in writing, it is signed by the drawer (Hilltop Investments), it is an unconditional order to pay, it states a fixed amount of money ($5,000), it is payable at a definite time (June 1, 2018), and it is payable to order (of First Choice). A draft is an unconditional written order that involves three parties. The party creating the draft (the drawer) orders another party (the drawee) to pay money to a third party (the payee).
Here, Hilltop Investments, as noted, is the drawer, Greater Metro is the drawee, and First Choice is the payee. Primary liability arises on a negotiable instrument when a party is absolutely required to pay the instrument. On a draft, no party is primarily liable until the drawee accepts it. The drawee's acceptance, or promise to pay the draft when it is presented for payment, places the drawee in the position of primary liability.
In this problem, Greater Metro, the drawee, accepted this draft on May 5 and became primarily liable. Drawers and indorsers are secondarily liable, which means that they are required to pay the instrument if the party with primary liability refuses to do so. In the case of a draft, Greater Metro's refusal to accept the instrument would have had the same effect. Here, First Choice, who indorsed the back of the instrument, and Hilltop Investments have secondary liability.
Universal defenses are valid against all holders, including holders in due course.
(86) VerifiedTrue
In terms of requirements for holder-in-due-course (HDC) status, first an HDC must be a holder of a negotiable instrument.
(62) VerifiedTrue
A drawer's secondary liability does not arise until the drawee fails to pay or to accept the instrument.
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