Business Law: Strategic Considerations for Managers and Owners

Business Law: Strategic Considerations for Managers and Owners

22.10. Holly Hill Acres, Ltd. v. Charter Bank of Gainesville, 314 So.2d 209, Web 1975 Fla. App. Lexis 13715 (Court of Appeal of Florida).

Answer

Negotiability, following to Mann and Roberts (2012: 497) "is a legal concept that makes written instruments more freely transferable and therefore a readily accepted form of payment in substitution for money". Two of the four types of negotiable instruments (drafts and checks) contain orders or directions to pay money; the other two (notes, and certificates of deposit) involve promises to pay money.

In this case, the instrument used is a note, which is an unconditional written promise by a party, the maker, to pay money to another, the payee. They may be in the form of either time or demand notes, and may be for a single payment or for installment payments. For the note to be negotiable, the requirements to be met are strict, including the fact that if the requirements are not presented on the face of the note, it will not be negotiable. In fact, the reference to the mortgage itself does not make the note non negotiable, but the fact that "The terms of said mortgage are by reference made a part hereof" means that the note is note 'self-explanatory', or in other words, the terms of payment cannot be determined by looking solely at the face of the note. Being that the reason to consider it non negotiable.

23.8. General Investment Corporation v. Angelini, 278 A.2d 193, Web 1971 N.J. Lexis 263 (Supreme Court of New Jersey).

Answer

One of the most extended uses of promissory note meeting the requirements to be a negotiable instrument is as a mean of payment to third parties, in which case, the payment will be made by the maker to a third party, who may not be the same person as the original payee. The third party, then, is named as a Holder in Due Course (HDC), and has the same rights as an assignee of an ordinary nonnegotiable contract, so free of many of the defenses that can be asserted against the original payee. Nevertheless, for that to be the case, the HDC must take the instrument for value, in good faith, without notice of defects, and bearing no apparent evidence of forgery, alterations, or irregularity. Otherwise, under the Red Light Doctrine, the holder of the instrument will not be considered an HDC if he is aware that the instrument contains an unauthorized signature, it has been altered or he is aware of an adverse claim or defense.

In this case, the plaintiff (General Investment Corporation) "was aware that Lustro (1) was nearly insolvent at the time of the assignment and (2) had engaged in questionable business practices in the past". Even so, General took the promissory note which "would not mature until 60 days after a certificate of completion was signed", something that never happened because Lustro, the payee, did not complete the installation agreed. Now, although the instrument was transferred by negotiation, which it would allow General to receive greater rights than the transferor because they are not subject to some defenses that might be raised against the transferor, after checking the requirements for General to be considered an HDC, arises the question about if the instrument was taken in good faith. In my opinion,