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Chapter 13: Negotiable Instruments - Chapter 13 - Journal Entry

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NEGOTIABLE INSTRUMENTS (page 404)

Robert Durbin, a student, borrowed funds from a bank for his education and signed a promissory note for its repayment. The bank lent the funds under a federal program designed to assist students at postsecondary institutions. Under this program, repayment ordinarily begins nine to twelve months after the student borrower fails to carry at least onehalf of the normal fulltime course load at his or her school. The federal government guarantees that the note will be fully repaid. If the student defaults on the repayment, the lender presents the current balance—principal, interest, and costs—to the government. When the government pays the balance, it becomes the lender, and the borrower owes the government directly. After Durbin defaulted on his note, the government paid the lender the balance due and took possession of the note. Durbin refused to pay the government also, claiming that the government was not the holder of the note. The government filed a suit in a federal district court against Durbin to collect the amount due.

Answer the following questions, using the information presented in the chapter.

1.Using the categories discussed in the chapter, what type of negotiable instrument was the note that Durbin signed (an order to pay or a promise to pay)?  Explain.

2.Suppose that the note did not state a specific interest rate but instead referred to a statute that established the maximum interest rate for government guaranteed school loans. Would the note fail to meet the requirements for negotiability in that situation? Why or why not?

3.How does a party who is not named by a negotiable instrument (in this situation, the government) obtain a right to enforce the instrument? 

4.Suppose that in court, Durbin argues that because the school closed down before he could finish his education, there was a failure of consideration; he did not get something of value in exchange for his promise to pay.  Assuming that the government is a holder of the promissory note, would this argument likely be successful against it?  Why or why not?