Exam 16: Negotiability,transferability,and Liability

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No one is primarily liable on this instrument on May 1.On May 5,Beta Corporation is primarily liable.Alpha Company and Delta,Inc. ,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 (Delta),it is an unconditional order to pay,it states a fixed amount of money ($5,000),it is payable at a definite time (June 1,2002),and it is payable to order (of Alpha).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,Delta,as noted,is the drawer,Beta is the drawee,and Alpha 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,Beta,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,Beta's refusal to accept the instrument would have had the same effect.Here,Alpha,who indorsed the back of the instrument,and Delta have secondary liability.