Clarkson-11e: Case Problem with Sample Answer

Chapter 25: Transferability and Holder in Due Course

25–7. Case Problem with Sample Answer

In September 2001, Cory Babcock and Honest Air Conditioning & Heating, Inc., bought a new 2001 Chevrolet Corvette from Cox Chevrolet in Sarasota, Florida. Their retail installment sales contract (RISC) required monthly payments until $52,516.20 was paid. The RISC imposed many other conditions on the buyers and seller with respect to the payment for, and handling of, the Corvette. Cox assigned the RISC to General Motors Acceptance Corp. (GMAC). In August 2002, the buyers sold the car to Florida Auto Brokers, which agreed to pay the balance due on the RISC. The check to GMAC for this amount was dishonored for insufficient funds, however, after the vehicle’s title had been forwarded. GMAC filed a suit in a Florida state court against Honest Air and Babcock, seeking $35,815.26 as damages for breach of contract. The defendants argued that the RISC was a negotiable instrument. A ruling in their favor on this point would reduce any damages due GMAC to less than the Corvette’s current value. What are the requirements for an instrument to be negotiable? Does the RISC qualify? Explain. [General Motors Acceptance Corp. v. Honest Air Conditioning & Heating, Inc., 933 So.2d 34 (Fla.App. 2 Dist. 2006)]

Sample Answer:

Under the UCC, to be negotiable an instrument must contain, among other things, an unconditional promise or order to pay. Its payment cannot be conditioned on the occurrence or nonoccurrence of some other event or agreement. In this problem, the RISC does not qualify as a negotiable instrument. As pointed out in the facts, the RISC imposed a number of conditions on the buyers and the seller with respect to the payment for, and handling of, the Corvette. Thus, a court should determine that GMAC is entitled to a ruling in its favor on this point. (In the case on which this problem is based, that is what the court ultimately held. The court issued a judgment in the defendants’ favor on other grounds, however, principally GMAC’s “improvident” release of the title to the car before Florida Auto Brokers’s check was honored. The court also noted that the current value of the Corvette exceeded the amount that remained unpaid under the RISC.)