Requirements for Negotiation. Thomas Fink, Donald Schroer, David Swanson, and Marie Swanson—doing business as F.S.S.S., a partnership—signed two promissory notes to borrow money from the Alaska Mutual Bank (AMB), providing the same real estate as

Question

collateral for both loans. Patricia Fink and LaVonne Schroer signed guaranties of repayment for the second note. AMB failed. The first note ended up in the hands of the First Interstate Bank of Oregon. The second fell into the possession of the Federal Deposit Insurance Corp (FDIC). When Fink, Schroer, and the Swansons were unable to repay the first note, the Oregon bank agreed to accept a lesser amount if the FDIC would approve. The FDIC refused and filed a suit in a federal district court against the Finks, the Schroers, and the Swansons to collect the money due on the note that the FDIC now owned. On the FDIC's motion for summary judgment, one of the issues was whether Patricia and LaVonne's guaranties were negotiable instruments. If so, Patricia and LaVonne could have asserted a certain defense under which they might have been able to avoid liability. Did the guaranties satisfy the requirements for negotiable instruments? Explain.

Answer 1

Requirements for negotiation
No. The court granted the FDIC's motion for summary judgment. The court pointed out that "[t]o constitute a negotiable instrument, a document must * * * contain an unconditional promise to pay." The court acknowledged that "Patricia Fink and LaVonne Schroer executed separate documents apart from the promissory notes that they guaranteed." The court concluded, however, that neither guaranty contained an "unconditional promise" to pay a fixed amount. Thus, according to the court, "[n]either guaranty is a negotiable instrument."