Question 1

A note is a promise, by the maker of the note, to pay a payee.

Accepted Answer

A note, often referred to as a promissory note, is a financial instrument in which one party (the maker) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.

Question 2

A contract that is personal or nonassignable cannot be classified as commercial paper.

Accepted Answer

Commercial paper refers to unsecured, short-term debt instruments issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities. It is meant to be easily transferable. A contract that is personal or nonassignable does not meet these criteria, as its terms are specific to the parties involved and cannot be transferred to others.

Question 3

An instrument that merely mentions another document is not considered negotiable.

Accepted Answer

False

Question 4

A person who comes into possession of a bearer instrument by theft cannot claim the payment due on it.

Accepted Answer

Bearer instruments are payable to the holder or possessor of the document, regardless of how they came into possession of it. The issuer cannot refuse payment based on how the holder acquired the instrument.

Question 5

Which of the following was the ruling of the court in the Case Opener regarding the gambler who wrote bad checks to a casino to purchase markers and then tried to avoid payment on the basis of an oral agreement by which a casino host told the gambler that he already had sufficient remaining casino credit to receive the markers?
A) The potential oral agreement as to the markers was irrelevant to the negotiability of the checks.
B) The oral agreement was relevant to the negotiability of the checks, but it did not affect the gambler's liability on the checks.
C) The oral agreement was relevant to the negotiability of the checks and acted to excuse the gambler from liability on the checks.
D) The oral agreement established that the checks were not negotiable instruments.
E) The oral agreement established breach of contract; therefore, while another type of instrument would have been negotiable, the checks involved were not.

Accepted Answer

The potential oral agreement regarding the markers did not affect the negotiability of the checks. In such cases, the law typically views the checks as independent obligations to pay, separate from any other agreements or understandings between the parties.

Question 6

An oral negotiable instrument is permitted under the UCC with special conditions.

Accepted Answer

Negotiable instruments under the Uniform Commercial Code (UCC) must be in writing to be considered valid; oral agreements do not meet the criteria for negotiability.

Question 7

Article 3 of the UCC recognizes three types of negotiable instruments: notes, drafts, and checks.

Accepted Answer

Article 3 of the UCC recognizes two primary types of negotiable instruments: notes and drafts, with checks being a subtype of drafts.

Question 8

If a third party never becomes involved in the transaction, it does not matter whether an instrument may be considered negotiable.

Accepted Answer

If a third party never becomes involved in the transaction, then the negotiability of the instrument is irrelevant.

Question 9

A note is an order by a drawer to a drawee to pay a payee.

Accepted Answer

A note, specifically a promissory note, is a financial instrument in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. It does not involve a drawer and drawee, which are terms associated with a different financial instrument, the draft or bill of exchange.

Question 10

Which statement is true regarding negotiable instruments in the European Union?
A) If a transaction is defined as a negotiable instrument within a certain country, it must conform to certain general characteristics outlined by the European Economic Council.
B) The European Economic Council adopted the UCC as the law in regard to negotiable instruments in all member countries of the European Union.
C) The European Economic Council adopted the UCC as the law in regard to negotiable instruments in all member countries of the European Union unless a member country has specifically opted out.
D) The European Economic Council suggests the UCC as the law in regard to negotiable instruments in all member countries of the European Union; but in order for it to be applicable, a member country must specifically affirm adoption of the UCC.
E) Negotiable instruments are not recognized.

Accepted Answer

The European Union has its own set of regulations and directives that member countries must follow, which include general characteristics for negotiable instruments. The Uniform Commercial Code (UCC) is a comprehensive set of laws governing all commercial transactions in the United States, not the European Union.

Question 11

A currency or cash substitute has existed for centuries in Anglo-American law.

Accepted Answer

Various forms of currency or cash substitutes, such as promissory notes, have been recognized and used in Anglo-American law for centuries, facilitating trade and commerce.

Question 12

If an instrument fails to qualify as a negotiable instrument, it means that it could still be an enforceable contract, but the special rules regarding negotiable instruments do not apply.

Accepted Answer

Negotiable instruments are governed by specific rules that facilitate their transfer and the rights of the parties involved. If an instrument does not meet the criteria to be considered a negotiable instrument, it can still be a valid and enforceable contract under general contract law, but it won't benefit from the special provisions and protections that apply to negotiable instruments.

Question 13

In order to satisfy the requirement of negotiability that payment be at a time certain or on demand, acceleration of payment is not allowable.

Accepted Answer

Acceleration clauses in negotiable instruments allow the payee or holder to demand full payment before the original due date under specific conditions, such as default, without violating the requirement of payment being at a time certain or on demand.

Question 14

All negotiable documents should be in electronic format.

Accepted Answer

Negotiable documents can be in either physical (paper) or electronic format, depending on the legal requirements and the preferences of the parties involved.

Question 15

The UCC requirement that the signature of the creator appear in order for an instrument to be negotiable can be satisfied by an automated signature.

Accepted Answer

Under the Uniform Commercial Code (UCC), an automated signature can satisfy the requirement for a signature as long as it is intended by the party to authenticate the document. The UCC is flexible regarding the form of signatures, allowing electronic or automated signatures to be recognized as valid.

Question 16

Which statement is true regarding negotiation of an instrument?
A) Negotiation of both an order instrument and bearer instrument is by delivery alone.
B) Negotiation of both an order instrument and bearer instrument require endorsement plus delivery.
C) Negotiation of an order instrument is by endorsement plus delivery, while negotiation of a bearer instrument is by delivery alone.
D) Negotiation of a bearer instrument is by endorsement plus delivery, while negotiation of an order instrument is by delivery alone.
E) Negotiation of both an order instrument and a bearer instrument requires both delivery and an additional three days to allow for bank clearance.

Accepted Answer

Negotiation of an order instrument requires endorsement (the signature of the holder) plus delivery to the new holder, while a bearer instrument can be negotiated simply by delivery to the new holder without the need for an endorsement.

Question 17

For an instrument to be negotiable, the instrument must indicate it was created with the purpose of being transferred.

Accepted Answer

Negotiable instruments are designed to be transferable, and their form and language typically indicate the intention for them to be passed from one party to another.

Question 18

A negotiable instrument must be a conditional order to pay.

Accepted Answer

A negotiable instrument is an unconditional order or promise to pay a certain amount of money.

Question 19

Salma arranged with ABC Bank for a revolving line of credit up to $50,000 for her antique shop. The bank required that she provide a promissory note promising payment of $50,000 to the bank or as much as may be outstanding in amounts owed to the bank payable on demand. The note allowed for partial early prepayment and for interest after default. A few months later, although Salma was not in default, the bank canceled the line of credit and demanded payment of all amounts due based on the promissory note. If the reasoning of the case in the text Reger Development, LLC v. National City Bank is followed, which of the following is the most likely result of the dispute between Salma and ABC Bank?
A) Salma will prevail because she was current on payments, and the bank did not exercise good faith in calling the note.
B) Salma will prevail because the reference to prepayment destroyed the note's negotiability.
C) Salma will prevail because the reference to interest after default destroyed the note's negotiability.
D) The bank will prevail because, although the note is not a negotiable instrument, the bank has an enforceable contract.
E) The bank will win because it had the right to call for payment of the demand instrument.

Accepted Answer

The bank will win because it had the right to call for payment of the demand instrument, as per the principles outlined in Reger Development, LLC v. National City Bank, which supports the enforceability of demand provisions in loan agreements.

Question 20

Which of the following is true regarding payment on a time instrument?
A) It is payable in the same manner as a demand instrument.
B) It may be made payable at a past or future date so long as a method for computing past-due interest is set forth in the document.
C) It must be payable at a future time, and the date must be determinable through a separate instrument prepared in conjunction with the time instrument.
D) It may be made payable at a past or future date so long as the method of computing interest is set forth either in the time instrument itself or in a separate document prepared in conjunction with the time instrument.
E) It must be payable at a specific future time which is easily determinable from the document itself.

Accepted Answer

A time instrument must be payable at a specific future time that is easily determinable from the document itself, ensuring clarity and enforceability.

Quiz 26: Negotiable Instruments: Negotiability and Transferability