Question 1

Kent Weston wrote a check for $500 payable to the order of Chester Jones. Chester indorsed the back of the check as follows: "Chester Jones." The check is now

Accepted Answer

When Chester Jones endorsed the check by simply signing his name on the back, he did not specify a new payee. This action converts the check into bearer paper, meaning whoever holds the check can cash it.

Question 2

Which statement about notes and drafts is accurate?

Accepted Answer

A note involves the maker (who promises to pay) and the payee (who will receive payment).

Question 3

Under the UCC, a holder in due course is a holder who has given value for the instrument. Which of the following holders have given value for the instrument?

Accepted Answer

Only Todd has given value for the instrument by accepting the check as payment for past services rendered. Beth's promise to paint the neighbor's house does not constitute giving value, as it is merely an exchange of promises. Steve's note and mortgage to his attorney are for a service that has not yet been performed and therefore do not count as giving value for the instrument.

Question 4

Maia wrote a check which said, "Pay to the order of Kevin Mathews $10.97." The next line of the check stated, "One thousand ninety-seven Dollars." In applying the rules of interpretation, how much should the drawee pay?

Accepted Answer

Words control over numbers in the interpretation of checks, so the amount written out in words is the amount that should be paid.

Question 5

A bank that draws a check on itself has issued

Accepted Answer

A check drawn on a bank itself is known as a cashier's check. It is a guaranteed payment form because the bank itself acts as both the drawer and the drawee.

Question 6

Tim buys a high-powered tool from Binford Tools to use on the construction of his own garage. Binford Tools provides a full warranty on the tool for the first six months. To pay for the tool, Tim signs a negotiable promissory note which contains the FTC Consumer Credit Notice. Binford properly negotiates the note to First Finance. Within three weeks, the tool stops working and Binford refuses to repair or replace it. In the meantime, First Finance demands payment from Tim. Under the Federal Trade Commission rules, this consumer credit situation means First Finance

Accepted Answer

The answer of Tim buys a high-powered tool from Binford...

Question 7

If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person who pays the instrument doesn't know of the fraud.

Accepted Answer

The answer of If an employee with responsibility for issuing...

Question 8

An instrument is negotiable if it satisfies six standards. Which of the following is a standard of negotiability?

Accepted Answer

A negotiable instrument must state a definite sum of money. This means that the amount of the instrument must be clear and unambiguous. If the amount is not definite, then the instrument cannot be negotiable. The other options are not standards of negotiability: A is incorrect because negotiable instruments must be in writing; B is incorrect because the instrument must be signed by the maker or drawer, not the payee; and C is incorrect because negotiable instruments must be unconditional.

Question 9

Sophie issues a promissory note made "payable to the order of Molly." Molly indorses the note by signing her name and gives the note to Dana. Which of the following is correct?

Accepted Answer

The answer of Sophie issues a promissory note made "payable...

Question 10

In which case would the holder in due course not receive payment?

Accepted Answer

A holder in due course would not receive payment if the promissory note was obtained through fraud or forgery, as in the case of Ricardo forging Amberly's signature. Dylan and Yoko both signed valid promissory notes and are obligated to make payment as agreed.

Question 11

Generally, Rita signs her name using an infinity symbol rather than her legal name. Rita signed an instrument using this symbol. Which statement is correct?

Accepted Answer

The essential requirement for a signature on a negotiable instrument is that the signature be made with the intention of adopting, authenticating, or executing the writing. It is clear from the language of the question that Rita intended to indicate her signature by using the infinity symbol. Therefore, the instrument can be negotiable.

Question 12

The term "issuer"

Accepted Answer

The term "issuer" is an all-purpose term that can refer to both the maker and drawer of commercial paper. It does not necessarily mean a specific type of entity, such as a bank issuing a certificate of deposit.

Question 13

Value means that the holder of an instrument

Accepted Answer

Value refers to the consideration that was given by the holder of the instrument in exchange for it. This means that the holder has already done something (such as providing goods or services or paying money) in exchange for receiving the instrument.

Question 14

A "holder" of order paper can be described as

Accepted Answer

A holder of order paper is any person in possession of the instrument if it is payable to or indorsed to him. The payee may be the original holder of the instrument, but if they transfer it to someone else through endorsement, that person becomes the holder. Choice A is therefore not always accurate. Choice B is overly broad, as not every person in possession of the instrument is a holder. And choice D is simply not accurate.

Question 15

Lucky loses in a high-stakes poker game to Fat Chance. To pay his debt, Lucky writes a check to Fat Chance, who negotiates the check to Convenient, who then tries to cash the check at Lucky's bank. Lucky has already stopped payment on the check, so the check is not honored by his bank. Convenient then tries to collect the check by suing Lucky. High-stakes poker games are illegal in this state. Which statement is correct?

Accepted Answer

Convenient cannot prevail because the underlying contract, the poker game, was illegal. Therefore, no party can collect on the debt created by an illegal contract. Additionally, even if Convenient had been a holder in due course or a buyer in the ordinary course of business, they would still be subject to the illegality defense.

Question 16

Sprock is a holder in due course on an instrument issued by Klingon. Which of the following defenses could be successfully raised by Klingon?

Accepted Answer

The answer of Sprock is a holder in due course...

Question 17

An indorser who writes "without recourse" next to her signature on a negotiable instrument is not liable for payment.

Accepted Answer

Writing "without recourse" limits the liability of the indorser and indicates that she is not guaranteeing payment if the instrument is dishonored.

Question 18

An indorsement is the signature of the

Accepted Answer

An indorsement is the signature of the payee, indicating that they are transferring the right to receive payment to another entity. The drawer is the person who writes the check, the payer is the person who is making the payment, and the issuer is the entity that issued the check or other financial instrument.

Question 19

The evening news was full of stories about how Levine sold fraudulent negotiable instruments to investors around the country. Two days later, Brighty, who did not hear the news reports, bought some of the fraudulent negotiable instruments from a swindled investor. Can Brighty claim the position of a holder in due course considering the publicity of the scam?

Accepted Answer

Brighty can claim to have purchased the instruments in good faith if he subjectively believed the instruments were valid and if objectively his purchase of the instruments was commercially reasonable. The fact that there was publicity about the scam does not automatically mean that Brighty had knowledge of it. As long as he bought the instruments with an honest belief that they were valid and did so in a reasonable manner, he can still be considered a holder in due course.

Question 20

Which is an unconditional order to pay?

Accepted Answer

An unconditional order to pay is a promise to pay a specific amount of money without any conditions or contingencies. Statement A qualifies as an unconditional order to pay since it promises to pay $5,000 for the painting with no conditions attached to the payment. Statements B and C both include conditions, which disqualifies them from being unconditional orders to pay.

Quiz 15: Negotiable Instruments