Question 1

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

Accepted Answer

The standard of negotiability that is listed among the choices is that the instrument must state a definite sum of money. The other options are incorrect as negotiability requires a written document, cannot be conditional, and does not require a signature by the payee.

Question 2

A possessor of non-negotiable commercial paper has the same rights as the person who made the original contract.

Accepted Answer

Non-negotiable commercial paper cannot be transferred to another person and the possessor of such paper has the same rights as the original contract maker. Therefore, the statement is true.

Question 3

The term "issuer"

Accepted Answer

The term "issuer" is an all-purpose term that refers to both the maker and drawer of a commercial paper, as they are both responsible for issuing the instrument. The issuer, therefore, is the entity that creates and signs the commercial paper, promising to pay the amount indicated on the paper to the bearer or holder.

Question 4

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

Accepted Answer

In case B, the promissory note was obtained through forgery, which makes the transaction void. Therefore, the holder in due course (Divine) would not receive payment. In case A and C, the promissory notes were obtained legally, so the holder in due course would receive payment if the borrower (Dylan or Yoko) failed to pay.

Question 5

To be negotiated, bearer paper must simply be delivered to the transferee.

Accepted Answer

Bearer paper is negotiated by delivery alone, without the need for an endorsement, because it is payable to the holder or bearer of the document.

Question 6

An indorsement is the signature of the

Accepted Answer

An endorsement is the signature of the payee, indicating the transfer of the rights to the check to another party. The drawer is the person who writes the check, the payer is the person who will be paying the check, and the issuer is usually the bank that issued the check.

Question 7

Margo is in possession of a check issued to her by Felix. The check states, "Pay to the order of Margo." If Margo wishes to transfer the check to Pete to pay a debt she owes him, all she needs to do is strike out her name on the front of the check, write in Felix's name, and give it to him.

Accepted Answer

Margo cannot transfer the check to Pete by striking out her name and writing in Felix's name. This would be considered an unauthorized endorsement and could result in legal issues for Margo and Pete. Instead, Margo should write "Pay to the order of Pete" on the back of the check and sign it. This is known as a third-party check and is valid as long as Felix's bank accepts it.

Question 8

A & D, Inc. wrote a negotiable note payable to Vicy, Inc. for the purchase of some satellite receivers. A & D left the amount of the note blank because it was uncertain as to amount of the applicable tax. Vicy completed the note for $3,000 more than A & D actually owed for the receivers it purchased. The note was negotiated to a holder in due course. A & D will not have to honor the note as this constituted fraud in the execution.

Accepted Answer

This situation constitutes fraud in the inducement, not fraud in the execution. Fraud in the execution involves misleading someone about the nature of the document being signed (e.g., tricking someone into believing they are signing a different type of document), whereas fraud in the inducement involves misleading someone about the terms or conditions of a contract. In this case, A & D knew they were signing a negotiable note but were misled about the amount, which is a matter of the terms, not the nature of the document. A holder in due course holds the note free from such defenses, meaning A & D would likely have to honor the note.

Question 9

Which is an unconditional order to pay?

Accepted Answer

An unconditional order to pay is a promise to pay a certain amount of money without any conditions attached. Choice A fits this definition as the speaker is promising to pay $5,000 for the painting without any additional conditions. Choices B and C both have conditions attached to the promise to pay, making them conditional orders to pay. Therefore, the correct answer is A.

Question 10

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

C) One thousand, ninety-seven dollars or $1,097.00. Words control over numbers.

Question 11

Tim wrote a negotiable note. Subsequently, Tim's debts were discharged in bankruptcy. If a holder in due course presents the note for payment, Tim does not have to pay.

Accepted Answer

The answer of Tim wrote a negotiable note. Subsequently, Tim's...

Question 12

Charlene Brown has possession of a check made out to the order of Charlene Brown (herself)which she received in payment for writing a manuscript for her publisher. Charlene is a holder in due course and the publisher cannot claim any "real" defenses to payment. Charlene has an unconditional right to be paid for the check.

Accepted Answer

Since Charlene is a holder in due course, she has all the rights and privileges of a valid holder of the check and the publisher cannot claim any real defenses to payment. Thus, Charlene has an unconditional right to be paid for the check.

Question 13

There are three parties on a promissory note: the maker, the drawee, and the payee.

Accepted Answer

A promissory note typically involves two parties: the maker (who promises to pay) and the payee (to whom the payment is to be made). The term "drawee" is used in the context of a draft or check, not a promissory note.

Question 14

Which statement about notes and drafts is accurate?

Accepted Answer

A note is a written promise to pay a certain amount of money to a designated person or organization, with two parties involved: the maker (who promises to pay) and the payee (who receives the payment). A draft, on the other hand, is a written order to pay a certain amount of money, with two parties involved: the drawer (who orders the payment) and the drawee (who is ordered to make the payment). Therefore, option C is the accurate statement.

Question 15

Value means that the holder of an instrument

Accepted Answer

Value refers to some form of consideration given in exchange for the instrument. Option A correctly states that the holder of the instrument has already done something in exchange for it. The other options are incorrect as they do not accurately describe the concept of value in relation to financial instruments.

Question 16

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, the newspaper carrier, has given value for the instrument by providing delivery services in exchange for the two-party check. Beth and Steve have not yet performed any services or provided any value in exchange for their promissory notes.

Question 17

With non-negotiable commercial paper, a transferee's rights are conditional.

Accepted Answer

With non-negotiable commercial paper, the transferee's rights are conditional and subject to the terms and conditions of the underlying contract or agreement. The transfer of non-negotiable commercial paper does not provide the transferee with the same level of protection and rights as negotiable instruments.

Question 18

There are two types of commercial paper: express and implied.

Accepted Answer

There are two types of commercial paper: promissory notes and bills of exchange.

Question 19

Tyron purchased a $2,900 promissory note from Jared for the discounted amount of $2,500. Tyron paid value, in good faith and without notice of any outstanding claims against this promissory note that read, "Pay to the order of Jared $2,900 on July 1, 2009, for the purchase of a 2001 Ford Taurus provided no major problems with the car arise prior to said payment date." Tyron is a holder in due course of a negotiable note.

Accepted Answer

The note is not negotiable because it contains an additional condition ("provided no major problems with the car arise prior to said payment date") which disqualifies it from being a negotiable instrument as per the requirements for negotiability, which demand an unconditional promise to pay.

Question 20

A "holder" of order paper can be described as

Accepted Answer

A holder of order paper is defined under the Uniform Commercial Code (UCC) as any person who is in possession of the instrument and it is either payable to them or has been endorsed to them. Therefore, choice C accurately reflects this definition. Choice A is incorrect because the payee may no longer be in possession of the instrument. Choice B is partially correct but does not specify the requirement of the instrument being payable to or endorsed to the possessor. Choice D is incorrect as it does not accurately reflect the definition of a holder.

Quiz 15: Negotiable Instruments