Deck 16: The Nature of Negotiable Instruments

Question 1

A negotiable instrument is a written document signed by the maker that contains a conditional promise or order to pay a fixed amount of money on demand or at a definite time to the bearer or to order.

Answer 1

False
Explanation: A negotiable instrument is a written document signed by the maker that contains an unconditional promise or order to pay a fixed amount of money on demand or at a definite time to the bearer or to order.

Question 2

A sight draft is payable as soon as it is presented to the drawee for payment.

Answer 2

True
Explanation: A sight draft is payable as soon as it is presented to the drawee for payment.

Question 3

Jake dies while he is the holder of an instrument. Upon his death, title to the instrument automatically vests in Jake's heirs.

Answer 3

False
Explanation: An assignment of negotiable instruments occurs by operation of law when the holder of an instrument dies or becomes bankrupt. In such cases, title to the instrument vests in the personal representative of the estate or the trustee in bankruptcy.

Question 4

When an instrument is indorsed in blank, it becomes payable to the bearer and may be transferred by delivery alone.

Question 5

When an unaccepted draft is presented for payment, the drawee is required to pay it.

Question 6

Big Bank pays a check made by Franklin, payable to Ellen to a forger who signed Ellen's name. Big Bank is not liable to Franklin.

Question 7

An indorser who receives consideration for an instrument is required to provide a warranty that she has no knowledge of the bankruptcy of the maker, acceptor, or drawer.

Question 8

The most common type of draft in use today is the check.

Question 9

The first set of numbers on a printed check is the bank's Federal Reserve number.

Question 10

Ownership of a check is transferred by indorsement by its payee.

Question 11

If a bank refuses to certify a check, the bank has dishonored it.

Question 12

A certificate of deposit is a written promise by the maker to pay money to the order of another party, the payee.

Question 13

To be negotiable, an instrument must be in writing.

Question 14

Sam gives a check to Tina who indorses it over to Amanda. Amanda is called the indorsee.

Question 15

A cashier's check is drawn by a bank upon itself.

Question 16

Kentle Bank decides to not honor a United Manufacturing check issued to Joe, an employee, which he cashed at the bank. Kentle Bank must notify Joe by midnight of the next banking day.

Question 17

A certificate of authority must be filed with a governmental agency in order for an instrument to be signed by an agent.

Question 18

Notes are promises to pay money, while drafts are orders to pay money.

Question 19

Elke has a contract with Acme Gravel Co. If she transfers her rights under the contract, this is called an assignment.

Question 20

The party to a note who promises to pay money is called the payee.

Question 21

If an instrument states, "Pay to the order of Karen Fuji or her assigns," it is payable to:

A) order.
B) cash.
C) bearer.
D) holder.

Question 22

A ____________ check is a check drawn by one bank on another bank in which it has funds on deposit in favor of a third person, the payee.

A) traveler's
B) teller's
C) cashier's
D) certified

Question 23

Through what kind of written instrument would Tim direct Howard to pay $600 to the order of Celeste?

A) A certificate of deposit
B) A note
C) A draft
D) A dishonored draft

Question 24

Historically, when merchants bought goods, instead of paying for them with gold or silver, they simply filled in a piece of paper called a ____________ which ordered the goldsmith or silversmith to give a certain amount of the precious metal to the person who sold the goods.

A) demand note
B) promissory note
C) bill of exchange
D) certificate of deposit

Question 25

To accept a draft, the drawee:

A) need only sign the draft across the face of the instrument.
B) needs to write "accepted" on a separate piece of paper.
C) need only sign on a separate piece of paper affixed to the draft.
D) needs to write "accepted" behind the instrument and sign the bank's record.

Question 26

If Daphne gave value for and cashes Lisa's check, what legal rights, if any, does Daphne have?

A) Daphne may insist upon an unqualified indorsement.
B) Daphne may not insist upon any particular type of indorsement.
C) Daphne may insist upon both an unqualified indorsement and a restrictive indorsement.
D) Daphne may insist upon an unqualified, restrictive and special indorsement.

Question 27

A check for which the issuing financial institution is both the drawer and the drawee is called a ____________.

A) bank draft
B) teller's check
C) certified check
D) traveler's check

Question 28

An instrument containing an acknowledgment that a bank has received a sum of money and a promise by the bank to repay the sum of money is called a(n):

A) installment note.
B) certificate of deposit.
C) promissory note.
D) certificate of demand.

Question 29

The words "without recourse" on an indorsement means the indorser is:

A) liable personally, but not other parties.
B) not liable for any problems associated with the instrument.
C) not liable if the instrument is dishonored.
D) liable for only up to fifty per cent of the loss.

Question 30

Which of the following is true of a foreign draft?

A) It is drawn in one state and payable in another state.
B) It is drawn in one nation and payable in another nation.
C) It is drawn on one bank and payable to a governmental body.
D) It is drawn in one city and payable in another city in the United States.

Question 31

If a bank pays a forged check, it is liable for ____________ the payee's funds.

A) converting
B) detaining
C) withholding
D) diverting

Question 32

If a drawee refuses to pay the instrument, it is said to be:

A) delayed.
B) dishonored.
C) detained.
D) defaulted.

Question 33

A blank indorsement should be used:

A) only for the purpose of deposit or collection.
B) to impose warranty liability on the maker.
C) to reserve more space for other indorsements.
D) only in limited situations.

Question 34

Which of the following is true of warranties by indorsers?

A) The indorser is not entitled to enforce the instrument.
B) The indorser warrants that the instrument is subject to a defense of any party that can be asserted against the indorser.
C) The indorser warrants that he or she has knowledge of the bankruptcy of the maker, acceptor, or drawer.
D) The indorser warrants that there has been no alteration or other irregularity.

Question 35

Brianna repaid a $600 loan to her friend, Sharkey. She made the check payable jointly to Sharkey and Sharkey's daughter, Evie, even though she intended Sharkey to have the entire interest in the repaid debt.

A) Sharkey can legally forge Evie's indorsement as Brianna did not intend Evie to have any interest.
B) Sharkey cannot cash the check unless Evie indorses it herself.
C) If Sharkey forges Evie's indorsement, he can be held liable for the tort of conversion.
D) If Sharkey cashes the check with Evie's indorsement, he is legally obligated to give her half of the payment.

Question 36

Writing the words, "pay to the order of" or "pay to", followed by name of the indorsee and the signature of the indorser on an instrument makes it a ____________ indorsement.

A) special
B) restrictive
C) qualified
D) conditional

Question 37

Industries Inc. drew a check payable to "Gloria Schell and Pippen Tallit" in the sum of $20,000. For a proper negotiation, the check needs to be indorsed:

A) only by Gloria Schell, since her name appears first.
B) by either payee, since the indorsement of only one of the payees is necessary to negotiate the check.
C) by both payees.
D) by the maker.

Question 38

Lillian Fey purchases a night table from Aretha Boyner. Aretha wants Lillian to pay her by check before delivering the night table to Lillian's house. Lillian decides to attach an indorsement that reads, "Pay to Aretha Boyner if she delivers her night table to me, Lillian Fey, at 16 Holmes RD." This is an example of a(n)

A) indorsement for deposit.
B) conditional indorsement.
C) qualified indorsement.
D) significant indorsement.

Question 39

A check that a drawee bank guarantees will be paid to the holder is a:

A) bank draft.
B) traveler's check.
C) certified check.
D) treasurer's check.

Question 40

A check indorsed "for deposit only":

A) prevents further negotiation of the instrument.
B) requires the amount of the instrument to be credited to the indorser's account before further negotiation occurs.
C) requires the amount of the instrument to be credited to the indorser's account and prevents further negotiation.
D) requires the amount of the instrument to be further indorsed by the payee in person before being credited to the indorser's account.

Question 41

Shawn was an indorser on a check. A subsequent holder presented the check to the bank named on the instrument and was informed that there was not enough money in the account to honor the check. The next day, the subsequent holder demanded the money from Shawn. Must Shawn pay the subsequent holder of the instrument? Why or why not?

Question 42

Sarah gives a negotiable note for $5,000 to Roofing Contractors. Roofing cleverly alters the note to $7,000 and negotiates the note to Bigger Bank for consideration. When this alteration is discovered, discuss what recourse Bigger Bank will have against Sarah and Roofing.

Question 43

An envelope containing a $10 rebate check was placed in Hart's mailbox by mistake. It was addressed to Rice, a former tenant, and read, "Pay to the bearer or
G. Rice, $10.00." Discuss Hart's role.
Hart is the holder of the check. A holder is a person who is in possession of a negotiable instrument that is issued or indorsed to that person's order or to bearer. When an instrument is payable to "a specified person or bearer," it is payable to the bearer.

Question 44

Ashe indorses an order instrument in the following manner: "Pay to Big Bank, for deposit only, Ashe." Discuss the types of indorsements and the legal implications the instrument represents.

Question 45

When Hanson received her paycheck, she indorsed it in blank, placed it on her desk, and went to get a cup of coffee. The check accidentally blew out of an open window. Matson, a stranger to Hanson, found the check on the sidewalk below, took it to a bank, and cashed it. Was the transfer of the check to the bank a negotiation? Why or Why not?

Question 46

Donna is the holder of a note that has been indorsed so many times that there is no space left on the back of the note for indorsements. Donna wants to transfer the note for $200 to Acme Finance, but wants to indorse on the face of the note "without recourse, Donna ". Acme wants to staple a sheet of blank paper to the note and have Donna simply sign "Donna" there. Discuss whether Donna or Acme is correct concerning the location of Donna's signature and if Donna is legally entitled to indorse "without recourse."

Question 47

Andrews forged the signature of Baumann on a check and gave it to Callas in payment for merchandise. Callas indorsed the check and delivered it to Davis as down payment on a car. When Davis presented the check to the bank for payment, the forgery was recognized. Callas claimed that he was not liable to Davis because he had no knowledge of the forgery. Discuss.

Question 48

Discuss if the following instrument is negotiable:
"Ninety days after today, I promise to pay Sarah J. two thousand dollars."
Signed: Peter K.

Question 49

Mark gives a $3,000 check drawn on Access Bank to Acme Industries who mislays the check for three weeks. When Acme finds the check, they request that Access Bank certify the check. Access declines to do so, and Acme tells Mark that the check has been dishonored. Mark contacts Access who agrees to certify the check. Access subsequently wants to withdraw their certification, since Mark has insufficient funds in his account. Discuss the legal issues contained in their situation.

Question 50

Cade, the owner of Cade Body Shop, Inc. is in the habit of paying business expenses from his personal checking account. One such check to Parts Warehouse, Inc. is dishonored, and Parts attempts to collect from Cade personally who asserts that only Cade Body Shop, Inc. is liable. Discuss the legal resolution of this problem.