Deck 15: Negotiable Instruments

Question 1

Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument to Luke. Of the three, Joel is the only person who has primary liability.

Answer 1

True

Question 2

Trisha loaned Brian $600 evidenced by a promissory note. When Brian paid off the loan, he did not ask Trisha for the note. She sold it to Carin, a holder in due course. Brian does not have to pay Carin since he already paid Trisha the full $600.

Answer 2

False

Question 3

Suppose that Emmett impersonates a famous clown. He goes into an advertising agency and convinces the manager to issue a check to him in the name of the famous clown, purportedly as part of a fund-raising campaign for a nursing home for old retired clowns. If Emmett negotiates the check to a check-cashing store by forging the name of the famous clown, then the ad agency will be able to argue that the bank must reimburse the account because the bank paid a check on a forged signature.

Answer 3

False

Question 4

Conversion means that someone has stolen an instrument or a bank has paid a check that has a forged indorsement.

Question 5

A draft is always a check, but a check is not always a draft.

Question 6

A drawee has primary liability on a draft.

Question 7

Nelson writes Leah a check for mowing his lawn. Leah deposits the check in her bank, but it is not paid by Nelson's bank. Leah calls Nelson to notify him that her bank returned his check to her unpaid. Leah's notice of the dishonor is insufficient; she must provide written notice.

Question 8

Lance indorses a promissory note to Connie in exchange for consideration. Unknown to Lance, the note is not good because the maker's signature was forged. Connie later attempts to present the instrument for payment to the original alleged maker, Lilly, who is able to deny liability for payment due to the forged signature. Connie may later sue Lance for breach of a transfer warranty.

Question 9

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.

Question 10

Drawers and indorsers are secondarily liable on negotiable instruments.

Question 11

An accommodation party and a co-maker of a note have the same liability on an instrument.

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.

Question 13

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

Question 14

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

Question 15

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

Question 16

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.

Question 17

Commercial paper is a contract to pay money.

Question 18

Warranty liability is the liability of someone who gives payment on a negotiable instrument.

Question 19

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

Question 20

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

Question 21

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

A)order paper.
B)bearer paper.
C)a cashier's check.
D)special paper.

Question 22

Which statement about notes and drafts is accurate?

A)With a draft, two people are involved: drawer and drawee.
B)With a note, you order someone else to pay.
C)With a note, two people are involved: maker and payee.
D)With a draft, you make a promise that you will pay.

Question 23

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?

A)Beth promises to paint the neighbor's house in exchange for a promissory note as an advance payment for the job.
B)Steve gives a note and mortgage on his house to his attorney as a retainer to handle his pending divorce.
C)Todd, a newspaper carrier, accepts a properly indorsed two-party check for the past two months of deliveries.
D)All of these are correct.

Question 24

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?

A)Nothing; when the instrument is ambiguous it is declared non-negotiable.
B)Ten dollars and 97 cents. Numbers control over words.
C)One thousand, ninety-seven dollars or $1,097.00. Words control over numbers.
D)Parol evidence would be needed to determine the purpose of the check.

Question 25

A bank that draws a check on itself has issued

A)a special indorsement.
B)a claim in recoupment.
C)a certificate of deposit.
D)a cashier's check.

Question 26

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

A)can collect if it is a holder in due course.
B)can collect if it is not a holder in due course.
C)can collect whether or not it is a holder in due course.
D)cannot collect.

Question 27

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.

A)the Imposter Rule
B)the Conversion Rule
C)the Employee Indorsement Rule
D)the Fictitious Payee Rule

Question 28

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

A)The instrument can be oral provided there is proof beyond a reasonable doubt.
B)The instrument must be signed by the payee.
C)The instrument must be conditional.
D)The instrument must state a definite sum of money.

Question 29

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?

A)Sophie issued a bearer instrument, and Molly kept it in bearer form.
B)Sophie issued an order instrument, but Molly changed it to bearer form.
C)Sophie issued an order instrument, and Molly kept it in order form.
D)Sophie issued a bearer instrument, and Molly changed it to bearer form.

Question 30

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

A)Nineteen-year-old Dylan signs a promissory note to pay $500 to Alice and hands her the note.
B)Ricardo forges Amberly's name to a promissory note and sells it to Divine.
C)Yoko borrows money from Carole and signs a promissory note to repay the amount with interest.
D)All of these are correct.

Question 31

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?

A)The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's legal name.
B)The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's given name.
C)The instrument cannot be negotiable. To be negotiable, the instrument must be signed using letters from the alphabet.
D)The instrument can be negotiable. Rita intended to indicate her signature.

Question 32

The term "issuer"

A)is not used in relation to commercial paper.
B)is an all-purpose term that means both maker and drawer.
C)is synonymous with drawee.
D)is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.

Question 33

Value means that the holder of an instrument

A)has already done something in exchange for the instrument.
B)cannot transfer the instrument to another person.
C)is not in physical possession of the instrument.
D)believes the transaction was honest in fact.

Question 34

A "holder" of order paper can be described as

A)the payee.
B)any person in possession of the instrument.
C)any person in possession of the instrument if it is payable to or indorsed to him.
D)the first party to come in contact with a negotiable instrument.

Question 35

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?

A)If Convenient can demonstrate that he is a holder in due course, he will prevail.
B)If Convenient can demonstrate that he was a buyer in the ordinary course of business, he will prevail.
C)If Convenient can demonstrate that he gave value without notice, he will prevail.
D)Convenient will not prevail.

Question 36

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

A)mental incapacity
B)prior payment
C)breach of contract
D)fraud in the inducement

Question 37

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

Question 38

An indorsement is the signature of the

A)drawer.
B)payer.
C)issuer.
D)payee.

Question 39

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?

A)Brighty is presumed to have knowledge of the scam and therefore did not purchase the instruments in good faith.
B)Although Brighty passes the subjective test of good faith, he fails the objective test and therefore cannot claim to have purchased the instruments in good faith.
C)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.
D)Brighty cannot be a holder in due course because once an action of fraud is discovered, no additional claims against that party can be sought.

Question 40

Which is an unconditional order to pay?

A)"I will pay $5,000 for the painting."
B)"I will pay $2,500 for the truck if it is still running."
C)"I will pay $400 if I have the money by Friday."
D)All of these are correct.

Question 41

When a negotiable instrument is transferred, the transferor warrants all of the following EXCEPT

A)the instrument is bearer paper.
B)all signatures are authentic.
C)as far as she knows the issuer is solvent.
D)the instrument has not been altered.

Question 42

An accommodation party on a negotiable instrument

A)typically receives a direct benefit from the instrument.
B)is always primarily liable for the instrument.
C)is the same as a "guarantor" under the UCC.
D)has the same liability to a holder as the person for whom he signed.

Question 43

Ivy wants to buy a necklace from Bethany for $500 and offers to write a check. To protect herself, Bethany insists that Ivy give her a certified check. If Ivy does this, who then becomes primarily liable?

A)Bethany
B)the bank
C)Ivy
D)both Ivy and the bank

Question 44

Tom indorsed a check made payable to the order of Tom Jones as follows: Pay Raymond Berry
/s/ Tom Jones
Raymond negotiated the check to his landlord for his rent. Raymond indorsed the check as follows:
Without Recourse
/s/ Raymond Berry
With regard to Tom's indorsement, which statement is correct?

A)Tom has secondary contractual liability on the check as an indorser.
B)Tom has no contractual liability on the check because he is the payee.
C)Tom has primary contractual liability on the check as payee.
D)Tom eliminated his liability as an indorser by the type of indorsement he used.

Question 45

Alejandro signs on the back of an instrument; he is considered to be

A)an indorser.
B)an acceptor.
C)an issuer.
D)None of these are correct.

Question 46

Generally, indorsers are not liable under signature liability if

A)they write the words "without recourse" next to their signatures on the instrument.
B)they are not the drawee.
C)a check is presented for payment within 30 days after the indorsement.
D)they are an accommodation party.

Question 47

Anyone who presents a check for payment makes certain warranties. Which of the following is NOT one of those warranties?

A)that he or she is a holder
B)that the check has not been altered
C)that the drawee is a solvent institution
D)that all signatures are authentic

Question 48

Mack writes a check to his maid, Marianne, in payment for services rendered. Marianne indorses the check in blank and gives the check to her masseuse, Janet, in exchange for a neck massage. Without indorsing the check, Janet gives the check to Martin, her newspaper carrier, in payment for the next four months' delivery charges. Martin indorses with a special indorsement and negotiates the check to his church, St. Mark. The church indorses the check and deposits it in its bank account. If Mack's bank later dishonors the check, to whom may St. Mark's look for recovery?

A)Martin only
B)Mack only
C)Mack, Marianne, Janet, and Martin
D)Mack, Marianne, and Martin

Question 49

On March 1 Donna wrote a check for $296 to Sun Services. When will the check be overdue? What is the effect of the check's being overdue? What is the effect if the check is stamped "Insufficient Funds" by Donna's bank?

Question 50

Because negotiable instruments are more valuable than non-negotiable ones, it is important for buyers and sellers to be able to tell, easily and accurately, if an instrument is indeed negotiable. What six standards must an instrument meet in order for it to be negotiable?

Question 51

Discuss the effect on an instrument of: (a)contradictory amounts between the numerals and amount written in words on a check;
(B)the interest rate left blank on a promissory note; and
(C)contradictory terms that are typed or printed onto a promissory note and terms that are handwritten.

Question 52

Which of the following parties has primary liability on a draft?

A)the drawee
B)the maker
C)the drawer
D)the indorser

Question 53

Cecilia made a check out to Gideon for $15. Gideon fraudulently changed the check to read $150, and cashed it at Corner Bank. Is Cecilia discharged from liability on the check?

A)Yes, Cecilia owes nothing on the check because alteration of a check is a real defense and real defenses are good even against holders in due course.
B)No, Cecilia pays $150 because of the impostor rule.
C)No, Cecilia pays $150 because she is not an indorser or accommodation party.
D)Yes, Cecilia owes nothing unless Corner Bank is a holder in due course, in which case she owes the original $15.

Question 54

Jessie is the maker of a $1,000 promissory note in favor of Tyler. Tyler subsequently indorses the note to Ryan by signing just his name. Ryan in turn indorses it to Breanna by indorsing the back of the note, "Without recourse, Ryan." Breanna then indorses it to Liz, the present holder, with a special indorsement. If the note is dishonored by Jessie after it is properly presented to her for payment by Liz, then Liz, after giving timely notice to Tyler, Ryan, and Breanna, may collect payment under signature liability from

A)Tyler only.
B)Breanna and Tyler only.
C)either Tyler, Ryan, or Breanna.
D)neither Tyler, Ryan, nor Breanna.

Question 55

TriColor purchased an industrial stamping machine from Vicy, Inc. TriColor paid for the machine with a negotiable note. The note was payable to the order of Vicy, Inc. Vicy, Inc. indorsed the note and gave it to CCLoans to satisfy a debt. CCLoans knew nothing about the contract between TriColor and Vicy, Inc. CCLoans indorsed the note and gave it to Great River Youth Club as a charitable donation. When Great River Youth Club presented the note for payment on its due date, TriColor refused to pay, claiming that the stamping machine was defective.
A. Is Great River Youth Club a holder in due course?
b. Will TriColor be able to avoid liability to Great River Youth Club on the basis that the machine was defective?

Question 56

When a person indorses a check, the indorser assumes contractual liability based on the indorsement. This liability expires unless presentment is made

A)within 3 days of indorsement.
B)within 7 days of indorsement.
C)within 30 days of indorsement.
D)within a reasonable time after the indorsement.

Question 57

Which of the following statements regarding instrument liability is TRUE?

A)The holder of an instrument must first ask for payment from those who are secondarily liable.
B)For any given instrument, only one person can be liable at a time.
C)A person with primary liability is unconditionally liable and must pay unless he or she has a valid defense.
D)A person with secondary liability has the same liability to the holder as a person with primary liability.

Question 58

List the warranties a transferor of a negotiable instrument makes.

Question 59

James Packard, a lawyer representing Robert Marino, received a check for $16,000 in settlement of Robert's case. Instead of turning over the money to Robert or putting it into a trust fund for him, James forged Robert's indorsement and deposited the money into his own account without notifying Robert. Discuss the claims the parties have.

Question 60

An instrument ordering someone else to pay money is called a(n)

A)accommodation.
B)transfer warranty.
C)discharge.
D)draft.

Question 61

Dwight Stringer signed three promissory notes as an agent for his company. The first, he signed "Dwight Stringer, agent for Park Systems, Inc." The second, he signed "Dwight Stringer, Agent." The third note was signed merely "Park Systems, Inc." Discuss the liability of Dwight and Park Systems, Inc. on each of the notes.

Question 62

Explain when presentment warranties apply. Identify the presentment warranties on a check and a promissory note.