Question 1

Laurel Speckle received a check from State University.She indorsed the check as follows: "For Deposit only,/s/ Laurel Speckle." Laurel's indorsement is a:
A) blank indorsement.
B) special indorsement.
C) restrictive indorsement.
D) None of the above is correct.

Accepted Answer

A restrictive indorsement limits what can be done with the check, such as "For Deposit only," which specifies that the check can only be deposited into an account.

Question 2

Which of the following would be notice of an overdue instrument?
A) Taking a demand instrument after a request for payment is made.
B) Taking an instrument one day after the due date.
C) Taking a check 91 days after its issue date.
D) All of the above illustrate overdue instruments.

Accepted Answer

A) Taking a demand instrument after a request for payment is made indicates that the instrument is overdue since the demand has already been made.
B) Taking an instrument one day after the due date can also be considered as an overdue instrument.
C) Taking a check after 90 days of its issue date is a factor used to determine whether a check is stale or not, but it may not necessarily be considered as an overdue instrument. 
Therefore, all of the above choices illustrate an overdue instrument.

Question 3

In June,The Seascape Gallery sells an oil painting to Collegiate Systems,Inc.Collegiate promises to pay for the painting in three months.The gallery prepares a draft ordering Collegiate Systems to pay $3,000 to First Bank on September 15.Collegiate Systems signs the draft.The draft is a:
A) sight draft.
B) time draft.
C) trade acceptance.
D) Both b and c

Accepted Answer

The draft is a time draft because it specifies a future date for payment (September 15). It is also a trade acceptance because Collegiate Systems, the buyer, has accepted the draft by signing it, agreeing to pay the specified amount at the specified future date.

Question 4

The section of the UCC that governs negotiable instruments is:
A) Article 3.
B) Article 2.
C) Article 6.
D) Article 9.

Accepted Answer

Article 3 of the UCC governs negotiable instruments such as checks, promissory notes, and bills of exchange.

Question 5

In good faith,Clinton gave Jane $500 for a negotiable promissory note made out to Jane for $550.She needed some money before the due date on the note,and Clinton had no notice of outstanding claims or other defects of the note.Clinton:
A) has more rights than Jane.
B) has the same rights as Jane.
C) has only conditional rights because they depend on Jane's rights.
D) cannot transfer the note to anyone else.

Accepted Answer

The answer of In good faith,Clinton gave Jane $500 for...

Question 6

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 the above are correct.

Accepted Answer

Only Todd, the newspaper carrier, has given value for the instrument by delivering newspaper services in exchange for the check. In options A and B, there is no actual exchange of value for the instrument as promised services do not count as value.

Question 7

George's Wholesaling agrees to purchase 1000 pounds of bananas from Chickadee Exports at 39 cents per pound.George's does not have the money for the bananas now,but promises to pay in two months.Chickadee Exports wants George's business but needs the money now.Chickadee (as drawer)prepares an instrument ordering George's (as drawee)to pay $390 to Primary Bank (the payee).This is an example of a:
A) check.
B) trade acceptance.
C) promissory note.
D) None of the above.

Accepted Answer

This is a trade acceptance because it is an instrument that orders the drawee (George's Wholesaling) to pay a certain amount of money to the payee (Primary Bank) at a future date. This instrument is created to fulfill the need for Chickadee Exports to get the money now, but still allow George's Wholesaling to delay payment for two months. A check and a promissory note are similar instruments, but they do not involve a three-party transaction like a trade acceptance does.

Question 8

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 her 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.

Accepted Answer

Convenient will not prevail because the high-stakes poker game is illegal and any transactions resulting from it are therefore also illegal and unenforceable. Being a holder in due course, a buyer in the ordinary course of business, or giving value without notice does not change the legality of the transaction.

Question 9

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.

Accepted Answer

A holder of order paper is any person in possession of the instrument if it is payable to or endorsed to him. Therefore, choice C is the correct answer. The payee (choice A) is the person to whom the instrument is payable, but they may not necessarily be the holder. Choice B is too broad as it includes anyone in possession of the instrument, even if they have no legal right to it, while choice D is incorrect as the first party to come in contact with a negotiable instrument may not necessarily be the holder.

Question 10

Felicia,an elderly woman,does not speak or read English well.Felicia is a recent immigrant to this country.A dishonest immigration officer tells Felicia to sign several documents as being necessary to maintain her legal alien status.Unknown to Felicia,she signs a promissory note.The immigration officer thereafter sells the note to Neighborhood Bank,a holder in due course,who goes after Felicia for payment of the note.Felicia's defense to the Neighborhood Bank is:
A) fraud in the inducement; a real defense.
B) fraud in the execution; a real defense.
C) unauthorized completion; a personal defense.
D) breach of contract; a real defense.

Accepted Answer

Felicia's defense would be fraud in the execution, which is a real defense. Felicia was misled as to the nature of the document she was signing, and thus did not understand what she was signing. This defense would allow Felicia to void the contract for lack of mutual assent.

Question 11

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.

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 12

Sonny has a negotiable instrument which he gives to Cheryl as a birthday present.Sonny is a holder in due course on the instrument.As it turns out,Cheryl can only collect on the instrument if she has holder in due course status.If Cheryl sues to collect this instrument,what will be the result?
A) Cheryl is not a holder in due course, so she is subject to personal and real defenses of the issuer.
B) If Cheryl took the instrument in good faith and without knowledge of any claims against the instrument, she is a holder in due course even though Sonny gave her the instrument for her birthday.
C) Cheryl must pass the instrument on to someone else for money. That is the only way she can realize payment of the instrument.
D) Although Cheryl does not qualify as a holder in due course, she can claim the holder in due course status through Sonny and collect the instrument.

Accepted Answer

The answer of Sonny has a negotiable instrument which he...

Question 13

Which of the following can be negotiable?
A) A promissory note that states, "Pay to Floyd Burchett $3000 on September 1, 2015."
B) A check written on the standard check form that does not state the date it was issued.
C) A promissory note from Farmer Douglas to Hainey Seeds, Inc. promising to pay for the seed purchased in the spring with bushels of grain harvested in the fall.
D) An oral promise to pay to the order of Justin $500 on demand.

Accepted Answer

The answer of Which of the following can be negotiable?
A)...

Question 14

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) None of the above are correct.

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 the fraud. However, he would need to meet the standards of good faith in order to claim holder in due course status.

Question 15

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.

Accepted Answer

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

Question 16

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

Accepted Answer

The FTC Notice allows consumers to assert claims and defenses against any holder of the note, meaning Tim can refuse payment to First Finance due to the tool's failure and Binford's refusal to honor the warranty.

Question 17

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.

Accepted Answer

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

Question 18

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 payable on demand.
C) The instrument must be conditional.
D) The instrument must state a definite sum of money.

Accepted Answer

One of the standards of negotiability is that the instrument must state a definite sum of money. The other options are not standards of negotiability - an instrument must be in writing, signed, unconditional, contain an order or promise to pay, and be payable on demand or at a definite time.

Question 19

To be negotiable,a check must be in writing.Under the UCC,a check:
A) must be written on standard size paper of 6" ´ 2.5".
B) must be written on an official bank form.
C) need not be on any official form or even on paper.
D) Both a and b are requirements for a negotiable check.

Accepted Answer

The UCC does not require a check to be on any official form or paper size, as long as it is in writing.

Question 20

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) Forgery.
B) Prior payment.
C) Breach of contract.
D) Fraud in the inducement.

Accepted Answer

Forgery is a valid defense against a holder in due course, as the instrument was not issued by the proper party and therefore is not valid. Prior payment, breach of contract, and fraud in the inducement may be valid defenses in other situations but are not applicable to this scenario.

Quiz 25: Creating A Negotiable Instrument

Laurel Speckle received a check from State University.She indorsed the check as follows: "For Deposit only,/s/ Laurel Speckle." Laurel's indorsement is a:

Which of the following would be notice of an overdue instrument?

In June,The Seascape Gallery sells an oil painting to Collegiate Systems,Inc.Collegiate promises to pay for the painting in three months.The gallery prepares a draft ordering Collegiate Systems to pay $3,000 to First Bank on September 15.Collegiate Systems signs the draft.The draft is a:

The section of the UCC that governs negotiable instruments is:

In good faith,Clinton gave Jane $500 for a negotiable promissory note made out to Jane for $550.She needed some money before the due date on the note,and Clinton had no notice of outstanding claims or other defects of the note.Clinton:

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 "holder" of order paper can be described as:

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:

Sonny has a negotiable instrument which he gives to Cheryl as a birthday present.Sonny is a holder in due course on the instrument.As it turns out,Cheryl can only collect on the instrument if she has holder in due course status.If Cheryl sues to collect this instrument,what will be the result?

Which of the following can be negotiable?

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?

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?

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

To be negotiable,a check must be in writing.Under the UCC,a check:

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