Question 1

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.

Accepted Answer

The answer of Discuss the effect on an instrument of:...

Question 2

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.

Accepted Answer

Todd, the newspaper carrier, accepted a properly indorsed two-party check for the past two months of deliveries. This means that he has given value for the instrument as he has fulfilled his obligation to deliver the newspaper for two months. Choices A and B involve a promise to perform a service and a retainer payment respectively, which do not constitute giving value for the instrument.

Question 3

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.

Accepted Answer

Value means that the holder of an instrument has already done something in exchange for the instrument. This could be providing goods, services, or money in exchange for the instrument. The value given in exchange gives the instrument its worth and makes it negotiable.

Question 4

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 immigration 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 is fraud in the execution, also known as fraud in factum. This defense arises when a person signs a document without knowledge or understanding of its nature, character, or contents. Felicia did not know that the document she signed was a promissory note, so her signature was obtained by fraud. As a result, she can assert this defense against Neighborhood Bank, even though it is a holder in due course.

Question 5

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.

Accepted Answer

The FTC Consumer Credit 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 6

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.

Accepted Answer

One of the standards of negotiability is that the instrument must state a definite sum of money. The other options are incorrect as negotiable instruments must be in writing, signed by the maker or drawer, and unconditional.

Question 7

George's Wholesaling agrees to purchase 1,000 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)a trade acceptance.
C)a promissory note.
D)an outstanding claim.

Accepted Answer

This is an example of a trade acceptance, which is a type of negotiable instrument used in business transactions where the buyer (drawee) agrees to pay the seller (drawer) at a later date. In this case, Chickadee Exports is the drawer and George's Wholesaling is the drawee, and they have agreed on the terms of the sale (1,000 pounds of bananas at 39 cents per pound). The trade acceptance orders George's to pay $390 to Primary Bank, indicating that Chickadee is willing to wait for payment as long as the payment is guaranteed by a third party (the bank).

Question 8

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(n)
A)blank indorsement.
B)special indorsement.
C)restrictive indorsement.
D)improper indorsement.

Accepted Answer

Laurel's indorsement "For Deposit only" is a restrictive indorsement. It restricts the use of the check to only be deposited into Laurel's account and not to be cashed or transferred to any other account.

Question 9

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 10

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)must be written on a pre-printed bank issued check.

Accepted Answer

The UCC does not require a check to be on any official form or even on paper. It only requires the check to be in writing, signed by the drawer, contain an unconditional promise or order to pay a specific amount of money, payable on demand, and to a designated payee or bearer.

Question 11

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 draft.
D)future draft.

Accepted Answer

A time draft is a type of draft that requires payment at a specified future date. In this case, Collegiate Systems has promised to pay for the painting in three months, and the draft orders them to pay on September 15, making it a time draft.

Question 12

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.

Accepted Answer

Since the high-stakes poker game is illegal in this state, the contract between Lucky and Fat Chance is void, meaning the check was not valid from the beginning. Therefore, Convenient cannot collect the check by suing Lucky, and will not prevail in court.

Question 13

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.

Accepted Answer

An unconditional order to pay is a promise to pay a specific amount of money, without any conditions or contingencies. Option A is a clear and unconditional promise to pay $5,000 for the painting.

B, C, and D are not unconditional orders to pay. Option B is conditioned upon the truck still running, while option C is conditional upon having the money by Friday. Option D is incorrect because only option A is an unconditional order to pay.

Question 14

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

Accepted Answer

Mental incapacity is a real defense that can be raised against a holder in due course, while the other options are personal defenses that cannot be successfully raised against a holder in due course.

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

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.

Accepted Answer

In case B, the promissory note is a result of forgery, and therefore, the holder in due course (Divine) is not entitled to receive payment. In cases A and C, the promissory notes are valid, and the holders in due course (Alice and Carole) are entitled to receive payment.

Question 17

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 defined as any person in possession of the instrument if it is payable to or indorsed to him. This means that the payee (A) is considered a holder, but so are other individuals who have possession of the instrument and have been named as payee or indorsee. Choice B is too broad and does not take into account the requirements of being named as payee or indorsee. Choice D is incorrect as it does not consider the necessary criteria to be considered a holder.

Question 18

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.

Accepted Answer

A check that a bank draws on itself is called a cashier's check, which is a financial instrument that guarantees the payment of funds to the recipient.

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?
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.

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. However, the objective test considers whether a reasonable person in the position of the purchaser would have known about the fraud, and whether the purchase was commercially reasonable. Therefore, if Brighty had no actual knowledge of the fraud, and if he reasonably believed that the instruments were valid and his purchase was commercially reasonable, he can still be considered a holder in due course.

Question 20

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

Sophie issued an order instrument because it was made "payable to the order of Molly." By Molly endorsing the note with just her signature, she converted it to bearer form, allowing it to be negotiated by delivery alone.

Quiz 25: Creating a Negotiable Instrument

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.

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?

Value means that the holder of an instrument

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

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(n)

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

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

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

Which is an unconditional order to pay?

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

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?

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

A "holder" of order paper can be described as

A bank that draws a check on itself has issued

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?